The Shariah supervisory board (SSB) is the central organ of Islamic financial institutions’ Shariah governance structures. Different countries and jurisdictions have adopted different governance structures, and can be broadly classified into three major models. DR MOHAMMAD MAHBUBI ALI writes.
The first model is the decentralized Shariah governance structure in which no central Shariah council is established at the national level. This structure only requires the formation of an SSB or Shariah committee at the respective Islamic financial institutions. Countries like Singapore, the UK and Turkey have all adopted this model.
The second model is a centralized Shariah governance structure, which only requires the establishment of a central Shariah authority for Islamic financial products and services without a dedicated SSB at the institutional level. The Kingdom of Morocco, for example, regards the Higher Council of Ulemas as the sole entity with full authority to issue Fatwas on various Shariah issues. A specialized committee comprising nine members and one coordinator was formed under the country’s Higher Council of Ulemas to deal with Islamic finance issues.
The two-tier Shariah governance structure is the third model, which necessitates a central Shariah council at the national level and a Shariah committee at the institutional level. Malaysia, Brunei, Pakistan, the UAE and Bahrain are among the countries that have adopted this structure.
Different legal frameworks, varying levels of Shariah expertise and the unique needs of the respective countries frequently cause differences in Shariah governance structures between countries and jurisdictions.
Indonesia has implemented a two-tiered Shariah governance structure. At the national level, the National Shariah Board (Dewan Syariah Nasional (DSN)), appointed by the Indonesian Council of Scholars (Majlis Ulama Indonesia or MUI), serves as the highest Shariah authority for any matters related to Shariah compliance for Islamic financial institutions in the country. The board is charged with issuing Fatwas on Islamic financial products and services, as well as supervising SSBs’ implementation of Fatwas at their respective Islamic financial institutions. It also has the authority to recommend the appointment and termination of SSBs in Islamic financial institutions.
At the institutional level, each Islamic financial institution appoints an SSB with at least two members to ensure full compliance with Shariah principles and Fatwas issued by Indonesia’s National Shariah Board. They must also conduct a regular Shariah compliance review and provide Shariah opinions and reports on Shariah compliance and supervision.
A member of the SSB is appointed by the shareholders of the respective Islamic financial institutions at the annual general meeting, with approval from Indonesia’s Financial Services Authority and a recommendation from the National Shariah Council. An appointed member of the SSB in one Islamic financial institution may also serve on the SSbs of four other Islamic financial institutions.
First, MUI, an independent non-government authority, appoints DSN, in contrast to other countries where the central Shariah board is usually appointed by a sovereign authority or a central bank.
Second, a member of Indonesia’s National Shariah Board may serve on the SSB. Other countries, such as Malaysia and Brunei, restrict such a practice.
Third, an Indonesian SSB should have at least two members. International best practices such as AAOIFI and IFSB, on the other hand, require at least three members for the SSB, whereas Malaysia requires at least five members in an Islamic financial institution.
Fourth, an SSB member cannot serve in more than five Islamic financial institutions. Malaysia, on the other hand, restricts this to a maximum of three SSB memberships in any given period. Multiple memberships are not restricted in some countries.
Fifth, the SSB is required to conduct Shariah reviews on a regular basis. Thus, the Shariah review and Shariah audit functions in Indonesia, to some extent, are entrusted and performed by the SSB.
Based on the foregoing, the Shariah governance practices in Indonesian Islamic financial instutions have raised some concerns, particularly the issue of multiple memberships of SSBs due to a lack of a Shariah scholar pool with the necessary Shariah and finance qualifications.
Furthermore, the SSB’s role in Islamic financial institutions is not supported by proper and adequate Shariah compliance guidelines. In addition, the country lacks a dedicated Shariah governance framework. While the Republic has issued a number of regulations outlining various aspects of Shariah governance, they are dispersed across various legislation, Acts, guidelines and circulars.
Dr Mohammad Mahbubi Ali is an associate fellow at the International Institute of Advanced Islamic Studies (IAIS) Malaysia. He can be contacted at [email protected].