Governance of Islamic Financial
Institutions
Are Shari’a
Boards the only Institutions with a Role?
by Akhtar Hamid, Lead Counsel, The World Bank. The views expressed in this paper are
entirely the author’s, and do not necessarily represent those of the World Bank
Introduction
•Recent developments suggest
qGovernance of Islamic Financial
Institutions (IsFIs) be seen in much broader terms
than just Shari’a Boards
qSeveral possible Shari’a-based institutions with a potential for impacting IsFIs, directly or indirectly
qShari’a Boards are only a small, though critical,
sub-set
Introduction
Continued…
•Remarks address issues going
beyond Shari’a Boards alone
qDraw generalizations and lessons
from recent developments in
qAccept that (a) discussions in
qTherefore should be seen as
raising “possibilities” rather than stating “definitive positions”
qHope will help put role of Shari’a Boards in perspective and promote better
understanding of it
Introduction
Continued…
• Cover following topics
q Shape and Depth of Governance
Structure
q Elements of Governance Structure
q Responsibilities of Shari’a-based Governance Institutions
q Qualifications of Shari’a-based Governance Institutions
q Merits and Demerits of Shari’a-based Governance Institutions
Shape and
Depth of Governance Structure
ŻDetermined by type of underlying financial
system
q“Mixed”, i.e., partly Shari’a-based, partly conventional
q“Exclusive”, i.e.,
entirely Shari’a-based
q“Undecided” or “Wavering”,
i.e., in a state of transition somewhere in between the “mixed” and “exclusive”
systems
Shape and
Depth of Governance Structure
ŻVaries in complexity
qRelatively simple under the “mixed”
system
qFar more complex under the “exclusive”
system
qEven more complicated in the “wavering”
or “undecided” state
Elements of
Governance Structure
•May include
q a Shari’a
Board specifically so called, within the central bank or IsFIs
themselves
qA national Shari’a
Council
qA national
qA national legislature
qA central bank
qA specific Shari’a
committee or commission (or a series of them)
Elements of
Governance Structure
•May exist in various permutations
and combinations depending on type of financial system
•Emergence of several Shari’a-based governance institutions at the same time or
in rapid succession may lead to
qFragmented responsibility
qOverlapping jurisdictions and
turf warfare
Elements of
Governance Structure
•Their unnecessary proliferation
be guarded against, and if a number of them do emerge, a clear delineation of
their responsibilities is essential
Responsibilities
of Shari’a-Based Governance Institutions
•Undertake a several part exercise
to legislate a policy and legal framework for a Shari’a-based
banking/financial system
qAs part of the Executive
qAs part of the Legislature
qAs part of the Superior Judiciary
qAs part of IsFIs
Responsibilities
of Shari’a-Based Governance Institutions
•Address difficult theological and
other questions (e.g., on nature of “riba” or
“interest”)
qDiscover and give effect to
relevant Shari’a rule
qConduct elaborate research,
needing expert services and time
qChart a course between different
schools of thought
Responsibilities
of Shari’a-Based Governance Institutions
•Questions especially difficult
where financial system moving from a conventional to a Shari’a-based
system
Qualifications
of Shari’a-Based Governance Institutions
•Personnel of Shari’a-based
governance institutions obviously need to
qBe thoroughly conversant with the
Quran, the “hadith” and the
“sunnah”, as well as ancient and traditional Islamic
commentaries
qHave ready access to the view of
contemporary Islamic scholars, economists, bankers, lawyers and other experts
qBe fitted for their work by
training, experience and background in theology, law and finance
qIn particular, represent all
major Islamic schools of thought
Qualifications
of Shari’a-Based Governance Institutions
•Persons trained and qualified in
all these fields not easy to find in large numbers to man several Shari’a-based governance institutions at the same time
qUnless a long tradition exists of
providing such training, together with the necessary institutional structure
qWhich is not likely to be the
case especially where the system is “transitioning” or “wavering”
Merits and
Demerits of Shari’a-Based Governance Institutions
•A Shari’a
Board so named, or a Shari’a Council or a specific Shari’a committee or commission
qCan be properly equipped to do
its work
qUnless otherwise lacks merit, can
be counted on to produce satisfactory work products
Merits and
Demerits of Shari’a-Based Governance Institutions
•A Shari’a
court not an ideal forum for laying down broad new principles or guidelines
qCannot be seen to be openly
making new law
qLimited to conflicting arguments
presented by two or more parties, and the narrow points of law and fact upon
which they are based
qDecision always subject to review
in the next case, or by a higher court
qLimited in terms of numbers
qLimited in terms of time
qIn certain circumstances very
existence precarious at best
Conclusions
vThe shape and character of Shari’a-based governance institutions is determined largely
by the type of the underlying financial system; if that system is in a state of
flux, the search for the right mix of governance institutions can be endless
vGovernance institutions can
belong to any branch of government – executive, legislature and/or judiciary,
apart from the banking sector proper
Conclusions
(continued)
vIf not guarded against, they have
a tendency to proliferate unnecessarily, with a risk of leading to fragmented
responsibility, overlapping jurisdictions and turf warfare
vThey have a difficult task of
discovering and applying oftentimes obscure rules of theology, in a manner
acceptable to the rank and file of stakeholders
Conclusions
(continued)
vIt may not always be an easy job
of finding sufficient numbers of qualified persons to man large numbers of such
governance institutions
vApart from the right sort of
membership, they need access to all manner of source and plenty of time to do
an effective job of laying down broad guidelines for stakeholders’ benefit
vFrom that point of view, some of
such governance institutions are better placed than others to fulfill their
mandate, the case of Shari’a courts are being
particularly noteworthy in this connection