A NEW SHARIA GOVERNANCE FRAMEWORK FOR ISLAMIC BANKS IN Indonesia.pdf

西南交通大学学报
第 56 卷第 2 期
2021 年 4 月
JOURNAL OF SOUTHWEST JIAOTONG UNIVERSITY
Vol. 56 No. 2
Apr. 2021
ISSN: 0258-2724 DOI：10.35741/issn.0258-2724.56.2.16
Research article
Economics
A NEW SHARIA GOVERNANCE FRAMEWORK FOR ISLAMIC BANKS IN
INDONESIA
印度尼西亚伊斯兰银行的伊斯兰教治理框架
Inten Meutia, Mohamad Adam*
Faculty of Economics, Universitas Sriwijaya
South Sumatra, Indonesia, mr_аdаm2406@yahoo.com
Received: January 6, 2021 ▪ Review: February 20, 2021 ▪ Accepted: April 1, 2021 ▪ Published: April 30,
2021
This article is an open-access article distributed under the terms and conditions of the Creative Commons
Attribution License (http://creativecommons.org/licenses/by/4.0)
Abstract
This research proposes a new framework of sharia governance for Islamic Banks in Indonesia. The
research adopted an analytical approach to compare sharia governance concepts based on Accounting,
Audit Organizations for Islamic Financial Institutions and Islamic Financial Services Board and PBI no
11/33/2009. The author proposed a more comprehensive conceptual framework based on Accounting,
Audit Organizations for Islamic Financial Institutions, Islamic Financial Services Board, and BI
guidelines. The contribution of this research was to provide a more comprehensive governance
framework for financial institutions in Indonesia. This framework was expected to improve the practice
of governance of Islamic financial institutions in Indonesia. Based on researchers' best knowledge, there
were no studies that had tried to compare these guidelines. Therefore, it was necessary to compare them
to find out if there are variations between the suggestions provided by the guidelines.
Keywords: Sharia Governance, Sharia Compliance, Accounting, Audit Organizations for Islamic Financial
Institution, Islamic Financial Services Board, Standard
摘要这项研究为印度尼西亚的伊斯兰银行提出了一种新的伊斯兰教法治理框架。该研究采用了
一种分析方法，根据会计，伊斯兰金融机构审计组织和伊斯兰金融服务委员会以及 PBI 号
11/33/2009 来比较伊斯兰教法的治理概念。作者提出了一个基于会计，伊斯兰金融机构审计组织
，伊斯兰金融服务委员会和商业智能指南的更全面的概念框架。这项研究的目的是为印度尼西
亚的金融机构提供更全面的治理框架。预计该框架将改善印度尼西亚伊斯兰金融机构的治理实践
。根据研究人员的最佳知识，没有研究试图比较这些指南。因此，有必要将它们进行比较，以找
出指南提供的建议之间是否存在差异。
关键词: 伊斯兰教法治理，伊斯兰教法合规，会计，伊斯兰金融机构审计组织，伊斯兰金融服务

199 Meutia and Adam / Journal of Southwest Jiaotong University / Vol.56 No.2 Apr. 2021
委员会，标准
I. INTRODUCTION
In recent years, corporate governance issues
have received much attention in the field of
Islamic finance. The development of corporate
governance in conventional banking also raises
the problem of how Islamic corporate governance
should be planned. The epistemological
orientation is another aspect of corporate
governance in Islam that is different from the
western concept. The basic principle of Tawhid,
Shure, ownership rights, and commitment to
contractual obligations governing economic and
social behavior requires Islamic financial
institutions to obey the rules and principles of the
sharia [1], [2].
The corporate governance structure in Islamic
Financial Institutions (IFIs) requires additional
governance measures in the interest of sharia
compliance, known as sharia governance [3].
Sharia governance is part of the practice of
Islamic finance, which is useful for gaining and
maintaining the trust of shareholders and other
stakeholders. Sharia governance also plays a role
in convincing stakeholders that sharia principles
are the basis of all transactions, practices, and
activities.
A good sharia governance system will help
IFI mitigate the risk of sharia non-compliance,
which results in potential losses and negative
things that can damage the credibility of IFI [4].
According to [5], Sharia compliance is a priority
from the perspective of IFIs. Governance that
specifically addresses issues relating to the role
and implementation of the Sharia Supervisory
Board is essential. Besides, governance is
important for Islamic financial institutions for the
following reasons:
1. Securing the interests of the Investment
Account Holder;
2. Ensuring sharia compliance;
3. Governance and risk management of
Mudharaba and Musharaka contracts; and
4. Development of a comprehensive
governance framework that describes the
responsibilities of the board of directors and
senior management.
In line with the global focus on governance,
various governing bodies of Islamic Financial
Institutions continue to work to improve the
regulatory and supervisory framework to develop
governance standards that are consistent with the
nature of Islamic banking [6], [7], [8]. The
Accounting and Auditing Organization of Islamic
Financial Institutions (AAOIFI) in 2005 issued
governance standard number 7 as a governance
guide for Islamic financial institutions. The
Islamic Financial Services Board (IFSB) has also
issued governance guidelines for Islamic
financial institutions, namely IFSB number 3 and
number 10.
In Indonesia, governance practices for banks
are regulated by the Financial Services Authority
Regulation number 55 / POJK.03 / 2016
concerning the Implementation of Governance
for Commercial Banks. Sharia Commercial
Banks are regulated by Bank Indonesia
Regulation number 11/33 / PBI / 2009
concerning the Implementation of Good
Corporate Governance for Sharia Commercial
Banks and Sharia Business Units.
However, there are indications that
governance in Islamic financial institutions in
Indonesia is not functioning well, marked by
several cases such as the closure of 19 Mega
Syariah Sub-Branch Offices in 2016, as well as a
drastic decline in profits experienced by Bank
Muamalat Indonesia to 71.36% as of June 2016,
namely IDR 106.54 billion to IDR 30.51 billion
in addition to an increase in NPF of 7.23% from
the previous year of 4.93% as of June 2015
(Sindo 11 February 2016).
Rama [9] revealed that sharia governance
standards in Indonesia cannot yet be called a
model of a comprehensive governance
framework for Islamic banks. The format of the
governance guidelines tends to be the result of
adjustments to the governance guidelines for
conventional banks that have been issued by
Bank Indonesia previously.
Therefore, this study tries to dissect the
regulations on shariah governance that apply in
Indonesia by comparing them with the sharia
governance guidelines issued by IFSB and
AAOIFI. Guidelines for sharia governance are
essential instruments used to achieve the goals of
the Islamic finance industry. Therefore,
comparing in detail the existing sharia
governance guidelines to check whether there are
significant differences between existing
guidelines is essential. This paper aims to
propose the concepts of Islamic governance
based on AAOIFI, IFSB, and PBI. The
contribution of this paper is to provide a more
comprehensive governance framework for
financial institutions in Indonesia. This
framework is expected to improve the practice of
governance of Islamic financial institutions in
Indonesia.

200
Before proposing a comprehensive sharia
governance concept, this paper conducts a critical
comparative analysis of the three governance
guidelines. This study uses comparative analysis
because it focuses on the similarities and
differences between the three governance
concepts. A critical comparative analysis is a
method following the objectives of this study. A
similar study has been done by [10] when
comparing governance and Islamic governance
concepts. The same method was used by [11] to
discuss the nature, application, and comparison
of Islamic corporate governance principles
(IPCG) with conventional corporate governance
principles taking into account specific references
to the Organization for Economic Cooperation
and Development (OECD). Meanwhile [12] also
used the same approach when comparing Shariah
compliance screening methods used by 15 users
of Islamic finance.
Before discussing the three Sharia governance
guidelines, the first section will discuss some
previous research regarding Sharia governance in
Islamic banks. The second section will discuss
the guidelines for AAOIFI sharia governance.
Furthermore, the IFSB guidelines will describe in
the next part, and the fourth section will explain
the PBI guidelines. The last part concludes and
provides recommendations.
II. LITERATURE REVIEW
Generally, various studies on Sharia
governance focus on a positivist approach
analyzing how the influence of Sharia
governance on the performance of Sharia banks.
[13] analyzed the quality of governance in 44
Islamic banks operating in Bahrain, Kuwait,
Qatar, Oman, the United Arab Emirates, and
Saudi Arabia. The measurement of governance
index refers to the board of commissioners, audit
committee, and the Sharia Supervisory Board.
This study found no significant relationship
between the quality of governance and the
financial performance of Islamic banks. Several
Sharia governance studies which also analyzed
the quality of governance were carried out by
[14], [15], [16], [17].
Research conducted by [17] explores the
relationship between governance in Islamic
banks with efficiency and risk in 56 Islamic
banks in the GCC Gulf Cooperation Council. The
governance measures used are Sharia supervisory
board (SSB) size, Chief Executive Officer (CEO)
-duality, and ownership structure. The results
showed that the application of a tight CG
structure correlated with a higher level of
efficiency. The research also shows that the
governance structure in Islamic banks allows
them to take higher risks to achieve high levels of
efficiency.
The study of [18] tried to compare Sharia
governance practices by investigating the level of
Sharia governance in three countries, Sri Lanka,
Malaysia, and Bahrain. This study uses a
qualitative approach and content analysis. This
study critically evaluates Sharia governance
practices in all three countries. Based on Sharia
governance practices in all three countries, the
researcher concludes that Sharia governance
practices in Sri Lanka are still lagging compared
to the other two countries.
Research on governance in a somewhat
different Islamic bank has been conducted by
[19]. This study analyses in more detail the role
of internal Shariah auditors in Islamic banks. In
more detail, this study analyses the competence
and effectiveness of internal Shariah auditors.
This study confirms that competence in terms of
knowledge, skills, and training can affect the
effectiveness of internal Shariah auditors in
Islamic banks.
The importance of the Sharia governance
framework is emphasized by [20], who try to
develop a comprehensive theoretical framework
for interpreting sharia governance mechanisms in
Islamic financial institutions. After reviewing the
three most commonly used theories in corporate
governance and the field of sharia governance,
namely agency theory, stewardship theory, and
stakeholder theory, the researcher integrates
based on interrelated concepts and their
relationship with Sharia governance.
Research by [21] on Islamic governance in
Islamic banks in Indonesia revealed that there are
still many weaknesses of Islamic governance in
Islamic banks in Indonesia. This weakness is due
to the principles of Islamic bank governance, still
referring to conventional governance, as also
stated by [22].
This study tries to fill the gaps in the research
and literature on the concept of sharia
governance by proposing a conceptual
framework for sharia governance which is
developed based on three existing governance
guidelines. As discussed earlier, research in the
field of sharia governance based on the existing
literature generally only compares practices with
governance guidelines. To the best of the writer's
knowledge, no one has yet tried to critically
analyze the strengths and weaknesses of each
guide and develop a more holistic governance
concept, so this paper will contribute to filling
this gap. This study differs from previous studies
on Sharia governance, which only analyzed the

level of governance based on the concepts and
guidelines available. The present study offers a
more holistic governance framework and is
developed based on governance guidelines issued
by AAOIFI, IFSB-10, and Bank Indonesia
Regulations. This governance framework is
useful for overcoming the weaknesses of Sharia
governance guidelines in Indonesia, which are
dominated by conventional bank governance
concepts.
III. AAOIFI SHARIA GOVERNANCE
STANDARD
Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) has
issued several governance standards and
guidelines. Developing accounting and audit
thinking relevant to IFI is one of AAOIFI's
objectives. This goal is carried out based on
teachings of Islamic Sharia, which represent a
system that covers all aspects of life as well as
under the environment in which the IFI exists
[23].
AAOIFI has issued 92 standards and
guidelines, including 24 accounting standards,
five auditing standards, seven governance
standards, 54 sharia standards, and two ethical
codes [23]. Seven standards related to
governance, namely:
1. Governance standard for IFIs no. 1:
sharia supervisory board: appointment,
composition, and report
2. Governance standard for IFIs no.2: sharia
review
3. Governance standard for IFIs no.3:
internal sharia review
4. Governance standard for IFIs no.4: audit
& governance committee for Islamic financial
institutions
independence of sharia supervisory board
statement on governance principles for Islamic
financial institutions
corporate social responsibility conduct and
disclosure for Islamic financial institutions.
Governance Standards no. 1 to 5 relate
specifically to the basic guidelines of sharia
governance, guideline 6 relates to general
governance principles for Islamic financial
institutions. Guide number 7 specifically contains
mandatory and voluntary standards for
implementing social responsibility in all aspects
of the activities of Islamic financial institutions
and guidance on disclosure of social
responsibility information for stakeholders of
Islamic financial institutions.
A. Sharia Supervisory Board: Appointment,
Composition, and Report
The AAOIFI definition of the sharia
supervisory board is "an independent body of
legal experts specializing in fiqh mua’malah
(Islamic commercial jurisprudence). Members of
the sharia supervisory board consist of those who
must have expertise in fiqh mua’malah. Expertise
in Islamic financial institutions (IFI) and
knowledge of Islamic fiqh are other requirements
of members of the sharia supervisory board.
Their primary responsibility is to provide
direction, guidance, supervision regarding the
activities of sharia financial institutions. The aim
is to ensure IFIs carry out their activities under
sharia principles.
According to [23], each Islamic financial
institution must have a sharia supervisory board
that shareholders will appoint at their annual
general meeting based on the board of directors'
recommendations by considering local
regulations and laws. Shareholders can authorize
the board of directors to improve the
remuneration of the sharia supervisory board.
AAOIFI also regulates essential elements of
the sharia supervisory board’s report. The
following essential elements must contain in the
SSB Report:
• Title
• Addressee
• Opening or introductory paragraph
• Scope paragraph describing the nature of
the work performed
• Opinion paragraph containing an opinion
on the compliance of the Islamic financial
institution with sharia rules and principles.
• Date of report
• Sharia supervisory board’s signature.
B. Sharia Review
Sharia review aims to ensure that what is done
by the IFI in its activities is not contrary to
sharia. As confirmed by AAOIFI, the definition
of Sharia review is an examination of the extent
of IFI's compliance with sharia in all its
activities. This inspection includes contracts,
agreements, policies, products, transactions,
memoranda and articles of association, financial
statements, reports (especially internal audit and
central bank inspection), circulars, etc. [23].
Sharia review, according to AAOIFI, must be
carried out with the following procedure:
1. Planning review procedures
2. Executing review procedures and
preparation and review of working papers.

202
3. Documenting conclusions and reports.
IV. IFSB GOVERNANCE GUIDELINE
The guidelines and key principles provided by
IFSB No. 3 aim to facilitate IFIs with appropriate
governance structures and processes. IFSB uses
the stakeholder-oriented approach as a model
basis. In sections 1 and 3, IFSB-3
recommendations on integrated corporate
governance approach base on ethics and
compliance with sharia rules and principles.
Besides, recommendations for several key
principles related to protecting the rights and
interests of investment account holders (IAH) are
provided by the IFSB 3. For example, principle
2.1 requires IFIs to recognize IAH rights to
monitor their investment performance and those
related to risk, while principle 2.2 encourages
them to implement a good strategy and
transparent investment [24].
IFSB-3 defines governance as:
"A relationship between a company's
management, its BOD, its shareholders, and other
stakeholders which provide the structure through
which the company's objectives are set; and the
means of attaining those objectives and
monitoring performance are determined."
Furthermore, it explains that corporate
governance encompasses "a set of organizational
arrangements in which IFI management actions
must align with the interests of community
stakeholders; the provision of appropriate
incentives for governance units such as BOD,
sharia board, and management. Moreover, to
meet the interests of stakeholders and facilitate
effective monitoring.
Governance should encourage IFIs to use
resources more efficiently and adhere to Islamic
sharia rules and principles [24]. The IFSB further
provides guiding principles in five parts. The
principles include a general approach to sharia
governance systems, competency, independence,
confidentiality, and consistency.
Sharia governance systems state that ex-ante
and ex-post processes are an essential part of
good governance practices. Issuance of sharia
resolution and compliance checks before the
product offers to customers is a relevant ex-ante
process. Furthermore, after the product offer, the
ex-post process carried out, namely, conducting
an internal sharia review and reporting of sharia
governance to follow up and monitor the
consistency of sharia compliance and effectively
manage the risk of sharia compliance that may
arise from time to time. Besides, each IFI must
ensure that the sharia council has a clear frame of
reference regarding its mandate, responsibilities,
clear operating procedures, reporting lines, good
understanding, ethics, and professional behavior.
V. GOVERNANCE GUIDELINE OF
BANK INDONESIA
Bank Indonesia issued a regulation on sharia
governance through Bank Indonesia Regulation
Number 11/33 / PBI / 2009 concerning the
Implementation of Good Corporate Governance
for Sharia Commercial Banks and Sharia
Business Units. According to [25], the
implementation of Good Corporate Governance
is an effort to protect stakeholders' interests and
improve compliance with regulations, applicable
laws, and ethical values that generally apply to
the Islamic banking industry.
From now on, referred to as GCG, good
corporate governance is governance banks that
apply the principles of transparency,
accountability, responsibility, professionalism,
and fairness. Bank Indonesia regulates the
implementation of governance for Islamic
Commercial Banks (BUS) and Sharia Business
Units (UUS). The implementation of GCG for
BUS must at least realize in:
a. Implementation of the duties and
responsibilities of the Board of Commissioners
and Directors;
b. Completeness and implementation of the
duties of the committees and functions that run
BUS internal control
c. Implementation of the duties and
responsibilities of the Sharia Supervisory Board;
d. The application of the compliance
function, internal audit, and external audit;
e. The maximum distribution of funds; and
f. Transparency of BUS financial and non-
financial conditions.
The implementation of GCG for Sharia
Business Units must at least realized in: (a)
implementation of the duties and responsibilities
of the Director of UUS; (b) implementation of
the duties and responsibilities of the Sharia
Supervisory Board; (c) channeling funds to core
financing customers and depositing funds by core
depositors; and (d) transparency of UUS financial
and non-financial conditions [25].
Referring to the governance rules issued by
Bank Indonesia for sharia commercial banks,
there are still many aspects that need attention to
the realization of better sharia governance. Sharia
governance stipulated in PBI 11/33 / PBI / 2009
or Bank Indonesia Circular number 12 / DPbS /
April 2010 more focus on governance aspects in
general, intended for Conventional Banks. For
example, the governance guidelines issued by
Bank Indonesia do not assume that the

implementation of social responsibility is an
integral part of the governance aspects of Islamic
financial institutions. At the same time, much
literature says that one of the crucial functions of
Islamic banks is a social function. As stated by
that, the concept of social responsibility that
highlights people's expectations of the business
of Islamic finance in terms of safeguarding the
interests of others contains values contained in
Islamic moral philosophy and ethical systems,
which are extended to the context of business
[26], [27].
VI. SHARIA GOVERNANCE
GUIDELINES BASED ON PBI,
IFSB, AND AAOIFI
The Bank Indonesia Regulation (PBI)
concerning the implementation of "good
corporate governance" for sharia commercial
banks and sharia business units is contained in
PBI no 11/33 / PBI / 2009. This PBI states that
the implementation of good corporate
governance in the Islamic banking industry must
meet sharia principles (sharia compliance). The
element of governance in PBI is generally not
different from the governance element in
conventional banks, except there are additional
elements of the Sharia Supervisory Board. The
Islamic governance component based on PBI is
the same as the governance component for
conventional banks and public companies with
the addition of the Sharia Supervisory Board.
Meanwhile, IFSB number 10 is more specific
to the sharia governance guide so that its name is
also the Sharia Governance System. Regarding
the governance component, the IFSB regulates in
more detail, where there are three governance
components, namely DPS, internal sharia
compliance, and internal sharia review. The
AAOIFI added the fourth component, the
external independent sharia audit (ISAE). ISAE
is not related to financial audits. ISAE aims to
ensure that Islamic financial institutions adhere to
sharia principles and rules in conducting
contracts and transactions. ISAE, in this case, is
the outermost safety layer to ensure a financial
service institution complies with sharia principles
and rules.
Regarding the Sharia Supervisory Board
(SSB), PBI discusses four matters, namely: SSB
requirements, SSB duties and responsibilities
(review), SSB meetings, and SSB transparency
aspects (dual positions). In connection with
concurrent positions, PBI regulates the obligation
of SSB to disclose multiple positions as SSB in
other Islamic financial institutions. Besides, PBI
also prohibits SSB from becoming consultants at
the relevant bank to avoid conflicts of interest, as
discussed in the IFSB and AAOIFI.
Simultaneously, both the IFSB and AAOIFI did
not regulate concurrent positions at other
financial institutions.
The independence aspects of SSB are an
essential part of the IFSB and AAOIFI, which are
not discussed in PBI. At the same time, the
consistency and confidentiality of SSB are only
discussed by the IFSB. Table 1 below
summarizes the differences and similarities in the
sharia governance framework in PBI, IFSB, and
AAOIFI.
Table 1.
Comparative analysis of sharia governance frameworks
Bank Indonesia
Regulation Number 11/33
/ PBI/ 2009
IFSB-10: Guiding Principles on
Sharia Governance Systems for
Institutions offering Islamic
Financial Services
AAOIFI Sharia Governance
Standard
Definition
Not explicitly discussed
A set of institutional arrangements
and organizations for Islamic
financial institutions ensures there
is adequate independent supervision
of sharia compliance.
A set of regulations that are useful
for Islamic financial institutions
ensures sharia compliance with all
its activities.
Goals
To protect stakeholders'
interests and improve
compliance with applicable
laws and regulations and
ethical values that generally
apply to the Islamic banking
industry.
Not explicitly discussed Not explicitly discussed
GCG
Component/
Sharia
Governance
Element
• Board of
Commissioners
• Directors
• Committees
(Remuneration and
Nomination, Risk
• SSB
• Internal Sharia
compliance unit/department (ISCU)
• Internal Sharia
review/audit unit/department
(ISRU)
• SSB
• Internal Sharia
Compliance
• Internal Sharia
Audit/Review
• External Independent

204
Monitoring, Audit
Committee)
• Sharia
Supervisory Board
Sharia Audit
Sharia
Supervisory
Board
(SSB)
• SSB
Requirements
• SSB Duties and
Responsibilities (review)
• SSB Meeting
• Transparency
Aspects of SSB (Multiple
Positions, conflicts of
interest)
• SSB expertise
• Independence
• Confidentiality
• Consistency in improving
SSB competencies (carried out by
IFIs)
• Appointment,
Composition, and Report.
• Independence of Sharia
Supervisory Boards
• Sharia Review
• SSB report
Sharia
Compliance
Implementation of Sharia
Principles in Fundraising
Activities and Funds
Distribution and Services
• ex-ante and ex-post
product
• Issuance of relevant
sharia statements/resolutions.
• Dissemination of
information about sharia
statements/resolutions to IFIs
operating personnel who monitor
daily compliance.
• Internal sharia
compliance audit/review to verify
that sharia compliance has fulfilled
• Annual sharia compliance
audit/review to verify that sharia
compliance audits have been
carried out correctly, and the sharia
board has recorded the findings.
An IFI should establish a proper
structure for ensuring Shariah
compliance.
Elements of Sharia compliance
structure are as follow:
• Appropriate governance
structures should be in a place to
allow for a transparent shariah
compliance process
• Interaction between the
SSB or its members and the
management should be transparent.
• The BOD must be
responsible for ensuring that the
conduct of an IFI’s overall affairs
is under Shariah. The SSB should
report on shariah compliance based
on its independent review.
Internal
Sharia
Review
Not discussed Not discussed
Ensure that IFIs 'management
carries out their responsibilities
concerning the implementation of
sharia and the principles
determined by the IFIs' SSB
Internal
Sharia
Compliance
Operating as a separate department
of IFIs, led by a separate head unit
working under the direction of the
SSB. Responsible as SSB liaison
and management.
Independent
External
Sharia Audit
An external auditor responsible for
providing independent conclusions
on sharia compliance of IFIs based
on applicable sharia accounting
standards guidelines.
Audit &
Governance
Committee
(AGC)
Increase transparency and greater
disclosure in financial statements
to gain the public trust of IFIs
concerning the application of
sharia rules and principles.
Based on the comparative analysis, as shown
in Table 1, several things were found that
differentiated between the governance
frameworks proposed by PBI, IFSB, and
AAOIFI.
The definition of sharia governance is very
clearly expressed in IFSB and AAOIFI, while in
PBI, it is not. In contrast to the objectives of
sharia governance, PBI states the targets clearly.
At the same time, IFSB and AAOIFI do not
explicitly disclose in the specific section on what
the goals of sharia governance are. However,
according to IFSB and AAOIFI, the purpose of
governance can be traced from the definition
given.
Regarding the governance component, PBI
grouped the governance component into four
elements, which included the usual governance
components in the conventional governance
framework, namely the Board of Commissioners,
Directors, and Committees (Remuneration,
Audit, Governance).
The Sharia Supervisory Board in the PBI
component seems only to complement the
conventional governance component. In the
governance component proposed by IFSB and
AAOIFI, there are three components, namely:

Sharia Supervisory Board (SSB), Internal Sharia
compliance unit/department (ISCU), Internal
Sharia review/audit unit/department (ISRU). In
this case, there is an emphasis on the importance
of ensuring sharia compliance, as stated in the
definition given. Also, AAOIFI added another
governance component, namely External
Independent Sharia Audit. The existence of an
External Independent Sharia Audit shows the
seriousness of AAOIFI on the issue of sharia
compliance. The presence of an independent
party that conducts governance audits gives more
confidence to stakeholders, especially customers.
External party audit, in this case, is not only
limited to meeting accounting standards but also
includes aspects of Shariah compliance.
Related to sharia compliance, which should be
a core issue in sharia governance, PBI only gives
very normative statements. This contrasts with
IFSB and AAOIFI, which explain how Islamic
financial institutions can achieve sharia
compliance.
The regulation of the Sharia Supervisory
Board requirements is another matter that is
discussed by each rule. PBI provides standards
that are more normative at the legal level and
requirements that PBI also sets up for other
positions in banks such as the Board of
Commissioners and Directors.
Meanwhile, IFSB and AAOIFI emphasize
aspects that should be attached to individual
SSBs, such as independence, consistency,
confidentiality. Besides, AAOIFI also regulates
the review and reporting process that DPS must
carry out. One exciting thing regulated in the PBI
and not in the IFSB or AAOIFI is related to the
dual duties of other financial institutions.
According to PBI, DPS may hold multiple
positions as DPS at most four different financial
institutions.
Based on the discussion above, a
comprehensive sharia governance framework
design developed using PBI, IFSB, and AAOIFI
guidelines.
Table 2.
Sharia governance framework
Governance
Sharia
Objectives
: Ensuring Sharia Compliance in every
aspect of operational activities of
financial service institutions.
The Sharia
Governance
Component
: 1. Sharia Supervisory Board
(SSB)
2. Internal Sharia Compliance
(ISC)
3. Internal Sharia Review (ISR)
4. Audit dan Governance
Committee (AGC)
5. External Sharia Audit (EAC)
Governance : 1. Transparency
Sharia
Principle
2. Competence
3. Independence
4. Consistency
5. Accountability
Figure 1. Sharia governance framework
This sharia governance framework can
describe as follows: The objective of sharia
governance, which is the only goal is to ensure
compliance with sharia rules in every operational
aspect and activity of Islamic financial
institutions. Meanwhile, the compulsory
component in achieving these objectives is the
existence of the shariah supervisory board,
internal sharia compliance, internal sharia
review, audit committee, governance, and the
external Shariah audit. Most of the regulations in
the GCC countries and Southeast Asian countries
have not made requirements regarding external
sharia audits. However, with the development of
Islamic financial products and services
worldwide, the need for an effective external
sharia audit is an absolute necessity [28]. The
existence of an external audit, in this case, to
assure that sharia compliance is not only
confirmed by parties within the institution but
also by parties outside the institution. The
existence of an external audit is essential to
ensure independence.
To carry out sharia governance properly, the
principles of competence, independence,
consistency, accountability, and transparency are
absolute principles that must adhere to the
governance component.
One of the critical characteristics of internal
Islamic audits is competency. Conceptually,
internal Islamic audit competencies are the skills
needed to carry out based on educational
qualifications and experience in work [19]. The
competence and credibility of members of the
Sharia Committee guarantee that a credible and

206
competent committee oversees Islamic bank
operations.
Regarding transparency [29] states that there
is a relationship between transparency and
governance effectiveness. [29] further states that
transparency through information disclosure is at
the core of governance initiatives, called
governance for disclosure. Every organization
that is transparent in its reporting meets one of
the criteria of good governance. According to
[11] disclosure of actual financial facts and
accurate information must be freely available to
users. Another critical point involved in
disclosure is to provide users with adequate
information needed for the right financial
decisions.
Furthermore, this will result in inaccurate
payment of zakat, which is the third pillar of
Islam. Accuracy, in a certain sense, involves
aspects of justice and a fair system. This can help
in making consistent economic and business
decisions. This basis is a strong ethic in the
Islamic accounting system and helps in
promoting proper disclosure and transparency in
every business transaction.
Concerning the importance of accountability
as an element of Islamic governance, according
to [20], Islam views individuals as loyal and
afraid of God. Therefore accountability in Sharia
governance is a stronger belief. As a result,
greater accountability in Sharia governance can
lead to better company performance and increase
trust in IFIs.In Islamic economics, accountability
will produce proper and fair disclosure and
transparency. The ultimate responsibility is to
God. The basic concept of Islamic accountability
believes that all resources are available to
individuals in the form of trust.
Consistency is another principle that will
determine good sharia governance. According to
[30], consistency in decision-making by the
shariah committee is something that all
components of governance must maintain.
Consistency will improve the quality of decision-
making while increasing stakeholder confidence
in IFIs. In ensuring the quality and consistency of
Sharia decisions, the Sharia Committee is
expected to develop a structured process of
achieving Sharia decisions that must be
documented, adopted, and maintained at all times
to ensure the credibility of decision-making and
protect the committee from undue influence [31].
Independence is an essential aspect of
governance that is discussed both at IFSB and
AAOIFI. To maintain SSB independence,
AAOIFI and IFSB state that SSB must be
independent of BOD, where they have the
freedom to carry out their duties to make
informed and objective decisions. Members may
not be employees of the same bank and may not
be involved in managerial decisions and
operational responsibilities. [32] argued that SSB
independence is critical to building the
confidence of stakeholders in IB in terms of
compliance with the rules and principles of
Shariah. [33] reinforces this by stating that SSB
independence reduces agency problems, reduces
financing costs, and improves Islamic Bank
performance.
VII. CONCLUSION
This paper discusses the importance of
Islamic governance guidelines as a guide to
ensure that all activities in Islamic banks are in
line with Islamic principles. This paper conducts
a comparative analysis of sharia governance
guidelines sourced from AAOIFI, IFSB, and PBI.
In the end, this paper summarizes the results of
the analysis in the form of a comprehensive
conceptual framework.
It should be realized that no one frame is
perfect, as well as proper guidelines issued by
AAOIFI, IFSB, and PBI. Each guide has its
advantages. For example, if PBI only emphasizes
sharia compliance with DPS, the IFSB
emphasizes the need for ISRU and ISCU. While
AAOIFI completes it by adding external sharia
compliance, however, what needs to be
understood is that all governance frameworks
aim to ensure that Islamic banks comply with
sharia principles.
Based on the results of the comparative
analysis, this paper proposes a more
comprehensive sharia governance framework for
Islamic financial institutions. This framework is
expected to be a guideline for Islamic financial
institutions to improve sharia compliance of the
organization.
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