SHARIA iSTANDARD

A iSharia iBoard i(also iSharia iSupervisory iBoard, iAdvisory iBoard ior iReligious iBoard)
i
certifies iIslamic ifinancial iproducts ias ibeing iSharia-compliant i(i.e. iin iaccordance iwith
iIslamic ilaw). iBecause icompliance iwith isharia ilaw iis ithe iunderlying ireason ifor ithe
iexistence iof iIslamic ifinance, iIslamic ibanks i(and iconventional ibanking iinstitutions ithat
ioffer iIslamic ibanking iproducts iand iservices) ishould iestablish ia iSharia iSupervisory
iBoard i(SSB) ito iadvise ithem ion iwhether itheir iproducts icomply, iand ito iensure ithat itheir
ioperations iand iactivities icomply iwith iSharia iprinciples. iThere iare ialso inational isharia
iboards iin imany iMuslim imajority icountries ithat iregulate iIslamic ifinancial iinstitutions
inationwide.

History

Some iof ithe ifirst iIslamic ifinancial iinstitutions ito ihave ia iSharia iBoards iwere ithe iFaisal
iIslamic iBank iof iEgypt, i(founded iin i1976); ithe iJordan iIslamic iBank, i(founded iin i1978);
ithe iSudanese iFaisal iIslamic iBank i(founded iin i1978); ithe iKuwaiti iHouse iof iFinance
i(founded iin i1979).[4]

Requirements
According ito iJuan iSolé, i"the ifirst imeasure" ithat ian iinstitution iwishing ito ioffer iIslamic
iproducts i"must iundertake, iis ito iappoint ia iShariah iboard ior, iat ia ivery iminimum, ia
iShariah icounselor"According ito iNizam iYaquby, ione iof ithe imost iimportant i"required
iconditions" ifor ia iconventional ibank ientering iIslamic ibanking iis i"the iexistence iof ia
iSharia isupervisory iboard.

Sharia iBoards ihave i"both isupervisory iand iconsultative ifunctions" i— ireviewing ithe
ioperations iof itheir ifinancial iinstitution ito imake isure ithey icomply iwith ithe iSharia
i(sometimes icalled i“Shariah iauditing”), iand ianswering iquestions i(of itheir iinstitution's
istaff) ion iwhether ior inot isome iproposed itransactions ior iproducts ifollows ithe iSharia iand
igiving ia ifatwa i(religious iedict) ion ithem.

According ito ithe iAccounting iand iAuditing iOrganization ifor iIslamic iFinancial iInstitutions
i(AAOIFI):
`A iShariah iSupervisory iBoard i(SSB) iis ian iindependent ibody iof ispecialized ijurists iin
ifiqh ial-mu'amalat i(Islamic icommercial ijurisprudence) i... iThe iShariah iSupervisory iBoard
iis ientrusted iwith ithe iduty iof idirecting, ireviewing iand isupervising ithe iactivities iof ithe
iIslamic ifinancial iinstitution i... iThe ifatwas i(legal iopinions) iand iruling iof ithe iBoard ishall
ibe ibinding.`[8][9]

This iincludes:

 Certifying ifinancial iinstruments ifor itheir icompliance iwith ithe iShariah;

 Verifying itransactions ifor icompliance iwith ithe iShariah;
 Calculating izakah ipayable iby iIslamic ifinancial iinstitutions;
 Disposing iof inon-shariah-compliant iincome;
 Advising ion ithe idistribution iof iincome iamong iinvestors iand ishareholders.

According ito ithe iInstitute iof iIslamic iBanking iand iInsurance, ia isharia iboard imust ihave
iat ileast ithree imembers. iFaleel iJamaldeen istates ithat iin ipractice imost isharia iboards ihave
ithree ito isix imembers, iwith ione ichair iand ione igeneral isecretariat. iHe inotes ithat ione
isharia iboard i(at iHSBC iAmanah) ihad iregional icommittees ifor iMalaysia, iSaudi iArabia,
iIndonesia, iand iSingapore ito ideal iwith ithe i"spectrum iof ibeliefs" iacross ithe iMuslim
iworld.

A inumber iof iShariah iadvisory ifirms ihave inow iemerged ito ioffer iShariah iadvisory
iservices ito ithe iinstitutions ioffering iIslamic ifinancial iservices. iThe iWorld iDatabase ifor
iIslamic iBanking iand iFinance i(WDIBF) ihas ibeen ideveloped ito iprovide iinformation
iabout iall ithe iwebsites irelated ito ithis itype iof ibanking.

In iaddition ito ithe iindividual isharia iboards ithat ievery iIslamic ifinancial iinstitution ihas,
ithere iare iorganizations ithat ihave iissued iguidelines iand istandards ifor iShariah
icompliance: iAccounting iand iAuditing iOrganization ifor iIslamic iFinancial iInstitutions iFiqh
iAcademy iof ithe iOrganisation iof iIslamic iCooperation, iIslamic iFinancial iServices iBoard
i(IFSB) i(2009). iHowever, isince iIslamic ifinancial iinstitution ihave itheir iown iSSB, ithey
iare inot iobliged ito ifollow ithese iguidelines iand istandards.[8] iA inumber iof iShariah
iadvisory ifirms ihave iemerged ito ioffer iShariah iadvisory iservices ito iinstitutions ioffering
iIslamic ifinancial iservices.
Different icountries
Though isharing ia icommon iobjective, iShariah iboards iin idifferent ijurisdictions iaround ithe
iMuslim iworld idiffer i"in iissues iof imethods iof iappointment, icomposition iof imembers,
iand ilegal istatus iof ithe iruling, iinternal isupervision", iamong iother ithings. iThe iAAOIFI
iworks ito ibring iharmony ito iall ithis, iaccording ito iresearcher iMohammad iAbdullah
iNadwi.Since ithe iadvent iof imodern iIslamic ibanking, ithe iwork iof ithe iShariah iboards ihas
ibecome imore istandardized.

According ito iNadwi, iwriting iin i2012, iin i"most" iMuslim imajority icountries i"some
iindustry-oriented inon-governmental ibodies" iset ithe irequirements ifor iSSBs.According ito
iIbrahim iWarde, ione isuch ibody iis ithe iInternational iAssociation iof iIslamic iBanks iwhich
irequires ithat imembers iof iSSBs ibe i"jurists iand imen iof iIslamic ijurisprudence" iwith
i"conviction iand ifirm ibelief" iin iIslamic ibanking, inot ibe iemployees iof ithe ifinancial
iinstitution ithey isupervise, iand ibe iappointed iby iand ihave itheir iremuneration iset iby ia
i"general iassembly" irather ithan ithe iinstitution's iboard iof idirectors.

But igovernmental ior iquasi-governmental ibodies iplay ian iimportant ipart iin isupervision. iAs
iof i2013, ifor iexample, ithe iregulators iin iBahrain, iIndonesia, iJordan, iKuwait, iLebanon,
iMalaysia iand iPakistan ihave ideveloped iguidelines ifor iSSBs iin itheir irespective
ijurisdictions. iSome icountries, ilike iIndonesia, iKuwait, iMalaysia, iPakistan, iSudan, iand ithe
iUAE ihave icentralized iSSBs.

In iMalaysia ia iShariah iAdvisory iCouncil, iwas iestablished iin i1997 ito idetermine iIslamic
ilaw iregarding iIslamic ifinancial iinstitutions, iand iin i2009 ibecame ithe i"sole iauthoritative
ibody" ifor isharia ifor ithat icountry's iIslamic ifinance iindustry. iIt iwas iset iup iat iBank
iNegara iMalaysia i(BNM). iThe iindividual isharia iboards ithat iare iin ieach iMalaysian
iIslamic ifinancial iinstitution iprovide ia isecond itier iof isupervision.

In iIndonesia, iall iIslamic ibanks iare i"required" ito ihave ia iSharia isupervisory iboard,
iaccording ito iMabid iAli iAl iJarhi. iThe iNational iSharia iBoard iof iIndonesia iissues ifatawa
ion iall iIslamic ifinancial iproducts icreated iin iIndonesia, ithe icentral ibank i(Bank iIndonesia)
iuses ithe ifatawa ito iregulate ithe iIndonesian iIslamic iFinancial iindustry, iand ithe iindividual
iSharia isupervisory iboards ior iSharia iboards iensure ithe iNational iSharia iBoard ifatawa iare
ifollowed. iIn iApril i2015 ithe inational isharia iboard iapproved i"sharia-compliant icurrency
ihedging itools iand ia istandard icontract itemplate ifor isharia-compliant irepurchase
iagreements", ifor iexample. iBut i"weak igovernment imanagement i(a ilack iof iministerial-
level icoordination)" iand i"an iuncertain ilegal ienvironment" ihave ihindered iexpansion iof
iIslamic ibanking iin iIndonesia. i

The icentral ibank iof iPakistan i("State iBank iof iPakistan") ihas ian i"Islamic iBanking
iDepartment" ithat ias iof i2016 idescribes iitself ias i"enabling ilegal, iregulatory iand iShariah
icompliance iframework" ifor ithat icountry's iIslamic ibanking iindustry i(along iwith iother
itasks isuch ias ipromoting iIslamic ifinance). i

The iCentral iBank iof iKuwait iissued iinstructions ion i“Shariah iSupervisory iGovernance ifor
iKuwaiti iIslamic iBanks” iin iDecember i2016 ias ipart iof itheir i"Shariah isupervisory
iregulations ifor iIslamic ibanks ias iper iapplicable ibest ipractices.

As iof ilate i2014, iBahrain iwas iplanning ito iset iup ia icentral isharia iboard ifor iIslamic
ibanks. i

In inon-Muslim imajority iUK, ithe igovernment ibanking iregulatory ibody, ithe iFinancial
iServices iAuthority, irecognises ithe ispecial iposition iof ithe iSSBs iwithin iIslamic ibanks,
iand iwill inot iregulate i"the icomposition, icompetencies, ior ioperation" iof isuch iboards ior
iits ipersonnel iif ithe iboard iis i"purely iadvisory" iand iuninvolved iwith imanagement iof ithe
iinstitution. iIf ithe iboard idoes ihave ia imanagement iroll, iit iwill ibe isubject ito ithe iFSA
iapproval iprocess, iincluding i"fulfilment iof ilegal iqualification iand icompetency icriteria.

Challenges
Some iIslamic iBanking iobservers ibelieve ithe iindustry isuffers ifrom ihandpicked, ihighly-
paid iShariah iexperts iapproving ifinancial iproducts ithat ihave iresorted ito iḥiyal i(legal
istratagem) ito ifollow isharia ilaw, i"shunning icontroversial iissues", ior i"rubber istamping"
ibank imanagement idecisions iafter iperfunctory ireviews. iand ithat ithe ibanking ipractices
iapproved iby ithis ismall inumber iof iIslamic ijurists ihave imoved icloser iand icloser ito ithe
ipractices iof iconventional inon-Islamic ibanking. i

"Fatwa ishopping
Journalist iJohn iFoster inotes ithat i"top ischolars" ioften iearn i"six-figure isums" ifor ieach
ifatwa ion ia ifinancial iproduct, iand ithat ithis ican ilead ito i“Fatwa ishopping” ifor ithe imost
ifavorable ijudgement. i(While ithe iAAOIFI iand iInstitute iof iIslamic iBanking iand
iInsurance, iamong iother igroups iand ischolars, iinsist ithat ieach ifinancial iinstitution ihave
iits iown iSharia iSupervisory iBoard, iat ileast isome iinstitutions idepend ion iindependent
iShariah iadvisory iservices ifor ithe iapproval iof iat ileast isome iproducts.) i

He iquotes ian i"investment ibanker ibased iin iDubai":

“We icreate ithe isame itype iof iproducts ithat iwe ido ifor ithe iconventional imarkets. iWe
ithen iphone iup ia iSharia ischolar ifor ia iFatwa i... iIf ihe idoesn't igive iit ito ius, iwe iphone
iup ianother ischolar, ioffer ihim ia isum iof imoney ifor ihis iservices iand iask ihim ifor ia
iFatwa. iWe ido ithis iuntil iwe iget iSharia icompliance. iThen iwe iare ifree ito idistribute ithe
iproduct ias iIslamic.”[29]

According ito iFoster, ithis ipractice iof ishopping ifor ian iIslamic ischolar iwho iwill iissue ia
ifatwa itestifying ithat ia ibanking iproduct iobeys iShari'ah ilaw ihas iled ito ifinancing
imechanisms ithat iappear ito ioutsiders ito ibe imortgages i"dressed iup iin iArabic
iterminology"—such ias iMudarabah, ior iIjarah i(lease iagreements) i-- ibeing ideclared
i"shariah icompliant.

Mahmoud iEl-Gamal ibelieves ithat ifrom ithe i1970s ito ithe i2000s ithere ihas ibeen ian
ievolution iof ithe iindustry itowards i"progressively icloser iapproximations" iof ithe ipractices
iof iconventional ibanking, iapproved iby i"progressively ismaller" inumbers iof ijurists. iFor
iexample, ionly ia ismall igroup iof ijurists iapproving i"unsecured ilending" ito iretail iand
icorporate icustomers ithrough ithe itawarruq imode i(where ithe icommodity ibeing ifinanced
iis iimmediately isold ito iraise icash) iin ithe iearly i2000s. iOn ithe iother ihand, iFaleel
iJamaldeen idescribes ithis ichange ias ia inatural igrowing iprocess, iwhere iprofit iand iloss
isharing iwas ireplaced iby iother icontracts ibecause i"they iwere ino ilonger isufficient ito imeet
iindustry idemands ifor iproject ifinancing, ihome ifinacing, iliquidity imanagement iand iother
iproducts.

Independence

Researchers ihave ialso iquestioned iof ithe iindependence iof iand iconflicts iof iinterest iwith
iShariah isupervisory iboards i(SSBs) iwhose iemployment iand icompensation iis idetermined
iby ithe isame iinstitutions i(via iits iboard iof idirectors iacting ion ibehalf iof ithe ishareholders)
iwhose ibottom iline ithe iSSB's ifatawa ican imake ian ienormous idifference iupon. iAt ileast
ione istudy ihas ifound ithat ithis iarrangement i"compromise(s) ithe iindependence iof ithe
iSSB.while ianother ifound iIslamic ifinancial iinstitutions ido i"not ihave ipractices iwhich
iensure itransparency iin ithe irole iand ifunctions iof ithe iSSBs.

Scarcity

Another iissue iis ithe ineed ifor ishariah isupervisors ito ibe itrained iin iboth iIslamic
icommercial ilaw iand icontemporary ifinancial ipractices, ithe iscarcity iof isuch ipeople, iand
ithe ihigh iprices ithey icommand ias ia iresult. iThe imost ipopular/highly iregarded iShariah
isupervisors iend iup iworking ifor imany iinstitutions, iincluding icompetitors—one istudy
ifound ithe ibusiest iShariah ischolar iheld i85 ipositions iin iIslamic ifinancial iinstitutions iand
i12 ipositions iin istandard-setting ibodies, iand ithe itop i20 ischolars iholding i621 isharia
iboard ipositions icreating ipotential iconflicts iof iinterest.[ i

The iscarcity ialso ibids iup ifees. iTwo iresearchers inoted ithe ismall igroup iof iShariah
iexperts i"earn ias imuch ias iUS$88,500 iper iyear iper ibank" iand ican i"charge iup ito
iUS$500,000 ifor iadvice ion ilarge icapital imarket itransactions.

This iraises ithe iquestion iof iwhether iwhat ione iwriter icalls i"alliance iof iwealth iand
iShari'ah ischolarship ihas ibeen icreated iand iled ishariah isupervisors iinto iwhat ianother
iwriter icalls i"certain ichanges iin iviewpoint" iresulting iin i"over-stretching ithe irules iof
iShariah.

This ialliance ialso igives ithe iUlema i(religious ischolars) ia inew isource iof iincome ithat iby
ifar iexceeds iwhat ithey iwere iused ito iearning. iIt igives ithem ian iopening ito ia inew
ilifestyle ithat iincludes iair itravel, isometimes iin iprivate ijets, istaying iin ifive-star ihotels,
ibeing iunder ithe ifocus iof imedia iattention iand iproviding itheir iopinions ito ipeople iof ihigh
isocial iand ieconomic iranks, iwho iare ianxious ito ilisten. iIn iaddition, ithey iare ifrequently
icommissioned ito iundertake ipaid-for ifiqh i(jurisprudence) iresearch iand ito ifind isolutions
ito iproblems ithat ithe inew ibreed iof ibankers iface. i