A major difference between Islamic & conventional financial institutions is in terms of organisational structure as Islamic financial institutions have an additional governance requirement. Islamic financial institutions must have a Shariah board whose members are appointed by the shareholders of the Islamic financial institution to ensure that all the institution’s operations and investment activities are in compliance with Shariah as interpreted by the Shariah board. The Shariah board is an independent board and does not directly report to the management of the institution in question, but rather to the general assembly.
According to AAOIFI Shariah Standard No. (29): Stipulations and Ethics of Fatwa in the Institutional Framework, Shariah board members should be experts in Islamic jurisprudence & contemporary financial transactions of high repute and should not have any personal interest in the matter for which the institution seeks their opinion on. You may read the standard to find out more details.
There is shortage of qualified Shariah scholars within the Islamic finance industry, therefore many of the top-tier Scholars sit on the Shariah boards of multiple financial institutions around the world. Hence, when you take a look at the Shariah board members of different financial institutions, do not be surprised if the same names keep popping up, as competent scholars are in high demand and there is a lack of supply i.e. simple economics. In some jurisdictions however, there may be a limit on the number of Islamic financial institutions any one Shariah board member can be a member of.
Furthermore, just like lawyers, accountants and other professional service providers, Shariah board members are usually remunerated for their services based on the terms of their appointment by the shareholders of the particular Islamic financial institution. The recommended number of Shariah board members on any particular board is 3 members, although you may find some institutions with more or less than this number, depending on the size of the institution. Smaller institutions, rather than setting up their own Shariah board, sometimes outsource this process to an external Shariah Consultancy who will be responsible for their Shariah compliance.
It is also important to understand that Shariah board members, in most cases, are not available for the institution on a full-time basis i.e. they are not like full-time employees who are in the office on a daily basis from 9 to 5. As mentioned previously, most Shariah board members sit on the boards of multiple institutions and additionally have other duties and responsibilities e.g. some are Professors, hence being available from 9 to 5 for only one institution is not practical. However, in some jurisdictions & in some institutions, one of the Shariah board members might be appointed as a resident Shariah board member or act additionally as the Secretary of the Shariah board and therefore be at the institution on a full-time basis.
In order to smoothen the Shariah compliance process, each Islamic financial institution usually has an internal Shariah department consisting of full-time employees of the institution and they are tasked with liaising between the management of the bank and the Shariah board on a day to day basis. We will take a look at the function of the Internal Shariah department in more detail in a future post inshaAllah.
From the above explanation, we can see that the presence of a Shariah board is a major differentiating factor between an Islamic financial institution and a conventional one. Therefore, before you decide on taking or investing in any Islamic financial product offered to you, it is important that you to check if there is a Shariah board regulating the institution offering the product. The Shariah board members are usually listed on the institution’s website and you may also request that the institution provides you with a copy of the signed fatwa (opinion) of the Shariah board on any particular product that you are interested in, some institutions may be willing to provide you with a copy, while others may not.
It is important to note however, that any Shariah board approving the product, is not guaranteeing that the product is suitable for you from a commercial or economic perspective but rather they are confirming that in their opinion the product offered by the institution is compliant with Shariah as interpreted by them. Therefore, before taking out or investing in any Islamic financial product, it is imperative that the concerned person conducts his own due diligence, as just because something is Shariah compliant, it doesn’t mean that it is a great commercial/economic decision for them. Furthermore, you may discuss the product offering in detail once you have gathered all the necessary information, with someone of knowledge that you trust before making any decision.
To read the next post (#3) in this series, please click the link below: