Pursuit of excellence must sweep away conflict of interest

With the Islamic finance industry now reported to be worth more than $1.3 trillion, historic assurance and governance practices within the industry must be revisited. The critical need to reinforce, upgrade and enhance Sharia assurance practices is paramount in meeting stakeholder expectations and safeguarding the integrity of the industry.

Sharia audit practices remain an opaque area with varied approaches. Recent public challenges on the Islamic compliance of certain sukuk [Islamic bond] structures, exemplifies the need to readdress the Sharia assurance, governance and certification processes.

Sharia compliance implies that a product is interest-free and in line with ethical principles. When a so-called Islamic product fails to meet those standards, the credibility and integrity of the industry is called into question.

Demonstrating comprehensive compliance with Sharia principles provides necessary assurance to customers, investors and financial markets. Ensuring compliance with Sharia is critical as it provides a distinct value proposition that not only gives a competitive advantage, but is also the backbone of the industry.

A financial product is ultimately deemed Sharia-compliant by the Sharia Supervisory Boards (SSBs) at financial institutions. These boards typically consist of three to five Islamic scholars who oversee the merits and make-up of a product to determine if it falls in line with accepted Islamic principles.

When advising on the design of Islamic financial products and then attesting on its ongoing compliance, scholars run the risk of reviewing their own design

Sharia scholars serve as both advisers and auditors. As advisers, they provide a certificate of Sharia authentication to a product or deal. As auditors, the SSB is responsible for ensuring the religious opinion, or fatwa, of a product is properly implemented. In cases of a breach, the SSB must ensure the problem is identified and treated.

But here is where the fundamental challenges lie. A recent report by the Islamic Finance Council UK (IFC), together with Malaysia’s Bank Negara body ISRA (International Sharia Research Academy for Islamic Finance), examined the audit-assurance role of scholars. The report found a lack of robust external Sharia audits, which can compromise the independence of the current practices.

It is imperative for scholars to realise that being involved in the assurance process is a fiduciary-like responsibility. In a post Enron-WorldCom environment, where the audit industry witnessed the collapse of one of the largest accounting firms, (Arthur Andersen in 2002), the scrutiny placed on auditors has increased significantly, forcing changes within the audit industry.

There is a creeping cynicism and significant aspirational dissatisfaction within Islamic finance related to the engineering of synthetic “halal” debt using commodity murabaha [fiduciary sale], the lack of true differentiation to conventional products, minimal social impact and the role of paid scholars who sit on multiple boards.

To address these concerns and maintain the integrity of the industry, a number of areas must be tackled. For one thing, scholars must understand the very real concern that, when advising on the design of Islamic financial products and then attesting on its ongoing compliance, they run the risk of reviewing their own design. This self-review contains an inherent risk that the scholar’s independence in the auditing process may be impaired in practice or in perception.

Under the Sarbanes-Oxley legislation, which emerged in 2002 following major corporate and accounting scandals, there are severe restrictions placed on audit companies providing non-audit services to the same client in order to ensure auditor independence. This must apply to Sharia scholars as well.

To preserve their watchdog role, SSBs should also present audit opinions within a financial institution’s annual report. The use of qualified Sharia opinions can help enhance transparency and empower Sharia scholars to place pressure on institutions that are not undertaking the necessary adaptations which scholars would like to see. External audit firms for Sharia compliance may also be used, but there remains, in practice, a large gap in the performance of external Sharia audits by suitably qualified firms.

Enhanced disclosure in Islamic finance will ultimately improve transparency and should be undertaken on a voluntary basis in a manner that encourages self-regulation. Alternatively, regulators and/or standard-setting bodies, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) or the Islamic Financial Services Board (IFSB), may consider setting minimum disclosure requirements for the SSB or Sharia consultancy firm that is providing the Sharia assurance service.

In any case, scholars should aim to continue their professional development as the industry evolves. And they need to organise. The IFC has pioneered in this arena initiating the only global scholar continuous professional development programme. This is a good example of where the UK has added to the global Islamic finance sector within the education and training arena.

While recent attempts have been made in Malaysia, the Islamic finance industry lacks an established professional membership body for Sharia scholars. Such a body could play a meaningful role in regulating scholars and prescribing continuing professional development (CPD) requirements for Sharia audit quality.

Various challenges exist in Sharia auditing, but adopting certain practices from conventional audit firms could play a significant role in enhancing Sharia assurance robustness, while at the same time empowering individual scholars to ensure the direction of the industry remains aligned with the highest principles of Sharia.

A process of self-regulation by scholars and advisory firms by voluntarily adopting improved practices is critical to the positive progression of the sector. Regardless of legal requirements, scholars have the individual choice to adopt better practices, which indeed is encouraged and reflected in the Islamic philosophy of the constant striving for ihsaan [excellence].

Due to the limited number of top-tier scholars, adoption by even one can have an immense impact on shaping the industry and encouraging other scholars to adopt similar improved practices.



The Islamic Finance Council UK (IFC) is a not-for-profit body established to promote and develop the Islamic finance industry. It has been appointed to advise a number of governments and pioneered the development of a global educational programme for Sharia scholars, which has received endorsement from government agencies in the UK, Bahrain, Dubai and Malaysia. IFC board members represent a unique group of highly qualified professionals spanning the banking, legal and financial advisory sectors.

Key areas of expertise are: government advisory and policy development; Sharia governance, continuing professional development (CPD) and developing Sharia audit frameworks; thought leadership, and education and awareness campaigns; and ethical finance, promoting better co-ordination and an enhanced understanding of the shared values among operators in Islamic finance and the broader ethical finance arena.