Sharia Boards in the Islamic banks by Beata Paxford

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Beata Paxford is a senior lawyer for a renowned Polish law firm. She is a PhD candidate in the Chair of Banking Law at Warsaw University

Islamic finance & banking has successfully settled in Europe. That is a fact. However, if you happen to talk with someone about the idea, you will usually hear the answer: “Yes, interest free banking”. And what has to be emphasized is that Islamic banking & finance is not only related to the prohibition of riba, but it has a whole spectrum of issues worth knowing. One of such is the ques­tion of Sharia boards – the advisory body of all Islamic financial institutions.

The presence of the Sharia board is a sine qua non condition of the existence of an Islamic financial institution. A Sharia Board consists of experts or scholars trained, as its very name suggests, in Sharia. Their first role is to provide ad­vice to the Board of Directors in matters connected with religious Islamic law. The members of the Sharia board are also responsible for compliance checks of transactions held by the institution the board advises for. The rule has it that an Islamic finance institution (Islamic banks included) has to make sure that all the transactions are compliant with Sharia and can therefore be called Islamic. Banks and other financial companies that intend to embark on the Islamic ven­ture, are obligated to employ a Sharia board. In traditionally Islamic countries, this issue is not a problem, as there would be plenty of access to scholars. Nev­ertheless, in Europe, finding and keeping a reliable and credible Sharia body might cause some legal and management issues.

First of all, availability. Experts in Islamic finance point out that the European market does not boast a large number of Sharia scholars to chose from. This is why many Islamic firms literally share members of a Sharia board. The question arises as to whether one and same expert can provide unbiased advice for competing firms. Islamic institutions, it has to be underlined here, are not charity organizations, they are des­tined to compete and woo clients, often using various marketing techniques. Furthermore, insti­tutions may differ in terms of goals, targets and scope of business. Hence, economists and law­yers specialising in Islamic finance ask if such a solution provides for a healthy and trustworthy standard. Of course, it might be said that the members of the Sharia board sitting in various firms are objective and independent, but still the issue remains. Likewise, some financial institutions want the members of their bodies to sign an anti­competition agreement, requiring them not to work for a competitive institu­tion for some period of time. For Islamic finance firms, that could turn out to be disastrous. There are only a few respected experts in Sharia and from what can be seen, there is a long way to go before new ones appear on the scene.

For a European market, an Islamic financial firm would need a Sharia board that knows the religious law, economy and the characteristics of continental financial and banking services. For a Sharia scholar trained in another country on a different continent, a more lax European approach to Sharia may seem unacceptable. For instance, derivative based transactions that are used in Europe can be considered haram in more conservative Islamic environment. Bodies like the Islamic Finance Services Board or AAOIFI are working hard to provide a unified set of guidelines for Islamic institutions around the world, but there is still a long way to go. Luckily, recently European universities (mainly in the UK) have developed MBA courses in Islamic finance & banking aiming at educating more professionals in Sharia-oriented business. However, we have to wait a couple of years to assess whether the specialists with the MBA diploma in Islamic finance will prove efficient and well prepared for the job.

The other issue worth considering is the independence of the Sharia board. Usually, the members of the Sharia board are employed by an Islamic institution. According to European law, they have to work on the grounds of an employment contract under the supervision of an employer. In financial institutions, the Board of Directors (or the Management Board as it is sometimes called or le directoire in French) is the main authority of the firm. The Board decides on the strategy of the firm, the salaries, the investments and lay offs and other like­wise issues. In an Islamic financial institution, ideally and theoretically, the Sharia Board is a completely independ­ent body that provides fatwas on Sharia compliance. Nei­ther the Board of Directors nor the Supervisory Board can influence the fatwas issued by the Sharia board. Gener­ally, the employment contract as such excludes independ­ence because there exists subordination between the em­ployee and the principal. In terms of the Sharia board, such solution would be not acceptable, as the employed members of the Sharia board could be stripped of their independence in a compliance check.

In respect of the independence of the Sharia board, there is also a question of potential legal problems related to this body. As mentioned previously, financial institutions (if they act as joint stock companies, plc, limited liability companies etc.) are required to have two bodies – that is, the managing Board of Directors and a Supervisory Board. The members of each of the bodies are either appointed by the shareholders or by another body. Their roles are usually specifically stipulated in the relevant legal codes.

Both bodies have different roles in the company. In terms of the Sharia board, it is difficult to place their role among these bodies. The role of the Sharia board is mostly simi­lar to the role of the Supervisory Board. However, the members of the Sharia board do not often possess the required economical and legal knowledge to read compli­cated financial statements and to assess the work of the Board of Directors.

Hence, those shaping the Islamic finance industry have much on their plate in respect of the Sharia board. In the author’s view, the members of the Sharia board should excel both in Islamic law and economics. They should go on a special course or even studies to gain the required knowledge of e.g. bank management, specific legal issues in a given jurisdiction, the ability to value and understand financial transactions and their aim. The Sharia board can no longer remain archaic in terms of the modern manage­ment of a financial firm.