Previous IFSB publications highlighted a particular concern over the role and function of Shariah boards within the Islamic financial services industry. Shariah boards play a key role in advising institutions on their compliance with Shariah rules and principles. Whilst other IFSB publications have contained recommendations for ensuring appropriate Shariah governance systems are in place, the Guiding Principles on Shariah Governance System were a response to the industry’s need for greater clarity in this fundamental area.
‘Shariah Governance’ is defined as the set of institutional and organisational arrangements through which an IFI ensures that there is effective independent supervision of, in particular, the issue and dissemination of Shariah pronouncements, and internal and external Shariah compliance reviews.
General Approach - various different Shariah governance structures have been adopted in different jurisdictions, and systems adopted should be proportionate to the size, complexity and nature of the business. Shariah boards should have a clear mandate and be equipped with operative procedures and reporting lines to provide effective Shariah governance.
Competence - the choice of the scholars and other individuals whose role is to provide Shariah advice should be made on the basis of an individual’s honesty, good character and possession of the necessary qualifications to understand the technical requirements of the business. The need for ongoing professional development of such individuals is also crucial to ensure that they are kept up-to-date with legislative changes and industry-specific knowledge. Shariah boards should be regularly assessed in relation to objective performance criteria and be accountable to the board of directors.
Independence - no individual member of a Shariah board should be ‘connected’ with the company or serve another function within the company. Each member should be capable of exercising independent judgement. The management of the IFI should ensure that all relevant information is supplied to the Shariah board promptly and in such a manner that enables the board to discharge its duties properly. This will involve allowing the Shariah board independent access to senior management and providing for any further enquiries that may be made.
Confidentiality - members of the Shariah board will inevitably be exposed to commercially sensitive inside information in the discharge of their duties. As part of an IFI’s broader risk management processes therefore, it should ensure that adequate confidentiality clauses are included in each member’s service contract. There should also be an appropriate procedure for dealing with leaks of inside information, which may include some form of disciplinary action.
Consistency - decisions of Shariah boards should be consistent and, as far as possible, follow the pronouncements of the central Shariah authority in the relevant jurisdiction, where applicable. Where no such authority exists, it is recommended that the Shariah board uses best efforts to conform to any previous rulings and to publish its decisions so that they may be openly and transparently assessed.