Guide to corporate governance in Islamic banks — Part 2

In-Depth Analysis

The Shariah audit function is one of the most distinctive features of Islamic bank governance. Unlike conventional internal audit which focuses primarily on financial accuracy and regulatory compliance, Shariah audit examines whether every transaction executed by the bank complies with the Fatwa and guidelines issued by the Shariah board. AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) has established comprehensive governance standards for Islamic financial institutions. These include standards on the independence of the Shariah supervisory board, the qualifications required for members, and the scope of their responsibilities. AAOIFI recommends that Shariah board members have expertise in both Islamic jurisprudence AND modern finance to ensure practical and informed decision-making. The qualifications debate: there is ongoing discussion in the industry about whether Shariah board members should be scholars with deep knowledge of Fiqh who also understand modern finance, or finance professionals with adequate knowledge of Shariah. The prevailing consensus, supported by AAOIFI, favors the former — scholars who understand finance — rather than financiers who understand Shariah. The independence of the Shariah board is critical. Board members should not have financial interests in the bank's performance that could compromise their objectivity. They must be free to reject any product or transaction that does not meet Shariah requirements, regardless of its commercial potential. This independence is similar in principle to the independence required of external auditors in conventional finance.