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Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services


Wafik Grais


World Bank

Matteo Pellegrini


Publish What You Pay (PWYP) Africa

November 1, 2006

World Bank Policy Research Working Paper No. 4054

Abstract:     
The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals' association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.

Number of Pages in PDF File: 38

Keywords: Banks & Banking Reform, Corporate Law, National Governance, Non Bank Financial Institutions, Governance Indicators

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Date posted: November 14, 2006  

Suggested Citation

Grais, Wafik and Pellegrini, Matteo, Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services (November 1, 2006). World Bank Policy Research Working Paper No. 4054. Available at SSRN: http://ssrn.com/abstract=940711

Contact Information

Wafik Grais (Contact Author)
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
Matteo Pellegrini
Publish What You Pay (PWYP) Africa ( email )
B.P. 1851, Quartier Bastos
Rue 1,761
Yaounde, Cameroon
South Africa
+237 2 20 3039 (Phone)
+237 2 20 5158 (Fax)
HOME PAGE: http://www.publishwhatyoupay.org
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