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Answer To: Find the attachments - Title: Governance of shari'ah scholars (multiple board positions across the...

David answered on Dec 31 2021
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Introduction to Shari’a and Islamic financial system:
Muslim’s lives in every aspect are guided by the Shari’a, comprehensively. It is not
simple to attain the cognitive abilities which will enable a person to study, understand as
well as comprehend in detail the literature in original sources of Shari’a. In fact, it takes
years of hard work and patience to get to that point. Moreover, after that experience has
to be gained to get there.1
Islam doesn’t separate business life from religious life. Islamic Shari’a established
codes of practice and behavio
r which guides the Islamic financial system. It prohibits
interest in all transactions. It prohibits gambling and some forms of businesses like
arms, alcohol and tobacco. Islamic finance is based on the idea of risk sharing. It
prohibits debt financing. The alternative it offers is exchanging one set of property rights
for the other, further strengthening the risk sharing principle.2
Shari’a also focuses on practice complete transparency and disclosure between the
trading parties in all the transactions. These principals couldn’t be applied to
conventional systems, therefore Islamic financial institutions were established with
these. Islamic financial system gives out financial products, which are in compliance
with the Islamic Law (Shari’a), mainly to the Muslim investors. Some of the Islamic
products have also gained attention of the conventional borrowers and investors.3
Shari’a supervision is the single most distinguishing factor that separates the
conventional system from the IFI. The IFIs have Shari’a Supervisory Board (SSB) and
Board of Directors (BoD) to oversee their functions. 4
Shari’a SSB members stand out to take the role of scholars and serves as guides to the
management by advising them on Shari’a matters by issuing fatawa. There are a lot of

1
“Meet the Scholar,” http://www.deloitte.com/view/en_XD/xd/viewpoint/2064992d33587210VgnVCM200000bb42f00aRCRD.htm
2
“The Islamic Financial System Alternative,” http://www.worldfinancialreview.com/?p=533
3
“Shari’a compliance services,”
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/Sharias%20Compliance%20Services.pdf

4
“ Shari’a supervisory board in Islamic finance,” http://www.scribd.com/doc/34853985/Shariah-Supervisory-Board
http://www.deloitte.com/view/en_XD/xd/viewpoint/2064992d33587210VgnVCM200000bb42f00aRCRD.htm
http://www.worldfinancialreview.com/?p=533
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/Sharias%20Compliance%20Services.pdf
http://www.scribd.com/doc/34853985/Shariah-Supervisory-Board
commercial constraints due to which in-house monitoring function committee can not be
set up.
The problem of conflict of interest:
The major problem faced by the Islamic system is that there are large number of IFIs,
but there aren’t enough qualified people that understand the nitty-gritty’s of the
transactions that take place within the IFI. Also, there are not enough scholars who can
be on the SSB. To top it up the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) has mandated Islamic banks to have minimum three
members on each of their SSB board. The same applies to other Islamic financial
institutions like Islamic insurance companies, Islamic funds, Islamic real estate
companies and Islamic corporations trading in capital markets. This resource crunch led
to each many Shari’a scholars sitting on several SSBs, thus creating many conflicts of
interest and limiting each member’s contributions even further.
Shari’a has defined the conflicts of interest as offenses (haram).
One hadeeth says “leave that which makes you doubt for what does not make you
doubt”
(Hadeeth from Mohammed al-Hassan bin Ali narrated by Al-Tirmidhi; Al Nesaa’i; and
Ahmed). This hadeeth considers conflicts of interest as a situation that causes doubts in
other people’s minds
Another hadeeth says “who keeps himself away from doubts, will highly exalt his
religion and his integrity; and whoever commits doubtful things, commits offenses
(haram)”
(Hadeeth narrated by Al Boukhari; Muslim; Al-Tirmidhi; and Al Nesaa’i).
The second hadeeth lays emphasis on the positive side of the elimination of the
conflicts of interest, which leads to exaltation of an individual’s integrity as well as
religion.
The conflicts of interest are not desirable in Islam whether in personal life or in business
arena.
Al Qari (2008) defines conflicts of interest as “the shortage in fulfillment of two desires in
a contractual agreement because they go against each other”.
Overview of research:
The paper describes the parameters which cause the conflicts of interest within the
Sharia supervisory board. The authors consider six parameters the SSB executive
position, the SSB remuneration, the relation between the SSB members and the Board
of Directors (BoD), and the multiple memberships in Islamic funds, issuers of Islamic
bonds (Sukuk), and companies trading in capital markets.
The authors issued a questionnaire and based on the above six parameters and
recorded responses for all. They then conducted an ordinary least square regression
with the following equation:
Conflicts = α + β1position + β2Memb1- β3Memb2 - β4Memb3 + β5Remun + β6Relation
+ ε
in an attempt to empirically explain the reasons that affect the conflict of interest in the
SSb in Islamic financial institution (IFI).
OLS regression is used to compare the probabilities of difference (β) are at a given
significance level (α). ...
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