Governance Standards: Shari'ah Supervision and Internal Controls
Core concepts
AAOIFI Governance Standards address the Shari'ah Supervisory Board (SSB), its composition, independence, and reporting, plus internal Shari'ah review, audit, and risk management. Candidates must know the SSB's role: issuing fatwas and rulings, reviewing contracts, and issuing an annual Shari'ah compliance report. Independence means members should not be executive directors or hold conflicting roles, and they need competence in both fiqh al-muamalat and finance. The institution needs a Shari'ah compliance function that performs ex-ante review and ex-post audit, reporting to the SSB, with a clear escalation path for breaches. Governance also covers the investment account holders' rights and the disclosure of related-party and prohibited-income matters.
Traps
Questions confuse the SSB with the audit committee or with management. The SSB advises and rules but does not manage operations. Independence is tested through scenarios: an SSB member who is also a major shareholder or paid consultant may be compromised. Another trap is the remedy for a breach: the institution must correct the transaction and dispose of impermissible gain to charity, documented and reported. Also distinguish internal Shari'ah review (management function) from external Shari'ah audit (independent assurance).
Rule of thumb
For any governance scenario, ask: Who has authority? Who is independent? Who reports to whom? A compliant structure has the SSB at the top of Shari'ah authority, a compliance unit executing and monitoring, and internal audit providing assurance, each with documented reporting lines.
Worked example
A bank discovers a murabaha contract missing a required ownership step. The compliance function reports to the SSB, which rules the transaction non-compliant; the profit attributable is given to charity, the process is corrected, and the incident is disclosed in the annual Shari'ah report. Management cannot overrule the SSB on Shari'ah matters.