Shariah Governance Structure of Islamic Financial Institutions in Sri Lanka

Hayathu Mohamed Ahamed Hilmy,Rusni Hassan

doi:10.18646/2056.64.19-018

Hayathu Mohamed Ahamed Hilmy, Rusni Hassan

Open Access

https://doi.org/10.18646/2056.64.19-018

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Abstract

Shariah governance plays a key role in ensuring integrity of Islamic financial system. The structure and the process of Shariah governance has been proposed by the international standard setting bodies for Islamic Financial Institutions (IFIs) to follow and incorporate Shariah governance practices in their operations and financial products. This study aims to investigate the Shariah governance practice in Sri Lanka that practices dual financial system (conventional and Islamic finance) for the past twenty years, with a special focus on process and structure. The qualitative method is employed in this study whereby the primary data are gathered in the form of interview while secondary data are collected through research articles, annual reports, official websites, magazines and newspaper. This study found there are gaps and shortcomings in the Shariah governance practice at IFIs in Sri Lanka particularly in the structure and the process as compare to the international framework and guidelines issued by international standard setting body such as AAOIFI and IFSB. The main contribution of this study is to put forward recommendations to rectify the gaps and to further enhance the Shariah governance practices in Sri Lankan IFIs.

Highlights

Islamic finance is a system that strictly complies with Islamic law without involvement of Shariah prohibited elements, which is otherwise the key element in conventional banking
As the objective of this study is to examine the process and the structure of Shariah governance as practiced by the Sri Lankan Islamic Financial Institutions (IFIs), the researchers analyse the process and structure of Shariah governance as to whether the IFIs comply with the internal and external arrangements guided by the standards that they follow respectively
The methodology employed is by examining the literatures and annual reports to find the gap in the practices and supported with the interview with the officers in the IFIs

Summary

Introduction

Islamic finance is a system that strictly complies with Islamic law without involvement of Shariah prohibited elements, which is otherwise the key element in conventional banking. Shariah governance framework is a mechanism used by Islamic Financial Institutions (IFIs) to ensure Shariah compliance and to mitigate Shariah noncompliance risk, which is costly and adversely affect reputation of and business continuity of IFIs (Haqqi, 2014). The history of Sri Lanka in Islamic finance can be traced back in 1997 when Amana Investments was created by founder Osman Kassim (Amana Bank, 2019). There has been a lack of empirical research on Shariah governance in Sri Lanka. It is important to examine Shariah governance practices of Sri Lankan IFIs, especially given the growth of Islamic finance industry in Sri Lanka is growing, among countries like Bangladesh and Singapore It is important to examine Shariah governance practices of Sri Lankan IFIs, especially given the growth of Islamic finance industry in Sri Lanka is growing, among countries like Bangladesh and Singapore (Kuwait Finance House Research Ltd, 2013 p. 29)

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