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Shari’ah Scholars as an Independent Director: A Proposal

By: Ezry Fahmy

1.0 Shari’ah scholars in IFIs

Malaysian rules and regulations have spelled out several provisions in relation to the
establishment of Shari’ah Advisory Committee (SAC) in the islamic financial institutions
in Malaysia. The existence of Shari’ah Advisory Committee (SAC) or Shari’ah
Supervisory Board (SSB) is one of the most important governance mechanisms of an
Islamic Financial Institution (IFI) to ensure the Islamic Financial Institutions (IFIs) are
compliance with Shari’ah.

It is important for the SSB to understand their roles and responsibilities as well as the
process of how an SSB should reviews the performance of a given IFIs. The roles and
responsibilities of the SSB of IFIs as define by the AAOIFI connotes a greater duty of not
only endorsing and approving the Bank’s products but ensuring its compliance through
directing, supervising and importantly reviewing its operations. This actually has no
difference than what define by IBA 1983 whereby the function of the Shari’ah committee
is more than just an advisory role on the bank’s operation1. Thus the SSB are considered
to be responsible in most aspects of the bank’s operational.

The Shari’ah scholars who act as advisors grounded in endorsement of all products
and services of their respective IFIs, without whom the compliance of the product to the
Shari’ah would be questionable2. This critical role is indiscriminate to all financial
products, be it banking, takaful, capital markets, wealth management and so forth.
According to AAOIFI standard, Shari’ah advisers can be defined primarily as
"specialized jurists, particularly in fiqh muamalah and Islamic finance, entrusted with the

1
Mohd Hairul et. al.(2009) The Practice of Shariah Review as Undertaken by Islamic Banking Sector in Malaysia.
International Review of Business Research Papers. 5(1). p. 294-306.
2
Aznan Hasan. (2009) How Shariah boards add value. Retrieved on March 8, 2010 from
http://www.thefreelibrary.com/How+Shariah+boards+add+value.-a0212386367
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duty of directing, reviewing and supervising the activities related to Islamic finance to
ensure they 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".3

1.1 Role and responsibilities of Shari’ah scholars

As what explained above whereby the roles and responsibilities of the Shari’ah
scholars as SSB in respective IFIs has a lot to do with ensuring the operational side of
IFIs are Shari’ah compliance. Therefore, indirectly the Shari’ah advisor control what
do’s and don’ts in the IFIs operational sides and their authority in approving products and
services more or less determine the path of the IFIs in terms of growth and sustainability.
Consequently, there should be no chance for conflict of interest between the Shari’ah
advisor and the IFIs!

Another question mark that we feel important to raise is whether the endorsement
in the yearly annual report where the Shari’ah advisor claims that “we hereby confirm
that all the business activities fulfill the Shari’ah requirement”. Personally, we have a
doubt; because it lacks the criteria of being independent. Our premise is that, the Shari’ah
officer/advisor works in the organization, paid by the organization and where the one
who approves the many products offered by the bank. Therefore, it does not seem right to
have people from inside to make such claim. Even the financial reports are being
validated by an external auditor.

2.0 Comprehend the position of Independent director and Shari’ah Scholars

Analyzing such statement above indirectly questioning why it is in the first place
there is a need of independent director especially for Shari’ah scholars? As what
explained above whereby the roles and responsibilities of the Shari’ah scholars as SAC
in respective IFIs has a lot to do with ensuring the operational side of IFIs are Shari’ah

3
AAIOIFI, Accounting and Auditing Organization for Islamic Financial Institutions. (1999), Governance Standard for
Islamic Financial Institutions. No. 1 - Shari’a Supervisory Board: Appointment, Composition and Report.
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compliance. Therefore, indirectly the Shari’ah advisor control what do’s and don’ts in the
IFIs operational sides and their authority in approving products and services more or less
determine the path of the IFIs in terms of growth and sustainability. Consequently, there
should be no chance for conflict of interest between the Shari’ah advisor and the IFIs!

But currently, majority IFIs in the Islamic finance industry appointed the Shari’ah
scholars and pays them as advisor for the IFIs. Therefore, there is a direct relationship
between the Shari’ah advisor and the IFIs their working with. This kind of relationship
reflects that the Shari’ah Advisory Committee (SAC) as not totally independent as what
the bankers ought to be. Especially when such issues rise when in some cases like
products and services by Malaysia’s IFIs, which are often, deemed not Shari’ah
complaint in the more austere Gulf. These kind of issues being used by the critics as they
called ‘Fatwa Shopping’ where the bankers phone up a Shari’ah scholar that are willing
to give them a Fatwa to seal of approval, confirming the product is Shari’ah compliant by
offer them a sum of money4. Such claim analogically may be viewed as a glass of water
with half empty or half filled. But on the other side, this kind of case will happen as long
as the Shari’ah scholars are ‘attached’ with the respective IFIs.

3.0 Independent director in IFIs

The idea of having one of Shari’ah scholar as independent director in IFIs mainly
because to ensure there are sound policies, procedures and effective and efficient
monitoring systems with proper checks and balances can be done especially regards to
Shari’ah matters in IFIs operational process. An independent director can be explained
as5:
a) not been employed by the Company

b) not, and is not affiliated with a company that is an advisor or consultant to the
Company

c) not affiliated with a significant customer or supplier of the Company

4
John Foster. (2010). How Sharia-compliant is Islamic banking?. BCC News. Retrieved on March 23, 2010, from
http://news.bbc.co.uk/2/hi/business/8401421.stm
5
Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.22
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d) no personal service contracts with the Company

e) not affiliated with a non-profit organization that receives significant funding

from the Company

f) not employed as an executive of another company where any of the

Company's executives serve on that company's board of directors

g) not a member of the immediate family of an individual who is, or has been
during the past five years, employed by the Company

h) not a controlling person of the Company

In simple words, an independent director is one who is independent of management

and free from any business or other relationship that could interfere with the exercise of
independent judgment or the ability to act in the best interests of a listed company6. The
purpose of identifying and appointing independent directors especially the Shari’ah
scholar is to ensure that the board includes directors who can effectively exercise their
best judgment for the exclusive benefit of the IFIs, judgment that is not clouded by real or
perceived conflicts of interest.

In IFIs case, the business operational processes represent Islamic business

organization, it portrays the image of Islam, thus any actions or decisions have direct and
indirect impact towards the teachings and religion of Islam. By having a Shari’ah scholar
in as the independent director, the Shari’ah scholar can help the board to provides
expertise and guidance on conformance to the Shari’ah principles in all matters of the IFI
business operations.

Having a Shari’ah background person in the board of director and being independent
will give good impression to the public. A Shari’ah scholar is a person with good
reputation and character as well as possesses the necessary qualifications and expertise,
particularly in fiqh muamalah and Islamic jurisprudence, and has experience and/or
exposure in Islamic finance brings greater confidence from the public towards the IFIs.
6
Bursa Malaysia. (n.d). Corporate Governance Guide: Towards Boardroom Excellence. p.23.
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Stakeholder may feel relief if the independent director plays their important role as part
of corporate governance: automatically maintaining public trust and confidence in the
banking business.

4.0 Governance Framework: The way forward

Moreover, effective governance framework requires involvement of all stakeholders,

namely, the board, senior management, and Shari’ah advisors that properly structured
and complement each other in providing check and balances mechanism that strengthens
the corporate governance practices. A committed and knowledgeable board is a
cornerstone to an effective corporate governance system. Therefore having a Shari’ah
scholar on board would help the IFIs via the necessary skills and experience towards
achieving the IFI’s goals. This will eventually lead to a sound corporate governance
practices that later on will contributes to situation where risk taking activities and
prudence practices are appropriately balanced in the interest of stakeholders.

Besides that, an independent director comprises of Shari’ah scholar even only one of
them being selected should be seen from a brighter side, this is when the role of the
Shari’ah scholar as the Shari’ah Advisory Committee (SAC) as well as role as part of the
boards can be strengthen when the Shari’ah scholar could fully utilize knowledge that he
possess about market and industry. A dynamic mix of competent and diverse skill sets
coupled with an appropriate tone at the top of practicing and promoting legal-ethical
compliance and professional conduct are necessary ingredients for an effectively
governed board.

To conclude, the appointment of Shari’ah scholar as an independent director will

enhance the effectiveness of the board as the oversight body to oversee what the
management does. Hence it will also help the company not only be independent
according to the legislative but also independent in thought and action especially
regarding the Shari’ah matters which are the back bone of the industry.
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