Shariah Supervisory Board

Shariah Supervisory Board (SSB) is one of the main components of an Islamic bank. Shariah boards have fiduciary responsibilities towards the institution’s stakeholders.

In theory, the role of SSB involves six areas:

1. Provide fatwas that certify permissible financial products;

2. Undertake Shariah audit to ensure products comply with guidelines;

3. Calculate zakat payments;

4. Dispose of non-Shariah compliant income or earnings;

5. Provide advice to the bank on the distribution of income to shareholders or depositors/investment account holders.

6. Provide guidance to the bank on its wider social role

However, in practice, the role of Shariah boards varies significantly from one country to another. Further, there are three types of Shariah boards:

1. International Shariah Boards: For example, AAOIFI, Islamic Development Bank (IDB). The main role of AAOIFI’s Shariah board is to publish Shariah standards in order to harmonise the industry’s practices. The IDB Shariah boards acts in advisory capacity by providing Shariah opinions and working closely with other international agencies (such as: IFSB) in developing standards.

2. National Shariah Boards: For example, Malaysia, Pakistan, Sudan, Indonesia. In this case, the national Shariah board has the overall authority on Shariah governance framework and policy.

3. Institutional Shariah Boards: These are commonly referred to as Shariah Supervisory Boards (SSBs) and work on an institutional level.

Challenges Facing Shariah Supervisory Board

SSBs include some of the most prominent and respected scholars. Many of these scholars are highly regarded with their opinions having the potential to move markets. Nonetheless, concerns have been raised, that since Shariah scholars are generally employed directly by the financial institutions, their independence can be compromised, since bank managers use their influence to gain more acceptable opinions. This has been commonly referred to as “Fatwa shopping” or “Shariah advisory à la carte”.

Moreover, a decentralised approach to Shariah governance has led to further fragmentation in the industry, increasing transaction costs and overall efficiency of Islamic banks, compared to conventional banks. This has led to calls for a nationalised approach to Shariah governance. (One of the main arguments in favour of the Shariah board for each individual institution is that it encourages product development and innovation in the fast-growing industry).

Exhibit 1: Shariah Governance Framework (Key markets)

Source: World Bank

Exhibit 2: Shariah Corporate Governance Institutions by Country

Source: Official country websites and central bank Annual Reports; World Bank

Exhibit 2: Shariah Supervisory Boards for the Biggest Islamic Banks

Source: IslamicBanker.com 2015. For latest information on Shariah Scholars, please see: https://www.islamicmarkets.com/scholars

Further Reading on Shariah Supervisory Boards

1. Shari'ah Governance in Islamic Banks (Edinburgh Guides to Islamic Finance) Hardcover – 27 Jul 2012

2. Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services: https://openknowledge.worldbank.org/bitstream/handle/10986/8901/wps4054.pdf?sequence=1

3. Shariah Governance: http://www.islamicmarkets.com/articles/shariah-governance

4. Shariah Scholars in the GCC - A Network Analytic Perspective: http://www.islamicmarkets.com/publications/shariah-scholars-gcc-network-analytic-perspective