Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

CHAPTER 8

Corporate Governance and Shari'a Compliance

The structures and processes established within an institution offering Islamic financial services (IIFS) for monitoring and evaluating Shari'a compliance rely essentially on arrangements internal to the firm. By being incorporated into the institutional structure, a Shari'a supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shari'a-conforming instruments, an SSB can enable innovation likely to emerge within the institution.

This chapter reviews the issues and options facing current arrangements for ensuring Shari'a compliance by IIFSs. It considers a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by self-regulatory professional associations. Such a framework could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would be entrusted mainly to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities have met its Shari'a requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This ...