Shari'ah Supervisory Board (SSB) is the salient feature of Shari'ah governance upon which the entire operation of Islamic Financial Institutions (IFIs) depends for validations. This chapter examines the status of SSB in the context of Shari'ah governance in Sri Lankan IFIs. The position of SSB has been examined in three dimensions, namely appointment, qualifications of SSB members, and the enforcement of their decisions. The qualitative method of research and the gap analysis have been applied to find the gap between the guidelines issued by Accounting and Auditing Organizations (AAOIFI) and Islamic Financial Services Board (IFSB) and the actual practices of SSB. Some gaps were found in the practice of SSB in the abovementioned three areas though each IFI has setup SSB institutionally at micro level. The recommendations are put forward to enhance the SSB practices in Sri Lankan IFI, which is the significant contribution of this chapter.
TopIntroduction
Shari’ah governance is one of the unique features of Islamic finance that discriminates it from its conventional counterpart. The role of Shari’ah governance is to ensure Shari’ah compliance either in Shari’ah legitimacy of products or Shari’ah compliancy of services offered by the IFIs (SGF, 2010). Hence, the IFSB-10 defined Shari’ah governance in the context of the IFIs as:
“A set of institutional and organizational arrangements through which Islamic financial institutions ensure that there is an effective independent oversight of Shari’ah compliance over the issuance of relevant Shari’ah pronouncements, dissemination of information and an internal Shari’ah compliance review” (IFSB, 2009). The definition provided by the IFSB-10 implies that there are three main features of Shari’ah governance that IFIs are bound to follow. Firstly, a body should be arranged institutionally as a special and independent body, which refers to the Shari’ah Supervisory Board (SSB) and its relevant departments such as internal Shari’ah review, Shari’ah audit, Shari’ah research, Shari’ah compliance department, etc. Secondly, that body should provide independent supervision that confirms Shari’ah compliancy. This refers to the compositions of the board and its competency to serve efficiently towards Shari’ah compliance. It depends on the freedom and the powers of the body rendered by the IFIs. Thirdly, it denotes the entire process of the body such as Shari’ah review, Shari’ah pronouncements, and dissemination of information among the staff as well as to the public (Marjan & Ahmed, 2016).
Shari’ah governance is a very serious area in Islamic finance which affirms ‘Islamicity’ of the entire business of IFIs. The successful process of this essential area mainly depends on competent SSB that consists of Shari’ah experts (Laldin, 2018).
There are concerns regarding the feasibility of the SG practices as well as the independence and qualification of the SSBs in the IFIs across jurisdictions that have different regulatory environments. The success of the IFIs depends mainly on good corporate governance (CG), and this governance specifically relies mainly on the existence of effective SSBs (Nomran, Haron, & Hassan, 2016).
The importance of SSB is thoroughly explained in all the discussion of Shari’ah governance. The first of the seven governance standards of AAOIFI starts by explaining the details of the Shari’ah Supervisory Board Appointment, Composition and Report (AAOIFI, 2015). The SSB influences profoundly on the entire activities of the respective IFIs by providing advice and opinions. Thus, the independent services of SSB, comprising Shari’ah experts are the main indicators of Shari’ah compliant operations that take place in IFIs.
TopBackground Of The Study
Sri Lanka is one of the non-Muslim countries that has established Islamic finance in the banking and financial sector. By the collective effort carried out by a group of people, Amana Investment Limited (AIL), established in 1997 is the pioneer in Sri Lankan Islamic financial industry. In 2010, it became a full-fledged Islamic bank and was renamed as Amana Bank (Nafees & Habeebullah, 2016). In the meantime, Amana Takaful Limited (ATL) was established in 1999 to provide Islamic insurance products and services. These initiatives paved the way for the establishment of new IFIs afterwards.