Board of Islamic Banking are binding to all RF banks in Malaysia.
Then, at the individual bank level, each bank appoints its own Shari’aa
Supervisory Committee to ascertain compliance of the bank operations
with the rules set by the Central Bank’s Shari’aa Board guidelines. This
approach saves a lot of confusion and conflicts within different Shari’aa
Boards. The involvement of the Central Bank adds credence and weight
to the rulings. In addition, because the Shari’aa Board is operated and
supervised by the Central Bank, there is no potential for conflict of in-
terest, because the individual banks are not paying their own hand-
picked scholars for their services.
2.The other approach is to allow each bank to appoint its own Shari’aa
Board. The implementation of this approach has created a lot of con-
fusion and conflicting opinions among the scholars in each of the Is-
lamic banks. It also creates an implicit uneasy feeling of conflict of
interest, because the bank pays the salaries of its Shari’aa Board mem-
bers. This approach has also created a large demand for the limited
supply of RF Shari’aa scholars available. The net result has been the
appointment of some of the ‘‘superstar scholars’’ on the Shari’aa
Boards of more than one bank. I know of scholars who serve on the
Boards of more than 50 Islamic banks. This creates another conflict
of interest situation, because these scholars are exposed to the inside
information of many competing banks. This approach is used mostly
by Islamic banks in the oil-rich Gulf countries and in some Asian
countries (except Malaysia).Concerns of Western Central Bankers and
Bank Regulators Regarding Shari’aa Boards
This important issue is very sensitive, and it created some serious concern
in the many efforts invested in trying to implement RF banking and finance
in the West. There are three reasons for the concerns:
1.In most Western societies, especially in the United States, the govern-
ment and its departments operate with a firm belief in the separation of
church and state. Operating a bank with a formal Board that has the
mission of implementing the laws of a certain religion may be a bit sen-
sitive, especially with consumers who subscribe to other religions,
which may result in religious discrimination disputes that may lead to
messy law suits.
2.The existence of two boards in one bank, with one board having appar-
ent superiority of control over the other, may create a serious operating
conflict that could have a negative impact on the bank’s safety andShari’aa 79