The Structure of Sharia Boards for Islamic Financial Institutions - dummies

The Structure of Sharia Boards for Islamic Financial Institutions

By Faleel Jamaldeen

The sharia board, or sharia supervisory board (SSB), sits near the top of an Islamic financial company’s governing structure. If you look at the organization of such a firm, you often find the sharia board reporting to the board of directors, executive management, or executive board.

Sharia boards have two broad areas of responsibility within an Islamic financial institution:

  • Ensuring that a firm’s operations are sharia-compliant

  • Confirming that product development is sharia-compliant

In practice, most Islamic financial institutions have three to six sharia board members. (And yes, those members may be women! Most sharia scholars working in the Islamic finance industry are men, but women can and do participate on sharia boards.)

Although some Islamic financial firms could probably rely on the guidance of a single Islamic scholar working as a full-time advisor on both product development and operations, most financial institutions engage multiple sharia board advisors on a part-time or full-time basis in order to instill confidence in the strength, authority, and accuracy of the board’s rulings and oversight.

The general perception is that a financial institution benefits from having a diversity of scholarly opinions, backgrounds, and experiences. If it hires just one advisor and that person’s opinions don’t jibe with the opinions of many other sharia scholars in the industry, the firm may find itself promoting products that are heavily criticized for not being sharia-compliant. No Islamic institution wants to face that type of public relations battle.

Most of the scholars serving on a sharia board also hold full-time teaching positions, and many scholars serve on multiple sharia boards. No regulatory body requires a term limit for sharia board scholars, but an individual firm may.

The general sharia board structure most often looks like this:

  • One scholar serves as chairman of the sharia board, which means that he heads the team.

  • One scholar holds the position of general secretariat and acts as the board’s liaison with the firm’s senior management and board of directors.

  • Other scholars serve as board members, fulfilling the duties.

In a very well-established Islamic financial institution, the sharia board may be subdivided into various units that each takes responsibility for a different set of tasks. This kind of structure is called a sharia group, and its divisions may look like this:

  • Unit for sharia supervision supervises the firm’s operations.

  • Unit for research and development undertakes various research activities for the institution and helps ensure that any new product development is based on sharia principles.

  • Unit for communication and support services shares information to and from the sharia board and the firm’s senior management or board of directors. It’s also involved in documenting resolutions, interacting with other scholars and boards, and preparing sharia reports for inclusion in the firm’s annual report.

An international Islamic financial institution may use a slightly different sharia structure, which includes a central sharia board as well as various regional sharia committees.

Why employ this seemingly complex structure? The institution must make sure that its sharia scholars represent the spectrum of beliefs among its customers and potential customers. Sharia interpretations vary from region to region, so a company that operates in the Middle East and in Southeast Asia, for example, benefits from sharia board representation in both regions.