The new Shari’a governance module: A big boost for Bahrain’s Islamic Finance
01-Nov-2017


For the last decades, Bahrain has built a well-known reputation as a center for Islamic Finance. The kingdom has actively taken a lot of initiatives in the field of Islamic finance which include introducing internationally accepted regulations. For example, in October 2016, the Central Bank of Bahrain (CBB) has released a comprehensive Shari’a Governance (SG) module for market consultation which then been approved and expected to be implemented in January 2018. The new module gives more authorities to the Shari’a Supervisory Board, internal Shari’a review, and internal Shari’a audit. It also requires Islamic banks to engage an audit firm to conduct external independent Shari’a compliance audit. 

Shari’a Governance is unique and vital because it is related to religious aspects in supervising the IFI’s activities. There are at least two objectives of Shari’a governance. The first is to reassure that the IFIs’ activities are in fully compliance with the Shari’a principles. The second is to highlight the stakeholders’ interests that must be protected by the IFIs.  In Bahrain, prior to the approval of new SG module, IFIs like their conventional counterparts have to adhere to corporate governance code which was issued by the Ministry of Industry and Commerce in 2011. The principal no. 9 of the corporate governance code in particular is the most importance one for IFIs and it states companies which are guided by the principles of Sharia have additional responsibilities to their stakeholders. Companies which refer to themselves as “Islamic” will be subject to additional governance requirements and disclosures to provide assurance to stakeholders that they are following Shari’a principles. In ensuring compliance with Shari’a principles, each company should establish a SSB consisting of at least three sharia scholars. 

In addition, IFIs in the Kingdom are required to follow the CBB Rulebook which is a detailed rulebook governing all financial activities in the country and this rulebook serves the conventional financial institutions as well. A separate volume titled Volume 2 of the Rulebook is specifically used to govern and regulate the Islamic banks. The CBB in his guidelines required that all Islamic banks must comply with the AAOIFI Accounting standards and the Shari’a pronouncements issued by AAOIFI’s Shari’a Board. Based on the above discussion, we can conclude that the current practice of SG in Bahrain is still adopting the minimalist style. As a result, there are at least three main Shari’a governance issues existing namely: 1) independence of the SSB, 2) legal status of the Shari’a pronouncements and 3) the conflicting of the SSBFatwas.

The new SG module is expected to tackle the above issues. For the issue of independence of the SSB, it is stated that the CBB as regulatory authority puts specific regulations to the IFIs that any appointment and dismissal of the SSB members must obtain prior approval from the CBB. For the second issue, the new module clearly states that the fatwas and rulings of the SSB are binding and must be followed by the IFIs. For the third issue, the new module grants the power to the Central Shari’a Supervisory Board (CSSB) to reduce such conflicts in the future. It is also mentioned that in case of any conflicts arise between the opinion or interpretation of the CSSB and the SSB of the IFIs with respect to any Shari’a matter, the opinion of the CSSB shall prevail.

 Based on the above discussion, it is clear that the implementation of the new SG module in January 2018 will give a big boost for the development of Islamic financial industry in Bahrain since it provides the solutions to the current SG issues. It is also expected to raise the confidence of public toward the Islamic finance.

The author is Head of Business Administration and Humanities Department, University College of Bahrain 


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