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The Aims of Corporate Governance for Accountability

The main aim of corporate governance is to ensure transparency, fairness and accountability. Efficient corporate governance especially within an Islamic paradigm is an essential as it tends to encourage honesty, integrity, transparency, accountability and responsibility amongst all stakeholders in an organization. In IFIs, another component of corporate governance namely Shari’ah governance is the very essence of Islamic finance practice particularly in building and maintaining the confidence of the shareholders as well as the other stakeholders that all transactions, practices and activities are in compliance with the Shari’ah principles.

Shari’ah governance is now becoming more diverse and advanced in parallel with the strong growth of Islamic finance worldwide. In the context of IFIs, Shari’ah governance is actually a prerequisite of their corporate governance framework. As a part of the corporate governance framework, Shari’ah governance is peculiarly unique to IFIs and it requires for a set of instutional arrangement that distinct from its conventional counterpart. In this aspect, the setting up of Shari’ah board as part of the organs of governance is really necessary and crucial to IFIs.

In view of the tremendous growth and sophisitication of Islamic finance sector, Shari’ah governance nowadays has profound strong influence on the day-to-day practice of IFIs. Realizing the importance of Shari’ah governance, each jurisdiction has adopted different approaches in developing and nurturing its Shari’ah governance framework. At this point, it is very important to understand and appreciate the pluralistic approaches of Shari’ah governance across jurisdictions so as to identify and highlight its best practices. It should be noted that from the regulatory point of view, Malaysia represents the most regulated Shari’ah governance model followed by Brunei, Pakistan and Sudan, while GCC Countries as well as the UK prefer less regulatory interference.

Malaysia develops its Shari’ah governance infrastructure and architecture in both regulatory and non-regulatory aspects. In fact, a special endowment fund of USD60 million has been allocated by the government of Malaysia to promote the development of Shari’ah compliance and governance in the global Islamic banking and finance sector. As regard to the legal aspects of Shari’ah governance, the Bank Negara Malaysia (BNM) has established the National Shari’ah Advisory Council (SAC) in which set the Shari’ah rules for the national Islamic financial services sector. The SAC will work closely with Shari’ah board of IFIs as well as the SC and also acts as a reference for advice from the judiciary. The Malaysian regulators have gone even further to enhance the quality of Shari’ah governance in the Islamic financial services sector by issuing the Guidelines on the governance of Shari’ah Committee for the Islamic Banks known as BNM/GPS1 in 2004 and introducing the Concept Paper on Shari’ah Governance Framework for IFIs in 2010.

IFIs in GCC) Countries, namely countries in the Arabian Gulf which are consisting of Saudi Arabia, Kuwait, Bahrain, Qatar and the United Arab Emirates except the Sultanate of Oman have their own framework of Shari’ah governance which is different from Malaysia. Saudi Arabia treats IFIs equal to its conventional counterpart and therefore allows the market to develop its own Shari’ah governance system. On the other hand, Kuwait, Bahrain, Qatar and the UAE allow slight regulatory intervention of their Shari’ah governance framework by issuing several directives in the form of rulebooks as well as adopting the AAOIFI Governance Standards.

Shari’ah governance framework in the UK is more on the Financial Services Authority’s (FSA) policy basis and unregulated through specific legislation. The establishment of Shari’ah board of the Islamic Bank of Britain for instance is due to the market factor and not because of the regulatory requirements in the UK. It should be noted that the practice and framework of Shari’ah governance are developed and nurtured by the respective IFIs and there is no proper monitoring and coordination as in the case of Malaysia. The IFIs are allowed to adopt their own Shari’ah governance approach without being adhered or subjected to any national or higher level of Shari’ah board.

The discussion so far indicates that a study on Shari’ah governance system in IFIs is viable, indispensable and in fact beneficial to be explored theoretically as well as empirically. Indeed, this brings into focus the measures, analytical and empirical study that need to be carried out to enhance and find the best practice of Shari’ah governance in IFIs. In this regard, the study aims to provide, in the light of the research findings, certain essential guidelines and policy recommendations for proper and sound Shari’ah governance system.

1.1 Statement of Problem

IFIs have taken the form of commercial banks, investment banks, investment and finance companies, asset Management Company and financial services companies. There are diverse banking models practiced in different jurisdictions namely dual banking models, wholly Islamic institutions, Islamic subsidiaries of conventional banking groups, and Islamic banking windows within conventional banks. Basically, the implementation of Islamic finance and the way it be nurtured are greatly depend on the local legal environment and market factors.

In Malaysia, the establishment of Shari’ah board is a statutory requirement to all banks which offer Islamic banking products 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 and section 51 of the Central Bank of Malaysia Act 2009 (CBA) for the BNM. The main objective of the establishment of the Shari’ah board is to advise Islamic banks on any Shari’ah matter and also to ensure compliance with the Shari’ah tenets and requirements in their operations. Even though these legislations provide regulatory frameworks for the establishment of Shari’ah board but their legal ambit are not clear. The existing provisions in these legislations are inadequate and the frameworks are slightly ambiguous.

In the UK and GCC countries, the absence of a comprehensive set of regulatory framework on Shari’ah governance may impede the development of Islamic finance in these jurisdictions. This position may create regulatory gaps and confusion to the players and the public as regard to the legal and Shari’ah compliance in IFIs. Significant Shari’ah governance issues such as rejection of fatwa, differences of Shari’ah pronouncements and Shari’ah non-compliance risk have potential of affecting the credibility and image of Islamic finance as well as incurring huge financial liabilities.

In view of the diverse and distinct framework of Shari’ah governance, the study attempts to explore the actual practices of Shari’ah governance across jurisdiction particularly in Malaysia, GCC Countries and the UK. It is expected that the empirical findings of the extensive study on this subject would be able to identify issues, gaps and problems and at the same time to propose some policy recommendations pertinent to Shari’ah governance system in IFIs for further development of the industry.


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