The Islamic Financial Service Board is an international financial organization. It was founded in 2003 and issues guiding principles and standards within the Islamic banking and financial sector. It aims to promote stability and order in the Islamic financial industry. It also aims to promote the awareness of Islamic financial services. Among its duties is the issuance of Shariah-compliant standards, and provision of guidance and supervision for Islamic Financial Institutions. The IFSB issued principles and standards regarding issues on Risk Management, Capital Adequacy Standards, Corporate Governance, Transparency and Market Discipline, Supervisory Review Process, Governance for Islamic Collective Scheme, Sukuk Securitization and Real Estate Investment, Takaful (Islamic Insurance) Undertakings, Conduct of Business, and Shariah Governance Systems1 for institutions offering Islamic financial services. The Board developed guiding principles in recent years to strengthen governance structures and processes in various segments of the Islamic financial services industry. These three guiding principles are Guiding Principles for Governance for Institutions offering only Islamic Financial Services (IFSB-3, 2006) Guiding Principles on Governance for Islamic Collective Investment Schemes (IFSB6, 2008) Guiding Principles on Governance for Takaful Operations (IFSB-8, 2009) In all three guiding principles, there were recurring issues of the functions of the Shariah boards2. Due to these recurring issues, the IFSB prepared other sets of guiding principles on Shariah governance system. The objectives of these guiding principles are to: I. Complement other prudential standards issued by the IFSB by focusing on the importance of sound Shariah governance system with regard to competence, independence, confidentiality, and consistency of Shariah boards. II. Facilitate better understanding of Shariah governance issues in order to ensure that stakeholders are satisfied that an appropriate system is in place. III. Provide enhanced degree in terms of issuance, compliance and auditing for compliance with Shariah rulings. IV. Provide greater harmonization of the Shariah governance structures and procedures across jurisdictions. There are nine guiding principles covered by the IFSB3. As we go further we will discuss each in details. This report is basically a summary of the guiding principle issued by the 1 2
This paper will focus on the guiding principles of Shariah Governance System. Shariah boards are the panel within any Islamic financial institution that certify the compliance of Shariah products.
IFSB and has been divided in three subsections. The next subsection will focus on the definition and scope of the Shariah governance system. The subsection after it covers the nine guiding principles and their best practices. I conclude by explaining the importance of adhering to these principles.
Definition and Scope of Shariah Governance System:
Shariah Governance System is a set of institutional and organizational arrangements that enable IIFS4 ensure effective independent oversight5 of Shariah compliance with regard to the following structures: Issuance of relevant Shariah pronouncements/resolutions: Shariah pronouncement refers to any juristic opinion on any matter relating to Islamic financial issues issued by the appropriate Shariah board. Any resolution issued must be critically scrutinized and deliberated upon. It must also be endorsed by the recognized Shariah board. Dissemination of information on Shariah pronouncements/resolutions: It is the duty of the Internal Shariah Compliance Unit (ISCU) to disseminate information of pronouncements to operative personnel of the...