Chapter 16

Supervising Operations: The Sharia Board

In This Chapter

arrow Tracing the evolution of the sharia board since the 1970s

arrow Seeing how a sharia board is structured

arrow Determining who sits on a sharia board

arrow Appreciating the work of a sharia board

arrow Touring various models of real-world sharia governance

As I emphasize throughout this book, the Islamic finance industry is based on sharia principles. Sharia is Islamic law, a code of conduct that Muslims follow because they believe it’s God’s law (see Chapter 1). Sharia governs a broad spectrum of activities — from the way the justice system works in a Muslim country to how a Muslim family handles its everyday life. And, of course, within the Islamic finance system, sharia governs the way that banks, fund management companies, insurance fund operators, and other financial professionals conduct their business.

Even people who know nothing about Islamic finance have likely heard of sharia law, and opinions about sharia among non-Muslims are rarely positive. From East to West, sharia gets its share of criticism and negative media attention. But the way sharia is applied within a certain family or tribe shouldn’t taint its application in the Islamic financial industry. As I explain throughout this book, Islamic financial industry regulatory bodies and professionals are working hard to maintain a level of purity and transparency that greatly benefits all participants in the system.

To achieve that purity and transparency, the Islamic finance industry depends upon the support of sharia scholars: men and women who are deeply knowledgeable about sharia and who share their expertise by sitting on sharia boards that help govern Islamic financial institutions. In fact, a sharia board is probably the most easily recognizable feature that distinguishes an Islamic finance institution from a conventional one. All Islamic financial institutions are expected to operate in sharia-compliant ways, and the supervision provided by sharia boards ensures that compliance.

The Goldman Sachs sukuk controversy

In late 2011, Western banking behemoth Goldman Sachs announced its intention to issue sukuk (the Islamic equivalent of bonds; see Chapter 13) worth U.S. $2 billion. This announcement clearly signaled that conventional financial institutions recognize the profit potential that exists within the global Islamic finance industry. Yet many Islamic financial professionals and scholars immediately began debating whether Goldman Sachs could possibly issue a product based purely on an Islamic contract (see Chapter 6) and keep any profits from such a product separate from its other (non-sharia-compliant) products. (To remain in compliance, sukuk profits cannot be used to support other interest-bearing products, for example.) Although Goldman took the essential step of securing product approval from ten sharia scholars after making its announcement, the company’s success in governing the sukuk per Islamic financial industry principles will depend largely on the continued supervision of sharia scholars.

For these reasons, I devote this chapter to describing a sharia board, explaining how it functions in an Islamic financial institution, and noting what qualifies someone to sit on such a board.

Adapting the Sharia Board to a Rapidly Changing Industry

As I explain in detail in Chapter 3, the modern Islamic finance industry is very young. The modern concept of sharia-compliant financial products came into existence in the 1960s and early 1970s as a result of Islamic economists’ efforts.

Considering the industry’s short history in three distinct phrases is helpful for examining the sharia board’s role in guiding modern Islamic institutions. The first phase involved initial steps to move away from the interest-based conventional banking system; the second focused on developing ways to earn income for deposits and investments in a sharia-compliant way. Most recently, the Islamic finance industry has been able to diversify considerably with products and contracts that complement what’s found in conventional markets. Here, I describe the role of the sharia board during each of these three phases.

Finding its legs: The first two decades of the industry

The era from the mid-1960s until about 1980 marks the emergent period for the Islamic banking industry. Note that I use the word banking here; no other industry sectors existed during this initial phase. With the establishment of the Mit Ghamr Savings Bank in Egypt and Tabung Haji in Malaysia (see Chapter 3), Islamic economists’ theories began taking form. The 1970s saw the emergence of many commercial Islamic banks that introduced simple products based on contracts such as mudaraba (financial partnership) and musharaka (joint venture).

Historical records don’t indicate the existence of an Islamic bank sharia board until more than a decade after Mit Ghamr and Tabung Haji. Monzer Kahf, a research economist and independent consultant in Islamic finance and economics, indicates in his paper Strategic Trends in the Islamic Banking and Finance Movement that the following banks were the first to create sharia boards:

check.png Faisal Islamic Bank of Egypt, established in 1976

check.png Jordan Islamic Bank, established in 1978

check.png Sudanese Faisal Islamic Bank, established in 1978

check.png Kuwaiti House of Finance, established in 1979

The banks made the effort to appoint a sharia board shortly after their establishment primarily to give their customers and investors confidence in the banks’ credibility as purveyors of sharia-compliant products.

remember.epsThe sharia scholars who sat on the first sharia boards (understandably) had little experience with the burgeoning Islamic financial industry. They also were largely unfamiliar with conventional financial contracts, products, techniques, regulations, and business law. The first Islamic banks were mostly dealing with trade and agriculture-related industry, and their sharia boards lacked familiarity with manufacturing, international trade, and international financial dealings. Therefore, this first phase of sharia board existence was more or less a training period: The scholars had a great deal to learn.

Because of the scholars’ lack of experience with the finance industry as a whole, many disagreements occurred during this period among sharia boards and senior bank managers regarding what types of products banks should offer customers. Managers pushed to develop new, innovative products that would help Islamic banks better compete with their conventional counterparts, but scholars tended to be very conservative. Sharia boards rejected many new product ideas because the scholar advisors weren’t yet comfortable with the industry’s laws, contracts, techniques, and principles.

Gaining confidence: The development of new products in the 1980s

The 1980s were a significant development phase for modern Islamic finance. The Islamic banking industry was faring well by the start of this decade, which saw the emergence of Islamic capital market instruments: Islamic investment funds and sukuk (the Islamic equivalent of bonds).

Although mudaraba and musharaka contracts were the basis of most Islamic financial products during the industry’s initial phase, by the 1980s they were no longer sufficient to meet industry demands for project financing, home financing, liquidity management, and other products. They also couldn’t meet the development needs of the Islamic capital market, which Muslim investors badly wanted. (Many Muslim investors — especially high net worth individuals — were actively seeking interest-free capital market instruments in which to invest their excess money.)

With several years of industry experience under their belts, sharia board advisors — who brought extensive knowledge of Islamic contracts with them — helped pave the way for product solutions that propelled the development of the entire industry in the 1980s. Sharia boards during this phase enabled great innovation in the banking sector, in the capital market, and in the takaful (Islamic insurance) sector, helping the Islamic finance industry meet quickly growing demand for diversified products.

Establishing key standards as the industry goes global

Since the 1990s, a crucial focus of the Islamic finance industry has been to establish accounting, auditing, risk mitigation, and other governance standards that promote confidence in Islamic firms and set the stage for global development. The industry’s global potential as a formidable financial contender emerged and began to attract larger numbers of eager patrons because of several factors, including these:

check.png Islamic banks reached into broader territories, and Western commercial banks opened Islamic windows.

check.png Investors worldwide gained access to sukuk issues and Islamic mutual funds.

check.png New benchmarks for Islamic investment performance carried well-known names such as Dow Jones Index and Standard & Poor’s.

remember.epsThe role of sharia boards has been influenced by the establishment of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in 1990 and the Islamic Financial Standards Board (IFSB) in 2002. Both organizations encourage the ongoing development of standardized Islamic contracts and techniques, which help sharia boards develop consistent ways to handle the supervision of Islamic financial institutions. That doesn’t mean, of course, that the corporate governance of one Islamic firm will ever exactly mirror the governance required by another firm; each institution is unique. But industry-wide standards that are spelled out for all stakeholders provide a sharia board with support that allows it to operate more effectively and efficiently.

Who’s Who: Outlining the Structure of a Sharia Board

The sharia board sits near the top of an Islamic financial company’s governing structure. If you look at the organization of such a firm, you often find the sharia board reporting to the board of directors, executive management, or executive board. (See Chapter 7 for a sample organizational chart of an Islamic bank and Chapter 15 for information on corporate governance within the Islamic financial industry.)

tip.epsIn this book, I use the term sharia board, but you will definitely run across the term sharia supervisory board (SSB) in the industry as well. Both terms refer to the same group of people.

As I explain in the later section “Recognizing the Sharia Board’s Role,” sharia boards have two broad areas of responsibility within an Islamic financial institution:

check.png Ensuring that a firm’s operations are sharia-compliant

check.png Confirming that product development is sharia-compliant

In practice, most Islamic financial institutions have three to six sharia board members. (And yes, those members may be women! Most sharia scholars working in the Islamic finance industry are men, but women can and do participate on sharia boards.) Although some Islamic financial firms could probably rely on the guidance of a single Islamic scholar working as a full-time advisor on both product development and operations, most financial institutions engage multiple sharia board advisors on a part-time or full-time basis in order to instill confidence in the strength, authority, and accuracy of the board’s rulings and oversight.

The general perception is that a financial institution benefits from having a diversity of scholarly opinions, backgrounds, and experiences. If it hires just one advisor and that person’s opinions don’t jibe with the opinions of many other sharia scholars in the industry, the firm may find itself promoting products that are heavily criticized for not being sharia-compliant, for example. No Islamic institution wants to face that type of public relations battle.

remember.epsMost of the scholars serving on a sharia board also hold full-time teaching positions, and many scholars serve on multiple sharia boards (a fact that I address in “The small pool of qualified candidates” later in this chapter). No regulatory body requires a term limit for sharia board scholars, but an individual firm may.

The general sharia board structure most often looks like this:

check.png One scholar serves as chairman of the sharia board, which means that he heads the team.

check.png One scholar holds the position of general secretariat and acts as the board’s liaison with the firm’s senior management and board of directors.

check.png Other scholars serve as board members, fulfilling the duties that I outline later in this chapter in “Recognizing the Sharia Board’s Role.”

In a very well-established Islamic financial institution, the sharia board may be subdivided into various units that each takes responsibility for a different set of tasks. This kind of structure is called a sharia group, and its divisions may look like this:

check.png Unit for sharia supervision supervises the firm’s operations.

check.png Unit for research and development undertakes various research activities for the institution and helps ensure that any new product development is based on sharia principles.

check.png Unit for communication and support services shares information to and from the sharia board and the firm’s senior management or board of directors. It’s also involved in documenting resolutions, interacting with other scholars and boards, and preparing sharia reports for inclusion in the firm’s annual report.

realworldexample.epsAn international Islamic financial institution may use a slightly different sharia structure, which includes a central sharia board as well as various regional sharia committees. Global Islamic finance services group HSBC Amanah, for example, has a central sharia committee and regional sharia committees. The central committee has three scholars. Regional committees exist for Malaysia (with five members), Saudi Arabia (three members), Indonesia (three members), and Singapore (three members).

Why employ this seemingly complex structure? The institution must make sure that its sharia scholars represent the spectrum of beliefs among its customers and potential customers. Sharia interpretations vary from region to region, so a company that operates in the Middle East and in Southeast Asia, for example, benefits from sharia board representation in both regions.

Holding a Seat: Sharia Board Membership

No internationally standardized rules (such as licensing) exist yet regarding who qualifies for membership on a sharia board. Some countries with well-established Islamic finance industries, such as Malaysia and Pakistan, have implemented domestic regulations regarding the qualifications of sharia board advisors, but most countries haven’t taken such steps.

Still, even nations that lack specific regulations expect certain standards from sharia board members. In this section, I explain what the basic qualifications are for sharia board participation. In addition, I point out some issues that surround sharia board membership and how the industry is attempting to address them.

Listing the qualifications

remember.epsThe most basic qualification sought for someone being considered for the sharia board is expertise in Islamic commercial jurisprudence (which, in Arabic, is fiqh al-muamalat) and Islamic jurisprudence (usul al-fiqh). That expertise may need to be demonstrated by a post-secondary education degree — a bachelor’s, master’s, or doctorate degree — depending on the country and institution in question. However, exceptions exist: Sometimes sharia scholars with extensive qualifications in the Islamic finance field but little academic-based expertise in Islamic commercial jurisprudence may be invited to join a sharia board. (Note: Some, but not all, Islamic financial institutions require fluency in Arabic to sit on a sharia board.)

The key international regulatory bodies have something to say about qualifications as well. The AAOIFI defines sharia advisors as experts in Islamic commercial law. And the IFSB has issued a guiding principle (IFSB-10, to be exact) that indicates sharia scholars should have these four qualifications:

check.png A bachelor’s degree from a recognized university in sharia studies, including Islamic commercial law

check.png Skills in Islamic law methodologies for forming opinions

check.png Strong knowledge of Arabic in order to conduct research with original sources

check.png Knowledge of English in order to ease communications

realworldexample.epsDegrees in Islamic commercial law are offered in many Muslim countries, including Malaysia, Pakistan, Saudi Arabia, and Egypt, and in the United Kingdom. The University of Bedfordshire in the United Kingdom, for instance, offers a Master of Laws degree (LLM) in Islamic commercial law; the International Islamic University in Malaysia offers a PhD in Islamic commercial law, and the International Islamic University in Islamabad, Pakistan, offers an LLM in Islamic commercial law.

Industry professionals expect that sharia board advisors will also have knowledge of conventional finance, economics, accounting, and the commercial laws of the country or countries served by the Islamic institution for which they are considering board participation.

Here’s how an international Islamic institution may list the requirements for an opening on its sharia board:

Expert sharia advisor sought for part-time sharia supervisory board position. Qualifications include a master’s degree in sharia studies, experience in product research and development for the Islamic financial industry, expertise in sharia principles as they apply to the Islamic finance industry, and fluency in Arabic.

When a sharia scholar contacts an Islamic institution to express interest in serving on a sharia board, that person’s qualifications typically go to a nominating committee (populated by some members of the firm’s board of trustees) that presents candidates and recommendations to the entire board. The full board makes the hiring decision.

A young scholar interested in becoming a sharia board advisor may start by working as an officer doing activities such as writing reports for a sharia board. (For comparison, consider a junior lawyer who sits with more experienced lawyer to get experience.)

Eyeing potential issues surrounding sharia board membership

Islamic financial institutions face two main issues related to sharia boards: the sharia board’s relationship with the board of directors (and the ethical dilemma that this relationship can create) and an overlap of sharia board members among various firms due to the small number of qualified board-member candidates.

The relationship to the board of directors

Someone who qualifies to serve on a sharia board has spent years developing expertise in Islamic law, Islamic commercial law, and the financial industry. He’s committing to a long-term appointment and will devote many hours to fulfilling the responsibilities of the position. Clearly, he deserves to be paid. The problem is that payment comes from the same entity that hires him — the institution’s board of directors — which means that the board of directors plays a supervisory role with the sharia board.

controversy_religion.epsIn theory, a sharia board should be an independent body that operates parallel to the board of directors and reports directly to the firm’s stakeholders. However, in practice — in a typical corporate governance structure — sharia boards report to the organization’s senior management and/or board of directors. This setup creates a potential conflict of interest because the sharia board is bound both to the institution and to sharia.

Say, for example, that the board of directors or a senior manager advocates introducing a new product line, and the sharia board believes that the new products aren’t sharia-compliant. The sharia board members must be able to express and hold to that opinion — that is, to stand up to the folks signing their checks — in order to ensure the long-term strength of the institution.

In some ways, this predicament is similar to the one faced by an external auditor of any corporation; the auditor must conduct its business without being influenced by senior management or the board of trustees that hired it. Otherwise, a conflict of interest may arise, and the auditor may not be able to provide the essential objective opinion that shareholders and all other stakeholders rely on. But because an external auditor is a separate entity appointed by the shareholders, its independence is protected when it comes to corporate governance; senior management and the board of directors have less influence on an auditor than they may with a sharia board.

Some industry experts therefore propose that sharia boards assume the structure of external auditors. They argue that sharia board responsibilities need to be outsourced to a separate, expert entity that can supervise and audit the sharia compliance of the institution. This separate entity would be appointed by the shareholders and report to the board of directors and shareholders.

Most of the time, the current structure works, despite the potential conflict of interest. Boards of directors generally work within the parameters defined by the sharia board for product compliance because not doing so has the potential to harm the firm’s reputation in the long run.

The small pool of qualified candidates

remember.epsAs the Islamic finance industry has grown, the number of highly qualified sharia scholars available to sit on sharia boards hasn’t kept pace. As a result, many sharia scholars sit on the boards of multiple Islamic financial institutions. For example, a 2011 report by Funds@Work, a strategy consultant for the investment industry, contains these compelling figures for that year:

check.png Twenty scholars occupy a total of 621 sharia board positions.

check.png Each of these 20 scholars holds between 14 and 85 board positions.

check.png An additional 260 sharia scholars are occupying 520 board positions.

Here are potential issues that arise from this situation:

check.png Conflicts of interest: Boards of directors and senior managers of financial firms may question scholars’ ability to juggle their multiple commitments and provide the best possible service to the firm in question. Especially when a scholar sits on the sharia boards of two or more firms in the same industry sector (two or more banks, for example), the concern must be raised about whether the scholar can assist with new product research and development for one firm without her work influencing new product research and development for the other firm(s). The same concern applies to the scholar’s duties to oversee the institution’s operations and approve transactions to ensure sharia compliance.

check.png Slips in confidentiality: A sharia board advisor’s opinions regarding new product development or company operations are influenced by his experiences in the field. If a scholar is an advisor to multiple institutions, he may unintentionally share information among them that should be kept confidential. Obviously, institutions demand the highest ethics from their sharia advisors, but inadvertent sharing of information may still occur.

One possible solution is for an Islamic firm to take a chance on an up-and-coming sharia scholar who shows potential. However, the risk to the company’s short-term operations may be substantial. If a scholar doesn’t fully understand all aspects of both sharia law and the Islamic financial industry, she may be too quick to reject new product proposals that have potential. (A more-skilled scholar may recognize such potential and modify the proposal to become sharia-compliant.) Even worse, this person may approve products or transactions that aren’t sharia-compliant.

The industry is taking steps to encourage the development of sharia scholars and avoid an ongoing situation in which sharia advisors serve multiple boards. For example, young scholars are encouraged to sit on a sharia board under the supervision of more experienced members, and senior scholars are encouraged to leave opportunities open for young scholars by avoiding multiple board positions. An increase in the number of university degree programs for Islamic commercial law also helps.

Recognizing the Sharia Board’s Role

A sharia board is the cornerstone of an Islamic financial institution. Therefore, the credibility of the sharia board has a big impact on the credibility of the institution. In this section, I explain the two primary functions of the sharia board — ensuring that the firm’s operations comply with sharia principles and assisting the firm with sharia-compliant new product development — and describe other roles that a sharia board may play.

Assuring operational compliance

One of the main functions of a sharia board in an Islamic financial institution is to make sure that its operations are sharia-compliant. In this way, the sharia board is much like a supervisory or auditing unit.

The sharia board members or designated associates routinely conduct a sharia audit. This means that they test a sample of transactions occurring in all departments, branches, and business units of the Islamic financial institution with a specific eye on sharia compliance.

In reviewing these transactions, the sharia board is looking for any instances in which the institution (whether intentionally or not) engaged in activities that involved any noncompliant elements, such as interest, speculation, gambling, or participation in noncompliant industries (for example, businesses that produce pork products, pornography, or weapons of mass destruction).

remember.epsThe institution’s internal controls (its stated policies and procedures) should specify how often the sharia audit takes place as well as how the sharia board can derive sufficient and appropriate transaction samples to test for compliance. (Obviously, the board can’t study every transaction; doing so would be much too time-consuming.) Internal controls also cover how and when the sharia board must issue a report on its audit findings to the rest of the company’s stakeholders.

Based on the audit findings, the sharia board suggests ways the institution can improve sharia compliance. Although the Islamic firm’s board of directors and senior managers may want to move ahead with certain types of transactions despite the sharia board’s feedback, an Islamic company’s shareholders (who own the company and have ultimate control) will push for sharia compliance in almost every instance. That’s because everyone is aware that an Islamic company can serve its Muslim customers only by adhering to Islamic principles. If it chooses to deviate from them, it’s essentially choosing to become a conventional financial firm and thereby threatening its very reason for existence.

remember.epsUltimately, the sharia board is accountable to the shareholders, investors, and depositors who want assurances that they’re putting their money into a company whose values and operations conform to sharia.

Reviewing new products

The sharia board’s efforts don’t stop with compliance audits; they extend to researching and developing new sharia-compliant products. Often, a sharia board provides suggestions and approval for potential products.

Fatawa rulings that affect Islamic finance

Sharia boards of Islamic financial institutions often issue fatawa (the plural of fatwa) on matters such as new products and operational issues. A fatwa is any ruling made by a recognized or authorized entity about an issue from the point of view of Islamic law. (For example, a recognized sharia board may issue a fatwa regarding a social issue such as in vitro fertilization.) In the Islamic finance industry, the fatawa issued by a specific company’s sharia board aren’t necessarily binding to other companies, but other companies’ sharia boards may consider those rulings when they evaluate new products, for example.

Although any sharia board can issue fatawa, certain sharia organizations’ rulings garner more respect than others. Here are a few of the organizations that issue such highly regarded fatawa:

check.png The Fiqh (Islamic Jurisprudence) Council is part of the World Muslim League based in Mecca, Saudi Arabia. It’s one of the most important bodies that issues fatawa regarding the Islamic finance industry. For example, the Fiqh Council issued rulings regarding the permissibly of tawarruq(reverse murabaha), which I describe in Chapter 10.

check.png The International Islamic Fiqh Academy based in Jeddah, Saudi Arabia, is a subsidiary of the Organization of the Islamic Conference. Its resolutions, such as its 2009 resolutions related to the permissibility of tawarruq, carry a good deal of weight in the Islamic finance industry.

check.png Nationally recognized sharia boards, such as the Sharia Advisory Council of Malaysia and the Shariah Board of the State Bank of Pakistan, play vital roles by making sharia rulings regarding the Islamic financial transactions in their home countries.

You may be wondering how many new financial products are really necessary. After all, if Muslim customers have access to current (checking) and savings accounts along with a variety of investment vehicles, that should suffice, right? Not if an Islamic financial institution wants to compete with conventional firms. To fully serve customer needs, an Islamic institution must study what’s available in the market and create sharia-compliant product alternatives.

When a conventional financial company creates a new product, the product development team must gain approval from senior management. In an Islamic firm, approval must come not only from senior management but also from the sharia board; if the sharia board balks because the product isn’t compliant, the product doesn’t enter the market.

Performing other compliance- related functions

Following are additional roles and responsibilities that a sharia board may handle in an Islamic financial institution:

check.png Finding sharia-compliant solutions to unprecedented situations that arise.

check.png Researching and developing Islamic contracts that the firm doesn’t yet use and applying those contracts to new product development.

check.png Archiving relevant documents, such as sharia board meeting minutes, passed resolutions, and completed studies. This responsibility belongs specifically to the sharia secretariat.

check.png Writing off income from noncompliant transactions or investments and transferring it to the firm’s charity fund (described in Chapter 14). For example, an Islamic mutual fund may invest in a company that earns as much as 5 percent of its profits from noncompliant activities; in that case, the mutual fund must transfer 5 percent of its investment profits from that company to the charity fund.

check.png Calculating the firm’s zakat (the amount it’s obligated to donate to charity) and supervising the zakat fund (which may be combined with the charity fund).

check.png Informing customers regarding their zakat liability: the amount of their investment profits that they must designate for zakat.

check.png Assisting the preparation of the firm’s annual report by commenting on sharia-related matters.

check.png Assisting human resource development by providing training in sharia-compliant transactions.

check.png Reviewing the institution’s promotional activities to make sure they meet high ethical standards.

check.png Communicating with other institutions, regulators, and research organizations regarding sharia compliance matters.

Considering Real-World Models of Sharia Corporate Governance

As I explain in Chapter 15, sharia governance is an essential component of the total corporate governance of an Islamic financial institution. One of the principles outlined by the IFSB (which issues principles and standards on corporate governance, risk management, and capital adequacy) states that an Islamic firm should have a proper mechanism in place to ensure that product development and operations are sharia-compliant. The sharia board is at the heart of that mechanism, but not every sharia board functions in exactly the same way.

Both in theory and in practice, many corporate governance models are available to Islamic financial institutions. Depending on the country or region in which it operates, and on the needs of its stakeholders, an Islamic financial firm must apply the most appropriate model. The firm’s sharia board plays a larger or smaller role depending on the specific model applied.

realworldexample.epsVery briefly, here are just a few examples of how sharia governance looks in some countries with well-established Islamic finance industries:

check.png Malaysia: Malaysia’s sharia governance is regulated by the Sharia Advisory Council (SAC), which was established in 1997 by the Bank Negara Malaysia (the central bank of Malaysia). The SAC is the highest authority council in the country, and it determines Islamic law regarding Islamic banks, takaful (Islamic insurance) operators, and other Islamic financial institutions. This council’s approval is required in order to validate any new products in Malaysia’s Islamic financial markets. Note: To be clear, each Islamic financial institution in Malaysia has its own sharia board; the SAC provides a second tier of supervision for Islamic financial products.

The SAC became a more powerful body after the passage of the Central Bank of Malaysia Act 2009. This act states that the SAC is the sole authoritative body for sharia matters in Malaysia’s Islamic finance industry.

check.png Bahrain: Bahrain doesn’t have a single religious authority that mirrors Malaysia’s Sharia Advisory Council, but the Central Bank of Bahrain established the National Sharia Board (NSB) to make sure its own operations are sharia-compliant. In all situations that aren’t specifically covered by NSB rulings, an Islamic financial institution in Bahrain must get guidance from its own sharia board and follow governance standards set by the AAOIFI.

check.png Kuwait: Kuwait doesn’t have a higher-level structure for sharia governance. Each Islamic financial institution has its own sharia board. In the case of a disagreement between the board of directors and sharia board of a company, the matter may be referred for voluntary arbitration to the Fatwa Board of the Ministry of Awqaf and Islamic Affairs.

check.png Indonesia: The National Sharia Board, an independent organization recognized by Bank Indonesia (the Central Bank of the Republic of Indonesia), is responsible for issuing sharia rulings on all Islamic products developed in Indonesia. In other words, Islamic financial products are regulated by Bank Indonesia based on fatawa issued by the NSB. Therefore, the sharia board of an individual financial institution plays a supervisory role in new product development, focusing its efforts on ensuring that the NSB’s fatawa are being followed. (Check out the sidebar “Fatawa rulings that affect Islamic finance” in this chapter for more on fatawa.)

check.png Pakistan: The Shariah Board established by the State Bank of Pakistan (which is the central bank of Pakistan) is the higher-level authority of that country’s Islamic finance industry. Each Islamic financial institution must have its own sharia advisory board, which ensures that the company is complying with the Shariah Board’s rulings.

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