Guide to corporate governance in Islamic banks — Part 1

In-Depth Analysis

Having concluded the discussion on profit distribution between the Islamic bank and its depositors, the series moves to corporate governance in Islamic banks. Corporate governance in Islamic financial institutions has a unique dimension compared to conventional banks — the presence of the Shariah Supervisory Board (SSB). The Shariah board is an independent body of specialized jurists in Islamic commercial jurisprudence (Fiqh Al-Muamalat). Its role includes: (1) Approving all new products and contracts for Shariah compliance before launch, (2) Reviewing existing products periodically, (3) Issuing Fatwas (religious rulings) on specific transactions, (4) Overseeing the bank's operations through Shariah audit, and (5) Reviewing the bank's profit distribution to depositors. The governance structure typically includes: the Board of Directors (responsible for strategy and oversight), the Management Committee (responsible for day-to-day operations), the Shariah Board (responsible for Shariah compliance), the Internal Shariah Audit team (responsible for ongoing compliance monitoring), and External Auditors (responsible for financial audit including Shariah compliance reporting). This multi-layered governance structure provides stronger investor protection than conventional banking in many respects. The Shariah board acts as an additional check on management decisions, particularly those involving risk-taking and product design. Management cannot introduce new products or modify existing ones without Shariah board approval.