Paper Title: A Critical Analysis of Conceptual Background of Shariah Governance for Islamic Banking and Finance

Author:        Shafi’ Abdul Azeez Bello

Publisher:    Shariah Governance in Islamic Banking Institutions, Routledge.

This paper highlights the importance and role of Shariah governance in regulating the practice of Islamic banking and keeping it standardized and stable with the trust of key stakeholders.

The author writes that principles of Shariah governance involve Shariah governance structure, oversight, accountability and responsibility, independence, competency, confidentiality and consistency.

The author highlights the important role of board of directors, Shariah committee and management in ensuring a sound, active and stable governance mechanism.

To ensure transparency, independence of Shariah board is important to avoid conflict of interest and any duress in Shariah analysis of a product or transaction.

Competency is also vital. It is understandable that individuals cannot be expert in diverse fields. Therefore, there should be strong reliance on system and processes. Teamwork can enhance the competency of committees.

The author also highlights the different approaches in Shariah governance which are being practiced around the world. On one hand, there is reactive approach which only wakes up when there is a need. This approach is common in West which initiates legislation only when there is a need to embed Islamic banking in the regulatory framework.

Even more dormant than this is the passive approach which disregards any importance of distinct Shariah legislation and regulation. Then, showing greater involvement and engagement, there is the minimalist approach on one end and interventionist approach on the other end. In between, there is a proactive approach.

Author writes that minimalist approach engages in just enough legislation to allow Islamic banking to operate. This is common in GCC countries. Proactive approach leaves little to self-regulation and guides the industry practice more actively and deeply, such as in Malaysia.

The interventionist approach becomes even more active and sometimes it results in breach or conflict of jurisdiction. Too many regulators trying to regulate same activity. Pakistan is one example where there is Federal Shariat court, Council of Islamic Ideology and central bank’s own Shari’ah board.

The author highlights that principles of sound governance would remain relevant to Islamic financial institutions as well.

Transparency, competency, independence, sound monitoring, vigilance, legislation where needed and strong disincentives for inappropriate actions are necessary.

Centralized Shariah governance can help in standardization and build more trust among the stakeholders. Disputes, ill-defined jurisdiction, and weak authority in enforcement can result in diluted effects and is ill suited for sound governance. The paper is a good attempt to summarize the different approaches to Shariah governance adopted globally and to give an overview of principles of sound Shariah governance.