in Islamic Banks and Financial Institutions;
An Overall Review
Ash-Shaikh H. Abdul Nazar
President, Centre for Spiritual Solidarity
General Secretary, All Ceylon Jamiyyathul Ulama
This paper endeavours to give hints to design a firm framework for Shari’ah supervision in Islamic banks and financial institutions within the parameters of contemporary developments. It also offers instructive understanding of basis for Shari’ah supervision in such establishments from an Islamic perspective.
article investigates the importance of
Shari’ah supervision in institutions
of Islamic banking and finance, qualifications
of Shari’ah supervisors and their
role. The definition of Shari’ah
supervision, selection of Shari’ah
supervisors, method of decision making,
role of In-house Shari’ah supervisors,
obstructions facing Shari’ah supervisory
boards, etc. are explored in this article.
compliance in Islamic banks and financial institutions
is, really, very crucial and depend anything and everything
on it. It should be necessarily maintained in all
their bearings with no excuse since the whole show
is based on laws laid down by Almighty Allah.
The growing trend is that the general public particularly
investors and clients irrespective of faith look for
spotlessness of the operation in these establishments.
Islam is clean and pure and things happening in its
name must, also, be clean and pure. Otherwise, ultimately
the name of this very great and noble divine religion
will get tarnished and its infallible teachings will
Therefore, being true to its word and committed to applying the regulations and ethics in terms of Islamic banking and finance, each and every institution of this nature has to prove that it falls into line with Shari’ah.
Significance of Shari’ah Supervision
fundamental reason for emergence of Islamic banks
and financial institutions is to provide a Shari’ah
alternative to interest-based banks and financial
institutions. That is why each institution of Islamic
banking and finance has a Shari’ah supervisory
board as an intrinsic part of its organizational structure.
It is now embedded in everybody’s mind that
any establishment claiming to be an Islamic bank or
an Islamic financial institution is incomplete without
a proper Shari’ah supervisory board to ensure
its purity and accuracy in the eyes of Shari’ah.
this background, supervising the entire operation
in such institutions offering Islamic banking and
financial services and their adherence to the tenets
of Shari’ah in all activities is, of course,
most of the workers in these institutions lack knowledge
of Islamic banking and finance is another element
that demands Shari’ah supervision. However magnificent
the infrastructure in such an institution is, it is
extremely illogical for it to assert Shari’ah
compliance when its workers are not conversant with
Islamic banking and finance.
present modern world has seen a number of new forms
of trade which in some cases do not have reference
in the old treatises of Islamic Jurisprudence (Fiqh).
Even if the reference is available, the bankers are
incapable of reading, understanding and interpreting
them. This is another factor that contributes to the
fact that Islamic banks and financial institutions
need to be kept under the supervision of Shari’ah
an Islamic bank or financial institution, indeed,
entails people, money, property, etc. with a large
number of dealings, transactions and investments.
So the day-to-day operation possibly encounters problems
and cases which should be addressed in the light of
Shari’ah. Here comes the key role of Shari’ah
scholars who can solve them by applying the Shari’ah
principles. For this reason too, the constant Shari’ah
supervision is of paramount importance.
is public knowledge that with ulterior motive of money
making, some unscrupulous people have established
institutions in the name of Islamic banking and finance.
Though their memorandum and articles and / or rules
spell out that the whole operation and conduct of
business should conform to the doctrines of Shari’ah,
it is not so in practice. They do not want to commit
to applying of Shari’ah principles either. This
saddening phenomenon, which sometimes makes the whole
thing absurd, compels other institutions with real
commitment to adhering to Islamic principles both
in word and deed to be under the Shari’ah supervision.
and large, all these establishments ought to have
full-time Shari’ah supervision as expected by
investors, clients and general public at large and
forced by nature as things have developed.
What is Shari’ah Supervision?
Shari’ah supervision has been defined by various
institutions and scholars in different ways. The all-embracing
one is ‘Shari’ah supervision in essence
is to ensure that Islamic banks and financial institutions
conduct their business in accordance with the Islamic
principles, rules and etiquette as guided, advised
and instructed by the Shari’ah supervisory boards’.1
is crystal clear from the above definition that two
areas receive the focus of the Shari’ah supervision;
viz application of principles and application of etiquette.
Islam in general does not lay down the rules alone;
but it formulates a framework for their application.
This framework requires inter alia application of
rules and ethics both side by side. Islamic Banking
and Finance is not an exemption.
Basis for Shari’ah Supervision
the market place for Shari’ah compliance is
not new or alien. If one looks at the history of Islam,
he / she could easily find that this was practiced
by Prophet Muhammad (Sallallahu alaihi wasallam).
It is recorded by Imam Muslim (Rahimahullah) on the
authority of Aboo Hurairah (Radhiyallahu anh) that
Allah’s Messenger (Sallallahu alaihi wasallam)
passed by a heap of a foodstuff. He inserted his hand
into the heap. His fingers sensed dampness. ‘What
is this? O owner of the foodstuff!’ asked Allah’s
Messenger (Sallallahu alaihi wasallam). The owner
said: ‘It got wet in rain. O Allah’s Messenger!’.
Then said Allah’s Messenger (Sallallahu alaihi
wasallam): ‘Why had you not kept it over in
order that people would notice it? The one, who deceives,
is not from me.’2
practice adopted by Allah’s Messenger (Sallallahu
alaihi wasallam) in supervising the market activities
did not end with his demise, but continued throughout
the caliphate of four caliphs (Radhiyallahu anhum).
The Islamic caliphate had a separate department called
‘Al-Hisbah’. The chief task assigned to
Al-Hisbah was to enjoin what is right if it is abandoned
and forbid what is wrong if it is perpetrated. This
embodied among other things monitoring the business
activities in the market.3
Selection of Shari’ah Supervisors
perform the heavy task of supervising the show in
the Islamic banks and financial institutions, a handful
of Islamic scholars are selected by the institutions.
In some establishments, board of directors handles
the selection, and in some, stakeholders do it. The
way of selection and appointment may vary, yet the
job entrusted to the Shari’ah scholars thus
selected and appointed is same.
minimum three (03) members are needed to constitute
a full Shari’ah supervisory board.
Duties Involved in Shari’ah Supervision
job of supervising includes amongst other things the
following responsible duties:
- to examine the Shari’ah aspects in the institution’s memorandum and articles, rules, etc.
- to vet for Shari’ah compliance manuals, agreements, contracts, rules and regulations, bonds, promissory notes and all other documentation.
- to introduce more and more Shari’ah compatible products.
- to study proposals of new investment ventures.
- to lay down necessary rules to regulate the relationship with un-Islamic banks and financial institutions.
- to expound the Shari’ah position on transactions referred to the Shari’ah supervisory board for Shari’ah clearance.
- to audit for Shari’ah compliance all dealings, transactions and operations of the institution, to make observations and to follow up rectification of shortcomings before anything else.
- to stipulate that any new product, investment or service should have the approval of the Shari’ah supervisory board before embarking on it.
- to provide Shari’ah advices with regard to dealings, transactions and operations of the institution.
- to act on complaints from the standpoint of Shari’ah.
- to audit for Shari’ah compliance all investment, facility and transaction related files and documents.
- to analyze the budgets, auditors’ reports, etc.
- to present periodical reports in which the Shari’ah supervisory board airs its opinions in respect of dealings and transactions carried out and the institution’s upholding of and complying with Fatwas (Islamic rulings), decisions, guidance, etc. of the Shari’ah supervisory board.
- to adjudicate transactions that have run into dispute.
stipulate that manuals, agreements, contracts, rules
and regulations, bonds, promissory notes and all other
documentation should have the approval of the Shari’ah
supervisory board before bringing them into effect.
advisory and supervisory role of Shari’ah supervisory
boards nowadays includes Shari’ah audit too. The Shari’ah
supervisory boards perform audits either annually,
biannually or monthly, as the case may be. However,
it is difficult for the Shari’ah supervisory boards
with a limited number of members to review all the
transactions that have taken place in different branches
of the institutions. It would, therefore, be ideal
and practical to form independent Shari’ah audit firms
in the private sector or that the existing chartered
audit firms acquire necessary expertise to undertake
the Shari’ah audit. In both cases, the firms need
to hire and train adequate staff to conduct the Shari’ah
audit effectively and impeccably. Nevertheless, if
the existing chartered audit firms can come forward
to undertake this job, it will be most welcomed with
open arms by Islamic banks and financial establishments
as this would be more convenient for them to have
the Shari’ah audit and accounts audit at a same time.
The renowned scholars and researchers M. Umer Chapra
and Habib Ahmed also have suggested same.4
Qualifications of Shari’ah Supervisors
Even by cursory reading of the duties mentioned
above, one can appreciate the grave and serous responsibility
shouldered by Islamic scholars engaged in the Herculean
job of supervising the institutions of Islamic banking
and finance. Therefore, picking out Ulama for this
assignment has to be handled with utmost care and
due prudence. We have an age-old adage in Arabic
‘أعـط الـقـوس بـاريـهـا’
the bow to the one who knows how to shape it’.
Generally the following qualifications should be
essentially found in such scholars as suggested
by some eminent Ulama like Shaikh Hamzah Abdul Kareem
- They should be well-versed in the
Holy Qur’an and its Sciences.
- They should have thorough knowledge of Sunnah and its Sciences.
- They should know well the cases of Ijma’ (Consensus of Ulama on a matter).
- They should be proficient in Arabic.
- They should have cognizance of individual reasoning (Ijtihaad) of Islamic Jurists, evidences in support of their opinions, bases of their views, reasons for their differing in views, etc.
- They should be conversant with Principles of Jurisprudence (Usool Al-Fiqh).
- They should be knowledgeable about Intents of Shari’ah (Maqaasid Al-Shari’ah).
- They should be familiar with general banking practices.
- They should bear good character both in personal and public life.
should be able to act impartially in delivering Fatwas
(Islamic Rulings) and adjudicating of disputes.
In fact, everyone will agree that it is beyond question and argument that the aforesaid conditions are fair and reasonable as far as the job involved is concerned.
Planning and Scheduling
Carrying out any task; big or small, easy or uphill needs proper planning and scheduling. Shari’ah scholars’ job of supervision requires a comprehensive program to monitor all the activities of the institutions and a detailed timetable for this purpose, meetings and audits. It is also imperative that Shari’ah supervisory boards have model formats to collect and collate data and write supervision and other reports.
Scope of Responsibility
The entire operation of the establishments
in the field of Islamic banking and finance must conform
to Shari’ah. Showing Shari’ah in front and face and
ignoring it behind the curtain is violation of Shari’ah
and taking people especially the investors for a ride.
It should, also, be noted that Shari’ah compliance
is not complete by mere paperwork only. It needs physical
application to be completed. Here a question automatically
arises ‘Who is responsible for this?’
The answer is simple. Boards of directors
are responsible for running the institutions according
to Shari’ah principles and values and Shari’ah supervisory
boards are responsible for ensuring that the operation
is in harmony with Shari’ah. This necessitates complete
transparency in all stages and aspects.
Procedure for Decision Making
There ought to be a clear-cut system
adopted by each Shari’ah supervisory board in making
decisions and delivering Fatwas (Islamic Verdicts).
All decisions must be taken in conformity with Al-Qur’an
and Al-Sunnah, and the Fiqh Schools of Thought (Math-habs)
have to be taken into consideration for such decisions.
In the event of difference of opinions on any matter
or issue, the opinion of the majority of the members
most supported by the evidences shall be final.
Before concluding on anything, the
members of Shari’ah supervisory boards must study
it in depth. If necessary, experts could be consulted.
In any case, they shall not rush to issue any Fatwa
before close analysis of the matter or issue in the
light of Shari’ah.
Libraries are pregnant with treatises
containing marvelous studies of Islamic jurists especially
in areas of economy, trade and commerce. These books
should be referred to at times of attempting to deliver
It is imperative, while making efforts to issue a Fatwa, to closely look at the context and intent of a text in the Holy Qur’an or Sunnah.
Fatwa changes as time and place change’ (الفتوى تختلف باختلاف الزمان والمكان).
This is a general rule accepted by great Islamic jurists
throughout the ages. Shari’ah supervisory boards must
take this also into account in the event of delivering
There are some other general rules agreed upon by
all Islamic jurists;
‘Hardship brings simplification’ (المشقة
‘Worse evil is removed by lesser evil’ (الضرر
الأشد يزال بالضرر الأخف),
‘Public welfare is given preference over personal
(المصلحة العامة مقدمة على المصلحة الخاصة),
‘Warding off evils is given preference over procurement
(درأ المفاسد مقدم على جلب المصالح),
‘Necessities permit forbidden things’ (الضرورات
تبيح المحظورات), etc.
Scholars benefit from one another,
exchange views and share knowledge and experience.
No scholar is perfect. No Shari’ah supervisory board
should think that they are self-sufficient and therefore,
need not consult other Ulama nor benefit from their
knowledge and experience. Each Shari’ah supervisory
board has to consider the decisions and Fatwas of
Fiqh academies and other institutions that organize
conferences and assemble Ulama of eminence to make
collective studies and deliver Fatwas on important
matters and issues. In most cases, as proven practically,
collective efforts outweigh individual efforts.
All this naturally requires that
the members of Shari’ah supervisory boards should
keep them updated by intensive reading and reference
and keep abreast of current affairs and new developments
that take place in Islamic banking and finance.
In-house Shari’ah Supervisors
As discussed earlier, the advisory
and supervisory role of the Shari’ah supervisory boards
is a tremendous responsibility and a challenging job
and it certainly entails a great degree of fastidious
perusal, consultation, reference and meticulous research.
Are the scholars who serve on Shari’ah supervisory
boards in a position to spare time to act their part
duly and effectively? This is a pragmatic question.
In reply to this, the scholars have suggested having
in-house Shari’ah supervisors full-time inside the
In-house Shari’ah supervisors primarily
ease the burden of the members of Shari’ah supervisory
Boards by carrying out most of the duties technically
entrusted to them. In the meantime, in-house Shari’ah
supervisors may act as secretaries to their respective
Shari’ah supervisory boards. So, in this way, convening
of Shari’ah supervisory board meetings, minuting the
proceedings of meetings, maintaining such minutes
and other Shari’ah related documents, etc. may rest
with them as agreed between the managements and Shari’ah
As in-house Shari’ah supervisors
are expected to perform the duties of Shari’ah supervisory
boards, the institutions should necessarily look for
Shari’ah scholars with the qualifications stipulated
for members of Shari’ah supervisory boards and appoint
them. Only those, who fit the bill, should be appointed
formally. Such appointees have to work in the establishments
on a full-time basis and they are technically their
employees. However, the regulators of Islamic banks
and financial institutions very precisely say that
even though they are employees in such establishments,
they are fully independent in the assessment of Shari’ah
compliance and should not be influenced at all by
managements or any others. They also enjoy complete
freedom to report to Shari’ah supervisory boards on
any matter or issue.7
Obstacles Confronting Shari’ah Supervisory Boards
Circumstances warrant analyzing the barriers before
Shari’ah supervisory boards. Of course, Shari’ah supervisory
boards face numerous obstructions that could be outlined
- Shortage of Ulama fulfilling the conditions set out for members of Shari’ah supervisory boards.
- Rapid and tremendous developments and sudden changes in trade and economy and difficulty in expounding the Shari’ah position then and there, keeping pace with the latest developments and unexpected changes.
- Lethargy of managements in implementing the decisions of Shari’ah supervisory boards.
- Carelessness of managements about following the guidance of Shari’ah supervisory boards to the letter.
- Non-implementation by managements of guidelines issued by Shari’ah supervisory boards.
- Pressurizing by managements of Shari’ah supervisory boards to approve some of their dealings or transactions which are not in harmony with Shari’ah.
performance of Shari’ah supervisory boards in their
order to overcome theses obstacles, it is proposed as
- to pick out and appoint only the scholars who meet the qualifications stated earlier.
- to support Shari’ah supervisory boards with banking experts.
- to establish institutes to train Ulama in Islamic banking and finance.
- to establish independent Shari’ah audit firms and to motivate existing chartered audit firms to prepare them to undertake Shari’ah audits.
- to let Shari’ah supervisory boards examine and review closely every activity of the institutions; major or minor with complete transparency and without let or hindrance or pressure form anyone.
- to make it compulsory that the establishments should adhere to the guidance of Shari’ah supervisory boards, put their decisions into practice and rectify the shortcomings as directed by them.
shall equip themselves well with English knowledge
since it is the working language in most of these
The Shari’ah supervision shall be
meaningful, efficient and effective in its full sense.
Ulama especially young ones must arm themselves with
necessary knowledge in this sphere and good command
of English. Institutions of Islamic banking and finance
should operate in line with Shari’ah with honesty,
integrity and complete transparency to Shari’ah supervisory
boards. They must always remember that they all deal
with divine laws not man-made laws.
People everywhere at all times like
to deal and bank with credible establishments in the
- Hamzah Abdul Kareem Muhammad Hammad, Al-Raqaabah Al-Shar’iyyah Fee Al-Masaarif Al-Islamiyyah (Amman: Daar Al-Nafaais, 2006) 30 - 32
- Aboo Al-Husain Muslim Ibn Al-Hajjaj, Saheeh Muslim, Book of Iman, Chapter: Saying of Prophet (Sallallahu alaihi wasallam): ‘The one, who deceives us, is not from us’
- Abdul Azim Islahi, Economic Concepts
of Ibn Taimiyah (United Kingdom: The Islamic Foundation,
1996) 42, 186 – 191
Al-Khulafa’ Al-Raashidoon Wa Al-Dawlah Al-Umawiyyah for Intermediate Second Year (Kingdom of Saudi Arabia: Ministry of Higher Education, Fifth Edition) 182
- M. Umer Chapra and Habib Ahmed, Corporate Governance in Islamic Financial Institutions (Jeddah: Islamic Development Bank, 2002) 68 - 69
- Hamzah Abdul Kareem Muhammad Hammad, Al-Raqaabah Al-Shar’iyyah Fee Al-Masaarif Al-Islamiyyah, 43 - 51
- Banking Advisory Committee of All Ceylon Jamiyyathul Ulama, Standards for Islamic Financial Institutions Seeking Accreditation by All Ceylon Jamiyyathul Ulama, 10
Advisory Committee of All Ceylon Jamiyyathul Ulama,
Standards for Islamic Financial Institutions Seeking
Accreditation by All Ceylon Jamiyyathul Ulama, 10