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The supervision of the shariah law is considered vital in the Islamic financial institutions and all the acts and functions performed shall be consistent with the provided shariah law under Islam. These principles are supervised by a principal body called the Shariah Committee which is responsible to take care of the compliance of the Islamic financial institutions in providing the products and facilities. Shariah Committee is referred to as a body of persons who are entrusted with the responsibility of compliance of products and facilities provided by the Islamic banks like capital market, banking and takaful. Under the Islamic transactions and commercial laws, the Shariah committee has been defined as an independent body of specialised jurists who direct, supervise, review and approve the acts of Islamic financial institutions for the compliance of Islamic laws and principles. Discussing exactly the definition of shariah law, it has been stated that the definition of shariah law states that there are six foundations or elements in shariah compliance which is also termed as Halal investing. These elements are profit sharing, restriction on unjust gains and exploiting profits, prohibition on gambling, making investments in lawful activities only, taking care of moral values in every work and taking care of the successful and real economy.
It has also been observed that the shariah board has a very close connection and relationship with the Islamic financial institutions (IFIs) as the board is responsible for the approval and validity of the acts of the institutions as per the compliance of the shariah laws. Moreover, the board is also a representative of the ulama and has the authority of issuing Fatwa relating to the products and facilities provided and practised by the banks and other financial bodies. The shariah board considers people who are well versed with the shariah laws, jurisprudence and finance. Hence, it can be said as an element of corporate governance for Islamic financial institutions. The presented submission starts with the meaning of shariah compliance followed by the factors which have made the shariah compliance lucid. At last, the report how the shariah board is contributed towards shariah compliance and what duties and responsibilities it had followed in shariah compliance.
The meaning of Shariah compliance in the financial service industry means that the financial service institutions abide by the sharia laws and adhere to the requirements of sharia law provided under the Islamic religion. The investing of the funds shall comply with the shariah laws and it considers a part of multiple categories in responsible investing. It requires that the people in the Muslim religion invest their money responsibly and do not make an investment that is unethical and inconsistent with shariah. Further, there are two important principles of sharia compliance in respect of financial services and Islamic banking which is the sharing of profit and loss and the prohibition on collection of payment of interest from investors and lenders.
There are almost 300 banks and around 250 mutual funds that operate in compliance with Islamic principles. As per the report of Thompson Reuter in 2016, it has been projected that by the year 2021 the Islamic bank capital shall grow to $3.5 trillion. Sharia compliance means that Islamic banking shall be grounded within the Islamic faith while they relate to any commercial transactions. The principles followed by Islamic banking are propounded under the religious book Quran and also the religious text of Islam called Hadith. In Islamic banking, all the transactions must comply with the legal code of Islam called the shariah and also the teachings in the holy book Quran. Further, the rules that are governing the financial transactions under Islamic banking are called Fiqh-al-muamalat. Another point of consideration in the meaning of shariah compliance is it differs from the conventional banking system as it prohibits speculation and overcharging in the form of interest. Sharia compliance system prohibits the charging of interest in any form and also prohibits the investment in any substance which is prohibited in the Quran. Hence, in other words, it can be said that compliance with the shariah law provides for ethical investment of a different kind. For example, the Mit-Ghamr Savings Bank of Egypt was established in 1963 is considered to be the first example of an Islamic bank that gave money based on a profit-sharing model. The bank was closed in the year 1967 due to some political issues but during the time of operation, the bank exercised great care and caution of the Islamic law and shariah compliance as it approved only 40% of the total loan application.
The compliance of the shariah law has attracted attention across the globe especially in the financial service sector. Shariah compliance in the financial sector and banking institutions is not a new concept and the compliance of these laws in lending and commercial transactions is followed for a long time. The Muslims and Islamic followers are not comfortable in taking the facility of banking institutions unless the institution in compliance with the shariah laws. Hence, the Muslim friendly services provided by the banks and other financial institutions attract customers from Islamic countries for investment and money borrowing. The compliance of the shariah law has seen tremendous success since the historical period as it has attracted customers from Muslim countries. There are many factors responsible for the success of shariah compliance and related laws. Based on analysis of various literature, it has been concluded that there are mainly three factors that are responsible for the shariah compliance by the Muslims in the financial service industry. These factors are:
The Muslims and the Islamic followers are against the lending and borrowing of money on interest and this has made them in shortage of funds for example, in opening a new business or for personal use like marriage or purchasing a home. The shortage of funds makes them drop the idea of taking money from the bank and hence, the bank faces brokerage of clientele. Hence, the banks especially in Muslim countries in the world started lending money at zero interest. The bank approaches the investors to invest money in the bank and pays the amount of profit every year, not fixed as fixed profit is considered interest under shariah law. In cases of home loans for Muslims, the bank provides the facility of zero interest based on an agreement of rent. For example, the instalment of the house is taken as rent from the buyer and on each payment of instalment, the tenant shall become the owner of a proportion of land based on the size and rent of the property and the total amount for which the agreement has been made. But in case the buyer fails to pay the instalments, he shall only be the owner of that proportion of land for which has paid the instalments and shall stand as a tenant for the rest of the land.
Hence, the above-mentioned initiative has been taken by the banks keeping in mind the basic needs of the Muslims and Islamic followers and this initiative has contributed as a success factor for the lucid standing of the shariah law as it has complied with the principles of Islam as well as served the basic needs of the Muslims. Moreover, such initiative of the banks and financial institutions in lending money on zero interest to the Muslims and Islamic followers has also made the banks stand in compliance before the shariah board and shariah committee.
Another factor that has made shariah compliance effective and lucid is the demand of the Muslim population for the compliance of sharia laws in the financial institutions. It has been observed that the Muslim population has demanded the compliance of sharia laws by the financial institutions and banks so that their needs of finances shall be met. The Muslim population comes in need of financial help and funds but the borrowing of money on interest is prohibited in the Islamic religion and hence, the Muslim population has demanded the establishment of financial institutions which shall adopt the practice of sharia compliance and Islamic laws in lending and borrowing money. The financial institutions and banks have also noticed high demand from the Muslim populations for the compliance of sharia and thus, there has been an initiative taken by banks to fulfil the demands of a larger proportion of the society. Hence, there has been more international customers who are Islamic followers attracted towards the banks to get money for their personal use and business purposes.
The third factor which has made shariah compliance a lucid concept is the procedures adopted by the banks and financial institutions. The bank has adopted such procedures which are interest-free and does not involve any function which is prohibited under the Islamic rules and sharia law. Hence, these procedures have made the Muslim population accept the offers of the banks and financial institutions and at the same time get their needs and demands satisfied. In other words, the banks have provided for all the services which are halal in Islam and hence, these procedures have become ethically and religiously acceptable. Apart from this, the procedures have been seen as per the rules of Islam is not only lending money but also for those who are interested in investing. The banks and financial institutions have adopted such procedures which is acceptable in Islam for investing. The profit-sharing is not fixed as fixed profit shall amount to interest and thus, the banks give profit to the Muslim investors as per the market value of their investment. This has made the Muslim population invest in banks and start the expansion of their business.
Thus, it can be stated that the effectiveness of shariah compliance and the sharia law is seen initially in the Islamic countries but gradually it has been adopted by many banks across the globe as the Muslim comprises a large section of the population and providing them with Islamic friendly services shall attract more Muslim population. Moreover, shariah compliance has gained lucidity as it has to stand successful in meeting the needs and demands of the Muslims as per the sharia laws.
It has been analysed that the sharia board has fulfilled such duties and responsibilities which stands as an essence to the Islamic financial institutions. It has been observed that the contribution made by the sharia board is that it has made sure that the financial institutions comply with all the principles of shariah and abide by the laws of Islamic finances and commercial transactions. The activities are relating to functions including money lending and loans and also investment made by Muslims. In addition, the board has also successfully contributed to reviewing, supervising and directing the activities of the financial institutions. According to the view of Azam, et. al., 2020 it has been observed that the shariah board has contributed in functions like providing advice on financial matters, participation in the Islamic banking system, ensuring that the products and services of the bank are as per the shariah laws and Islamic rules and are not haram i.e., illegal activities, in developing contracts as per the Islamic laws and encourage legitimate products than conventional products. The board has also contributed by becoming a referring body in deciding issues that are of Islamic concern or relating to the financial and banking industry. Furthermore, it has been observed that the shariah board has also contributed to the controlling and supervising of the industrial processes. Apart from supervising the industrial process, the shariah board has also contributed to making it stand in compliance with the global industrial standards. Moreover, the board has also contributed to starting training programs for the staff of the banks and employees so that they are well versed with the Islamic rules of banking and financial transactions. The board has also represented in meetings and conferences and made the world aware of the Islamic principles and how banks and financial institutions can work as per Islamic laws without decreasing productivity. Overall, it has been observed that the main contribution of the shariah board is seen in ensuring that the banks and financial institutions abide by the laws of sharia and Islamic rules and follow sharia principles in the rendering of products and services.
Considering the example of Pakistan, the banks are of the view that they require expert advice in the addressing of daily transactions. Further, to ensure that all the transactions comply with shariah law, the State Bank of Pakistan has set up two important regulatory and supervisory body which shall ensure that the activities of the financial institutions of Pakistan are complying with the shariah laws. This regulatory framework consists of a Shariah Board which is at the level of the State Bank of Pakistan. This board has the function of advising and supervising the functions of the banks and also reviewing the activities of the bank and ensure whether the activities comply with the shariah laws or not. Another body is called the Shariah Board but this is at the Islamic bank level.
As per the guidelines of the State Bank of Pakistan, every Islamic bank shall constitute a shariah board which shall consist of three scholars well versed in shariah laws and these scholars shall be recruited by the board o director of each bank as per the criteria. It has also been analysed that the contribution of the shariah board has been seen in building the confidence of the public as the board ensures that the money of the investors is not invested for the illegal purpose under Islamic laws and that money lend to customers is as per the laws of Islam. Further, the board has contributed to building the shariah culture as it has played a monitory role in the functions of the banks. It has also been observed that 80% of the Muslim population in Pakistan are of the view that there are no disadvantages seen of the sharia board, rather the board has met with the requirements of the Muslims by making them avail themselves the facilities of the financial industry being inconsistent with their religion. But 20% of the population stated that there are some of the disadvantages of the board. For example, the population stated that there is a lack of knowledge of banking among the board members and also due to tight and busy schedules, the board was unable to deal with their issues on time. Further, it has also been stated by the population that there are additional resources involved in the working of the Islamic bank as these resources are responsible to report every activity of the Islamic bank to the State bank and thus, this increases the cost and expenses of an Islamic bank as compared to conventional and other banks.
Apart from the contribution seen in the advisory role and supervisory role of the Shariah Board, the contribution of the board is also seen in the recruitment procedure where the shariah board helps in the recruitment of the employees done by the board of directors. It has been analysed that the advice taken from the shariah board makes the functioning of the bank efficient as the advice of the board in recruitment helps in selecting the best talent. Further, most of the respondents in Pakistan have stated that the major and the most significant contribution of the Sharia board in the banking system and financial industry is that the board has provided for an additional and alternative banking system. Further, the board has also contributed to the standardization of policies and structure of the banks and their systems. Further, it has also contributed to solving the issue of the banks as it provides advice based on the principles of Islam. This has made the wealthy population keep their funds in surplus in the shariah-compliant banking system and the board has also contributed to the avoidance of unethical and unjust means in the Islamic banking and financial system.
Further, it has also been observed that the respondents have stated that there is a boost in the confidence of the public as there is the inclusion of compliance with sharia laws. Further, there has been spread of awareness among the public that the major responsibility and contribution of the board is in the supervision and reviewing of the operations of the banks. Also, there has been confidence in the public that due to the contribution and supervision of the shariah board the bank shall not adopt any practise which is repugnant to the laws of religion.
Thus, it can be concluded that the sharia laws are the laws that are the governing rules under Islam and the inclusion of these laws in the financial industry and banking sector shall ensure that the banking system and its functions shall comply with the shariah laws. Further, many factors have responsible for the lucidity of the shariah compliance concept. These factors include the need and demands of the Muslim population where their requirements are met for their need of funds. The compliance of shariah law has also ensured in boosting up the confidence of the public as the procedure adopted by the shariah board stands consistent with the rules and principles of Islam. The contribution of the shariah board is seen in the advisory and supervision functions of the Islamic bank where the board ensures that the process of the bank and its operations are following the principles of Islam. Hence, it has been concluded that the shariah board has contributed to the growth and functioning of the financial institutions and banking sector in Muslim countries.
Ahmad M, and Lateh N, 'The Development of Shariah Risk Management Model (SRM-I) For the Use of Shariah Compliance Organizations' (2020) 5 Environment-Behaviour Proceedings Journal
Ahmed S, Islam R, and Mohiuddin M, 'Service Quality, Shariah Compliance and Customer Satisfaction of Islamic Banking Services in Malaysia' (2017) 4 Turkish Journal of Islamic Economics
Alam M and others, 'The Influences of Shariah Governance Mechanisms on Islamic Banks Performance and Shariah Compliance Quality' (2021) ahead-of-print Asian Journal of Accounting Research
Atan S, Arif N, and Ahmad K, 'Incorporating Islamic Values into Business Towards Holistic Shariah Compliance' (2017) 23 Advanced Science Letters
Azam M and others, 'The Moderating Role Of shariah compliance on The Relationship Between Firm Profitability and CSR Activities' (2019) 35 International Journal of Ethics and Systems
Azam M, Khalid M, and Zia S, 'Board Diversity and Corporate Social Responsibility: The Moderating Role of Shariah Compliance' (2019) 19 Corporate Governance: The International Journal of Business in Society
Fakhruddin I, Jusoh M, and Mat Noerwani N, 'Influence Cross Membership and Qualifications of The Shari'ah Supervisory Board’S Towards the Shari'ah Compliance Related SSB Information' (2020) 6 ADVANCES IN BUSINESS RESEARCH INTERNATIONAL JOURNAL
Hermanto B, ‘The Role of DSN-MUI to Ensure Shariah Compliance of Islamic Financial Transactions in Indonesia (A Political Ambiguity Perspective)’ (2018) 6 Journal of Islamic Banking and Finance
KAR?M M, and SHETU S, 'Level of Shariah Compliance in The Operation of Islamic Banks in Bangladesh: An Empirical Study'  International Journal of Islamic Economics and Finance Studies
Laldin M, and Djafri F, 'Islamic Finance in The Digital World: Opportunities and Challenges (Kewangan Islam Dalam Dunia Digital: Peluang Dan Cabaran)' (2019) 16 Journal of Islam in Asia (E-ISSN 2289-8077)
Mohd Noor N, Ismail A, and Mohd. Shafia M, 'Shariah Risk: Its Origin, Definition, And Application in Islamic Finance' (2018) 8 SAGE Open
Muhammad Iqmal Hisham Kamaruddin, and Mustafa Mohd Hanifah, 'Enhancing Shariah Audit Practices in Islamic Financial Institutions in Malaysia' (2017) 13 Journal of Modern Accounting and Auditing
Shah S, 'THE CREDIT SUPPLY CHANNEL OF MONETARY POLICY TRANSMISSION MECHANISM: AN EMPIRICAL INVESTIGATION OF ISLAMIC BANKS IN PAKISTAN VERSUS MALAYSIA' (2019) 5 Journal of Islamic Monetary Economics and Finance
Umar Z and others, 'Does Shariah Compliance Make Interest Rate Sensitivity of Islamic Equities Lower? An Industry Level Analysis Under Different Market States' (2018) 50 Applied Economics
 Muhammad Azam, Muhammed Usman Khalid and Syeda Zinnaira Zia, 'Board Diversity and Corporate Social Responsibility: The Moderating Role of Shariah Compliance' (2019) 19 Corporate Governance: The International Journal of Business in Society.
 Hermanto B, ‘The Role of DSN-MUI to Ensure Shariah Compliance of Islamic Financial Transactions in Indonesia (A Political Ambiguity Perspective)’ (2018) 6 Journal of Islamic Banking and Finance
 Md. Rezaul KAR?M and Samia Afrin SHETU, 'Level Of Shariah Compliance In The Operation Of Islamic Banks In Bangladesh: An Empirical Study'  International Journal of Islamic Economics and Finance Studies.
 Iwan Fakhruddin, Mohd. Abdullah Jusoh and Norlia Mat Noerwani, 'Influence Cross Membership and Qualifications of The Shari'ah Supervisory Board’S Towards the Shari'ah Compliance Related SSB Information' (2020) 6 ADVANCES IN BUSINESS RESEARCH INTERNATIONAL JOURNAL.
 Syed Muhammad Abdul Rehman Shah, 'THE CREDIT SUPPLY CHANNEL OF MONETARY POLICY TRANSMISSION MECHANISM: AN EMPIRICAL INVESTIGATION OF ISLAMIC BANKS IN PAKISTAN VERSUS MALAYSIA' (2019) 5 Journal of Islamic Monetary Economics and Finance.
 Siti Anisah Atan, Norjariah Arif and Kamilah Ahmad, 'Incorporating Islamic Values into Business Towards Holistic Shariah Compliance' (2017) 23 Advanced Science Letters.
 Md. Kausar Alam and others, 'The Influences of Shariah Governance Mechanisms on Islamic Banks Performance and Shariah Compliance Quality' (2021) ahead-of-print Asian Journal of Accounting Research.
 Mohamad Akram Laldin and Fares Djafri, 'Islamic Finance in The Digital World: Opportunities and Challenges (Kewangan Islam Dalam Dunia Digital: Peluang Dan Cabaran)' (2019) 16 Journal of Islam in Asia (E-ISSN 2289-8077).
 Zaghum Umar and others, 'Does Shariah Compliance Make Interest Rate Sensitivity of Islamic Equities Lower? An Industry Level Analysis Under Different Market States' (2018) 50 Applied Economics.
 Azam M, Khalid M, and Zia S, 'Board Diversity and Corporate Social Responsibility: The Moderating Role of Shariah Compliance' (2019) 19 Corporate Governance: The International Journal of Business in Society
 Selim Ahmed, Rafikul Islam and Mohammad Mohiuddin, 'Service Quality, Shariah Compliance and Customer Satisfaction of Islamic Banking Services in Malaysia' (2017) 4 Turkish Journal of Islamic Economics.
 Muhammad Azam and others, 'The Moderating Role Ofshariahcompliance on The Relationship Between Firm Profitability and CSR Activities' (2019) 35 International Journal of Ethics and Systems.
Footnote: Muhammad Iqmal Hisham Kamaruddin and Mustafa Mohd Hanifah, 'Enhancing Shariah Audit Practices in Islamic Financial Institutions in Malaysia' (2017) 13 Journal of Modern Accounting and Auditing.
 Mohd Helmi Ahmad and Najahudin Lateh, 'The Development of Shariah Risk Management Model (SRM-I) For the Use of Shariah Compliance Organizations' (2020) 5 Environment-Behaviour Proceedings Journal.
 Nurul Syazwani Mohd Noor, Abdul Ghafar Ismail and Muhammad Hakimi Mohd. Shafia, 'Shariah Risk: Its Origin, Definition, And Application In Islamic Finance' (2018) 8 SAGE Open.
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