IMEFM 6,3. The current issue and full text archive of this journal is available at

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1 The current issue and full text archive of this journal is available at IMEFM 6,3 226 governance in Islamic banks: effectiveness and supervision model Hichem Hamza Graduate School of Business, University of Manouba, Tunis, Tunisia International Journal of Islamic and Middle Eastern Finance and Management Vol. 6 No. 3, 2013 pp q Emerald Group Publishing Limited DOI /IMEFM Abstract Purpose The governance is topic that has generated much interest in the literature of Islamic banking industry. The supervision plays an essential role in the governance of Islamic banks. The Board (SB) which is peculiar to is considered as the principal component of the governance framework. The purpose of this paper is to examines the link between compliance, the form of supervision and the effectiveness of governance. Design/methodology/approach This paper compares two model of governance framework, the first is the decentralized model in the Gulf Cooperation Council (GCC) and the second is the centralized model in Malaysia. Findings The independence of the SB in their mission of supervision and the consistency of ruling are the principal components of an efficient governance structure. Centralized governance system, basically in Malaysia, seems to be beneficial to the industry in term of effectiveness and credibility of the. Research limitations/implications The research focuses exclusively on the qualitative analysis about the SB and governance in Islamic countries. Practical implications The model of centralization is able to strengthen the position and the independence of SB and can better examine the subjects of divergences between the whole of the SB in order to promote, in the long term, the consistency of Fatwas and interpretations between banks and regions. Originality/value To the best of our knowledge few studies have examined this subject in a comparative discussion between MENA and Southeast Asia region. This paper contributes to the literature on governance by considering the difference between these two regions in term of supervision model of rules and principles and its application in Islamic banking. Keywords Board, governance, supervision, Islamic banking regulation, Islam, Banking Paper type Research paper 1. Introduction (IB) have the responsibility to ensure the compliance with the rules of their products, instruments, operations, practices and management. The compliance with the principles will be achieved by having a proper governance framework. In this sense and in the aim of credibility, IB have established their own Board (SB) usually comprised of a panel of scholars. The governance which refers to all the elements about the active role of SB and compliance with is strongly fundamental for IB. The compliance with the and the implementation of governance is encouraged by international institutions of regulation like Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) and Islamic Financial Services Board (IFSB). Today, some observers criticize the genuine morality of Islamic finance and condemn the non-compliance of some Islamic products and operations. In fact, failure

2 to meet the underlying principles of the Islamic finance would give rise to risk and damage the credibility and the reputation of the Islamic banking industry. The credibility of IB is linked to the influence of SB in the banking decisions and the consistency in the interpretation. Is there a code of ethical responsibility of the SB? Does the SB have a real power on the financial operations rules? Does the IB make a control on the consistency of the various decisions of the SB? The non-compliance can be attributed to the passive role of the SB in the governance scheme. The members of SB, appointed and remunerated by the IB, play only the role of advisory bodies. They do not have the necessary authority to accomplish the task and implement decisions and this can be explained by their dependence with the management. Also, it should be noted that the diversity of backgrounds and the different schools of jurisprudence of SB members as well as the regional context and national regulatory environment in which the members of the SBs function can create inconsistency in the interpretation of and may thus prevent the harmonization of product and financial operations. This situation has leaded some countries to develop governance through the reinforcement of regulation and supervision of IB. In fact, the independence of the SB in their mission of supervision and the consistency of ruling can contribute to an efficient governance structure. The regulation of governance in IB aims to preserve the credibility of the industry. The existence of efficient governance enhances the stakeholders confidence in the IB s products and activities. In Malaysia and in the Gulf Cooperation Council (GCC), both are the great centers of the Islamic finance, the structure and regulation of governance in IB is not the same. In Malaysia, the SB governance is based on centralized model while in GCC countries we find a decentralized model. The main objective of this paper is to examine the effectiveness of governance in the IB in a context regulation change. Our idea is to make a conceptual relationship between compliance, the form of supervision and the governance of IB. In this relationship, the essential role is done by the internal and the external SB. The aim is to examine the role of SB in enhancing the compliance of IB through the supervision and the impact on governance and credibility. This paper is divided into two main sections. Section 2 identifies critical issues about the risk of non-compliance and examines the independence of SB and the consistency of interpretation as fundament of governance effectiveness. Section 3 discusses the regulatory framework of the governance model in some Islamic countries. The last section concludes the discussion. governance in Supervision and governance effectiveness The non-compliance risk arises from failure to comply with the rules and principles determined by the SB of the bank or the relevant body in the jurisdiction in which the IB operate (IFSB-1, 2005). non-compliance risk can hit asset values of IB with possible loss of investment or reinvestment income. The direct consequence of non-compliance can be the fund withdrawals and cancellation of investment contracts causing a decline in profits and performance of IB. The non-compliance with the affects public confidence in Islamic finance and exposes the IB to the incredibility risk. In this sense, IB should have a SB who has to ensure the compliance of products and services offered to consumers and investors with the rules and principles of the.

3 IMEFM 6,3 228 The SB is composed of experts (Foukahas) in Islamic jurisprudence or Fiqh Al-Mouamalat and with sufficient knowledge of contemporary finance. The main role of the SB is focused on the formulation of fatwas and review process aiming to provide a common position in economics, finance and banking. 2.1 Certification and review roles of SB As described by DeLorenzo (2007), the SB assists in all steps of the products or service process and lifecycle. First, the SB assists in the pre-certification step in which product is under development and structuring. Then, the SB will issue a fatwa to certify the finished product or service before its introduction in the market. After that, the SB should follow the evolution of product by identifying and mitigating all possible risk primarily the compliance risk. For the successful management of compliance risk and during all steps, SB must work closely with management throughout the process of product development and its lifecycle. According to the AAOIFI Governance Standard for IB[1] (GSIB Nos 1 and 2), Committee is an independent body entrusted with the duty of directing, reviewing and supervising the activities of the Islamic financial institution in order to ensure that they are in compliance with Islamic rules and principles. The AAOIFI (1999, 2008) Standard requires at least three individuals in the board. In contemporary practice, most of the IB appoint between three and six members. According to the principles of the IFSB (2005, 2006)[2], an appropriate mechanism must be created to ensure the compliance with the principles, this adequate system includes SB. The SB is assisted by review to monitor and oversee the compliance of all actions and commitments of IB with SB ruling. Following the recommendation GSIB No. 3 of the AAOIFI, most of IB have established an internal review structure, generally in the form of review units. With a methodological approach in conducting the review, the internal review assesses compliance of all transactions with the fatwas issued by the Committee in term of proper implementation by the managers. Even after using a new product, the audit of the operations of financial institutions is very important to ensure that actual practice conforms to the requirements of (Iqbal et al., 1998). In the end of the annual period, a report is issued to certify that all financial transactions comply with the principles. This constitutes insurance for customers on the compatibility of products and practices of IB with the. Although the review is in charge of the review of all transactions, the Committee remains the ultimate arbiter in matters of compliance (Grais and Pellegrini, 2006). The separation between the SB and the review or audit is an essential requirement for efficient supervision model. Failure in this separation implies that the fatwa issued may be modified by the Committee when there is slippage on the part of executive managers. With this separation we can avoid certain complicity between managers and Committee. The executive managers have an ethical responsibility to implement correctly the recommendation of SB. Also, the board of directors has a moral responsibility to request a perfect compliance of the IB behavior with the. The determination of the board of directors is essential for the implementation of efficient governance (Figure 1). supervision operates at the macro level as well as the micro level (Nathan Garas and Pierce, 2010). It is clear that SB, through the supervision of the banking activities, is the most important governance structure to ensure compliance

4 with. The soundness and the reliability of the governance will depend basically on the independence of SB and the consistency of pronouncements or ruling between the various SBs in a state or a region. 2.2 Independence of the SB Given their vital place and nature of their tasks, members of SB are directly involved in governance with board of directors and managers. The impact of ethics on the financial performance can be the cause of divergence between SB, executive management and board of directors. In this sense, IFSB (2009) stresses particularly the independence of SB from the management of IB and how the potential interest conflicts should be managed. As the members of SB are appointed and remunerated by the IB, for a service of assessment and review provided, is potentially problematic and could create a conflict of interest. In this situation they cannot be completely impartial and independent. The SB members are under double pressure, first, the pressure of the IB for commercial reasons and second, they seek to preserve their reputation in order that validated products must be without fault. For example, scholars must prohibit the IB to realize certain profitable transactions or impose a reallocation of illicit income to charity which leads to a lower performance. Under these circumstances, the IB managers may be tempted to use their leverage to influence SB members (Grais and Pellegrini, 2006). The religious factor, which gives much reason for Islamic finance compared to the conventional system, will lose of its interest compared to the interference of the IB managers who use SB in their own way. Indeed, in the aim to preserve their status, the SBs give their agreement to products that are moving away from principles. The IB run a risk of reputation, when they are perceived as not complying with the rules of, this could involve a movement of distrust of certain stakeholders and withdrawal of deposits by the clients. Iqbal et al. (1998) propose, for the long-term interest of IB, the establishment of an independent SB to oversee the implementation of the principles of. These authors emphasize that if the Islamic banking system is not perceived as Islamic, existing IB will soon lose much of their market. Bin Ibrahim (2009) stresses the importance for the board of directors to understand clearly the role of governance and acknowledge the independence of SB. If there is an influence from board of directors or managers this will compromise the governance process and taint the decision. In fact, the integrity of the SB is possible only with whole independence in the execution of their missions. This independence reinforces the credibility of the IB with the public, governance in 229 Governance in Micro supervision in the IB level: Independence of the committee and review Macro supervision in the country level: Central bank and regulation of ruling consistency Compliance Figure 1. governance and supervision

5 IMEFM 6,3 230 the investors and the companies. This independence is one of the key factors of good governance. The appointment and the remuneration should be done by another body like central bank or government to ensure the independence of the SB. Another element which is related to the SB independence is the confidentiality of information. In fact, the SB members who sit on the SB of more than one financial institution should preserve the confidentiality of each IB in term of information and documentation about contracts, operations and activities. With the possession of this type of information, the SB members may find themselves in a strong position with managers and board of directors and this will perhaps create another type of conflict of interest. So if confidentiality is compromised an IB should have procedures in place to take appropriate disciplinary action to protect its interests. 2.3 The consistency of ruling which governs all financial decisions is subject to a variety of interpretations and contexts in which it applies. In economic and financial transactions, is subject to interpretations from different schools of thought (Madhaheb) which generate a diversity of views on the same issues. The variations or divergence between SB s members in their opinions on the permissibility of the implementation of certain Islamic financial products may be attributed to a diversity of backgrounds, to schools of jurisprudence, as well as to the regional context and national regulatory environment in which the members of the SBs function (Gintzburger, 2010). Questions were raised about the differing judgments issued for similar practices causing confusion for all IB customers. For the same product, such differences were found between banks or geographic areas more or less liberal. scholars of a country may permit a financial transaction which may differ substantially from the point of view of scholars of other country. The heterogeneity on similar matters may thus prevent the harmonization of product and financial procedures. This diversity of opinion among the scholars that compose the religious councils could be one of the greatest challenges to be raised by Islamic finance. The lack of centralization and religious supervision can lead to a lack of standardization of ruling and uniformity in Islamic financial and banking products within the same jurisdictions and among various regions. The aim of centralized regulation is to ensure the harmonization of ruling and to reinforce the credibility of SB. Ingar (2008) stresses the fact that each bank has its own SB amplifies the lack of consistency despite the fact that often the same SB members sit in several IB. Such situation creates a lack of efficiency and coherence throughout the Islamic financial industry. Ingar (2008) also states that environmental factors increase the disparities between the SBs like the strong competitive environment in which IB tend to have monopolistic behavior. Then the circles of intellectuals and religious organizations have a significant influence on the SB. There is also the degree of practice and religious education of the population which appears to be another influencing factor. It seems that more a community is educated religiously; it is more demanding about the product compliance to the. If this heterogeneity is properly harmonized across different IB and regions, it can become a great strength for the Islamic financial services industry and will resolve the conflicting opinions and interpretations. Khan and Feddad (2004) suggest the gradual international codification and standardization of fatwas. This duty may be delegated to an existing international organization, whose mission already involves the

6 promotion of harmonization and convergence of interpretations (Grais and Pellegrini, 2006). The IFSB Standard Guideline on Governance (2009) encourage the improving of consistency in terms of the professionalism of members of the SB, which could be crucial in enhancing their credibility and confirming their integrity through a set of best practices. Also, the purpose of the AAOIFI s SB is to achieve harmonization and convergence in the concepts and application among the supervisory boards of IB to avoid contradiction or inconsistency between the fatwas and applications by these institutions, thereby providing a pro-active role for the supervisory boards of IB and central banks. governance in Models of governance The SB plays crucial role in monitoring and ensuring best practices of governance which is unique to IB. In practice, the governance framework is more centralized in Malaysia, Sudan and Pakistan than in the GCC countries. 3.1 The decentralized model In this approach the IB have their own SBs which are independent of the Central Bank. In the GCC countries and other states, each IB has its own SB, which decides on the conformity of products offered. It is the cases of Kuwait, Saudi Arabia, Bahrain, Qatar, the UAE, Jordan, Yemen, Gambia and Indonesia. In the GCC, there are no effective national SB at the level of central banks. There are individual SBs at the level of the IB. The permissibility of contracts and compliant financial products is decided at the level of these institutions by their own Committee. We note the influence of standards and opinions of the AAOIFI board on most IB SBs in the GCC states. The national SB of the Central Bank of Bahrain serve and asses only the compliance of its own products. The members of national SB are not restricted to serve any financial institution, also no limitation to serve more than one institution. The IB shall establish a Supervisory Committee to ensure and review the compliance products in line with the AAOIFI s Governance Standards. All the Supervisory Committee have to submit to the shareholders an annual report and review about the operations and the activities of the IB. The AAOIFI aims to harmonize concepts and applications among Supervisory Committee of various IB. Its objective is to prevent inconsistencies between Supervisory Committee of different banks and assist with developing new products (Figure 2). In the case of Kuwait, the Central Bank Law 32/1968 provides that every IB shall have its own Supervisory Board. IB s SB are influenced by both AAOIFI and the Islamic Fiqh Academy standards. In the case of conflict of opinions concerning Committee Governance in Islamic Banks Review Committee AAOIFI Governance Standards Islamic Fiqh Academy (OIC) Figure 2. governance in GCC

7 IMEFM 6,3 232 a ruling, disagreement or disputes among SB members this should be referred to the board of directors of the IB. They can then transfer the matter to the fatwa board of the Ministry of Awqaf and Islamic Affairs, which will serve as the final authority and which can be considered as a national SB (Wilson, 2009). The fatwa board is not authorized to issue fatwa for products of the IB and the compliance review is done by the internal audit committee of each IB as there is no national approval by the central financial authorities on products issued by IB (Gintzburger, 2010). There is no restriction for the members of the fatwa board or the SB to serve in any IB. Also, there is no limitation to serve as a member of Supervisory Board of more than one IB. SBs are required to submit an annual report to the general assembly that the banks operations comply with principles and this report should be included in the annual financial statements. In the UAE, the first Islamic banking law in the GCC was implemented in The Article 6 of the UAE Islamic banking law states that each IB, financial institution and investment company should establish its own Supervisory Authority to ensure that its transactions and practices conform to Islamic law. The same law indicates the establishment of Higher Authority to supervise IB, financial institutions and investment companies (Art. 5, Federal Law No. 6 of 1985). This body will be the final authority in matters in Islamic banking and finance. No restrictions are imposed to the scholars of different SBs. In Qatar, there is no Central Bank s SB, but disputes and issues can be referred to the Supreme Council of the Ministry of Awqaf. This council has no influence on the permissibility of Islamic financial products. Like in Kuwait, every IB shall have its own Supervisory Board and the compliance review is done by the internal audit committee of IB. There is no restriction to scholars to be a member of SB in more than one IB. In Saudi Arabia there is no national SB. There are supervisory boards at the level of IB which are only influenced by the standards of the Islamic Fiqh Academy. From the perspective of jurisprudence, the Islamic Fiqh Academy is involved in establishing legal norms and the treatment of subject s differences (Table I). In the GCC countries, some uniformity is ensured by the fact that most scholars sit on several SB. This type of approach allows products innovation contributing significantly to the dynamism of the industry (Wilson, 2009). Nevertheless, the risk is the lack of regulation where the regulators do not have their own SBs and therefore the issue Bahrain Kuwait UAE Qatar KSA Table I. governance regulation in the GCC Fatwa issued by IB U U U U U Existence of review U U U U U committee Presence of scholars in U U U U U other IB Nomination of U U U U U scholars by IB Authority of conflict The national SB in Central Bank Ministry of Awqaf and Islamic Affairs Higher Authority The Ministry of Awqaf Islamic Fiqh Academy

8 of dispute resolution becomes more problematic, this will gives rise to inconsistencies in the fatwas across SB, or even over time in the same SB. 3.2 The centralized model The centralized approach is based on central SB, attached to the Central Bank, which rules on the conformity of products and activities of all the IB. Each IB shall have its own SB, but it must comply with the rules set by the central SB. The existence of a SB in the Central Bank will reduce the differences of interpretation, provided that the Central Bank does not try to impose his own opinions but to crystallize the views through open debate (Chapra and Khan, 2000). A centralized governance model is practiced in Malaysia, Pakistan and Sudan. In Malaysia, the central financial authorities are the Central Bank, Bank Negara Malaysia, and the Securities Commission. Two governance structure has been established, comprising a Advisory Council (SAC) at the Central Bank of Malaysia for both financial authorities and a Committee in each IB. The standards followed are those of the SAC of Bank Negara Malaysia and of the Securities Commission. These standards are influenced externally by both the standards of the AAOIFI, the Islamic Fiqh Academy (Mujma al fiqh il islamy) of the OIC in Jeddah, the IFSB standards and internally by the opinions of Malaysian SB members with certain opinions particular to Malaysia (Gintzburger, 2010). The review and audit of compliance is done by the IB to support Committee. In Malaysia, the Islamic Banking Act 1983 and Takaful Act 1984 require the establishment of an independent Committee within each IB with a minimum of three and a maximum of seven Muslim religious scholars[3]. The first Committee was set up in 1983 by Bank Islam Malaysia Berhad (BIMB) which started its operations as Malaysia s first IB on 1 July According to the Financial Stability and Payment Systems Report (2010), the SAC was established in 1 May 1997 as the highest authority and sole reference on all matters pertaining to banking and takaful. The SAC is responsible for all compliancy matters and also for validating all Islamic banking and takaful products to ensure their compliance with. The Committee will refer to the SAC for its resolutions on a issue. The SAC serves as the final arbiter in the interpretation of principles on Islamic banking and takaful matters and practices. The aim is to ensure uniformity and harmonization of interpretations and strengthening the regulatory framework and promoting good governance within the Islamic financial sector. Apart from the central SAC, Committee at the IB level remains the most important governance mechanism to ensure compliance with. The IB need to receive approval from the financial authorities to appoint any scholars as SB members. Both the SAC in the Central Bank and the Committee have set the standard for any matters and governance for the operations of the IB. The authorities have a monitoring system to check compliance and governance in order to protect the interest of the framework, the shareholders and stakeholders of the IB as well as their customers (Gintzburger, 2010) (Figure 3). In December 2004, Bank Negara Malaysia issued the Guidelines on the Governance of Committee for the IB outlining the role, scope of duties and responsibilities of a Committee and its members and the relationship and working arrangement between the Committee at individual institutions and the SAC at the governance in 233

9 IMEFM 6,3 Advisory Council (SAC) 234 Islamic Banks Committee Gouvernance Audit Committee Islamic Banks Figure 3. governance standards AAOIFI Governance Standards Source: Bin Hasan (2007) BNM Guidelines IFSB Standards national level. Only the SB of Bank Negara and the Securities Commission can issue fatwa, the role of the Committee of IB is to ensure that this fatwa is implemented with respect to the contracts offered. Members of the SBs of Bank Negara and the Securities Commission cannot serve on the boards of Islamic financial institutions and vice versa. For reasons of confidentiality, Committee members can only serve as a member of Committee in one financial institution in the same industry (Islamic banking and takaful are considered as different industries). Similar to Malaysia, Pakistan also has established a SB at Central bank, which is the sole authority in matters pertaining to Islamic finance with the power to issue fatwa. It has also required the establishment of a advisor for each IB. In 2008, the State Bank of Pakistan issued a detailed instructions and guidelines for compliance in Islamic banking institutions[4]. According to these instructions, SB or advisors should be appointed by the board of directors in the case of a domestic bank, or by the management in the case of foreign IB having branches in Pakistan. Any member of SB at the State Bank of Pakistan is allowed to serve as advisor for only one financial institution. In the case of conflict of opinions, disagreement or disputes among advisors members, it should be referred to the State Bank of Pakistan s SB which is the final authority and their decisions are compulsory (Table II). In Sudan, the government has developed continuously the Islamic finance since the establishment of the first -compliant bank, the Faisal Islamic Bank in In 1984, the banking and financial industry changed its practices to conform with. Similar to Malaysia, the government established in 1992 a SB at Central bank called the Malaysia Pakistan Sudan Table II. governance regulation in the Malaysia, Pakistan and Sudan Fatwa issue done by Central Bank U U U Review committee U U U Presence of scholars in other IB No U U Appointment of scholars by IB U U U a Authority of conflict Central Bank Central Bank Central Bank Note: a After approval of Central Bank

10 High Supervisory Board (HSSB) to ensure compatibility of financial practices with Islamic principles (Article (7) of 1992 Act). The body is a centralized national advisory council and is the sole authority in matters pertaining to Islamic finance with the power to issue fatwa. In fact, the compliance is supervised at two levels: the HSSB and the IB s Supervisory Boards. The HSSB supervises the Supervisory Boards of IB Governance as well as products and the conformity of the Central Bank activities to the principles of the. The Bank of Sudan Act passed in 2002 (law regulating the banking activity) specifically stipulates that the Bank will abide by Islamic principles in the performance of its duties and objects, and in the exercise of its functions and supervision of the banking systems. The council includes 11 people, the majority of whom are scholars also we find economists, specialists in finance, jurists and bankers (including the Central Bank Governor) among its members. All members are appointed by the president of the country upon recommendation of the bank Sudan s governor and the minister of finance. The members are allowed to sit in HSSB and in the SBs of IB. The HSSB provide fatwa on all -related matters. It studies and suggests solutions for the problems that face the banking sector with regards to the application of principles. The HSSB has the final decision in cases where there are different opinions on an issue specific to banking and insurance. The HSSB intermediates for disputes between various IB, IB and Bank of Sudan, and IB and its customers. A bank can also turn to the HSSB as the ultimate authority if it does not agree with a decision of its internal SB (Bekin, 2009). The board is also empowered to inspect banks and insurance companies to ensure proper implementation of principles and submit to the Minister of Finance annual reports on the consistency of banking and insurance transactions with principles. In addition to the HSSB for the application and the supervision of governance, every IB is required to establish its Supervisory Board composed of three members. The nominations of the Supervisory Board membership are done by the management after approval by the general assembly, they have to be ratified and approved by HSSB. The Supervisory Boards provide fatwa on matters referred to it by the IB. It examines and revisits all IB s transactions and certifies conformity of the IB s performance with. governance in Conclusion compliance allows the IB to consolidate their differentiation factor compared to conventional financial institutions and support their reputation and credibility. The reinforcement of the SB role in the IB is necessary and allows strengthening of the decision-making process. This role should be emphasized on control and review to ensure compliance with rules. In this sense, regarding their tasks, the appointment and the remuneration of the SB members should be done by another body like central bank or government to ensure the independence of the SB which is crucial for credibility. Also, the divergence of interpretations or inconsistency between the SBs of IB can affect the credibility of the industry. It is requesting a standardization of ruling and uniformity in Islamic financial and banking products within the same regulation and among various regions. The governance frameworks reflect a difference in the approach of governance and regional variations in the application of Islamic finance contracts.

11 IMEFM 6,3 236 In the GCC countries, the decentralized approach is often applied where each IB has its SB which is independent from the Central Bank authority. With this approach it is difficult to achieve consensus in interpretation and to manage properly the existing interest s conflicts. In Malaysia basically, the centralized approach knows advances in term of fatwa and review and seems to give harmonization to the industry. The Central Bank of Malaysia, Bank Negara, has tightened rules for IB by requiring them to set up review, audit and risk management functions to reinforce compliance. In Africa, only Sudan has a governance framework which is based on centralized approach like in Malaysia. The existence of decentralized and centralized approaches in the same time can increase significantly the regional differences in the application of Islamic finance contracts. This situation is harmful to the credibility of Islamic industry and need more coordination between main players. The model of centralization is able to strengthen the position and the independence of SB and can better examine the subjects of divergences between the whole of the SB in order to promote, in the long term, the consistency of fatwas and interpretations between banks and regions. The existence of a model of centralization becomes obvious and starts taking place in several countries. In this model, the question now is about the cooperation between the internal SB (micro-supervision) and the central SB (macro-supervision). In this sense the creation of council of all SB of all the IB in a country can harmonize governance practices in collaboration with the Central Bank. Notes 1. The AAOIFI had provided standards on Supervisory Board, Review and Internal review under its Governance Standard (GSIB, 1999 and 2008). 2. Principle 3.1 of the IFSB Guiding Principles on Corporate Governance (IFSB-3, 2006). Principle 7.1 of the IFSB Guiding Principles on Risk Management (IFSB-1, 2005). 3. Pursuant to Section 3 (5) (b) of the Islamic Banking Act 1983 (IBA 1983) for, Section 124 (7) of the Banking and Financial Institution Act 1989 (BAFIA 1989) for Islamic Banking Scheme Banks, Section 8 (3) (a) Takaful Act 1984 (TA 1984) for Takaful operators and Section 16B of the Central Bank of Malaysia (Amendment) Act 2003 (CBA 2003) for Central Bank of Malaysia. 4. State Bank of Pakistan, Instructions for Compliance in Islamic Banking Institutions, Karachi, Annexure 1 of IBD Circular Nos. 1 and 2 of References AAOIFI (1999, 2008), Governance Standard for Islamic Financial Institutions, AAOIFI, Manama. Bekin, R. (2009), Sudan: forgotten center of Islamic finance, NewHorizon Magazine, April-June, pp Bin Hasan, A. (2007), Optimal governance in Islamic finance, paper presented at the Financial Regulators Forum in Islamic Finance Global Islamic Finance Forum (GIFF), Kuala Lumpur, Malaysia, March. Bin Ibrahim, M. (2009), Managing risk through governance, Keynote addressed at the joint Conference Between International Research Academy for Islamic Finance (ISRA) Together with Institute of Islamic Banking and Insurance London (IIBI) and Thomson Reuters, Kuala Lumpur, Malaysia, August.

12 Chapra, M.U. and Khan, T. (2000), Regulation and supervision of, Occasional Document No. 3, Islamic Research and Training Institute-Islamic Development Bank, Jeddah. DeLorenzo, Y. (2007), compliance risk, Chicago Journal of International Law, Vol. 7 No. 2, pp Financial Stability and Payment Systems Report (2010), Press Statements, Bank Negara Malaysia, Kuala Lumpur. Gintzburger, A.S. (2010), An analysis of global trends and regional pockets in the application of Islamic finance contracts in Malaysia and the Gulf Cooperation Council, paper presented in International Conference on Islamic Banking & Finance, Cross Border Practices & Litigations, Kuala Lumpur, Malaysia, June. Grais, W. and Pellegrini, M. (2006), Corporate governance and Shari ah compliance in institutions offering Islamic financial services, World Bank Policy Research Working Paper. IFSB-1 (2005), Guiding Principles of Risk Management for Institutions (other than Insurance Institutions) Offering only Islamic Financial Services, IFSB-1, Kuala Lumpur. IFSB-10 (2009), Guiding Principles on h Governance Systems for Institutions Offering Islamic Financial Services, IFSB-10, Kuala Lumpur. IFSB-3 (2006), Guiding Principles on Corporate Governance for Institutions Offering only Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds), IFSB-3, Kuala Lumpur. Ingar, L. (2008), Le développement de la finance islamique sur fond de crise financière mondiale, Keynote addressed at the Second French Forum on Islamic Finance, Paris, France, November. Iqbal, M., Ahmad, A. and Khan, T. (1998), Challenges in Islamic banking, Occasional Document No. 2, Islamic Research and Training Institute-Islamic Development Bank, Jeddah. Khan, M.F. and Feddad, L. (2004), The growth of Islamic financial industry: need for setting standards for application, paper presented at the 6th Harvard University Forum in Islamic Finance, Cambridge, MA, USA, May. Nathan Garas, S. and Pierce, C. (2010), Shari a supervision of Islamic financial institutions, Journal of Financial Regulation and Compliance, Vol. 18 No. 4. Wilson, R. (2009), Shari a governance for Islamic financial institutions, paper presented at the Meeting Re-Imagining the Shari a: Theory, Practice and Muslim Pluralism at Play, Venice, Italy, September. governance in 237 Further reading Chapra, M.U. (2008), The global financial crisis: can Islamic finance help minimize the crisis in the future?, paper presented at the Forum on the Global Financial Crisis Held at the Islamic Development Bank, Jeddah, Saudi Arabia, October. IFSB (2010), Islamic Finance and Global Financial Stability (Report), IFSB, Kuala Lumpur. Corresponding author Hichem Hamza can be contacted at: hichemhamza@yahoo.fr To purchase reprints of this article please reprints@emeraldinsight.com Or visit our web site for further details: