Approaches Used to Appoint Shari'aa Boards

The role of the Shari'aa Board in a typical Islamic bank brings to mind the typical role played by a compliance committee within the board of directors of any conventional bank in the United States — but, of course, it is concerned only with issues that pertain to compliance with the law (Shari'aa). It is important to note that two approaches have been used to implement the law in RF banking activities.

1. The first approach is implemented in Malaysia. In this approach, the central bank (Bank Negara Malaysia, BNM) has its own Central Bank Islamic Banking Division with its own banking books and regulations, as well as its own National Bank Shari'aa Board. The National Shari'aa Board of Islamic Banking in Malaysia issues edicts on different products, services, and operating standards and procedures. The opinions and rulings of the National Shari'aa Board of Islamic Banking are binding to all RF banks operating in Malaysia. Then, at the individual RF bank level, each RF bank appoints its own Shari'aa Supervisory Committee to ascertain compliance of the RF bank operations with the rules set by the central bank's Shari'aa Board guidelines. This approach proved to be beneficial. It saves a lot of confusion and resolves conflicts within different Shari'aa Boards. The involvement of the central bank adds credence and weight to the RF banking rules and regulations issued by the central bank Shari'aa Board. In addition, because the Shari'aa Board is operated and supervised by the central bank, there is no potential for conflict of interest because the individual banks are not paying their own hand-picked scholars for their services.

2. The other approach is to allow each RF bank to appoint its own Shari'aa Board. The implementation of this approach has created a lot of confusion and conflicting opinions among the scholars in each of the Islamic banks. It also creates an implicit uneasy feeling of conflict of interest, because the RF bank pays the salaries of its Shari'aa Board members. This approach has also created a large demand for the RF Shari'aa scholars who are scarce and are available in short supply. The net result has been the appointment of some of the “superstar scholars” on the Shari'aa Boards of more than one RF bank. Your author knows of scholars who serve on the boards of more than 50 Islamic banks. This creates another conflict-of-interest situation because these scholars are exposed to the inside information of many competing RF banks. This approach is used mostly by RF banks in the oil-rich Gulf countries and in some Asian countries (except Malaysia).

Concerns of Western Central Bankers and Bank Regulators Regarding Shari'aa Boards

This important issue is very sensitive, and it created some serious concerns in the many efforts invested in trying to implement and popularize RF banking and finance in the West. There are three reasons for these concerns:

1. In most Western societies, especially in the United States, the government and its departments operate with a firm belief in the separation of church and state. Operating a bank with a formal board that has the mission of implementing the laws of a certain religion may be a bit sensitive, especially with consumers who subscribe to other religions, which may result in a fear of religious discrimination disputes that may lead to messy law suits.

2. The existence of two boards in one bank, with one board (the Shari'aa Board) having apparent superiority of control over the other, may create a serious operating conflicts that could have a negative impact on the RF bank's safety and soundness. In addition, there can be further conflict if the Shari'aa Board is paid generously to issue edicts that can create serious conflict-of-interest issues.

3. Most, if not all, of the scholars represented on the Shari'aa Board do not have direct experience in banking and finance, and in most cases, they do not have a proven track record and knowledge of the banking regulations in the West. They may not even have experience in the local area in the West where the RF bank operates. In addition, because many of the scholars live in other countries, it is difficult for them to appreciate local needs, banking regulations, and challenges, and the regulators may find it hard to exercise their regulatory powers on them.

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