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Roles of Shariah Board in Islamic Bank

TM.Rimsan Final year Special Degree in Islamic Banking & Finance

With demand for Shariah-compliant financial services growing at a faster rate than conventional banking, Shariah boards play a vital role in helping to develop new procedures and products to position the Islamic bank to adapt to industry trends, and customers expectations. In fact, Islamic financial products must be structured to conform to strict legal and Shariah requirements. Shariah Boards play an important role in that sense as they help ensuring that the issued financial products strictly adhere to the principles of Shariah and offer constructive and creative recommendations to maintain Islamic banking system in line with the continued challenges of working in a sophisticated and ever-changing financial environment. In addition, by showing flexibility based on their Ijtihad, Boards scholars help to respond to changes and diversity in day to day life by taking into consideration concepts of custom, general good, utility or necessity while remaining within the Islamic law boundaries. The Shariah Board A Sharia supervisory board is an independent body of specialized jurists in fiqh al muamalat (Islamic commercial jurisprudence). However the Sharia supervisory board may include a member other than those specialized in fiqh al muamalat but who should be an expert in the field of Islamic financial institutions and with knowledge of fiqh al-muamalat. The Sharia supervisory board is entrusted with the duty of directing, reviewing and supervising the activities of the Islamic financial institution to ensure that they are in compliance with Islamic Sharia rules and principles. The fatwas and rulings of the Board shall be binding on the Islamic financial institution.( Islamic Finance Innovation and Growth, ed. By Archer, S. And Abdel Karim, R.) Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Sharih scholars on the religious boards carry great responsibility, it is important that only high caliber scholars are appointed to the religious boards Shari'ah Guiding Principles The Shariah has evolved within the guidelines set by three broad principles agreed upon by Islamic scholars and jurists over the centuries. These are: 1. Interest of the community takes precedence over the interests of the individual;

2. Relieving hardship takes precedence over promoting benefit; 3. A bigger loss cannot be prescribed to alleviate a smaller loss and a bigger benefit takes precedence over a smaller one. Conversely a smaller harm can be prescribed to avoid a bigger harm and a smaller benefit can be dispensed with in preference to a bigger one. History of Shariah Board Originally, most finance business in Muslim countries was supposed to be done under the Islamic legal system, but towards the end of the 19th century, Western business law replaced its Islamic counterpart. Until recently, there was no procedure to declare whether a given financial product was in Shari'ah-compliant or not. In the 20th century, there were concerns among many Muslims about the prevention of Riba how to work within the present Westernized system. Some smaller experiments were done and in 1963 the first larger attempt in Mit Ghamr, Egypt was made by Ahmad El Najjar. The bank was socially oriented and lasted until 1967. It predominantly entered into Mudaraba contracts with the savings it received. Other banks began to copy this model. The first truly commercially bank, the Dubai Islamic Bank, was established by traders around Sheikh Zayed Lootah and still exists today as a market leader. The first global development bank, was established by the Organisation of the Islamic Conference in 1974: The Islamic Development Bank, based in Jeddah. As Kahf noted, none of the above banks had a Shariah Supervisory Board in place. Only in the second half of the 1970s did jurists (Shari'ah scholars) get involved into the young Islamic banking industry. Faisal Islamic Bank of Egypt (1976) and the Jordan Islamic Bank (1978) established a formal Shariah Supervisory Board especially to gain credibility among potential clients. This practiced continued with major other new banks established like the Kuwait Finance House in 1979. The initial concern of economists working on Islamic banking from 1950 onwards was to get away from Riba with the key suggestion of Profit-/Loss Sharing financing modes. Shariah scholars, however, reviewed the issues from the classical legal point of view, in which the economists are not so deeply trained by profession. The Shariah scholars intention was to implement the full range of Fiqh Muamalat rather than the single prohibition of Riba. Economists in contrast analyzed the Islamic banking need from a more general point of view, deducted from overall objectives. Controversies based of these two methodologies are still going on in all debates. Shariah supervision?


While it may be convenient to explain Shariah supervision as a religious audit but its scope is far more comprehensive. In essence, Shariah supervision is the process of ensuring that a financial product or service complies with Islamic legal precepts and principles, either by its conforming (to one degree or another) to a recognized Islamic legal norm or by its not violating the same. Ideally, Shariah supervision will be a part of an Islamic product or service from the time of its development, to its launch, and throughout the period it is offered. At the stage of research and development, or of drafting contracts or offering memorandums, Shariah supervision, in one form or another, should be an active participant. Moreover, once a product is launched, Shariah supervision may take the form of ongoing monitoring through periodic audits. Such audits may be undertaken by means of site visits, document reviews, or consultation with management at regular intervals. Shariah compliance Achieving Shariah compliance is of crucial importance for integrity and credibility of Islamic banking and finance; and the Shariah board is a key element of the structure of Islamic banks to ensure that compliance within the business of Islamic financial institutions. By carrying the responsibility of ensuring that all offered products and services are fully compliant with the principles of Shariah, Shariah board contributed to the public awareness about the philosophical basis and the concept of Islamic banking and finance. Shariah compliance is not just restrictive in regard to investment in companies with unacceptable business; it also includes a promotion of investment in businesses that contribute to the ethical values of Islam and purification of bad profits by distributing them to charity for the welfare of the community as a whole. The Purpose of Shariah Board The most obvious and immediate purpose of Shariah supervision is to certify for practicing Muslim consumers and clients that the financial product or service being offered to them is acceptable from an Islamic legal perspective. The primary beneficiary of Shariah supervision will be Muslim consumers or investors who may not have necessary skills or knowledge to evaluate the Islamic banking products in the light of Shariah teachings. It also supplies form of guarantee and advocacy that money being invested in the IFIs is duly used in compliance with Shariah rulings and haram elements are eliminated. From the view point of corporate governance, IFIs embody a number of interesting features since equity participation, risk and profit loss sharing arrangements from the basis of Islamic finance. SB functions as an extra layer of governance in IFIs in order to bring transactions under strict conformity with the Islamic law and expectations of Muslim community. Roles of a Shariah Board


The standard definition by the AAOIFI is pointing out the kind of qualification as specialized jurist in Fiqh Muamalat. It further explains the importance of legal analysis for Islamic financial institutions. After reviewing all the documents, contracts and reviewing them, demanding adjustments and finally agreeing if so agreeable the Shariah Scholar is issuing a Fatwa, a legal opinion, which is used to advertise it to prospective clients. Such a Fatwa is subject to a number of conditions, regarding the prevailing circumstances. non-Islamic legislation, which cause legal constraints y The need to further develop the emerging Islamic finance industry as an alternative and viable financing system y The various existing constraints and restrictions imposed under the various conventional financing techniques available in many Muslim countries y The prevailing conditions and affairs of the Ummah and the need to remove them from the shackles of Riba Summarizing the conditions the local circumstances and habits (al Urf) and temporary needs of utmost necessity (darura) are sources for compromises. The role of the Shariah Board is as such an advisory role regarding Is lamic law to an Islamic financial institution including a judgment of the compliance of certain products put forward to them. Because of major restrictions they have the capacity to compromise to a certain degree. A decision of a Shariah Board is made binding by internal decision to the Islamic financial institution. Between the institution and the client contracts are typically governed by non Islamic law which raises the question of legal enforcement. An Islamic financial institution is required to establish operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. The management is also required to periodically report and certify to the religious board that the actual investments and business activities undertaken by the institution conform to forms previously approved by the religious board. Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that act as an independent Shariah Supervisory Board comprising of at least three Shariah scholars with specialized knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance and economics. They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shariah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shariah principles (a form of
y Often a

post Shariah audit). The Shariah Supervisory Board is required to issue independently a certificate of Shariah compliance.

Important Duties of the Sharia Board in briefly


It has a significant investigatory function to interpret different financial concepts and determine whether or not this they include non-permissible transactions such as Riba

supervise its development of Islamic banking products, and determine the Shariah compliance of these products and the investments.

The Shariah Supervisory Board have to carry their own independent audit and certify that nothing relating to any of the operations involve any element that is prohibited by Shariah.

provides the necessary expertise to create alternative framework of banking services which conform to the principles of Islam.

To issue a Fatwa(s) as to whether all or any specific products or services of Gatehouse or any service beneficiary comply with the rules and principles of Shariah.

To make recommendations or issue guidance as to how products/services under review could be made Shariah-compliant.

To conduct a review of products/service documents as, and when, necessary to ensure ongoing compliance of documents with Shariah principles.

To devote time and effort to devising more Sharia-compliant transactional procedures, templates and banking products that enable the Bank to adapt to market trends while maintaining a high competitive edge in deposit procedures, investments, and banking services. At the same time, the Board gives its opinion on proposed new templates and banking transactions.

Analyzing unprecedented situations that are not covered by fatwa, in the Banks transactional procedures or those reported by different departments, branches and even the customers. This is to ensure Sharia compliance before the Bank develops any new products or implements any new procedure.

Ensuring Sharia compliance in the implementation of all banking transactions and correcting any breaches.

Preparing an annual report on the Banks balance sheet with respect to its Sharia compliance.


The Fatwa & Sharia Supervision Board submits a complete annual report for the Board of Director, summarizing all the issues referred to the Board, as well as its opinion on the Banks transactional procedures.

To provide advice to Islamic financial institutions

Islamic finance instruments, becoming an increasingly important consideration for both Muslims and non-Muslims from the perspective of investment and product innovation. Shariah boards need to keep up with the growth and sophistication of the industry and make sure they are as effective as possible. Some recommendations:  More training in economics, investments and legal issues related to investments and product innovation. The lack of knowledge about modern economic and legal issues can weigh down the ability of Shariah scholars to issue well-informed rulings on financial products and investment activities.  Placing specialized Shariah scholars on separate Shariah boards for different projects to work more efficiently on projects best suited to their particular areas of expertise. This process will ensure that the right scholars in the right numbers develop, certify and supervise the financial products and services endorsed by Islamic financial institutions.  Shariah boards should be independent from financial institutions in order to ensure transparency and efficiency when giving opinions on proposed contracts and transactions.  Shariah advisors should work closely with financial institutions and lawyers in developing new Islamic financial instruments.  There is a nagging concern about the availability of suitably qualified Shariah advisors. Their numbers need to be increased. This will allow more Shariah-compliant transactional procedures and more time for advisors to spend with economists and investment practitioners to develop new Islamic financial products.

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