In the Name of Allāh,

the Entirely Merciful, the Especially Merciful

Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.

Resolution No. 177 (3/19)

Role of Shariah Supervision in Controlling Islamic Banking Activities: Significance, Conditions and Modus Operandi

The Council of the International Islamic Fiqh Academy of the Organization of the Islamic Conference, holding its 19th session in Sharjah, United Arab Emirates, on 1–5 Jumādā al-Ūlā 1430h (26–30 April 2009),

Having examined the research papers submitted to the Academy concern- ing the Role of Shariah Supervision in Controlling Islamic Banking Activities: Significance, Conditions and Modus Operandi,

Having listened to the discussions on the subject,

Resolves

First: Shariah supervision

Shariah supervision refers to the process of issuing Shariah opinions (fatāwā) and rulings pertaining to the activity of the institution; monitoring their im- plementation, and ensuring their proper application.

Second: Three Main Components of Shariah Supervision

1. Shariah Supervisory Board

It is a group of no lesss than three scholars who are specialized in Islamic jurisprudence (jurisprudence of financial transactions in particular) and are scholarly competent and well aware of the practice realities. This group assumes the tasks of issuing fatwā; reviewing the actual practice of the financial institution to ensure its compliance in all its transactions and operations with the rules and principles of Shariah, and submitting a report to the general assembly. The decisions of the Shariah supervisory board are binding to the institution.

1. A Shariah supervisory board should be independent, and therefore the following has to be observed:

1. Appointment and termination of members of Shariah

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supervisor board as well as the specification of the amounts of honoraria payable to them is the responsibility of the general assembly of the institution. Final endorsement of decisions in this regard should be sought from the central Shariah supervisory body or any other competent authority.

1. A member of the Shariah supervisory board should not be an executive director or hold any other staff position in the institution. He should also have no other type of work relationship with the institution other than membership of the Shariah supervisory board.

• A member of the Shariah supervisory board should not be a shareholder in the concerned institution.

1. Criteria of Ijtihād (interpretative judgement) and Shariah Opinion (Fatwā) by the Shariah Board:

1. Abidance by Academy resolutions, with due consideration to resolutions of other bodies that assume the duty of collective Ijtihād (interpretative judgement), as far as resolutions of such bodies do not contradict those of the
2. Avoidance of anomalous viewpoints, running after permits and prohibited fabrications (of different opinions), as indicated in Academy resolution 70 (1/8).

• Observance of objectives of Shariah and final consequences of acts when formulating Shariah rulings.

1. Observance of the Academy resolution 153 (2/17) concerning Ifta.

2. Internal Shariah Audit Department

This is the department that applies necessary procedures to ensure proper implementation of decisions of Shariah board in all transactions per- formed by the institution. Such procedures include the following:

1. Review of manuals and procedures to ensure operations performance according to Shariah rulings issued by Shariah supervisory
2. Training staff of the institution to the extent that enables them to do their jobs properly from a Shariah and professional
3. Constitution of a team for internal Shariah The team should have sufficient academic and practical competence, enjoy autonomy,

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and report directly to a high-level authority within the institution’s organisational structure, such as the audit committee or board of directors. Appointment and termination of team members should be coordinated with the institution’s Shariah supervisory board.

3. Central Shariah Audit

   1. Supervising activities of the supervisory authority to which it
   2. Ensuring the effectiveness of Shariah supervision at the level of institutions. This task involves auditing the work of Shariah supervisory boards and internal Shariah audit departments and setting regulations and standards that govern Shariah audit activities in the institutions, including appointment of members, their termination, competence, number, and mandate their

Recommendations

1. Supervisory authorities in each country should assume the duty of issuing regulations and rules to organize Shariah audit activities and undertake necessary procedures to ensure the independence of the Shariah supervision function.
2. Islamic rating agencies should refrain from rating products that are prohibited by the Academy resolutions.

Indeed, Allāh is All-Knowing.