Shari'asupervision of Islamic financial institutions

Abstract

PurposeThe governance structure of Islamic financial institutions (IFIs) implements Islamic canon law (Shari'a) into business transactions throughShari'asupervision processes. This paper aims to defineShari'asupervision and examineShari'asupervisory councils (both within and outside the Central Bank),Shari'aconsulting firms,Shari'aadvisors, andShari'aSupervisory Boards (SSB). It also discusses the importance of the hierarchical position of SSBs and evaluates their objectives and functions.Design/methodology/approachThe paper reviews a wide range of theoretical literatures especially recent proceedings of relevant conferences in the Gulf Cooperation Council (GCC) countries along with the standards of the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). A framework for understanding the role of the SSB is developed suggesting a set of objectives and functions for the SSB.FindingsThe paper finds a lack of standardization among the IFIs concerning the position of the SSB within the corporate hierarchy. Moreover, the SSB is found to control the IFIs activities more than the other types ofShari'asupervision such asShari'aconsulting firms andShari'aadvisors.Research limitations/implicationsThe research focuses exclusively on the GCC countries and excludes the other Middle East and Far East countries whereShari'asupervision might have different forms.Social implicationsThe research provides guidelines for IFIs in defining the SSB role in their governance structure and recommends the SSB among the other forms ofShari'asupervision (Shari'aconsulting firms andShari'aadvisors) in controlling the IFIs activities.Originality/valueThis study contributes to the literature gap about the governance of IFIs. It is one of the first studies that provide a conceptual foundation for the SSB role in the governance structure of IFIs.