An empirical investigation into the role, independence and effectiveness of Shari’ah boards in the Malaysian Islamic banking industry

Abstract

Islamic banks' operations are guided by the principles and values laid down in Islam (i.e., the \nShari'ah). To ensure Shari'ah compliance on the operations of the bank and to inspire the \nconfidence of shareholders and stakeholders, each Islamic bank is required to establish a \nShari'ah board. This study empirically investigates the Shari'ah boards operating in the \nMalaysian Islamic banking industry and specifically examines the influence of the dual-layer \nShari'ah governance system on Malaysian Islamic banking practices where, besides the \nregulated Shari'ah board, Shari'ah supervision at the highest level is undertaken by the \nShari'ah Advisory Council (SAC) of the Central Bank of Malaysia. Two separate \nquestionnaire surveys were distributed to banks offering Islamic banking in Malaysia. One \nwas sent to the Shari'ah department of the Islamic banks and the second to the branch \nmanagers to assess the current practice and the expectations regarding how the issues \ninvestigated are being practised by the Shari'ah board. Furthermore, a series of in-depth \ninterviews were undertaken with important stakeholders within the Malaysian Shari'ah \ngovernance framework. \nEssentially, this study indicates that Shari'ah boards do in the main undertake a valuable \nShari'ah advisory role and reveals the existence of an established structure for Shari'ah \nreviews. However, the Shari'ah reviews were found not to be effectively implemented by the \nShari'ah boards thus raising concern regarding the quality of the Shari'ah reports issued by \nthe boards highlighting both the importance and need for an external Shari'ah audit. In \naddition, the composition of the Shari'ah board members is revealed to have influence over \nthe quality of Shari'ah decisions issued by the board. Moreover, the integrity of the Shari'ah \nboard members, such as their ethical value, reputation and scholarly background, was found \nto be important in influencing its accountability and independence. Interestingly, Shari'ah \nboards were also perceived by branch managers of not providing the required level of \ninvolvement. The study also emphasises that branch managers felt the Shari'ah Advisory \nCouncil (SAC) to be the most important party within the Malaysian Shari'ah governance \nframework, and that the dual-layer Shari'ah governance system was viewed as having \ncontributed to the standardisation of Islamic banking. Also, it appears that the role played by \nthe Shari'ah Advisory Council (SAC) is not limiting creativity in developing Islamic banking \nproducts.

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