The Compliance with Shariah Governance System of AAOIFI : A Study on Islamic Banks Bangladesh

Abstract

The study examines the compliance levels of 17 private commercial banks, which operate Islamic banking in Bangladesh, with Shariah governance system of AAOIFI to understand their Shariah non-compliance risk management status. The results show that none of the Islamic banks in Bangladesh are full-compliant with Shariah governance system of the AAOIFI because none of them has audit and governance committee at board level. The average of Shariah compliance levels of the full-fledged Islamic banks is highest but it is medium and lowest against the banks, which operate Islamic banking through some Islamic bank branches and windows, respectively. However, the banks conduct Shariah audit and inspections by the Shariah Supervisory Committees (SSCs). Some limitations of the SSC have been observed. These are: some banks formed the SSC with both outsiders and insiders, but appointment of insiders is a complete deviation from the AAOIFI standards. Reports of the SSC have not been presented in a uniform way which creates confusion among the stakeholders regarding information. Though disclosure of doubtful income indicates operational efficiency of Shariah based banks, some reports of the SSC did not mention the amount of doubtful income at all. It has been hypothesised that if there is more compliance with Shariah so there shall be higher growth of Islamic banking. The study therefore suggests that the Shariah compliance levels should be increased by all banks. Moreover uniformity and transparency should be ensured in the reports of the SSCs. All of these shall not only help to mitigate Shariah non-compliance risk but also re-enforce the growth and company efficiency of the Islamic banks Bangladesh.