Sharia Board

A Sharia Board (also Shariah Supervisory Board, Advisory Board or Religious Board) certifies Islamic financial products as being Sharia-compliant (i.e. in accordance with Islamic law). Because compliance with shariah law is the underlying reason for the existence of Islamic finance, Islamic banks (and conventional banking institutions that offer Islamic banking products and services — called IBS banks) should establish a Shariah Supervisory Board (SSB) to advise them and to ensure that their operations and activities comply with Shariah principles.

Requirements

Sharia Boards have "both supervisory and consultative functions" — reviewing the operations of their financial institution to make sure they comply with the Sharia, and answering questions (of their institution's staff) on whether or not some proposed transactions or products follows the Sharia and giving a fatwa (religious edict) on them.

According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI):

`A Shariah Supervisory Board (SSB) is an independent body of specialized jurists in fiqh al-mu'amalat (Islamic commercial jurisprudence) ... The Shariah Supervisory Board is entrusted with the duty of directing, reviewing and supervising the activities of the Islamic financial institution ... The fatwas (legal opinions) and ruling of the Board shall be binding.`"

This includes:

a. certifying financial instruments for their compliance with the Shariah;

b. verifying transactions for compliance with the Shariah;

c. calculating zakah payable by Islamic financial institutions;

d. disposing of non-shariah-compliant income;

e. advising on the distribution of income among investors and shareholders.

According to the Institute of Islamic Banking and Insurance, a Sharia Board must have at least three members.

Since the advent of modern Islamic banking, the work of the Shariah boards has become more standardized. As of 2013, for example, the regulators in Bahrain, Indonesia, Jordan, Kuwait, Lebanon, Malaysia and Pakistan have developed guidelines for SSBs in their respective jurisdictions. Some countries, like Indonesia, Kuwait, Malaysia, Pakistan, Sudan, and the UAE have centralized SSBs (In Malaysia that SSB is called the National Shariah Advisory Council, and was set up at Bank Negara Malaysia (BNM). In Indonesia, the Ulama Council serves a similar purpose.)

A number of Shariah advisory firms have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. The World Database for Islamic Banking and Finance (WDIBF) has been developed to provide information about all the websites related to this type of banking.

In addition to the individual sharia boards that every Islamic financial institution has, there are organizations that have issued guidelines and standards for Shariah compliance: Accounting and Auditing Organization for Islamic Financial Institutions, Fiqh Academy of the Organisation of Islamic Cooperation, Islamic Financial Services Board (IFSB) (2009). However, since Islamic financial institution have their own SSB, they are not obliged to follow these guidelines and standards.

Challenges

Some Islamic Banking observers believe the industry suffers from handpicked, highly-paid Shariah experts approving financial products that have resorted to ḥiyal (legal stratagem) to follow sharia law, "shunning controversial issues", or "rubber stamping" bank management decisions after perfunctory reviews. and that the banking practices approved by this small number of Islamic jurists have moved closer and closer to the practices of conventional non-Islamic banking.

"Fatwa shopping"

Journalist John Foster notes that "top scholars" often earn "six-figure sums" for each fatwa on a financial product, and that this can lead to “Fatwa shopping” for the most favorable judgement. (While the AAOIFI and Institute of Islamic Banking and Insurance, among other groups and scholars, insist that each financial institution have its own Sharia Supervisory Board, at least some institutions depend on independent Shariah advisory services for the approval of at least some products.)

He quotes an "investment banker based in Dubai":

“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa ... If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”

According to Foster, this practice of shopping for an Islamic scholar who will issue a fatwa testifying that a banking product obeys Shari'ah law has led to financing mechanisms that appear to outsiders to be mortgages "dressed up in Arabic terminology" -- such as Mudarabah, or Ijarah (lease agreements) -- being declared "shariah compliant".

Mahmoud El-Gamal believes that from the 1970s to the 2000s there has been an evolution of the industry towards "progressively closer approximations" of the practices of conventional banking, approved by "progressively smaller" numbers of jurists. For example, only a small group of jurists approving "unsecured lending" to retail and corporate customers through the tawarruq mode (where the commodity being financed is immediately sold to raise cash) in the early 2000s.

Independence

Researchers have also questioned of the independence of and conflicts of interest with Shariah supervisory boards (SSBs) whose employment and compensation is determined by the same institutions (via its board of directors acting on behalf of the shareholders) whose bottom line the SSB's fatawa can make an enormous difference upon. At least one study has found that this arrangement "compromise(s) the independence of the SSB", while another found Islamic financial institutions do "not have practices which ensure transparency in the role and functions of the SSBs".

Scarcity

Another issue is the need for shariah supervisors to be trained in both Islamic commercial law and contemporary financial practices, the scarcity of such people, and the high prices they command as a result. The most popular/highly regarded Shariah supervisors end up working for many institutions, including competitors -- one study found the busiest Shariah scholar held 85 positions in Islamic financial institutions and 12 positions in standard-setting bodies, and the top 20 scholars holding 621 sharia board positions, -- creating potential conflicts of interest.

The scarcity also bids up fees. Two researchers noted the small group of Shariah experts "earn as much as US$88,500 per year per bank" and can "charge up to US$500,000 for advice on large capital market transactions."

This raises the question of whether what one writer calls "alliance of wealth and Shari'ah scholarship" has been created and led shariah supervisors into what another writer calls "certain changes in viewpoint" resulting in "over-stretching the rules of Shariah".

This alliance also gives the Ulema (religious scholars) a new source of income that by far exceeds what they were used to earning. It gives them an opening to a new lifestyle that includes air travel, sometimes in private jets, staying in five-star hotels, being under the focus of media attention and providing their opinions to people of high social and economic ranks, who are anxious to listen. In addition, they are frequently commissioned to undertake paid-for fiqh (jurisprudence) research and to find solutions to problems that the new breed of bankers face.

See also

• Islamic banking and finance
• Shariah investments
• Shariah Board entry in the Islamic Finance WIKI

References

Books, documents, journal articles

• el-Gamal, Mahmoud A. (2006). Islamic Finance : Law, Economics, and Practice (PDF). New York, NY: Cambridge. ISBN 9780521864145.
• Irfan, Harris (2015). Heaven's Bankers: Inside the Hidden World of Islamic Finance. Little, Brown Book Group. Retrieved 28 October 2015.
• Jamaldeen, Faleel (2012). Islamic Finance For Dummies. John Wiley & Sons. ISBN 9781118233900. Retrieved 15 March 2017.
• Khan, Feisal (2015-12-22). Islamic Banking in Pakistan: Shariah-Compliant Finance and the Quest to Make Pakistan More Islamic. Routledge. ISBN 9781317366539. Retrieved 9 February 2017.
• Khan, Muhammad Akram (2013). What Is Wrong with Islamic Economics?: Analysing the Present State and Future Agenda. Edward Elgar Publishing. Retrieved 26 March 2015.
• Kuran, Timur (2004). Islam and Mammon: The Economic Predicaments of Islamism. Princeton University Press. ISBN 1400837359. Retrieved 25 March 2015.
• State of the Global Islamic Economy Report 2015/16 (PDF). Thomson Reuters & Dinar Standard. Retrieved 19 March 2017.
• Usmani, Muhammad Taqi (December 1999). The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan (PDF). Karachi, Pakistan: albalagh.net.
• Usmani, Muhammad Taqi (1998). An Introduction to Islamic Finance (PDF). Kazakstan.{{cite book}}: CS1 maint: location missing publisher (link)
• Visser, Hans (2013). Islamic Finance: Principles and Practice, (Second ed.). Elgar Publishing. Retrieved 7 December 2016.
• Warde, Ibrahim (2000, 2010). Islamic finance in the global economy. Edinburgh: Edinburgh University Press. {{cite book}}: Check date values in: |date= (help)

External links

• Funds at Work Shariah Scholar Network Analysis
• Guidance Residential Sharia Supervisory Board