The Corporate Governance of Multiple Sharia' Board Directorship Practice Under the Centralised Approach: A Case Study of Qismut+3 South East Asia Divisional Members of Malaysia And Indonesia

Abstract

The raison d'être of this thesis is to scrutinize the corporate governance framework for Islamic financial institutions ( IFIs ) vis-à-vis the multiple Sharia' board directorship practice in two significant members of the QISMUT+3 region namely Malaysia and Indonesia. As at 2016, there are approximately 1068 Sharia' scholars around the world, who occupy Sharia' board directorships across 46 countries. 75 per cent of these directorships concentrated in ten countries, spanning across the Southeast Asia, the Gulf Cooperation Council ( GCC ), and South Asia. With the top 50 Sharia' scholars commanding a significant 73 per cent share of the available 1142 Sharia' board directorships worldwide, which also include those within Islamic banking standard-setting agencies such as the Islamic Financial Services Board ( IFSB ) and the Accounting and Auditing Organisation for Islamic Financial Institutions ( AAOIFI ), the fact that it hypothesises an average of 16 Sharia' board directorships per scholar indicates a high concentration risk of Sharia' board directorships within the industry and presents a reasonable cause for concern on the ability of the IFI s Sharia' board to manage the Sharia' due diligence and review process. The issue behind the practice revolves around several substantial grounds such as conflict of interest, time commitment, confidentiality concern, and more importantly, the compliance of the stated practice with the Sharia' law. Ultimately, it can appear ironic if the application of the practice was unfounded on any valid principles of the Sharia' law and yet remain practised by the Sharia' scholars, who owe both the IFIs and the religion of Islam, a great responsibility in assuring the stakeholders that Sharia' compliance does not stop at the financial products and services offered, but seeks to include the conducts and practices of the Sharia' scholars as the custodians to IFI s Sharia' compliance assurance. In analysing these issues, this researcher adopts an exploratory case study approach and utilises semi-structured interview as its data mining method in exploring and advancing the understanding in these areas, especially in light of the limited empirical research conducted on the practice. The research findings reveal that the repercussion and continuance of the practice with respect to the sustainability of the Islamic banking industry in the long-term remain largely unknown, if not, under-researched even in countries such as Malaysia with the most progressive and comprehensive Islamic corporate governance framework for the IFIs. In the same vein, the findings suggest that the course of action recommended by Indonesia exhibits several practical merits worth considering. The introduction of a systematic and comprehensive certification programme that encompasses the fundamental exposure to both the theoretical and practical aspects of Islamic banking can provide the industry with a steady reservoir of quality IFI s Sharia' board members, who can in turn, contribute to the uniformity and standardisation of Islamic banking Fatwas across the IFI s Sharia' board they represented. In ensuring the independence of the IFI s Sharia' board, the introduction of a rotation system that limits the length of a Sharia' board directorship to a maximum of two terms, comprising three to four years a term, can serve as a viable initiative in enhancing the transparency, efficiency, accountability and professionalism in the IFI s Sharia' compliance endeavours.