Shariah supervisory system in Islamic financial institutions

Abstract

Purpose – The aim of this paper is to review the different steps of development of Shariah governance system and to discuss the different practices of Shariah governance in Islamic financial institutions internationally. Design/methodology/approach – The paper has a particular focus on the other contributions of relevant literature and existing laws and regulations for Islamic financial institutions which provides a reflective synthesis on practical work of Shariah governance system across different jurisdictions. Findings – The main attention of this paper is Islamic financial institutions and a key issue arising is that the typical structure, functions, duties and responsibilities are different from country to country. Practical implications – The paper put forward various suggestions to the regulatory authorities and to the Islamic Financial Services Board to enhance the Shariah governance system and to standardize the different practices of Shariah governance worldwide. Originality/value – The originality and the value of the paper lie in its critical review of current Shariah governance practices worldwide. As well, some key issues pertaining to Shariah governance in Islamic financial institutions are addressed to encourage further investigation by academics and practitioners in the field.

Composition and Working of the Sharia Supervisory Boards in Bahrain’s Islamic Banks

“…The study emphasized the relative robustness of the centralized sharia governance system and cautions against the harmful effects of co-existence of both the systems at the same time leading to regional differences in the application of Islamic finance contracts and credibility of the Islamic industry. In a related study, Grassa (2013) opined that "even though the Southeast Asian sharia governance model looks to be most efficient and effective in achieving the Shariah compliant purpose than the GCC model, it cannot be considered the perfect Shariah supervisory model".…”

“…In conclusion, even though many Islamic countries have in place a Sharia supervisory and governance framework, it has often been commented that these frameworks are inadequate when it comes to addressing the issues and challenges confronting Islamic Banks today (Grassa, 2013;Grassa, 2015;Hidayat and Al-Khalifa, 2018). Researchers (Grais and Pellegrini, 2006;Rammal, 2006;Khan, 2007;Farook and Farooq, 2013;Hamza, 2013;Hassan and Mollah, 2014) have specifically raised issues concerning the workings of Sharia Boards and its membership, viz.…”

“…Sharia compliant or adhering to sharia means observing strictly what is permissible (halal) or staying away from the prohibited (haram). In order to assure an Islamic bank"s stakeholders that the Bank is doing its business in a sharia permissible manner, the services of religious boards comprising sharia scholars known as Sharia Boards are employed (Aziz, 2012;Grassa, 2013). The Sharia Supervisory Board, which is peculiar to Islamic banks is considered as the principal component of the Sharia governance framework (Hamza, 2013).…”

Empowering the Shari’ah Committee towards Strengthening Shari’ah Governance Practices in Islamic Financial Institutions

“…Prior researches such as Muhamad Sori et al (2015), Muhammad et al (2015), Grassa (2013), andHasan (2014) highlight that the Shari'ah committee is given limited authority and participation in the operational and management activities of IFIs.…”

“…Currently, different institutes have different standards and practices which is one of the major flaws of the Islamic finance industry. Grassa (2013) mentions countries differ in their approach to Shari'ah governance. For instance, Bahrain has both a Shari'ah governance committee at the institutional level and the National Shari'ah Advisory Board at the national level, i.e., in the Central Bank of Bahrain.…”