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.’
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