SHARÔÑAH GoVeRnAnce FoR ISlAmIc FInAncIAl InStItutIonS
Rodney Wilson∗ Abstract For Islamic financial institutions to have credibility, formal procedures for SharÊÑah governance are required; otherwise clients would have no assurance that the institution is upholding the principles of Islam in its financial dealings. This formal assurance can be provided by national law, as in the case of Iran, which enacted the Law on InterestFree Banking of 1983, under which all banking operations had to be SharÊÑah compliant. Malaysia passed an Islamic Banking Law the same year, but it created a dual system whereby licensed Islamic banks could compete alongside those operating conventionally. Unlike in Iran, however, Malaysia instigated a system for ongoing assurance by establishing SharÊÑah Boards for the Central Bank and the Securities Commission with the power to deliver fatwÉ, and boards at the level of each Islamic bank to ensure that the financial products they offered are SharÊÑah compliant and conform to the requirements of the centrally issued fatwÉ. At the other extreme, the countries of the GCC have devolved all SharÊÑah governance to the institutional level, although many Islamic banks recognise the rulings of the SharÊÑah Board of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Organization of the Islamic Conference (OIC) Fiqh Academy. This paper discusses the merits of centralised versus devolved SharÊÑah governance and considers what competences and experience SharÊÑah Professor Rodney Wilson is Director of Postgraduate Studies at Durham University’s School of Government and International Affairs. He can be contacted at r.j.a.wilson@ durham.ac.uk.
ISRA International Journal of Islamic Finance • Vol. 1 • Issue 1 • 2009
SharÊÑah Governance for Islamic Financial Institutions
Board members should have. The Islamic Financial Services Board has recently issued guidelines on SharÊÑah governance. These are evaluated, including the conditions for the appointment of SharÊÑah Board members, their mandate, procedures for the conduct of meetings, and lines of accountability and reporting. Keywords: SharÊÑah governance, SharÊÑah Board members, Islamic banking law. IntRoductIon If Islamic financial institutions are to be credible to their clients, they need to have a formalised system to ensure that all their activities are SharÊÑah compliant. exactly what constitutes an effective SharÊÑah governance system is a matter of debate, however, and it is apparent from examining the experiences of different countries and institutions that a variety of systems are in place. this pluralistic approach has advantages, as the legal environments in which Islamic financial institutions operate differ, not only in terms of the status of SharÊÑah, but also depending on whether the countries use common or civil law. Furthermore, client expectations of what constitutes acceptable and effective SharÊÑah governance differ, and, as will be evident from this study, most systems currently employed are market rather than state driven. Indeed, in the realm of Islamic finance, SharÊÑah governance has largely been privatised rather than nationalised. the credibility of financial institutions with their clients has been highlighted by the financial crisis of 2008, when some conventional financial institutions faced a run on deposits. many conventional financial institutions found that they had lost the confidence of other banks and, hence, they could no longer rely on the inter-bank market for funding. merely having a SharÊÑah Board does not, of course, provide immunity to liquidity crises or overcome the difficulties associated with the credit crunch, but it was noticeable that in many jurisdictions Islamic banks fared better than their conventional counterparts. this was because of two factors that were positively linked to SharÊÑah governance. Firstly, Islamic banks have to rely on...
Please join StudyMode to read the full document