Governance Standards: Shari'ah Supervision and Controls
Governance standards explain how an Islamic financial institution demonstrates Shari'ah compliance in practice. The central organ is the Shari'ah Supervisory Board (SSB): independent scholars who issue fatwas and rulings, review products, and report to shareholders. Know the SSB's independence requirements (appointment, remuneration, no conflict with management), its term and removal process, and the distinction between the SSB and internal Shari'ah review or audit functions.
The compliance machinery
- Shari'ah review: an independent internal function checking that operations match SSB rulings.
- Internal Shari'ah audit: tests controls, not just outcomes.
- Shari'ah risk management: identifies non-compliance risk and its consequences, including income purification.
- Corporate governance: board composition, fit-and-proper criteria, and disclosure of related-party dealings.
Traps
- Assuming the SSB manages operations: it rules and oversees; management executes.
- Confusing Shari'ah review with financial audit: different scope and criteria.
- Forgetting the purification requirement when non-compliant income arises.
- Overlooking disclosure: the annual Shari'ah report and how non-compliance was remedied must be published.
Rule of thumb
Three lines of defence: management (first), Shari'ah review and compliance (second), internal Shari'ah audit and the SSB (third). If a question asks who approves a product, the answer is the SSB; if it asks who monitors compliance day to day, the answer is the review function.