ESSAYS ON THE SHARI’AH GOVERNANCE SYSTEM IN ISLAMIC BANKS: DISCLOSURE PERFORMANCE OF SHARI’AH BOARDS AND HISTORICAL EVOLUTION OF THE ROLES OF SHARI’AH SCHOLARS

Abstract

During the last decades, we witness the convergence of Islamic banking sector towards conventional banking sector, which was more evident after the 1990s with the entrance of Islamic Banks (IBs) into competition with conventional banks in the global market. Because of such convergence, initial aspirations of Islamic banking sector during the emergence period in the 1960s as part of Islamic Moral Economy (IME) have mostly failed resulting in high utilisation of debt-financing instruments accompanied with lack of consideration for social consequences of everyday practices of IBs. Although it is expected that supervisory role of Shari’ah Boards (SBs) should prevent or at least moderate the observed convergence beyond merely relying on the legal-rational interpretation of Islamic law or Shari’ah; they are rather considered as facilitators of the divergence of IBs from IME norms.
In order to investigate the role and status of Shari’ah scholars in IBs and the reasons behind the lack of ability of Shari’ah scholars to prevent the observed social failures of IBs, it is important to identify three main problems; (i) examination of supervisory role of SBs through Shari’ah Annual Reports (SARs) within IME framework; (ii) investigation of the process of divergence of IBs from initial aspirations of IME within postcolonial framework; and (iii) exploration of paradigm shifts in ifta (issuing legal opinion) institution’s reason d’etre with the objective of tracing the roots of modern SB as an ifta institution to explore the main reasons behind the inability of Shari’ah scholars in SBs to prevent the divergence from the IME objectives.
This research, therefore, aims at constructing and constituting an Islamic Corporate Governance (ICG) system and its constituents through the foundational principles of Islamic ontology by framing it on the Islamic Political Economy (IPE) structure and IME substance. In addition, research aims to empirically examine SBs disclosure performance through their most effective communication channel with stakeholders, namely SARs to determine the performance of Shari’ah scholar in Shari’ah compliancy related communication. Furthermore, this study aims at examining the theoretical aspects of SBs to identify the process that makes this division as a source of legitimacy in terms of Shari’ah compliancy through analysis of the evolution of ifta institution in history and its transformation into SB division.
Referring to the ontological and epistemological sources of Islam, a theoretical ICG system is developed in this study in Essay 1. Based on this theoretical foundation and available standards on SBs, Essay 2 presents an empirical analysis on the extent of disclosure in SARs as well as the factors affecting the level of disclosure in these reports with a sample size of 305 SAR from 41 IBs of 15 countries for the period of 2007-2014 through statistical and econometrics methods. The results of disclosure analysis indicate that SARs do not contain adequate details to convince stakeholders in Shari’ah compliancy of IBs. However, Shari’ah scholars’ explicit approval of Shari’ah compliancy of the institution in SARs without disclosing details of their analysis seems a sufficient condition for the stakeholders considering the high growth rate of the Islamic banking sector during last decades.
This study further examines the SB as modern ifta institution in its historical trajectory to explore how such trust has been gained and whether similar conditions are valid for Shari’ah scholars employed in modern Islamic banking sector today. However, before investigating historical trajectory of ifta institution, this study analyses the relationship between IBs and conventional banks which especially became a matter of concern as with the entrance of IBs to the global financial market, they have to compete with conventional banking sector in terms of performance, efficiency, minimisation of cost and increased shareholder value.
The aim of Essay 3 is to analyse the sources of observed convergence in IBs towards conventional banks through the phases that IBs have evolved, for which the development of modern Islamic banking sector is analysed in three stages and explored separately: (i) Establishment of first Islamic bank as a hybrid institution until the entrance of Islamic banking sector into competition at global scale; (ii) Convergence of Islamic banking institutions to conventional banking due to competition at the global scale; (iii) Co-optation and adoption of Islamic banking structure and instruments by conventional banks. As the current trajectory in Islamic banking sector demonstrates, IBs and conventional banks with Islamic windows follow a pragmatist approach to achieve growth and lacks the adherence to the initial goals of Islamic economics movement, which aimed at establishing an alternative sector based on Islamic ontological and epistemological sources. Considering the convergence of IBs towards their conventional counterparts during the last decades and insufficient disclosure in SARs by SB members, we claim that the source of an ‘Islamic’ identity in IBs is not due the practical success of SBs alone, but also the role and status of Shari’ah scholars (and indirectly SBs) in the sight of stakeholders. This requires the investigation of SB division from a theoretical perspective to understand its emergence and evolvement, for which the ifta institution and its evaluation is examined through its historical trajectory.
Essay 4, therefore, critically explores and explains the evolution of ifta institution and the role and status of Shari’ah scholars in pre-modern period so that their ‘legitimacy source role’ in IBs can critically be explored and understood. Essay 5, by building on the fourth essay, aims at critically exploring the transformation of ifta institution and the role and status of Shari’ah scholars in the modern period through the conceptual framework of institutional logics. Our research revealed that there are three important transformations between pre-modern and modern period in terms of the role and status of Shari’ah scholars. These are embeddedness of Shari’ah scholars into the financial sector in modern period rather than the society as in the pre-modern period; transformation of the source of legitimacy of Shari’ah scholars from society to ‘being assigned to a SB by the management of IB’; and lastly, complexity of products and services in the modern period compared to the pre-modern period.
In order to overcome the social failure of Islamic finance sector and prevent the convergence towards conventional sector as a result of these transformations, this study offers a civil society based control mechanism that goes beyond ‘halal’ and Shari’ah compliant product and services, and investigate the products and services with IME based dimensions through a fuzzy logic approach. In the conclusion, we discuss the reasons behind the lack of ability of Shari’ah scholars in preventing the social failures of IBs during the last decades based on five essays.