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Jakarta Post

Sharia compliance in financial products

The key function of sharia governance is the existence of sharia supervisory board. 

Bazari Azhar Azizi (The Jakarta Post)
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Thu, July 13, 2017

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Sharia compliance in financial products Personal touch: A teller serves a customer at the sharia lender Bank Syariah Bukopin's head office in Central Jakarta on Feb. 7, 2017. (JP/Dera Menra Sijabat)

I

slamic financial institutions (IFIs) differ from conventional financial institutions. The primary distinction of Islamic financial instructions is the application of Islamic or sharia principles in its business activities.

Thus, the adherence toward the sharia principles is essential for the IFIs. The establishment of a body to ensure sharia-compliance implementation in the IFIs is crucial. Hence, from the late 1970s, the designation of a different board comprising sharia scholars has become standard in countries with the co-existence of Islamic and conventional banks, and other IFIs are following this trend.

Some countries employ a central sharia board to ensure sharia compliance. Therefore, the discussion arises as to whether the assurance of the sharia-compliance should be conducted at the organizational or state level.

The sharia board governs the IFIs by producing rules to incorporate the various aspects of the economy. Thus, it is the foundation and main drive of the Islamic financial system, whereby the appropriate sharia governance system that supports sharia compliance procedures and structure can be established.

Sharia compliance assures the primary differentiation between the Islamic and conventional financial institutions. Also, the Islamic Financial Service Board (IFSB) conveys that sharia compliance is regarded as the higher concern compared to other risks.

The IFIs that do not adhere to sharia rulings and tenets, their contracts are void, and the earnings from these contracts are recorded as “illegitimate.”

Thus, to overcome this risk, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) implies that an IFI must have procedures to comply with sharia in financial transactions and construct an effective mechanism to ensure shariacompliance.

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