Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Way Forward 473Whichever option is taken, ensuring Sharī´ah compliance requires much more input bythe banks themselves and the regulators. This refers to the need for full-fledged Sharī´ahdepartments in all IFIs, effective internal Sharī´ah controls and Sharī´ah inspection of Islamicbanks’ operations. The banks operating “Islamic windows” may be required to establishstand-alone Islamic banking branches in place of “windows” to conduct business under theguidance of Sharī´ah monitoring.Another important aspect is that Sharī´ah boards/advisors should supervise, not onlyadvise, the activities of Islamic banks in order to ensure Sharī´ah compliance in all respects.To this end, they should finalize the model agreements and application procedures for themodes of financing and try to ensure that banks follow them in all their transactions, inletter and spirit. A passive role, whereby they are limited to approving the products orprocedures and the applications are left totally to the banks, opens the door to interest in thegarb of asset-based transactions. The modus operandi adopted in many cases lacks Sharī´ahinspiration and a slight change or negligence in any of the formalities may render thetransactions non-Sharī´ah-compliant. Therefore, the experts deem it necessary that Sharī´ahboards should thoroughly inspect, at least once a year, the Islamic banks’ activities.For Sharī´ah-related inspection of operations of the IFIs, the following three options havebeen suggested, with the scale of preference in ascending order: 101. Sharī´ah-related inspection by central banks themselves.2. Inspection by specially created Sharī´ah audit firms working in the private sector.3. Inspection by external CA and audit firms.But this order of preference might be different in different jurisdictions. In countries wherethe central bank’s inspection team is competent, professionally trained and well-equipped,the first option might be the best. All depends on the expertise and integrity of the auditorsand the audit firms. The regulators may decide on merit, with the ultimate objective ofeffectively checking that the IFIs do not undertake non-Sharī´ah-compliant practices.Box 18.1: Sharī´ah Compliance Framework Introduced by the StateBank of Pakistan• A Sharī´ah board comprising two Sharī´ah scholars and three experts in the areas ofbanking, accounting and the legal framework was established in the central bank inDecember, 2003. The board advises the central bank on modes, procedures, laws andregulation for Islamic banking to ensure Islamic banks’ functioning in line with theSharī´ah principles.• A Sharī´ah board or at least a Sharī´ah advisor has to be appointed by each Islamicbanking institution (IBI) as per fit and proper criteria approved by SBP’s Sharī´ahboard.• Each IBI has to conduct internal Sharī´ah audit at least once in a year.10 Chapra and Khan, 2000.