board, as the highest authority on Sharia' issues pertaining to Islamic Banking in a country; its distinguishing features .... Institutions and Investment Companies.
Cover page (title of paper, name of authors, and author affiliations) 10th International Conference on Islamic Economics and Finance
AN INFERENTIAL REASONING ON THE CENTRALISATION OF ISLAMIC BANKS’ SHARIA’ BOARDS TOWARDS THE ADVANCEMENT OF THE GLOBAL ISLAMIC BANKING INDUSTRY By
TE
Abd Hakim Abd Razak
IB U
Ph.D. in Law Student
PR
EP R
IN
T:
PL
EA
SE
D
O
N O
T
Q
U O
TE
O
R
D
IS T
R
Trinity College Dublin, Ireland
Abstract 10th International Conference on Islamic Economics and Finance
ABSTRACT The raison d'être of this paper is to supply basic insights into the principle of Shura in Islamic Banking; the idea of a centralised Sharia' governance system, i.e. the centralised Sharia' board, as the highest authority on Sharia' issues pertaining to Islamic Banking in a country; its distinguishing features than that of a de-centralised system, i.e. the Sharia' board at the individual IFI level; and the pros and cons of the two said governance systems. These were analysed by referring to the provisions of the Holy Quran and the Sunnah, Ijma’ (consensus) of Sharia' scholars, and recent reports on the Islamic Banking industry as a whole. Despite the fact that the double-digit growth of Islamic Banking appears to be a promising sign towards the current US$ 2 trillion industry and further expected to cross the US$ 6.5 trillion mark by 2020, there remains concern over the lack of standardisation on adopted governance standards among IFIs across key regions such as Qatar, Indonesia, Malaysia, Bahrain, Saudi Arabia, United Arab Emirates, Pakistan, etc. Correspondingly, there has been much debate surrounding the issue of whether the Islamic Banking industry requires a centralised Sharia' board at the state level to complement the Sharia' boards at IFIs’ individual level. The fact that the industry is already equipped with two prominent standardsetting agencies in the form of the AAOIFI and the IFSB does little to suggest that best governance practices, which centres around the theme of consistency, harmony and uniformity, are on the horizon; at least not whilst their issued standards and guidelines remain voluntary to IFIs. All in all, it is aspired that this paper may assist the reader in evaluating the pros and cons of the whole concept of Sharia' board centralisation. Insha’Allah (God’s willing).
Conference paper (excluding author names and affliations) 10th International Conference on Islamic Economics and Finance
AN INFERENTIAL REASONING ON THE CENTRALISATION OF ISLAMIC BANKS’ SHARIA’ BOARDS TOWARDS THE ADVANCEMENT OF THE GLOBAL ISLAMIC BANKING INDUSTRY
1.0
INTRODUCTION
Islamic Banking is currently one of the fastest growing sectors of the financial market industry, spanning across 75 countries through more than 300 Islamic financial institutions (‘IFIs’). It is without a doubt that since its emergence in the 1970’s, the global Islamic Banking market is growing steadily at 15-20% per annum while global Sharia’-compliant assets are forecasted to grow from over US$500 billion in 2009 to beyond the milestone of $2 trillion by 2014 (Ernst & Young, 2012, p. 4) and is further expected to cross the US$ 6.5 trillion mark by 2020 (BMB Islamic UK Limited, 2012, p. 5) (see Figure 1), with the GCC alone is expected to hold a share of more than $2 trillion (Ernst & Young, 2012, Greenwood, 2014)}. As a result, it is not surprising for many to view this industry as one of the key doorways to the wealthy petro-funded region of the Middle East or pars pro toto: the Gulf Cooperation Council (‘the GCC’)1.
1
The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
1
10th International Conference on Islamic Economics and Finance
Figure 1: Projected Size of the Islamic Banking Industry 2005 – 2015 (Shanmugam and Zaha Rina, 2009, p. 96) Yet, despite all these remarkable figures, Islamic Banking faces mounting challenges to remain firm to true Islamic principles while expanding internationally. It is apparent that the role and responsibilities of IFIs are to serve the financial needs of their various stakeholders and to give proper consideration to the legitimacy of their operations from a Sharia’ point-ofview (BMB Islamic UK Limited, 2011, p. 44). However, in recent years, the industry was heavily criticised for failure to ensure consistency, uniformity, and strict adherence of the products and services offered with the Sharia’ law (Nurrachmi et al., 2013, p. 11-14, Mikail and Arifin, 2013, p. 168-189, Taymiyya, 1981)2. Furthermore, its authenticity and merit were 2
Refer to the controversial permissibility of Bai Al Inah (sale and buy back) and organized Tawarruq (tri-partite
sale) in certain jurisdictions despite being ruled out by the Hanafi, Maliki and Hanbali’s schools of thought. Bai Al Inah is a sale and buy back product, in which the bank would purchase an asset from the client on a cash basis and then immediately resell the asset to the customer at a marked up price on a deferred payment basis. It involves two contracts, which must be independent and executed separately from each other. Scholars argued that it serves as a back door to Riba’, which is forbidden in Islam because of the probability that the banks will take advantage of a customers’ desperate plea for cash and further subjugate them to debt. Also, it is viewed as a juristic ruse or stratagem to legalising Riba’. Tawarruq on the other hand is more acceptable to the scholars as it involves a third party and does not indicate a clear ruse to the prohibition of Riba’.
2
10th International Conference on Islamic Economics and Finance
even questioned by several Islamic Banking practitioners; citing them as mirroring the conventional banks’ (Azrul Azwar, 2010, p. 40, Wilson, 2007, p. 10, Usmani, 2008, p. 2-14, Warde, 2010, p. 240). The problem does not lie within the products or services themselves, but rather from a number of emerging issues in the Islamic Banking industry such as, inter alia, the corporate governance framework of IFIs and inconsistency of Sharia' opinions across IFIs’ Sharia' boards. It is in this regard that the paper shall aim to explain the idea of a centralised Sharia' board as an ideal solution to the continuing challenges that have been plaguing the Islamic Banking industry since its introduction in the last few decades and analyse recent criticisms the industry has encountered against its current practices.
2.0 THE PRINCIPLE OF SHURA (CONSULTATION) IN SHARIA' LAW Basically, the term Shura is derived from the Arabic word of Shawara, which meant ‘to advise or consult’, ‘to deliberate, and ‘to ask’ (Wehr, 1979, p. 574-575). In essence, when a matter requires a decision that affects the interests of the public, the Islamic concept of justice necessitates the implementation of Shura as the a guiding principle. This is in accordance with the following provision of the Holy Quran and Sunnah: “… and consult them (the people) in affairs (of moment). Then, when thou hast taken a decision put thy trust in God. For God loves those who put their trust (in Him).” (Surah Ali Imran 3: 159) Although the Prophet Muhammad (p.b.u.h.) never consulted his companions on matters pertaining to the Sharia' legal rulings (Raysūnī, 2011, p. 17-18), there are numerous instances that highlighted the adoption of Shura by the Prophet on other matters throughout his life. According to Al-Razi (al-Razi, 1990, p. 79-80) and Al-Qurtubi (al-Qurtubi, 2004, p. 191-194), the practice of Shura was not to favour the human intellect over divine revelation, but to teach mankind on the concept of unity and the importance of consultation in 3
10th International Conference on Islamic Economics and Finance
administrative issues, i.e. the significance and wisdom behind collective decisions over those made individually. For example, during the battle of Badr Al-Qubra (1H/622 C.E.), the Prophet (p.b.u.h.) consulted his companions on the proper discourse that should be taken against the Quraish armies (An-Nabahani, 1996, p. 238). Similarly, the Prophet (p.b.u.h.) had also sought counsel from his companions when his wife, ‘Aisha, was falsely accused of indecency (An-Nabahani, 1996, p. 52). After the demise of Prophet Muhammad (p.b.u.h.), this act of democracy was then continued by the Muslims, who conducted an open dialogue to discuss on the potential successors of the Prophet (p.b.u.h.), of which the majority of Muslims decided for Abu Bakr As-Siddiq to be made as the first caliph of Islam (Asy-Syawi, 1997, p. 103, Tawfiq Al-Attar, 1996, p. 8). By the time of Umar Al-Khattab, a consultative council was formed as a medium to discuss on the appointment of the subsequent caliph3 (Kathir, 2003, Osman, 1997, p. 11). Indeed, decision-making is regarded by Islam as a trust from God and the system of Shura ensures that this divine obligation is duly observed in order to protect the rights of all parties involved. Also, it helps to prevent the subjugation of the society’s rights in the hands of a certain group of people (Mawdudi, 1988, Shaikh, 1988), i.e. those who are entrusted with a public authority. On the contrary, Shura is viewed by the majority of Sharia' scholars as merely a mechanism to make decisions, which are not binding on the ruler or a particular authority, unless a covenant is agreed between the parties to implement a binding decision (Shaharuddin et al., 2012, p. 7, Hasan, 2003, p. 37-38, al-Qasimi and al-Qadi, 1986) 4 .
3
There were six candidates named by Umar Al-Khattab as his potential successor, namely Uthman, ‘Ali, Talhah,
Az-Zubayr, Sa’id, and Abdur-Rahman bin ‘Awf. 4
Also see the following decision of the Egyptian High Constitutional Court on Ijtihad in 1994, “Ijtihad consists
in applying the rule of reason in what is not an object of a (sacred) text, as an extension of the edifice of transactional rules that is necessitated by God’s clemency and justice towards His subjects. The advantage thereof is to cushion the Islamic Sharia' as the latter is not cloistered unto itself. This practice (Ijtihad) does not confer any sacredness (qudsiyya) on the opinion of some jurist or another with regard to the legal matter under consideration, and there is no impediment to revisiting it, evaluating it, or replacing it by another rule.
4
10th International Conference on Islamic Economics and Finance
However, this assertion is rebutted by scholars such as Yusuf Al-Qardawi, Muhammad Salim Al-‘Awwa, and Taha Jabir Al-‘Alwani, who contended that the outcome of Shura ought to be binding since any decision is resolved through a majority vote (El-Awa, 1978, p. 96, AlQaradawi, 2011, An-Nabahani, 1996, p. 249-250). In other words, a non-binding Shura decision would make a mockery of the entire Shura process. This corroborates with the view of Ibn ‘Atiyya, a distinguished Andalusian Quranic commentator, who proposed if those in power fail to consult those who are more knowledgeable and conscious of God, i.e. the Sharia' scholars, they should be dismissed from their respective positions (Al-Andalusi, 1997, Osman, 1997, p. 11). Accordingly, the practice of binding Shura decisions has been implemented by the Sharia' boards of several countries such as the Higher Sharia' Supervisory Board (‘HSSB’) of the Central Bank of Sudan5; the Sharia' Advisory Council (‘SAC’) of the Bank Negara Malaysia6; the Higher Sharia' Authority (‘HSA’) of the United Arab Emirates7; and the Fatwa Board of the Ministry of Awqaf and Islamic Affairs of Kuwait8. Uniquely, some of these institutions have moved even further in ensuring that their decisions are not only binding on the IFIs, but also
Interpretive opinions, by themselves, do not possess a binding force on those who do not have the same opinion; one should not, therefore, consider these opinions as a Law of Sharia' that is absolute and incontestable and cannot be contradicted.” See GOOLAM, N. M. 2006. Ijtihad and Its Significance for Islamic Legal Interpretation. Mich. St. L. Rev., 1443.. Also see ARABI, O. 2001. Studies in Modern Islamic Law and Jurisprudence, Kluwer Law International. 5
Section 21 (1) of the 2003. The Banking Business (Organisation) Act 2003.
6
Section 55 and 57 of the PARLIAMENT OF MALAYSIA 2009. Central Bank of Malaysia Act 2009 (Act 701).
Malaysia. 7
Article 5 of the UNITED ARAB EMIRATES 1985. Federal Law no - (6) of 1985 Regarding Islamic Banks, Financial
Institutions and Investment Companies. In: EMIRATES, U. A. (ed.). United Arab Emirates. 8
Article 93 of the 1968. Law No. 32 of the Year 1968 Concerning Currency, The Central Bank of Kuwait and the
Organisation of Banking Business.. Also see VAN GREUNING, H. & IQBAL, Z. 2008. Risk Analysis for Islamic Banks, World Bank Publications., p. 192.
5
10th International Conference on Islamic Economics and Finance
the parliament and the courts. For instance, section 57 of the Central Bank of Malaysia Act 2009 mandates that the Sharia' rulings issued by the SAC shall be binding on both the IFIs and the court or arbitrator, who made reference to it. Likewise, Article 230 (1) of the Constitution of Pakistan mandates that the Islamic Council, a special body formed to ensure Sharia' compliance of the Pakistani laws, can question the legality of any bill tabled in the Parliament if it contradicts the principles of Sharia' law. Also, the decision of the Islamic Council shall bind both the Parliament and the President9. However, it must also be noted that the practice of Shura may not automatically guarantee a positive outcome. This can be exemplified by the collective decision taken by the Shura council during the battle of Uhud (3H/624 C.E.), which had inflicted great losses to the Muslim armies. Similarly, a decision concluded by the majority in Shura may not necessarily represent the best outcome for everyone in the community10. Nonetheless, Sharia' scholars such as Sheikh Ahmed Rida and Ibrahim Sham Al-Din (Rida and Al-Din, 1999) pointed out that the Sharia' law also mentioned that as long as the majority based its decision on the rules and principles of the Sharia' law, the outcome is more trustworthy and best represent the interest of the community 11 . Further, it is also asserted that Shura is similar to the Western concept of democracy in the sense that both agreed that collective consideration is more comprehensive, more accurate, and more likely to lead to a fair and sound result for
9
Article 230 (3) of the n.d. The Constitution of Pakistan.
10
“And if you follow most of those on the earth, they will lead you astray from the path of God; they follow
nothing but conjecture and they only lie” (Surah Al-An’am 6: 116); “…They believe therein; but those of the Sects that reject it, - the Fire will be their promised meeting place. Be not then in doubt thereon: for it is the Truth from your Lord: yet many among men do not believe!” (Surah Hud 11: 17); “And We have explained to men in this Quran every kind of similitude: yet the greater part of men refuse except with ingratitude!” (Surah Al-Isra’ 17: 89); “And truly before them, many of the ancients went astray” (Surah Al-Saffat 37:71). 11
“O ye who believe! Obey God, obey the Messenger, and those charged with authority amongst you. If you
differ in anything among yourselves, refer it to God and His Messenger, if you do believe in God and the Last Day: that is best, and most suitable for final determination” (Surah An-Nisa’ 4: 59).
6
10th International Conference on Islamic Economics and Finance
the social good than that made by the minority or an individual (Sulaiman, 1998, p. 98). Even so, this comes with a caveat. In order to guarantee that the decisions taken by the majority fulfil both the Sharia' law and the public interest, the majority is required to be those of Ulu Al-Amr Minkum, i.e. those who are elected and entrusted with authority by the public themselves (Osman, 1997, p. 12). Further, the Islamic governmental concept of Al-Bay’a demands bilateral responsibilities on those bestowed with authority, i.e. the ruler, and those subjected to the authority, i.e. the people. On one hand, the ruler is responsible to guarantee the supremacy of the Sharia' law and protect the best interest of the community. On the other, the people is obliged to support the ruler and obey his commands as long as they are in compliance with the Sharia' law (Ya'la and Ibn Al-Husayn Al-Farra, 1966, p. 224). In short, although it is practically difficult for Shura to satisfy every partyies in a discussion (Al-Hasyimi, 2009, p. 3), its role as a platform of conscience in the Islamic legal system remains relevant, especially for a developing industry such as Islamic Banking. Truly, this has been more challenging with the presence of four major schools of thought in Islam, whose variant opinions have been viewed as a sign of inconsistency (Mushtak, 2010). Further, there is also growing uncertainty as to the exact criteria required of the Ulu Al-Amr Minkum in the Islamic Banking industry, who are responsible for issues and decisions pertaining to the Sharia' compliance of IFIs’ financial products and services. Be that as it may, the author opine that these differences in opinions should not be viewed as limitations, but rather sources of potential strength – when harnessed through a proper medium. All in all, since the Sharia' law aims to reach mutual understanding without favouring the opinion of an Imam or a particular school of thought over the other12 (Raysūnī, 2011, p. 4, Ates, 2003, p.
12
“Those who hearken to their Lord, and establish regular prayer, who (conduct) their affairs by mutual
consultation; who spend out what We bestow on them for sustenance” (Surah Al-Shura 42: 38).
7
10th International Conference on Islamic Economics and Finance
359), Shura can be viewed as an ideal platform to bridge the variant opinions between these four schools of Fiqh.
3.0 THE CENTRALISED ISLAMIC CORPORATE GOVERNANCE SYSTEM 3.1 A NATIONAL SHARIA’ BOARD In a centralised Islamic corporate governance system, the national Sharia' board serves as the sole authority in the country on Sharia' issues regarding Islamic Banking. At this level, the Sharia' board plays a significant roles in the harmonization and standardization of Fatwas whilst acting as both an advisor to the central bank and the highest Sharia' authority for the IFIs in the country (Dusuki, 2011). For example, due to the existence of different Islamic schools of thought, an Islamic financial instrument that is approved in one country may not necessarily be approved in other countries13 (Nursyamsiah and Kayadibi, 2012, p. 123, Perry, 2010). This owes to the fact that different IFIs have different Sharia' boards with different opinions due to the variation in school of thought orientation among the Sharia' scholars. For instance, the interpretation of Sharia' law is liberal in Malaysia and Egypt, intermediate in the United Arab Emirates, but strict in Saudi Arabia and Kuwait (Platt, 2006). Further, these differences do not only occur between Islam’s four major schools of thought, but may also occur within a particular school as well. In other words, variation of opinions can even occur in a country that subscribes to a particular school of thought. With a national Sharia' board, these differences can well be consolidated and resolved through the implementation and enforcement of centralised Sharia' decisions; which will subsequently benefit all IFIs in the country through the reliance on a consistent set of standards.
13
See Bai Al-Inah in NURSYAMSIAH, T. & KAYADIBI, S. 2012. Application of Bay ‘al-‘Inah in Islamic Banking and
Finance: From the Viewpoint of Siyasah Shar ‘iyyah. 3rd Annual World Conference on Riba' - The Multifaceted Global Crises of Riba': Resilience, Response & Reform, Kuala Lumpur, 26-27 November 2012. Kuala Lumpur., p. 123.
8
10th International Conference on Islamic Economics and Finance
Accordingly, the presence of a centralised Sharia' board does not necessarily imply that the authority to issue Fatwa of the Sharia' board at individual IFI level is completely abolished. In fact, the latter is still required by the regulatory framework to provide Sharia' advisory services to the IFI, which includes the issuance of Fatwas pertaining to new product inventions and Sharia' compliance of the IFI’s overall financial operations (Bank Negara Malaysia, 2011, p. 34-35, Shaharuddin et al., 2012, p. 8). In other words, a centralised Sharia' board can be seen as an intermediary factor that aims to ensure consistency in the adoption of Sharia' opinions and standards across the country’s IFIs. Thus, the whole idea of a centralised Sharia' board is not merely constrained to the total subjugation of IFIs’ Sharia' boards to the authority of the former, but rather as an ideal venue for close cooperation and collaboration between the two different levels of Sharia' boards. On the positive side, ,however, this model of governance provides the IFI’s Sharia' board with additional time to focus on product development of IFI whilst increasing the ir number of hours the Sharia' scholars are spending in the office (Islamic Development Bank, 2013, p. 29), especially in light of the multiple representation practice across IFIs’ Sharia' boards around the world; which inflicts not only additional burdens and strains on the Sharia' scholars but also reduces their Sharia' governance oversight (Thomson Reuters, 2014, p. 179). As a result, these circumstances hinder them from providing effective supervision over the IFIs’ financial operations. In response, several jurisdiction such as Malaysia and Sudan have gone a step further by prohibiting Sharia' scholars from holding multiple positions across the Sharia' boards of other IFIs in order to enable them to concentrate and dedicate themselves to their respective IFI {Thomson Reuters, 2014 #839, p. 113]. At the moment, there is a growing number of countries thatthat have opted or in the process of adopting for a national Sharia' board as the apex of Sharia' decisions for Islamic Banking.
9
10th International Conference on Islamic Economics and Finance
These are ,are Malaysia (the SAC of Bank Negara Malaysia)14, Pakistan (Sharia' Board of the State Bank of Pakistan), the United Arab Emirates (HSA), Bahrain (National Sharia' Board of the Central Bank of Bahrain), Oman (Sharia' Supervisory Authority of the Central Bank of Oman)15, Nigeria (Sharia' Council of the Central Bank of Nigeria), and prospectively Morocco16 and Bangladesh17. Although their names vary from one country to the other, the national Sharia' board serves towards a single purpose, i.e. to act as the highest Sharia' authority in the country. Among these countries, the Malaysian centralised governance system is considerably the most unique where itas it involves established two national Sharia' boards to to regulate its diverse Islamic Banking market. On one hand, there is the SAC of the Central Bank of Malaysia, which is mainly responsible for to supervisinge general Islamic Banking activities, and on the other, there is the Sharia' Advisory Council of the Securities Commission of Malaysia, which is more focused on all Sharia' issues concerning the Islamic capital market industry {Securities Commission, 2007 #347, p. 4}. Unlike the AAOIFI and the IFSB, a national Sharia' board decision is binding and statutorily enforceable against all IFIs in the country. In Malaysia as for instance, section 58 of the Central Bank of Malaysia Act 2009 stipulates that in the event of conflict between Sharia' 14
Established by virtue of section 51 of PARLIAMENT OF MALAYSIA 2009. Central Bank of Malaysia Act 2009
(Act 701). Malaysia.. 15
THOMSON REUTERS 2015. Oman Islamic Finance Report 2015: Building on a Strong Start. Oman Islamic
Finance Report 2015., p. 37. Also see VISZAINO, B. 2014. Oman Sets Up Central Sharia Board in Move to Boost Islamic Finance. Reuters, 8 October 2014. 16
Morocco has proposed to phase out the requirement of Sharia' board for IFIs in the country in favour of a
national Sharia' board, which shall be the sole authority for Islamic Banking matters. See ISLAMIC DEVELOPMENT BANK 2013. Islamic Development Bank Group in Brief. Jeddah: Islamic Development Bank., p. 29. Also see VISZAINO, B. 2014. Oman Sets Up Central Sharia Board in Move to Boost Islamic Finance. Reuters, 8 October 2014. 17
In the meantime, the central bank of Bangladesh has halted the issuance of licenses for Islamic windows
pending the formation of the country’s centralised Sharia' board. See THOMSON REUTERS 2014. Islamic Finance Development Report 2014. In: ABDUL ALIM, E. (ed.)., p. 109.
10
10th International Conference on Islamic Economics and Finance
rulings issued by the Sharia' board of an individual IFI and the SAC, the latter’s rulings shall prevail 18 . Likewise, in the United Arab Emirates, article 5 of the Federal Law No. (6) of 1985 19 mandates that the Higher Sharia' Authority shall be the final authority on Sharia' matters related to Islamic Banking and its decision shall be binding on all IFIs in the kingdom. Interestingly, although the idea of a national Sharia' board would find less appeal among Islamic countries, particularly the GCC, which prefers to leave the Sharia' issues concerning Islamic Banking to individual IFIs’ Sharia' boards (Hasan, 2010, p. 106-107, Pepper, 1992)20, the author views the system as ideal, especially to countries that are still new to this banking concept and are seeking a for suitable governance framework. This has recently been demonstrated by Oman, which despite being the last nation tohat introduced Islamic Banking among the GCC, has begun to benefit from its newly adopted centralised governance approach (Thomson Reuters, 2015, p. 113, Viszaino, 2014). Not only did it that didn’t only speed up the development of Islamic Banking products, but it also minimised the overall operational costs for Sharia' corporate governance of its IFIs (Viszaino, 2014). In addition, although Oman was not listed in the top 10 countries of the 2014 Thomson Reuter’s Islamic corporate governance sub-indicator due to its recent introduction of a centralised Sharia' Supervisory Authority in late September 2014 (Thomson Reuters, 2014, p. 112), it was
18
Section 58 of PARLIAMENT OF MALAYSIA 2009. Central Bank of Malaysia Act 2009 (Act 701). Malaysia.. The
position of the SAC as Malaysia’s highest authority on Islamic Banking issues is further strengthened by the recently introduced Islamic Financial Services Act 2013, which stipulates that IFIs shall be deemed as Sharia'compliant only when it complies with the rulings of the SAC. See section 28 of PARLIAMENT OF MALAYSIA 2013. Islamic Financial Services Act 2013 (Act 759). Malaysia. 19
UNITED ARAB EMIRATES 1985. Federal Law no - (6) of 1985 Regarding Islamic Banks, Financial Institutions
and Investment Companies. In: EMIRATES, U. A. (ed.). United Arab Emirates. 20
Since Sharia' law is the governing law in most of the GCC countries, the presence of a centralised Sharia'
board as a medium to harmonise the differences of Sharia' opinions among IFIs’ Sharia' boards is regarded as needless. This also explains the absence of a written constitution in countries such as Saudi Arabia, which relies totally on the provisions of the Holy Quran and the Sunnah.
11
10th International Conference on Islamic Economics and Finance
ranked seventh in terms of the strength of overall Islamic Banking governance framework, above established market players such as the United Arab Emirates and Qatar (see Figure 2).
Figure 2: Oman’s Ranking According to the Standards of Good Practice in Islamic Banking with Regards to Regulations, Corporate Governance, and Sharia' Governance (Thomson Reuters, 2014, p. 108)21
4.0 THE DE-CENTRALISED ISLAMIC CORPORATE GOVERNANCE SYSTEM 4.1 A SHARIA’ BOARD OF IFI Since Sharia' compliance is integral to the IFIs’ Islamic corporate governance framework, a viable mechanism is required to further guarantee the Sharia' compliance of IFIs’ financial 21
Modified.
12
10th International Conference on Islamic Economics and Finance
products and services. In essence, IFIs are either recommended or legally obliged by statutory laws, articles of association, central bank’s guidelines, or the AAOIFI or the IFSB Sharia' governance standards to either establish an institutional-level Sharia' board (Islamic Financial Services Board (IFSB), 2009, p. 8) or acquire the services of a Sharia' advisory firm22 (Rammal, 2006, Islamic Financial Services Board (IFSB), 2009, p. 1) or alternately, a Sharia' scholar, whose expertise lies in the areas of Fiqh Al-Muammalat23 (Islamic Financial Services Board (IFSB), 2009, p. 4-8). From a general perspective, the IFI’s Sharia' board is expected to perform a range of responsibilities that include participation in product development and structuring activities, review and approval of matters related to Sharia' law, issuance of Fatwa, Sharia' auditing, issuance of an annual certification of Sharia' compliance and Sharia' compliance assurance of IFI’s financial activities such as in shares, equities, Sukuk and other business avenues, and the computation of Zakat (McMillen, 2006, p. 141, Dusuki, 2011, Sabur and Wares, 2011, p. 3-4, Ayub, 2007, p. 363). Also, the Sharia' board is responsible to assist the management in complying with the rules of Sharia' through guidance, advice, and proper training on Fiqh Al-Muammalat, which must also include the staffs and personnel (Chik, 2011, p. 8). In some IFIs, especially those within the centralised system, the Sharia' board is 22
Nonetheless, it is noted that the luxury of a Sharia' board is something that every IFI can afford with due to
several factors, e.g. deficiency in terms of capital, size of operation, shortage of qualified Sharia' scholars, etc . 22
For instance, Australia-based Iskan Finance had neither a Sharia' advisor nor a Sharia' board. Instead, it models its programmes based on the Fatwas issued by leading Sharia' scholars and consultations it seeks from the Al-Azhar Seminary of Egypt. 23
Understandably, the final two options will most likely be preferred by conventional banks that offer Islamic
Banking products either limitedly or on an ad hoc basis since in a de-centralised system, they are neither expected nor statutorily required to have in-house Islamic corporate governance frameworks as compared to full-fledged IFIs or conventional banks with broad range of Islamic Banking products. On the service acquisition of a Sharia' scholar, however, it is submitted that though this option is preferred due to the cost factor, it will nevertheless place the financial institutions concerned at a disadvantage in terms of collective wisdom that can be achieved as compared to the first and second options.
13
10th International Conference on Islamic Economics and Finance
obliged to ensure consult the central Sharia' board on Sharia' matters that could not be resolved whilst ensuring the IFI’s compliance with the Fatwas, policies, and guidelines related to Sharia' compliance issued by the central Sharia' board (Bank Negara Malaysia, 2011, p. 34-35). Uniquely, although the establishment of a Sharia' board at IFI level is considered a major feature of a de-centralised system, it has also been made as a mandatory requirement by several countries that have adopted the centralised system. For example, in the United Arab Emirates, Article 6 of the Federal Law No. (6) of 1985 mandates for the creation of an inhouse Sharia' board in all IFIs in the kingdom, which duties shall include inter alia, the alignment of IFI’s financial operations with the Sharia' law24. Similarly in Malaysia, section 30 of the Islamic Financial Services Act 2013 also mandates for the same requirement whilst at the same time providing additional flexibility to banks that have more than one entity licensed to conduct Islamic Banking business, to only establish a single Sharia' board to oversee the overall Sharia' compliance of the bank’s financial activities 25. Although this reliance on a single Sharia' board can be risky to the extent of compromising the IFI’s overall Sharia' compliance, this policy is arguably ideal, especially for those that operate within a centralised system, not only due to its cost-efficient factor, but also owing to the presence of a central Sharia' board in the said system, which significantly reduces the roles and responsibilities of 24
The said article stipulates “The respective articles and memorandum of association of each Islamic bank,
financial institution and investment company should clearly stipulate that a Sharia' Supervision Authority shall be formed of minimum three members to render their transactions and practices accordant with the principles and provisions of Islamic Sharia' law.” See Article (6) of UNITED ARAB EMIRATES 1985. Federal Law no - (6) of 1985 Regarding Islamic Banks, Financial Institutions and Investment Companies. In: EMIRATES, U. A. (ed.). United Arab Emirates. 25
PARLIAMENT OF MALAYSIA 2013. Islamic Financial Services Act 2013 (Act 759). Malaysia.. This policy is a
positive improvement to the repealed Takaful Act 1984 and superseded BNM Guidelines on the Governance of Sharia' Committee that required a separate Sharia' board to be formed if the banking group conducts Takaful business. See BANK NEGARA MALAYSIA 2011. Shariah Governance Framework for Islamic Financial Institutions BNM/RH/GL_012_3. In: MALAYSIA, B. N. (ed.). Kuala Lumpur, Malaysia., p. 9.
14
10th International Conference on Islamic Economics and Finance
the IFI’s Sharia' board. In other words, with the IFI’s Sharia' board is relieved of its responsibility to issue Sharia' decisions on Islamic Banking; which now rest solely on the shoulder of the central Sharia' board, the former will be able to focus on the other aspects of Sharia' compliance. Whilst a centralised governance system promotes uniformity of Islamic Banking Fatwas and policies vis-à-vis Sharia' compliance across IFIs’ Sharia' boards, a de-centralised Sharia' governance system grants IFIs with more flexibility in adopting Fatwas and policies that best fit their respective business environment and legal system26 (Wilson, 2009, p. 4, Lahsasna, 2014, p. 697-699). For example, the de-centralised governance system allows the IFIs the freedom to create financial products and services that are not only compatible with the country’s market appetite, but also unrestrained to a particular Islamic school of thought (Hasan, 2006). Due to this flexibility, it could perhaps explain the preference showed towards the system by the majority of GCC countries such as the United Arab Emirates, Saudi Arabia, Qatar, and Kuwait. On the negative side, this governance system grants autonomy to the IFIs’ Sharia' boards to decide on the Sharia' compliance of their financial products and services. At times, this had led to uncertainty and confusion among consumers and investors over the actual Sharia' compliance status of the said products due to different rulings between the IFIs’ Sharia' boards (Reuters, 2014). For example, a product approved by an IFI’s Sharia' board may not necessarily be approved as an underlying model for another IFI’s product27 (Shanmugam and Zaha Rina, 2009, p. 93).
26
On the other hand, the adoption of a de-centralised governance system does notn’t necessarily owed to the
IFIs’ preference over the system as it can also be contributory to the regulatory authority’s financial policy. For example, the IFIs in the UK may freely adopt any Islamic corporate governance system as the Financial Services Authority (‘FSA’) does notn’t view Sharia' compliance as an issue of its concern, but rather the IFIs themselves. 27
See note 2.
15
10th International Conference on Islamic Economics and Finance
However, in the absence of a national Sharia' board or strong legislation that gives Sharia' decisions on Islamic Banking a statutory binding effect, any decisions by the IFI’s Sharia' board remain unenforceable against the BOD due to their passive statutory effect. This is more likely to occur since neither the AAOIFI nor the IFSB’s Sharia' standards have binding legal effects on the IFIs. In other words, a Sharia' decision can be refused by the BOD if it is deemed as counter-productive or interfering with the bank’s profit-driven VMO. This is further justified by (Daoud, 1996, p. 43), who discovered a 50-50 division among IFIs with regards to the legal status of Sharia' rulings issued by their Sharia' boards due to unclear regulatory framework 28. Clearly, this highlights the absence of a crucial enforcement factor, i.e. the binding element of Sharia' rulings, which is clearly missing in a decentralised Islamic corporate governance system.
5.0 CONCLUSION Although the diversity of Fatwas and Sharia' law interpretations in the Islamic Banking industry is perceived by the public as a sign of inconsistency and conflict among the Sharia' scholars, the idea of a centralised Sharia' board/governance system is rebutted by several prominent Sharia' scholars such as Sheikh Dr. Mohamed Ali Al-Qari, who opined that such diversity ought to be viewed as a form of strength that should neither be ignored nor eliminated 29 . Further, since the primary aim of the Sharia' law is to reach mutual understanding without superimposing one particular view on every matter, the authority to
28
Here, approximately 50 per cent of the IFIs considered the Sharia' rulings issued by their Sharia' board as
binding, while the remaining 50 per cent was a mixture of those who viewed the rulings as merely advisory and those who failed to respond. 29
MUSHTAK, P. 2010. Shariah Governance in Islamic Finance Industry. Arab News, March 22.. Also see
SECURITIES COMMISSION MALAYSIA 2010. Malaysian Islamic Capital Market. Kuala Lumpur: Securities Commission Malaysia., p. 1.
16
10th International Conference on Islamic Economics and Finance
issue Fatwas should neither be centralised nor monopolised by an institution such as a centralised Sharia' board. With due respect, the author completely agrees with this view because from the Sharia' law perspective, a Fatwa is neither obligatory nor carries a legal binding effect towards the person who asked for it30. In fact, it is not detrimental at all to have different opinions in Islamic Banking as it provides the industry with a platform to new universe of different ideas and financial solutions as compared to a rigid Islamic corporate governance system 31 . Nonetheless, the proposal for a centralised Sharia' board will also assist in its own way, i.e. it does not only unify the divergent opinions among Sharia' jurists and address the growing uncertainties surrounding the industry, but also provide a cost-efficient solution, especially to smaller IFIs, which can appoint younger, competent, and energetic Sharia' scholars at low costs than joining the bandwagon chase for top Sharia' scholars, who undoubtedly justify their high compensation tags with quality advisory services, but may never be available at all times due to their many other commitments.
30
31
HASSAN, K. & LEWIS, M. 2007. Handbook of Islamic Banking, Edward Elgar Publishing., p. 332.
17
10th International Conference on Islamic Economics and Finance
BIBLIOGRAPHY 1968. Law No. 32 of the Year 1968 Concerning Currency, The Central Bank of Kuwait and the Organisation of Banking Business. 2003. The Banking Business (Organisation) Act 2003. n.d. The Constitution of Pakistan. AL-ANDALUSI, I. A. 1997. Al-Muharrar Al-Wajiz fi Tafsir Al-Kitab Al-‘Aziz, Ministry of Awqaf and Islamic Affairs. AL-HASYIMI, M. A. 2009. Al-Shura fil Islami (Shura in Islam), Islamhouse. AL-QARADAWI, Y. 2011. Shura is Compatible with the Essence of Democracy. (Islamopedia Online, Fatwa, 27 June 2011) [Online]. Available: http://www.islamopediaonline.org/fatwa/yusuf-alqaradawi-shura-compatible-essence-democracy [Accessed 14 December 2014]. AL-QASIMI, Y. A.-D. & AL-QADI, M. A.-H. 1986. Al-Fatwà fil-Islam, Dar al-Kutub al-Ilmiyya. AL-QURTUBI, A. A. 2004. Al-Jami ‘li-Ahkam al-Qur’an (The Compendium of Legal Rulings of the Quran), Dar al-Kutub al-‘Ilmiyya. AL-RAZI, F. A.-D. M. 1990. al-Tafsir al-Kabir (The Large Commentary), Dar al-Kutub al-'Ilmiyyah. AN-NABAHANI, T. 1996. The Ruling System in Islam, Khilafah Publications. ARABI, O. 2001. Studies in Modern Islamic Law and Jurisprudence, Kluwer Law International. ASY-SYAWI, T. M. 1997. Syura Bukan Demokrasi (Shura ain't Democracy), Gema Insani Press. ATES, H. 2003. Towards a Distinctive Model? Reconciling the Views of Contemporary Muslim Thinkers on an Ideal State for Muslim Societies. Religion, State & Society, 31, 347-366. AYUB, M. 2007. Understanding Islamic Finance, Hoboken, N.J., Wiley ; Chichester : John Wiley. AZRUL AZWAR, A. T. 2010. Overview of Islamic Finance - Islamic Finance Course: Structure & Instruments. Available: http://www.bankislam.com.my/en/Documents/shariah/OverviewOfIslamicFinance13122010.pdf [Accessed 14 October 2013]. BANK NEGARA MALAYSIA 2011. Shariah Governance Framework for Islamic Financial Institutions BNM/RH/GL_012_3. In: MALAYSIA, B. N. (ed.). Kuala Lumpur, Malaysia. BMB ISLAMIC UK LIMITED 2011. Global Islamic Finance Report (GIFR) 2011. BMB ISLAMIC UK LIMITED 2012. Global Islamic Finance Report (GIFR) 2012. BMB Islamic UK. CHIK, M. N. 2011. Shariah Audit: Shariah Perspective. (International Shariah Audit Conference, Kuala Lumpur, 9 May 2011) [Online]. Available: http://www.bankislam.com.my/en/Documents/shariah/ShariahAudit_ShariahPerspective.p df [Accessed 18 November 2013)]. DAOUD, H. 1996. Shari ‘a Control in Islamic Banks. International Institute of Islamic Thoughts, Herndon, VA. DUSUKI, A. W. 2011. Islamic Financial System: Principles & Operations, International Shari'ah Research Academy for Islamic Finance (ISRA). EL-AWA, M. S. 1978. On the Political System of the Islamic State, American Trust Publications. ERNST & YOUNG 2012. World Islamic Banking Competitiveness Report 2012-2013. Growing Beyond: DNA of Successful Transformation. GOOLAM, N. M. 2006. Ijtihad and Its Significance for Islamic Legal Interpretation. Mich. St. L. Rev., 1443. GREENWOOD, A. 2014. Feeding Frenzy for Sukuk. Bloomberg Businessweek Middle East, 8 October 2014. 18
10th International Conference on Islamic Economics and Finance
HASAN, A. 2003. An Introduction to Collective Ijtihad: Concept and Application. American Journal of Islamic Social Sciences, 20, 26-49. HASAN, Z. 2006. Legal Thoughts of Madhhab Al-Shafi'i in the Implementation of Islamic Banking in Malaysia. International Seminar on Legal Thought of Madhhab Shafi'i. University of Brunei Darussalam. HASAN, Z. 2010. Regulatory Framework of Shari’ah Governance System in Malaysia, GCC Countries and the UK. Kyoto Bulletin of Islamic Area Studies, 3, 82-115. HASSAN, K. & LEWIS, M. 2007. Handbook of Islamic Banking, Edward Elgar Publishing. ISLAMIC DEVELOPMENT BANK 2013. Islamic Development Bank Group in Brief. Jeddah: Islamic Development Bank. ISLAMIC FINANCIAL SERVICES BOARD (IFSB) 2009. Guiding Principles on Shari'a Governance Systems for Institutions Offering Islamic Financial Services. In: BOARD, I. F. S. (ed.) IFSB-10. Islamic Financial Services Board. KATHIR, I. 2003. Tafsir Ibn Kathir, Dar-us-Salam. LAHSASNA, A. 2014. Shariah Governance in the Islamic Financial Institution: Issues and Challenges. 5th International Conference on Business and Economic Research Proceeding, Kuching, 24-25 March 2014. MAWDUDI, A. A.-. 1988. Towards Understanding the Qur ‘an (Tafhim Al-Qur ‘an), Islamic Foundation London. MCMILLEN, M. J. 2006. Islamic Capital Markets: Developments and Issues. Capital Markets Law Journal, 1, 136-172. MIKAIL, S. & ARIFIN, M. 2013. A Critical Study on Shari'ah Compliant and Shari'ah-based Products in Islamic Banking Institutions. Journal of Islamic and Human Advanced Research جججج, 3, 169-185. MUSHTAK, P. 2010. Shariah Governance in Islamic Finance Industry. Arab News, March 22. NURRACHMI, R., MOHAMED, H. & NAZAH, N. 2013. Dispute Between Bank and Customer in Bai Bithaman Ajil (BBA). Case in Malaysia. Munich Personal RePEc Archieve Paper. NURSYAMSIAH, T. & KAYADIBI, S. 2012. Application of Bay ‘al-‘Inah in Islamic Banking and Finance: From the Viewpoint of Siyasah Shar ‘iyyah. 3rd Annual World Conference on Riba' - The Multifaceted Global Crises of Riba': Resilience, Response & Reform, Kuala Lumpur, 26-27 November 2012. Kuala Lumpur. OSMAN, F. 1997. Islam in a Modern State: Democracy and the Concept of Shura’. Center for MuslimChristian Understanding History and International Affairs, Edmund A Walsh School of Foreign Service, Georgetown University, Washington DC, 200057. PARLIAMENT OF MALAYSIA 2009. Central Bank of Malaysia Act 2009 (Act 701). Malaysia. PARLIAMENT OF MALAYSIA 2013. Islamic Financial Services Act 2013 (Act 759). Malaysia. PEPPER, W. F. 1992. Foreign Capital Investment in Member States of the Gulf Cooperation Council Considerations, Issues and Concerns for Investors. Arab Law Quarterly, 7, 33-63. PERRY, F. V. 2010. Corporate Governance of Islamic Banks: A Better Way of Doing Business, The. Mich. St. U. Coll. LJ Int'l L., 19, 251. PLATT, G. 2006. Cover Story: Profits with Principles. In: GIARRAPUTO, J. (ed.) Global Finance. July/August 2006 ed.: Joseph Giarraputo. RAMMAL, H. G. 2006. The Importance of Shari'ah Supervision in Islamic Financial Institutions. Corporate Ownership and Control, 3. RAYSŪNĪ, A. 2011. Al-Shura: The Qur’anic Principle of Consultation, The International Institute of Islamic Thought (IIIT). REUTERS 2014. Malaysian Bank Merger to Disrupt Islamic Finance. CNBC. RIDA, R. & AL-DIN, I. S. 1999. Tafsir Al-Qur'an Al-Hakim, Dar Al-Kutub Al-‘Ilmiyya. SABUR, M. & WARES, K. 2011. Does Corporate Governance Model of Interest-free Banks Provide Better Protection Against Financial Crisis? Empirical Investigation on Corporate Governance 19
10th International Conference on Islamic Economics and Finance
Perspectives of the Interest-Free Banks Globally. 8th International Conference on Islamic Economics and Finance, Qatar. SECURITIES COMMISSION MALAYSIA 2010. Malaysian Islamic Capital Market. Kuala Lumpur: Securities Commission Malaysia. SHAHARUDDIN, A., MAS'AD, M. A., MOHD SAFIAN, Y. H., SHAFII, Z., SALLEH, A. Z., HAJI ALIAS, M., ABU SEMAN, J., AKRAM LALDIN, M. & ABDUL KHIR, M. F. 2012. Fatwas on Islamic Capital Markets: A Comparative Study Between Malaysia and Gulf Co-operation Council (GCC) Countries - Research Paper (No:40/2012), International Shari'ah Research Academy for Islamic Finance (ISRA). SHAIKH, M. A. 1988. Ethics of Decision Making in Islamic and Western Environments. American Journal of Islamic Social Sciences, 5, 115-28. SHANMUGAM, B. & ZAHA RINA, Z. 2009. A Primer on Islamic Finance, Charlottesville, Va., Research Foundation of CFA Institute. SULAIMAN, S. J. 1998. Democracy and Shura. In: KURZMAN, C. (ed.) Liberal Islam: A Sourcebook. Oxford University Press. TAWFIQ AL-ATTAR, A. A.-N. 1996. Al-Ta'rif bi Al-Ijtihad Al-Jama'i. Conference on Al-Ijtihad Al-Jama'i fi Al-A'lam Al-Islami, Al-Ain, 1996. TAYMIYYA, I. 1981. Majmu‘ Al-Fatawa (37 Vols), Maktabat al-Ma ‘arif. THOMSON REUTERS 2014. Islamic Finance Development Report 2014. In: ABDUL ALIM, E. (ed.). THOMSON REUTERS 2015. Oman Islamic Finance Report 2015: Building on a Strong Start. Oman Islamic Finance Report 2015. UNITED ARAB EMIRATES 1985. Federal Law no - (6) of 1985 Regarding Islamic Banks, Financial Institutions and Investment Companies. In: EMIRATES, U. A. (ed.). United Arab Emirates. USMANI, M. T. 2008. Sukuk and Their Contemporary Applications. AAOIFI Shari'a Council Meeting, Manama, 2007. VAN GREUNING, H. & IQBAL, Z. 2008. Risk Analysis for Islamic Banks, World Bank Publications. VISZAINO, B. 2014. Oman Sets Up Central Sharia Board in Move to Boost Islamic Finance. Reuters, 8 October 2014. WARDE, I. 2010. Islamic Finance in the Global Economy, Edinburgh University Press. WEHR, H. 1979. A Dictionary of Modern Written Arabic, Harassowitz Verlag. WILSON, R. 2007. Islamic Finance in Europe. RSCAS PP 2007/02. WILSON, R. 2009. The Development of Islamic Finance in the GCC. Working Paper, Kuwait Programme on Development, Governance and Globalisation in the Gulf States, May 2009. YA'LA, A. & IBN AL-HUSAYN AL-FARRA, M. 1966. Al-Mu'tamadfi Usul Al-Din (The Approved Matter According to the Principles of Religion). In: IBISH, Y. (ed.) Nusus Al-Fikr Al-Siyasi Al-Islami (The Constitutional Thought in the Islamic Studies). Dar Al-Tali'a.
20