Sharia Supervisory Board

A Sharia Supervisory Board (SSB), also called a Sharia board, Sharia committee or Sharia advisory board, is a body of scholars specialized in Islamic commercial law that is appointed by an Islamic financial institution to direct, review and supervise its activities for compliance with Sharia. The board approves products, contracts and policies, issues rulings on questions referred to it, and reports on whether the institution has followed those rulings.

Sharia boards are a defining feature of Islamic banking, takaful, Islamic funds and sukuk issues. Their approval is what allows an institution to market a product as Sharia-compliant.

Early Islamic banks in the 1970s, such as Faisal Islamic Bank of Egypt and Dubai Islamic Bank, appointed religious advisers to confirm that their operations were permissible. As the industry grew, the advisory role was formalized into standing boards. In the 1990s the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued governance standards that defined the board's appointment, composition and report, and the Islamic Financial Services Board later published guiding principles on Sharia governance systems for regulators to adopt.

• Product approval: reviewing term sheets, contract templates and process flows for new products, such as murabaha financing or ijarah leases, and issuing a fatwa or resolution approving, amending or rejecting them.
• Guidance: answering questions from management, compliance staff and customers on how rules apply to specific cases.
• Review: examining, directly or through internal Sharia review and audit staff, whether completed transactions followed the approved structures.
• Purification: deciding how impermissible income identified in reviews should be handled through income purification, and approving the charities that receive it.
• Zakat and profit distribution: where relevant, advising on zakat calculation and on the allocation of profit to holders of mudarabah investment accounts.
• Annual report: issuing a report to shareholders stating its opinion on the institution's compliance.

AAOIFI's governance standards call for a board of at least three members, appointed by shareholders on the recommendation of the board of directors, and bar directors or significant shareholders of the institution from serving on it. Members are expected to have expertise in fiqh al-muamalat, the law of transactions, and familiarity with finance. National rules add requirements on qualifications, conflicts of interest, limits on the number of boards a scholar may sit on, and disclosure of members' names.

Some countries supplement institution-level boards with a central authority. In Malaysia, the Shariah Advisory Council of Bank Negara Malaysia issues rulings that bind Islamic financial institutions and the courts on questions of Islamic finance, and each institution must also have its own Shariah committee. The United Arab Emirates established a Higher Sharia Authority attached to the Central Bank of the UAE, and Pakistan's central bank has a Shariah board for the banking sector. Central authorities aim to reduce inconsistent rulings between institutions, which can confuse customers and create Sharia non-compliance risk.

Critics have raised several concerns. A relatively small number of prominent scholars sit on many boards at once, which raises questions about workload and concentration of influence. Because the institution pays its own board, observers question how independent the board can be when a profitable product needs approval, a problem sometimes described as fatwa shopping. Some boards have been criticized for approving structures, such as certain forms of tawarruq or bay al-inah, that replicate conventional interest-bearing loans in form while differing little in substance. Others argue that boards focus on legal form rather than on the wider objectives of maqasid al-sharia. These criticisms are part of the reason regulators have moved from voluntary practice to formal Sharia governance frameworks with internal Sharia audit, public disclosure and fit-and-proper tests for board members. Conventional banks operating an Islamic window are generally also required to appoint a Sharia board or committee.