Shariah Board

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A Sharia Board certifies the Islamic financial products as being Sharia-compliant. It thereby reviews the related contracts and provides an opinion about whether those agreements would be permissible under Islamic law.


Originally, most finance business in Muslim countries was supposed to be done under the Islamic legal system, but towards the end of the 19th century, Western business law replaced its Islamic counterpart. Until recently, there was no procedure to declare whether a given financial product was in Shari'ah-compliant or not. Certain practices, like modern tawarruq, allowed those wishing to do so to create ontracts enforceable in the Shariah Courts.

In the 20th century, there were concerns among many Muslims about the prohibition of Riba how to work within the current Westernized system. Some smaller experiments were done and in 1963 the first larger attempt in Mit Ghamr, Egypt was made by Ahmad El Najjar, an economist who studied in Cologne, Germany. The bank was socially oriented and lasted until 1967. It predominantly entered into Mudaraba contracts with the savings it received. Other banks began to copy this model.

The first truly commercially bank, the Dubai Islamic Bank, was established by traders around Sheikh Zayed Lootah and still exists today as a market leader. The first global development bank, was established by the Organisation of the Islamic Conference in 1974: The Islamic Development Bank, based in Jeddah. The Islamic Development Bank recently celebrated its 30th anniversary.

As Kahf [1] noted, none of the above banks had a Shariah Supervisory Board in place. Only in the second half of the 1970s did jurists (Shari'ah scholars) get involved into the young Islamic banking industry. Faisal Islamic Bank of Egypt (1976) and the Jordan Islamic Bank (1978) established a formal Shariah Supervisory Board especially to gain credibility among potential clients. This practiced continued with major other new banks established like the Kuwait Finance House in 1979.

The initial concern of economists working on Islamic banking from 1950 onwards was to get away from Riba with the key suggestion of Profit-/Loss Sharing financing modes. Shariah scholars, however, reviewed the issues from the classical legal point of view, in which the economists are not so deeply trained by profession. The Shariah scholar’s intention was to implement the full range of Fiqh Muamalat rather than the single prohibition of Riba. Economists in contrast analyzed the Islamic banking need from a more general point of view, deducted from overall objectives. Controversies based of these two methodologies are still going on in all debates.

Duties of a Shariah Board

The duties of a Shariah Supervisory Board or Shariah Committee are to advise and certify in form of a legal opinion (fatwa) certain financial products of a financial institution. The definition of the Islamic department of the National Commercial Bank of Saudi Arabia reads as follows:

“Shariah Board The Shari’ah Committee (Shari’ah Control and Fatwa Body that is independent of the bank) consists of learned and honest Shari’ah scholars. The Committee is responsible for expanding the Shari’ah provisions with respect to the issues that are put forward before it and to control the activities of the Division and the branches pursuant to the provisions of Islamic Shari’ah. The committee carries out its activities in total independence. The Islamic Banking Services Division is committed to the application of the fatwas and decisions passed by the Committee”

visited 27th October 2005,

The key issues of such a board are laid down in this text: independence of the bank, qualification, bindingness of their decisions towards the bank.

The current understanding of a Shariah Board is defined by the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) in Bahrain. This body is built to standardise key practices of the industry. Their definition is as follows:

„A Shari´a supervisory board is an independent body of specialised jurists in fiqh al mu´amalat (Islamic commercial jurisprudence). However the Shari´a supervisory board may include a member other than those specialised in fiqh al mu´amalat but who should be an expert in the field of Islamic financial institutions and with knowledge of fiqh al-mu´amalat. The Shari´a supervisory board is entrusted with the duty of directing, reviewing and supervising the activities of the Islamic financial institution to ensure that they are in compliance with Islamic Shari´a rules and principles. The fatwas and rulings of the Board shall be binding on the Islamic financial institution.“

p. 76, Islamic Finance Innovation and Growth, ed. By Archer, S. And Abdel Karim, R.

The standard definition by the AAOIFI is pointing out the kind of qualification as specialised jurist in Fiqh Muamalat. It further explains the importance of legal analysis for Islamic financial institutions.

After reviewing all the documents, contracts and reviewing them, demanding adjustments and finally agreeing if so agreeable the Shariah Scholar is issuing a Fatwa, a legal opinion, which is used to advertise it to prospective clients. Such a Fatwa is subject to a number of conditions, regarding the prevailing circumstances, which are named e.g. in the Fatwa for the Islamic Bond (Sukuk) of the German state Saxony-Anhalt:

  • Often a non-Islamic legislation, which cause legal constraints
  • The need to further develop the emerging Islamic finance industry as an alternative and viable financing system
  • The various existing constraints and restrictions imposed under the various conventional financing techniques available in many Muslim countries
  • The prevailing conditions and affairs of the Ummah and the need to remove them from the shackles of Riba

Summarizing the conditions the local circumstances and habits (al Urf) and temporary needs of utmost necessity (darura) are sources for compromises.

The role of the Shariah Board is as such an advisory role regarding Islamic law to an Islamic financial institution including a judgement of the compliance of certain products put forward to them. Because of major restrictions they have the capacity to compromise to a certain degree.

A decision of a Shariah Board is made binding by internal decision to the Islamic financial institution. Between the institution and the client contracts are typically governed by non Islamic law which raises the question of legal enforcement.

Sharia Governance

The IFSB has issued a standard for Sharia Governance. It requires that the Sharia Scholars fulfill fit and proper criteria, shall be appointed by the shareholders and not the management. Further it is suggested that Islamic financial institutions follow a Sharia audit process internally and as best practice also external once a year.

The International Islamic Rating Agency offers a Sharia Quality Rating. Major elements of this evaluation will cover an institution’s internal mechanisms for Shari’a compliance, the authority, strength and resources of the entity’s Shari’a committee, and the opinions expressed by Shari’a committee members and their differences in opinion, if the Sharia rulings and processes.

Legal Enforcement

A Shariah Board is not a substitute for a Shariah Court – it cannot enforce the rules of a contract between the client and the financial institution. Any dispute is subject to local laws agreed on in the contract. There are two famous cases in which the contracts comprised a double reference – to UK law and to Shariah. Such a double reference could lead to issues how to interpret the contract.

The lesson learned out of this cases are that those contracts remain enforceable. If the judgement should lead to the same outcome like it would be most likely with a Shariah court, if so existing, then the provisions and stipulations made should be included clearly into the running text of the contract.

Practically Islamic finance transactions and products are enforced by civil or common laws prevalent in the jurisdiction the deal is done or internationally dominant with UK law as matter of choice. Although arbitration under a legal system which permits it offers a way to opt in and appoint Shariah scholars as arbitrators, which could so rule a binding decision, it is widely considered to choose non-Islamically oriented courts by preference and common practice. From this perspective Shariah compliance is not subject to be governed by Shariah law, it is subject to local laws and the contract is drafted in a way which is not offensive to Shariah considerations, rather than a choice of a different legal system as understood in the convention of Rome dealing with the matter of choice of law but per se limited to state law.

Certification Process

In order to receive a certificate certain steps are needed to be undertaken. The minimum involved parties are the financial institution, the Shariah scholars and as well the institutions law firm drafting the documents and contracts.

The choice of a Shariah scholar could be undertaken on a case by case decision for a certain defined product or the financial institution has appointed a continuous board supervising their Islamic department or in case of an Islamic bank the entire institution. Most of Shariah boards consisting on two to three scholars which should be reputated and recognised in the area the product is sold or the institution is situated. The overall number of scholars in the world with the qualification of finance and Fiqh Muamalat is analysed by Funds at Work in their study.

The process of certification has a number of loops. Firstly a drafted structure chart will be shown to the Shariah Board for an initial indication whether it raises concerns before taking all the time to draft the detailed contracts about it. If so agreed by the scholars, then the law firm proceeds in drafting all the documents and contracts to undertake the transaction. All this paper work needs to be read, understood and analysed by a scholar, and he will raise a number of questions and proposes a number of a changes in the wording and content. It then goes back to the lawyer for the necessary changes and could then possibly pass the board, however, the board may ask again for further changes, which put the contract again in the “loop”. This process is one of the reasons which some conventional banks hesitate to create an Islamic compliant product as it slows down of course the time to market.

Considering the time to market challenge there should be a clearly defined project coordinator inside the financial institution to steer the process. Further benefit can be achieved by involving dedicated Shariah consultants, which are identifying critical issues.

Critics and Outlook

A living and dynamic industry like Islamic Finance is, has always lively debates. One of the standard debates is the role of the Shariah Board, its scope of analysis and its methodology. As defined by AAOIFI the Shariah Scholars are dominated by the profession of Islamic commercial law, Fiqh Muamalat, so the approach is a legal analysis, which looks deeply into the principles of Islamic law and all contractual details.

Many participants are missing a broader evaluation of the objectives, in regard to wellbeing and prosperity. The achievements of this very general formulated ideas would be in need for an analytic method similar to the Social Responsible Investing and Sustainability industry. Currently these issues are not far taken in the ongoing discussion on conferences, although there is a widespread concern about it. A Fatwa, the compliance certificate given, is not like a rating, it just states the compliance but not on which level. Recommendable features achieved in one product but not in another are not issue to be mentioned at all. Competition towards a higher compliance level did not yet take off.

Scholars are criticised for being paid by the institutions they certify. Actually this is similar to an auditor or rating agency, who is also paid by the party it reviews – both resulting in a potential conflict of interest. On top of this economists suspect banks to choose scholars which are easier in giving a certificate for a certain product. This would erade the relevance of the Shariah compliance process.


Standardisation is frequently demanded publicly. There are initial standards already, but for practioners it is still unsatifiying to have differences from scholar to scholar as this also slows down the processes. Ther reason could be a difference in opinion in their professional reasoning regarding compliant products, which may or may not over time converge. There is a saying of the prophet Mohamed cited in this context: “The difference in opinion is a blessing.”; it opens also the door for new approaches to an issue posed towards them and a more pragmatic and flexible approach. Even if we demand and will see a further convergence in opinions of the scholars, a number of issues will remain controverse among them. One of the major reasons is to certify certain products on a compromise basis, such as acceptance because of local constraints of time and region – scholars tend to differ on the evaluation on the principle of necessity enabling to allow forbidden transactions for temporary pressing needs. Products which achieved such a certificate will not carry it for eternity, as the Fatwa then is subject to review.

For non industry members often surprising to hear is the bottle neck of scholars. The double qualification of finance with fiqh muamalat is not widespread yet. The number of scholars with international reputation to clients goes down dramatically to may be 5 to 10 names only. Getting a product throught the compliance process can therefore be slowed down because of their workload. With an industry growth of 15 % per anno, the number of contracts to be reviewed growing simarily, which means annually there is space for 5 to 10 new scholars. A figure which seems to be possible, but still the lack is felt by most of the market participants and the established scholars themselves.

The marketing value of the big names of the Shariah Board members is of utmost importance. The name of Junior Scholars just started in the business does not have any sales impact yet. Those names needs to be spread and marketed first before the product. They are only an add on to complement a specific board till they get fully known. More scholars are, however, not the solution as any person does not memorize more than 7 names +/- 2 in general. In the auditing and consulting business the big 5 were the names who attracted the business and had valuable and useful brand names for their business.



  • Monzer Kahf. "Strategic Trends in the Islamic Banking and Financing Movement", in Proceedings of the Fifth Harvard University Forum on Islamic Finance, Cambridge, Massachusetts, USA, 2002.
  • Archer, S. And Abdel Karim, R. (Editors). "Islamic Finance Innovation and Growth"

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