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Home > Capital Markets Checklists > The Role of the Shariah Advisory Board in Islamic Finance

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The Role of the Shariah Advisory Board in Islamic Finance


Checklist Description

This checklist outlines the responsibilities of an Islamic bank’s advisory board to ensure that the bank’s activities conform to shariah law.

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Definition

The shariah board is a key element of the structure of an Islamic financial institution, carrying the responsibility of ensuring that all products and services offered by that institution are fully compliant with the principles of shariah law. The role of the board also involves the reviewing and overseeing of all potential new product offerings. Additionally, the board may be called on to make a judgment on individual cases referred to it, relating to whether specific customer business requests are acceptable to the institution. Given that shariah law is derived from studies of both the Qur’an and the Sunna, inconsistencies can occur in the interpretations of precisely where the boundaries of compatibility lie, with the result that some shariah boards may deem unacceptable proposals that may be approved by other boards.

With demand for shariah-compliant financial services growing at a faster rate than mainstream banking, the board can play a vital role in helping to develop new procedures and products to position the institution to adapt to industry trends and customers’ expectations. The board should be closely involved in overseeing shariah-compliant training programs for employees. Board members also participate in the preparation of an annual investors’ report on the bank’s balance sheet, with particular reference to its compliance with shariah principles.

Given the importance of the role of the shariah boards in ensuring the conformity of the institution’s offerings, boards typically include acknowledged experts, such as contemporary Islamic scholars. It is common for such scholars to sit on the shariah boards of multiple institutions; some senior scholars may sit on the boards of 15 or more institutions. The activities of individual boards are supervised by an independent body, the International Association of Islamic Bankers. This association’s Supreme Religious Board examines the judgments, or fatwas, of individual shariah boards to ensure conformity to shariah law.

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Advantages

  • The board’s role is well defined: ensuring that the institution’s activities are fully compliant with shariah law is its responsibility.

  • Given the speed of change in the financial services industry, the board plays a vital role in advising the institution as to the feasibility of potential new products and services.

  • Shariah audits can be undertaken in conjunction with the board to give greater reassurance to customers.

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Disadvantages

  • Shariah law is highly subject to interpretation, particularly in relation to its significance in the demand-driven financial services industry.

  • Inconsistencies occur between different boards in their interpretations of what is and is not permissible.

  • Precedents are not binding in Islamic jurisdictions, with the result that personnel changes to a board may shift the balance of collective opinion over time.

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Action Checklist

  • Some Islamic investors may seek reassurance that products and services which have been approved by shariah boards outside their own jurisdictions are truly compliant with their own shariah-compliant objectives.

  • Given the complexity of some Islamic sukuk structures (the arrangements established to create the Islamic equivalent of a bond), it is important that shariah boards are given the considerable resources needed to ensure the true compliance of these instruments.

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Dos and Don’ts

Do

  • Ensure that shariah boards have a high level of autonomy and independence, protecting them from commercial pressures.

  • Do ensure shariah boards are well resourced to ensure full compliance with both legal and religious requirements.

Don’t

  • Don’t expect every board member to be an expert on every aspect of Islamic finance. While shariah boards require a range of members with a diverse range of religious and financial knowledge, institutions should not expect individual board members to be experts in every aspect of their wide-ranging brief. However, board members with specialized knowledge of particular aspects can work very effectively on sub-boards related to particular initiatives or projects.

  • Don’t overlook the need to ensure that shariah board members are well informed about developments and trends in the global financial marketplace.

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Further reading

Books:

  • Archer, Simon, and Rifaat Ahmed Abdel Karim. Islamic Finance: The Regulatory Challenge. Singapore: Wiley, 2007.
  • El-Gamal, Mahmoud A. Islamic Finance. Cambridge, UK: Cambridge University Press, 2006.

Article:

  • El Ahmed, Waleed M. “A unified voice: The role of shariah advisory boards in Islamic finance.” Business Islamica (October 2007). Online at: tinyurl.com/4xgxxqd

Websites:

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