Basically, this article is highlighting the Shari’ah governance system where addressed the Shari’ah non-compliance risk in the Islamic bank and as a risk management tool to alleviate Shari’ah non-compliance risk so that it will affirm the credibility and effectiveness of Shari’ah governance. In addition, the implementation of the Shari’ah Board (SB) as part of the governance in Islamic bank also ensures that the bank is doing its operation and business in a permissible manner as outlined by the Shari’ah.
According to the article, it’s elaborating the Shari’ah governance structure whereby by having Shari’ah governance in Islamic bank will help the Islamic Financial Institution to ensure that all its operations and business activities are in accordance with Shari’ah. Not only that, Shari’ah governance also provides a comprehensive guidance, especially to the Shari’ah Board as well as the management of the Islamic bank in discharging its duties in matters relating to Shari’ah so that the credibility and effectiveness of Shari’ah governance in the Islamic bank could be identified. The main purpose of this article is to look closely at the Shari’ah governance in Islamic Bank in term of Shari’ah compliant, Shari’ah supervision as well as the effectiveness of Shari’ah governance.
As Shari’ah principles are the foundation for the practice of Islamic finance, the comprehensive compliance with Shari’ah principles would bring confidence to the public and financial market on the credibility of Islamic bank operations. In order to meet the public confidence, credible operations of Shari’ah compliant status and good Shari’ah governance are needed in the Islamic bank. This had been retrieved from several materials in the form of articles as well as published material like the model of Shari’ah governance itself. For example, the consistency of Shari’ah ruling made by the Shari’ah Board is centralized even though within the different Islamic bank. This may help the Islamic financial institution to overcome any problem arise in term of Shari’ah opinion and interpretation about the product.
Generally, the effectiveness of Shari’ah governance can be seen through the role of the Shari’ah board as well as its standardization in making a Shari’ah ruling towards the concept of the products and structure according to the Shari’ah. The harmonization in making a Shari’ah ruling will help the public in understanding the opinion provided by the different school of thought regarding the demanding of the diverse needs of customers. Some of the Islamic financial institutions might face the issued regarding the harmonization of Shari’ah ruling. In order to overcome this problem, Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) which one of the international institutions of regulation had prepared the Shari’ah standard from Shari’ah scholars across the world. The Shari’ah standard may be in the form of a regulatory framework for some of the countries. Usually, the performance of Islamic bank will be monitoring by the central bank through the establishment of the Shari’ah Board in the Islamic bank to guide in term of the rules and to help resolve any conflict arise of Shari’ah opinion.
The implementation of the Shari’ah board actually reflected the supervision that has been used by the Islamic bank in order to prevent bank from involving in risky business activities especially regarding the Shari’ah compliance of the bank’s operation. As related in chapter of banking regulation and supervision, the Shari’ah board has a relation to the Shari’ah Advisory Council (SAC) where requires the Shari’ah board to help SAC on any matters referred by Islamic banking. The Shari’ah board must able to explain any Shari’ah issues arise upfront and must provide the suggestion for a decision that supported by the Shari’ah jurisprudence as the sources. Later, all decisions that had been made by SAC must be implemented properly by Islamic financial institutions.
A model of Shari’ah governance is being used to be compared to analyze the Shari’ah Board role in monitoring the conduct in term of Shari’ah in the Islamic bank. One of the models is the decentralized model in the Gulf Cooperation Council (GCC) and the other one is the centralized model in Malaysia, Sudan, and Pakistan. Based on both models, it has been identified that the centralized model had the significant elements of the efficiency of the Shari’ah governance structure which through the independence of the Shari’ah board from the management of Islamic banks in the supervision as well as the consistency of the Shari’ah ruling that had been made. Even though both of the models have its own Shari’ah board in the Islamic bank, the centralized model seems to act in accordance with the central bank while decentralized model does not have a national Shari’ah board at the central bank. Furthermore, under the centralized model, the Shari’ah Advisory Committee will act as a reference to the Shari’ah Board when there are Shari’ah issues arises regarding the Shari’ah matters in the Islamic bank. On the contrary, one of the GCC country like Kuwait, the ruling made by the Shari’ah board is determined by AAOIFI and Islamic Fiqh Academy Shari’ah Standard where when there is a conflict of opinion or disputes, the members of the Shari’ah board may refer to the management of the Islamic bank. Thus, as compared both of the models, centralized Shari’ah model given more beneficial to the Islamic financial industry in term of the effectiveness and the credibility of the Islamic banks. This had been reviewed by taken the implementation of the Shari’ah governance system from some of the countries which already structured its Shari’ah governance structure.
The Shari’ah governance provides a strong foundation for the advancement of the Islamic banking industry because it traces comprehensiveness of the guidelines of the roles of the Shari’ah committee as well as a National Shari’ahAdvisory Committee to do the tasks. This is necessary because the guideline is a significant element that should act as a sources before any implementation need to be done. As stated, that Shari’ah board roles in Islamic bank are crucial to strengthening the Shari’ah decision-making process, it was agreeable due to enhancing the credibility and effectiveness in the industry itself. To create a standardization, the existence of a model will help the Shari’ah board to promote the uniformity in Islamic banking products in a Shari’ah manner within the same regulation among various of regions.
Some of the strength that had been found out were Shari’ah governance is a significant mechanism to ensure the Islamic bank implied based on Shari’ah principles in all aspects. Another strength is the Shari’ah Board comprises of experts in the field of Shari’ah matters which have knowledge in Fiqh and Usul Fiqh as well as some of the knowledge in the finance field. This is because, with the knowledge of Usul Fiqh that the Shari’ah board possesses, the members can issue the fatwa so that any issue arise will be resolved.
On the other hand, there is also a weakness where the lack of consistency of Shari’ah ruling even the same Shari’ah Board sit on several Islamic banks. Sometimes, the inconsistency may happen due to the multitude of the Shari’ah thoughts in the same case arise. The possession of the knowledge in both Usul Fiqh and finance acquired by the Shari’ah Board also limited because not all people are able to learn both fields easily. As the knowledge of Islamic finance is still new and fresh, there is only a few or slight references are written in Islamic finance. This will bring a lower contribution of the new generation, especially the academician to specialized in both Shari’ah and finance.
Overall, the involvement of the Shari’ah board in Islamic bank as a player help to bring an effective of Shari’ah governance because its members play important roles in ensuring a good Shari’ah governance. As the role of Shari’ah committee are advising the management on Shari’ah matters pertaining to the products and services, the decision-making process made will be properly clear enough to be recognized. The good Shari’ah governance also can bring a public confidence in the Islamic banking system so that it will help the Islamic banking and finance industry toward the tremendous growth in the future.
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