THE ROLE AND RESPONSIBILITIES OF SHARI’AH BOARDS IN THE CONTEXT OF ISLAMIC FINANCE AND THEIR POSITION IN LAW BY SARA ASHRAFKASHANI A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY INSTITUTE OF ADVANCED LEGAL STUDIES UNIVERSITY OF LONDON SEPTEMBER 2015 SUPERVISOR: PROFESSOR BARRY A. K. RIDER 1 Table of Contents Table of Contents………………………………………………………………………………2 Declaration……………………………………………………………………………………...6 Abstract…………………………………………………………………………………………7 Acknowledgement……………………………………………………………………………...8 Dedication………………………………………………………………………………………9 List of Abbreviations/Acronyms………………………………………………………………10 List of Cases…………………………………………………………………………………...10 List of Statutes…………………………………………………………………………………13 List of Arabic Terms…………………………………………………………………………..14 Chapter One…………………………………………………………………………………………………………….18 Introduction…………………………………………………………………………………………………………….18 Chapter Two…………………………………………………………………………………………………………….23 Islamic Finance in the Global Financial Services Industry……………………………………….23 2.1 Introduction………………………………………………………………………………23 2.2 The Development of Islamic Finance……………………………………………………23 2.3 Islamic Finance Sources………………………………………………………………….26 2.3.1 Shari’ah……………………………………………………………………………..26 2.3.2 International Soft Law……………………………………………………………....30 2.4 Islamic Jurisprudence and Islamic Finance Development………………………………...34 2.4.1 Juristic Ruling (Fatwa) and Islamic Finance………………………………………..43 2.5 Islamic Finance Principles………………………………………………………………...48 2.5.1 The Prohibition of Riba……………………………………………………………..49 2.5.2 The Prohibition of Gharar…………………………………………………………..52 2.5.3 The Prohibition of Maisir…………………………………………………………...58 2.6 Islamic Financial Institutions……………………………………………………………...59 2.6.1 Islamic Banks……………………………………………………………………….60 2.6.2 Islamic Capital Markets……………………………………………………………..66 2.6.3 Islamic Insurance…………………………………………………………………....68 2.7 Conclusion…………………………………………………………………………………69 Chapter Three………………………………………………………………………………………………………….71 The Significance of Shari’ah Boards in the Context of Islamic Finance…………………….71 3.1 Introduction………………………………………………………………………………71 2 3.2 The Historical Development of Shari’ah Boards………………………………………...72 3.3 The Functions of Shari’ah Boards…………………………………………………….....74 3.4 The Regulation of Shari’ah Boards……………………………………………………...82 3.4.1 Shari’ah Boards in Malaysia…………………………………………………………83 3.4.2 Shari’ah Boards in the GCC………………………………………………………….85 3.5 Divergence in the Interpretation of Shari’ah and Islamic Financial Products……………86 3.5.1 Shari’ah Framework and Financial Innovation………………………………………89 3.5.1.1 Shari’ah and Product Development……………………………………………..94 3.5.1.1.2 Derivatives in Islamic Finance…………………………………………..97 3.6 Conclusion……………………………………………………………………………...100 Chapter Four………………………………………………………………………………………………………….102 The Legal Relation of Shari’ah Boards with Islamic Financial Institutions…………….102 4.1 Introduction……………………………………………………………………………...102 4.2 Corporate Objective and Its Implications for the Legal Relations of the Corporate…….103 4.2.1 Shari’ah Objectives and Corporate Objectives: the Role of Maslahah……………...105 4.3 Shari’ah Boards as Fiduciaries…………………………………………………………..107 4.3.1 Fiduciary Relationship in the Context of Modern Corporate Law…………………..113 4.3.2 The Fiduciary Obligations of Shari’ah Boards………………………………………117 4.3.2.1 No Conflict of Interest………………………………………………………….122 4.3.2.2 Conflict of Duties………………………………………………………………126 4.3.2.2.1 No Profit Rule…………………………………………………………..130 4.4 Confidentiality………………………………………………………………………..131 4.5 Accountability………………………………………………………………………..135 4.6 Conclusion……………………………………………………………………………137 Chapter Five………………………………………………………………………………………………………….139 The Duties of Shari’ah Boards in the Context of Islamic Finance…………………………..139 5.1 Introduction………………………………………………………………………………139 5.2 Authority and Shari’ah Ruling in Islamic Finance………………………………………140 5.2.1 The Nature of Authority in the Context of Positivism………………………………141 5.2.2 The Nature of Authority in Islamic Law…………………………………………….146 5.3 Legality in Positivism……………………………………………………………………149 5.4 The Implications of Economic and Financial Policy for the Functions of Shari’ah Boards…………………………………………………………………………………………..151 5.5 The Duties of Shari’ah Boards…………………………………………………………..155 5.5.1 Operational Risk in Islamic Finance: the Role of Shari’ah Boards in Shari’ah Compliance Risk Management…………………………………………………………………157 5.5.1.1 Reputational Risk……………………………………………………………….161 5.5.1.2 Audit…………………………………………………………………………….163 5.5.1.2.1 Hisbah…………………………………………………………………...167 5.5.2 Shari’ah Audit………………………………………………………………………..169 3 5.6 Shari’ah Compliance in the Context of Malaysia Regulatory System………………….174 5.7 Conclusion………………………………………………………………………………176 Chapter Six……………………………………………………………………………………………………………178 The Implications of Shari’ah Boards’ Fatwas for the Roles of Directors………………..178 6.1 Introduction…………………………………………………………………………….178 6.2 The Place of Board of Directors in the Context of Modern Corporate Law……………179 6.2.1 Reasons for the Existence of Board of Directors…………………………………...181 6.3 The Relation between Legitimation and the Institution of Board of Directors…………183 6.3.1 The Concept of Legitimacy in the Context of Fiduciary Duties of Directors………185 6.4 Who is a Director?............................................................................................................188 6.4.1 De Facto Directors…………………………………………………………………..189 6.4.2 Shadow Directors……………………………………………………………………191 6.4.2.1 Shari’ah Boards as Shadow Directors………………………………………….194 6.4.3 The Importance of the Identification of Directors…………………………………..196 6.5 The Implications of Shari’ah Boards’ Fatwas for the Strategic Role of Directors……...198 6.6 The Implications of Shari’ah Boards Fatwas for the Control Role of Directors………..205 6.7 Conclusion………………………………………………………………………………208 Chapter Seven………………………………………………………………………………………………………210 The Liability of Directors for the Violation of Shari’ah Boards’ Fatwas………………..210 7.1 Introduction…………………………………………………………………………….210 7.2 Investor Protection in the Context of Anglo-American Corporate Law………………..211 7.2.1 The Importance of Path Dependence in the Law of Investor Protection…………...218 7.3 The Fiduciary and Non-Fiduciary Duties of Directors With Regard to Shari’ah Boards’ Opinions……………………………………………………………………………………….221 7.3.1 The Fiduciary Duty of Loyalty……………………………………………………..225 7.3.2 The Non-Fiduciary Duty of Care, Skill and Diligence……………………………..230 7.4 Conclusion……………………………………………………………………………....242 Chapter Eight……………………………………………………………………………………………………….244 The Role of Shari’ah Boards in Shari’ah Governance……………………………………………244 8.1 Introduction…………………………………………………………………………….244 8.2 The Concept of Corporate Governance………………………………………………...245 8.2.1 Stakeholders’ Interests and Good Corporate Governance………………………….250 8.3 Governance in Islam……………………………………………………………………255 8.4 The Concept of Shari’ah Governance…………………………………………………..257 8.4.1 The Roles of Shari’ah Boards in Shari’ah Governance…………………………….261 8.5 Issues in Shari’ah Governance………………………………………………………….263 8.5.1 Transparency………………………………………………………………………..265 4 8.5.2 Accountability……………………………………………………………………..268 8.6 Corporate Ethics………………………………………………………………………..271 8.7 Conclusion……………………………………………………………………………..273 Chapter 9…………………………………………………………………………………………………………….275 The Issue of Professionalism in the Regulation of Shari’ah Boards’ Functions……275 9.1 Introduction……………………………………………………………………………275 9.2 The Concept of Regulation……………………………………………………………275 9.3 Issues in the Regulation of Shari’ah Boards…………………………………………..283 9.4 Professionalism and Shari’ah Boards’ functions……………………………………...285 9.5 Conclusion…………………………………………………………………………….290 Chapter Ten……………………………………………………………………………………………………….292 Conclusion…………………………………………………………………………………………………………292 Bibliography………………………………………………………………………………………………………308 5 Declaration I declare that the work presented in this thesis is solely my own work other than where I have clearly indicated that this is the work of others. The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without prior written consent of the author. 6 Abstract This study seeks to investigate the role of Shari’ah boards in the context of Islamic finance and defines their legal position in law. It explains ambiguity over the concept of Shari’ah and its implications for the responsibilities of Shari’ah boards in the context of Islamic finance. In this regard, it investigates the history of Islamic law to explain the crucial role of Shari’ah jurists in the interpretation and implementation of Shari’ah principles in terms of legitimacy-making for commercial transactions. Shari’ah supervisory board as the second layer of governance bears a trust-like relationship with the Islamic financial institution and investors. This thesis establishes a fiduciary place for Shari’ah boards to explain their responsibilities according to common law and statute. It endeavours to explain the implications of value-creation and the success of the company for Shari’ah boards’ fiduciary duties. 7 Acknowledgement All praise and thanks are due to God, who endowed me with the will, strength and means to complete this project. Without His bounty, grace and mercy this work would never have been accomplished. There are many people without whom I could not have written the present study. I am forever grateful to my supervisor, Professor Barry A. K. Rider
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