The control of the Shari'a Supervisory Board in the Islamic financial institutions

Abstract

PurposeThe Islamic financial institutions (IFIs) maintain better control over their transactions than conventional financial institutions (CFIs) through the existence of Shari'a Supervisory Board (SSB) and Shari'a Control Department (SCD). The purpose of this paper is to highlight the superiority of Shari'a supervision over external audit and Shari'a audit over internal audit. The study identifies five independent variables that affect the SSB control: ex‐ante Shari'a audit; ex‐post Shari'a audit; SCD reporting to the SSB; corrective actions of SSB towards the management violations; and the number of SSB members.Design/methodology/approachThe variables are articulated in five hypotheses, which are tested by ordinary least square regression. The data are collected via a questionnaire which was sent to the SSB members of 219 IFIs in the Gulf Cooperation Council (GCC) countries.FindingsThe results indicate that ex‐ante Shari'a audit, ex‐post Shari'a audit, and reporting of SCD are significantly related to the SSB control, whereas corrective actions and the number of SSB members have insignificant relation.Research limitations/implicationsThe research is focused on internal factors only, without considering other external factors such as stakeholders and regulators. Also, the research covered the GCC region alone.Practical implicationsThe research recommends testing the hypotheses in other geographies to generalize the results, and including external factors as well as shareholders and board of directors.Social implicationsThe research provides practical implications for the SCD role and calls for merging the SCD with the traditional internal audit department to reduce the excessive work of controlling.Originality/valueThe paper contributes to the literature gap about the SSB. It is believed to be one of few studies that provide empirical evidence about the SSB control in the IFIs of the GCC region.

The influence of the SSB’s characteristics toward Sharia compliance of Islamic banks

“…The result shows that remuneration has no influence on the sharia compliance of Islamic banks and H5 is rejected. Garas (2012) finds that remuneration has insignificant relation with conflict of interest in the SSB. The previous studies state that if the remuneration of SSB comes from the percentage of annual report will lead to conflict of interest (Garas, 2012) and may influence the level of supervision.…”

“…Garas (2012) finds that remuneration has insignificant relation with conflict of interest in the SSB. The previous studies state that if the remuneration of SSB comes from the percentage of annual report will lead to conflict of interest (Garas, 2012) and may influence the level of supervision. One of the functions of SSB is to get opinion about the sharia compliance of banking products.…”

“…SSB performs religious, social, economic, legal and governance functions (Garas & Pierce, 2010). The existence of SSB will impact on the Islamic compliance on the Islamic bank's operation, maintaining the trust of stakeholder on the IB's activities, supporting management in providing sharia-compliant products, fulfilling legal requirements for governance and commitments of Islamic banks in religious functions (Garas, 2012;Garas & Pierce, 2010). SSB also can influence the process of decision making to be guided by Islamic beliefs and values (Eighuweel et al, 2017).…”

A systematic literature review on Sharī'ah governance mechanism and firm performance in Islamic banking

“…Several studies have discussed the CG from an Islamic perspective, current SG practices and issues, challenges of good SG, different SG models and systems across jurisdictions (see, e.g., Grais and Pellegrini, 2006a; Grais and Pellegrini, 2006b; Hasan, 2009; Nathan Garas and Pierce, 2010; Nathan, 2010; Hasan, 2011; Abdullah Saif Alnasser and Muhammed, 2012; Nathan Garas, 2012a, 2012b; Grassa, 2013; Hamza, 2013; Grassa and Matoussi, 2014b; Ayedh and Echchabi, 2015; Sulaiman et al , 2015; Grassa, 2015).…”

Minimizing Frauds on the Indonesian Islamic Banks

“…The enthusiasts represent the largest cluster with a frequency of around 66 percent, while the rejectors represent the smallest segment with a frequency of 10 percent. Samy [9] said that Islamic financial institutions (IFIs) maintain a better control over their transactions than conventional financial institutions (CFIs) through Sharia Supervisory Board (SSB) and Sharia Control Department (SCD). H1: Sharia compliance has a positive negative relationship with fraud…”