Analysing the Role of Shariah Supervisory Boards in Islamic Financial Institutions

SSB (or in some Islamic financial institutions known as shariah committee), is one of the most important governance mechanism of an IFI to ensure compliance with shariah. Compliance with shariah is the distinctive characteristic of an IFI as compared to conventional financial institutions. Acknowledging this importance, the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) has provided standards on SSB, shariah review and internal shariah review under its governance standards (AAIOIFI, 1999). At present in line with shariah principles several Islamic financial institutions are engaged in product development activities globally to cater the needs of a wide range of parties. However, considering the essentiality for these institutions to innovate and operate within the ambits of shariah, need of the shariah supervision cannot be over stated. The safeguard to make Islamic financial institutions perform their dealings according to the Islamic laws comes when there is a legitimate control body in the institution. Hence, it is vital for such institutions to form a shariah supervisory board (SSB) comprising on fiqh al-muamalat experts to guide their transactions in accordance with the principles of shariah. Malaysia and several other countries have passed laws to govern the formation and functions of SSB. In fact, SSB undoubtedly forms the most important and influential entity in any Islamic financial institution.The paper in hand attempts to discuss these functions in detail and tries to shed a little light on established laws in Malaysia regarding regulations of SSB and operations of Islamic financial institutions