Foundations of Shari'ah Governance of Islamic Banks

Karim Ginena, Azhar Hamid

• Publisher: Wiley
• Year: 2015
• Print ISBN:
  9781118460771
• Edition: 1
• eBook ISBN:
  9781118460795
• Topic: Business
• Subtopic: Finance
• Index: Business

A practical guide for robust shar?'ah governance of the Islamic banking industry

Debate in the market on the extent of shar?'ah compliance of Islamic banks, their products, and activities has piqued stakeholders' interest. In Foundations of Shar?'ah Governance of Islamic Banks, Karim Ginena and Azhar Hamid explore the depths of shar?'ah governance to unravel its mysterious dimensions, and equip academics and practitioners with a solid understanding of the subject, which has become a serious challenge and thus deserves dedicated attention.

The authors make a strong case for the need to contain the shar?'ah risk that Islamic banks experience, and present a compelling argument for how this should be done. Ginena and Hamid propose a robust shar?'ah governance model that comprehensively tackles thisrisk, and helps improve the extent of shar?'ah compliance of market players. The authors detail the internal, external, and institutional arrangements needed to promote responsible shar?'ah governance, and critically analyze current laws, regulations, and industry practices on the topic. The chapters of the book do the following:

• Examine the roots, characteristics and objectives of shar?'ah and its relation to financial dealings;
• Probe the role of regulators in shar?'ah governance, explore the different approaches adopted by banking supervisors, and provide examples of relevant legal and regulatory measures;
• Explain to bank directors and management the fiduciary duty they assume with respect to shar?'ah compliance, and detail how they could discharge this responsibility in line with best practices;
• Elaborate on the purpose of the Shar?'ah Supervisory Board (SSB), its responsibilities, competence criteria, internal regulations, and key governance guidelines; additionally, they explore different SSB models;
• Describe the internal shar?'ah control system including its six components, and examine the internal shar?'ah audit function as well as different stages of conducting a shar?'ah audit;
• Clarify the role of a shar?'ah auditor, with guidance on reporting lines, scope of duties, authority, and practical ways on fulfilling tasks, such as a sample shar?'ah risk assessment grid and audit checklists;
• Discuss the newly emerging external shar?'ah advisory firms that are expected to play a key role in the coming years and the services they provide.

Through an effective treatment of each of these elements, and the way that they interact with one another, the book offers a fresh take on how robust shar?'ah governance of Islamic banks can be successfully accomplished. It is a comprehensive resource for academics, regulators, directors, lawyers, auditors, consultants, employees, and customers of Islamic banks interested in learning more about these challenges. This essential reading persuasively extends the discourse on the subject and addresses critical shar?'ah issues that have policy implications for decision makers in jurisdictions aiming to attract the fast-growing Islamic finance industry or increase their market share.

Part I

By Karim Ginena

Chapter 1
The Roots, Characteristics, and Objectives of Sharī‘ah and the Islamic Economic System

Chapter Summary

This chapter examines the roots of sharī‘ah in order to provide a solid theoretical foundation that is needed for understanding Islamic jurisprudence in general and Islamic transactional law in particular. Without this minimum understanding of sharī‘ah, it would be rather difficult to discuss sharī‘ah governance. The chapter begins by defining key terms, such as sharī‘ah, the Qur’ān, sunnah, and fiqh. Next, it discusses ijtihād and the differences in juristic opinions that could result from undertaking such an activity. Thereafter, the chapter explores obligation-creating and declaratory sharī‘ah rulings and the subject of these rulings. The characteristics and objectives of sharī‘ah are investigated in order to provide a context for these rulings. Subsequently, the chapter explores the Islamic economic system and its characteristics, in addition to identifying the objectives of sharī‘ah relating to property.

1.1 Sharī‘ah, the Qur’ān, and Sunnah

Sharī‘ah¹ etymologically means the source of drinking water,² and shar‘ means to ordain.³ Muslims believe that sharī‘ah is an ethical way of life revealed by God to secure the success (falāh) of creation in this world and the next.⁴ It does so by promoting what will benefit beings and protecting against that which will harm them.⁵ God, the Divine, uses several derivatives of the word sharī‘ah when addressing His final messenger to creation, prophet Muhammad (pbuh),⁶ in the Qur’ān.⁷

Qur’ān etymologically means the recited one.⁸ Terminologically speaking, Qur’ān is defined as “the communication of God the Exalted, revealed to prophet Muhammad (pbuh), whose recital is considered worship to God.”⁹ Muslims believe that the Qur'ān is the word of God, and that its words and meanings were revealed to prophet Muhammad (pbuh) over a 23-year period.¹⁰ They therefore take it to be a holy book of guidance and legislation,¹¹ and see an obligation to ponder over it, deduce from it, and act upon it.¹²

Imām Al-Shā

ibi observes that Sharī‘ah was revealed not only to illuminate a way for creation to glorify and worship their Creator, but also to stop people from aimlessly following their whims.¹³ In commenting on the concept of “worship,” Ibn Taimīyah (d. 728 ah¹⁴/1327 CE) states that it encompasses two aspects: first, abiding by sharī‘ah with humility towards the Divine; second, doing so with a loving heart.¹⁵ Ibn Taimīyah identifies the realm of worship as encompassing everything, whether said or performed, that pleases the Divine.¹⁶ This entails carrying out prescribed duties and staying clear of outlined prohibitions. He gives examples of acts of worship that extend beyond the main rituals. These include truthfulness, trustworthiness, being dutiful to one’s parents, honoring covenants, being kind to neighbors, orphans, destitute people, wayfarers, and animals, as well as patience, gratitude, being content with God's decree, and dependence on the Divine.¹⁷ He adds that pursuing the means necessary for achieving God's obligations is an act of worship in itself. In essence, every act can be considered an act of worship as long as the individual's intention is to please the Divine and the act is in line with the teachings of prophet Muhammad (pbuh). For example, the brain can contemplate, the tongue can call to good and prevent evil, the heart can love and fear God, etc. Such a holistic understanding of worship is meant to develop a strong personal relationship between the individual and the Divine that holistically covers the different avenues of life.¹⁸

While sharī‘ah offers guidance to creation to steer them in the direction of that which is beneficial and to protect them from what is detrimental, it is not meant to be burdensome.¹⁹ Ibn Kathīr (d. 674 AH/1372 CE) comments in his exegesis on the verse which reads, “He has chosen you and has not placed upon you in the religion any difficulty” (22:78), by saying:

He has not given you more than you can bear and He has not obliged you to do anything that will cause you difficulty except that He has created for you a way out. So, the salah [prayer], which is the most important pillar of Islam after the two testimonies of faith, is obligatory, four rak’as [units] when one is settled, which are shortened to two rak’as when one is traveling … And he [prophet Muhammad (pbuh)] said to Mu‘ādh and Abu Mūsa, when he sent them as governors to Yemen: Give good news and do not repel them. Make things easy for the people and do not make things difficult for them.²⁰

This clement approach of the Divine is embraced by prophet Muhammad (pbuh), as evident in his sayings. For example, “He who is deprived of gentleness is, in fact, deprived of all good.”²¹ Attesting to this, the Divine says: “And We have not sent you, [O Muhammad], except as mercy to the worlds” (21:107). This mercy is embodied in the prophet relieving people from their burdens through his teachings. ‘Aishah (d. 58 AH/678 CE), the wife of the prophet (pbuh), reported: “Whenever the prophet was given a choice between two matters, he would [always] choose the easier as long as it was not sinful to...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright
• Table of Contents
• Dedication
• Foreword
• Acknowledgements
• Introduction
• Part I: By Karim Ginena
• Part II: By Azhar Hamid
• Index
• End User License Agreement