Shari’ah Boards perform the all-important role of reviewing, approving, and overseeing the services and transaction of an Islamic bank. The boards consist of recognized scholars who have thorough knowledge of Islamic jurisprudence as well as Islamic law of financial transactions. Since Islamic banks have to operate in a financial world dominated by traditional banks, they have to demonstrate extreme care in keeping their operations in compliance with Shari’ah. The boards provide a proactive role in supervision of banks’ transactions for the purpose of Shari’ah compliance.
Currently, a vast majority of Islamic banking involves fixed return products such as Murabaha and Ijarah. Since fixed return products are close to interest based products, any carelessness on the part of the bank might allow an element of interest in the transactions thus rendering the whole exercise futile in terms of Shari’ah. It has been recommended for the Shari’ah Boards to review the bank transactions at least annually for Shari’ah compliance.
In case of Murabaha, the boards must ascertain that the transactions are trade transactions and no time value of money is involved. The Murabaha mark-up price once agreed must be retained regardless of when the payment is made. If Murabaha is rolled over to another Murabaha, any income this generated must be paid out to charity. Also, the Murabaha funds once released must not be used by the customer to earn interest elsewhere. This may necessitate direct payment to the supplier. The bank also must take the legal title of the product to make the transaction valid. It is the supervisory responsibility of the Shari’ah Board to ensure that these and other aspects of the legitimate Murabaha transaction are observed.
Another vastly used transaction in Islamic banking is Ijarah that also requires Shari’ah supervision. For example, the leased asset must legally belong to the bank during the term of the lease. If the transaction involves lease-to-purchase, the purchase must be exercised in a separate contract. Further, the bank as owner of the asset must bear the expenses of maintaining the asset. The rental payments must be only received once the customer has received the asset.
Similarly, all the financing modes used by the Islamic banks, like Diminishing Musharakah, Mudarabah, Salam, and Istisna’a must observe the Shari’ah rulings on the structure of these contracts. They must make sure that these are true profit and loss contracts and all parties share the results of the outcome of the business endeavor. Islamic banks also invest in equity markets. It is the role of Shari’ah Boards to ensure that all investment activities in stocks, Sukuk and other instruments are in compliance of Shari’ah. This would exclude investment in businesses involved in prohibited activities such as alcohol and tobacco products, pornography, most traditional financial services, amusement and recreational services, and companies with interest income and leverage beyond prescribed ratios. If such activities are unavoidable, Haram income must be determined and given out in charity.
Shari’ah Boards of Islamic banks are principally investigative bodies concerned with Shari’ah compliance of Islamic banks. But the Boards have a duty to go beyond that role of certifying bank operations. They have a bigger role of innovating and developing financial product to revive the just economic model of Islam.
The role of certifying financial transactions and conducting Shari’ah audits is essential for survival and functioning of the interest free banking system. Since Islamic banks operate in a secular economy, there are enormous points of interface with conventional banks. New situations arise to where questions could be raised about certain relationships with other banks might involve Riba. The Boards must be capable of understanding the complexity of today’s financial transactions and give Shari’ah ruling for their validity.
The Shari’ah Boards have the additional responsibility of growing the Islamic economy to fulfill the higher Shari’ah objective of socio-economic justice. Islam is a religion for all times and burden lies with the scholars to adapt the Shari’ah to new situations that did not exit in early Islamic period. The development of Islamic banking to date represents this ability of scholars to adapt to the new environment. Where at one time interest free banking was a novel idea, these concepts are now put into practice and many mega projects are being funded based on Islamic Finance concepts. It required the efforts of Shari’ah scholars and developers of Islamic finance to work with businessmen and entrepreneurs to create products and financing schemes that were different from the conventional finance and meet the Riba free requirements of Shari’ah. The emergence of Mudarabah, Musharakah, Murabahah, Ijarah and Ijarah Wa Iqtina as modern alternative means of financing was the result of past concepts applied to the modern world.
This is an ongoing challenge for Shari’ah scholars and developers of Islamic finance to grow their product offerings to encompass entire economic activity. The reemergence of the Islamic financial system has the potential to end the slumber of Muslims and provide a model of an economy based on justice for the modern world.
