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10th International Conference on Islamic Economics and Finance
CENTRAL SHARĪʿAH BOARD IN CENTRAL BANKS: A COMPARATIVE
STUDY OF PAKISTAN AND BRUNEI DARUSSALAM
By,
Hassan Shakeel Shah
PhD Candidate at Sultan Omar ‘Ali Saifuddien Centre for Islamic Studies
PR
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University Brunei Darussalam, Brunei Darussalam.
Conference paper (excluding author names and affliations)
CENTRAL SHARĪʿAH BOARD IN CENTRAL BANKS: A COMPARATIVE STUDY OF
PAKISTAN AND BRUNEI DARUSSALAM
Abstract
It is obvious that only standardized Islamic financial products can gain easy acceptance among
the general public while conflict in Fatwā can affect the confidence of the shareholders as well
as the customers. Therefore, a central Sharīʿah Board is the all-important element of a robust
Sharīʿah-compliance supervision mechanism. It plays a significant role in standardizing and
harmonizing the Sharīʿah rulings in the jurisdiction. Hence, the issue of composition of the
central Sharīʿah body should be a matter of major concern. Apart from the voting right, wellexperienced financial practitioners, lawyers and accountants should also be part of the central
Sharīʿah boards together with prominent Sharīʿah scholars. The technical members will give
their opinion in the relevant areas of their expertise to the Sharīʿah scholars, who will consider
their views while giving a Sharīʿah ruling on issues under consideration to enhance the Sharīʿahcompliant business industry more effectively. This paper seeks to explore the importance of the
centralized Sharīʿah boards at the national level. The paper also seeks to shed light on the two
centralized models of Pakistan and Brunei through a comparative study.
Keywords: Fatwā, Sharīʿah Board, Sharīʿah-compliance
Introduction
The essence of Islamic finance requires all Islamic products to be structured and implemented in
accordance with the provisions of the Islamic law. There is enough evidence to support the fact
that Islamic finance does not appeal only to Muslims but also to non-Muslims. On the basis of its
fundamental moral values, Islamic finance has often been compared with the theme of ethical
finance, corporate citizenship and corporate social responsibility (CSR). Consequently, the
Islamic financial paradigm is premised on Maqāsid al-Sharīʿah (objectives of Islamic law) which
provides the vision and goals of the social responsibility of the Islamic financial system (ISRA,
2012).
Islamic financial institutions (IFIs) are required to establish Sharīʿah boards or Sharīʿah advisors
to advise them and to ensure that their operations and activities comply with Sharīʿah principles
(AAOIFI, 2010). The Sharīʿah boards constitute one of the most important components of
Islamic financial institutions (IFIs). One of the basic roles of the Sharīʿah boards is to give fatwā
in the light of Sharīʿah on new trends of transaction or to amend and explain an opinion which
1
has already been given. This will help IFIs to make their products, services and operations
Sharīʿah-compliant. The Sharīʿah boards set IFIs apart from the traditional financial institutions.
In the past, some of the Sharīʿah board members did not have sufficient awareness of the modern
financial system and were often unable to understand the financial terminologies and the
language through which transactions were documented. This could be a major obstacle to the
progress of Islamic finance and the development of new products. However, there is currently a
move to recruit Sharīʿah scholars who have good knowledge of the modern financial system.
Some institutions are even recruiting jurists, accountants and financial experts onto their Sharīʿah
boards but usually those members do not possess voting rights while making any Sharīʿah
decisions.
According to Ahcene (2010), the Fatwā in Islamic finance can be classified into two categories:
official and non-official Fatwā and individual and collective Fatwā. An official Fatwā can only
be issued by a Mufti who is officially appointed by the government. This Fatwā is supported by
the government; therefore, it has a strong influence in society as well as on the business sector. A
non-official Fatwā is issued by a non-official Mufti. He might be a formal Mufti or only a
competent Sharīʿah scholar who has a valuable experience of Islamic law. The individual Fatwā
is issued by a single Sharīʿah scholar based on his individual Ijtihad. This type of Fatwā can be
official when a government appointed Mufti issues it and if it is not related to any official body
then it becomes a non-official Fatwā. A collective Fatwā is issued by a group of Sharīʿah
scholars. This type of Fatwā does not belong to any single Mufti but it carries all the names of
those individuals who were involved in the issuance of that Fatwā. This type of Fatwā includes
Fatāwā from a country’s Fiqh Academy or Darul Ifta and the collective Fatāwā by the
International Fiqh Academy of the Organization of Islamic Cooperation (OIC). The Fatāwā
given by the Sharīʿah board is categorized under the collective Ijtihad.
The Sharīʿah board as it is defined by the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) is, “… an independent body of specialized jurists in fiqh almuʿamalāt (Islamic commercial jurisprudence)” (AAOIFI, 2010: 4).
Different jurisdictions adopt different ways of their Sharīʿah compliance processes, especially
with regards to the Sharīʿah boards. Some countries have centralized Sharīʿah boards at their
2
central banks or at the national level. Other countries also require their Islamic financial
institutions (IFIs) to establish Sharīʿah boards or at least have a full time Sharīʿah advisor in their
institution to look at their day to day activities in the light of Sharīʿah principles. In addition,
there are countries, which do not have any central Sharīʿah board at their regulatory or national
level; these countries rely on their in-house Sharīʿah boards only.
The Necessity of Central Sharīʿah Board
According to Chapra and Ahmed (2002: 81), “it is necessary to create a centralized Sharīʿah
board to clear the Sharīʿah compatibility of various modes and instruments of finance used by
banks. In the absence of such a centralized Sharīʿah board, every bank is under an obligation to
have its own Sharīʿah board. This is very costly, particularly for the smaller banks. Moreover,
the existence of a large number of Sharīʿah boards lead to conflicting opinions which creates
inconsistency and uncertainty. With the passage of time and the free discussion of all
controversial issues, the conflicts would tend to get gradually resolved. However, in the initial
evolutionary phase such a centralized board seems to be essential to minimize the conflict and to
standardize the instruments of Islamic finance. Such standardization will pave the way for the
creation of an Islamic financial market”.
The main objective of a central Sharīʿah board is standardization and harmonization of Sharīʿah
rulings. Lack of standardization of Sharīʿah rulings within the same jurisdictions is becoming a
big challenge for the Islamic financial industry. The diversity of opinions in the issuance of
Fatāwā creates confusion in the minds of the general public. The proper harmonization of the
diversity of opinions which is based on the different schools of thought can become a great
strength for the Islamic financial services industry by providing different options suitable to the
varying needs of the customers. Moreover, the central Sharīʿah boards also help and guide the
central banks or the regulatory authorities in formulating the rules and policies for the better
performance of the Islamic financial institutions as well as for the resolution of conflicting
opinions on Sharīʿah rulings (Akhtar, 2006).
Being an apex Sharīʿah board of the country, it includes in its responsibilities to look after all
Sharīʿah related matters of Islamic banks, including Islamic insurance or Takaful companies,
Islamic mutual funds, Islamic real estate investment trusts (iREITs), and Islamic capital market.
3
Thus, a central Sharīʿah board is the sole supervisory authority to be consulted by the
management of the central banks as well as the Sharīʿah boards of the IFIs. For the purpose of a
progressive, sound and stable Sharīʿah-compliant financial industry, the members of the central
Sharīʿah boards should have diverse backgrounds in Islamic jurisprudence. Others include
Islamic commercial law (fiqh and fiqh al-muamalat), conventional law, accounting and finance.
As being practised in Sharīʿ ah Boards of the State Bank of Pakistan and the Bank Negara
Malaysia.
Apart from that, it is also crucial for all IFIs to establish in-house Sharīʿah board or at-least
recruit a full time Sharīʿah advisor who can supervisor their day to day activities in the light of
Sharīʿah principles. It will also ease the responsibilities of the central Sharīʿah board.
Many models of centralized Sharīʿah boards exist in various countries with almost the same goal
of unifying and standardizing the Sharīʿah rulings. Nevertheless, in some of the aspects, they
differ from one country to another. However, this study focuses on the two centralized Sharīʿah
board models of Pakistan and Brunei Darussalam.
The Pakistani Model
1. A Quick glance at Islamic Banking in Pakistan
Pakistan was established as the first Islamic Republic created in the name of Islam. Therefore,
the idea of the Islamic banking in Pakistan goes back to the early days of independence. On July
1, 1948, on the occasion of the opening ceremony of the State Bank of Pakistan Mohammad Ali
Jinnah, the founder of Pakistan said in his speech:
“I shall watch with keenness the work of your Research Organization in evolving
banking practice compatible with Islamic ideas of social and economic life…, the
adoption of Western economic theory and practice will not help us in achieving our
goals of creating a happy and contended people. We must work our destiny in our
own way and present to the world an economic system based on true Islamic
concept
of
equality
of
manhood
(http://www.sbp.org.pk/about/history/h_moments.htm.
2014).
4
and
social
justice”
Accessed 20 December
The process of Islamization of the financial system of Pakistan coincided with the global
resurgence of Islamic banking in the late 1970. Pakistan was among the three countries in the
world that had been trying to implement Islamic banking at the national level. The other two
countries include Iran and the Sudan. Many significant and practical steps were taken in 80s.
Those attempts paved a significant step in the evolution of the Islamic banking system in
Pakistan (SBP-KAPS, 2013). In a technical sense it was the most advanced model compared to
any other model being practised anywhere in the world at that time. However, that system fell
apart as it did not adequately address some of the important issues, one of which was
unavailability of an effective Sharīʿah compliance mechanism. Despite the loopholes, those
efforts provided a valuable experience that has been taken into account in the formulation of the
current strategy of the State Bank of Pakistan to re-launch Islamic Banking in Pakistan (SBP,
n.d, Islamic Banking Sector Review, 2003-2007).
After struggling for twenty years, the government of Pakistan and the management of the State
Bank decided that the transformation of the banking system should be made gradually and
without causing any further disruption. This decision was made in a meeting held on September
4, 2001 under the chairmanship of the President of Pakistan attended by the officials of the
Ministries of Finance and Law, the Governor of the State Bank of Pakistan, the Chairman and
some members of the council of the Islamic Ideology and the chairman of the CTFS (SBP,
2003). In December 2001, the State Bank of Pakistan issued a detailed Islamic banking policy
for the establishment of Islamic banks. It encouraged the parallel development of the Islamic and
conventional
banking
system
in
a
gradual
and
steady
fashion
(www.kantakji.com/media/1286/islamicbankingin_111.doc. Accessed 9 December 2014). It
was decided that the State Bank of Pakistan would offer three institutional options:
1. Setting up subsidiaries by the commercial banks for the purpose of conducting Sharīʿah
compliant transactions;
2. Specifying branches by the commercial banks exclusively dealing with Islamic products
with all safeguards to ensure integrity and purity of Islamic banking operations, and
3. Setting up new full-fledged commercial banks to carry out exclusively banking business
based on proposed Islamic products.
5
As a result of these efforts, in 2001, an Islamic Banking Division was established in the Banking
Policy Department at the SBP. In January 2002, the first Islamic commercial banking licence
was issued to Al-Meezan Investment Bank Limited upon its request under the criteria issued by
the SBP to convert itself into an Islamic commercial bank. The license was issued in the name of
Meezan Bank Limited to operate as a full-fledged Islamic bank.
Later on in September 2003, in recognition of the need for a separate department to look after the
regulation and promotion of the Islamic banking sector, the Islamic Banking Department (IBD)
was established in the State Bank. The department has been staffed with highly experienced
personnel in regulating the banking industry and with sufficient knowledge of all aspects of
Islamic banking, including conceptual as well as business strategies (SBP, n.d, Islamic Banking
Sector Review, 2003-2007).
2. The Central Sharīʿah Board of the State Bank of Pakistan
In view of having a central Sharīʿah authority to direct the State Bank of Pakistan (SBP) and the
Islamic banking industry, a Sharīʿah Board was formed at the SBP. The Central Sharīʿah Board
of the State Bank of Pakistan (SBP) was first established by the Central Board of Directors of the
SBP on October 24, 2003. The central Sharīʿah board advises the SBP on the procedures, laws
and regulations pertaining to Islamic Banking in the light of Sharīʿah principles. Dr. Mahmood
Ahmed Ghaazi ex-Federal Minister for Religious Affairs and a Sharīʿah Scholar of world
renown was appointed as its first Chairman (SBP. n.d. Strategic Plan for Islamic Banking
Industry in Pakistan).
2.1 The Appointing Authority and Its Terms of Office
The Central Board of Directors of the State Bank of Pakistan appoints the members of the
Sharīʿah Board of the State Bank of Pakistan.
The terms of office of the Central Sharīʿah Board of the SBP are as follows:
i.
The initial term of office of all members, excluding the ex-officio member of the Sharīʿah
Board is for two years.
6
ii.
By the end of the term, the Chairman and members of the Sharīʿah Board will remain in
office until their successors are appointed.
iii.
The Governor of the State Bank of Pakistan can fill any casual vacancy arising in the
Sharīʿah Board for the un-expired portion of the term of the member concerned.
2.2 Composition of the Sharīʿah Board
The Sharīʿah Board consists of members drawn from among Islamic scholars, bankers,
accountants, lawyers and other relevant fields. It has a minimum of five members. At least three
members are Sharīʿah scholars, one member a Chartered accountant, a lawyer and one
representing the bankers and the State Bank of Pakistan to be the Director of the Islamic Banking
Department of the SBP, who also serves as the secretary of the Sharīʿah Board. The Chairman of
the Sharīʿah Board would be from among the Sharīʿah scholars. The technical members, i.e. the
lawyer, the accountant and the banker give their opinions in the relevant areas of their expertise
to the Sharīʿah scholars, who consider their views while giving a Sharīʿah ruling on issues under
consideration (SBP. n.d. Strategic Plan for Islamic Banking Industry in Pakistan). To produce an
excellent and widely acceptable standardization of Islamic financial modes, a comprehensive
composition of a central Sharīʿah board with all these experts of various fields is crucial.
2.3 Role and Responsibilities
The role and responsibilities of the central Sharīʿah Board of the SBP as mentioned in the
official document of the SBP are given as follows:
i.
Review and approve for Sharīʿah compliance the products/instruments developed by the
State Bank of Pakistan for conducting its central banking and monetary management
functions under the Islamic modes.
ii.
Advise the State Bank of Pakistan on Prudential regulations developed for the Islamic
banking sector.
iii.
Approve the fit and proper criteria for the appointment of Sharīʿah advisors of institutions
conducting Islamic banking activities.
7
iv.
Advise the State Bank of the Sharīʿah ruling in case of a conflict arising from the
Sharīʿah audit of the Islamic banking activities of the banks under the supervisory control
of the State Bank.
v.
Advise the State Bank on the Sharīʿah rulings in case of a conflicting Sharīʿah opinion on
the Islamic banking products.
vi.
Perform such other functions as may be assigned from time to time, by the State Bank for
conducting of smooth functioning of the Islamic financial system (SBP. n.d. Strategic
Plan for Islamic Banking Industry in Pakistan).
2.4 Schedule of Meetings and Work
1. The Sharīʿah Board holds quarterly meetings. However, at the request of the Secretary to
the Sharīʿah Board, it may hold special meeting if a matter of importance in the working
of the bank arises.
2. The Sharīʿah Board meetings must be attended by at least four members that should
include at least one Sharīʿah scholar. In case of the absence of the Chairman of the
Sharīʿah Board, the Sharīʿah scholar presides over the meeting.
3. The Sharīʿah Board can invite experts from different fields for consultations and advice,
when needed.
4. The Sharīʿah Board holds discussions on the rulings keeping in view the early opinions
of Sharīʿah scholars on such subject. In the absence of any Sharīʿah opinion on the
subject in question the Sharīʿah Board will be required to come up with a
declaration/ruling by their own efforts.
5. The Sharīʿah Board applies religious rulings that are applicable to Islamic financial
institutions with the aim of bringing banking functions and financial matters in
accordance with the Sharīʿah principles (Interview: Naveed Ahmed, Deputy Director
Islamic Banking Department of the State Bank of Pakistan, 8 December 2014).
8
2.5 Sharīʿah Governance and Compliance Framework
The State Bank of Pakistan has adopted a three-tier Sharīʿah-compliance mechanism to promote
confidence in the Islamic banking system and to ensure a deeper and extensive Sharīʿahcompliance supervision. The following shows the three-tier Sharīʿah-compliance mechanism:
1. A central Sharīʿah Board at the State Bank of Pakistan approves guidelines and policies
and sets the criteria for the Sharīʿah advisors.
2. The Sharīʿah Board in each Islamic bank provides guidelines to the banks on their day to
day activities and builds confidence in the clients.
3. The Sharīʿah audit system or Sharīʿah-compliance inspection is carried out on annual
basis (El-Tiby, 2011).
The State Bank of Pakistan has been issuing regulation, instructions and guidelines for the
Sharīʿah-compliance business since the re-launching of Islamic banking in 2001, to promote and
strengthen Islamic finance in the country. In 2008, the SBP issued a detailed set of instructions
and guidelines for Sharīʿah-compliance through IBD Circular No. 2 of 2008. Most recently, in
April 2014, the State Bank of Pakistan issued a comprehensive “Sharīʿah Governance
Framework for Islamic Banking Institutions”. This is a very good step towards promotion of the
Islamic banking industry of Pakistan. It will certainly help the board of directors, executive
management and the Sharīʿah boards of the Islamic banking institutions to strengthen their
Sharīʿah-compliant business.
The Bruneian Model
1. History of Islamic Banking & Finance in Brunei Darussalam
Islamic Banking was first introduced in Brunei Darussalam in the early 1990s and since then it
has shown tremendous growth. The Perbadanan Tabung Amanah Islam Brunei (TAIB) was
established in September 1991 followed by the Islamic Bank of Brunei (IBB) in 1993 and later
the Islamic Development Bank of Brunei (IDBB) in 2000. In 2005, the Brunei Ministry of
Finance proposed the merger of the IBB and the IDBB to become the Bank Islam Brunei
Darussalam (BIBD). The BIBD is the only Islamic bank in Brunei. The TAIB is an Islamic trust
9
fund and is not considered as a bank. 1 However, both the BIBD and the TAIB offer nearly
similar Sharīʿah-compliant financing products and services and both have their own Sharīʿah
Advisory Boards. Islamic banking services in Brunei are full-fledged Islamic banks, and no
Islamic banking windows, stand-alone branches or subsidiaries of conventional banks are
operating in the state. Domestic Islamic and conventional banking activities are governed by the
Islamic Banking Act 1999 and the Banking Order 2006 under the supervision of the Financial
Institution Division of the Ministry of Finance (Khairuddin & Ashak, 2010).
In 2010, the Islamic banking sector played a significant role in the overall banking industry of
Brunei Darussalam with total assets of B$6.36 billion and deposits totaling B$5.167 billion
which accounted for 37% and 34.6% respectively of the total market share. Similarly, the takaful
industry has been able to penetrate the insurance market with a sizeable market share of 42%
(gross
premiums)
and
20%
(assets)
as
at
the
(http://www.ambd.gov.bn/index.php/divpublications-bra-datadiv/overview.
end
of
2010
Accessed
12
November 2014). At the end of 2012, 40% of the market shares were Sharīʿah-compliant
banking products. In the next five years, this percentage is forecast to reach up to 60 percent of
the country’s market shares (Borneo Bulletin Year Book, 2013). Nevertheless with the size of the
country, the Islamic financial sector of Brunei is growing faster than in many others countries.
Technically, there is no central bank in Brunei. The Autoriti Monetari Brunei Darussalam or
Authority Monitory Brunei Darussalam (AMBD) is a statutory body that acts as the central bank
as well as the regulatory authority of Brunei Darussalam. The Islamic Financial Services Unit of
the AMBD covers banking, Takaful, asset management, mutual funds and trusts services.
2. The Central Sharīʿah Board of Brunei Darussalam
The Brunei Ministry of Finance has a national or centralized Sharīʿah board which is called the
Sharīʿah Financial Supervisory Board (SFSB) where the Autoriti Monetari Brunei Darussalam
(AMBD) is the appointed secretariat.
On January 17, 2006, the SFSB was established under the Constitution of Brunei Darussalam
under the Sharīʿah Financial Supervisory Board Order, 2006, Article 83(3). The board was
1
The TAIB is licensed under the TAIB Act Ch. 163 and not under the Islamic Banking Order 2008.
10
established to enhance the Sharīʿah governance and supervision as well as enhancing the growth
of the industry. The Board is entrusted with the duty of making sure that all Islamic products are
in accordance with Sharīʿah before they are distributed (SFSB, 2006).
2.1 The Appointing Authority and Its Terms of Office
As mentioned in the Sharīʿah Financial Supervisory Board order 2006, the central Sharīʿah
advisory board or the Sharīʿah Financial Supervisory Board (SFSB) is appointed by His Majesty;
the Sultan of Brunei Darussalam with recommendation from the Ministry of Finance (SFSB,
2006).
The period or term of office of any member of the SFSB is three years starting from the date of
appointment.
2.2 Composition of the Sharīʿah Board
According to the Sharīʿah Financial Supervisory Board order 2006, the board shall consist of; the
Permanent Secretary, Ministry of Finance (ex-officio), who shall be the chairman of the Board,
the State Mufti of Brunei Darussalam (ex-officio), and not less than six other persons to be
appointed by His Majesty, the Sultan of Brunei on the recommendation of the Ministry of
Finance in consultation with the Muslim Religious Council. At least four of them should be
Muslims who are followers of the sect of Ahlis Sunnah WalJamāʿah and who are religious
scholars, experts in Islamic knowledge or experienced in fiqh al-muʿamalāt. And at least two of
them shall be Muslims who are experienced in banking, economics, finance, law or any other
related discipline. The Ministry of Finance, with the approval of His Majesty, may appoint one
of the members to be the deputy chairman of the Board (SFSB, 2006).
For the composition and appointment of a Sharīʿah Supervisory Board, AAOIFI (2010)
stipulates that members of the Board should be “… specialized jurists in fiqh al-muʿamalāt” or
specialists in Islamic commercial jurisprudence. Bakar (2004) suggests that the Sharīʿah
supervisory board may include a member other than those specialized in fiqh al-muʿāmalāt but
who should be an expert in the field of Islamic financial institutions and with knowledge of fiqh
al-muʿāmalāt. The Sharīʿah supervisory board is entrusted with the duty of directing, reviewing
and supervising the activities of the Islamic financial institutions to ensure that they are in
11
compliance with Islamic Sharīʿah rules and principle. The Fatāwā and the rulings of the board
are binding on the Islamic financial institution.
2.3 Role and Responsibilities
According to the Sharīʿah Financial Supervisory Board order 2006 (SFSB 2006), every financial
institution should consult the SFSB on Sharīʿah matters relating to Islamic banking, Takaful,
Islamic financial and Islamic development financial business as well as any other business which
is in line with Sharīʿah principles. Every financial institution is also obliged to apply to the SFSB
for Islamic approval for its product in accordance with the Hukum Sharaʿ (rules of the Sharīʿah)
before it enters into transaction.
2.4 Schedule of Meeting and Work
The chairman of the SFSB can call meetings as often as may be required but not less than six in a
year. The selection of place and time will be dependent on the decision of the appointed
chairman. The board can invite any technical expert to attend the meeting of the board to advise
them on any issue.
2.5 Sharīʿah Governance and Compliance Framework
Under the regulations of the new Islamic Banking Order 2008, every Islamic bank in the country
is required to have a Sharīʿah Advisory Body (SAB). This body should consist of at least three
Muslim Religious Scholars, two of whom being citizens of Brunei. Article 2(b) of the ‘Bank’s
Articles of Association’ mentions that the SAB should consist of a Chairman, a Deputy
Chairman, three members and a Secretary (BIBD n.d. SAB-TOR). According to section 15(1)(a)
of the Sharīʿah Financial Supervisory Board Order, 2006, members of the SAB must be
appointed for a period of two years through a written approval by the Sharīʿah Financial
Supervisory Board.
Thus, the Brunei Ministry of Finance has established a two-tier Sharīʿah governance and
compliance system, comprising a centralized Sharīʿah Financial Supervisory Board (SFSB)
where the AMBD is the appointed secretariat and the Sharīʿah Advisory body (SAB) formed in
each respective Islamic Financial Institution (AMBD, 2012). Apart from that, no specific
12
Sharīʿah governance and compliance framework has been established yet by the SFSB of the
Autoriti Monetari Brunei Darussalam (AMBD).
Since there is no specific framework or guidelines established for the Sharīʿah-compliance
business by the authorities, the Bank Islam Brunei Darussalam (BIBD) adopts a self-arranged
Sharīʿah governance and compliance framework based on the Sharīʿah legal maxim thus:
“everything is allowed unless it is otherwise stated.” The BIBD adopts the standards of the
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). For the
product approval process, the BIBD also makes reference to the guidelines issued by the Bank
Negara Malaysia (BNM) as well as the Labuan Offshore Financial Services Authority (LOFSA)
(Interview: Hjh Hanifah Jenan, Director Sharīʿah Department of the Bank Islam Brunei
Darussalam, 24 December 2014).
The Islamic Financial Services Unit (IFSU) at the AMBD could pay urgent attention towards
formulation of a comprehensive Sharīʿah governance and compliance framework. This
framework will help the boards of directors, SABs and the management units of the IFIs in
pursuing their duties towards the Sharīʿah-compliance business. It will also relieve the unclear
regulatory problems as well as improve the quality of ongoing and proposed services and
products of the IFIs.
The existing staff of the IFSU at the Autoriti Monetari Brunei Darussalam (AMBD) is not
enough. The available staff is working on many different areas. This could affect the level of
Sharīʿah-compliance. The authorities could recruit some more experts of Islamic finance in the
unit for the abundant benefits.
Comparative Analysis
Pakistan and Brunei Darussalam have both established centralized Sharīʿah boards in the
countries. The Islamic financial institutions (IFIs) of both countries are also required to establish
their in-house Sharīʿah Boards. Brunei has a full-fledged Islamic banking environment while in
Pakistan a conventional financial system works in parallel with the Islamic financial system. The
Islamic financial services industry of Pakistan consists of Islamic banks, microfinance banks,
Islamic mutual funds, Mudāraba and Takaful companies. Commercial and microfinance banks
are being operated under the State Bank of Pakistan (SBP) while the rest are controlled by the
13
Securities & Exchange Commission of Pakistan (SECP) (IFN February, 2014). On the other
hand, all Islamic financial institutions (IFIs) of Brunei Darussalam are regulated under the
Autoriti Monetari Brunei Darussalam of the Ministry of Finance. Another fact is that Brunei is
among the countries that have legally captured the regulatory framework on Sharīʿah advisors in
their national constitutions while the legal provisions on Sharīʿah advisors in Pakistan are limited
to circular, guidelines and frameworks issued by the State Bank of Pakistan (Rusni, 2013).
The notion of Islamic Banking in Pakistan was started in the early days of Independence. The
process of Islamization of the financial system of Pakistan is paralleled with the global
resurgence of Islamic banking in the late 1970s. Pakistan was among the three countries which
have been trying to implement Islamic banking at the national level. The mid 1980s attempt was
a significant step in the evolution of Islamic banking system in Pakistan. In December 2001 the
state bank of Pakistan issued a detailed Islamic banking policy which encouraged the parallel
development of the Islamic and conventional banking system. Moreover, in January 2002, the
first Islamic commercial banking licence was issued to Meezan Bank Limited to operate as fullfledged Islamic bank. In the case of Brunei, Islamic banking was introduced in 1990s. The
Perbadanan Tabung Amanah Islam Brunei (TAIB) was established in September 1991, followed
by the Islamic Bank of Brunei (IBB) in 1993 and later the Islamic Development Bank of Brunei
(IDBB) in 2000. In 2005, the Brunei Ministry of Finance proposed the merger of the IBB and the
IDBB to become Bank Islam Brunei Darussalam (BIBD). Currently, the BIBD is the only
Islamic bank in Brunei.
In October 2003, the Central Sharīʿah Board of the State Bank of Pakistan (SBP) was first
established by the Central Board of Directors of the SBP. The central Sharīʿah board advises the
SBP on the procedures, laws and regulations pertaining to Islamic Banking in the light of the
Sharīʿah principles. The Central Board of Directors of the SBP appoints the members of the
central Sharīʿah Board. The term of office of all Sharīʿah Board members are for two years,
excluding the ex-officio member.
However, looking at the Brunei model, the Sharīʿah Financial Supervisory Board (SFSB) of
Brunei was established under the Constitution of Brunei Darussalam under the Sharīʿah
Financial Supervisory Board Order 2006, Article 83(3). The board is appointed by His Majesty;
14
the Sultan of Brunei Darussalam with recommendation from the Ministry of Finance. The term
of office of the SFSB members is for three years. The reason behind the establishment of the
SFSB was to enhance the Sharīʿah governance and its supervision as well as enhancing the
growth of the industry.
The Sharīʿah board of the SBP should comprise of at least five members; three of whom should
be Sharīʿah scholars, a chartered accountant, a lawyer and one banker representing the state Bank
of Pakistan. In comparison with the Bruneian model, the SFSB shall consist of; the Permanent
Secretary, Ministry of Finance (ex-officio), who shall be the chairman of the Board, the State
Mufti of Brunei Darussalam (ex-officio), and not less than six other persons to be appointed by
His Majesty, the Sultan of Brunei on the recommendation of the Ministry of Finance in
consultation with the Muslim Religious Council. At least four of them shall be Muslims who are
followers of the sect of Ahlis Sunnah WalJamāʿah and who are religious scholars. At least two of
the members shall be Muslims who are experienced in banking, economics, finance, law or any
other related discipline. The Ministry of Finance, with the approval of His Majesty, may appoint
one of the members to be the deputy chairman of the Board.
The official document of the SBP describes some of the main role and responsibilities of the
central Sharīʿah Board while more details about the role and responsibilities of the SFSB were
not found in the available documents. However, being the apex Sharīʿah bodies of both countries
their role and responsibilities might be same. This includes standardization of the Sharīʿah
rulings through the unification of Fatwā across the jurisdiction. It also advises and directs the
authorities on the Sharīʿah-compliant issues and matters.
It was described by the authorities of the SBP that the central Sharīʿah Board holds quarterly
meetings. However, at the request of the Secretary to the Sharīʿah Board, it may hold special
meetings if necessary. Furthermore, the Sharīʿah Board meetings must be attended by at least
four members that should include at least one Sharīʿah scholar. In case of the absence of the
Chairman of the Sharīʿah Board, the Sharīʿah scholar will preside over the meeting. On the other
hand, the chairman of the SFSB can call meetings as often as may be required but should not be
less than six in a year. The selection of place and time will depend on the choice of the chairman.
15
Both central boards hold authority to invite any technical expert to attend the Sharīʿah board
meeting to advise them on any requested matter.
The State Bank of Pakistan has recently issued a detailed document on the Sharīʿah governance
and compliance framework for the Islamic banking institutions. This Sharīʿah governance
system of the SBP is based on three dimensions; a central Sharīʿah board, in-house Sharīʿah
board and, annual Sharīʿah-compliance audit. On the other hand, the Bruneian authorities have
established a two-tier Sharīʿah governance mechanism which rotates under the central and local
Sharīʿah boards. Apart from that, no framework or guidelines of the Sharīʿah governance and
compliance has been established yet.
Conclusion
The conflict of opinion in Islamic finance can take away the confidence of the shareholders and
the general public. Lack of standardization of Sharīʿah rulings is a huge challenge faced by the
Islamic financial industry nowadays. Thus, the necessity for a higher Sharīʿah authority at the
regulatory level arises to harmonize the diverse opinions on Sharīʿah rulings and to unify the
Fatwā across the country.
Pakistan and Brunei have both adopted a centralized Sharīʿah governance structure.
Additionally, the Pakistani model provides detailed guidelines and provisions for the central
Sharīʿah board as well as for the structure of their national Sharīʿah governance mechanism.
With regards to the Bruneian model, very few guidelines have been issued yet by the central
authorities. Apart from the aforementioned issues, there are still many issues and challenges that
need to be resolved (IFN February, 2013).
Nevertheless, in the development of Islamic banking in Pakistan, the question is still to be
solved, because a lay man is still not satisfied about the theme of Islamic Banking and Finance
vis-à-vis conventional system. The authorities could pay more efforts through multimedia and
other means to increase the awareness about Islamic finance in the country.
It was recommended among others that the Islamic Financial Services Unit (IFSU) at the AMBD
could pay urgent attention towards formulation of a comprehensive Sharīʿah governance and
compliance framework to relieve the unclear regulatory problems as well as improve the quality
16
of ongoing and proposed services and products of the IFIs. Additionally, the existing staff of the
IFSU at the Autoriti Monetari Brunei Darussalam (AMBD) is not enough. This could affect the
level of Sharīʿah-compliance. The authorities could recruit some more experts of Islamic finance
in the unit for the abundant benefits.
Reference List
AAOIFI. (2010). Governance Standards for Islamic Financial Institutions. Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI), Bahrain.
Ahmed, Naveed. (2014). Ref: Information on the Sharīʿ ah Board of the State Bank of Pakistan.
e-mail to S. Hassan ([email protected]), 08 Dec. [08 Dec 2014].
Akhtar, S. (November 27, 2006). ‘Sharīʿah Compliant Corporate Governance’. Keynote
Address
delivered
at
Annual
Corporate
Governance
Conference.
Dubai.
http://www.sbp.org.pk/ibd/speeches.htm Date: 16.12.2014
Bakar, M.D. (2004). ‘The Sharīʿah Supervisory Board and Issues of Sharīʿah Rulings and their
Harmonization in Islamic Banking and Finance.’ In: S. Archer & A.A.K. Rifaat. (eds.).
Islamic Finance: Innovation and Growth. London: Euromoney Books: 74-89.
BIBD. (n.d.) Sharīʿah Advisory Body, Terms of Reference. Brunei: BIBD.
BIBD. (n.d.) Submission Guidelines for Products and/or Services to be Endorsed/Approved by
Sharīʿah Advisory Body. (An Official Document of the Bank Islam Brunei Darussalam).
BIBD, Brunei.
Borneo Bulletin Year Book 2013. (2013). Brunei Press, Brunei.
Chapra, Umer and Ahmed, Habib. (2002). Corporate Governance in Islamic Financial
17
Institutions. Islamic Development Bank. King Fahad National Cataloging-in-Publication
Data. Jeddah: Saudi Arabia.
“Development of Islamic Banking in Pakistan & Malaysia.” Retrieved from:
www.kantakji.com/media/1286/islamicbankingin_111.doc Date: 09.12.2014
El-Tiby, Amr .M. (2011). Islamic Banking: How to Manage Risk and Improve Profitability. John
Wiley & Sons, Inc. Hoboken, New Jersey. p. 21.
International Shari’ah Research Academy for Islamic Finance (ISRA). (2012). Islamic Financial
System: Principles & Operations. International Shari’ah Research Academy for Islamic
Finance (ISRA). Kuala Lumpur, Malaysia. p xi.
IFN. (February 2013). Islamic Finance News. Red Money Group. Kuala Lumpur, Malaysia.
Khairuddin, K.A. & Ashak, S. 2010. “Brunei: A Niche Money Market for Offshore Islamic
Finance”, in: Angelo M. Venardos. (Ed.). Current Issues in Islamic Banking and
Finance: Resilience and Stability in the Present System. Singapore: World Scientific
Publishing Co.
Lahsasna, A. 2010. Introduction to Fatwā, Sharīʿah Supervision & Governance in Islamic
Finance. Kuala Lumpur, Malaysia.: CERT Publication Sdn. Bhd.
Rusni, H. 2013. A Comparative Analysis of Sharīʿah Governance in Islamic Banking Institutions
Across Jurisdictions. ISRA Research Paper, 50. Kuala Lumpur, Malaysia.
SBP. n.d.. Knowledge, Attitude and Practices of Islamic Banking in Pakistan. Pakistan: State
Bank of Pakistan.
SBP. n.d.. Pakistan’s Islamic Banking Sector Review, 2003-2007. Pakistan. State Bank of
18
Pakistan.
SBP. n.d.. Strategic Plan for Islamic Banking Industry in Pakistan. Pakistan: State Bank of
Pakistan.
Sharīʿah Financial Supervisory Board Order. 2006. Constitution of Brunei Darussalam. Brunei
Darussalam: Government Gazette, Government of Brunei Darussalam.
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