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Paper Title: How Diverse are Shariah Supervisory Boards of Islamic Banks? A Global Empirical Survey

Author:        Omar Kachkar and Mustafa K. Yilmaz

Publisher:    International Journal of Ethics and Systems, Vol 39(2), 312 – 341 

This study aims to examine diversity in the composition of Shariah supervisory boards (SSBs) of Islamic banks (IBs).

It investigates diversity from two perspectives: existing composition of SSBs and the regulatory frameworks and standards of selected Organization of Islamic Cooperation countries. Diversity characteristics include education, nationality, gender and age.

The available profiles of 428 SSB members in full-fledged Islamic commercial banks have been scrutinized and analyzed. These board members occupy 522 SSB positions in 238 institutions operating in 52 countries around the globe. From the regulatory perspective, 12 national and international Shari’ah governance frameworks and standards have been examined.

Findings indicate various levels of diversity in SSBs of the reviewed IBs. The level of diversity in educational background and in the nationality of SSBs can be described as generally acceptable. However, a lack of diversity in gender and age among SSB members is evidently observed in IBs.

While the lack of age diversity in SSBs may be relatively justified as a common trend in the composition of corporate boards, SSBs of IBs are seriously lagging behind in gender diversity. On the regulatory level, this study concluded that provisions on diversity as a requirement in SSBs are almost non-existent in the existing regulatory frameworks and standards.

Corporate governance in Islamic financial institutions is a critical issue. Number of experts with requisite expertise in Islamic studies and financial markets are very small in number. Given the growth in Islamic finance industry globally especially in private sector, there is gap in demand and supply of quality Shari’ah experts.

There is also an issue of conflict of interest. Some Shari’ah board members are part of both commercial institutions as well as regulatory bodies. It creates a clear conflict of interest. It is also common that a single Shari’ah advisory board member provides similar services to the industry at large.

It happens specially if the expert is well-respected and people trust him more than others. In that case, even if there are other experts with similar education and expertise, they are less well-regarded under the tutelage of the more famous and experienced expert.

Compensation and contract design is also a critical issue. If the Shari’ah board member is on the payroll of a commercial institution it is serving on full-time basis, then it becomes awkward to ensure objectivity and non-partiality.

Even if the Shari’ah board member is impartial, the recommendations may or may not be given due importance and weightage if the governance mechanism is weak and the recommendations are not fully binding and taken as final. One alternative approach is that the regulatory institutions shall compensate the Shari’ah experts fully or partially and this can help in reducing conflict of interest.

Gender diversity is also a big issue, especially in South Asian regions like Afghanistan, Pakistan and Bangladesh. Even in other regions, very few female Shari’ah experts are available, except in Malaysia and some other regions.

In South Asia, one reason is lack of specialization courses in female religious schools. One potential solution could be to allow women from academic institutions to be part of Islamic financial institutions if they possess the required expertise.

AAOIFI had also launched Certified Shari’ah Adviser and Auditor (CSAA) certification which is open to both male and females. If such certifications are also deemed permissible as evidence for the candidate to have requisite skills and expertise, then more women can be taken on board. It is because reforming the educational system and introducing specialization in female religious schools would require more efforts and time.

Given the huge disparity that exist in gender diversity, regulators may also take the route of making it mandatory to have at least one female Shari’ah board member. This has been the standard practice done in corporate governance globally to allow some balance in an otherwise almost all male-dominated boards. Lastly, at a strategic level, it is important to build trust for creating readiness in public about the use of Islamic banking. This requires sound governance framework. A diverse board avoiding conflict of interest and representing broader segments of society with a common minimum expertise of Islamic finance can help in achieving consensus. 

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