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JFRC
18,4 Sharia supervision of Islamic
financial institutions
Samy Nathan Garas
386 New York Institute of Technology, Manama, Bahrain, and
Chris Pierce
Global Governance Services Ltd, Orpington, UK
Abstract
Purpose The governance structure of Islamic financial institutions (IFIs) implements Islamic canon
law (Sharia) into business transactions through Sharia supervision processes. This paper aims to define
Sharia supervision and examine Sharia supervisory councils (both within and outside the Central Bank),
Sharia consulting firms, Sharia advisors, and Sharia Supervisory Boards (SSB). It also discusses the
importance of the hierarchical position of SSBs and evaluates their objectives and functions.
Design/methodology/approach The paper reviews a wide range of theoretical literatures
especially recent proceedings of relevant conferences in the Gulf Cooperation Council (GCC) countries
along with the standards of the Accounting and Auditing Organization of Islamic Financial
Institutions (AAOIFI). A framework for understanding the role of the SSB is developed suggesting a
set of objectives and functions for the SSB.
Findings The paper finds a lack of standardization among the IFIs concerning the position of the SSB
within the corporate hierarchy. Moreover, the SSB is found to control the IFIs activities more than the other
types of Sharia supervision such as Sharia consulting firms and Sharia advisors.
Research limitations/implications The research focuses exclusively on the GCC countries and
excludes the other Middle East and Far East countries where Sharia supervision might have different
forms.
Social implications The research provides guidelines for IFIs in defining the SSB role in their
governance structure and recommends the SSB among the other forms of Sharia supervision (Sharia
consulting firms and Sharia advisors) in controlling the IFIs activities.
Originality/value This study contributes to the literature gap about the governance of IFIs. It is one of
the first studies that provide a conceptual foundation for the SSB role in the governance structure of IFIs.
Keywords Islam, Financial institutions, Recruitment, Governance
Paper type Conceptual paper
8. Research limitations
The concepts included in this paper can be used as a platform for identifying the role of
the SSB in the governance structure of IFIs. However, there are still a number of
limitations to this study. First, the research does not address the forms of Sharia
supervision in other geographies such as middle East and far East countries, which have
JFRC a significant number of IFIs. Second, the study emphasizes the role of the SSB and
18,4 excludes the role of the alternative forms (SCF and Sharia advisor), which might have
different impact on the governance of the IFIs. Third, the study excludes the impact of
the IFIs stakeholders on the SSB role.
10. Conclusion
Sharia supervision plays an essential role in the governance of IFIs. It has different
forms at macro and micro levels. At the macro level, Sharia supervision is conducted
by SSC within and outside the central banks. At the micro level, it is conducted by SSB,
SSC, and Sharia advisor. The SSB is the mostly common form of supervision. The SSB
derives its importance from five resources: religious, social, economic, legal, and
governance and aims to ensure that IFIs activities are Sharia compliant through
supervising management and providing them with guidance.
Note
1. The central banks requirements from the IFIs concerning the establishment of the SSB are
listed on their web sites: Central Bank of Bahrain, www.cbb.gov.bh (accessed 30 June
2009); Central Bank of Kuwait, www.cbk.gov.kw (accessed 25 June 2009); Central Bank of
Qatar, www.qcb.gov.qa (accessed 28 June 2009); Central Bank of UAE, www.centralbank.
ae (accessed 27 June 2009); Doha Securities Market, www.dsm.com.qa/dsmsite/ (accessed
28 June 2009); Dubai Financial Market, available at: www.dfm.co.ae (accessed 27 June
2009); and Dubai Financial Service Authorities, available at: www.dfsa.ae (accessed
27 June 2009).
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402
JFRC
worldwide
Table AI.
financial institutions
The number of Islamic
No. Country Bank Insurance Investment bank Capital market Real estate Fund Total
1 Albania 1 1
2 Algeria 2 2
Appendix 1
3 Australia 1 1 1 3
4 Azerbaijan 1 1
5 Bahrain 7 9 18 3 3 40
6 Bangladesh 5 1 1 7
7 Bosnia/Herzegovina 1 1
8 Brunei 2 1 3
9 Egypt 2 1 3
10 Gambia 1 1
11 Germany 3 3
12 Guinea 1 1
13 India 1 1 2
14 Indonesia 3 2 5
15 Iran 12 1 2 1 16
16 Iraq 1 1 2
17 Jordan 2 3 2 7
18 Kenya 1 1
19 Kuwait 3 6 37 13 19 78
20 Lebanon 3 1 2 6
21 Malaysia 16 12 3 3 34
22 Mauritania 1 1 2
23 Niger 1 1
24 Nigeria 1 1
25 Pakistan 8 3 10 6 2 29
26 Palestine 4 4
27 Philippines 1 1
28 Qatar 6 2 5 2 4 1 20
29 Russia 1 1
30 Saudi Arabia 9 15 8 5 1 38
31 Senegal 1 1 1
32 Singapore 1 1 2
(continued)
No. Country Bank Insurance Investment bank Capital market Real estate Fund Total
33 South Africa 1 1 3 5
34 Sri Lanka 1 1
35 Sudan 10 5 7 1 5 2 30
36 Switzerland 2 1 3
37 Syria 3 3 6
38 Thailand 1 1
39 Tunisia 1 1 1 3
40 Turkey 2 1 3 5
41 UAE 10 7 7 11 3 5 43
42 UK 6 4 4 2 7 5 28
43 USA 4 3 5 12
44 Yemen 3 1 4
Total 130 83 120 40 55 30 458
Note: The countries highlighted in italics are the GCC countries
Sources: GCC central banks; GCC stock exchanges; Zawya Database (2009); Securities Database (2009); CIBAFI (2009); Arab Banking and Finance
Directory (2009/2010); McKinsey & Company (2008/2009); Kulathakal (2007) and Direct calls
supervision
Sharia
Table AI.
403
JFRC Appendix 2
18,4
No. Sharia scholar Bahrain Kuwait Qatar KSA UAE Total
Sources: Zawya Database (2009); Securities Database (2009); CIBAFI (2009); IFIS (2009) and Arab
Banking and Finance Directory (2009/2010) Table AII.
18,4
406
JFRC
functions
Table AIII.
Classifications of the SSB
Appendix 3
Al
Functions Abu Ghudda Hammad Abdulla Ahmed Al Qari Al Haiti Al Qorra Daghi Beriquridar