Search results

This chapter aims to explore the Shari’ah governance rules applied in the Malaysian Islamic banking arena and the effect of Islamic Financial Services Act 2013 on it.

This is a legal exploratory study primarily focused on library research.

Shari’ah governance is a concept that has been developed and applied gradually in Malaysia and the new Islamic Financial Services Act 2013 has taken it to the next level. However, this does not mean that it has resolved the problems in Shari’ah governance that existed before the enactment of the act.

Islamic Financial Services Act 2013 is a new statute that repealed Islamic Banking Act 1983. As such, not many have reviewed this new piece of legislation. This chapter will give insight into the evolution of Shari’ah governance as part of corporate governance of Islamic banks in Malaysia and will help explain the most recent developments in this arena along with the challenges.

The prime difference between conventional and Islamic financial institutions (IFIs)is the compliance with shari'ah. Hence, shari'ah is a very crucial pillar, rather a main pillar of Islamic finance. In order to ensure shari'ah compliance by the IFIs at all levels, central banks of different countries crafted and implemented shari'ah governance framework. This chapter focusses on the cross-country comparison of shari'ah governance framework. The countries included in this chapter are Malaysia, Pakistan, the United Kingdom and Bahrain. The result shows that Malaysia and Pakistan are leading in terms of comprehensive shari'ah governance framework whereas Bahrain comes next and the United Kingdom is the last in terms of comparison.

The most crucial challenge facing Islamic Financial Institutions (IFIs) is the full compliance of their activities with shari'ah principles. The complexity of IFIs requires Otoritas Jasa Keuangan (OJK, Indonesian Financial Services Authority) to adopt a good shari'ah governance framework to address shari'ah risks of Islamic banking and financial institutions (IBFIs). However, the current shari'ah governance structure in Indonesia is far from ideal compared to the international best practice. This chapter proposes a new shari'ah governance framework by involving shari'ah supervisory board authority (Otoritas Dewan Pengawas Syariah) under the commissioners of OJK to oversight, regulate, and supervise the shari'ah matters for IBFIs in Indonesia. The chapter discusses the challenges in adopting this new framework. The chapter concludes that the current shortcomings of the proper shari'ah governance framework for shari'ah supervision and regulation requires a new shari'ah board authority under the commissioners of OJK who has full authority over shari'ah matters.

This chapter explores the historical development of shari’ah governance infrastructures in the Malaysian landscape, pre- and post-Islamic Financial Services Act 2013 (IFSA) and its implications on the industry. This chapter analyzed two approaches developed in the shari’ah governance, namely, the inclusivity and uniformity approach. Inclusivity approach showed that the shari’ah compliance responsibility is shared inclusively by the shari’ah committee together with the institution’s top management. While the uniformity approach showed that the end-to-end shari’ah compliance is achieved through issuance of shari’ah standards that can be easily related by the practitioners into their banking operations and business. The coherence implementation of these approaches has enabled another important stakeholder, the judiciary to have more clarity and certainty in dealing with matters pertaining to Islamic banking and finance. Consumers’ trust and confidence in the financial sector is thereby secured and sustained, hence providing financial stability within the industry, which meets with the expectation and mandate given to IFSA.

This chapter aims to explore and examine the extent of Islamic corporate governance practices in 35 Islamic Financial Institutions (IFIs) in Malaysia, Gulf Cooperation Council countries and the United Kingdom, particularly in its six major areas, namely approaches to Islamic governance, regulatory framework and internal policies, roles and functions of shari’ah board, attributes of shari’ah board members on independence, competency and transparency, and confidentiality, operational procedures and perception of IFIs of the shari’ah board’s performance. A questionnaire was developed by benefiting from the Islamic corporate governance standards identified by International Financial Services Board and Accounting and Auditing Organization for IFIs, which included mainly about 50 standards with sub-sections as questions. The study demonstrates the state of Islamic corporate governance practices in these countries. The survey findings affirm that there are significant differences and diverse Islamic governance practices amongst IFIs in the case countries. The study hence provides evidence that there are shortcomings and weaknesses to the existing governance framework, which needs further enhancement and improvement.

This chapter summarizes the current practice of shari'ah governance framework of Islamic banking entities (IBEs) in Oman and the challenges faced by such institutions. The Central Bank of Oman (CBO) issued proper shari'ah governance framework enshrined in the Islamic Banking Regulatory Framework of CBO. The shari'ah governance framework shall contain shari'ah supervisory board, internal shari'ah reviewer, shari'ah compliance unit, shari'ah risk unit, and shari'ah audit unit. To strengthen the role of shari'ah, the CBO also issued a regulation for the establishment of High Shari'ah Supervisory Authority in CBO to harmonize opinions related to shari'ah matters among the IBEs. These elements are expected to perform an oversight role on shari'ah matters relating to Islamic banking business activities. This chapter also discusses the issues and challenges faced by IBEs in Oman, and proposed some improvement to the CBO to strengthen shari'ah governance framework in the Sultanate.

Cooperatives are formed with the idea of cooperation. Due to their features, cooperatives have the potential to address the issue of poverty alleviation and improvement in income distribution, which currently is the central focus of governments' economic policy making. Currently, Islamic cooperatives or shari'ah-based cooperatives have also been developing well. Shari'ah-based cooperative is essentially the transformation of conventional cooperative through an approach in line with the Shari'ah principles. It could be one of the best solutions in supporting Islamic banking and finance for unbankable customers. This chapter describes the development of cooperatives in Malaysia and Indonesia. The chapter also discusses the need for cooperative governance and highlights the features of cooperatives that results to their governance is more complex that the governance of business organisations. This chapter also highlights laws, regulation and shari'ah governance measures taken by both jurisdictions to promote growth of shari'ah-based cooperatives.

This chapter highlights the variations of agency theory in the unique and complex context of Islamic banks in Saudi Arabia. The results provide an insight into agency structures in the context of Islamic banking that may lead to trade-offs between shari'ah compliance and mechanisms for protecting the rights of investors. This empirical study finds that most of the surveyed Islamic banks appear to recognize the value of governance and have implemented some basic mechanisms. Certain flaws in governance pertaining to audit, control, and transparency were also noted. The situation gets worse in cases where the investment account holders do not have any representation on the board or any voice for control or monetary rights. Other peculiar models balancing the two key requirements may be effective regarding agency dynamics. This study should motivate the policy makers to tailor the regulations to safeguard the interests of all investors without violating the principles of shari'ah.

The concept of corporate governance is not new for institutions and organizations. The topic came into light after the financial crisis and frauds done by the companies. The topic of Islamic finance also gained momentum. Islamic Financial Services Board, Accounting and Auditing Organization of Islamic Financial Institutions, regulatory authorities of Islamic financial institutions and Islamic financial institutions themselves paid attention to the topic of corporate governance. Governance have critical place in Islam as human beings are answerable to Allah (swt) for acts, deeds, and fulfillment of responsibilities as vicegerent. This chapter focuses on the importance of corporate governance and differences between the corporate governance from conventional and Islamic point of view. How the topic of governance was discussed during the time of Holy Prophet (PBUH), different examples of the countries focusing on corporate governance are shared in this chapter.