Shari'asupervision of Islamic financial institutions

Abstract

Purpose -The governance structure of Islamic financial institutions (IFIs) implements Islamic canon law (Shari'a) into business transactions through Shari'a supervision processes. This paper aims to define Shari'a supervision and examine Shari'a supervisory councils (both within and outside the Central Bank), Shari'a consulting firms, Shari'a advisors, and Shari'a Supervisory Boards (SSB). It also discusses the importance of the hierarchical position of SSBs and evaluates their objectives and functions. Design/methodology/approach -The paper reviews a wide range of theoretical literatures especially recent proceedings of relevant conferences in the Gulf Cooperation Council (GCC) countries along with the standards of the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). A framework for understanding the role of the SSB is developed suggesting a set of objectives and functions for the SSB. Findings -The paper finds a lack of standardization among the IFIs concerning the position of the SSB within the corporate hierarchy. Moreover, the SSB is found to control the IFIs activities more than the other types of Shari'a supervision such as Shari'a consulting firms and Shari'a advisors.Research limitations/implications -The research focuses exclusively on the GCC countries and excludes the other Middle East and Far East countries where Shari'a supervision might have different forms. Social implications -The research provides guidelines for IFIs in defining the SSB role in their governance structure and recommends the SSB among the other forms of Shari'a supervision (Shari'a consulting firms and Shari'a advisors) in controlling the IFIs activities. Originality/value -This study contributes to the literature gap about the governance of IFIs. It is one of the first studies that provide a conceptual foundation for the SSB role in the governance structure of IFIs.

Characteristics of the Sharia Supervisory Board and Its Relevance to Islamic Social Reporting at Islamic Banks in Indonesia

“…According to Charles dan Chariri (2012), the party holding the role in the implementation and disclosure of the ISR is the SSB. SSB occupies a strategic position in the hierarchy of Islamic financial institutions (Nathan Garas & Pierce, 2010). SSB has the same authority and position in Islamic financial institutions as the board of commissioners (Farook et al, 2011).…”

Characteristics of Shar¯ı‘ah Supervisory Board, Corporate Governance Mechanisms and Efficiency of Islamic Banks: Evidence from Listed Banks in Asia

“…Idrees (2014) argues that it is the responsibility of supervisory board to analyze the actions and behaviors of individuals and institutions in order to certify that these are all Sharī'ah compliant. The SSB is an independent body with members that are qualified in Islamic studies or have fiqh knowledge and are aware of financial transactions in accordance with Sharī'ah rules and regulations (Garas & Pierce, 2010). The functions and duties of SSBs are more or less same in different countries but comprise different number and nature of members (Akbar, 2008;Charles & Chariri, 2012).…”

“…First is the supervisory function and second is the consultative function. The supervisory function deals with issuance of fatwá and giving approval to new products while the consultative function is the means to calculate due zakāh and giving solutions that are Sharī'ah compliant during the implementation of contracts (Garas & Pierce, 2010). The position and authority of SSB is equivalent to board of commissioners in the IB and are sometimes treated as external auditors (Farook, Hassan & Lanis, 2011).…”

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

“…(Mejia et al, 2014). Garas and Pierce (2010) commenting on the sharia supervision in Islamic financial institutions (IFI), observed that it can assume different forms at macro and micro levels in different countries. At the macro level, Sharia supervision could be conducted by national or regional Sharia Supreme Councils and at the micro level, it can be conducted by Sharia Supervisory Board, Sharia Consulting firms or a single Sharia advisor.…”