Abstract
Purpose: The purpose of the article is to critically analyse State Bank of Pakistan’s Shariah governance framework (SGF) which is indeed a backbone for the survival of Islamic banking institutions (IBIs). Shariah compliance along with other contemporary standards makes it more challenging for the staff to ensure satisfaction of all stakeholders of IBIs. Besides profitability, IBI customers need complete satisfaction that their funds have been administered according to the Shariah law and returns are from permissible business operations.
 Design/methodology/approach: SGF was analysed for making inferences by systematically and objectively identifying special characteristics of the framework for IBIs. Utilising interpretive and naturalistic approach including both observational and narrative based discourses associated with ground realities, the article outlines pragmatic modifications in existing framework to bridge the gap between Shariah boards and the board of directors.
 Findings: Over the years Shariah governance mechanisms have significantly groomed in Pakistan, however, the need and room for improvement always remains for further developments . SGF enables convenient operations of IBIs with predetermined set of instructions and objectives. Nevertheless, IBIs need continuous monitoring and handholding to implement the SGF in true spirit. This article critically analysed updated SGF (2018) through content analysis and identified a few important gaps in the existing SGF. Those gapes such as absence of It has been observed that lack of performance evaluation of Board of Directors (BoD) and Shariah Board (SB) is important impediment in the development and expansion of IBIs.
 Originality/Value: Current study identifies that existing SGF is devoid of determining key performance indicators (KPIs) for IBIs in terms of Shariah compliance and performance of BoDs and SBs. Therefore, this article concluded with proposed new Shariah governance framework for IBIs to ensure close liaison between BoD and SB through Board’s Committee of Shariah Governance (BCSG) with the provision of indicators for Shariah compliance ratings of IBIs.
Highlights
Shariah governance through Shariah Boards (SBs) is essential to monitor and govern the operations of the Islamic Banking Institutions (IBIs) in order to ensure their integrity, credibility, transparency and reputation
IBIs are required to establish SBs with the aim to supervise their operations in order to ensure that they abide by the Shariah principles
According to the Shariah Governance Framework (SGF 2018) issued by the State Bank of Pakistan (SBP), SBs have the power to ban any of the operations and activities of the IBIs which is non-compliant with the Shariah principles
Summary
Shariah governance through Shariah Boards (SBs) is essential to monitor and govern the operations of the Islamic Banking Institutions (IBIs) in order to ensure their integrity, credibility, transparency and reputation. The decisions of the SB related to Sharaih compliance are binding even for the Board of Directors (BOD), which appoints the SB members including the chairman after the approval from the SBP. This indicates that having an effective and efficient SB is a matter of prime concern for the IBIs; otherwise, weak and inefficient SBs may adversely affect the reputation, integrity and perception of Islamic banks and the Islamic finance industry. Stand clearly apart from their conventional counterparts with much better returns on investments and equity
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