Foundations of Shari'ah Governance of Islamic Banks

Chapter 2Corporate and Sharī‘ah Governance of Islamic Banks¹

Chapter Summary

This chapter discusses corporate governance, its importance to the banking sector, and some of its challenges relating to the economic and financial crisis of 2007. The chapter looks back in history at the hisba system and juxtaposes the OECD and Islamic principles of corporate governance. Sharī‘ah compliance is identified as one of the key outstanding needs of Islamic banks not addressed by corporate governance codes and principles issued by organizations like the OECD; thus, an adapted corporate governance understanding is presented along with guidance on the topic by the IFSB and AAOIFI. Key stakeholders in the corporate governance of Islamic banks are identified along with their concerns and responsibilities. The chapter also defines sharī‘ah risk as well as sharī‘ah governance and proposes a comprehensive model for sharī‘ah governance of Islamic banks. After identifying the possible consequences of sharī‘ah risk, the chapter examines the causes and events of this risk in detail. The chapter closes by discussing the sharī‘ah compliance-related responsibilities of the Board of Directors (BOD) and management. In this vein, it groups sharī‘ah-related responsibilities of the audit and governance committee under four main domains: sharī‘ah reporting, internal sharī‘ah control, internal sharī‘ah audit function, and external sharī‘ah audit.

2.1 Corporate Governance Gains Prominence

In the first chapter ...