Shari’ah governance system: A need for professional approach

Author (s): 
Abdussalam Ismail Onagun and Abdussalam Mikail

This research paper aims to address one of the most crucial challenges facing Islamic financial institutions. That is, the full compliance of the IFIs in its product and activities with Shari’ah rules and principles, as it has been seen in the cases of some Sukuk development. In the light of full compliance issues, there is a need to apply a professional approach to the Shari’ah governance system.  It has been notice that transparency, market discipline of IFIs cannot be underestimated and non-compliance is a reason for reputation risk that can trigger the IFIs failure and cause systemic risk and instability. This reputation risk can be minimized by putting in place professional approach to the Shari’ah governance system. This paper will focus on the need to apply professional approach to Shari’ah governance by analyzing the two stages of Shari’ah governance process: (i) ex-ante compliance, and (ii) ex-post compliance. The ex-ante Shari’ah compliance is basically the internal Shari’ah review that supervises, monitor and control tasks that take place upon and during implementation of the verdict of Shari’ah Supervisory Boards. These activities include making sure that the IFIs comply with the Shari’ah rules and principles while designing the contracts and agreements. With both design and compliance activities being perform by the same Shari’ah experts, each role has its own professional requirements. However, the paper will explain the need for professional approach in the ex-post Shari’ah governance process which requires thorough and comprehensive Shari’ah audit to review bank’s operation and check the transactions that took place after the execution of the contracts in ensuring the implementation of Shari’ah board decisions by the bank’s management. The SSB opinion may be compared to the Auditor’s report included in the conventional accounts. Finally, this paper will recommend IFIs to adopt professional approach in Shariah governance system in order to enhance internal Shari’ah review and external Shari’ah audit processes

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