Shariah Board Approval by Email With an Undisclosed Interest
Al-Falah Islamic Bank has a five-member Shariah Supervisory Board. On 2 February one member resigned and another was travelling, leaving three members. Over four days the three remaining members exchanged emails and approved a new tawarruq working capital product; one of them abstained, so two voted in favour. The chairman holds an 8% equity stake in the bank's commodity broker and did not disclose it. Internal Shariah audit reports to the Head of Retail Banking, who is the product owner. The branch network is pressing to launch on 1 March because a competitor has launched a similar product, and the central bank requires SSB approval before launch. A draft fatwa has been pre-signed by the chairman and is waiting for the other two signatures. The board asks the company secretary to confirm whether the approval is valid and what to do before 1 March.
1. Is the 2 February approval valid? Address quorum, circulation, abstention and the chairman's interest.
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The approval is not valid. The board has five seats; one resignation leaves four, and with one member travelling only three could act. Quorum is not the only test: the SSB charter, IFSB-10 and the AAOIFI governance standards require a decision of the board taken in a properly convened meeting, or under a circulation procedure the charter expressly permits, usually only for urgent matters and usually requiring unanimity. Here two members voted in favour and one abstained; an abstention is not approval, so the product has the support of two of five, which is not a majority of the board and not a majority of the four remaining members. The chairman's undisclosed 8% stake in the commodity broker is a separate defect: the broker earns fees on the tawarruq flow, so he has a material interest and should have disclosed and recused. If he recuses, only two members remain and there is no quorum. A pre-signed fatwa is not a decision. There is no valid approval and the 1 March launch cannot proceed.
2. What are the conflict of interest and independence failures, and what governance changes are needed?
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The chairman's 8% equity in the broker must be disclosed to the board and the SSB, entered in the conflict register, and he must recuse from the tawarruq product, broker selection and any fee review. The bank needs a written conflict policy with annual declarations covering directorships, shareholdings above a threshold and family interests; 8% is plainly material. It should also consider tendering the broker relationship and whether the chairman can remain on the SSB while the relationship continues. Internal Shariah audit reporting to the Head of Retail Banking, who owns the product, destroys objectivity: it should report functionally to the SSB and administratively to the board audit committee, with unrestricted access to both, and the SSB should approve its plan. The board composition gap also needs fixing: appoint a replacement or a named alternate with regulatory approval, and amend the charter to set quorum, circulation and recusal rules explicitly, so the same situation cannot recur.
3. What should be done before 1 March, and what should the company secretary's note say?
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Convene a properly constituted SSB meeting with the vacancy filled or an approved alternate, with the chairman recused on the tawarruq item. Table the full product paper, the broker arrangement, the sequencing controls and the fee structure, and obtain a fresh fatwa with the required majority. If that cannot be done in time, delay the launch: launching on two emailed votes and a pre-signed fatwa would be a reportable breach with the central bank and would put the income in question. Fix the internal audit reporting line and commission a targeted review of the commodity murabaha process. Disclose the conflict and the remediation to the regulator proactively, with minutes and the revised policy. The note should state plainly that the 2 February process failed on quorum, majority, circulation and conflict, that the product is suspended until re-approval, and that any set-up costs already incurred are sunk rather than a reason to proceed.