Islamic finance offers products and services that comply with Islamic law (sharia) but who decides what is and is not sharia-compliant and what mechanisms exist to enforce those judgments?Each Islamic finance institution has a sharia supervisory board (SSB). The board is composed of at least three jurists. They are paid by the bank but act as independent consultants. Their role is both consultative and regulatory: They answer the staff’s questions, advise on charity contributions (zakat), verify operations and certify products.
SSBs decide what is allowed (halal) or forbidden (haram) based on the two main sources of Islamic law: the Quran and the Sunnah—or what the Prophet Muhammad reportedly said and did during his lifetime. Board decisions are taken by majority vote and binding on the bank.
SSB members are typically religious scholars who specialize in Islamic jurisprudence. In Western countries like the UK, they can also be non-Muslims experts who have studied such matters extensively.
Over the past 10 years, Islamic finance has rapidly expanded across the world and finding qualified people to sit on SSBs has become challenging. In the world of Islamic finance, reputation is key and sharia non-compliance can be fatal to a bank. A number of private firms have emerged over the past few years offering sharia compliance services or consultancies. Their clients are Islamic banks but also conventional lenders and companies who wish to develop products or acquire certifications that will allow them to tap into the Islamic market.
These consulting firms usually employ a group of Islamic scholars who function like an externalised sharia board, providing guidance and issuing Islamic rulings (fatwas) in exchange for a fee. At there international level, there are two supervisory bodies for Islamic finance: the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Malaysian Islamic Financial Services Board (IFSB).
These bodies collaborate with institutions such as the IMF or the World Bank to promote sharia compliance globally. The AAOIFI sets basic standards for the Islamic finance industry while the IFSB issues recommendations based on risk assessment.
In Bahrain and the United Arab Emirates, AAOIFI standards are mandatory but in most countries, their standards and recommendations are not binding. If a bank doesn’t comply, there are no sanctions. It is up to each country’s government to enforce certain rules through their central banks who impose those rules on sharia boards.—Agencies
