The main aim of corporate governance is to ensure transparency, fairness and accountability. Efficient corporate governance framework that derived from the Islamic rules and principles is of the essence to any organizations as it plays significant role to resolve the agency problems as well as to promote transparency, fairness, integrity, credibility and accountability. In IFIs, another component of corporate governance namely Shari'ah governance is the very essence of Islamic finance practice particularly in building and maintaining the confidence of the shareholders as well as the other stakeholders that all transactions, practices and activities are in compliance with the Shari'ah principles.
Shari'ah governance is now becoming more diverse and advanced in parallel with the strong growth of Islamic finance worldwide. In the context of IFIs, Shari'ah governance is actually a prerequisite of their corporate governance framework. As a part of the corporate governance framework, Shari'ah governance is peculiarly unique to IFIs and it requires for a set of instutional arrangement that distinct from its conventional counterpart. In this aspect, the setting up of Shari'ah board as part of the organs of governance is really necessary and crucial to IFIs.
In view of the tremendous growth and sophisitication of Islamic finance sector [1] , Shari'ah governance nowadays has profound strong influence on the day-to-day practice of IFIs. Realizing the importance of Shari'ah governance, each jurisdiction has adopted different approaches in developing and nurturing its Shari'ah governance framework. At this point, it is very important to understand and appreciate the pluralistic approaches of Shari'ah governance across jurisdictions so as to identify and highlight its best practices. It should be noted that from the regulatory point of view, Malaysia represents the most regulated Shari'ah governance model followed by Brunei, Pakistan and Sudan, while GCC Countries as well as the UK prefer less regulatory interference.
Malaysia develops its Shari'ah governance infrastructure and architecture in both regulatory and non-regulatory aspects [2] . In fact, a special endowment fund of USD60 million has been allocated by the government of Malaysia to promote the development of Shari'ah compliance and governance in Islamic financial services sector. With regard to the development of Shari'ah governance at macro level, the Bank Negara Malaysia (BNM) has established the National Shari'ah Advisory Council (SAC) as the highest Shari'ah authority in Islamic banking and finance. The SAC will work closely with Shari'ah board of IFIs as well as the SC and also acts as a reference for advice from the judiciary. The Malaysian regulators have gone even further to enhance the quality of Shari'ah governance in the Islamic financial services sector by issuing the Guidelines on the governance of Shari'ah Committee for the Islamic Banks known as BNM/GPS1 in 2004 and introducing the Concept Paper on Shari'ah Governance Framework for IFIs in 2010.
IFIs in GCC Countries [3] , namely countries in the Arabian Gulf which are consisting of Saudi Arabia, Kuwait, Bahrain, Qatar and the UAE except the Sultanate of Oman have their own framework of Shari'ah governance which is different from Malaysia. Saudi Arabia treats IFIs equal to its conventional counterpart and therefore allows the market to develop its own Shari'ah governance system. On the other hand, Kuwait, Bahrain, Qatar and the UAE allow slight regulatory intervention of their Shari'ah governance framework by issuing several directives in the form of rulebooks as well as adopting the AAOIFI governance standards.
Shari'ah governance framework in the UK [4] is more on the Financial Services Authority's (FSA) policy basis and unregulated through specific legislation. The establishment of Shari'ah board of the Islamic Bank of Britain for instance is due to the market factor and not because of the regulatory requirements in the UK. It should be noted that the practice and framework of Shari'ah governance are developed and nurtured by the respective IFIs and there is no proper monitoring and coordination as in the case of Malaysia. The IFIs are allowed to adopt their own Shari'ah governance approach without being adhered or subjected to any national or higher level of Shari'ah board.
The discussion so far indicates that a study on Shari'ah governance system in IFIs is viable, indispensable and in fact beneficial to be explored theoretically as well as empirically. Indeed, this brings into focus the measures, analytical and empirical study that need to be carried out to enhance and find the best practice of Shari'ah governance in IFIs. In this regard, the study aims to provide, in the light of the research findings, certain essential guidelines and policy recommendations for proper and sound Shari'ah governance system.
1.1 Statement of Problem
IFIs have taken the form of commercial banks, investment banks, investment and finance companies, asset Management Company and financial services companies. There are diverse banking models practiced in different jurisdictions namely dual banking models, full-fledged Islamic institutions, Islamic subsidiaries of conventional banks, and Islamic windows. Basically, the implementation of Islamic finance and the way it be nurtured are greatly depend on the local legal environment and market factors.
In Malaysia, the establishment of Shari'ah board is a statutory requirement to all banks which offer Islamic banking products pursuant to section 3 (5) (b) of the Islamic Banking Act 1983 (IBA 1983) for Islamic banks, section 124 (7) of the Banking and Financial Institution Act 1989 (BAFIA 1989) for Islamic banking scheme banks and section 51 of the Central Bank of Malaysia Act 2009 (CBA) for the BNM. The main objective of the establishment of the Shari'ah board is to advise Islamic banks on any Shari'ah matter and also to ensure compliance with the Shari'ah tenets and requirements in their operations. Even though these legislations provide regulatory frameworks for the establishment of Shari'ah board but their legal ambit are not clear. The existing provisions in these legislations are inadequate and the frameworks are slightly ambiguous.
In the UK and GCC countries, the absence of a comprehensive set of regulatory framework on Shari'ah governance may impede the development of Islamic finance in these jurisdictions. This position may create regulatory gaps and confusion to the players and the public as regard to the legal and Shari'ah compliance in IFIs. Significant Shari'ah governance issues such as rejection of fatwa, differences of Shari'ah pronouncements and Shari'ah non-compliance risk have potential of affecting the credibility and image of Islamic finance as well as incurring huge financial liabilities.
In view of the diverse and distinct framework of Shari'ah governance, the study attempts to explore the actual practices of Shari'ah governance across jurisdiction particularly in Malaysia, GCC Countries and the UK. It is expected that the empirical findings of the extensive study on this subject would be able to identify issues, gaps and problems and at the same time to propose some policy recommendations pertinent to Shari'ah governance system in IFIs for further development of the industry.
1.2 Research Aim and Objectives
The aim of this research is to analytically explore the extent of Shari'ah governance practices in IFIs by analysing the practices and implementation of Shari'ah governance in Malaysia, GCC countries and the UK. This study explores, inter alia, whether the existing Shari'ah governance framework provided in the mentioned case countries is adequate and efficient or need further enhancement. The study, thus, attempts to formulate a proper and sound Shari'ah governance framework based on the empirical analysis extracted from the research findings.
There are a number of objectives through which the aim of this study will be fulfilled, which are as follow:
To investigate the different approaches of IFIs to Shari'ah governance;
To study the regulatory and internal approaches of Shari'ah governance in IFIs;
To examine the roles and functions of the Shari'ah board in IFIs;
To study the effectiveness of Shari'ah governance practices pertaining to the mechanism of independence, competency and transparency;
To examine the operational procedures of Shari'ah governance in IFIs;
To investigate the perception of IFIs on their Shari'ah board's performance;
To ascertain the extent of disclosure of Shari'ah governance practices in IFIs: and
To provide, in the light of empirical result of the research, certain essential guidelines and policy recommendations which can be considered to enhance and improve the Shari'ah governance system.
1.3 Research Questions
The study aims to respond and answer all of the following formulated research questions, which are derived form aim and objectives of the study:-
What does Shari'ah governance system mean?
To what extent the different approaches of IFIs towards Shari'ah governance?
How different are regulatory and internal framework of Shari'ah governance in IFIs?
What are the differences of roles and functions of Shari'ah board in IFIs?
Are there any standard operational procedures for Shari'ah governance process?
What mechanisms are in place that would ensure independence, competency, transparency and confidentiality in Shari'ah governance?
To what extent that the Shari'ah board has demonstrated its roles and functions?
What is the extent of disclosure practices of Shari'ah governance in IFIs?
Analytical responses to each of these questions are provided through qualitative and quantitative analysis in the following chapters in an empirical manner.
Hypothesis
In the light of the research aim and objectives as well as the research questions, the study formulated 7 hypotheses that would set the direction of the entire research which are as follow:-
There are significant differences on the IFIs approaches to Shari'ah governance;
There are significant differences on the regulatory and internal framework of Shari'ah governance in IFIs;
There are significant differences on the roles and functions of Shari'ah board;
There are significant differences on the attributes of Shari'ah board members on competency, independence, transparency and confidentiality;
There are significant differences on the operational procedures of Shari'ah governance;
The IFIs are satisfied with the performance and contribution of the Shari'ah board; and
There are significant differences on the extent of disclosure of Shari'ah governance practices.
1.5 Thesis Statement
IFIs in Malaysia, GCC Countries and the UK have different set of frameworks of the Shari'ah governance system. The existing Shari'ah governance framework and practices needs further enhancement and improvement, which brings into focus the measures and efforts that need to be taken in order to strengthen the IFIs. This is important for the consolidation and sustainable of Islamic financial industry globally.
1.6 Significance of Research
In view of the lack of intensive and in-depth research on the area of Shari'ah governance, the researcher undertakes to conduct comprehensive study on the extent of Shari'ah governance practices with hope that its findings may provide certain guiding frameworks, principles and best practices for Shari'ah governance system in IFIs. The findings of this study will provide useful information on the framework and practices of Shari'ah governance of IFIs in Malaysia, GCC countries and the UK by emphasizing the following aspects:
A study on the design and implementation of the Shari'ah governance strategy in Malaysia, GCC countries and the UK;
There must be a comprehensive Shari'ah governance framework at the institutional, national and international level;
To strengthen the existing Shari'ah governance framework through comparative study of the practices in Malaysia, GCC countries and the UK;
The role of the regulator or authority in improving the standards and best practices in inculcating sound and effective Shari'ah governance; and
Amplifying the roles of Shari'ah board practices in Malaysia, GCC countries and the UK and identifying the best practices for policy adaptation.
1.7 Scope of Research
The scope of this study is limited to Shari'ah governance of IFIs or institutions that offering Islamic financial product and services in Malaysia, GCC countries (Kuwait, Bahrain, UAE, Saudi Arabia and UAE) and the UK. The study excludes Oman as one of the case countries in the GCC region, since the government of Oman has resisted implementing the Shari'ah-compliant banking for political reasons. This research focuses on the framework of Shari'ah governance of these three respective jurisdictions from three different regions, as they provide three distinctive models and approaches. The research attempts to explore the extent of Shari'ah governance practices by analysing systematically the empirical results of the research in which its findings may provide certain essential guidelines of strong and effective Shari'ah governance system.
1.8 Outline of Research
Corporate governance is one of the vital parts of any corporation development as it plays a role to design and promote principles of fairness, accountability and transparency. It seems that the western concept and principles of corporate governance is very much similar to Islamic perspective and in fact highly commendable in Islam, despite of the fact that they stem from 2 different epistemological orientation. In the context of IFIs, a concept of corporate governance plays a crucial part in ensuring its development and more importantly fulfilling the objectives of the firm within the ambit of maqasid Shari'ah. In this regard, corporate governance in IFIs needs another layer of governance namely Shari'ah governance to address the issue of Shari'ah compliancy.
The literature seems to suggest that the existing Shari'ah governance framework needs further enhancement and improvement in order to reinforce the development and growing of IFIs. This brings into focus the measures and efforts that need to be taken to strengthen the credibility of IFIs through enhancing Shari'ah governance framework. This research attempts to study on the framework of Shari'ah governance system in IFIs and its actual practices in Malaysia, GCC countries and the UK. The research consists of 10 chapters which are divided into 4 parts. Part 1: Theoretical Concept of Corporate Governance, Part 2: Theoretical Concept of Shari'ah Governance, Part 3: An Empirical Result of the Research and Part 4: Discussion, Recommendations and Conclusion.
Part 1 of the study comprises of three chapters. Chapter 1 mainly presents an overview of the study, objectives, scope, significance, research questions, research methodology and statement of problems of the research. It outlines the whole research direction and the essence of the study in the area of Shari'ah governance. Chapter 2 discusses a conceptual framework of corporate governance from western perspective. This includes conceptual definition, roles, models and institutions of corporate governance particularly within the context of financial services sector. A reference will be made to famous western academic concept of corporate governance namely 'Shareholders value' and 'Stakeholders value' models. Chapter three provides a comprehensive analysis on the concept and theoretical context of corporate governance from Islamic perspectives. This chapter briefly analyses a few models of corporate governance in Islam and explains its fundamental principles in the context of financial services industry.
The discussion on the conceptual definition and theoretical framework as well as comparative overview of corporate governance from both conventional and Islamic perspectives in chapter 2 and 3 is very important for purpose of enlightening the relevancy of Shari'ah governance as part of the corporate governance in IFIs. Faith-based epistemology of corporate governance in Islam which is inclined towards stakeholder-oriented system requires additional measure for IFIs to address specific issues pertaining to Islamic rules and principles in the form of Shari'ah governance.
There are 2 chapters in Part 2. Chapter 4 constructs a theoretical concept of Shari'ah governance whereby it discusses conceptual definition of Shari'ah governance, roles and models of Shari'ah board, development of Shari'ah governance system and its process and guidelines. The research also highlights issues and challenges pertinent to Shari'ah governance system as practiced by IFIs in cross border jurisdictions. Chapter 5 focuses on the regulatory frameworks of Shari'ah governance system in Malaysia, GCC Countries and the UK. The study identifies 5 Shari'ah governance models in the context of regulatory perspective.
Part 3 presents empirical result of the study and consists of four chapters. Chapter 6 elucidates the research methodology used as to how the study is conducted and the findings are derived. The study employed mixed method approach as research strategy namely a combination of quantitative and qualitative research method. A primary data is collected through interviews and survey via questionnaires and secondary data is generated through literature review and unobtrusive research method. Descriptive, interpretative and content analysis method of analysis are used in analyzing the data and sources available. Chapter 7, 8 and 9 distinctively impart the empirical results of the study. Chapter 7 provides an analysis of the questionnaires, chapter eight presents the empirical result of the semi-structured interview and chapter 9 elucidates the extent of disclosure of Shari'ah governance practices via analysis of the annual reports, financial statements and websites.
Part 4 provides the overall findings, policy recommendations and conclusion. Based on the research findings derived from the empirical study, chapter 10 offers detail specific policy recommendations that derived from the overall research findings for purpose of enhancement and improvement of Shari'ah governance. This chapter concludes the study by summarizing the whole research findings, to what extent its contribution and highlighting research limitations.
Conclusion
The aim of this research is to engage with the theoretical and empirical study on the extent of Shari'ah governance practices of IFIs in Malaysia, GCC Countries and the UK. The study emphasizes on the regulatory and non-regulatory aspects of Shari'ah governance and these include Shari'ah governance approach, regulatory and internal framework, roles of Shari'ah board, attributes of Shari'ah board with respect to independence, competency, transparency and confidentiality, operational procedures and assessment of Shari'ah board. With significant numbers of Shari'ah boards in numerous IFIs in Malaysia, GCC countries and the UK, undeniably that there are distinctive models and practices of Shari'ah governance in these 3 jurisdictions. This diversity is actually reflecting the beauty and blessing of Islam because it provides an opportunity to study comparatively the Shari'ah governance practices with purpose to identify gaps, shortcomings, weaknesses and highlight the best practices for possible recommendations.
It is a strong belief that some common elements that underlying and promoting good governance and best practices are fundamentally to be drawn to facilitate the creation and optimization of a healthy and viable environment for Shari'ah governance without impeding further growth of the industry. Effective Shari'ah governance is essentially adhering on its essential element of participatory, transparent and accountable. These elements are embedded in Islam and therefore become an integral part of corporate governance framework in IFIs. Consequentially, sound Shari'ah governance framework requires involvement of all stakeholders, the government, the industry associations, the shareholders, the directors, the management and other persons relevant to the business. This research argues that with findings, solutions and recommendations from in depth study on this area will contribute something significant towards developing good and effective Shari'ah governance system. Constant enhancement on the framework is necessary to ensure optimal Shari'ah governance in IFIs.
