Shari'ah Governance and Audit Assurance in Islamic Banks

1. Introduction

The strength and stability of the Islamic financial system has gained worldwide attention especially during the global financial crisis that took place in 2008. After the crisis, the growth of Islamic financial institutions (IFI) was boosted and the total assets of Islamic financial institutions (IFIs) rose 19% in 2011 and 21% in 2012 as compared to less than 10% in the conventional banking system around the world .Contributions to corporate social responsibility (Abdelsalam, Duygun, Matallín-Sáez, & Tortosa-Ausina, 2014; Platonova, Asutay, Dixon, & Mohammad, 2018) and the improvement of financial development can be seen as the achievement and development of IFIs (Gheeraert, 2014; Gheeraert & Weill, 2015). With the improvement and rapid growth in the finance industry, Malaysia is documented as the third largest country in the world after Iran and Saudi Arabia to contribute to the overall assets of domestic banks at approximately 21.9%, while there was a 9.6% contribution to global Islamic banking in the year ending 2014. The outstanding achievement shown by Malaysia has placed the country within the world as having developed an Islamic banking system. This progress is due to the comprehensive and efficient governance framework embodied in the Shari’ah governance framework (SGF) which was enforced in 2011 (IMF, 2017). Shari’ah principles, which are the backbone of Islamic finance, are crucial for the confidence of stakeholders in IFIs. Therefore, the strength of governance practiced by IFIs is seen as promoting stakeholder confidence and enhancing the credit rating of IFIs (Ginena, 2014; Grassa, 2016; Ullah, Harwood, & Jamali, 2018).

In order to safeguard the interests of stakeholders, Shari’ah audit is compulsory for every IFI in Malaysia (Ghani & Rahman, 2015) and it is performed as an internal audit function. This function is responsible to provide assurance of risk management (Zakaria, Nurazalia, & Noraini Mohd Ariffin, 2016). Organisations that have an effective audit function are better and more stable in terms of risk exposure to fraud and mismanagement (Omar & Bakar, 2012). Shari’ah audit has become the main aspect of research interest in recent years. However, little is known about the roles and responsibilities of Shari’ah audit practice especially in mitigating Shari’ah Non-Compliance Risk (SNCR) in IFIs (Ghani & Rahman, 2015). The lack of knowledge and proper training regarding Shari’ah audits has led to the occurrence of Shari’ah SNCR in IFIs (Endaya & Hanefah, 2013, 2016). In addition, mistakes in understanding the terms, and wrong interpretation of fatwa by the Shari’ah audit staff is the cause of the occurrence of SNCR. Previous studies have focused on Shari’ah audit issues such as the aspect of separation between conventional and Shari’ah audit (Karim, 1990), human capital in implementing Shari’ah audit (Shafii, Abidin, Salleh, Jusoff, & Kasim, 2013) and the gap between the actual and the desired outcomes in implementing Shari’ah audit (Kasim, Mohamad Ibrahim, & Sulaiman, 2009) and research into Shari’ah audit effectiveness (Endaya & Hanefah, 2016). Even though many studies have been implemented, it is indeed difficult to find field studies concerning a review of Shari’ah audit after implementation of SGF 2011. Therefore, this area of study is worth exploring and to narrow the gap between theoretical and field study research.