Foundations of Shari'ah Governance of Islamic Banks

Foreword

In recent years, the instant collapse of some of the iconic AAA rated companies, along with the recurring local, regional and global financial crises, have highlighted the fragility of corporate governance infrastructure that is meant to prevent such failure. From this failure, one fundamental lesson that we could draw is to realize the need for principles-based internal regulation. We need to recognize the oversights made in how companies have conducted their business, especially financial institutions. With such a perspective, the sharī‘ah governance system offers an important (albeit some may think experimental) building block for forming a robust financial architecture of global relevance.

The sharī‘ah supervisory mechanism has been adopted by most Islamic financial institutions on a voluntary basis. However, some jurisdictions make the process a legal requirement for conducting business. As early as 1980 a federal law was introduced in Pakistan – “The Modaraba Companies and Modaraba (Floatation and Control) Ordinance.” The law, for the first time in history, made the Religious Board mandatory for any company established. The term “Sharī‘ah governance” was first introduced in 2003 by M. A. Qatan in this sentence: “the Sharī‘ah governance process is a unique building block of the Islamic financial architecture” (quoted from Khan and Muljawan, Bank Indonesia and IDB, Islamic Financial Architecture - Risk Management and Financial Stability, 2003, p. 275, p. 275). Later, ...