The Role of the Shari’ah Board in the Islamic Banking Industry of Bangladesh

Abstract

Islamic banking has now become an integrated part of global financial industry with a remarkable growth rate. The main distinguishing feature of Islamic banking system is the compliance of all of its products, services and arrangements with the principles and values laid down by Shari’ah. Shari’ah-compliance is the single most important motivation for choosing Islamic banking by its clients and stakeholders. To ensure this Shari’ahcompliance, every Islamic bank is required to establish a Shari’ah Board with adequate mandated authority to perform its role. Identifying the governance function and role of Shari’ah board based on Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Service Board (IFSB) standards, this study empirically investigates the crucial issues regarding the role, independence, accountability and effectiveness of the Shari’ah Board in the Islamic banking industry of Bangladesh. Eight full-fledged Islamic banks of Bangladesh were taken as the sample and both primary and secondary data were used for the study. Two separate questionnaire surveys were conducted. One was distributed among the members of Shari’ah Board with the aim of assessing the current Shari’ah governance practices by the Shari’ah Boards. The second was distributed among the branch managers of Islamic banks operating in Bangladesh with a view to ascertain their expectations regarding the issues under investigation surrounding the role of Shari’ah board. Besides reviewing a good number of related literatures, standards and guidelines of AAOIFI, IFSB, Bangladesh Bank and sample institutions were evaluated with a view to examining the legal framework of governance function of the Shari’ah Boards. It is observed that the guidelines of Bangladesh Bank for Islamic banks in Bangladesh, as the principal regulatory authority, are not comprehensive and moderate compared with the AAOIFI and IFSB standards. There is no mandatory requirement for Islamic banks in Bangladesh to comply their regulations with that of AAOIFI and IFSB standards. The results of this study indicate that the Shari’ah Boards mostly perform traditional advisory role that include advising the board of directors on Shari’ah issues, providing training to the Shari’ah department officers, preparing Shari’ah-compliance manual, examining Shari’ahcompliance by auditing the activities of bank etc. But, it has no significant contribution in determining bank’s strategic issues, i.e. designing corporate objectives. In regard to the development of Islamic banking products, the boards’ involvement seem to be limited to the conceptual, designing, implementation and review stages; but not the technical aspects such as pricing, marketing etc. On the other hand, Shari’ah Boards’ involvement in accounting related issues such as profit distribution, Zakat calculation etc. was found significant in most of the banks. Additionally, Shari’ah Boards are frequent in publishing Shari’ah reports, resolutions and responding to queries. This study reveals that personal integrity and fiduciary duties are simultaneously important in determining the accountability and independence of Shari’ah Board. The ethical value, reputation and scholarly background of Shari’ah Board members, were found to be important in influencing its accountability and independence. All of the banks have ‘fit and proper’ criteria in appointing Shari’ah Board member as suggested by Bangladesh Bank, but in practice these aren’t maintained properly. The Shari’ah Boards have not been given adequate power to undertake its duties independently and effectively. It has no power to stop the bank from undertaking non-Shari’ah-compliant transactions. There is no reporting channel for any possible conflict between the Shari’ah Board and board of directors or management. Interestingly, Shari’ah Boards were also perceived by branch managers of not providing the required level of involvement. Although Shari’ah Boards were found to be the sole authority for Shari’ah review function, but they have not been prescribed appropriate operative procedures. However, the Shari’ah reviews were found not to be effectively implemented by the management and thus, raising concern regarding the quality of the Shari’ah reports. There is also lack of adequate guidelines issued by Bangladesh Bank. Despite these deficiencies, Most of the Shari’ah Boards receive professional support, ample time and direct access to information for Shari’ah review and undertaking its duties. The study provided some recommendations to ensure independent and effective role of Shari’ah boards of Islamic banks in Bangladesh. The recommendations include: to develop a single set of comprehensive rules and regulations regarding the Shari’ah-compliance based on AAOIFI and IFSB standards and make it mandatory for all Islamic banks to comply with; to monitor its strict implementation by Bangladesh Bank to develop the confidence of stakeholders; to formulate a complete ‘term of reference’ for Shari’ah Board to run the Shari’ah governance function effectively; to mandate the board with adequate power to perform its duty independently; to maintain the ‘fit and proper’ qualification criterion in appointing Shari’ah Board member; to compose Shari’ah Board with various experts of related disciplines; to uphold an effective mechanism for Shari’ah Board to offer its advice to the board of directors and management of the bank on Shari’ah matters; to encompass the accounting, strategic and technical issues within the role of Shari’ah board; to provide effective support to Shari’ah Board from all the concerned parties within the bank; to develop an active communication channel among the Shari’ah board, management of the bank and Bangladesh Bank to ensure effective Shari’ah compliance; to disclose all the Shari’ah issues as suggested by AAOIFI and IFSB in the Shari’ah compliance report or annual report of the bank; and to initiate programs by the regulatory authorities for producing competent Shari’ah scholars and develop knowledge and skill of Shari’ah Board members.