Basically, Islamic finance provides products and services which comply with Islamic law (Shariah). This article will go on to describe who identifies what is and what is not considered Shariah-compliant, as well as who decides what mechanisms are applied to enforce those judgments? It goes on to further explain who enforces the rules for the Islamic Financial sectors.
Shariah Supervisory boards
Remember, every Islamic finance institution holds a Shariah supervisory board (SSB). And the board includes at least three jurists. These jurists are paid by the bank but act as independent consultants. Their role is both consultative as well as regulatory. They are supposed to answer the queries of staff members and give valuable advice on charity contributions (Zakat), verify operations and certify products.
The board decides what is allowed (halal) or forbidden (haram) based on the two main sources of Islamic law- the Quran and the Sunnah or what the Prophet Muhammad (swt) has been reported to say and did during his lifetime. It is important to keep in mind that board decisions are based on majority vote and binding on the bank.
The board members are typically religious scholars who specialize in Islamic jurisprudence. Not only this, they can be non-Muslim experts who have studied such matters in Western countries like the UK. The Islamic Finance has expanded all across the globe over the past 10 years. Spotting qualified people to sit on SSBs has become a difficult job. In the era of Islamic Finance, reputation plays a vital role and Shariah non-compliance can affect banks.
How Sharia compliance consultancy a good business?
There is a large number of private companies opening up in the past few years, providing Shariah compliance services or consultancies. Clients of such companies are basically Islamic banks but also conventional lenders as well as companies looking forward to developing products or acquiring certifications. It will let them tap into the Islamic market.
Consulting firms have a group of Islamic scholars who act like an externalised Shariahboard. The board provides guidance and issuesIslamic rulings (fatwas) in exchange for a fee.
Central Banks and International Standards
On international grounds, there are two supervisory bodies for Islamic finance including the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Malaysian Islamic Financial Services Board (IFSB).
Basically, the bodies collaborate with institutions like the IMF or the World Bank to promote Shariah compliance globally. Moreover, the AAOIFI sets basic standards for the Islamic finance industry. As far as IFSB is concerned, it issues recommendations based on risk assessment.
As a whole, Finterra is conscious about the sensitivities about Shariah compliance and has formed a collaborative agreement with the international Shari’ah Research Academy for Islamic Finance (ISRA) in the areas of Islamic FinTech, Financial Instruments, Shariah compliance, Financial Services Act and regulatory framework.
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