8.1.1 Ex-ante Sharī‘ah Supervision

The term “ex-ante” means “before the event.” In this context, ex-ante is used to refer to the activities performed at the inception of an Islamic bank. This stage is critical as it verifies sharī‘ah compliance prior to the commencement of any activity by the bank. Principally, this stage is developmental in nature. It involves several structural activities, such as the preparation of the memorandum and articles of association, development of the audit function, creation of product structures, policies and procedures, and training of staff. Some key activities of the ex-ante stage are examined below.

First, the development of necessary organs for sharī‘ah governance, such as the SSB and the sharī‘ah audit function of an Islamic bank. This is an obligation on the bank. The Islamic Financial Services Board (IFSB) advises Islamic banks to consider the following:

• to appoint a reputable and credible Sharī‘ah board;
• to support the Sharī‘ah board by appointing an ISCU [internal sharī‘ah compliance unit] or an individual Sharī‘ah officer, whereby the Sharī‘ah board shall be able to mandate and delegate some of its functions to the ISCU; and
• for the Sharī‘ah board to have at least three members, possibly trained in different schools of jurisprudence, have a mix of members with different lengths of experience, and where appropriate, comprise different nationalities. In addition to their Sharī‘ah expertise, members of the Sharī‘ah board should possess some exposure in the areas of commerce or finance – for example, in retail banking, takāful undertaking or capital market products.³

The sharī‘ah audit function is an important sharī‘ah governance organ of an Islamic bank, as we have seen earlier. It objectively examines and evaluates the extent of compliance of the bank with sharī‘ah principles and pronouncements issued by the SSB, and strengthens sharī‘ah compliance controls.

Second, to secure the SSB’s approval on the memorandum and articles of association. SSB members review these to confirm the independence of the SSB and sharī‘ah audit, and the appropriateness of responsibilities and powers stipulated therein.⁴ This will ensure proper consideration is given to sharī‘ah supervision and that SSB members can perform their duties effectively. Due to the importance of having a proper provision for sharī‘ah supervision in the articles of association of the bank, Bank Negara Malaysia (BNM), the Central Bank, has considered it a licensing requirement. The Islamic Banking Act says:

The Central Bank shall not recommend the grant of a license, and the Minister shall not grant a license, unless the Central Bank or the Minister, as the case may be, is satisfied–

1. that the aims and operations of the banking business which it is desired to carry on will not involve any element which is not approved by the Religion of Islam; and
2. that there is, in the articles of association of the bank concerned, provision for the establishment of a Syari’ah advisory body, as may be approved by the Central Bank, to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam.⁵

Third, the review of financial products and services. The SSB often engages in discussions with product developers and suggests ways and methods for modeling a sharī‘ah-based product. The IFSB highlights the importance of SSB product approval; it says:

Ex-ante considerations that should take place at the product design/development stage, before it is offered to the customers at the product design/development stage, an IIFS would want to ensure that its Sharī‘ah Governance System covers the relevant ex-ante processes, namely (i) issuance of Sharī‘ah pronouncements/resolutions, and (ii) compliance checks, before the product is offered to the customers.⁶

The SSB advises product developers and tries to offer sharī‘ah-based solutions to product issues, thereby helping to mitigate sharī‘ah risk. On the basis of such information, product developers complete their product description paper and present it to the SSB for feedback. The SSB reviews the paper and either accepts or rejects the proposed product.

Fourth, the development of sharī‘ah-compliant policies and procedures. On the basis of the product features described in the paper, a policy and procedure is prepared for each product and presented to the SSB. The SSB also reviews other activities and policies of the bank, including operations, accounting, profit distribution, zakat, charity account, human resources, and risk management.

Fifth, the preparation of information technology (IT) system modules that are compatible with the approved structures and features of products. This is quite important. IT specialists present the IT modules to the SSB and await their approval. Furthermore, legal documents are prepared in accordance with product and policy papers and presented to the sharī‘ah audit function for review. Sharī‘ah audit reviews the content of documents and once it is satisfied submits them to the SSB for consideration. The SSB scrutinizes the documents and provides its feedback. Should the documents satisfy sharī‘ah requirements then it gives its approval in the form of a decision.

Sixth, the preparation of marketing material and its presentation to the SSB for review and approval. It is important for marketing materials to be in line with sharī‘ah teachings or else customers may start to question the credibility of the Islamic bank.

Seventh, the training of bank staff on sharī‘ah guidelines governing products, services, and activities. This is an opportunity to inform management and staff about the sharī‘ah rulings that are directly relevant to their work. Along with training sessions, the SSB would conduct seminars and symposiums to educate stakeholders. The training plan would be developed at the ex-ante stage for the three stages to accommodate specific needs relevant to the stages. Each stage of sharī‘ah supervision has different activities and training sessions would need to be conducted accordingly.

A management report for the ex-ante stage would comprise the controls and measures implemented for sharī‘ah governance, while an SSB report would address necessary details of products, policies, and contract approvals. The IFSB has suggested this type of ex-ante report of sharī‘ah supervision, but has limited it to products only.⁷ These types of reports are not usually produced in the industry at the ex-ante stage; however, they are of importance, and would add value.

8.1.2 Intermediate Sharī‘ah Supervision Stage

This phase lies between the ex-ante and ex-post stages of sharī‘ah supervision. It relates to sharī‘ah supervision during the implementation of operations, through addressing day-to-day queries, issues, and concerns raised during the course of operations and activities of the bank, and the monitoring that accompanies the implementation of sharī‘ah directives. When management and staff attempt to apply sharī‘ah directives, questions often arise and additions or amendments to the SSB-approved processes and documentation may be requested. These requests are presented to the SSB for review and approval.

In practice, several activities are performed within the intermediate phase of sharī‘ah supervision. Since there is a possibility that the bank could find itself needing to make additions or modifications to existing approved products, structures, policies, legal documentation, and the IT system due to regulatory requirements or customer needs, the bank would seek the approval of the SSB on these amendments to ensure that they are in accordance with sharī‘ah principles. For example, after entering into a contract, the customer may approach the bank to terminate the contract before its maturity, due to concerns or unforeseen events. In such case, a dispute could arise between the bank and the customer. Management would present, via internal sharī‘ah audit, a query about the issue that would include possible courses of action along with supporting references⁸ to the SSB for approval and to outline the sharī‘ah guidelines that would need to be taken into consideration. In reviewing the issue and coming to a decision, the SSB would take into account the circumstances of the customer and other pertinent details. Another example relates to issuing sharī‘ah directives for non-standardized types of financing that often involve the commercial and syndicated financial activities of the bank. As these transactions are dynamic in nature, they often need to be customized to meet the needs of customers. Although general policies and procedures could be in place at the ex-ante stage of supervision, these are often not sufficient as transaction details differ on a case-by-case basis. Management would thus submit to the SSB the structure of the proposed transaction and the corresponding documents for review.

If the bank would like to implement the same structure that was previously approved by the SSB in future transactions, then it is not necessary to seek SSB approval again, so long as no changes were incorporated in the product structure and documentation. Seeking approval for something that has precedent is of no added value and hinders the performance of the business.

A “high” review of transactions under execution is another example of a sharī‘ah supervisory activity that would take place during the intermediate stage. Sharī‘ah auditors would carry out this task to ensure proper implementation of SSB directives. In doing so, disparities could be caught at an early stage and mistakes corrected before products are brought to market. Rectifying the errors at this stage limits the losses that the bank would bear, and alerts personnel to mistakes that should be avoided in future. This “high” review is different from the sharī‘ah audit that is performed at the ex-post stage. Its objective is to assist management in meeting its sharī‘ah compliance responsibility. AAOIFI affirms, “[…] the responsibility of compliance therewith rests with the management of an IFI.”⁹

8.1.3 Ex-post Sharī‘ah Supervision

The ex-post stage of sharī‘ah supervision takes place after the execution of transactions and activities. The IFSB Guiding Principles on Sharī’ah Governance clarify that ex-post product offering considerations are those that occur, “after the product has been offered to the customers and transactions have been carried out.”¹⁰ Practically, ex-post activities of sharī‘ah compliance involve auditing to assess whether executed transactions comply with SSB directives, to verify the calculation and payment of zakat, disposal of earnings that are a result of sharī‘ah non-compliant activities, and issuance of the sharī‘ah compliance report.¹¹ Below are some examples of sharī‘ah supervisory activities performed at the ex-post stage.

Sharī‘ah auditing is one of the most important activities of the ex-post stage of sharī‘ah supervision, since it evaluates the practices of the bank. The sharī‘ah audit exercise is typically performed by auditors who belong to the internal sharī‘ah audit function. If such a department does not exist, then internal audit would perform the sharī‘ah audit. Grais and Pellegrini state:

Besides Shariah Boards, most IIFS, particularly those complying with AAOIFI standards, have established another internal Shariah review structure, generally in the form of review units. These internal Shariah review units are independent from other departments or are an integral part of the Internal Audit and Control Department. The array of tasks that they perform is parallel to those of audit departments – reviewers generally use all necessary powers to ascertain that all financial transactions implemented by management comply with SSB rulings. In some instances Shariah review units have exclusive competence on ex-post monitoring.¹²

Such an audit would be periodically conducted in line with sharī‘ah audit standards,¹³ using fatawa, procedures, guidelines, and audit programs and checklists¹⁴ for each of the different business activities. The audit checklists would be prepared based on the policies and procedures of each product, fatwa, and other guidelines issued by the SSB. Sometimes banking supervisors and internal bylaws of the bank may require an external sharī‘ah audit to be conducted along with the internal sharī‘ah audit for the purpose of providing an independent judgment on sharī‘ah compliance. The appointment of external sharī‘ah auditors from any external agency is subject to the approval of the audit and governance committee.

Another important activity of the ex-post stage of sharī‘ah supervision is the issuance of the annual sharī‘ah compliance report. This report assesses the extent of compliance of the bank with sharī‘ah directives, as per the executed transactions and controls. After reviewing the sharī‘ah audit report, the SSB often provides its opinion on the bank’s sharī‘ah performance. It is a conflict of interest for the SSB to authorize and audit activities, and these tasks should be separated by relieving the SSB from issuing such an opinion regarding the compliance of the bank with sharī‘ah precepts. Such a duty should be delegated to an external sharī‘ah audit firm.

In conclusion, the various stages of sharī‘ah supervision are most effectively performed through the Board of Directors (BOD), SSB, management, and the internal sharī‘ah audit function (see Figure 8.1). The three stages are interlinked; weakness in any of the three stages would affect the others.

8.2.1 Collective Responsibilities

An inspection of the literature on the responsibilities of the SSB reveals that some authors have chosen to classify these duties, while others have shied away from doing so. Al Zarqa classifies SSB responsibilities into internal and external duties. Internal duties are those relating to “the issuance and implementation of fatawa and providing services to the Islamic financial institution to accomplish pertinent tasks.” On the other hand, external duties are those that concern “assurance that transactions are sharī‘ah compliant.” ¹⁵ Hammad categorizes the responsibilities of the SSB into academic and executive functions. Academic functions involve conducting research relating to Islamic transactional jurisprudence in connection with the activities of the Islamic financial institution, providing fiqh training to staff and the general public, participating in seminars to discuss topics of concern, and issuing fatawa. Executive functions include three types of control: preventive, remedial, and complementary. It is important to clarify here that SSB members do not engage in executive managerial functions. The term “executive” is used by Hammad in this context to indicate that these tasks are executed on a regular basis. Preventive control includes reviewing policies, articles of association, and products to assess compliance with sharī‘ah. Remedial control includes issuing fatawa. Finally, complementary control includes the review of transactions executed and the issuance of an internal sharī‘ah audit report.¹⁶ Salih lists the following five functions for the SSB:

• Earning stakeholder confidence through sharī‘ah compliance.
• Issuing fatawa related to products, contracts, and operations and scrutinizing banking operations to ensure the implementation of fatawa.
• Providing consultations before the launch of products.
• Meeting with management to look into sharī‘ah matters.
• Educating bank staff, conducting seminars for the general public, and publishing research.¹⁷

Mudawai states that the fundamental function of the SSB is to ensure that the operations of Islamic financial institutions are in accord with sharī‘ah principles.¹⁸ Haron divides the functions of the SSB into the following:

• Providing guidelines and offering advice to banks;
• Conducting sharī‘ah audits; and
• Making decisions on matters which have religious repercussions.¹⁹

There are researchers, however, who do not classify the responsibilities of SSB members in categories; nevertheless, they discuss their duties in detail.²⁰ In practice, there is no agreed, industry-wide set of responsibilities for SSB members. Some regulatory authorities describe SSB responsibilities in detail, while others require the presence of an SSB, but leave it up to the SSB and the bank to agree on their responsibilities. For example, the regulations issued by Bank Negara Malaysia, State Bank of Pakistan, Central Bank of Indonesia, and Central Bank of Oman detail responsibilities for the SSB and require Islamic banking institutions in these jurisdictions to adhere to this requirement. Tables 8.1 and 8.2 outline SSB responsibilities issued by Bank Negara Malaysia and the Central Bank of Indonesia and provide a sample of five Islamic banking institutions from the respective jurisdictions to display the extent of their adherence to regulatory guidelines.

		CIMB Islamic	Maybank Islamic	RHB Islamic	Hong Leong Islamic	Standard Chartered
1.	Responsibility & accountability
2.	Advise the board & IFI				-
3.	Endorse Sharia policies & procedures				-
4.	Endorse & validate relevant documents
5.	Assess work carried out by Sharia review & Sharia audit				-
6.	Assist related parties on Sharia matters
7.	Advise on matters to be referred to the SAC				-
8.	Provide written Sharia opinions

		Muamalat Indonesia	Mega Syariah	BRI Syariah	Bukopin Syariah	Syariah Mandiri
1.	Giving advices [Sic] and recommendations to Board of Directors as well as supervise bank activities				-
2.	Assessing and ensuring fulfillment of Sharia principles on operational guidelines & product issued by bank				-
3.	Supervising development process of Bank new products				-
4.	Obtaining fatwa (decrees) from the National Sharia Board for Bank new products that do not yet have fatwa				-
5.	Periodically conducting reviews of fulfillment of Sharia principles on the mechanism of fund accumulation and fund channeling as well as bank service provision				-
6.	Requesting data and information related to Sharia aspects from Bank work units in the framework of executing its tasks				-

As can be seen from the above tables, Hong Leong Islamic and Bukopin Syariah are two banks that are not in compliance with central bank requirements.²³

Many authors consider sharī‘ah audit a responsibility of the SSB. In addition to our earlier observation that authorizing and auditing duties need to be segregated to avoid conflicts of interest, practically speaking it is difficult for SSBs to perform this duty. Sharī‘ah audit requires specialized training and years of experience. Most sharī‘ah jurists sitting on SSBs do not have the required competency to perform this specialized work in line with industry-wide guidelines and standards. Additionally, sharī‘ah audits should be performed on a regular basis and jurists have limited time to dedicate to this task since there are few of them, and they are normally in high demand. Assigning the SSB the responsibility to perform sharī‘ah audits would likely result in an improper assessment.

In the next section, and in light of the current literature and practices, we outline the duties of SSB members. Members are obliged to fulfill these responsibilities due to their contractual relationship with the Islamic bank and accountable both morally and legally for them. A moral obligation is a commitment that needs to be honored in light of Islamic principles. The Qur’ān instructs: “O you who have believed, fulfill [all] contracts.”²⁴ Fulfilling contractual responsibilities is a religious duty, in addition to it being a legal mandate. In the context of the SSB, this means performing the agreed-upon duties with respect to sharī‘ah governance.

8.2.2 Individual Responsibilities

The responsibilities discussed above are those which sharī‘ah jurists perform collectively as part of the SSB. There are several responsibilities, however, which members are individually responsible for. These responsibilities mainly concern abiding by the contractual terms and conditions agreed to with the bank, such as the code of conduct and ethics, actively participating in discussions and the issuance of fatawa, punctually attending SSB meetings fully prepared to engage with the material presented beforehand, and continuously improving one’s knowledge and skills. These individual responsibilities should be stipulated in the contract with SSB members. Failure to perform these duties according to the agreed terms of the contract could serve as grounds for dismissal of an SSB member. Further details on the individual responsibilities of SSB members are provided below.

8.3.1 Issuing Fatawa and Ijtihād in Islamic Finance

A fatwa is the result of effort by jurists to derive a sharī‘ah ruling for an issue at hand. Suitable primary and secondary evidences used by jurists to do so include the Qur’ān and sunnah, consensus, a companion’s opinion, analogy, unrestricted interests, juristic preference, blocking the means, custom, the law of previous nations, and the presumption of continuity. Accordingly, sharī‘ah jurists of an SSB provide rulings to the IB in light of the rules and principles of Islamic jurisprudence. There are certain conditions, however, that the fatwa issuer (mufti jurist of the SSB) and the fatwa seeker (mustafti) need to abide by.

A mufti is required to be of outstanding character, have extensive knowledge of the Qur’ān, sunnah, the Arabic language and Islamic jurisprudence, as well as experience in dealing with the sharī‘ah sources used for deriving rulings. In an Islamic banking context, SSB members are required to demonstrate adequate understanding of finance (Islamic banking in particular) and knowledge of the legal and regulatory framework that governs the operations of the institution. SSB members need to also be unbiased and should not have personal interest in these matters.⁴⁷

With respect to the mustafti, personnel seeking fatawa are required to disclose complete and accurate information regarding the matter, and provide the SSB access to credible sources of information that could increase their understanding of the issue or case. Presenting an issue to the SSB with incomplete information could lead to a wrong ruling. Furthermore, SSB members must have complete independence, and the institution is not permitted to influence their decision or request that a ruling be in accordance with a particular school of Islamic jurisprudence, even if that school is endorsed by the jurisdiction.⁴⁸ According to AAOIFI, once a fatwa has been issued by the SSB, the institution is obliged to follow it, irrespective of whether it meets the satisfaction of management.⁴⁹ Moreover, the institution is not allowed to follow the fatawa of other SSBs, except with the permission of its own SSB.

Once the conditions of the fatwa issuer and fatwa seeker are met, the SSB should employ all its efforts to understand the issue and derive the appropriate ruling. In doing so, the SSB should seek advice from subject matter experts, such as accountants. The following important fatwa controls need to be considered when preparing a fatwa:

1. SSB members should examine rulings issued and made public by other SSBs, and consider pertinent studies and rulings issued by fiqh councils, such as the Islamic Fiqh Academy and academics.
2. Subject matter experts and specialists with expertise in banking, economics, law, accounting and/or other fields should be invited to clarify ambiguities and provide an opinion on technical matters in order for SSB members to reach a clear understanding of the issues being studied.
3. Should two rulings be available, the committee should facilitate matters by choosing the easier of the two rulings, so long as there is no sin in doing so, and such a decision does not lead to negative macro effects.
4. Fatawa must be written with clarity, precision, and conciseness and reference the Islamic juristic evidence that was used and any assumptions that were made.
5. Jurists should reference accredited sources and cite areas of consensus and contention. Unattested narrations of the prophet (pbuh), and derivations based on presumptive indications, must be avoided.
6. SSBs need to be careful not to resort to sharī‘ah exemptions on a regular basis so that this becomes the norm in many of the issues under study. Moreover, fatawa need to be revised at a later time when the reasons used to provide an exemption no longer apply.⁵⁰

With regard to the manuscript of a fatwa, AAOIFI has provided the following recommendations:

• Although a fatwa could be issued using several methods, such as uttering, signing, or acting upon the matter in question, for institutions, fatawa should be written in order to provide a document of evidence that could be referred to in the future.
• When transcribing a fatwa, it should be start with the verse “In the name of Allah, Most Gracious, Most Merciful”, along with praising God and sending blessings upon the prophet Muhammad. The same expressions could be repeated at the end of the fatwa or replaced by a phrase such as “God knows best” to close the fatwa statement.
• To prevent mistakes, fatawa need to be clearly handwritten or typed. The pages of a fatwa need to be initialed by those issuing it, thereby indicating their approval. As a means of providing a record, the date of issuance should be provided using an official stamp.
• It is preferable to provide a summary of the question being asked in the text of a resolution before providing the corresponding fatwa.
• Fatawa issued by the SSB of the institution should be documented in the minutes of the meeting.⁵¹

AAOIFI instructs jurists to abide by the following guidelines when issuing fatawa:

• Be careful in explaining a fatwa, and avoid being in a hurry to issue fatawa.
• Avoid issuing fatawa on the same subject and issue that would contradict one another.
• Refrain from issuing fatawa at times when one’s mind is not fully present and occupied with other matters that may affect one’s judgment.
• Maintain the confidentiality of information revealed for fatwa purposes, and refrain from disclosing technical and procedural aspects that could give away institutional secrets if made public.⁵²

The important steps involved in issuing a fatwa are precisely depicted in Figure 8.2.

The juristic evidence of unrestricted interests (maāli mursalah) is commonly used to derive rulings for the Islamic financial industry. In doing so, a jurist needs to ensure that (i) the derived ruling does not clash with the revealed texts, or alter the implications of these texts; (ii) the ruling does not clash with the principles and propositions of sharī‘ah; (iii) the ruling serves the purposes of sharī‘ah.⁵³ For instance, rescheduling a debt – by increasing its amount through additional charges – is invalid even if it allows the customer an extended period of time, because it contradicts texts prohibiting usury. Below are some examples of valid implementation of unrestricted interests.

1. Making a Unilateral Promise Binding

   On the basis of a unilateral promise to purchase that is provided by a customer, an Islamic bank acquires assets from a third-party seller. Such an undertaking is commonly employed in Islamic banking. The International Fiqh Academy has issued a resolution endorsing the viewpoint that sees this promise as binding upon the one who made it.⁵⁴ While there is a difference of juristic opinion on this, making such a promise binding serves the interests of both parties and the industry. Otherwise, customers would enter into promises with banks and fail to carry through on them, leading to losses. AAOIFI, with reference to the Internal Islamic Fiqh Academy resolution, entitles the bank to recover actual losses in case the customer breaches his promise to the bank. This is permitted since the customer caused the institution to enter into a deal that it would not have executed in the absence of the promise provided.⁵⁵

2. Earnest Money

   Allowing earnest money to secure a transaction is based on the practice of the Caliph ‘Umar ibn Al-Khaāb, as reported by Imam Ahmad ibn Hanbal.⁵⁶ It is practiced on the basis of unrestricted interests to demonstrate good faith by the customer and to be a source of compensation for actual damages that could result from the customer breaching their promise to enter into the transaction with the bank. The International Islamic Fiqh Academy has issued a resolution with respect to earnest money.⁵⁷

3. Appointment of an Agent for Purchasing or Acquiring Possession of an Asset

   In case of need, the bank is authorized to appoint an agent, other than the ultimate buyer, to purchase the asset on behalf of the bank.⁵⁸ This appointment of a third party is based on the principle of unrestricted interests, since it could be difficult for the bank, in certain circumstances, to purchase and acquire possession of the asset by itself.

8.3.2 Differences in Juristic Opinion and Conflict Resolution

As discussed in the previous chapter, sharī‘ah jurists will often have different opinions on issues. While each jurist is entitled to their own opinion on a micro level, this could not be the case on the macro level, as the diversity of fatawa in the Islamic financial industry poses a serious risk that leads to inconsistencies in rulings and could have negative effects on stakeholders’ confidence. This leads to a scenario where the same transaction could be prohibited by the SSB of Bank A but permitted by the SSB of Bank B.⁵⁹ For example, sharī‘ah jurists have differed on the issue of tawarruq (monetization transaction). Some have allowed it in particular forms, while others have banned it outright. Consequently, banks which are advised by jurists who permit it have products that are based on this form of transaction, while competing banks advised by jurists who prohibit it do not have such products. This discord in industry products not only shakes the confidence of stakeholders, but also creates an element of doubt regarding the permissibility of such instruments. Hence, SSBs need to be diligent in issuing their fatawa; moreover, a need arises to coordinate such fatawa on a macro level, if not industry-wide, then at least on a jurisdictional level.

Differences in juristic opinions could also occur within a single SSB. Resolving these differences requires effective interaction among SSB members, broadmindedness, and rules on the statutes of the SSB that are backed by regulations of central authorities (central banks) and entity bylaws. The chairman of the SSB plays an integral role in resolving differences in juristic opinions and conflicts that may arise between members. The chairman would be responsible for calling SSB members to a meeting to discuss the issue or conflict. The chairman would seek the opinion of other members before coming to a decision. Should the majority⁶⁰ of the SSB members agree on an opinion that is valid, then the issue would be resolved. In case of a tie between members, the chairman would side with the opinion that he sees as most correct. If a conflict is not resolved on an SSB level, then it should be brought up to the jurisdiction’s centralized SSB for resolution. Should there be no centralized SSB, then the chairman’s decision would be final. Should a conflict of interest arise, then AAOIFI advises the affected sharī‘ah jurist to review the issue with the SSB. If it is not resolved, then the concerned jurist should resign and no longer take part in the functions of the relevant SSB. AAOIFI instructs SSBs to retreat from mistaken fatawa that conflict with the rulings of sharī‘ah:

• The board [SSB] has to retreat from its fatwa if it is proven to be wrong on reviewing, or on examination by a higher body. In such case the board has to inform the institution so as to rectify the ruling and its consequent effects. The institution on its part has to correct all the actions that had been based on the wrong fatwa and refrain from adopting it any more.
• The board on its own initiative or on request of the institution, has the right to review a previous fatwa even if such revision would lead to issuing a new fatwa that contravenes the former one. In such case the institution has to follow the new fatwa in the future and rectify the effects and repercussions of the old one.⁶¹

In contemporary practice, where a centralized SSB is appointed, such a body is authorized to issue fatawa that apply to SSBs at the bank level; moreover, it issues guidance with respect to sharī‘ah conflicts that could arise at the individual bank level. According to the Central Bank of Malaysia Act of 1958, which was amended in 2003, the SSB at the central bank, known as the Sharī‘ah Advisory Council (SAC), is accorded final decision-making authority with regard to sharī‘ah matters of institutions within the jurisdiction. The regulation considers the SAC the ultimate arbiter.⁶²

Similarly, in Sudan, the SSB is granted the authority to issue fatwa and advise in an attempt to standardize juristic matters.⁶³

The Pakistani regulator gives authority to the Federal Sharī‘ah Court of Pakistan as a third party institution to make decisions on sharī‘ah matters pertaining to Islamic banking and finance. Issues that are not resolved at the bank level are to be presented to the State Bank of Pakistan.⁶⁴

The Central Bank Bahrain has a National Sharī‘ah Advisory Board that provides services to institutions regarding sharī‘ah compliance matters.⁶⁵

Indonesia also has its National Sharī‘ah Board (Dewan Syariah Nasional) at its Central Bank (Bank Indonesia). This board is responsible for issuing sharī‘ah rulings. Bank Indonesia issues regulations for Islamic banking institutions based on fatawa issued by its National Sharī‘ah Board.

In the State Bank of Kuwait, Article No. 93 of Islamic Banking Law states: “In case of a conflict of opinions among members of the Shari‘ah Supervisory Board concerning a Shari‘ah rule, the board of directors of the designated bank may transfer the matter to the Fatwa Board in the Ministry of Awqaf [religious affairs] and Islamic Affairs, that shall be the final authority on the matter.”⁶⁶

In the United Arab Emirates, as per the regulation, the Higher Shari’a Authority is established to resolve sharī‘ah issues that could not be resolved by the SSB at the bank level.⁶⁷

The above discussion shows that numerous regulatory authorities in various jurisdictions have accounted for resolving differences in juristic opinions and other sharī‘ah disputes that could arise among SSB members. In jurisdictions where there is no centralized SSB, banks could present issues to their SSB. Should the SSB require additional assistance, it could consult with jurists from AAOIFI’s sharī‘ah board, or other trustworthy jurists.

8.3.3 Different Approaches to Issuing Fatawa

Differences in juristic opinions are often due to the different approaches and methodologies applied in deriving juristic rulings. Furthermore, different circumstances and conditions require jurists to tailor their fatawa to meet the needs of people.⁶⁸ Differences in fatawa could also occur because of other factors, such as the strictness of certain jurists and the number of members serving on an SSB. In classical Islamic literature it is widely acknowledged that in matters where reasoning is anticipated rather than being definitive, jurists are rewarded for the effort that they exert in deriving rulings, even if they reach an incorrect ruling after detailed study.⁶⁹

The dedication of jurists, institutions, and regulators in adhering to standards issued by AAOIFI and the IFSB has largely contributed to harmonizing fatawa and practices. Disclosure, improved transparency on fatawa, and active exchange between sharī‘ah jurists could further increase fatwa harmonization in the industry.⁷⁰ Grais and Pellegrini comment: “In reality, however, the diversity of opinions is less widespread than might be expected. The CIBAFI sampled about 6000 fatwas, and found that 90% were consistent across banks. The fact that over one hundred Shariah scholars around the world issued these fatwas would suggest an overall consistency in the interpretation of the sources.”⁷¹ To mitigate the risk of fatwa inconsistency, IBs should be careful in selecting their SSB members, who should not only possess relevant education, but also sufficient experience. Additionally, regulators should seriously consider introducing centralized SSBs to standardize sharī‘ah rulings.

8.3.4 Reversal of Fatawa and Implications

In a situation where a fatwa is found to be mistaken, the SSB would need to reverse it. AAOIFI instructs SSBs to retreat from fatawa that are proved to be wrong upon review or examination by a higher body. This is in line with Islamic practices: “Caliphate Omar in one case issued a fatwa that denied some of the brothers the right of inheritance, and later on he issued another fatwa that granted such brothers the inheritance right. Having done so he said: the former case was subject to my previous fatwa, and the new one is subject to the new fatwa.”⁷² AAOIFI further stipulates that SSBs could review a previous fatwa even if such revision leads to issuing a new fatwa that contravenes the former one. For changing or amending a pronouncement, the IFSB recommends that institutions ensure that the “SSB adopts a specified process for changing, amending or revising any Sharī‘ah pronouncements or resolutions issued by it.”⁷³ The IFSB further holds the institution responsible for disclosing any revisions in SSB pronouncements to shareholders and the public.