Islamic Finance is very much now international in scope and depth. Increasingly this internationalisation is demanding that institutions have the framework for a Shariah compliant process in a much more coherent structured manner. Shariah governance needs to be more aligned to these globalisation trends within Islamic Finance Institutions (IFIs) as well as the general financial industry. There is increasing demand for and indeed an imperative requirement for proper, transparent and well thought-out Shariah corporate governance strategies.
Shariah Governance is not a stationary process but evolving according to the dynamics of fatwas (Islamic legal opinions issues by competent scholars of Shariah) and the financial markets. Better governance principles can be adopted and developed by tapping into this evolving process, which would garner increased credibility in the marketplace. To understand Islamic Finance properly one does need a strong grasp of many of the key principles and strategies of conventional finance. Islamic Finance scholars are well versed in Islamic structures (e.g Musharakah, Murabahah, Ijarah, Takaful etc.). Yet they have limited exposure to more developing areas of finance such as private equity, hedge funds and other commodity and foreign exchanges related investments, where the opinions are less consistent. This presents opportunities to enhance and develop knowledge, and develop products that ultimately deliver choices for the Islamic Finance investors. This will have the crucial benefit of broadening the platform for Islamic Finance products and creating real innovation and progress in the actual front end delivery of products, so that theory moves onto consumer benefit which is the key benefit to Islamic Finance Institutions.
Often a pragmatic approach needs to be taken within the context of Islamic Finance so that the spirit of its philosophy is adopted continuously. Whilst there are global standards on Islamic Finance in the context of financial services and banks as promulgated by IFSB and AAOIFI, these need to be properly adhered to, consistently applied and converged around key focused principles. These standards then need to be covered more widely as products evolve.
Islamic Finance and global finance are increasingly complex and continue to develop at a fast pace. Best practice in Islamic Finance and product development needs to be adopted in a much more broader and holistic manner. A one size fits all framework no longer works and is not credible. It is necessary to bring the whole Shariah governance process more in line with professional governance practices adopted elsewhere - be it in auditing, finance, shareholder governance etc. with the ultimate aim of having more transparent, more developed and more accountable Shariah Supervisory Boards. By having such frameworks in place this will mean that confidence and credibility in Islamic Finance increases and develops across IFIs. This process also needs ongoing development and perhaps needs to include relevant outsiders away from finance and/or Islamic Finance to add further credibility to the process and make the solutions more rounded and longer term.
It is interesting that, when looking at the construct of Shariah boards, practices vary widely across countries and financial institutions. Certain countries have Central Shariah Boards, (typically hosted by the Central Bank). In Pakistan, for example, the minimum number of scholars allowed in a Shariah board is one, whereas for Malaysia it is three. Other rules such as those governing conflict of interest and disclosure vary across different jurisdictions. Indeed, it could be argued that many countries have very relaxed standards. All of these issues needs to systematically developing into more coherent frameworks and indeed there could be an argument made that those countries that currently do not have a central Shariah board should start the process of undertaking such an initiative. This would create a focal point for all Islamic Finance Shariah activities and create real leadership in this area and align activities such as Shariah governance and compliance alongside such central board activities. With the increasing sophistication in finance, now is an ideal opportunity for different Islamic Finance bodies and jurisdictions to show real leadership in this area and move from the rhetoric into actual policy implementation across a number of areas.
Alongside the activities of a Shariah corporate governance strategy would be to develop and enhance continuous professional development (CPD) of Shariah scholars to maintain and enhance competency. This is a key area of focus that the Islamic Finance Council UK has been developing over the last two years, having held a number of sessions with scholars in the UK and Malaysia. In these sessions, conventional finance subjects are covered in detail to give the Shariah scholars a strong understanding on conventional finance principles. An understanding of these principles is vital in the current complex and global financial market. Topics such as investment management and alternative asset classes have been discussed and developed and more sessions are planned in due course. The Islamic Finance Council UK undertakes this initiative alongside the Chartered Institute for Securities and Investments (CISI) one of the leading financial training and development bodies in the UK. Recently the IFC UK entered into a partnership agreement with the Bahrain based Wafq Fund, established by the Central Bank of Bahrain, to deliver the session there. Such CPD programs are vital if ongoing competency in the overall Shariah Governance process is to be maintained and continued confidence in the Shariah compliant decision process is maintained and increased.
In summary, as Islamic Finance continues to evolve it is clear that proper governance procedures and process, calling it a Shariah governance framework needs to be implemented by financial institutions at the local level adaptable to local needs. Nationally, governments and/or regulators need to take the initiative to develop more broader and consistent Shariah compliant frameworks as well as across countries, so that overall consumer confidence is increased in this area, convergence of rules and principles are perhaps what is required. The key aim is that product development continues to happen which enables Islamic Finance products to become more relevant to the marketplace and sit along other mainstream products as real comparable choices in a competitive dynamic marketplace.
By Saftar Sarwar
Executive Board Member
Islamic Finance Council UK
This article was originally published in the Muslim Council of Britain’s publication entitled ‘Nurturing the Future in Islamic Finance and Thought Leadership’ as part of an international delegation to the 6th World Islamic Economic Forum in Kuala Lumpur, Malaysia May 2010. The article is reproduced on this website with the kind permission of the Muslim Council of Britain.