Developing effective Shariah governance for Islamic banks

Since its introduction in 1983, the Islamic bank sector  has grown considerably in terms of size and market share. In 2013, Islamic banks' deposit growth was 25.83 per cent compared to 20.58 per cent in conventional banks. However, it is essential to ensure a proper Shariah governance framework for Islamic banks in the country.
An effective Shariah compliance framework will not only help Islamic banks to grow but also to operate in a manner which will maintain trust between customers and other stakeholders.
 Islamic banking was introduced in the country by incorporation of some Islamic banking provisions in the amended Banking Companies Act, 1991. Apart from this, the Bangladesh Bank (BB) issued a guideline for conducting Islamic banking via a circular on November 09, 2009.
No separate division in the central bank to control, guide and supervise the operation of the Islamic banks has been opened and inspection and supervision of the Islamic banks operation are being carried out by the BB as per the general guidelines formulated for the conventional banks.
There is no independent Shariah Supervisory Council in the BB. As per the guideline, it is the responsibility of the board of directors of the respective banks to ensure that the activities of the banks and their products are Shariah compliant. The boards of the Islamic banks and conventional commercial banks having Islamic branches may form an independent Shariah Supervisory Committee with experienced and knowledgeable persons in Islamic jurisprudence. However, the Board shall be responsible for any lapses/irregularities on the part of the Shariah Supervisory Committee.  
In compliance with the guideline, each bank has formed its own Shariah Supervisory Committee. The accounting standards for Islamic banks have been developed to comply with the provisions of the Banking Companies Act 1991, the International Financial Reporting Standard (IFRS), the Companies Act 1994, the Securities and Exchange Rules 1987, Dhaka and Chittagong Stock Exchanges' Listing Regulations, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Islamic Shariah and other laws and rules applicable in Bangladesh.
INTERNATIONAL PRACTICES: There is diversity of practices of Islamic banking in the world. Some countries allow Islamic banks to operate without giving any attention to the Shariah governance framework for Islamic banks. There Islamic banks are subject to the same rules and regulations which are designed for conventional banks. In these countries, Shariah compliance is entirely upon the banks. The government or regulatory authority will intervene only if the matter has a significant impact in the industry. The UK and Turkey belong to this category.  On the contrary, some countries, especially in the Gulf region and South-East Asian region, have taken more rigorous approach towards ensuring Shariah governance for Islamic banks. Among these countries, the efforts taken by Malaysia and Pakistan are more comprehensive.
In Malaysia, the development of legal and regulatory framework for Islamic banks was supported by gradual introduction of various legislations. Malaysia first introduced Islamic Banking Act (IBA), 1983.  Since then, this development  has been supported by several other laws namely, the Takaful Act 1984, the Banking and Financial Institutions Act 1989 (BAFIA), the Central Bank of Malaysia Act 2009 and the Securities Commission Act 1993. In 2013, Malaysia introduced the Islamic Financial Services Act 2013 which repealed the Islamic Banking Act (IBA) 1983 and the Takaful Act 1984.
In order to harmonise the Shariah interpretations among various Islamic banks and financial institutions, Malaysia established in 1997 the Shariah Advisory Committee (SAC) at the Bank Negara Malaysia (BNM) which is the central bank of Malaysia and the main regulatory authority for banks and financial institutions in Malaysia.   
Introduction of Islamic banking in Pakistan was supported by several legislations such as the Banking Companies Ordinance, 1962, the Mudarba Companies Act 1984 and the Policies for Islamic Banking in 2001 and 2009. The State Bank of Pakistan (SBP), which is the main regulatory authority in Pakistan, has formed a Shariah Board at the national level in 2003.
In Pakistan, Islamic Banking Institutions (IBIs) are required to appoint and work under the guidance of a Shariah advisor. The SBP has provided Fit & Proper Criteria for Shariah advisers of the IBIs.  In 2008, the SBP issued detailed Instructions and Guidelines for Shariah Compliance in Islamic Banking Institutions which cover all the necessary elements of a robust compliance mechanism.
WHAT CAN BE DONE: Bangladesh can do a lot in terms of ensuring effective Shariah governance for Islamic banks. However, it is difficult for any government or regulatory body to create a framework overnight. It is a complex issue and needs to be implemented gradually. Even some steps taken by other countries are not suitable for Bangladesh.  For example, like Malaysia making the SAC the sole authority on Shariah matters relating to Islamic finance will not be a wise step for Bangladesh given the existing legal and regulatory framework.
In the light of best international practices, their experiences and in the context of existing legal and regulatory framework in the country, the Bangladesh Bank may initiate the process in the following manner:
* Bangladesh can form a Central Shariah Supervisory Board (CSSB) at the central bank.  The board should include at least three Shariah scholars, one accountant, one lawyer and one experienced banker. This Board can be an Independent Board and its role can be only advisory, not supervisory at this stage. A member, who is sitting at the Shariah Supervisory Board (SSB) of an IFI, cannot be member of the CSSB.  
* This board can advise and assist the Bangladesh Bank for formulating Shariah-related policies in regard to operations of   Islamic banks in Bangladesh. All Islamic banking products should be approved by the CSSB. In this regard, the BB can take  consent from the board and make it clear  before approving any Islamic banking  products. Like Malaysia, in case of any dispute among Shariah scholars at the Shariah Supervisory Board (SSB) at any IFI or any deviation in practices among various SSBs, the BB can solve the matter by issuing rule in consultation with this Board.
* The Bangladesh Bank can establish a separate division for Islamic banks and issue all guidelines related to Islamic banks, supervise and monitor those through this division.
* The current practice of having own Shariah  Supervisory Board (SSB) at each IFI can continue. However, the role and responsibilities of SSB can be specified and widened. The SSB can consist of prominent scholars who are highly qualified to issue Shariah interpretation on financial transactions and have considerable experience with knowledge of modern financial dealings and transactions. This committee should freely give opinions and endorse all the contracts, dealings, transactions and investment activities through monitoring, supervision and close scrutiny of contracts, transactions, and procedures.
* In order to promote harmonisation and adopt best international practices, Bangladesh can follow the standards set out by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). The AAOIFI and the IFSB are internationally recognised body for Islamic banking practitioners and the collective personal reasoning (Ijtihad) of the AAOIFI and the IFSB are highly important for uniformed practices of Islamic banking globally. Many countries in the world have followed these standards and obliged their financial institutions to comply with these standards. Conforming to these standards will help avoid confusion, misunderstanding, and ambiguity and ensure clarity and sound Islamic banking practices in the industry.
* The BB can establish a separate department  for inspecting Islamic banks and their operation. However, initially, instead of carrying out spot inspection like Pakistan, it can be made mandatory for all banks to submit internal Shariah Review Report periodically. Introduction of external Shariah Audit by a bona fide auditor and submission of this audit report like the current practices of Financial Report Submission can be considered in this regard.

The writer works in a private bank. He has a post-graduate degree in Islamic Banking, Finance and Management from the United Kingdom.
 akbar.chowdhury@yahoo.com