Independence, competence, responsibility and accountability are the qualities looked for in Shariah supervisory body members. A number of Shariah compliant institutions have updated their Shariah advisory selections so far this year, including the Securities Commission Malaysia, Arab Banking Corporation, International Islamic Liquidity Management Corporation and Kuwait Finance House. REBECCA SIMMONDS assesses further developments in Shariah compliant corporate governance.
Global regulatory updates
As of April 2014, the Islamic Financial Services Board (IFSB) had issued 22 standards, guiding principles, guidance and technical notes for the Islamic finance services industry; one of the most recent of which is IFSB-16, which was adopted at the 24th meeting of the IFSB council in March. IFSB-16 is the revised guidance on the key elements of the supervisory review process of institutions offering Islamic financial services, not including Takaful institutions or Islamic collective investment schemes.
In Africa, a number of banks introduced new members to their Shariah bodies including Kenya’s First Community Bank. The board is made up of seven local and international scholars to oversee the bank’s compliance to Shariah requirements and is headed by Dubai-based scholar Dr Hussain Hamid Hassan.
In Nigeria, in February 2014, the country’s Shariah scholars gathered for a four-day capacity building program run by the central bank and non-governmental organization, Enhancing Financial Inclusion and Access (EFINA), with support from the Islamic Finance Council UK. The event was organized to provide the opportunity for the country’s Shariah scholars to discuss various issues including the Shariah compliance of the current Islamic banking products and services in Nigeria and to better understand the function of Shariah scholars within the Shariah compliance framework. One of the major issues globally in Islamic finance is the dissonance between the issues involved, the advice given and the implementation of that advice within the industry’s various markets — this is an issue that standards such as the IFSB-16 are designed to combat.
In April 2014, the State Bank of Pakistan issued the long awaited Shariah governance framework for the country’s Islamic banks, clearly defining the roles and responsibilities within an Islamic banking institution. Implementation of the new framework will be enforced from October this year.
In Oman in March 2014, it was confirmed that the formation of a national Shariah board, which was announced last October, was finally underway. The board will be constituted of five Shariah scholars selected by the financial regulator, with a maximum of two international scholars and the remaining being Omani nationals.
In the GCC a number of Islamic banks and organizations with Shariah finance commitments were caught short by the tightened regulations imposed on stock exchange reporting, in line with the MSCI upgrade for both Qatar and the UAE. In Qatar, the stock of Shariah compliant bank Masraf Al Rayan was subject to suspended trading for a day in July, following a lack of clarity and information regarding the sale of the bank’s 50% stake in real estate joint venture Seef Lusail Real Estate Development Co. The implementation of tighter controls on reporting has been a pertinent issue for exchanges in Qatar and the UAE, with the move up to emerging market status, which requires higher disclosure standards than those of a frontier market. The fact that Shariah compliant institutions are those to have been caught out as yet is noticeable, if only because traditionally, the requirements of Shariah governance reporting are higher than those of conventional standards.
In June 2014, the appeal lodged in May by Shariah compliant Bahrain-based Gulf Finance House (GFH) against the imposition of a six-month monitoring period on its Kuwait-listed shares by the Capital Markets Authority was rejected. The monitoring had been mandated due to an unusual surge in stock trading in May 2013, a week prior to the signing of agreement between GFH associate Khaleeji Commercial Bank and Bank Alkhair to explore a possible merger, which ultimately failed to take place.
In July, the Dubai International Financial Center (DIFC) announced that it was considering the establishment of a centralized Shariah board to service all Shariah products in the DIFC, in order to widen the market for Islamic products by setting common standards. Currently each institution has its own Shariah board. Dubai has been in talks with the OIC regarding the establishment of mutual recognition agreements on minimum standards in Halal and other parts of the Islamic economy. Also planned is the establishment of Islamic Government Center in Dubai to regulate the standards of corporate governance in the Islamic business world.
Challenges and opportunities
Standardization in corporate and Shariah governance is almost inseparable from the issue of standardization in the wider sense for Islamic finance in terms of products and offerings as Shariah compliance makes up such as large part of how the industry functions. Many industry experts view the training of new, younger scholars as a way to get around this problem — a bottom-up solution to the issue, as if all Shariah scholars are educated with the same awareness of the issues then that in itself constitutes a form of compliance. Another option that has been put forward is a more frequent review and revision of standards such as those set by IFSB and AAOIFI, keeping Shariah and corporate governance in Shariah compliant financial organizations more in line.