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The Principles of Shariah Governance As Practised by Islamic Financial Institutions

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The Principles of Shariah Governance As Practised by Islamic Financial Institutions THE PRINCIPLES OF SHARIAH GOVERNANCE AS PRACTISED BY ISLAMIC FINANCIAL INSTITUTIONS Ahmad Faizol bin Ismail Submitted in accordance with the requirements for the degree of Doctor of Philosophy The University of Leeds Centre for Business Law and Practice School of Law November 2018 ii The candidate confirms that the work submitted is his own and that appropriate credit has been given where reference has been made for the work of others. This copy has been supplied on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. ã 2018 The University of Leeds and Ahmad Faizol bin Ismail iii Acknowledgement In the name of Allah, the Benificient, the Merciful. My utmost gratitude goes to the Almighty Allah for giving me the blessings and good health to complete this academic journey. Also, I would like to extend my deepest gratitude and appreciation to the following persons, groups and institutions: To my supervisor, Professor Andrew Campbell, for his professional supervision, constructive comments and continuous guidance, may Allah grant His hidayah to him. To Dr Jingchen Zhao for his insightful feedbacks and critical views. To the Ministry of Education in Malaysia and Universiti Sultan Zaiban Abidin, for granting me the valueable opportunity and privilege to carry this research project. To my beloved wife, Noorziate Akhmal binti Abdul Rodzi for her undying love, undivided support, encouragement and patience, and my cherished children, Arifah Maisarah, Atifah Mahirah, Ammar Izzuddin and Arif Iskandar, for their precious laughter. This research is dedicated to them. To my respected parents, Haji Ismail bin Muda and Hajjah Rahimah binti Ismail, and my respected parents-in-law, Haji Abdul Rodzi bin Awang and Hajjah Siti Faridah binti Sahar for their endless love and support. To my dear brothers, Ahmad Faizal, Ahmad Firdaus and Ahmad Ridzuan and sisters, Fazida Hazni, Fazlina Hazwa, Nik Nurul Amirah, Nik Nurul Ilham and Nik Nor Zakiah Faizah for their constant prayers and motivation. To my academic colleagues from the Faculty of Islamic Contemporary Studies, Universiti Sultan Zainal Abidin, and the Malaysian Students and Community of Leeds (MSCL), for their unlimited supports and valueable life sharings. Last but not least, to those whom I cannot mention here, this research is indebted with. iv Abstract Shariah governance is a system by which Islamic financial institutions (IFI) ensure that there is an effective independent oversight of the Shariah compliance process. For some reason, Shariah governance is explored through its functional and organisational division rather than its fundamental background. The genesis of this field of research is somehow still lacking in effort as it is in its infancy. Currently, despite attempts have been initiated by some scholars, the members of the Islamic financial industry, whether they are practitioners, academics or policy-makers are giving more attention to industrial applications such as product structuring, managerial efficiency and market expansion. Without undervaluing those aspects of Islamic finance, this research is more interested in exploring the underlaying fundamentals of the Islamic finance namely on Shariah governance. To do so, this research applied doctrinal research method. The data is collected from documents relevant to research themes. It is then analysed inductively and deductively to formulate a fundamental epistemological characteristic of Shariah governance. As a result, this research emphasises that there are three main principles applied by the IFIs, the aqidatic worldview, Shariah compliance and akhlaq-based ethics. Those three fundamentals are then brought into real-world implementation through three mechanisms: the governing law, the Shariah supervision and the Shariah audit. The combination of those principles and their mechanisms has demonstrated a great deal of potential in terms of implementation as manifested by this research in the UK jurisdiction. Table of Contents Acknowledgement ........................................................................................... iii Abstract ............................................................................................................ iv Table of Contents .............................................................................................. v List of Abreviations .......................................................................................... x List of Tables .................................................................................................... xi List of Figures ................................................................................................. xii Chapter 1 Introduction ................................................................................. - 1 - 1.1 Research Background ................................................................................ - 1 - 1.2 Research Questions ................................................................................... - 5 - 1.3 Research Methodology ............................................................................... - 6 - 1.4 Research Scope ......................................................................................... - 8 - 1.5 Chapters and milestones ............................................................................ - 8 - Chapter 2 An Examination of the Shariah Governance .......................... - 10 - 2.1 Introduction ............................................................................................... - 10 - 2.2 Shariah Governance Preamble ................................................................ - 11 - 2.2.1 The meaning of Shariah ................................................................... - 11 - 2.2.2 Shariah Characteristics as a Law: The Flexibility and Rigidity of Shariah - 15 - 2.2.3 Shariah Characteristics as a Law: Maqasid Shariah ........................ - 17 - 2.2.4 Corporations in Islam ........................................................................ - 19 - 2.2.5 Definition of Governance .................................................................. - 28 - 2.2.6 Shariah Governance Definition ......................................................... - 31 - 2.2.7 Overview of Islamic Financial Institutions ......................................... - 35 - 2.3 The Objectives of Shariah Governance .................................................... - 38 - 2.4 The Need to a Robust Shariah Governance for the IFIs .......................... - 40 - 2.5 Conclusion ................................................................................................ - 48 - Chapter 3 Developments of Standard-setters and Codes of Shariah Governance ................................................................................................. - 50 - 3.1 Introduction ............................................................................................... - 50 - 3.2 Historical Overview of Shariah Governance in Islam ............................... - 51 - vi 3.2.1 The Time of Prophet-hood ................................................................ - 51 - 3.2.2 The Time of the Caliphs .................................................................... - 52 - 3.2.3 The Time of Modern Islamic Finance ............................................... - 54 - 3.3 Standardisation of Shariah Governance Framework ................................ - 58 - 3.4 The Accounting and Auditing Organization for Islamic Financial Institutions Shariah Governance Codes ................................................................................. - 61 - 3.4.1 Shariah Supervision Body, Appointment, Composition and Report Standards (GSIFI No.1) .................................................................................... - 62 - 3.4.2 Shariah Review (GSIFI No.2) ........................................................... - 63 - 3.4.3 Internal Shariah Review (GSIFI No.3) .............................................. - 63 - 3.4.4 Audit and Governance Committee for Islamic Financial Institutions (GSIFI No.4) - 64 - 3.4.5 The Independence of the Shariah Supervisory Board (GSIFI No.5) - 64 - 3.4.6 Statement on Governance Principles for Islamic Financial Institutions for Islamic Financial Institutions (GSIFI No.6) ....................................................... - 65 - 3.4.7 Corporate Social Responsibility Conduct and Disclosure for Islamic Financial Institutions (GSIFI No. 7) .................................................................. - 67 - 3.4.8 Viewpoints on the AAOIFI Standards ............................................... - 68 - 3.5 The Islamic Financial Services Board Shariah Governance Codes ......... - 70 - 3.5.1 The Guiding Principles on Corporate Governance for Institutions Offering Only Islamic Financial Services (IFSB-3) ......................................................... - 70 - 3.5.2 Viewpoints on the IFSB-3 ................................................................. - 72 - 3.5.3 Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic Financial Services (IFSB-10) .................................................. - 74 - 3.5.4 Viewpoints on the IFSB-10 ............................................................... - 77 - 3.6 Malaysian Shariah Governance Codes .................................................... - 80 - 3.6.1 Guidelines on the Governance of the Shariah Committee of the Islamic Financial
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