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IMEFM
6,3

Sharia governance in Islamic

banks: effectiveness and
supervision model

226

Hichem Hamza
Graduate School of Business, University of Manouba, Tunis, Tunisia
Abstract
Purpose The Sharia governance is topic that has generated much interest in the literature of
Islamic banking industry. The Sharia supervision plays an essential role in the governance of Islamic
banks. The Sharia Board (SB) which is peculiar to Islamic banks is considered as the principal
component of the Sharia governance framework. The purpose of this paper is to examines the link
between Sharia compliance, the form of Sharia supervision and the effectiveness of Sharia governance.
Design/methodology/approach This paper compares two model of Sharia governance
framework, the first is the decentralized model in the Gulf Cooperation Council (GCC) and the
second is the centralized model in Malaysia.
Findings The independence of the SB in their mission of supervision and the consistency of Sharia
ruling are the principal components of an efficient Sharia governance structure. Centralized Sharia
governance system, basically in Malaysia, seems to be beneficial to the industry in term of
effectiveness and credibility of the Islamic banks.
Research limitations/implications The research focuses exclusively on the qualitative analysis
about the SB and Sharia governance in Islamic countries.
Practical implications The model of centralization is able to strengthen the position and the
independence of SB and can better examine the subjects of divergences between the whole of the SB in order
to promote, in the long term, the consistency of Fatwas and interpretations between banks and regions.
Originality/value To the best of our knowledge few studies have examined this subject in a
comparative discussion between MENA and Southeast Asia region. This paper contributes to the
literature on Sharia governance by considering the difference between these two regions in term of
supervision model of Sharia rules and principles and its application in Islamic banking.
Keywords Sharia Board, Sharia governance, Sharia supervision, Islamic banking regulation, Islam,
Banking
Paper type Research paper

International Journal of Islamic and

Middle Eastern Finance and
Management
Vol. 6 No. 3, 2013
pp. 226-237
q Emerald Group Publishing Limited
1753-8394
DOI 10.1108/IMEFM-02-2013-0021

1. Introduction
Islamic banks (IB) have the responsibility to ensure the compliance with the Sharia rules
of their products, instruments, operations, practices and management. The compliance
with the Sharia principles will be achieved by having a proper Sharia governance
framework. In this sense and in the aim of credibility, IB have established their own
Sharia Board (SB) usually comprised of a panel of Sharia scholars. The Sharia
governance which refers to all the elements about the active role of SB and compliance
with Sharia is strongly fundamental for IB. The compliance with the Sharia and the
implementation of Sharia governance is encouraged by international institutions of
regulation like Accounting and Auditing Organization for Islamic Financial Institution
(AAOIFI) and Islamic Financial Services Board (IFSB).
Today, some observers criticize the genuine morality of Islamic finance and
condemn the non-compliance of some Islamic products and operations. In fact, failure

to meet the underlying principles of the Islamic finance would give rise to Sharia
risk and damage the credibility and the reputation of the Islamic banking industry.
The credibility of IB is linked to the influence of SB in the banking decisions and the
consistency in the Sharia interpretation. Is there a code of ethical responsibility of
the SB? Does the SB have a real power on the financial operations rules? Does the IB
make a control on the consistency of the various decisions of the SB?
The non-compliance can be attributed to the passive role of the SB in the Sharia
governance scheme. The members of SB, appointed and remunerated by the IB, play
only the role of advisory bodies. They do not have the necessary authority to accomplish
the task and implement decisions and this can be explained by their dependence with the
management. Also, it should be noted that the diversity of backgrounds and the different
schools of jurisprudence of SB members as well as the regional context and
national regulatory environment in which the members of the SBs function can create
inconsistency in the interpretation of Sharia and may thus prevent the harmonization of
product and financial operations.
This situation has leaded some countries to develop Sharia governance through the
reinforcement of regulation and supervision of IB. In fact, the independence of the SB in
their mission of supervision and the consistency of Sharia ruling can contribute to an
efficient Sharia governance structure. The regulation of Sharia governance in IB aims
to preserve the credibility of the industry. The existence of efficient Sharia governance
enhances the stakeholders confidence in the IBs products and activities. In Malaysia
and in the Gulf Cooperation Council (GCC), both are the great centers of the Islamic
finance, the structure and regulation of Sharia governance in IB is not the same. In
Malaysia, the SB governance is based on centralized model while in GCC countries we
find a decentralized model.
The main objective of this paper is to examine the effectiveness of Sharia governance
in the IB in a context regulation change. Our idea is to make a conceptual relationship
between Sharia compliance, the form of Sharia supervision and the Sharia governance
of IB. In this relationship, the essential role is done by the internal and the external SB.
The aim is to examine the role of SB in enhancing the Sharia compliance of IB through
the Sharia supervision and the impact on Sharia governance and credibility.
This paper is divided into two main sections. Section 2 identifies critical issues
about the risk of Sharia non-compliance and examines the independence of SB and the
consistency of Sharia interpretation as fundament of Sharia governance effectiveness.
Section 3 discusses the regulatory framework of the Sharia governance model in some
Islamic countries. The last section concludes the discussion.
2. Supervision and Sharia governance effectiveness
The Sharia non-compliance risk arises from failure to comply with the Sharia rules and
principles determined by the SB of the bank or the relevant body in the jurisdiction in
which the IB operate (IFSB-1, 2005). Sharia non-compliance risk can hit asset values of
IB with possible loss of investment or reinvestment income. The direct consequence of
non-compliance can be the fund withdrawals and cancellation of investment contracts
causing a decline in profits and performance of IB. The non-compliance with the Sharia
affects public confidence in Islamic finance and exposes the IB to the incredibility risk.
In this sense, IB should have a SB who has to ensure the compliance of products and
services offered to consumers and investors with the rules and principles of the Sharia.

Sharia
governance in
Islamic banks
227

IMEFM
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228

The SB is composed of experts (Foukahas) in Islamic jurisprudence or Fiqh

Al-Mouamalat and with sufficient knowledge of contemporary finance. The main role
of the SB is focused on the formulation of fatwas and review process aiming to provide
a common position in economics, finance and banking.
2.1 Certification and review roles of SB
As described by DeLorenzo (2007), the SB assists in all steps of the products or service
process and lifecycle. First, the SB assists in the pre-certification step in which product is
under development and structuring. Then, the SB will issue a fatwa to certify the
finished product or service before its introduction in the market. After that, the SB should
follow the evolution of product by identifying and mitigating all possible risk primarily
the Sharia compliance risk. For the successful management of Sharia compliance risk
and during all steps, SB must work closely with management throughout the process of
product development and its lifecycle.
According to the AAOIFI Governance Standard for IB[1] (GSIB Nos 1 and 2), Sharia
Committee is an independent body entrusted with the duty of directing, reviewing and
supervising the activities of the Islamic financial institution in order to ensure that they
are in compliance with Islamic Sharia rules and principles. The AAOIFI (1999, 2008)
Standard requires at least three individuals in the board. In contemporary practice,
most of the IB appoint between three and six members. According to the principles of
the IFSB (2005, 2006)[2], an appropriate mechanism must be created to ensure the
compliance with the Sharia principles, this adequate system includes SB.
The SB is assisted by Sharia review to monitor and oversee the compliance of all
actions and commitments of IB with SB ruling. Following the recommendation GSIB No. 3
of the AAOIFI, most of IB have established an internal Sharia review structure, generally
in the form of review units. With a methodological approach in conducting the review, the
internal Sharia review assesses compliance of all transactions with the fatwas issued by
the Sharia Committee in term of proper implementation by the managers. Even after using
a new product, the audit of the operations of financial institutions is very important to
ensure that actual practice conforms to the requirements of Sharia (Iqbal et al., 1998). In the
end of the annual period, a report is issued to certify that all financial transactions comply
with the Sharia principles. This constitutes insurance for customers on the compatibility
of products and practices of IB with the Sharia. Although the Sharia review is in charge of
the review of all transactions, the Sharia Committee remains the ultimate arbiter in
matters of Sharia compliance (Grais and Pellegrini, 2006).
The separation between the SB and the Sharia review or audit is an essential
requirement for efficient supervision model. Failure in this separation implies that the
fatwa issued may be modified by the Sharia Committee when there is slippage on the part
of executive managers. With this separation we can avoid certain complicity between
managers and Sharia Committee. The executive managers have an ethical responsibility
to implement correctly the recommendation of SB. Also, the board of directors has a moral
responsibility to request a perfect compliance of the IB behavior with the Sharia. The
determination of the board of directors is essential for the implementation of efficient
Sharia governance (Figure 1).
Sharia supervision operates at the macro level as well as the micro level
(Nathan Garas and Pierce, 2010). It is clear that SB, through the supervision of the
banking activities, is the most important governance structure to ensure compliance

with Sharia. The soundness and the reliability of the Sharia governance will depend
basically on the independence of SB and the consistency of pronouncements or Sharia
ruling between the various SBs in a state or a region.
2.2 Independence of the SB
Given their vital place and nature of their tasks, members of SB are directly involved in
governance with board of directors and managers. The impact of ethics on the financial
performance can be the cause of divergence between SB, executive management and
board of directors. In this sense, IFSB (2009) stresses particularly the independence of
SB from the management of IB and how the potential interest conflicts should be
managed. As the members of SB are appointed and remunerated by the IB, for a
service of assessment and review provided, is potentially problematic and could create
a conflict of interest. In this situation they cannot be completely impartial and
independent.
The SB members are under double pressure, first, the pressure of the IB for
commercial reasons and second, they seek to preserve their reputation in order that
validated products must be without fault. For example, Sharia scholars must prohibit
the IB to realize certain profitable transactions or impose a reallocation of illicit income to
charity which leads to a lower performance. Under these circumstances, the IB managers
may be tempted to use their leverage to influence SB members (Grais and Pellegrini,
2006). The religious factor, which gives much reason for Islamic finance compared to the
conventional system, will lose of its interest compared to the interference of the IB
managers who use SB in their own way. Indeed, in the aim to preserve their status, the
SBs give their agreement to products that are moving away from Sharia principles. The
IB run a risk of reputation, when they are perceived as not complying with the rules of
Sharia, this could involve a movement of distrust of certain stakeholders and
withdrawal of deposits by the clients.
Iqbal et al. (1998) propose, for the long-term interest of IB, the establishment of an
independent SB to oversee the implementation of the principles of Sharia. These authors
emphasize that if the Islamic banking system is not perceived as Islamic, existing IB
will soon lose much of their market. Bin Ibrahim (2009) stresses the importance for the
board of directors to understand clearly the role of Sharia governance and acknowledge
the independence of SB. If there is an influence from board of directors or managers
this will compromise the governance process and taint the Sharia decision. In fact, the
integrity of the SB is possible only with whole independence in the execution of their
missions. This independence reinforces the credibility of the IB with the public,

Sharia
governance in
Islamic banks
229

Sharia Governance in
Islamic banks

Micro supervision in the IB level:

Macro supervision in the country level:
Independence of the Sharia committee and
Central bank and regulation of Sharia
Sharia review
ruling consistency

Sharia Compliance

Figure 1.
Sharia governance
and supervision

IMEFM
6,3

230

the investors and the companies. This independence is one of the key factors of good
governance. The appointment and the remuneration should be done by another body
like central bank or government to ensure the independence of the SB.
Another element which is related to the SB independence is the confidentiality of
information. In fact, the SB members who sit on the SB of more than one financial
institution should preserve the confidentiality of each IB in term of information and
documentation about contracts, operations and activities. With the possession of this
type of information, the SB members may find themselves in a strong position with
managers and board of directors and this will perhaps create another type of conflict of
interest. So if confidentiality is compromised an IB should have procedures in place to
take appropriate disciplinary action to protect its interests.
2.3 The consistency of Sharia ruling
Sharia which governs all financial decisions is subject to a variety of interpretations and
contexts in which it applies. In economic and financial transactions, Sharia is subject to
interpretations from different schools of thought (Madhaheb) which generate a diversity
of views on the same issues. The variations or divergence between SBs members in their
opinions on the permissibility of the implementation of certain Islamic financial products
may be attributed to a diversity of backgrounds, to schools of jurisprudence, as well as to
the regional context and national regulatory environment in which the members of the
SBs function (Gintzburger, 2010). Questions were raised about the differing judgments
issued for similar practices causing confusion for all IB customers. For the same product,
such differences were found between banks or geographic areas more or less liberal.
Sharia scholars of a country may permit a financial transaction which may differ
substantially from the point of view of Sharia scholars of other country.
The heterogeneity on similar matters may thus prevent the harmonization of product
and financial procedures. This diversity of opinion among the Sharia scholars that compose
the religious councils could be one of the greatest challenges to be raised by Islamic finance.
The lack of centralization and religious supervision can lead to a lack of standardization of
Sharia ruling and uniformity in Islamic financial and banking products within the same
jurisdictions and among various regions. The aim of centralized regulation is to ensure the
harmonization of Sharia ruling and to reinforce the credibility of SB.
Ingar (2008) stresses the fact that each bank has its own SB amplifies the lack of
consistency despite the fact that often the same SB members sit in several IB. Such
situation creates a lack of efficiency and coherence throughout the Islamic financial
industry. Ingar (2008) also states that environmental factors increase the disparities
between the SBs like the strong competitive environment in which IB tend to have
monopolistic behavior. Then the circles of intellectuals and religious organizations
have a significant influence on the SB. There is also the degree of practice and religious
education of the population which appears to be another influencing factor. It seems
that more a community is educated religiously; it is more demanding about the product
compliance to the Sharia.
If this heterogeneity is properly harmonized across different IB and regions, it can
become a great strength for the Islamic financial services industry and will resolve the
conflicting Sharia opinions and interpretations. Khan and Feddad (2004) suggest
the gradual international codification and standardization of fatwas. This duty may be
delegated to an existing international organization, whose mission already involves the

promotion of harmonization and convergence of Sharia interpretations (Grais and

Pellegrini, 2006). The IFSB Standard Guideline on Sharia Governance (2009) encourage
the improving of consistency in terms of the professionalism of members of the SB,
which could be crucial in enhancing their credibility and confirming their integrity
through a set of best practices. Also, the purpose of the AAOIFIs SB is to achieve
harmonization and convergence in the concepts and application among the Sharia
supervisory boards of IB to avoid contradiction or inconsistency between the fatwas
and applications by these institutions, thereby providing a pro-active role for the
Sharia supervisory boards of IB and central banks.

Sharia
governance in
Islamic banks
231

3. Models of Sharia governance

The SB plays crucial role in monitoring and ensuring best practices of Sharia
governance which is unique to IB. In practice, the Sharia governance framework is
more centralized in Malaysia, Sudan and Pakistan than in the GCC countries.
3.1 The decentralized model
In this approach the IB have their own SBs which are independent of the Central Bank.
In the GCC countries and other states, each IB has its own SB, which decides on the
conformity of products offered. It is the cases of Kuwait, Saudi Arabia, Bahrain, Qatar,
the UAE, Jordan, Yemen, Gambia and Indonesia. In the GCC, there are no effective
national SB at the level of central banks. There are individual SBs at the level of the IB.
The permissibility of contracts and Sharia compliant financial products is decided at
the level of these institutions by their own Sharia Committee. We note the influence of
standards and opinions of the AAOIFI board on most IB SBs in the GCC states.
The national SB of the Central Bank of Bahrain serve and asses only the Sharia
compliance of its own products. The members of national SB are not restricted to serve
any financial institution, also no limitation to serve more than one institution. The IB
shall establish a Sharia Supervisory Committee to ensure and review the Sharia
compliance products in line with the AAOIFIs Governance Standards. All the Sharia
Supervisory Committee have to submit to the shareholders an annual report and review
about the operations and the activities of the IB. The AAOIFI aims to harmonize
concepts and applications among Sharia Supervisory Committee of various IB. Its
objective is to prevent inconsistencies between Sharia Supervisory Committee of
different banks and assist with developing new products (Figure 2).
In the case of Kuwait, the Central Bank Law 32/1968 provides that every IB shall have
its own Sharia Supervisory Board. IBs SB are influenced by both AAOIFI and the
Islamic Fiqh Academy Sharia standards. In the case of conflict of opinions concerning

Sharia
Committee

Sharia
Governance in
Islamic Banks

AAOIFI Governance
Standards

Islamic Fiqh
Academy (OIC)

Review
Committee

Figure 2.
Sharia governance in GCC

IMEFM
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232

Table I.
Sharia governance
regulation in the GCC

a Sharia ruling, disagreement or disputes among SB members this should be referred to

the board of directors of the IB. They can then transfer the matter to the fatwa board of
the Ministry of Awqaf and Islamic Affairs, which will serve as the final authority and
which can be considered as a national SB (Wilson, 2009). The fatwa board is not
authorized to issue fatwa for products of the IB and the Sharia compliance review is done
by the internal audit committee of each IB as there is no national approval by the central
financial authorities on products issued by IB (Gintzburger, 2010). There is no restriction
for the members of the fatwa board or the SB to serve in any IB. Also, there is no
limitation to serve as a member of Sharia Supervisory Board of more than one IB. SBs are
required to submit an annual report to the general assembly that the banks operations
comply with Sharia principles and this report should be included in the annual financial
statements.
In the UAE, the first Islamic banking law in the GCC was implemented in 1985. The
Article 6 of the UAE Islamic banking law states that each IB, financial institution and
investment company should establish its own Sharia Supervisory Authority to ensure
that its transactions and practices conform to Islamic law. The same law indicates the
establishment of Higher Sharia Authority to supervise IB, financial institutions and
investment companies (Art. 5, Federal Law No. 6 of 1985). This body will be the final
authority in Sharia matters in Islamic banking and finance. No restrictions are imposed
to the Sharia scholars of different SBs.
In Qatar, there is no Central Banks SB, but disputes and issues can be referred to
the Supreme Sharia Council of the Ministry of Awqaf. This council has no influence on
the permissibility of Islamic financial products. Like in Kuwait, every IB shall have its
own Sharia Supervisory Board and the Sharia compliance review is done by the
internal audit committee of IB. There is no restriction to Sharia scholars to be a
member of SB in more than one IB.
In Saudi Arabia there is no national SB. There are Sharia supervisory boards at the
level of IB which are only influenced by the Sharia standards of the Islamic Fiqh
Academy. From the perspective of jurisprudence, the Islamic Fiqh Academy is involved
in establishing legal norms and the treatment of subjects differences (Table I).
In the GCC countries, some uniformity is ensured by the fact that most Sharia scholars
sit on several SB. This type of approach allows products innovation contributing
significantly to the dynamism of the industry (Wilson, 2009). Nevertheless, the risk is the
lack of regulation where the regulators do not have their own SBs and therefore the issue

Fatwa issued by IB
Existence of review
committee
Presence of scholars in
other IB
Nomination of Sharia
scholars by IB
Authority of Sharia
conflict

Bahrain

Kuwait

UAE

Qatar

KSA

U
U

U
U

U
U

U
U

U
U

The national
SB in Central
Bank

Ministry of
Awqaf and
Islamic Affairs

Higher
Sharia
Authority

The
Ministry
of Awqaf

Islamic Fiqh
Academy

of dispute resolution becomes more problematic, this will gives rise to inconsistencies
in the fatwas across SB, or even over time in the same SB.
3.2 The centralized model
The centralized approach is based on central SB, attached to the Central Bank, which
rules on the conformity of products and activities of all the IB. Each IB shall have its
own SB, but it must comply with the rules set by the central SB. The existence of a SB
in the Central Bank will reduce the differences of interpretation, provided that the
Central Bank does not try to impose his own opinions but to crystallize the views
through open debate (Chapra and Khan, 2000).
A centralized Sharia governance model is practiced in Malaysia, Pakistan and
Sudan. In Malaysia, the central financial authorities are the Central Bank, Bank Negara
Malaysia, and the Securities Commission. Two Sharia governance structure has been
established, comprising a Sharia Advisory Council (SAC) at the Central Bank of
Malaysia for both financial authorities and a Sharia Committee in each IB. The Sharia
standards followed are those of the SAC of Bank Negara Malaysia and of the Securities
Commission. These standards are influenced externally by both the Sharia standards
of the AAOIFI, the Islamic Fiqh Academy (Mujmaal fiqh il islamy) of the OIC in
Jeddah, the IFSB standards and internally by the opinions of Malaysian SB members
with certain opinions particular to Malaysia (Gintzburger, 2010). The review and audit
of Sharia compliance is done by the IB to support Sharia Committee.
In Malaysia, the Islamic Banking Act 1983 and Takaful Act 1984 require the
establishment of an independent Sharia Committee within each IB with a minimum of
three and a maximum of seven Muslim religious scholars[3]. The first Sharia
Committee was set up in 1983 by Bank Islam Malaysia Berhad (BIMB) which started
its operations as Malaysias first IB on 1 July 1983.
According to the Financial Stability and Payment Systems Report (2010), the SAC was
established in 1 May 1997 as the highest authority and sole reference on all Sharia matters
pertaining to banking and takaful. The SAC is responsible for all Sharia compliancy
matters and also for validating all Islamic banking and takaful products to ensure their
compliance with Sharia. The Sharia Committee will refer to the SAC for its resolutions on a
Sharia issue. The SAC serves as the final arbiter in the interpretation of Sharia principles
on Islamic banking and takaful matters and practices. The aim is to ensure uniformity and
harmonization of Sharia interpretations and strengthening the regulatory framework and
promoting good governance within the Islamic financial sector.
Apart from the central SAC, Sharia Committee at the IB level remains the most
important governance mechanism to ensure compliance with Sharia. The IB need to
receive approval from the financial authorities to appoint any Sharia scholars as SB
members. Both the SAC in the Central Bank and the Sharia Committee have set the
standard for any Sharia matters and governance for the operations of the IB. The
authorities have a monitoring system to check Sharia compliance and governance in
order to protect the interest of the Sharia framework, the shareholders and stakeholders
of the IB as well as their customers (Gintzburger, 2010) (Figure 3).
In December 2004, Bank Negara Malaysia issued the Guidelines on the Governance
of Sharia Committee for the IB outlining the role, scope of duties and responsibilities of
a Sharia Committee and its members and the relationship and working arrangement
between the Sharia Committee at individual institutions and the SAC at the

Sharia
governance in
Islamic banks
233

IMEFM
6,3

Sharia
Committee

AAOIFI
Governance
Standards

Sharia
Gouvernance

BNM
Guidelines

Audit
Committee

Islamic
Banks

Figure 3.
Sharia governance
standards

Islamic
Banks

234

Sharia Advisory Council

(SAC)

IFSB
Standards

Source: Bin Hasan (2007)

national level. Only the SB of Bank Negara and the Securities Commission can issue
fatwa, the role of the Sharia Committee of IB is to ensure that this fatwa is implemented
with respect to the contracts offered. Members of the SBs of Bank Negara and the
Securities Commission cannot serve on the boards of Islamic financial institutions and
vice versa. For reasons of confidentiality, Sharia Committee members can only serve as
a member of Sharia Committee in one financial institution in the same industry (Islamic
banking and takaful are considered as different industries).
Similar to Malaysia, Pakistan also has established a SB at Central bank, which is the
sole authority in matters pertaining to Islamic finance with the power to issue fatwa. It
has also required the establishment of a Sharia advisor for each IB. In 2008, the State
Bank of Pakistan issued a detailed instructions and guidelines for Sharia compliance in
Islamic banking institutions[4]. According to these instructions, SB or advisors should
be appointed by the board of directors in the case of a domestic bank, or by the
management in the case of foreign IB having branches in Pakistan. Any member of SB
at the State Bank of Pakistan is allowed to serve as Sharia advisor for only one
financial institution. In the case of conflict of opinions, disagreement or disputes among
Sharia advisors members, it should be referred to the State Bank of Pakistans SB
which is the final authority and their decisions are compulsory (Table II).
In Sudan, the government has developed continuously the Islamic finance since the
establishment of the first Sharia-compliant bank, the Faisal Islamic Bank in 1978. In
1984, the banking and financial industry changed its practices to conform with Sharia.
Similar to Malaysia, the government established in 1992 a SB at Central bank called the

Table II.
Sharia governance
regulation in the
Malaysia, Pakistan
and Sudan

Fatwa issue done by Central Bank

Review committee
Presence of scholars in other IB
Appointment of Sharia scholars by IB
Authority of Sharia conflict
Note: aAfter approval of Central Bank

Malaysia

Pakistan

Sudan

U
U
No
U
Central Bank

U
U
U
U
Central Bank

U
U
U
Ua
Central Bank

High Sharia Supervisory Board (HSSB) to ensure compatibility of financial practices

with Islamic principles (Article (7) of 1992 Act). The body is a centralized national
Sharia advisory council and is the sole authority in matters pertaining to Islamic
finance with the power to issue fatwa. In fact, the Sharia compliance is supervised at
two levels: the HSSB and the IBs Sharia Supervisory Boards.
The HSSB supervises the Sharia Supervisory Boards of IB Governance as well as
products and the conformity of the Central Bank activities to the principles of the
Sharia. The Bank of Sudan Act passed in 2002 (law regulating the banking activity)
specifically stipulates that the Bank will abide by Islamic Sharia principles in the
performance of its duties and objects, and in the exercise of its functions and supervision
of the banking systems. The council includes 11 people, the majority of whom are Sharia
scholars also we find economists, specialists in finance, jurists and bankers (including
the Central Bank Governor) among its members. All members are appointed by the
president of the country upon recommendation of the bank Sudans governor and
the minister of finance. The members are allowed to sit in HSSB and in the SBs of IB.
The HSSB provide fatwa on all Sharia-related matters. It studies and suggests solutions
for the problems that face the banking sector with regards to the application of Sharia
principles. The HSSB has the final decision in cases where there are different opinions on
an issue specific to banking and insurance. The HSSB intermediates for disputes
between various IB, IB and Bank of Sudan, and IB and its customers. A bank can also
turn to the HSSB as the ultimate authority if it does not agree with a decision of its
internal SB (Bekin, 2009). The board is also empowered to inspect banks and insurance
companies to ensure proper implementation of Sharia principles and submit to the
Minister of Finance annual reports on the consistency of banking and insurance
transactions with Sharia principles.
In addition to the HSSB for the application and the supervision of Sharia governance,
every IB is required to establish its Sharia Supervisory Board composed of three
members. The nominations of the Sharia Supervisory Board membership are done by
the management after approval by the general assembly, they have to be ratified and
approved by HSSB. The Sharia Supervisory Boards provide fatwa on matters referred to
it by the IB. It examines and revisits all IBs transactions and certifies conformity of the
IBs performance with Sharia.
4. Conclusion
Sharia compliance allows the IB to consolidate their differentiation factor compared to
conventional financial institutions and support their reputation and credibility. The
reinforcement of the SB role in the IB is necessary and allows strengthening of the Sharia
decision-making process. This role should be emphasized on control and review to
ensure compliance with Sharia rules. In this sense, regarding their tasks, the
appointment and the remuneration of the SB members should be done by another body
like central bank or government to ensure the independence of the SB which is crucial for
credibility. Also, the divergence of interpretations or inconsistency between the SBs of
IB can affect the credibility of the industry. It is requesting a standardization of Sharia
ruling and uniformity in Islamic financial and banking products within the same
regulation and among various regions.
The Sharia governance frameworks reflect a difference in the approach of
governance and regional variations in the application of Islamic finance contracts.

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236

In the GCC countries, the decentralized approach is often applied where each IB has its
SB which is independent from the Central Bank authority. With this approach it is
difficult to achieve consensus in Sharia interpretation and to manage properly the
existing interests conflicts. In Malaysia basically, the centralized approach knows
advances in term of fatwa and review and seems to give harmonization to the industry.
The Central Bank of Malaysia, Bank Negara, has tightened Sharia rules for IB by
requiring them to set up Sharia review, audit and risk management functions to
reinforce compliance. In Africa, only Sudan has a Sharia governance framework which
is based on centralized approach like in Malaysia. The existence of decentralized and
centralized approaches in the same time can increase significantly the regional
differences in the application of Islamic finance contracts. This situation is harmful to
the credibility of Islamic industry and need more coordination between main players.
The model of centralization is able to strengthen the position and the independence
of SB and can better examine the subjects of divergences between the whole of the SB
in order to promote, in the long term, the consistency of fatwas and interpretations
between banks and regions. The existence of a model of centralization becomes
obvious and starts taking place in several countries. In this model, the question now is
about the cooperation between the internal SB (micro-supervision) and the central SB
(macro-supervision). In this sense the creation of council of all SB of all the IB in a
country can harmonize Sharia governance practices in collaboration with the Central
Bank.
Notes
1. The AAOIFI had provided standards on Sharia Supervisory Board, Sharia Review and
Internal Sharia review under its Governance Standard (GSIB, 1999 and 2008).
2. Principle 3.1 of the IFSB Guiding Principles on Corporate Governance (IFSB-3, 2006).
Principle 7.1 of the IFSB Guiding Principles on Risk Management (IFSB-1, 2005).
3. Pursuant to Section 3 (5) (b) of the Islamic Banking Act 1983 (IBA 1983) for Islamic banks,
Section 124 (7) of the Banking and Financial Institution Act 1989 (BAFIA 1989) for Islamic
Banking Scheme Banks, Section 8 (3) (a) Takaful Act 1984 (TA 1984) for Takaful operators
and Section 16B of the Central Bank of Malaysia (Amendment) Act 2003 (CBA 2003) for
Central Bank of Malaysia.
4. State Bank of Pakistan, Instructions for Sharia Compliance in Islamic Banking Institutions,
Karachi, Annexure 1 of IBD Circular Nos. 1 and 2 of 2008.
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Further reading
Chapra, M.U. (2008), The global financial crisis: can Islamic finance help minimize the crisis in
the future?, paper presented at the Forum on the Global Financial Crisis Held at the
Islamic Development Bank, Jeddah, Saudi Arabia, October.
IFSB (2010), Islamic Finance and Global Financial Stability (Report), IFSB, Kuala Lumpur.
Corresponding author
Hichem Hamza can be contacted at: hichemhamza@yahoo.fr

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