“Islamic Finance in a
Sasana Kijang, Bank Negara Malaysia
THE ROLE OF SHARIAH BOARD IN
ISLAMIC BANKS: A CASE STUDY OF
AND BRUNEI DARUSSALAM
November 2012 | 13 Muharram 1434H
THE ROLE OF SHARIAH BOARD IN ISLAMIC BANKS: A CASE STUDY
OF MALAYSIA, INDONESIA AND BRUNEI DARUSSALAM
Nurhastuty Wardhany 1
& Shaista Arshad 2
This study theoretically examines the role of shariah board in supervising Islamic banks, in
particular the responsibility and the authority of the members. Furthermore, this paper attempts
to examine whether or not the proportion of responsibility and authority are equal. This is
achieved by comparing the role of shariah board in Indonesia with the role of shariah board in
Malaysia and Brunei Darussalam. These countries in the South East Asian region adopt
centralized models of Shari‟ah governance. This study is qualitative research and theoretically
based on shariah board and shariah government framework from AAOIFI and IFSB. The
comparison is based on the following criteria; the appointment, the qualification, process flow,
review and audit, governance, legislation, and remuneration. Evidence from our analysis
suggests that both Indonesia and Malaysia are equally proportionate. Hence, the equality
between the responsibility and the authority is important in supporting shariah board in
supervising Islamic banks. The paper suggests that the central bank of Indonesia needs to
strengthen the shariah board so that the fatwas are prevailing onto Islamic banks.
Key words: Shariah Board, Shariah Governance Framework
Nurhastuty Wardhany is a Master candidate in Islamic Finance at INCEIF.
Shaista Arshad is a recent postgraduate student from INCEIF in Master in Islamic Finance.
The development of Islamic finance has given rise to a new trend in the way business and
economics are being conducted. The uniqueness of the spiritual values based on the Quran and
Hadith forms the basis of Islamic finance. With the root source being every clear and irrefutable,
the identity of Islamic finance should not have any room for doubt.
When the Ummah is passionate about Islamic Financial Institutions, the question of compliance
to Shariah rule from Islamic Financial Institutions is bound to arise. Does the Islamic Financial
Institution apply the rules as ordained by the Quran and Sunnah? Can the Ummah trust Islamic
Financial Institutions to have good compliance and integrity? All these questions and hesitancy
should be answered with conviction, and in this case, the Shariah Board is answerable.
The shariah board has a unique relationship with Islamic financial institutions (IFIs), as they are
responsible for monitoring the compliance of Shariah rules in their transactions, issuance of
Shariah products. Furthermore, as a representative of the various Ulamas, the Shariah board has
the authority to issue Fatwas regarding the products and practices employed by banks and other
The members of the Shariah board are made up of unique individuals who have immense
knowledge of both Islamic Jurisprudence and finance. Furthermore, in playing their role, Shariah
Board members need to have a strong commitment in developing Islamic Financial Institutions
within the shariah framework.
Shariah Board can be said to be an element of corporate governance for IFIs. Corporate
governance in IFIs is slightly different from conventional corporate governance. Refering to the
IFSB-3 the concept of corporate governance in IFIs „is a set of organisational arrangements
whereby the actions of the management of institutions offering Islamic financial services are
aligned, as far as possible, with the interest of its stakeholders; provision of proper incentives for
the organs of governance such as the BOD, Shari’ah Supervisory Board and management to
pursue objectives that are in interests of stakeholders and facilitate effective monitoring, thereby
encouraging IIFS to use resources more efficiently; and comply with Islamic Shari’ah rules and
principles‟ (IFSB, 2006, pp.33)
This paper attempts to evaluate the structure of Shariah Boards in IFI‟s in South East Asian, in
terms of their organization, monitoring process, and fatwa issuing and shariah product approval
process. We further endeavour to learn the roles of Shariah boards in Indonesian and Malaysian
markets and Brunei Darussalam, concerning the above-mentioned structure and to understand
whether the Shariah board has independence in their decision making from the board of directors
of Islamic financial institutions.
The paper is divided into 7 sections, beginning with an introduction, followed by a brief
exploration of Shariah governance. In Section 3, the roles of the Shariah board in Malaysia are
evaluated. Section 4 and 5 highlight the roles of the Shariah board in Indonesia and Brunei
Darussalam respectively. After which, an analytical comparison is made between these three
countries in Section 6. Lastly, a conclusion is drawn up with reference to limitations and
potential avenue for further research is suggested.
2. SHARIAH GOVERNANCE
A well-established Shariah Governance framework is important for a comprehensive regulatory
and supervisory infrastructure. Islamic banks will have to adhere to this framework for guidance
on the compliancy of their practices, hence making it vital for the future of Islamic finance. The
significance of Shariah governance is highlighted by the fact that if we have an inadequate
infrastructure the compliance of Islamic finance to Islamic laws can be challenged.
According to the Islamic Financial Services Board, Shariah Governance Framework refers to the
set of institutional and organisational arrangements through which an IFI ensures that there is
effective independent oversight of Shari`ah compliance over each of the following structures and
processes (1)the issuance of relevant Shari‟ah pronouncement/resolutions; (2) dissemination of
information on such Shari‟ah resolutions to the operative personnel of the IFI; (3) an internal
Shari‟ah compliance review or audit; (4) to an annual shari‟ah compliance review or audit for
verifying the internal shari‟ah review. The Shariah Governance System is demanding the
establishment of a Shariah Advisory Board to ensure that Islamic banking products and
operations match Shariah principles. There are some guiding principles on the Shari‟ah
Governance System by Islamic Financial Services Board (IFSB) which are ex-ante and ex-post
process, the issue of competence, independence, confidentiality and consistency.
Furthermore, the shariah scholars appointed play a crucial role in the effective Shari‟ah
governance system. The Shariah board plays a fundamental role in ensuring and enhancing the
credibility of IFIs as well as having the authority to issue fatwa via collective ijtihad (ISRA,
The roles of the Shariah board can be categorised as: the Shari‟ah board at the macro and the
micro levels. At the macro level, there are the Shari‟ah boards at the central bank or regulatory
authority level. Shari‟ah boards at this level play significant roles in the aspect of harmonisation,
standardisation of fatwa and act as the highest Shari‟ah authority of IFIs (ISRA, p.708, 2011).
The Shariah board at the micro level can be an internal Shariah boards in IFIs or as a Shariah
advisory firms. The Shari‟ah board at the micro level have a responsibilities such as participating
in product development and structuring activities, reviewing and approving matters related with
Shariah, issuance of fatwa and Shari‟ah auditing, issuance of an annual certification of Shariah
compliance (McMillen, 2006 in ISRA, p.709, 2011) and ensuring the Shari‟ah compliance of
IFIs‟ investment in shares, equities, sukuk and other business avenues (Ayub, 2007 in ISRA,
p.709, 2011) and the computation of zakat. Generally, the roles of the Shari‟ah board involve
three main areas, i.e., the issuance of fatwa via collective ijtihad, supervision (raqabah) and
review (mutabaah) (ISRA, p.709, 2011).
3. THE ROLE OF SHARIAH BOARD IN MALAYSIA
Islamic banking services in Malaysia are offered through three types of governance structures:
(1) stand-alone Islamic banks; (2) Islamic banking windows within conventional banks; and (3)
Islamic banking subsidiaries of conventional banks (Moody‟s Global Banking Report, 2008).
To enrich the insight regarding the Role of Shariah Board in Malaysia, five Islamic banks are
added as reference and representatives of industry practices. The five Islamic banks are CIMB
Islamic, Maybank Islamic, RHB Islamic, Hong Leong Islamic and Standard Charterd Bank
Malaysia. These five Islamic banks were chosen as representative industry practices as they are
the leading Islamic banks in industry from market share.
3.1. Appointment of the Shari’ah Committee
Based on Shariah Governance Framework, the appointment of the Shariah Committee has two
steps. First, the board shall, upon recommendation of its Nomination Committee, nominate the
appointment of the members of the Shariah Committee. And then, the appointment and
reappointment of a Shariah Committee member shall obtain prior written approval of the Bank
and the SAC. In approving the appointment and reappointment, the bank may impose necessary
conditions it deems fit in addition to the requirements in the Framework. In the case of the
Shariah the Yang di-Pertuan Agong or King, on the recommendation of the finance minister
pursuant to the Central Bank of Malaysia Act 2009 (ISRA, 2011, p. 715), appoints board of Bank
If we refer to the annual reports from CIMB Islamic, Maybank Islamic, RHB Islamic, Hong
Leong Islamic and Standard Chartered Bank Malaysia, these banks do not disclose the process of
appointment of the SAC. Unlike the appointment of the Board of Directors, Islamic bank have
the discretion to disclose this information. Only Standard Chartered informs through the website
that the SAC was chosen by BOD‟s mandate.
3.2. Qualification of the Shari’ah Committee
There are some criteria regarding the qualification of the shari‟ah committe according to
Shari‟ah Governance Framework BNM which are: (1) a member of a shariah committee shall be
a muslim individual; (2) the majority of members in the shariah committee shall at least hold
bachelor‟s degree in Shariah, which includes study in Usul Fiqh or Fiqh Muamalat; (3) it is
reasonable to expect that the majority members of the shariah committee should be able to
demonstrate strong proficiency and knowledge in written and verbal Arabic, and have good
understanding in Bahasa Malaysia and the English language; (4) the shariah committee may
comprise of experts from relevant backgrounds such as finance and law; (5) the Shariah
Committee preferably shall comprise members of diverse backgrounds in terms of qualification,
experience and knowledge (SGF, p.30).
All of the five Islamic banks selected have already published the profile of each SAC member on
their website and annual reports. The profiles of the members fulfill the requirements by SGF
BNM from education background, experience as shari‟ah board and others.
3.3. Product Process Flow
Product development covers both pre-product approval (i.e. process of product structuring and
developing prior to introduction to the market) and post-product approval process (i.e. process
after the product has been offered to the customers and transactions have been carried out).
3.4. Shari’ah Review & Audit
The Shariah review function refers to regular assessment on Shariah compliance in the activities
and operations of the IFI by qualified shariah officer(s), with the objective of ensuring that the
activities and operations carried out by the IFI do not contravene with the Shariah (SGF, p.22).
Shariah audit refers to the periodical assessment conducted from time to time to provide an
independent assessment and objective assurance designed to add value and improve the degree
of compliance in relation to the IFI‟s business operations, with the main objective of ensuring a
sound and effective internal control system for Shariah compliance. Internal auditors, who have
acquired adequate Shariah-related knowledge and training, shall perform the function.
As for the Islamic banks selected, firstly, CIMB Islamic establishes a Shariah Advisory
Department that has a duty ensuring that the shari‟ah requirements are achieved and undertakes
periodic compliance reviews. Second, RHB Islamic established a shariah framework within their
bank that requires the presence of a shariah department head. Shariah department head is to
ensure compliance of day-to-day operations and has sub-unit which are shari‟ah compliance &
review and shari‟ah advisory, department & secretariat. Third, Standard Chartered has country
assurance and audit and group internal audit to do shariah compliance reviews based on shariah
compliance manuals. Lastly, Hong Leong and Maybank do not disclose this information on their
3.5. Shari’ah Governance
The Shariah governance framework of an IFI shall, at the minimum, comprise the following: (i)
the board oversight on Shariah compliance aspects of the IFI‟s overall operations; (ii) a Shariah
Committee with qualified members who are able to deliberate Islamic finance issues brought
before them and provide sound Shariah decisions; (iii) effective management responsibilities in
providing adequate resources and capable manpower support to every function involved in the
implementation of Shariah governance, (iv) an internal Shariah review that is conducted on a
continuous basis; (v) a regular Shariah audit, at least on an annual basis, verifying that the IFI‟s
key functions and business operations comply with Shariah; (vi) a Shariah risk management
process to identify all possible Shariah non-compliance risks and, where appropriate, remedial
measures that need to be taken to reduce the risk; (vii) an internal Shariah research team to
conduct research on Shariah; and (viii) issuance and dissemination of Shariah decisions to the
(i) The Board √ √ √ √ √
√ √ √ √ √
√ √ √ √ √
√ Internal audit √ Internal audit
√ √ √ √ √
√ √ √ √ Not disclosed
Not disclosed Not disclosed
RHB has set up a Group Shariah Committee to tackle shariah risk governance or as an effort to
do shariah risk management by handling matters relating to shariah principles and rulings. Hong
Leong minimumly discloses regarding shariah board. There are no information about the
appointment, profile of shariah board, shariah review, shariah audit and shariah risk
management. The annual report of 2011 looks like a conventional one with just additional
reference to their five scholars. For issuance and dissemination of shari‟ah decision to internal or
external stakeholder, there is no explicit description regarding this.
3.6. Legislative Infrastructure
The recent amendment of the Central Bank Act 1958 has further enhanced the existing
legislative infrastructure for Islamic finance including the Islamic Banking Act 1983, the Takaful
Act 1984 and the Government Funding Act 1983, by setting out a legal framework for the further
development of the Islamic financial system in Malaysia (Rosly, 2011, p.2).
Internal shariah board or shariah advisory gets remuneration from Islamic banks. Islamic banks
disclose the amount of remuneration for shariah board. Meanwhile, for centralized shariah board
there is no explicit information regarding this.
The Shariah Committee meetings shall be held at least once in every two months (SGF, appendix
5). From the below information, Hong Leong and CIMB Islamic do not fulfill this requirement.
CIMB Islamic Maybank
RHB Islamic Hong Leong
No. of board
6 4 5 5 6
Not disclosed Not disclosed Not disclosed 2 years term Not disclosed
4 times in a
11 times in a
8 times in a
Not disclose 11 times in a
√ √ √ √ √
Not disclosed Not disclosed Not disclosed Not disclosed Not disclosed
Duties, Responsibilities & Accountability of the Shariah Committee (SGF, appendix 4)
1.Responsibility & accountability √ √ √ √ √
2. Advise to the board & IFI √ √ √ - √
3. Endorse Shariah policies &
√ √ √ - √
4. Endorse & validate relevant
√ √ √ √ √
5. Assess work carried out by Shariah
review & Shariah audit
√ √ √ - √
6. Assisst related parties on Shariah
√ √ √ √ √
7. Advise on matters to be referred to
√ √ √ - √
8. Provide written Shariah opinions √ √ √ √ √
In general, the shariah boards in the Islamic banks have fulfilled the requirements of the Shariah
Governance Framework except Hong Leong Islamic. Moreover, shariah board play a bigger role
than just an obligation of conducting training programmes on Shariah related latters, advising the
bank on the computation and distribution of zakat and so on (Maybank, 2011).
4. ROLE OF SHARIAH BOARD IN INDONESIA
Islamic banking services in Indonesia are offered through three types of governance structures:
(1) Full-fledged Islamic Banks; (2) Islamic windows under conventional banks; (3)Islamic rural
To enrich the insight regarding the role of Shariah Board in Indonesia, five good corporate
governance report of Islamic banks and one annual reports are added as reference and
representatives from industry practices. The five Islamic banks are Bank Muamalat Indonesia,
Bank Mega Syariah, Bank BRI Syariah, Bank Bukopin Syariah and Bank Syariah Mandiri.
These five Islamic banks were chosen as representative industry practices because they are the
leading Islamic banks in industry in terms of market share.
4.1. Appointment of the Shari’ah Committee
Sharia banking committee is a forum comprising experts in the field of sharia muamalah and/or
economic experts, financial experts, and banking experts, whose tasks include assisting Bank
Indonesia in implementing fatwa of the Indonesian Council of Ulama into stipulations
formulated in Bank Indonesia Regulations. Bank Indonesia determines the number and
composition as well as other matters related with the Committee membership (Bank Indonesia
The procedure to appoint shariah supervisory board is: (1) bank is obliged to submit proposal on
candidate member of SSB for Bank Indonesia approval before these members hold their
position; (2) appointment of SSB members by the Shareholder General meeting is effective after
Bank Indonesia approval is obtained; (3)Submission of proposal on candidate members of SSB
as reference to point no.1 is made after having obtained recommendation from the Indonesian
Islamic Scholar Board (Bank Indonesia Regulation No.11/3/PBI/2009 article 37).
Bank Mega Syariah follows the procedure by central bank to appoint SSB and discloses the
permission number from national shariah board, Indonesia Ulama Council and shareholder
4.2. Qualification of the Shari’ah Committee
Members of SSB are expected to fulfill three requirements, which are integrity, competency and
financial reputation. Integrity comprises of (1) possession of good character and moral values;
(2) possession of commitment for complying with sharia banking stipulations and other
prevailing legislations; (3) possession of commitment for development of sound and sustainable
Bank; and not being listed in the Disqualified List as regulated in the stipulations concerning the
fit and proper test determined by Bank Indonesia. Competency comprises at least possessing
knowledge and experience in the field of mu‟amalah sharia and knowledge in the field of
banking and/or finance in general. Financial reputation comprises (1) not being included in the
list of non-performing credits; and (2) never having been declared as having been bankrupt or
being a shareholder, member of Board of Commissioners, or member of Board of Directors who
has been declared guilty in causing a company to become bankrupt in the last 5 years prior to
Centralized sharia board or sharia banking committee is expected to fulfill two requirements
which are integrity and competency. Integrity comprises (1) possessing good character and moral
values; (2) possessing commitment for developing sharia banking; (3) possessing vision and
mission for developing sharia banking; (4) possessing adequate time for implementation of tasks
as Committee member. Competency comprises (1) possessing good understanding in the field of
sharia mu‟amalah and/or the fields of economy, finance and banking; (2) possessing good
understanding of prevailing legislation.
Bank Bukopin Syariah does not disclose the profile of SSB even the chairman of SSB is
prominent Islamic scholar but it should dislose the education background and experience. Bank
Mega Syariah and Bank BRI Syariah do not disclose too the profile of SSB in GCG report. This
is possible since the appointment SSB should be approved national shariah board. Only Bank
Syariah Mandiri discloses the profile of SSB in annual report 2011.
4.3. Product Process Flow
The national shariah board Indonesia ulamas council must first approve any new product or new
service launched by banks. The Sharia supervisory board in sharia bank is an intermediary
between sharia bank and national sharia board.
Working mechanism for product approval starts from sharia department or internal department in
sharia bank suggest a product to the board of directors. Board of directors will discuss with
sharia boards. Sharia supervisory board will bring the new product to the daily implementing
agencies. Daily implementing agencies will accept question or new product and discuss for 20
days and the result of discussion will bring to the plenary national shariah council for approval.
If yes, it will deliver back to the daily implementing agencies and forward to the sharia
supervisory board. Moreover, the SSB will bring back to the sharia bank giving the answer or
4.4. Shari’ah Review & Audit
Central bank does not have any regulation yet regarding the shariah review and the shariah audit
but there is an emphasis for sharia supervisory board to review the banks activity from a shariah
compliance perspective. In addition, to fulfill this requirement, the sharia supervisory board is
supported by an internal audit. According to the central bank‟s regulation, internal audit is
obligated to report to the sharia supervisory board regarding shariah compliance in the bank‟s
activity (Bank Indonesia regulation no.11/33/PBI/2009).
In addition to this, the topic about shariah audit has established through certification of
Indonesian Institute of Accountant (Ikatan Akuntan Indonesia). External auditor and internal
auditor who do audit in shariah bank could use Statement of Financial Accounting Standards
(Pernyataan Standar Akuntansi Keuangan) for Shariah Banking Accounting (Akuntansi
Perbankan Syariah) which has already provided by Indonesian Institute of Accountant. In
addition, sharia bank when conducting external audit choose public accountant that proven
legally able to do sharia audit such as certificate of sharia audit.
If we see the industry practices from GCG report, Bank Muamalat Indonesia establishes shariah
compliance department under compliance and risk management division. This department has
responsibility to do shariah review. This department has four members in sharia review unit and
each of members need to have competencies in sharia based on education background nationally
or internationally. Every two months, sharia review should report to the SSB regarding the duty
to monitor bank activities in comply sharia principles. Additionally, every six months, sharia
review should inform the SSB opinion to other business units. In the case of Bank Mega Syariah,
the GCG report mentions that internal audit function has responsibility to ensure that the bank‟s
activity in line with sharia compliance. Besides having support from sharia supervisory board,
the one of the members of the audit committee in Bank Mega Syariah is a sharia scholar.
This means when internal audit reports to the committee audit, the committee able to handle and
to monitor the work of internal audit. Meanwhile for Bank BRI Syariah, there is not explicitly
description that internal audit perform a shariah review even the position of committee audit is
involved Islamic scholars. Based on annual report Bank Syariah Mandiri, internal audit should
report regarding sharia compliance by doing sample and reviewing SOP. Bank Bukopin does not
disclose about this.
4.5. Shari’ah Governance
Indonesia does not have any Shariah Governance Framework yet. Central bank gives detail rule
by issuing circular letter to all commercial banks conducting business based on shariah principles
in Indonesia. One of the circular letters is about Good Corporate Governance for Sharia Bank
and Sharia Windows under conventional bank (Bank Indonesia legislation Number:
11/33/PBI/2009). According to this circular letter, Good Corporate Governance must be
implemented in : (1) duty and responsibilities Board of Commissioner and Board of Director;(2)
completed committees & functions for internal control; (3) duty and responsibilities sharia
supervisory board; (4) application of compliance, internal audit and external audit function; (5)
maximum limit to distribute fund; (6) financial and non-financial transparency.
duty and responsibilities Board of
Commissioner and Board of
√ √ √ - √
completed committees & functions
for internal control
√ √ √ - √
duty and responsibilities sharia
√ √ √ - √
application of compliance, internal
audit and external audit function
√ √ √ - √
financial and non-financial
√ √ √ √ √
Bukopin syariah discloses name of Board of Commisioner, Board of Director, Sharia
Supervisory Board but lack of information about duty and responsibilities and profile and also
there is no any information regarding internal department from compliance, internal audit etc.
Generally, all sharia banks have fulfilled the requirements from central bank regarding corporate
governance for sharia banks.
4.6. Legislative Infrastructure
LEGISLATION INFRASTRUCTURE FOR SHARIA BANKS
The Law No.10 of 1998 Conventional banks are allowed to have UUS (sharia units).
The Law No.21 of 2008 Sharia Banking
GCG implementation for Sharia Commercial Banks and Sharia
About Full Fledged Sharia Bank
National Sharia Council gets operasional funding by Government (Ministry of Finance), Bank
Indonesia and community contributions. National Sharia Council accepts monthly contribution
funds from the Islamic financial institutions of his amanah. National Sharia Council should be
accounted for donations to the Indonesian Ulemas Council meanwhile for sharia banking
committee that assist central bank to make operational legislation regarding fatwa national sharia
council shall be borne by central bank including the budget and cost (Bank Indonesia regulation
No. of board
3 3 3 2 3
Not disclosed Not disclosed
12 9 20 11 16
SC‟s Report Not disclosed Not disclosed
Not disclosed √
four role as
SAC & member
has double role
four role as
role as SAC
double role as
Total number of sharia supervisory board shall be no less than two people or no more than 50%
of the total number of members of Board of Directors. All sharia banks have fulfilled this
requirement (Bank Indonesia Regulation Number. 11/3/PBI/2009). Sharia supervisory board
obliges to hold meeting once in a month (Bank Indonesia Regulation Number. 11/33/PBI/2009).
Sharia supervisory board members can only hold concurrent positions as a SSB member in no
more than four other sharia financial institutions (Bank Indonesia Regulation Number.
11/3/PBI/2009). From above table, Mega Syariah and Bukopin Syariah do not fulfill the
requirement from central bank.
Duties, Responsibilities & Accountability of the Shariah Committee
Bank Indonesia Regulation Number. 11/33/PBI/2009
1.Giving advices and
recommendations to Board of
Directors as well as supervise bank
√ √ √ - √
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
√ √ - √
5. Periodically conducting reviews
of fulfillment of sharia principles on
the mechanism of fund accumulation
and fund channeling as well as bank
√ √ √ - √
6. Requesting data and information
related to sharia aspects from Bank
work units in the framework of
executing its tasks
√ √ √ - √
Bukopin Syariah does not disclose the role of shariah board in GCG report 2011. Generally, the
shariah boards in all shariah banks has played role optimally and fulfilled the requirements from
5. THE ROLE OF SHARIAH BOARD IN BRUNEI DARUSSALAM
Islamic banking services in Brunei are full-fledged Islamic banks. To improve the understanding
regarding the Role of Shariah Board in Brunei, two Islamic banks are added as reference and
representatives from industry practices through their website. The two Islamic banks are
Perbadanan Tabung Amanah Islam Brunei (TAIB) and Bank Islam Brunei Darussalam (BIBD).
5.1. Appointment of the Shari’ah Committee
According to the Shariah Financial Supervisory Board Order 2006, the centralized board or
Shariah Financial Supervision Board is appointed by His Majesty, the Sultan and Yang
Dipertuan with recommendation from the Ministry of Finance and the deputy board is appointed
by the Ministry of Finance with approval from the Sultan.
Brunei Islamic financial institutions are obliged to appoint board of Islamic scholars called
“Shariah Supervisory Board”. The Shariah Supervisory Board is appointed by the general
assembly of shareholders and recommended by the Board of Directors meeting. The SSB is not
only independent from the Board of Directors but also allowed to attend the Board of Directors‟
meeting to discuss the religious aspects of their decision (AAOIFI, 2005 in Hassan, 2007).
5.2. Qualification of the Shari’ah Committee
The SSB members are specialized jurists in Islamic jurisprudence and experts in the Islamic
Finance (AAOIFI 2005, in Hassan, 2007). For Syariah Financial Supervisory Board, there is no
explicitly criteria for qualification but the member of the board should consist the permanent
secretary of Ministry of Finance, the Mufti Kerajaan for Brunei Darussalam, 6 members
appointed by His Majesty the Sultan and the deputy of board appointed by Ministry of Finance
with Sultan approval.
5.3. Product Process Flow
Every financial institution shall apply to the Syariah Financial Supervisory Board for approval
with respect to its submission that its Islamic product is in accordance with Hukum Syara’ before
it enters into any business transaction with respect thereto (Syariah Financial Supervisory Board
5.4. Shariah Review & Audit
There is no any explicitly information regarding shari‟ah review and audit in website and
financial report from Islamic banks in Brunei but since Brunei adopt rules by AAOIFI, it should
have an internal review or internal audit to do shariah review.
5.5. Shariah Governance
The important element of shariah governance in Brunei is SSB and centralized shariah board.
There is centralized fatwa and centralized appointment of Shariah committees of Islamic bank.
5.6. Legislative Infrastructure
Domestic Islamic and conventional banking activities are governed by the Islamic Banking Act
1999 and the Banking Order 2006 under the supervision of the Ministry of Finance, Financial
Institution Division. With the introduction of the new Islamic Banking Order, all Islamic banks
in the country are required to have a Shariah advisory Body comprising at least 3 Muslim
religious scholars (Venardos, 2010).
The Minister may, with the approval of His Majesty the Sultan and Yang Di-Pertuan, make
regulations which are necessary or expedient for giving effect to and carrying out the provision
of this Order, including the prescription of fees, and of any other thing required to be or which
may be prescribed under this Order, and for the due administration thereof (Syariah Financial
Supervisory Board Order 2006).
Unfortunately, the website of Perbadanan Tabung Amanah Islam Brunei does not provide
annual report or GCG report and does not provide SSB information meanwhile Bank Islam
Brunei Darussalam Berhad provides information regarding SSB. There are five shariah
supervisory board and from their profile, the SSB are an expert in Usul Fiqh and Fiqh Muamalat.
6. COMPARATIVE ANALYSIS OF MALAYSIA, INDONESIA, BRUNEI
DARUSSALAM ON THE ISSUES OF SHARIAH BOARD
Malaysia, Indonesia and Brunei Darussalam are three countries of South East Asian that have
centralized models of Shariah Governance. The centralized models of Shariah governance is
required institutions to ensure shariah compliance but the government still control by
establishing shariah advisory on a central level. According to Asyraf Wajdi Dusuki (2011),
centralized Shariah Governance structures comprise shariah advisory at the regulator‟s level,
centralized fatwa, issue guidelines on the governance of shariah committee for the Islamic
financial institution (IFI), conduct shariah compliance review and centralized appointment of
shariah committees of IFI.
6.1 Appointment of the Shariah Committee & Issue of Independence of Shariah Board
Those three countries (Malaysia, Indonesia and Brunei), have same procedure in appointment of
shariah supervisory board which is the appointment of SAC should be approved by central
bank/ministry of finance in one side and approved by the General Meeting of Shareholders.
Malaysia is different in point the appointment comes from the Board of Directors with the
approval of shareholders at general meeting meanwhile Indonesia and Brunei appointment made
by shareholders during general meeting. The issue of independence is the method of appointment
will affect the independence of shariah board. The optimum independent is shariah board
appointed by shareholders during general meeting with recommendation of BODs, and the
shariah board is allowed to attend the BOD‟s meetings to discuss the religious aspects of their
decision (Abu Ghudda & Abdul Sattar, 2001 in ISRA, 2011). In this case, Indonesia and Brunei
have complied with the optimum procedure to appoint SSB.
6.2 Qualification of the Shariah Committee and Issue of Competency
Legislation in Malaysia and Indonesia have required certain and specific criteria regarding SSB.
The five Islamic banks in Malaysia and five Islamic banks in Indonesia through their profile
disclose this qualification so that the background of education and experience as shariah
supervisory board is known. Moreover, the conclusion from bank‟s disclosure shows that SSB is
already competent to supervise Islamic banks from shariah prespective. Unfortunately, Islamic
banks in Brunei do not disclose much about this since there is no GCG report from their website
or annual report.
6.3 Product Process Flow
The difference between the process flow for Malaysia and Indonesia lies in the way it is
categorized. The SGF issued by Bank Negara, Malaysia covers both pre-product and post-
product approval process. Meanwhile, the Shariah Advisory Council in Indonesia formulates the
problems brought to the National Sharia Council plenary meetings.
The pre- and post- product approval revolves around structuring a process that is comprehensive
and true to Shariah standards. They should be transparent in nature and approved by all on the
committee. Furthermore, it is the responsibility of the Committee to ensure that the product
implementation is in compliance with Shairah principles and that a Shariah review and
governance report should be drawn up to insure that IFIs are able to monitor the consistency of
the compliance of the product.
Conversely, in Indonesia, the National Islamic Council first needs to legitimatize a fatwa issued
by the Daily Implementing Agencies. They then conjure an opinion on whether the IFI has
fulfilled all the Shariah requirements as issued by the National Islamic Council. Hence, product
development reports by the Shariah Advisory Council or the Daily Implementing Agencies are
forwarded to the National Islamic Council who will look into the matter and release their stances
on the matter.
6.4 Shariah Review and Audit
If we follow the AAOIFI standard regarding shariah review and shariah audit, there are
differences in the two but there is also an opinion that shariah review is same with shariah audit.
Malaysia distinguishes these two functions of internal control but from industry practices that are
written in annual reports, only two banks have shariah unit to do shariah review or shariah
compliance, one banks use internal audit to do shariah review and the rest do not notify about
The main difference is that Indonesia does not have guidelines for Shariah review yet but the
legislation emphasises the duty of Shariah supervisory board to do shariah review with internal
audit support. In addition, from the industry practices that are written in the GCG report, one of
the shariah banks established shariah compliance unit that is responsible to do shariah review.
Another shariah banks mentions that internal audit has a responsibility to do shariah review. The
rest of the shariah banks have internal audit without any emphasis in their report on the
obligation to do shariah review. In addition to this, the committee audit members of those sharia
banks are some of them Islamic scholars who turn out to be SSB in other shariah banks. The
logical reason behind this that the committee audit will monitor the work of internal audit while
performing shariah review.
On the other hand, Brunei is assumed to have adopted AAOIFI. Unfortunately, the lack of
transparency in website, GCC report or annual report, makes it difficult to know the shariah
review or shariah audit function of Islamic banks in Brunei.
6.5 Shariah Governance
Interestingly, Indonesia does not have any Shariah Governance Framework. The central bank
gives detail rule by issuing circular letter to all sharia banks to do good corporate governance
based on the regulation. According to the circular letter, the concept of good corporate
governance for sharia bank comprises (1) duty and responsibilities Board of Commissioner and
Board of Director;(2) completed committees & functions for internal control; (3) duty and
responsibilities sharia supervisory board; (4) application of compliance, internal audit and
external audit function; (5) maximum limit to distribute fund; (6) financial and non-financial
transparency. Most of the sharia banks have already fulfilled the requirements except one of the
bank chosen in this study.
Meanwhile, the BNM Shariah Governance Framework consists of six sections that state that IFIs
are free to establish their own Shariah governance framework so long as it meets the basic
requirements of the guidelines. Members of the Shariah board are responsible for the compliance
of shariah rules. Most of the Islamic banks have already fulfilled the requirement of Shariah
Governance Framework except for internal shariah research point and issuance & dissemination
of shariah decision to the stakeholder. Brunei has a concept of good corporate governance for
Islamic banks by ordering Islamic banks to have SSB.
6.6 Legislative Infrastructure
In Malaysia, the recent amendment of the Central Bank Act 1958 has further enhanced the
existing legislative infrastructure for Islamic finance including the Islamic Banking Act 1983, the
Takaful Act 1984 and the Government Funding Act 1983, by setting out a legal framework for
the further development of the Islamic financial system in Malaysia (Rosly, 2011, p.2). In
Brunei, domestic Islamic and conventional banking activities are governed by the Islamic
Banking Act 1999 and the Banking Order 2006 under the supervision of the Ministry of Finance,
Financial Institution Division meanwhile in Indonesia the Law No.21 of 2008 regulates sharia
Shariah supervisory boards in Malaysia and Indonesia gets remuneration from Islamic bank and
those are disclosed in annual report or GCG report meanwhile for Brunei is unknown.
Centralized shariah board gets remuneration from central bank.
In Indonesia, SSB are expected to hold meeting monthly meanwhile Malaysia expects SSB to
hold meeting every two months and there are some of Islamic banks that still do not fulfil this
requirement in both countries. Indonesia has some SSB that play a role as shariah board for more
than one institution. According to the Bank Indonesia regulation, this is allowed for up until four
positions in different IFIs. The problem arising with this the issue of confidentiality, as there is a
possibility that there will be confidentiality issues when shariah board members hold role in two
or more different Islamic banks or IFIs in same industry. Malaysia is stricter about this by
prohibiting Islamic banks to appoint any member of shariah board already present in other IFI of
the same industry (Section 19 of the BNM/GPS).
The sacred sources of the Shari' ah, the Qur'an and the Sunnah, have provided Muslims with a set
of eternal principles, but their application to the practical situations of each age requires the
exercise of ijtihad. This means consultations in which the individual deliberations of many
scholars play a vital role in reaching many firm conclusions. This exercise sometimes brings
different answers from different Shariah Supervisory Boards with regard to the same question.
The Shari' ah Supervisory Boards, being comprised of a number of Islamic scholars, decide the
matter placed before them after mutual deliberations, which is tantamount to collective ijtihad.
The role of the Shariah Board in Malaysia and Indonesia do not differ greatly from one another.
The biggest difference between the two countries is the framework of the Islamic banking
business from the legislation and the environment of business itself. Malaysia government plays
a proactive role by issuing shariah governance framework in January 2011 and giving chance to
the industry to adjust with it in 6 months. Brunei and Indonesia from legislation framework can
be said still in developing corporate governance for Islamic banks. The most important thing is
whatever kind of legislation that is settled by central bank is the willingness of industry to follow
This study is limited to only three countries in the South East Asian region, leaving room for
much further development. Further research can include a larger scale study involving different
countries and different models of governance framework. Similarly, the number of Islamic banks
is limited by their market share ratio in the market; this caused several other Islamic banks to be
eliminated from the study. Further development can have a larger number of banks included to
enrich the depth of this study.
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