As commonly known, the Shariah supervisory board has the crucial role of controlling and providing guidelines, advice and Fatwas to banks and institutions regarding Shariah compliant incomes and earnings.
In most Islamic countries, the financial institutions are ‘highly recommended’ to establish an independent Shariah supervisory committee even if not explicitly legally required.
In theory, the functions of the Shariah supervisory board could be expressed by three different corporate models:
- through a direct election of Shariah scholars from the administrative body of the company
- through the creation of the Shariah supervisory board as an autonomous entity from the administrative body of the company, and
- through the creation of an internal Shariah compliance department.
Therefore, is it feasible in Italy to create in a joint stock company an internal board to supervise Shariah compliance?
The fact is that actually the Italian Civil Code (but also the Italian Constitution) allows the introduction of ‘atypical clauses’ inside a company’s contractual agreement (Articles No 1322 and 1323) in accordance to the general principle of freedom of contract but this does not end on the assumption that any type of corporate governance model would be accepted inside the company itself.
As a consequence, while there is no place to recognize a legal binding of the Shariah board’s opinions, it would be permitted to provide the administrative body, which has the power for the company’s governance, with the choice to follow, or not, the Shariah board’s opinions.
Also, Article 2380-bis of the Italian Civil Code clearly states that the directors of the administrative body are in a position of supremacy, as the management of the company pertains exclusively to them, having the power needed to reach the corporate purpose.
So, following these circumstances, the role and responsibilities of the Shariah supervisory board would be advisory but would not interfere with the management and governance of the company.
Now, it is pretty clear that a Shariah supervisory board like the one described would not fully satisfy Islamic law because the Shariah reviews would not be carried out by an independent division/department or part of the internal audit department but by a body subject to the instructions of other bodies of the company.
Stefano Loconte is the managing partner at Loconte & Partners. He can be contacted at [email protected].