The Shari’ah Supervisory Board and the Practices of Islamic Banking Services Providers in Ethiopia

Shari’ah Board and its Necessity

A Shari’ah Board (SB), also can be called as Shari’ah Supervisory Board (SSB) or Advisory Board (AB), is an independent body of specialized jurists in fiqh al-mu'amalat (Islamic commercial jurisprudence). Nevertheless, the Shari’ah supervisory board can also include a member other than those specialized in fiqh mua’malat, but should be an expert in the field of Islamic financial institutions (IFIs) with the knowledge of fiqh mua’malat (AAOIFI)

Islamic banks and other banks that offer Islamic banking products and services should establish a Shari’ah Supervisory Board (SSB) to advise them on whether their products comply, and to ensure that their operations and activities comply with Shari’ah principles, because compliance with Shari’ah law is the underlying reason for the existence of Islamic finance.

These Boards, most of the time composed of three to six Shari’ah Scholars (Islamic legal scholars) versed in economic and financial matters including one chair and one general secretariat. (Jamaldeen (2012)) Furthermore, the AAOIFI principles state that “every Islamic financial institution shall have a Shari’ah supervisory board to be appointed by the shareholders in their annual general meeting upon the recommendation of the board of directors and shall consist of at least three members.

The bank should assured that the qualification of the board members that is their in-depth knowledge of Shari’ah h, integrity, familiarity and command of jurisprudence of transactions and interest in banking business. Shari’ah Supervisory Boards are used as 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.

In order to ensure the independence of the board, the members should not be the directors and hold any significant shares. The banks should safeguard the SSB members from illogical dismissal, like should require a recommendation from the board of directors and subjected to the approval of the shareholders in a general meeting for the case of their dismissal.

The functions of Shari’ah Supervisory Boards (SSB)

The Shari’ah Supervisory Board has the general duty of directing, reviewing and supervising the activities of the Islamic financial institution. In general, the of Shari’ah Supervisory Boards (SSB) have three most important functions. These are the certification, the supervisory and the advisory function certifies Islamic financial products as being Shari’ah h-compliant (i.e. in accordance with Islamic law)

1. The Certification function

This function is the most important function of the board. That is it certifies Islamic financial products as being Shari’ah h-compliant (i.e. in accordance with Islamic law). The Shari’ah scholars on the board examines the financial product and then issues a Fatwa (legal opinion), in which the board confirms or negates compliance with the Shari’ah h. Then, the Fatwas will often be published and made available to a wider public (by all means available)

2. The supervisory function

This is very important for Islamic banks as the name of the board for many institutions derived from this function of the board. The board will monitor the services, products and transactions of the organization to ensure that the business activities of the organization are in accordance with the principles of Islamic law. These are done based on the AAOIFI Shari’ah standards the Shari’ah related principles of the IFSB. For example, an Islamic bank is not allowed to invest haram businesses and companies that engage in unlawful business activities like alcohol or pork manufacturers.

3. The advisory function

The other important function of the board is the advisory function as it is a must to the management of the banks that offers Islamic products and services often seeks the advice of the Shari’ah Board before introducing a new product to the market, establishing new funds or developing a new investment policy. And hence, the Shari’ah Board indeed exercises the advisory functions. The Shari’ah Board may meet two to four times a year. Therefore, it raises the unavailability issues for ongoing consulting. For this reason, the IFSB in particular recommends the establishment of an internal Compliance Department in addition to the Shari’ah Board that can be responsible for the day-to-day questions of compliance with religious principles. Occasionally banks will solely rely on internal consultants. though these consultants often have a background in finance and be well versed in Islamic law, there is still a great difference to the Shari’ah Board. They are not legal scholars and therefore cannot issue a Fatwa. Most of the time, Shari’ah Boards and internal consultants coexist. But, when it comes to aspects of applicability of legal norms and the role of the “transformational conduit”, however, the external Shari’ah Board is the solely relevant institution.

Beside these major functions, the Shari’ah board has also other roles and responsibilities such as:

Calculating zakah payable by Islamic financial institutions;
Disposing of non-Shari’ah h-compliant income;
Consult on the sharing of income or expenses among shareholders and investment account holders;
The SSB issues reports (it may be quarterly, biannual, and annual) to certify that all financial transactions comply with the above-mentioned principles.
The board also provide proof to investors that the business conducts of an Islamic financial institutions or the financial products are Shari’ah h-compliant.

Qualification and Conflict of Interests

At first glance, the Shari’ah Board members’ expertise seems to be s significant requirement. They should have both a sound understanding of Islamic law and adequate knowledge in finance. According to the AAOIFI, the Shari’ah scholars should have good knowledge of Fiqh al-Muamalat (Islamic rules on commercial transactions). When we look at the boards of most Islamic banks, we can understand that the qualification of the board members have at least a degree in Shari’ah h, particularly in Fiqh Muamalat or Islamic jurisprudence from a recognized institution. The qualification in finance could require a degree in economics or finance or corresponding work experience.

Shari’ah advisers as defined by AAOIFI are specialized jurists expert in Fiqh al-Muamalat and entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance in order to ensure that the business activities of Islamic Banks and Conventional Banks that provide Islamic banking services are in compliance with Shari’ah rules and principles. The views of the Shari’ah adviser shall be binding in the specific area of supervision. The above definition indicates that Shari’ah advisers must have a good knowledge in Fiqh particularly in Fiqh al-Muamalat (Islamic rules on commercial transactions). This is important because Islamic finance is based on the underlying contracts discussed by the scholars under the purview of Fiqh al-Muamalat. In addition to the knowledge of Fiqh, it is also important for a Shari’ah scholar to understand the reality in the market so as to ensure that practical solutions within the parameter of Shari’ah are provided in order to address the issues in the market. The gap between the Shari’ah knowledge and market realities sometimes lead to decisions which are unrealistic and cannot be implemented on the ground.

The Shari’ah Supervisory Boards (SSBs) in the Context of Ethiopian Banks that provide Interest Free Banking Services

The business activities of Islamic banks should be continually supervised by the Shari’ah boards and confirm the business activities are Shari’ah h-compliant. Otherwise, the responsible controlling organ did not grant certificate of operations. But the challenge here in Ethiopia is that there is no such organ that have the authority to monitor and supervise the fulfillment of the requirements. Though the responsibility lies on the NBE, it did not made any progressive effort to manage the issues raised regarding Islamic banks in the country. The is no any established policy framework that promulgating Shari’ah law in financial transactions. Hence Islamic banking in Ethiopia faced with the challenge of ineffective supervisory framework. That is why there are no well-established Shari’ah Board based on the standards set by IFSI and hence we can say that the business is not working effectively. The banks that provide the services and the national bank of Ethiopia end up with contradicting issues instead of complementing each other.

The other major challenges that contribute for ineffective functioning of the SSBs is the shortage of Shari’ah scholars in Banks that provide the services as well as the National Bank of Ethiopia’s supervisors with the require knowledge. This if further strengthened by finding of many researched undertaken on the area in the country. Accordingly almost all of the Ethiopian banks that provide interest free banking services did not have well established Shari’ah board due to lack of highly regarded, learned scholars, who are authorities on Islamic banking, evaluate and scrutinize all the products and services (Kemal (2015), Kerima (2016), and Mohamed (2012))

Hence the Islamic banking industry in Ethiopia operates under the condition of some of the world’s most non prominent scholars, giving it a negative reputation for the soundness and dependability the business in the country. The did not have an agreement with the external audit firm, to ensure that all of our Islamic banking activities are consistent with the principles of the Shari’ah h. Accordingly, do not offer the full range of all the modes of financing available in Islamic banking practices. Thus, the Islamic banking service aims to collect funds from the customers. The lack of Shari’ah board and lack of supportive supervisory directive have created lack of trust and confidence on the wider community and negatively affect the image of the business and its development.

To overcome the problems the NBE should launch new regulating framework for Islamic banking because it cannot isolate itself from the global transformation in the financial system brought about by Islamic finance. More to that, there is a large market for Islamic banking institutions in terms of large number of Muslims who are ready to benefit from Islamic banking services. The establishment and development of Islamic financial institutions is advantageous to every economy because it enhances equitable distribute of income, operate interest free transactions, invest in only lawful investments and in real sector of the economy.

In conclusion, Islamic banking system is highly important for Ethiopia if the country wants to bridge the gap between the poor and the rich. Finally it is a must that the role of the NBE and that of the Shari’ah board should be structured in such a way that it adequately regulate and supervise Islamic banking activities as well as protects public interest in Islamic banking in Ethiopia with qualified persons in such areas.

Reference

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Alman M. (2012). Shari’ah Supervisory Board Composition Effects On Islamic Banks’ Risk-Taking Behavior. Bamberg University. Bamberg, Germany

Commercial Bank of Ethiopia. Addis Ababa University. Addis Ababa, Ethiopia

HAILU A. (2015). CHALLENGES AND PROSPECTS OF ISLAMIC BANKING FOR RESOURCE MOBILIZATION IN ETHIOPIAN COMMERCIAL BANKS. ST. MARY’S UNIVERSITY. Addis Ababa, Ethiopia

Mohammed K. A. (2016). Challenges on Interest Free Banking Services: The Case of

Olad M. M. (2012). Islamic Banking: Prospects, Opportunities and Challenges in Ethiopia. Addis Ababa University. Addis Ababa, Ethiopia

Shari'ah board. (n.d.). Retrieved Oct 2, 2018 from https://en.wikipedia.org/wiki/Shariah_Board/

Tuesday, April 23, 2019