Abstract
This study examines the critical role of Shariah governance, particularly the impact of Shariah supervisory boards (SBBs) within the corporate governance framework of Islamic financial institutions (IFIs). SSBs, as critical components of Shariah governance mechanisms, significantly influence Shariah compliance processes within IFIs. This study explores the unique systemic risks inherent in the Islamic financial environment, focusing on the complexities and elements defining SSB legitimacy. The IFSB recommends four essential components for Shariah governance systems, emphasizing the importance of SSBs. However, SSBs face challenges balancing SharÊ‘ah adherence and market dynamics, highlighting a conflict between business objectives and Shariah rules. This study acknowledges the limited strength of Shariah governance, advocating for universally adopted standards to address issues such as conflicts of interest within SSBs and the need for diversified skill sets. This paper assesses the effectiveness of Shariah governance and SSBs in IFIs. For this purpose, a survey was conducted among middle and senior-level managers and employees employed in IFIs or associated regulatory entities across diverse nations. The results highlight the critical role of SSB members, specific standards for board nominations, and the moderate influence of stakeholders' interests on Shariah governance success. Shareholders’ and customers’ interests show no significant correlation with Shariah governance success.
Published Version
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