Wednesday, 17 August 2022 11:10

Indonesian Shariah Governance Practices and Issues

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The Shariah Supervisory Board (SSB) is the central organ of Islamic financial institutions’ shariah governance structures (IFIs). Different countries and jurisdictions have adopted different governance structures, and can be broadly classified into three major models.

The first model is the decentralised shariah governance structure in which no central shariah council is established at the national level. This structure only requires the formation of an SSB or shariah committee at the respective IFIs. Countries like Singapore, the United Kingdom and Turkey have all adopted this model.

The second model is a centralised shariah governance structure, which only requires the establishment of a central shariah authority for Islamic financial products and services without a dedicated SSB at the institutional level. The Kingdom of Morocco, for example, regards the Higher Council of Ulamas as the sole entity with full authority to issue fatwas on various shariah issues. A specialised committee comprising nine members and one coordinator is formed under the country’s Higher Council of Ulamas to deal with Islamic finance issues.

The two-tier shariah governance structure is the third model, which necessitates a central shariah council at the national level and a shariah committee at the institutional level. Malaysia, Brunei, Pakistan, UAE and Bahrain are among the countries that have adopted this structure.

Different legal frameworks, varying levels of shariah expertise, and the unique needs of the respective countries frequently cause differences in shariah governance structures between countries and jurisdictions.

Indonesia has implemented a two-tiered shariah governance structure. At the national level, the national shariah board (Dewan Syariah Nasional (DSN)), appointed by the Indonesian Council of Scholars (Majlis Ulama Indonesia), serves as the highest shariah authority for any matters related to shariah compliance for IFIs in the country. The board is charged with issuing fatwas on Islamic financial products and services, as well as supervising the SSB's implementation of fatwas at their respective IFIs. It also has the authority to recommend the appointment and termination of SSBs in IFIs.

At the institutional level, each IFI appoints an SSB with at least two members to ensure full compliance with shariah principles and fatwas issued by Indonesia's national shariah board. They must also conduct a regular shariah compliance review and provide shariah opinions and reports on shariah compliance and supervision.

A member of the SSB is appointed by the shareholders of the respective IFIs at the Annual General Meeting (AGM), with approval from Indonesia's Financial Services Authority (FSA) and a recommendation from the national shariah council. An appointed member of a shariah supervisory board in one IFI may also serve on the shariah supervisory boards of four other IFIs.

Despite sharing a similar shariah governance structure with some jurisdictions, Indonesia's shariah governance practices differ from the majority of jurisdictions in the following ways:

First, the Indonesian Council of Scholars (Majlis Ulama Indonesia (MUI)), an independent non-government authority, appoints the national shariah board (Dewan Syariah Nasional (DSN)). In contrast to other countries, the central shariah board is usually appointed by a sovereign authority or a central bank.

Second, a member of Indonesia's national shariah board may serve on the SSB. Other countries, such as Malaysia and Brunei, restrict such practice.

Third, the Indonesian SSB should have at least two members. International best practices such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), on the other hand, require at least three members for the SSB, whereas Malaysia requires at least five members in an IFI.

Fourth, an SSB member could not serve in more than five IFIs. Malaysia, on the other hand, restricts to a maximum of three SSB memberships in any given period. Multiple memberships are not restricted in some countries.

Fifth, the SSB is required to conduct shariah reviews on a regular basis. Thus, the shariah review and shariah audit functions in Indonesia, to some extent, are entrusted and performed by the SSB.

Based on the foregoing, the shariah governance practices in Indonesian IFIs have raised some concerns, particularly the issue of multiple memberships of SSBs due to a lack of a shariah scholar pool with the necessary shariah and finance qualifications. Furthermore, the SSB’s role in IFIs is not supported by proper and adequate shariah-compliant functions. In addition, the country lacks a dedicated shariah governance framework. While the republic has issued a number of regulations outlining various aspects of shariah governance, they are dispersed across various legislations, acts, guidelines, and circulars

 

Dr Mohammad Mahbubi Ali is the head of economics, finance, Waqf and Zakat at the International Institute of Advanced Islamic Studies (IAIS) Malaysia. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Published in: Islamic Finance News (IFN), 16 August 2022

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