Sharia Boards and Sharia Compliance in the Context of European Corporate Governance

Islamic Finance has been growing at annual double-digit rates for about 40 years although even in conservative Islamic countries the Sharia with its prohibition of interest (ribâ) is not directly applicable law. Islamic Finance is voluntary and encompasses all kinds of financial services that are conducted without breaching the rules of the Sharia, although the contract itself is subject to a secular (national) jurisdiction. The paper analyses the coexistence of secular and religious law in the context of Islamic Finance and focuses on Sharia Supervisory Boards. These Boards, generally composed of three Sharia Scholars, proof to investors that their business conducts of an Islamic financial institution or at least their financial products are Sharia-compliant. Metaphorically speaking, Sharia Supervisory Boards have become a 'transformational conduit' between the religious laws and the investor, who has chosen to adhere to its principles, although there is no obligation for him to do so in a secular jurisdiction.The article analyses the most important functions of Sharia Supervisory Boards (SSB) as there are: the certification, the supervisory and the advisory function. Afterwards it will be shown, that Sharia Supervisory Boards can be embedded into the European understanding of Corporate Governance, if the management of the Islamic financial institution remains independent. Other questions in the context of Corporate Governance like the independence of the SSB from the Management or conflicts of interests by dual mandates in a SSB will be discussed as well. Besides the external SSB Islamic financial institutions set up an internal sharia review (Sharia Compliance Department). It will be discussed whether this internal body can be integrated into the regular Compliance Department.Since there is no uniform interpretation of the Sharia, there is a risk that the Sharia-conformity of a product will be contested (Sharia Risk). Therefore will be analyzed whether it is appropriate if either the investor or the bank/issuer are required to bear the entire risk of non-compliance unilaterally by themselves. It will be discussed if prospectus liability is applicable and indemnification clauses are valid