Modern Islamic Banking

CHAPTER 12Governance

Islamic financial institutions typically have the same governance structure as conventional financial institutions, consisting of a more senior, or supervisory, board chaired by the chairman of the company, and a lower board, or executive committee, responsible for the day-to-day running of the bank. Remuneration committees, audit committees and risk committees are all standard components of the governance structure. However, Islamic financial institutions have an additional organ of governance in the SAB. Five main elements are generally identified when considering the role of the SAB in the governance structure:

• Independence. Independence of the SAB and SAB members is a fundamental requirement and is an issue frequently discussed and debated. In order for an SAB to function effectively, its members must be independent of the management of the bank. As a result, the SAB members are usually appointed by the shareholders at the annual general meeting.
• Confidentiality. Due to the nature of the SAB members’ work and duties, they are exposed to a great deal of proprietary information. Their presence, as is common, on many boards dictates a detailed confidentiality requirement.
• Competence. Due to the multifaceted nature of the SAB members’ role, they are required to have a specialist knowledge and expertise. This includes not only Sharia’a knowledge and expertise, and in particular fiqh al muamalat (Islamic law of contracts), but also an understanding and knowledge ...