Today, Islamic Banking is recognized by different names like interest-free Banking, ethical banking, participation banking, and etc. Many of the products offered by Islamic banks are quite similar to that of conventional banking, but there are some norms which are exclusive to Islam. Literature on Islamic banking and finance runs into many volumes. Moreover, researchers, bankers, academicians, and others are making efforts to cope with the challenges faced by Islamic banks and to overcome the same by bridging the gap that Islamic banking has been witnessing from the start.
This paper aims to shed light on the Shari’ah related issues of the Islamic financial institutions (IFIs) particularly in the context of global financial markets and to see the various obstacles facing IFIs. This paper will also explore how Shari’ah monitoring varies from country to country, and also focuses on the initiatives taken by Indian Shari’ah scholars who are still waiting for Islamic banking to take shape in their country.
Although Islamic banking is emerging as one of the pillars of the global banking system, this fact did not yet earn recognition among the top fifty standard global commercial banks. Even some renowned scholars consider it to be an infant, and that infant has to pass through many growth stages like teething, stumbling and so on before walking firmly on its feet. As the industry continues to grow at an unprecedented rate, naturally, this has led to various approaches in different areas of the industry.
Shari’ah issues related to Islamic finance are still controversial in nature, as there is no similarity of opinions among the scholars and jurists on key issues like Tawarruq, Murabaha, Sukuk, and etc. After observing the functioning of various Islamic banks in different countries, it appears that similar investment products and schemes are interpreted differently mainly because of either the maslak of the jurist or socio economic conditions of those particular countries. In this respect it can also be seen that what Arab jurists consider most appropriate to Shari’ah guidelines is different in interpretation and practice in the south East Asian region such as Malaysia and Indonesia. Additionally, in a secular environment, say for example in the case of India, we find that the approach is somewhat related to the very typical nature of the Indian understanding of Islamic finance for the Muslims in the country who are governed under the secular laws.
At present there is no ultimate authority or a single organization that governs the Islamic financial industry. There are no designed set of rules and guidelines regarding Shari’ah interpretation. Generally, Islamic banks have their own boards which normally consists of a number of Shari’ah scholars who are well versed with Shari’ah and having some knowledge regarding finance. It has become a common practice for Islamic banks to appoint their own Shari’ah board made up of Shari’ah scholars. Nevertheless, since expertise in these matters is still relatively scarce in some countries, different Islamic banks often share the same scholars. Still, there remains the issue of different interpretation of existing Shari’ah rulings. The existence of various sects in Islam and the fact that each sect has its own authority or body that provides guidance and interpretations on Shari’ah issues makes things more complicated. Differences do arise and exist between countries and regions. For instance, Islamic financial restrictions are much more liberal in Malaysia compared to the Middle East where the financial regulations have been applied more strictly keeping in view that the need for a single authority is very essential in Islamic banking Industry because the purpose is to ensure that the financial institutions operate in conformity with Shari’ah needing a number of jurists who provide clarification in regards to any question that the financial institutions may have (Usmani, 1998).
One of the world’s most respected scholars, Sheikh Nizam Yaquby, described in a recent interview the challenge of having a very limited pool of Shari’ah advisors. According to Sheikh Yaquby there are about 60 scholars in the world qualified to advise banks involved in Islamic finance. This number is not even sufficient to fill the demand in the Middle East. Therefore, one way banks are overcoming this shortage is by hiring scholars and advisors who are already performing their duties in other organizations. In recent years there has been an increasing trend towards the creation of Shari’ah advisory firms which offer services such as Shari’ah audit/review, although they can not be considered as an alternative to a proper full-panel Shari’ah board.
MAJOR BODIES OF SHARI’AH SUPERVISION
Shari’ah advisors are the backbone of the industry without which the integrity of the whole industry will be at stake. Today; there are three major bodies which provide international Shari’ah governance: the Accounting and Auditing Organization of Islamic Financial Institutions AAOIFI, the Shari’ah Board and the (Organization of Islamic Countries) OIC Fiqh Academy. The former comprises 14 scholars representing the AAOIFI members, with each serving a four year term. They have issued Shari’ah standards for most of the major Islamic contracts, which has aided convergence. The OIC Fiqh Academy was inaugurated in 1988 before AAOIFI was founded, and considers a wider range of issues, most recently Tawarruq. The (Islamic Financial Services Board) IFSB’s main objectives are to address systematic stability and various governance and regulatory issues relating to Islamic financial industry. The IFSB took on the challenge and started working in the areas of regulation, risk management and corporate governance.
Although efforts towards achieving harmonization have a strong basis and foundation in the AAOIFI Shari’ah standards, further uniformity is required bearing in the mind the size of the industry and the need for sustained growth based on a (consistent) model. This not only plays a critical role in the governance and development of Islamic financial institutions but is also essential and critical to the expansion of the industry as a whole.
MODELS OF SHARI’AH ADVISORY SERVICES
Interestingly, the case of Islamic banking and finance in the Muslim world differs from country to country and this reflects the political and economic situation of that particular country or regime. Say for instance, in a country such as Qatar and Kuwait, there is no Shari’ah advisory council at their central banks that is considered as final authority for solving the Shari’ah related issues. To the contrary, Malaysia, Pakistan, Bahrain, and others are having their own Shari’ah advisory councils at the central banks. These advisory councils at the central banks are supposed to be supreme advisory caretakers of Islamic banks, financial Institutions and investment companies. Any adverse situations related to Shari’ah supervision are referred to the Shari’ah Advisory council, whereas in Qatar, adverse situations are being handled by the ministry of Awkaf and Islamic affairs as a Shari’ah Advisory council at the central bank does not exist.
In Indonesia there is a National Shari’ah board authorized to issue fatawas concerning product services and operation of Islamic banks. In Sudan, the Shari’ah high supervisory board is responsible for fatawa, contract templates, and arbitration relating to Islamic legal aspects, training, research, lectures, and seminars.
Due to not having a single authority or organization the presents models of Shari’ah advisory services not only effects the Shari’ah supervision but also exposes financial institutions to a number of risks such as fiduciary, reputational and Shari’ah risks and subjects them to transparency issues.
History of Islamic finance in India goes back to Shah Wali ullah Dehelvi, Sir Syed Ahmad Khan, Allama Iqbal and among the Ulamas can be included Maulana Maududi and his contemporary scholars whose thoughts during the middle of 20th century were mostly concerned with the theoretical and ideological aspects of Islamic finance. However, the professional Muslim economists came out since the early 1960s with Prof. Uzair Ahmad and Muhammad Nejatullah Siddiqi’s models of banking without interest. Their exercises were to bring out an alternative to the interest-based banking system, especially keeping in view the fact that Indian Muslims are aware of the Shari’ah and they regard interest as equal to Quranic riba. Interestingly before professor Siddiqui’s model of interest free banking, the Indian Ulema and scholars were also of the view that bank interests are not like the Quranic riba.). In particular, M. Nejatullah Siddiqi of the Aligarh Muslim University, India, examined the issues related to eliminating interest from the financial system and demonstrated as how interest can be eliminated from modern commercial banking. He focused on the modes of financings and his latter writings along with his other colleague, Dr. F. R Faridi, paved the way for understanding the monetary and fiscal issues of Islamic financial systems in the context of the current situation.
However, in recent years, the academic discussions on Islamic banking and finance are more focused on the monitoring of Shari’ah-compliant products in conventional financial institutions which are basically the outcome of the global expansion of Islamic banking. Another important factor is that India is now considered to be the biggest potential market for Islamic investments in the coming decades mainly because a large segment of the Muslim population in India is inclined to Shari’ah-based investments. There are two Shari’ah Boards in India: TASIS (Taqwa Advisory Shari’ah Investment Services) and IIFM (Islamic Investment Finance Board) that are actively engaged in this area. TASIS is meant to help Indian Corporates and entrepreneurs realize their commercial potential while following Shari’ah principles in the truest sense. On the other hand, the Islamic Investment Finance Board (IIFB) is an independent and non profit organization governed under the leadership of Maulana Mohammad Wali Rahmani, Secretary of All India Muslim Personal Law board. It consists of Aalims from across the country. The primary responsibility of the board is to ensure that all the Islamic Financial products made are Shari’ah-compliant. The work of IIFB is basically supervisory in nature to guide and advise the financial corporation regarding Islamic investment and finance including the prospects of Islamic Banking in India. Shari’ah scholars are also actively keeping eyes on what is happening around the world and making efforts to bring the Islamic banking industry to India.
Shari’ah board requires greater harmonization and uniformity. Religious scholars are now tending to specialize in Islamic economics and financial principles in order be more efficient and lead to optimal governance structures. This in turn is expected to ensure that Islamic financing is a viable option in the long run. It can also be seen that the different Models of Shari’ah advisory services in different countries lead to innumerable risks. In countries where Shari’ah authority is not available, reputational and Shari’ah risks are higher. However, this can be overcome by bringing people together from around the world so as to make possible consensus on the global practices.
ABOUT THE AUTHOR
Kashif Hasan Khan is a Research Fellow at the Center for West Asian Studies, Jamia Millia Islamia University, New Delhi, India; He can be reached at Kashif_islamicfinance@yahoo.com
 Mohammed Shaukat Malik, Ali Malik and Waqas Mustafa (2011), controversies that make Islamic banking controversial: An analysis of issues and challenges, American Journal of Social and management sciences, vol 2(1), p. 41-46
 Posted on Kasım, 4th April 2010, paper available at http://www.kirasertifikasi.com/islamic-finance-outsources-scholars%E2%80%99-supervision-to-grow/
 Hannie Van Greening, Zamir Iqbal (2008), Risk Analysis For Islamic Banks, World Bank Publication, p.192