Sharia Supervisory Board in Islamic Banks: A Critical Analysis of the Current Framework

Sharia Supervisory Boards (SSBs) are established within the structure of Islamic financial institutions (IFIs) to ensure the credibility of sharia-compliance. In sharia governance, the SSB is the main tool which IFIs apply to be presumed as sharia-compliant. However, the insertion of this body into the internal structure of the corporation can prove challenging, as this body, with its powerful authority, is unknown to the structure of the corporation. The role of sharia supervision performed by SSBs requires a high level of independence, which is significantly compromised in its current structure. While many researchers have identified conflict of interests surrounding the structure of SSBs and proposed suggestions, this thesis rethinks the entire structure of SSBs to make them more consistent with the well-known corporate governance mechanisms. The thesis examines the nature of SSBs’ roles and concludes that these are more closely aligned to gatekeeping. More specifically, their roles are similar to those of external auditors, and so the SSBs should be structured as such. This requires a separation of the SSB’s roles to be reassigned to different institutions. Regarding the sharia standard-setting role, the thesis suggests establishing a national Sharia Standard-setting Board to be the exclusive authority for issuing sharia standards for the Islamic finance industry. This body should overcome the limitations existing within similar bodies in certain jurisdictions where SSBs are granted wide legislative authority. To assess the auditing roles of SSBs, the thesis analyses the accountability framework of sharia governance. It argues that sharia firms provide a better alternative for conducting independent external sharia auditing. Also, a regulatory authority needs to be implemented for more effective accountability and to serve the unique stakeholders of sharia-compliance. The thesis concludes by proposing an SSB-free model which promotes sharia supervision as a profession and so, in turn, the whole industry of Islamic finance.