Corporate governance and Shariah compliance in institutions offering Islamic financial services

Wafik Grais and Matteo Pellegrini

No 4054, Policy Research Working Paper Series from The World Bank

Abstract: The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals'association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.

Keywords: Banks&Banking Reform; Corporate Law; National Governance; Non Bank Financial Institutions; Governance Indicators (search for similar items in EconPapers)
Date: 2006-11-01
New Economics Papers: this item is included in nep-ban and nep-cwa
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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