At a time when the global Islamic finance industry is debating whether Shariah advisory should be regulated and scholars restricted to advising only a small number of institutions, Malaysia almost in passing adopted on Jan. 1 a new Shariah Governance Framework (SGF) for Islamic financial institutions (IFIs) that supersedes the Guidelines on the Governance of Shariah Committees of IFIs introduced by Bank Negara Malaysia (BNM), the central bank, in 2004.
According to the Malaysian central bank, the primary objective of the SGF is to enhance “the role of the board, the Shariah committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment.”
One prominent international Shariah advisory to the Islamic finance industry, Muhammed Elgari of Saudi Arabia, who sits on several Shariah committees of such organizations as the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Dow Jones Islamic Market Indexes, and a number of banks, agrees that Malaysia’s Shariah Governance Framework for IFIs could become a blueprint for other countries to follow.
In an exclusive interview with the author, Elgari stressed that he can see the need for such a framework, which “most certainly” can be developed into a blueprint, even though he has yet to study the full details of the SGF.
Shariah advisory has been in the news in recent weeks following reports that the AAOIFI is in the process of drafting rules to regulate the shareholdings and the number of supervisory boards individual Shariah advisories can sit on. Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on multiple Shariah advisory boards, a practice which they claim could lead to conflicts of interest and is not consistent with best practice in terms of advisory.
Research by entities such as Funds@Work have added fuel to the fire, although the methodology of the research is not very detailed and transparent. According to Funds@Work, there are 1,141 overall Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the Top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.
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