Corporate Governance for Islamic Banks and Financial Institutions
This domain tests the extra governance layer an Islamic bank carries: the Sharia Supervisory Board, and the fiduciary duty owed to investment account holders who hold no voting rights.
Framework
IFSB-3 (corporate governance for institutions offering Islamic financial services), IFSB-10 (Sharia governance), and AAOIFI Governance Standards GSIFI 1–8, layered over the OECD-style principles applied by the regulator.
Components
- Board - independence, collective competence including fiqh, risk oversight, fit-and-proper tests.
- SSB - fatwa and product approval, independence from management, confidentiality, disclosure of fees and conflicts, term limits.
- Committees - audit and governance, risk, nomination and remuneration; internal audit covering sharia.
- Investment account holders - quasi-equity holders with no vote. The 'governance as shield' concern is that the bank may favour shareholders over IAH.
- Disclosure - related-party transactions, profit allocation bases, IAH rights.
Worked example
A bank's unrestricted IAH pool earns a profit, and the board proposes crediting IAH less than their calculated share and moving the difference to shareholders. Reasoning: the bank acts as mudarib; a disclosed, SSB-approved reduction to smooth returns is possible, but a silent transfer of IAH profit to shareholders breaches the fiduciary duty and the disclosure requirements of IFSB-3 and AAOIFI FAS 5. The proposal must be rejected or fully disclosed.
Traps
Treating the SSB as a management committee; assuming deposit insurance resolves IAH protection; reducing governance to fatwa issuance.