Shariah supervisory systems in Islamic finance institutions across the OIC member countries. An investigation of regulatory frameworks
| DOI | https://doi.org/10.1108/JFRC-02-2014-0011 |
| Date | 11 May 2015 |
| Published date | 11 May 2015 |
| Pages | 135-160 |
| Author | Rihab Grassa |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Shariah supervisory systems in
Islamic nance institutions
across the OIC member countries
An investigation of regulatory frameworks
Rihab Grassa
Higher Institute of Accountancy and Entrepreneurial Administration (ISCAE),
La Manouba, Tunisia
Abstract
Purpose – This paper aims to discuss the different practices and regulatory frameworks of Shariah
supervision in Islamic Financial Institutions (IFIs) across Organisation of Islamic Cooperation (OIC)
member states and to identify the gaps in current Shariah supervisory practices. Parallel with the rapid
growth of Islamic nance worldwide, corporate governance has received a considerable amount of
attention in Islamic nance. Shariah is a unique characteristic of Islamic nance. That is why the need
for a good and efcient Shariah governance system for IFIs is considered to be a crucial requirement to
ensure the development and the stability of the Islamic nance industry.
Design/methodology/approach – The paper is based on critical review of current laws and
regulations for IFIs; this provides a reective synthesis on the practical work of the Shariah supervisory
system across the 25 different OIC member states.
Findings – The paper reveals several ndings. First, the authors observe a weak and poor Shariah
supervisory system in most OIC member states. Furthermore, the authors detect various gaps in the
current Shariah supervisory practices. Most of these shortfalls are linked to the current regulatory
frameworks: the roles and the responsibilities of the national Shariah authority, and the institutional
Shariah board’s duties and attributes.
Originality/value – This paper’s originality and value lies in its critical review of current Shariah
supervisory practices across 25 OIC member states. Also, the paper puts forward various suggestions
to the regulatory authorities and to the Islamic Financial Services Board to enhance the Shariah
governance system and to standardize the different practices of Shariah governance worldwide.
Keywords Regulation, Institutional Shariah board, Islamic nancial institutions,
National Shariah board, OIC member states, Shariah supervision
Paper type Technical paper
1. Introduction
It is assumed that in Islamic Financial Institutions (IFIs), corporate governance is
developing considerably with the steep growth of the Islamic nance system worldwide.
As Shariah is a unique characteristic of Islamic nance, the need for a good and efcient
Shariah governance system for IFIs is a crucial requirement to ensure the development
and the stability of the Islamic nance industry.
Nevertheless, the collapse of many IFIs, like South Africa’s Islamic Bank of in 1997,
the demise of Turkey’s Ihlas Finance House in 2001, and various cases of fraud which
led to the Dubai Islamic Bank’s losses at between 2004 and 2007, put into question the
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Shariah
supervisory
systems
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Journalof Financial Regulation
andCompliance
Vol.23 No. 2, 2015
pp.135-160
©Emerald Group Publishing Limited
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DOI 10.1108/JFRC-02-2014-0011
IFIs’ current governance practices in and emphasized the need for an effective
governance system for IFIs (Ginena, 2014).
Previous failures of many IFIs led many countries and international Islamic nance
organization, like AAOIFI, Islamic Financial Services Board […], to make corporate
governance reforms in the form of governance codes, standards, rules and guidelines
showing how best to control and manage IFIs best. Over the past few years and in
response to the IFIs’ needs, many countries developed a comprehensive governance
framework for Shariah issues. However, it was remarked that due to the absence of a
well-conceptualized framework, these regulations were based essentially on respective
countries’ needs and experiences.
Whilst many practitioners, policymakers and researchers insisted on the need for a
sound and efcient Shariah supervisory system to promote the development of a solid
Islamic nancial system, we observed that there was little in corporate nance literature
discussing this issue. Therefore, we joined the wave of new studies on Shariah
governance (Grassa, 2013a;Hassan, 2010;Choudhury and Hoque, 2006;Muneeza, and
Hassan, 2014;Hamza, 2013) and we tried to explore and analyze the state of Shariah
supervisory practices in IFIs across the Organisation of Islamic Cooperation (OIC)
member states. The scope of our study covers 25 OIC member states and analyses the
extent of Shariah supervisory practices in IFIs across these countries. We do so by
discussing the following areas:
• different Shariah supervisory approaches;
• regulatory frameworks;
• roles of the higher Shariah authority at the national level; and
• the role and attributes of Shariah boards (SBs) at the institutional level.
The paper’s ndings argue that across OIC member states, there are different Shariah
supervisory practices. These differences reveal many gaps which can be summarized in
the following four points:
(1) rst, weak and poor Shariah supervisory systems in some countries;
(2) second, we observed some shortfalls in some countries’ current regulatory
frameworks;
(3) third, the limited responsibilities of the national Shariah authorities; and
(4) fourth, limited duties and unclear attributes of the institutional SB.
To reconcile these gaps, this study offers various suggestions. First, national Shariah
authorities need to play an even more crucial role in monitoring and ensuring a
well-adapted governance practice in Islamic banking. Second, there is a need for further
improvement in existing regulatory frameworks on Shariah supervision to reinforce the
development and growth of the Islamic nance industry. Third, international and
national Islamic nancial organizations need to do more effective work to promote an
effective Shariah governance environment.
This study contributes to the literature in several ways. First, this is the rst paper to
focus on the Shariah supervisory practices across 25 OIC member states, an area which
continues to lag behind in the Islamic nance literature. Second, the paper is a very
useful source of information; this may provide relevant guidelines for future
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