Are existing systems for Shariah governance adequate?

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BK5503 Islamic Banking
January 2014 Semester

INCEIF
The Global University in Islamic finance

MSc in Islamic Finance

Are existing systems for Shari’ah governance adequate? How could they be improved?

BK5503 Islamic Banking
January 2014 Semester

Name: Mohamad Zaky Bin Jailani
Student ID: 1400025

Mohamad Zaky Bin Jailani
1400025

Page 1

BK5503 Islamic Banking
January 2014 Semester

Table of Contents
Key Terms and Abbreviations

3

Abstract

3

1.0 Introduction

4

2.0 Issues and Recommendations

5

2.1 Ambiguous Roles of SSBs

5

2.2 Conflict of Duties

5

2.3 Lack of Competence

6

2.4 Lack of Legal Status

8

2.5 Lack of Accountability

8

2.6 Lack of Independence

9

2.7 Lack of Tranparency

10

3.0 Conclusion

11

Mohamad Zaky Bin Jailani
1400025

Page 2

BK5503 Islamic Banking
January 2014 Semester

Key Terms and Abbreviations
SSB

Shari’ah Supervisory Board

IIFS

Institutions offering Islamic Financial Services

IFSB

Islamic Financial Services Board
The Accounting and Auditing Organization for Islamic Financial

AAOIFI

Institutions

BOD

Board of Directors

Abstract
There is currently no standardisation of Islamic Finance governance across jurisdictions or even across institutions within the same jurisdiction. This paper covers the current state of governance at both the regulatory as well as the corporate levels, identifies various challenges and offers proposals to overcome these challenges. Proposals were based on certain jurisdictions within the Islamic Finance industry and parallel examples from conventional banking.

Mohamad Zaky Bin Jailani
1400025

Page 3

BK5503 Islamic Banking
January 2014 Semester

1.0 Introduction
The term “Shari’ah Governance System”, is defined by the IFSB to refer to structures and processes adopted by stakeholders to ensure compliance with Shari`ah rules and principles. Rights and obligations of stakeholder interests in Islamic financial institutions reflect two separate factors: first the participatory nature of Islamic finance, and secondly the need to have a body within the institution which can provide Shari‘ah assurance.1

If we look at the broader Shari’ah governance framework, we see arrangements put in place by regulators, and the presence of providers of financial information services external to the firms. Among regulatory arrangements, centralized SSBs are the most noteworthy. While there are significant differences across countries, centralized SSBs are usually concerned with ex-ante monitoring, mostly understood as standardization of Shari’ah interpretation, and ex-post monitoring of Shari’ah compliance. International bodies have been also been established to standardise practices. These include the IFSB, AAOIFI, the International Islamic Rating Agency (IIRA), the International Islamic Financial Market (IIFM) and the Liquidity Management Center (LMC). These bodies propose solutions in specific areas where conventional regulation fails to address the distinctiveness of the Islamic financial industry, rather than seeking to replace existing regulation.2

As for governance at a corporate level, countries such as Malaysia, United Arab Emirates, Jordan and Kuwait require the formation of an SSB before granting institutions the right to provide Islamic Financial Products.

1

Wilson, R. (2012), Legal, Regulatory And Governance Issues In Islamic Finance, Edinburgh University Press
2
Grais. W and Pellegrini. M (2006) Corporate Governance and Shari’ah Compliance in Institutions Offering Islamic Financial Services, World Bank Policy Research Working Paper 4054 Mohamad Zaky Bin Jailani

1400025

Page 4

BK5503 Islamic Banking
January 2014 Semester

2.0 Issues and Recommendations
In this section, we will discuss the various challenges facing Shari’ah governance and the potential ways we can overcome these challenges.

2.1 Ambiguous Roles of SSBs...
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