Shariah governance practices in the global Islamic finance industry

Islamic finance is still growing at a double-digit pace, making new inroads in the MENA region and Africa. Countries adopting Islamic finance have embarked on developing legal and regulatory frameworks to ensure compliance and good governance. Shariah governance frameworks (SGFs) are of a unique nature as they ensure full Shariah compliance by Islamic financial institutions.

Review of 2022
Financially, 2022 recorded a rather unwavering growth despite the aftermath of COVID-19. With less regulation for the year, regulators embarked on managing the systemic risks to ensure financial stability. Governance-related measures were initiated by central banks such as the granting of moratoriums to achieve optimum levels of fairness to individuals, SMEs and corporations. However, a few regulatory consultative initiatives were launched by standard-setters, central banks and capital market authorities across several jurisdictions.

In March 2022, the IFSB and AAOIFI circulated an exposure draft (ED) on the SGF for institutions offering Islamic financial services. The draft sought industry feedback on its content that aims to solidify a sound and effective SGF, provide minimum requirements and best practice examples to improve the quality of Shariah governance in institutions offering Islamic financial services, promote public confidence and enhance the harmonization of Shariah governance structures and practices across jurisdictions.

The ED adopts a principle-plus-rule approach that provides a comprehensive set of Shariah governance practices for implementing each principle. Key issues purported to be endorsed include the establishment of a Central Shariah Board, a mandatory external Shariah audit, specific governance considerations for Islamic windows and a limit on the number of Shariah supervisory board membership globally to only eight.

In March 2022 also, the central bank of Malaysia issued a discussion paper looking into the possibility of incorporating the essence of Ta’awun (cooperation) in Takaful products, offerings and operations. One of the key governance issues highlighted is the need to emphasize the contractual terms that do not give rise to a conflict of interest to the Takaful operator as the Wakeel (agent) in managing the Takaful fund on behalf of Takaful participants.

For corporate governance purposes, the discussion paper emphasizes on the ‘Fairness to Contracting Parties’, which entails clear and effective communication to Takaful participants on the wider scope of Ta’awun.

In January 2022, the ‘Guidelines for Shariah Advisers’ issued by Securities Commission Malaysia became effective. The guidelines aim to streamline a number of practices, namely the registration requirements for both local and foreign Shariah advisors and the fit and proper criteria applicable to Shariah advisors. The guidelines emphasized, among other things, the need for a Shariah advisor to have adequate arrangements in place to identify and effectively manage or mitigate conflicts of interest.

In the MENA region, the regulators did not issue any new Shariah guidelines in 2022. However, initiatives to enhance Shariah governance practices are noticed at the level of institutions dealing with the capital market. In March 2022, the Capital Market Authority of Saudi Arabia issued a consultation draft outlining the Shariah governance guideline for institutions providing Islamic capital market products and services. The draft aims to organize the responsibilities of the board of directors, the management and Shariah committee, and the provisions of the Shariah committee’s independence and its organizational affiliation.

Lastly, in 2022, the State Bank of Pakistan emboldened its SGF with the official adoption of four AAOIFI Shariah standards made mandatory for Islamic financial institutions to apply. These are Salam, Istisnah, combination of contracts and irrigation partnership which have been added to the existing regulations on Islamic finance, invoking penal action on Islamic financial institutions that do not comply.

Preview of 2023
SGFs in 2023 will not be very much different from previous years. The new IFSBAAOIFI SGF is expected to gradually impact the Islamic finance industry if taken seriously. However, the new framework will mainly be embraced by developed Islamic finance markets. For some developing markets, the framework will be used as a main reference for their respective SGFs.

On the other hand, Islamic finance will be forced to tweak some of its governance practices to accommodate digitalization and fintech solutions. With Islamic digital banks planned to be launched, issues of disclosure, transparency, the rights of the contracting parties using smart contracts and robot advisors will be the new governance issues to be debated. This will require all stakeholders to develop their capacities in the modern Islamic fintech ecosystem.

The SGF is developing in tandem with the development of Islamic finance in several jurisdictions. Islamic finance standard-setters such as IFSB and AAOIFI are consolidating their efforts to help regulators fully adopt the new SGF or use it a reference to adopt best practices of the SGF. The adoption of digitalization and fintech solutions are expected to pose new challenges to governance, especially Shariah governance practices in terms of realizing the Shariah requirements of Islamic financial products and services.

Prof Dr Younes Soualhi is a senior researcher fellow at ISRA RMC (INCEIF University). He can be contacted at [email protected]

*This article first appeared in IFN Annual Guide 2023 (

Share this post