Foundations of Shari'ah Governance of Islamic Banks

Introduction

Islamic banks have witnessed strong growth over the past four decades. This growth has been fuelled by consumer demand for sharī‘ah compliant financial products in different parts of the globe. These products mainly differ from those offered by conventional banks in that they comply with the teachings of sharī‘ah that concern the financial domain. Islamic transactional jurisprudence thus serves as a rich resource that establishes the foundational basis of sharī‘ah compliant financial transactions and enables innovation in this arena.

Some of the benefits that Islamic finance brings to the economy include developing a strong association between the financial sector and real goods and services, minimizing uncertainty in transactions as well as speculatory behavior, and linking entitlement to profits with liability for assets. As interest and a handful of activities (eg. gambling) are prohibited by sharī‘ah, Islamic finance neither contains any element of interest nor is it used as a means for funding these prohibited activities. Instead, profit is earned in connection with an underlying asset that is financed using sharī‘ah compliant contracts.

Despite the tremendous growth of this industry and consumer demand for it, scholarship on the sharī‘ah dimension of Islamic finance remains quite limited. This has led to inadequate understanding of the topic and hindered standardization efforts of sharī‘ah practices. Even with the rise of literature on Islamic finance, some ...