Most Islamic financial institutions and conventional banks offering Islamic products have a compliance committee, commonly called “Sharia Board”, which independently establishes the conditions for validity of the transactions with regard to the rules and principles of Sharia.
This committee is a collegial body generally composed of 4 to 7 Ulemas (Sharia scholars), who have an advanced banking and finance expertise. According to the financial institution, the committee members may not be permanent, and meet periodically, in order to review the conformity of the products and processes. It is common that Ulema sit in Sharia Boards of multiple institutions, and some internationally renowned legal experts are part of more than a dozen committees.
Ulemas of the committee are responsible for approving different transactions or products offered by the financial institution. They also examine in detail the structure and legal documentation of transactions, as well as the characteristics of the products that are submitted to them. The role of Sharia Board may also include assistance in the development of the legal and operational structure of the body, establishment of the investment objectives, criteria and strategy, so that they respect the principles of Sharia. The Board also examines the legal and operational structure of investments and publish initial certificates on launching of Funds in accordance with Sharia. And in case of profits incurred by the institution from illicit sources, members of the board should perform purification of gains while ensuring the distribution of Haram part to charities.
Therefore, Sharia Board stands as a major element of the structure of any Islamic financial institution. By their power, Ulemas can have a strong influence on the development of these institutions as they advise. Their independence with regard to the bank executives and their authority allow them to reject any transaction deemed contrary to the Sharia. Moreover, the committee may be called upon to pass judgment on individual cases which are submitted to it, aiming to determine if specific demands of business customers are acceptable to the institution.
While all ulemas agree on the fundamental principles of Islamic finance, few opinions and advanced interpretations may differ between different Sharia Boards, thereby preventing harmonization of Islamic financial products or procedures. Indeed, according to the financial institution some require strict adherence to the religious principles, others are more open to the market requirements. This diversity of opinions among Sharia Ulemas who make up these religious committees could prove to be one of the biggest challenges to be faced by the Islamic Finance.
It is for this reason that in countries such as Malaysia, the Central Bank created a central Sharia Board which decides on the conformity of financial products. In parallel, each institution may have its own Sharia Board, but it must, in the first place, comply with the standards laid down by this central Sharia Board. In Gulf countries, consistency is ensured by the fact that most of the Ulemas sit in several Sharia Boards at once, and therefore issue consistent fatwas through various financial institutions.