​Islamic Finance -The autonomy of Shariah Boards
The Shari'ah board's establishment, whether as the Shari'ah advisory board or the Shari'ah supervisory board, serves as an external organ to the Islamic bank. The Shari'ah advisers who have been nominated to the board are neither bank employees nor shareholders. This board has the freedom from the bank to direct the institution toward Shari'ah compliance. It is customary to let shareholders name Shari'ah advisers at their Annual General Meeting (AGM) or approve a list of these Shari'ah advisers put forth by the bank's management. This is particularly permitted by the governance guidelines for AAOIFI, Shari'ah Supervisory Board: Appointment, Composition and Report. Every Islamic financial institution must have a Shari'ah supervisory board, which the shareholders must elect at their annual general meeting on the board directors' suggestion while taking into account local laws and regulations.
The obligation to create a Shari'ah board suggests that the bank, not the regulators, should be responsible for upholding conformity with Shari'ah standards. The major objective is to establish an impartial Shari'ah board whose job it is to oversee Islamic banks and, perhaps more importantly, to unbiasedly examine and audit the banks' adherence to Shari'ah law at both the process and result levels.

​Islamic Finance - Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
The governance standard of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) on the nomination of the Shari'ah board is crucial as it is directed at the appointing authorities, which might be the central bank and other organizations. "The Shari'ah monitoring board shall consist of at least three members," states Article 7 of the norm. The Shari'ah Supervisory Board may hire consultants with knowledge of the business, economy, law, accounting, and/or other fields. Directors of substantial shareholders of the Islamic financial institution should not be on the Shari'ah supervisory board.
The removal of a member of the Shari'ah supervisory board necessitates a recommendation from the board of directors and requires the consent of the shareholders in a number of meetings, according to Article 8.

Islamic Finance -  Shari'ah Advisory and Oversight Boards are Regulators. 
The necessity to establish its own Shari'ah board prior to its licensing is a responsible regulatory policy to be imposed on an Islamic bank. The two types of Shari'ah boards are the Shari'ah Supervisory Board and the Shari'ah Advisory Board (SSB). The two boards vary in the ways that:
A Shari'ah advisory board is primarily tasked with providing Fatwas or religious opinions on specific items or concerns, whereas the Shari'ah supervisory board is supposed to oversee the bank's daily operations in addition to providing an endorsement as necessary. In other words, from the standpoint of Shari'ah compliance, the supervisory function of the Shari'ah board is more appropriate because it has a wider scope than the advising position. Having said that, the actual terms of reference of the Shari'ah board—not the title and nomenclature—determine the supervisory or advising role. A Shari'ah advisory board's role is equivalent to a supervisory board if the terms of reference in the appointment of the board contain a supervisory and review function. Likewise, unless this ability is expressly stated in the terms of reference of the founding of the Shari'ah board, the title of a Shari'ah supervisory board does not necessarily represent its authority to supervise and evaluate.

b. The Shari'ah advisory board is used in some settings and jurisdictions to highlight the limited authority and scope of this Shari'ah board, whereas the Shari'ah supervisory board is used to reflect the thoroughness of Shari'ah counsel and reviews all the actions of an institution. The name "Shari'ah supervisory board" is more applicable if the entity being overseen is a fully fledged IFI, Islamic insurance (Takaful), or Islamic asset management business. The board, which consists of certified scholars, is responsible for ensuring that all of the institution's operations adhere to Shari'ah law. The name "Shari'ah advisory board" would be judged more appropriate in the situation of an Islamic window operating within a conventional bank, that is, a conventional financial institution delivering specific Islamic financial products, Islamic insurance, or Islamic funds. The primary responsibility of the scholars serving on this board is to make sure that any particular product, plan, or fund being supplied by this conventional or Islamic company complies with Shari'ah law. These products must adhere to Shari'ah in their layout, construction, and legal paperwork. A full-fledged IFI should support Shari'ah-compliant systems and products in addition to IT solutions, accounting practices, and risk management approaches. Only the product design, structure, and principal operations, as well as the relevant legal documents or prospectuses, if applicable, are subject to the Shari'ah board's endorsement.

The meaning of SSB (shariah supervisory board) 
A Shari'ah supervisory board is a separate organization made up of experts in Fiqh al-Muamalah (Islamic commercial law). However, the Shari'ah supervisory board may have a member who is not an expert in Fiqh al-Muamalah but who still possesses knowledge of Fiqh al-Muamalah and expertise in Islamic financial organizations. The Shari'ah supervisory board is tasked with the responsibility of overseeing, reviewing, and directing the operations of the Islamic financial institution to make sure they adhere to Islamic Shari'ah laws and regulations. The Shari'ah supervisory board's Fatwas and decisions shall be binding upon the Islamic financial institution.

Shari’ah advisory board Shari’ah supervisory board
 Limited in issuing Fatwa on products. 
Appropriate and relevant to Islamic window
or conventional financial institutions offering Islamic financial products.

Shari’ah supervisory board
Entrusted to issue Fatwa and review thewhole activities pursuant to Fatwa.
Appropriate and relevant to fully-fledged
Islamic Financial Institutions (IFIs).

A Shari'ah board's Shari'ah supervisory services are meant to direct the Islamic bank in conducting all of its operations in accordance with Shari'ah guidelines. From the regulator's standpoint, this would likely be the best way to ensure compliance because the bank's management might not be able to fulfill this legal requirement without the help of a Shari'ah board on an intellectual and academic level. If an Islamic bank doesn't set up this Shari'ah board or doesn't follow Shari'ah rules, the bank's license may be cancelled. Section 4 (3) of the Malaysian Islamic Banking Act of 1983 contains such a clause and reads as follows:

‘where a licence is subject to conditions, the Islamic bank shall comply with those conditions.’

​Islamic Finance - the central government as regulators 
Because a licensed financial institution's license was contingent upon its adherence to Shari'ah principles, regulators are worried about compliance issues connected to that institution. A company that wants to obtain an Islamic bank license will frequently state in its articles of association and memorandum that its main line of business is banking according to Shari'ah law. Some nations, like Malaysia, also stipulate in their laws that the creation of a Shari'ah board for the business is a prerequisite for receiving an Islamic banking license. The Central Bank shall recommend the grant of a license, and the Minister shall not grant a license, unless the Central Bank or the Minister, as the case may be, is satisfied. 

​‘That there is, in the articles of association of the bank concerned provisions for the establishment of aShari’ah advisory body to advise the bank on operations of its banking business in order to ensure thatthey do not involve any element which is not approved by the religion of Islam.’

Although similar direct provisions cannot be found elsewhere, it can be anticipated that the approving authority may not award a license if certain prerequisites are not met.

​Islamic Finance - stakeholders in shariah compliance
Islamic financial activity must operate in accordance with Shari'ah principles. Shari'ah compliance affects a wide range of stakeholders, including regulators, shareholders, a bank's management, clients, and the general public. The attainment of Shari'ah compliance in any given IFI is in the interests of these stakeholders, both directly and indirectly.

Islamic Finance – Coverage of Shari’ah compliance

​Coverage of Shariah Compliance include: 
Risk management
Recovery and restructuring
IT solutions
Accounting treatment
Legal documentation
Product design and structure

Shari'ah compliance extends beyond a product's structure and design to take into account other pertinent factors. For instance, a product's product offering may be legal and compliant, but it may also incorporate a risk management tool that is not, such as an interest rate swap to protect against any asset liability mismatch of the bank. In this situation, the risk management tool would need to meet the same Shari'ah compliance criteria, which might call for using a profit rate swap rather than an interest rate swap.

Important characteristics of Shari'ah compliance
​Shari'ah compliance has three key characteristics: (A) ensuring that all contractual obligations must be met; (B) avoiding any unlawful acts or terms; and (C) maintaining compliance during the course of the product's lifespan.
One of these regions, or, in the worst case, all three, may be the site of a potential breach. The failure to maintain ongoing compliance, however, usually constitutes the most likely breach. It is possible to recommend a product as compliant if it satisfies all requirements and is free of all banned phrases, such as mortgage finance. If a customer were to default, an IFI might want to make an additional payment to the consumer that isn't legal. The approach and the result both need to reflect shari'ah conformity. As mentioned above, it should begin with the product design, continue through product execution, and address all auxiliary services like accounting, IT, marketing and advertising, legal documents, risk management, application forms, and other paperwork.

Islamic Finance - Adhering to Shari'ah Guidelines
Shari'ah compliance refers to abiding by all Shari'ah principles since in the context of Islamic finance, these principles serve as a norm. Products and services covered by the indicative syllabus content The definition of Shari'ah compliance The salient characteristics of Shari'ah compliance The stakeholders in Shari'ah compliance The relationship between Shari'ah compliance and regulation Book One diploma in Islamic business law Shari'ah compliance 40 umbrella of Islamic finance requires that all facets of a financial product or service strictly follow the guidelines of the Shari'ah. This means that compliance extends beyond the product's or service's structure and design to include the terms and conditions, legal documentation, accounting treatment, SOPs, IT components, and even marketing materials related to the product or service. Each of these needs to follow the guidelines established by Shari'ah principles in order to be considered Shari'ah-compliant. Products are regarded to be noncompliant when they contradict or diverge from Shari'ah standards.

​Any non-compliance issues will typically be addressed, and if necessary, appropriate action will be taken to bring the products into compliance. Non-compliant actions may cause the revocation of an IFI's license in some jurisdictions, such as Malaysia under the Islamic Banking Act 1983 (Section 4). Since IFIs must abide by their articles of organization, which typically mention their obligation to conform with Shari'ah principles, this is a logical result for any licensing process, even when it is not explicitly addressed in other jurisdictions. It should be noted that, outside Malaysia, no other jurisdictions have a specific law or act that addresses Islamic banking. Conducting Islamic finance activities requires compliance, which is a requirement of Shari'ah. An essential tool for facilitating Shari'ah compliance and making Shari'ah compliance observable and comparable across jurisdictions is the availability of Shari'ah standards.

​Islamic Finance - What does adhering to Shari'ah mean?
The basic definition of compliance Every society has a requirement for compliant behavior, which is supported by accepted norms and values that serve as the foundation for specific laws, rules, guidelines, or principles. To maintain a social order that will make it easier to attain societal goals, compliance or conformance is required. In this regard, being compliant is a universal trait, and in Islam, it is related to the principles and regulations of Shari'ah. The behavior of market participants and the policies and practices of financial institutions in the Islamic financial services sector must adhere to the principles and regulations of Shari'ah as articulated in the form of regulatory requirements, guidelines, and standards. The range of such compliant behavior covers any actions where the investing public and society should be given reasonable assurance that such actions do not conflict with or go against Shari'ah principles and laws. Any type of non-compliance erodes this guarantee and undermines investor faith in the Islamic financial system.

Compliance generally refers to the state of adhering to a particular norm, which then determines whether something is considered to be compliant or not. A person or organization is required to comply with all the rules set forth by a certain point of reference. This is known as compliance. This establishes a benchmark that individuals seeking compliance are required to meet and directs the compliance process. Only when the pertinent standard has been made known to all parties involved can compliance be anticipated. Experts in the subject typically establish the standards following protracted discussion of what should be covered. Although the majority of standards are approved by top experts, they are generally not required to be followed by law. Normally, the decision to adopt a standard is left up to the individual's conscience. It would be against best practice to not adhere to a standard, and this action would need to be justified by proof that the norm did not apply in the specific situation.

Islamic Finance - Shari'ah compliance and the equities market
 In contrast to the equity market, the difference between Islamic finance and conventional finance is more pronounced in banking and insurance products as well as in fixed income instruments. While traditional insurance contracts are predicated on the selling of an indemnity for a premium that carries a significant amount of uncertainty, traditional banking and fixed income instruments are fundamentally based on interest. However, it is more difficult to distinguish between the Islamic and Western equities markets because the banned features are found in transaction-based activities rather than in the design of the relevant contracts. Since the equities market investment contract is fundamentally founded on the profit and loss sharing principle, there is no Shari'ah difficulty with it. In other words, purchasing shares on any stock exchange is acceptable since it represents a Musharakah agreement between the shareholders.

​The contract itself complies. Shari'ah objections, however, mostly relate to the operations of the businesses that receive funds through the purchase of shares. The sale or purchase of goods and services that are prohibited by Shari'ah rules, such as the sale or purchase of non-Halal food and beverages, may be one of these activities. Non-approved activities can include those that affect the company's balance sheet, such as borrowing money or raising more funds through interest-based transactions like overdrafts and traditional bonds. Islamic commercial law is also pertinent to the transactional actions of the companies in the area of investment, where money must be put into actual economic activities. This demonstrates how Islamic financing differs from traditional finance in that compliance is crucial at both the contractual and transactional levels.