The Sharia Supervisory Board (SSB) is an important governance mechanism in Islamic banks, aimed at enhancing their religious credibility. The SSB is an independent body of sharia scholars that have expertise in Islamic commercial law. These scholars are employed and remunerated by the Islamic banks and their primary role entails giving fatwas on the sharia validity of the banks’ operations. In theory, the SSB act as religious auditors who are responsible for guiding, advising, reviewing and certifying at the end of each year that the banks’ products, contracts and transactions have conformed to the Islamic principles (Warde, 2010; AAOIFI, 2010). The SSB conducts sharia compliance checks both before and after the launch of a new product (AAOIFI, 2010). All new products therefore require a seal of approval from the SSB. The SSB’s opinion (fatwa) is theoretically binding such that refusal to approve a product implies that it cannot be used by the bank (Warde, 2010).
Besides the SSB, Islamic banks also have an internal sharia auditing team. The internal sharia auditors have a similar role to internal financial auditors except that they evaluate the extent to which Islamic banks transactions and contractual terms comply with the guidelines and instructions of the SSB (AAOIFI, 2010). Thus, the sharia audit team plays a bridging role between the management and the SSB. Final sharia audit results for each year are published as part of the annual reports (for most Islamic banks) and at times include recommendations made by the SSB for future improvements73.
A number of issues however, concerning the SSB and reliability of sharia certification have arisen. For example, there’s the issue of multiple board memberships and conflict of interest. Sharia scholars hold positions on numerous sharia boards, including those of competing banks. The top 10 of the 400-plus sharia scholars in the world hold 24-85 board seats each, occupying nearly 40% of all the SSB seats available worldwide74 73 For details on the role of the SSB, the SSB report and the internal sharia review, see guideline issued
by AAOIFI particularly: ‘Governance Standard for Islamic Financial Institutions, (GSIFI) 1, 2, 3 and 5 namely: Shari’ah Supervisory Board: Appointment, Composition and Report; Shari’ah Review; Internal Shari’ah Review and Independence of Shari’ah Supervisory Board’ (AAOIFI, 2010).
74 The exposure and influence of these scholars has far greater reach than the number of seats each
individual holds. This is because the same scholars also provide their services to consulting companies such as Minhaj Advisory, which caters for the needs of other financial institutions including mutual funds, asset management and real estate companies. Estimations show that the institutional and cross links of the top 3 scholars alone makes up 21% of the entire industry. These top 3 scholars are Sheikh
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(Ünal, 2010b). Furthermore, the same scholars hold positions not only on the boards of regulated banks but also in standard-setting regulatory bodies e.g. AAOIFI and central banks, effectively judging and regulating their own work. Such a system is
unsurprisingly criticised for conflict of interest, which remains an unresolved issue in the industry (Davies and Sleiman, 2012).
The high number of cross-memberships is commonly attributed to a severe shortage of qualified sharia scholars; however, it is not the availability but rather the ‘desirability’ of certain scholars which is driving this phenomenon. Although less experienced sharia scholars are mostly available, banks deliberately seek out well-known scholars for their reputation. Deals are made and products sold via the reputation of the scholars
certifying them. The bigger the name, the greater the credibility it brings to the institution and its products. This naturally stretches the demand for certain scholars to be far greater than others, leading to multiple board memberships (Fitch, 2011; Davies and Sleiman, 2012).
Multiple memberships however, put unrealistic demands on the scholars’ time,
affecting their ability to provide the quality of service (consultation, audit and scrutiny) which is required. Sharia boards are therefore commonly perceived to be mere
rubberstamps. Interviews have revealed that the role of SSB in many cases is rather superficial, that the sharia audit process is perfunctory and that SSBs do simply grant rubberstamp approvals to the decisions taken by the banks’ management (Warde, 2010).
There are also more serious concerns relating to the reliability and independence of the scholars’ opinion and banks’ sincerity in attaining sharia compliance. Doubts exist over the sharia scholars’ ability to fully understand the products they certify. Sharia scholars are certainly knowledgeable in Islamic law, however many are not well-versed in finance and therefore may fail to fully understand the economic purpose of the product they’re certifying. The SSB’s judgement can therefore be based on the structure as opposed to the substance of the financial product. Knowing this, product managers who are incentivised to seek rapid approvals, do not always disclose all the necessary
information. At other times, major financial institutions simply market products as
Nizam Mohammed Yacoubi, Dr Abu Guddah, and Dr Ali Elgari who prominently feature in GCC banks’ Sharia Supervisory Boards (Ünal, 2010a).
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sharia-certified without actual approval. In a recent controversy, it was revealed that Goldman Sach’s base prospectus had publically named three scholars as advisors on the issuance of its $2bn sukuk, even though none of the named scholars had seen the
prospectus, nor given their permission for the sukuk to be marketed as sharia-compliant (Davies and Sleiman, 2012). Such practices unsurprisingly create serious doubts over the legitimacy of products advertised as sharia-compliant.
The possibility of rent seeking by scholars combined with the potential lack of integrity on banks’ part makes the sharia certification process even more unreliable. With only 15-20 prominent scholars with ‘rock-star’ status, it is unsurprising that these scholars are well remunerated. In addition to their base pay ranging from $20,000-$50,000 a year, top scholars can earn $1000-$1500 per hour of consultation, annual bonuses of $10,000-$20,000 per board seat, and even six-figure sums (reportedly $150,000-
$500,000) for each fatwa issued to certify large transactions in international institutions (Foster, 2009; Khan, 2010; Fitch, 2011; Davies and Sleiman, 2012).
These handsome remuneration packages however raise questions regarding the extent to which certain sharia scholars willingly offer “tailor-made fatwas” to sharia-certify dubious products and practices based “on the most tenuous religious grounds in exchange for money” (Warde, 2010, p.236). It has been suggested that, banks can get almost any financial product/transaction certified as sharia compliant by actively seeking and relying on the validations of accommodating scholars and tempting them with high payoffs (Khan, 2010). Interviews with industry insiders have revealed evidence of such practices, particularly in conventional financial institutions offering Islamic products. As Foster (2009) reports, conventional banks create the same type of financial product for the Islamic market as the conventional counterpart, and keep approaching different sharia scholars for a fatwa until one certifies it as sharia
compliant. The product is then marketed as ‘Islamic’75. Evidence of such practices has given rise to the ongoing controversial debate on ‘fatwas for sale’ (Warde, 2010).
75 The interview reported in Foster (2009) reads “as one investment banker based in Dubai, working for a major Western financial organisation explains: "We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah compliant]. "If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic."
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In the ‘fatwa shopping’ process, variation in sharia interpretation plays a major role. As highlighted in chapter 2, sharia rules can be interpreted differently by different scholars, some being more lenient than others. The range of disagreements between scholars can lead to ‘fatwa wars’ which banks use to their benefit, by simply choosing the most lenient and ‘creative’ scholar willing to justify what suits the institution’s preferences (Warde, 2010; Foster, 2009).
Varying sharia interpretations and each bank having its own sharia board also make it difficult to arrive at a consensus on sharia-certified products and practices. This has created fragmentation in the Islamic banking industry as there are no uniform rules of sharia certification which apply to the industry as a whole (Tripp, 2006; Warde, 2010). The lack of transparency in how sharia scholars reach their conclusions in the sharia certification process complicates matters further. Rarely do sharia boards disclose their methodology and even then details are not publically published (Davies and Sleiman, 2012). Ultimately, the current controversial certification process not only has a financial but also a moral cost. Not only are the banks using their depositors, clients and
shareholders’ funds (and the income generated from these) to make excessive payments to sharia scholars, but the religious validity of the products and service provided is also contentious and potentially incompliant with the religious values of their stakeholders (Warde, 2010).
These issues are well recognised in the industry and several steps have been taken to overcome them, although the effectiveness of such measures is questionable. To address the problem of fragmentation and avoid reliance on fatwas from lone scholars, there have been attempts to create national and even international sharia boards. Malaysia, for example has established a national sharia board. However, since sharia scholars in Southeast Asia tend to be more lenient in interpreting the sharia than the orthodox views held in the Middle East, several rulings passed by Malaysian scholars are not considered valid in the Arab Gulf. Thus, the same sharia-certified products are valid in one market but not in others (Foster, 2009; Warde, 2010). To achieve
harmonisation across markets and develop common standards, attempts to benefit from transnational boards have also materialised, with the Islamic Fiqh Academy considered to be the most prestigious international sharia body, passing fatwas on Islamic banking issues. However, as no individual institution is bound by the resolutions/fatwas passed, these aren’t followed internationally. Furthermore, as the Islamic Fiqh Academy is
largely associated with Saudi Arabia, other countries with varying fiqh traditions tend to look towards their own fiqh academies (Warde, 2010). Such institutions therefore have not been very effective in overcoming the fragmentation and establishing standardisation of sharia certification in the industry.
Other initiatives have aimed specifically at increasing confidence in the sharia compliance of individual banks and their products, however these too cannot be considered successful. The Islamic International Rating Agency (IIRA) for example, aims to provide a Sharia Quality Rating, as a reference for the quality of compliance by banks and products marketed as ‘Islamic’. These ratings are designed to be used by financiers and investors in a similar manner to credit ratings (IIRA, 2006) . However, not only do banks need to volunteer to be assessed on an annual basis but the results of the review are also not published publicly without the bank’s consent (ibid). It is
reasonable to assume that banks with a poor rating will not consent to their rating being published publicly to prevent any negative impact on their reputation and therefore poor ratings are unlikely to appear in the public domain76. Thus, a reliable and independent assessment of sharia compliance appears to be rather difficult to find from within the Islamic banking industry.
Finally, in response to the criticism that sharia boards are mere rubberstamps, Malaysia has banned scholars from serving on more than one bank’s sharia board at a time. In the Arab Gulf, however, multiple board memberships are virtually unregulated.
Governments and regulatory bodies including AAOIFI and central banks in the Gulf have hesitated in making stricter rules in the industry including the issue of limiting board positions. Attempts at increased regulation have also seen strong resistance from some scholars. Without intervention from regulatory bodies and governments, the steps towards a single board membership and stricter regulation are unlikely to occur (Khan, 2010; Davies and Sleiman, 2012). Globally, the Islamic banking industry is years away from a standardised and transparent sharia certification process. Until then
controversies on ‘fatwas-for-sale’, conflict of interest, rent seeking on part of both 76 The IIRA website puts into question the success of the Sharia Quality Rating (SQR) initiative, as there
is neither a list of banks rated nor their ratings. Evidence of only one Islamic bank (namely Jordan Islamic Bank) with a SQR could be found on the website http://www.iirating.com (Accessed 15.01.17). Furthermore, since its inception, the IIRA has developed a focus towards providing credit ratings through a risk assessment of Islamic financial institutions and their financial instruments as opposed to sharia compliance ratings.
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banks and scholars continue to plague the industry and raise questions over the religious validity of the industry’s products and practices.