The Role, Independence and Effectiveness of the Shari’ah Board in Islamic Banks of Bangladesh

Abstract

The most important characteristic of Islamic banking is to maintain its products and services in accordance with the principles of Shari’ah. Several studies have identified that adherence to Shari’ah principles is the primary factor influencing the selection of Islamic banking. To maintain, oversee, and review the Shari’ah compliance of banking activities, every Islamic bank is required to have a Shari’ah Board with adequate functional authority. The Shari’ah Board is essential for ensuring the governance and credibility of an Islamic bank. Although the Board is expected to perform a significant authoritative governance function, several studies have found that the governance function, independence, and role of the Shari’ah Board may not be satisfactory or effective enough. In addition, a significant number of studies have identified the dilemmas facing Islamic banks regarding the Shari’ah Board’s independence, function, and role. There is also a scarcity of empirical evidence on the governance function of the Shari’ah Board. Moreover, the need for a well-defined standard in this regard has been perceived. Some Islamic banking regulatory institutions, particularly the Accounting and Auditing Organization for Islamic Financial Services (AAOIFI) and the Islamic Financial Services Board (IFSB), have established standards and guidelines regarding the governance function, independence, and role of the Shari’ah Board. In light of these circumstances, this paper aims to examine the governance function of the Shari’ah Board of Islamic banks in Bangladesh and assess its independence and effectiveness in comparison to the standards established by the AAOIFI and IFSB. As a model, this empirical study selects Islami Bank Bangladesh Limited (IBBL), the country’s first and largest Islamic bank. This study employed quantitative research methodology. Primary data have been collected through a questionnaire survey from members of the Shari’ah Board of IBBL. The standards and guidelines issued by AAOIFI and IFSB have been used as benchmarks in formulating the questions. This study evaluated the effectiveness of the Shari’ah governance mechanism of Islamic banks in the country and provided policy recommendations for its development, contributing to the sustainability and credibility of the industry.

Keywords: Islamic Banking; Shari’ah Board; AAOIFI; Bangladesh; IBBL