338 AN INTRODUCTION TO ISLAMIC FINANCE
of the rights of investors and entrepreneurs who have put their faith and trust
in the fi nancial institution to perform specifi c economic activities.
IFIs have created structures and processes that reassure stakeholders
on the conformity of all transactions and ensure compliance. A widely
adopted approach is to have internal or independent bodies certify compli-
ance with the Shari’ah. Each IFI has in - house religious advisers, collectively
known as the Shari’ah Supervisory Board (SSB).^27 In principle, the preroga-
tives of the SSBs lie in fi ve main areas:
(i) The certifi cation of permissible fi nancial instruments through a fatwa^28
(ex ante audit),
(ii) The verifi cation of compliance with the fatwa (ex post audit),
(iii) The calculation and payment of zakat,
(iv) The disposal of non - compliant earnings, and
(v) Advice on the distribution of income or expenses among the bank’s
shareholders and investment account holders. SSBs issue a report to
certify the conformity of all fi nancial transactions with these principles
and this is usually an integral part of the IFI’s annual report.
The role of Shari’ah boards in sound governance is critical — especially
in regard to consistency of application. It is common practice in the current
governance structure of IFIs to maintain a Shari’ah board or adviser for each
institution. However, duplication of effort, and the lack of standardization
and of competent Shari’ah experts make for ineffi cient decision - making pro-
cesses. Instead, a system - wide board of knowledgeable religious scholars,
who are also specially trained in Islamic economic and fi nancial principles,
would prove more effi cient and facilitate an optimal governance structure.
Such a board could work closely with regulators and supervisors to make
sure that effective monitoring and supervisory controls are devised to pro-
tect the rights of all stakeholders in accordance with the spirit of Islam.
The functioning of internal SSBs raises a number of corporate
governance issues, the fi rst of which concerns the independence of the SSB
from management. Generally, members of SSBs are appointed by the share-
holders of the bank, represented by the board of directors. SSBs report to
the board. Thus, they are employed by the bank, and their remuneration is
proposed by the management and approved by the board. The SSB mem-
bers’ dual relationship with the IFIs as providers of remunerated services
and as assessors of the nature of operations may create a confl ict of interest.
In principle, SSBs are required to submit an unbiased opinion in all matters
pertaining to their assignment. However, their employment status generates
an economic stake in the bank, which may have a negative impact on their
independence.
Intertwined with this there may be issues of confi dentiality because
Shari’ah scholars sit on the SSBs of a number of IFIs. This multiple member-
ship may be seen as a strength as it may enhance independence vis - à - vis a
particular IFI. However, as it entails access to proprietary information about