Chapter Summary

This chapter explores the authority of the SSB and probes the responsibilities of the BOD and management towards this entity. It examines SSB decisions and contrasts them with those of Islamic judges and muftis. The chapter then discusses the possibility of conflicts arising between SSB members and other parties and possible reasons for such discord.

7.1 SSB Authority

The word “authority” means a vested power to make decisions. Such power could be derived from knowledge and expertise of a discipline, or influence of character.¹ Richard Sennett elaborates:

…the root of authority is “author”; the connotation is that authority involves something productive. Yet the word “authoritarian” is used to describe a person or system, which is repressive […] Of authority it may be said in the most general way that it is an attempt to interpret the conditions of power, to give the conditions of control and influence a meaning by defining an image of strength. The quest is for a strength that is solid, guaranteed, stable.²

In Islamic legal terminology, wilayah means guardianship and one who is entrusted with such a responsibility is known as a wali. The Qur’ān identifies God, the Creator, as the ultimate Wali, as He leads and guards the universe: “It is Allah who created the heavens and the earth and whatever is between them in six days; then He established Himself above the Throne. You have not besides Him any protector or any intercessor; so will you not be reminded” (32:4).

In this context, sharī‘ah confers a degree of authority upon learned Islamic jurists who are seen as guides on Islamic matters. The respect imparted to these individuals could be traced to teachings, such as: “Allah will raise those who have believed among you and those who were given knowledge, by degrees” (58:11) and “The most superior among you are those who learn the Quran and teach it to others.”³ In this respect, Qurānic injunctions – as evidenced by verse (21:7) and others – guide those in need of advice to ask the experts in that field. Such an act, according to Al-Qurtabi, is mandatory for those who lack such knowledge.⁴

Thus, the authority of SSB members at Islamic Banks (IBs) stems from their knowledge and expertise. This authority is formally recognized within the bounds of the IB by virtue of provisions in the articles of association and/or the SSB charter that enable(s) this entity to discharge its duties.

Some regulatory authorities have identified the extent of authority that SSBs possess at the regulatory and bank levels, while others have chosen not to do so. Bank Negara Malaysia (BNM), the Central Bank of Malaysia, sheds light on the authority of the Shari‘ah Advisory Council (SAC) that is found at the regulatory level. With respect to the decisions of this entity it says:

Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56.⁵

Regulatory guidelines devised by BNM also impart upon SSBs at the bank level a degree of authority;⁶ however, the powers of the SAC are superior:

Where the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall prevail.⁷

In Indonesia, the National Sharī‘ah Board (Dewan Syriah Nasional) has been granted the authority to do the following:

1. Issue edicts, which are binding on the Sharia Oversight Board at every respective Sharia Financial Institution and serve as a basis for related legal actions.
2. Issue edicts to serve as a basis for provisions/regulations issued by the relevant authorities, such as the Department of Finance and Bank Indonesia.
3. Giving recommendations and/or revoking recommendations for names of members of the DPS at a Sharia Financial Institution.
4. Invite experts to provide explanation about certain issues in discussions on Sharia economy, including domestic as well as overseas monetary authorities/financial institutions.
5. Issue reminders to Sharia Financial Institution in order to cease violation of edicts issued by the DSN.
6. Giving recommendation to the relevant authorities to take action if such reminders are disregarded.⁸

When discussing the authority of SSBs, it is imperative to consider the following dimensions:

Legal infrastructure: In governing IBs and the work of SSBs, the legal framework should address the authority of this entity. Despite there being shortcomings in addressing this issue – and sharī‘ah governance in general – some legal systems, such as Oman, Malaysia, Pakistan, and Sudan, have demonstrated how this could be accomplished.

Regulatory guidelines: It is crucial for regulatory authorities to issue comprehensive guidelines, which not only address the authority of the SSB, but also its appointment, reporting line, responsibility, remuneration, and other crucial aspects. Few regulatory authorities to date have done this.

Bank-level arrangements: On the IB level, institutions have to ensure that their memoranda/articles of association and SSB charter address the powers of the SSB, its role, and other important dimensions relating to this entity.

7.2 Nature of SSB Decisions

Within the context of an SSB, the word “fatwa” is etymologically derived from “fata,” which means a young and strong individual who sheds misapprehension and provides clarification.⁹ The term fatwa “refers to a Shari’a opinion presented to a person who seeks it with regard to an incidence that has already occurred (the fatwa incidence) or is expected to occur.”¹⁰

Al Ashqer defines ifta as conveying Allah’s command while providing sharī‘ah reasoning to one who inquires about the Islamic legal ruling on a particular matter.¹¹

Lahsana defines fatwa in Islamic finance as “a discovery of Shari’ah ruling by a competent Shari’ah scholar on unclear matters in Islamic finance by providing legal Shari'ah opinion extracted from Islamic sources through a process of ijtihad on a particular religious matter.”¹²

Ibn Hamdan explains that a mufti is one who conveys the commands of God with evidence.¹³ He further elaborates that a fatwa is in response to a question posed; otherwise, it becomes an address and not a fatwa.¹⁴

Islamic jurists have for long pronounced fatawa with the objective of extending knowledge and guidance of the sharī‘ah to others. Prophet Muhammad (pbuh) practiced this, so did his companions and the jurists from then onwards. One of the most prolific companions in issuing sharī‘ah rulings is Ibn ‘Abbas, whose fatawa were compiled in 20 volumes.¹⁵ The different methodologies adopted by jurists for ascertaining Islamic legal rulings led to the emergence of different legal schools, such as the anafi, Māliki, Shāfi‘i, and Hanbali.¹⁶

Ifta as an activity has a wider scope of material to deal with and encompasses a broader set of topics, such as worship rituals, compared to judiciary, which is mainly limited to disputes. Commonly used to clarify religious rulings on matters of belief, transactions, and other domains, ifta is a means for distinguishing the halal (lawful) from the arām (unlawful), and serves as a medium for developing Islamic jurisprudence, especially when new circumstances and issues arise.¹⁷

The institution of fatwa has had great influence on the legal, political, social, and theological dimensions of Islamic societies. At the time of the third caliphate Uthman, a learned jurist entrusted with issuing fatawa was known as Shiekh ul Islam, and his fatawa heavily influenced decisions of judges.¹⁸ During the Umayyad caliphate (AD 668–750), muftis worked as legal consultants to judges. The interpretations of Islamic family law by Muhammad Abduh, the mufti of Egypt in the late nineteenth century, were integrated into the Egyptian personal status law.¹⁹ In the nineteenth century, fatawa issued by sharī‘ah scholars in the Indian subcontinent against British invaders were used as a means for rallying Muslims against their colonizers.²⁰ In the twentieth century, the scholars of Marrakesh issued a fatwa to overthrow their sultan.²¹ Similarly, scholars of the twenty-first century have issued fatawa for and against Egyptian presidents Mubarak and Morsi.

The decisions made by jurists sitting on SSBs differ from those made by judges serving in courts in terms of scope and nature. SSB fatawa are confined to financial rulings and issues pertaining to them, while judgments issued in courts do not have such a restriction and are dispute-related. In addition, court judgments are enforced by the state, whereas fatawa are not except in a handful of jurisdictions.²²

Contrary to the general rule of being non-binding opinions of an advisory nature,²³ fatawa of an SSB, in contemporary Islamic finance practice, are binding on the IB they serve but not on others in the market.²⁴ This enforcement happens either through regulatory authorities and the law, such as in Malaysia, or through self-enforcement by the IBs, such as in the UK.²⁵ Additionally, when a centralized SSB exists on the regulatory level, its fatawa are also often binding on IBs that operate in the jurisdiction. On this note, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) instructs:

The institution is obliged to follow the fatwa once it is issued, regardless of whether it meets the satisfaction of the management or not. This obligation holds true when the fatwa entails enforcement of prohibition of a certain act. When the fatwa entails permissibility of the act in question, the institution has the right to refrain from following it, if it believes that for practical needs it has to do so. In this case, however, rejection of the board fatwa should be reported to the General Assembly of the institution.²⁶

It further advises: “the institution should not follow the fatwas of other Shari’a Advisory Boards except with permission of its own Board.”²⁷ This restriction is meant to prevent IBs from continuously pursuing sharī‘ah exemptions without observing controls and from fatwa shopping, as these practices dilute the sharī‘ah and lead to the dissemination of poor fatawa.²⁸ Guidelines of the Islamic Financial Services Board (IFSB) also advise IBs to comply with the sharī‘ah rulings expressed by their own jurists, and to make them available to the public.²⁹ It is the duty of regulatory authorities to promote such discipline in order to protect the industry from the legitimization of poor practices and weak rulings that may, unfortunately, be given an Islamic stamp of approval by a jurist somewhere.

7.3 BOD and Management Responsibility Towards the SSB

The BOD sets the strategic goals and objectives of the IB and management is required to leverage resources to accomplish them in the most efficient manner. A key consideration throughout the process is compliance with sharī‘ah precepts.³⁰ The IFSB thus recommends that a system be established to facilitate sharī‘ah compliance. It says: “sharī‘ah governance system refers to the set of institutional and organizational arrangements through which an IFI ensures that there is effective independent oversight of sharī‘ah compliance.”³¹ In practice, however, there is no standard sharī‘ah governance system adopted by all jurisdictions. Therefore, the responsibility of the BOD and management towards the SSB varies from one jurisdiction to another. Nevertheless, below we address some of the key responsibilities to be considered.

7.4 Conflict between SSB Members

Juristic differences of opinion are not uncommon in Islamic jurisprudence. However, they should not lead to conflict, as such juristic differences are inevitable. To limit such conflicts, SSBs need to adopt policies that endorse open communication and broadmindedness, in addition to agreeing to practical procedures for resolving conflicts. The SSB chairman is expected to play a leading role in such a scenario. This would include summoning members to present the issue, having an open discussion on how it should be resolved, and taking a vote on how to move forward. If the conflict is not resolved at the SSB level, then it could be brought up to the regulatory-level SSB. In jurisdictions where no such body exists, it could be presented to AAOIFI’s sharī‘ah board, or as an alternative, the SSB chairman may be granted the authority to make the final decision.

If a conflict of interest³⁹ arises, the concerned sharī‘ah jurist should review the issue with the SSB. If the issue cannot be resolved, then the individual should resign from the SSB.

7.5 Conflict between the BOD and the SSB

As part of its fiduciary duty to govern the institution, the BOD works with the SSB in order to fulfill its sharī‘ah compliance responsibility. In doing so, there is the possibility that conflict could arise for numerous reasons, some of which are discussed below:

1. Unauthorized interference: Such interference may be the result of the BOD attempting to influence SSB decisions, or the way that it runs its affairs, thereby compromising its autonomy.
2. Sharī‘ah compliance concessions: While the BOD is responsible for ensuring that management operates the business in compliance with sharī‘ah, it is also held accountable by shareholders for profitability. The latter objective may pressure the BOD inappropriately to request the SSB to adopt a relaxed approach to sharī‘ah compliance replete with concessions.
3. SSB composition and incompetency: The BOD may hamper the work of the SSB by bringing in a jurist about whom the majority of other members have concerns. This may especially occur in jurisdictions where there is no standardized application process for recruiting SSB jurists, and shareholders are not sufficiently knowledgeable about the qualifications required of these jurists. Conflict in this scenario many not only occur between SSB members and the BOD, but also between the members themselves, as they would be unwilling to accept the qualifications or experience of the jurist concerned. Additionally, should the jurist have the requisite sharī‘ah background but lack adequate finance knowledge, then the communication gap could result in insoluble differences that would be difficult to repair.
4. Illegitimate expulsion attempts: If the BOD tries to remove an SSB member in an illegitimate way, then such interference would certainly cause conflict between the two parties.
5. Compensation: When compensation is incommensurate with the increasing scope of duties of an SSB then such a mismatch causes tension. This is especially the case when remuneration is not in line with market rates.