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Hawkamah Journal

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By Jahanara Sajjad AhmadIMG_0087.JPG

The Islamic Financial Services Board (IFSB) has defined the Shari’ah Governance System as the set of institutional and organisational arrangements through which an Institution Offering Islamic Financial Services (IFI) ensures that there is effective independent oversight of Shari’ah compliance over each of the following structures and processes:

(i) Issuance of relevant Shari`ah pronouncements and resolutions;

(ii) Dissemination of information on such Shari`ah pronouncements and resolutions to the operative personnel of the IFI who monitor the day-to-day compliance with the Shari`ah pronouncements and resolutions;

(iii) An internal Shari`ah compliance review or audit; and

(iv) An annual Shari`ah compliance review and audit for verifying that the internal Shari`ah compliance review and audit has been appropriately carried out and its findings have been duly noted by the Shari`ah board.

The above definition clearly shows that accountability, internal control, disclosure and transparency all form part of the Shari’ah governance system. So, in terms of corporate governance, how is Shari’a governance different then?

How is Shari’ah Governance different from Conventional Corporate Governance?

The Shari’ah Governance System has an additional layer of governance which is called the Shari’ah Supervisory Board (SSB). The role of the SSB is not only limited to passing fatwas but is also to ensure that these fatwas are implemented in true Shari’ah spirit. In addition to the SSB, the Shari’ah Governance system is complemented by the relevant internal controls such as the Shari’ah Review Unit, which assists the SSB in carrying out its compliance functions relating to the operations of the IFI.

The Shari’ah Supervisory Board 

The Shari’ah Supervisory Board is an independent body of specialised jurists in fiqh almua’malat (Islamic commercial jurisprudence). It consists of at least 3 members and may include a member who is an expert in the field of Islamic financial institutions but with knowledge of fiqh almua’malat. The SSB members are appointed upon the recommendation of the board and their appointment is subject to shareholders approval.

The SSB members are required to observe confidentiality and consistency while issuing fatwas. In addition to issuing fatwas, the SSB also acts as an advisory body to the Board of Directors.

It is recommended to have annual evaluations taking place with respect to the performance of the SSB as a whole, as well as individual members. The IFI should ensure that it has set clear and well documented terms of reference regarding the role and responsibility of the SSB.

While Sharia’h Supervisory Boards are expected to play a leading role in ensuring sound and effective Shari`ah governance, other stakeholders of an IFI are also responsible for contributing towards this responsibility such as employees, customers, shareholders and most importantly the Shari’ah external regulators.

Who does the SSB report to?

Administratively the SSB reports to the Board of Directors. However, the SSB is there to safeguard the interests of the shareholders as well as other stakeholders of the bank. Therefore, the SSB issues a report annually which is addressed to the shareholders and  which forms part of the Annual Accounts of the IFI. The SSB report is meant to certify if all financial transactions (including investments) comply with the Shari’ah principles.

What are Investment Account Holders?

An Islamic Bank has a special category of investors called the Investment Account Holders (IAH) or normally referred to as Profit Sharing Investment Account Holders. These accounts differ from conventional deposits because the contract between the Islamic Bank and the account holder is not that of a lender and a borrower but is usually based on the Mudarabah contract, where the bank acts as a Mudarib (fund manager) and the customer as Rabb al- Mal (the one providing funds). Under the principle of Muḍarabah, IAHs as Rabb al-Mal bear the risk of losing their capital invested by the IFI as Muḍarib. Effectively, this means that the IAH’s investment risk is similar to that of the shareholders of the IFI, who bear the risk of losing their capital as investors in the IFI. The IFI is therefore required to place IAHs at an equal footing with the shareholders with respect to IAHs right to access all relevant information in relation to their investment accounts. It is worth mentioning here that there are two types of IAHs, restricted and unrestricted and each category has its own disclosure rights specified in IFSB Standards.

IFI Governance Challenges.

One of the most spoken about governance challenges an IFI faces today is the lack of Shari’ah Scholars. It is extremely rare to come across scholars who are both well versed with Shari’ah as well as the corporate finance aspect of the transaction, giving rise to situations where one Shari’a Scholar can sit on more than 100 boards across multiple jurisdictions and countries.  Some countries have tried to limit the number of Board seats one Shari’ah scholar can sit on however, in our view this is not a solution to the problem. This restriction applies only to one jurisdiction and cannot be extended across borders. The long term solution to this problem lies in creating capacity building programs for Islamic bankers and aspiring Shari’ah scholars. This will develop more and more capable scholars and can be the only solution to bring a balance in the supply and demand situation of Sharia’h scholars.

Other IFI governance challenges include the consistency in fatwas issued. One way of tackling this situation would be if it is made mandatory for all Banks to publicly disclose the Fatwas and Shari’ah Rulings.

There is also inconsistency when accounting for Islamic Finance transactions using the Accounting and Auditing Organisation of Islamic Finance Institutions (AAOIFI) Standards compared to International Financial Reporting Standards (IFRS). There are also concerns raised with respect to off balance sheet disclosure of Restricted Investment Account Holders. The International Accounting Standards Board has now asked the Malaysian Accounting Standards Board to help with setting up an expert advisory group on Islamic accounting to look into these accountancy issues.

Another development that has taken place in the area of convergence of standards is that the IFSB has issued an Exposure Draft on Capital Adequacy Standard For Institutions Offering Islamic Financial Services (excluding Takaful Institutions and Islamic Collective Investment Schemes), applicable to fully fledged Islamic banks as well as Islamic Windows, with the aim of aligning the capital adequacy requirements with Basel III.

There are many other governance challenges being faced by the Islamic Finance Industry which are becoming barriers to the development and growth of the Islamic finance industry. Hawkamah has developed a series of programs and initiatives to overcome some of these challenges, some of which are mentioned below.

Based on research of MENA Islamic IFI’s, Hawkamah along with its Task Force members have developed a Policy Brief[1] on Corporate Governance of IFIs, which contains concrete recommendations on how to bridge the corporate governance gap in MENA Islamic Financial Institutions.

Hawkamah also regularly conducts capacity building programs on Islamic Finance in order to increase and further strengthen the knowledge base of Islamic bankers and Shari’ah Scholars.

Some of the other Hawkamah joint initiatives include developing standardised documents for Ijarah Sukuk and terms of reference of a Central Shari’a Supervisory Board.


The growing interest in developing the Islamic Finance Industry further has attracted an increased attention towards the governance of such Institutions. With new Islamic products being developed, Islamic benchmark rates created and Islamic Finance becoming a mode of financing for various cross sector projects such Pubic Private Sector Partnership projects as well, it is now imperative to have well -structured governance frameworks to be put in place which are effectively implemented throughout the organisation.

There is no “one-size-fits-all” approach to corporate governance and the same is true for Shari’ah Governance as well. The detailed scope of the Shari’ah Governance System may vary from one institution to another and the challenge for the IFI is to structure its governance regime best suited to its range of activities, geographical spread and the size of the organisation.



  • The certified Board Secretaries Workshop provided by Hawkamah and Dubai Financial Market is an essential course for learning corporate governance, scope and responsibilities of the board secretary and understanding the governance and disclosure requirements of the Dubai Financial Market and the Securities and Commodities Authority. It is a practical course which combined recent best practices and key learning lessons. I would highly recommend it for people involved in corporate governance and in particular in a listed company.

    Omran Al Zamani - Senior Legal Counsel - Dana Gas PJSC

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    Hassan Murad Agha - Group Head of Compliance & Internal Control - Gulf General Investment Co. (PSC)

  • All companies should promote their boards, executive managers or staffs who have board responsibilities for subsidiary companies to attend corporate governance training. Hawkamah provides the ability for people and companies in the GCC to upskill in the area of corporate governance and directorship through a comprehensive programme teaching international best practice which has been tailored to regional specific governance issues.

    Alastair Mulligan - VP Asset Management - National Central Cooling Company PJSC (TABREED)

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    Nabeel Mirza - Senior Director & MLRO - Compliance - GFH Financial Group B.S.C.

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    Nada Ishaq Abdul Karim - Manager - The Secretary of The Board of Directors - Bahrain Islamic Bank BSC

  • The DDP offered by the Hawkamah Institute is an excellent course to prepare directors to understand and fulfil their obligations properly as members of the board. I have benefitted immensely from this program and have started to implement some of the best practices taught on the boards that I am involved in.

    Amir Arab - Director - Havenvest Private Equity Middle East Limited

  • The Director Development Program is great way to gain insight and improved understanding in areas such as corporate governance and board functionality. I would highly recommend the program as a foundational step before they begin their board experience.

    Bindu Ann Joseph - Chief Operating Officer - 3W Networks

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