Who makes the rules for Islamic Finance?

Who makes the rules for Islamic Finance?

Islamic finance offers products and services that comply with Islamic law (Sharia) and often the question that comes up is who decides what is and is not sharia-compliant. Also, what mechanisms are existing to enforce those judgments?

There are several options a bank can utilize to keep check of these rules

Sharia Supervisory Boards:

• Generally, each Islamic finance institution has a sharia supervisory board (SSB). This board is composed of at least three jurists. These jurists although paid by the bank, act as independent consultants and are involved in both consultative and regulatory aspects. They verify operations, answer the staff’s questions, advise on charity contributions (zakat), and certify products
• The Sharia Supervisory Boards decide what is allowed (halal) or forbidden (haram) based on the two main sources of Islamic law; the Quran and the Sunnah; or what Prophet Muhammad reportedly said and did during his lifetime. Board decisions are taken by a majority vote and are binding on the bank.
• These SSB members are religious scholars who specialize in Islamic jurisprudence. They don’t need to be Muslims only. In countries like the UK, some non-Muslim experts have studied and specialized in this matter extensively.
• Over the past decade, Islamic finance has rapidly expanded across the world, and finding qualified people to sit on SSBs has become challenging. In the world of Islamic finance, reputation is important and sharia non-compliance can be extremely fatal to a bank

Sharia-Compliance Consultancy: A Juicy Business:

• At the international level, two supervisory bodies are created for Islamic finance. They are the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Malaysian Islamic Financial Services Board (IFSB).
• These bodies collaborate with institutions such as the IMF or the World Bank to promote sharia compliance globally. The AAOIFI sets basic standards for the Islamic finance industry while the IFSB issues recommendations based on risk assessment.
• In Bahrain and the United Arab Emirates, AAOIFI standards are mandatory but, in most countries, their standards and recommendations are not binding. If a bank doesn’t comply, there are no sanctions. It is up to each independent country’s government to enforce certain rules through their central banks and impose those rules on sharia boards.
• In all countries except for Sudan and Iran Islamic finance exists alongside conventional banking. For Islamic banks, this means navigating a dual regulatory framework. This means the country follows the country’s laws and regulations as well as sharia compliance.