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Chapter 37

Rethinking the strategic signicance of

Sharia supervision boards

Abdel-Maoula Chaar

cole Supriere des Affaires

Today, Sharia boards are an essential part of any Islamic Financial Institution (IFI) and itis unimaginable for any IFI not to have one. Yet, most professionals in the Islamic nancial

sector still view them as simple technical transactional units and underestimate the strategic

role and importance these structures hold for the IFIs as individual organisations as well as

for the Islamic nancial eld as a whole. This chapter re-examines the strategic implications

ofSharia boards. It describes the various ways in which they impact key success factors forthe IFIs and relates how they inuence the tendencies in the Islamic nance eld highlighting

their critical contribution to the institutionalisation of the sector.

Introduction

Compliance with the tenets ofSharia is the backbone of Islamic banking and nance. IFIsmust respect the ethical framework established by Islamic laws to be considered as legitimate

rms. It is their raison dtre. This imperative, coupled with todays economic requirements,

places IFIs in a very peculiar position. On one hand, their actions are structured by rules and

values moulded by a religious rationale (Makassid elSharia) highlighting the necessity totend to the wellbeing of the community at large (Istikhlaf). In modern business language, thismeans optimising stakeholders interests. On the other hand, and in order to efciently exert

their nancial mission and be recognised as valuable partners, IFIs should also adhere to thepractices of the eld of nance, a professional realm governed by the principle of economic

rationality and the concept of short term shareholder prot maximisation.

It is clear that IFIs are torn apart by contradictory principles and objectives: religious ratio-

nality versus economic rationality; shareholder interest versus stakeholder interest. Firms that

are subject to such conicting pressures from their environments are at risk of losing their bear-

ing and endangering their internal structure. To limit this risk, organisations generally decouple

some of their functions by creating specialised departments. This measure enables them to deal

with the specic and contradictory demands of the different sectors in their environment without

creating internal tensions that could jeopardise their inner cohesion. In the case of IFIs, this was

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achieved through the creation ofSharia supervision boards (SSBs) which ensure compliancewith the religious requirements without putting the economic imperatives and interests of the

rm at risk. The primary task of SSBs is to make sure that IFIs respect all the prescriptions of the

Sharia in their operations. The legal status, duties, responsibilities and modus operandi of theSSBs might vary from one board to another but the basic baseline remains the same: SSBs are

entrusted with the duty of directing, reviewing and supervising the activities of IFIs to ensure that

they are in compliance with Islamic Sharia rules and principles.1But there is more to the role ofSharia boards than the mere control ofSharia compli-

ancy. At the micro level, Sharia boards lower the perceived risk of the IFIs clients and po-tential clients by ascertaining that the operations of the nancial institution are in conformity

with Sharia guidelines. As such, the boards become an essential element of the legitimatingprocess of Islamic nancial institutions and a strategic marketing factor. This factor becomes

critical at the mezzo level due to the diversity of the religious sensitivities across the various

Islamic markets. It is critical that the religious orientations of the scholars on the board and theclients of the institution match because scholars cannot reassure their audience if they do not

share the same understanding and approach. Consequently, rms must select different schol-

ars depending on the market they wish to exploit. The recruitment ofSharia board membersbecomes therefore a strategic exercise. Lastly, Sharia boards also have an important macroeffect. The relative scarcity of informed scholars in Fiqh and nance and/or economics hasled to the participation of some scholars in many boards at the same time. This organisational

linkage has created a bridge between the different markets that compose the Islamic nance

universe and contributed to the institutionalisation of the eld. This outcome is of the utmost

importance, especially at a time where an increasing number of professional leaders are urging

for a unication of standards as a necessity for the future development of the eld.

Sharia boards interlocks effect on the Islamic nancial eld

SSBs are an essential element of the structure of Islamic nance institutions and constitute the

only organisational feature that differentiates Islamic nancial rms from their conventional

counterparts. SSBs are open to clerics and laics alike and some institutions recruit women.

This is the case for example of the Sudanese National Reinsurance Company which included

on its board Miss Amna Ali Mohammed and Miss Laila Mohammed Ahmed el Khatim. The

SSB members assess the compatibility of the nancial operations of the bank with the rules

and principles of the Sharia. They often have to also suggest solutions that will permit the

institutions to reach their goals in a Sharia compliant way. This is why the SSB tasks necessi-tate both a thorough understanding ofFiqh and a good understanding of contemporary nanceand economics. It is evident that attaining the required levels of knowledge in both disciplines

requires lengthy studies. It takes a certain number of years of schooling and experience to

have a good command ofFiqh and between four to ve years studying to obtain a mastersdegree in nance, business administration or economics. Furthermore, it is important to note

that Islamic nance began its effective expansion less than thirty-ve years ago (1975) and

the criteria and requirements desired in the scholars were not clearly dened until recently. It

is then not surprising to see IFIs suffering from a scarcity of scholars who are able to evaluate

cases from both a Sharia and nancial angle.



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It is difcult to accurately assess the scarcity levels of qualied scholars in the eld as

there is no single agreed upon database detailing the number of existing IFIs and Shariascholars. To document this article, the Sharia supervisory database was used, compiled by the

Islamic Finance Information Service. According to this database, 389 scholars serve world-

wide on the Sharia boards of 286 IFIs.2 Although the number of scholars exceeds the num-ber of nancial institutions, today, the market is experiencing an acute shortage of qualied

scholars mainly because scholars seldom sit alone on Sharia boards. The Accounting andAuditing Organisation for Islamic Financial Institutions (AAOIFI)3 advises IFIs to appoint at

least three specialists for each board. The majority of the institutions that were surveyed seem

to follow this recommendation as shown in Exhibit 37.1 and only 30% have hired less than

three scholars; two banks have 11 and 13 scholars!4 So, in order to populate the boards of these

286 institutions, under their present structure, 921 scholars are needed when there are only 391

specialists available.

Exhibit 37.1

Shariasupervision boards composition (number of scholars)

Source

: [Author query: please supply details. If authors own, please state Authors own.]

510 scholars

49 institutions(17.13%)

More than 10

scholars


12 scholars


34 scholars


As a result of the elds severe shortage of scholars, a number of individuals have been

recruited and serve simultaneously on the boards of many Islamic nance institutions result-

ing in the spontaneous creation ofSharia boards interlocks. In its usual form, an interlockoccurs when a person afliated with one organisation also sits on the board of directors of

another rm. The same applies for the Sharia supervision boards, interlocks are created whena scholar sits on the board of two or more IFIs. Exhibit 37.2 shows how Islamic nance institu-

tions are linked through their SSBs.



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Interlocking directorates have several noteworthy properties. Institutions can use them

to facilitate the communication and the ow of information between a group of competitors

against another. They can also utilise this link in a more aggressive way by acquiring enough

stocks to be represented on the competitors board and monitor their actions. Companies also

try to neutralise organisational threats by nominating a representative of the company on the

competitors boards and threatening them. A typical example of this situation is the case of

banks requiring membership on the boards of the institutions that are heavily indebted to them.

However, to benet from the strategic outcomes of interlocks, organisations must controlthe human resources involved in them. This is not the case for IFIs that are barred from any

proactive usage of their links with other companies at the level ofSharia boards. IFIs do nothave any power over their scholars as Sharia board members are not included in the hierarchi-cal structures of these rms and do not have any vested interests in the success of the rms

operations. As a matter of fact, the remuneration scheme of the scholars is usually similar to

that of consultants or lawyers, that is, they receive their retainer whatever is the outcome of the

operation they were involved in. Additionally, Sharia board members are usually nominatedby the general assembly or the board of directors of the institution in which they operate.5 This

procedure shields them from the eventual pressure of general managers who might be tempted

4Islamic bank

2

Islamicbank

Islamicbank

1

Islamic bank3

Bankingstructure

Bankingstructure

Bankingstructure

Bankingstructure

G L L

C

B D

C

EF

A

J I

M

SSB

SSB

SSB

SSB

F

F A

Exhibit 37.2

Shariasupervision boards interlocks

Source: [Author query: please supply details. If authors own, please state Authors own.]



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to threaten them by revoking their contracts if they do not show some understanding for

Sharia litigious cases or do not execute their instructions.

Scholars reputation as a legitimating factor of IFIs

It is interesting to note that the only step at which IFIs can directly control their Sharia boardsis during the member nomination process. In fact, the mere recruitment of the scholars proves

the rms willingness to respect the rules of the Sharia and hence permits the rms operation.This is a critical signal for the clients as their fate in the rm is directly linked to their percep-

tion of the institutions Sharia compliance. People who are involved in activities that they areneither able to control nor monitor tend to look for indicators, conrming that the rm they are

dealing with is trustworthy, such as the status of the rm and the reputation of its managers.

The majority of the clients of nancial institutions is in this same situation and is unable to

fully understand the mechanism of the operations used to generate the earnings on their depos-its. Whether the money is invested and used according to the rules and principals ofSharia iscrucial because any misusage of the clients funds might jeopardise their fate in the hereafter.

This situation illustrates the importance of the role ofSharia boards whose primary task is tomake sure that the clients money is used as it should be. In this respect, the board represents

the interest of the clients and some scholars compare Sharia supervision to consumer advo-cacy.6 These specialists stress on the fact that the services performed by Sharia supervisorsare directly intended for the clients who can rest assured that their money is used in ways that

conform to their beliefs. Sharia boards can therefore make or break the legitimacy of IFIs.However, few clients are able to assess the real ability of scholars to exert properly their

mission. Such aptitude entails the mastery of esoteric knowledge, including a good compre-

hension of the Koran, a thorough understanding of the Sunnah, a good command of interpreta-tion techniques and grammatical analytical skills. A regular customer does not possess such

knowledge and will base his or her assessment of the capabilities of scholars and the relevance

of theirfatwas based on the reputation of these scholars. Hence, the clients of IFIs considernot only the status of the rm and its management but also the reputation of the members on

its SSB to evaluate the quality of the service they are beneting from.

The question of evaluating the prociency ofSharia boards is further complicated by thevariety of possible viewpoints and interpretations that exists in Islam. Muslims agree on the

main tenets of Islam but are divided in several sects that differ in their approach to the global

doctrine. These differences are more drastic when it comes to interpretations. Five schools of

thoughts (four Sunni and one Shiite), distributed in relatively homogeneous clusters over theworld, advocate different techniques to extract the needed guidance from the sacred texts. The

result of these analyses might vary according to the methodology used and the adepts of one of

these schools will seldom adopt the complete outcome of the works of another. For instance,

Malaysia follows the Shai school of thought while theHambali school is particularly inu-ential in the Arabian Gulf area. The Shai school is generally seen as being more exible withthe interpretation ofSharia and Malaysian scholars permit some operations that are disputedby their Gulf counterparts. For example,Bai Aldayn which is a common practice in Malaysiacannot be used in the Gulf Co-operation Council (GCC) markets because Arabian Gulf schol-

ars do not validate the interpretation that has lead to this practice.



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It is also worth noting that this opposition toBai Aldayn is market driven. With the glo-balisation of banking services, it is easy for the GCC clientele to access theBai Aldayn instru-ment if it wants to. However, in reality, the clients seldom do it. It is evident that the customers

of IFIs use only the products that match their religious sensitivities. And, due to their Fiqhilliteracy, clients of IFIs are unable to have their own proper assessment of the validity of an

instrument or an operation and consider the attitudes and views of scholars who share the same

religious approach to reach a decision. Hence, GCC clients will not useBai Aldayn as long asthe local scholars do not validate the operation.

This example highlights the fact thatfatwas do not have a universal reach. In fact, prac-tices based on specicfatwas can only be used when the viewpoints of the scholars issuing the

fatwa and the religious tendencies of the clients coincide. This link demonstrates, if needed,that the nomination of scholars is not exclusively related to their Fiqh prociency but also tostrategic market considerations. In fact, Sharia boards can open up or close some of the po-

tential markets of IFIs depending on whether their members match or not the local or regionaltendencies.

Firms are therefore better served by recruiting board members who issue fatwas con-sidered legitimate in the markets they target. The actual practice of IFIs matches this theory.

When looking at the geographical distribution of the most recruited scholars across the region,

one can clearly notice that their identity varies according to the areas of operations considered.

For instance, the study of the composition of the Sharia boards of the Malaysian and theArabian Gulf7 IFIs leads to the identication of two separate homogenous clusters of scholars.

The results of this analysis were based on a thorough scan of the composition of the

Sharia boards of each rm as well as the identity of the scholars who are recruited in eachregion. A calculation of the number of boards in which each scholar participates by region

resulted in two distinct lists (GCC and Malaysia) that were sorted in descending order. This

study also helped dene the level of recruitment of each scholar and therefore the weight of

his reputation in each region. Indeed, rms tend to recruit individuals who have the capacity to

improve and develop their operations. As described earlier, the aptitude ofSharia board mem-bers to enhance the activity of Islamic nance institutions is closely linked to their reputation.

Hence, Islamic institutions tend to hire the most reputable scholars and the level of recruitment

can be used as a proxy to compare reputations.

When considering the implication of this situation, it is important to keep in mind that

the used calculation does not measure the reputation per se but the perception of the players

in the dened markets about the scholars reputation. Institutions recruit specic scholars be-

cause they think that they are able to enhance their operations and/or to shadow leading rmsand gain respectability. From the customers perspective, their trust of a particular scholar in-

creases with the number of rms that hire them because they think that the level of recruitment

is correlated with the intrinsic qualities of the person enrolled. Consequently, the clientele of

Islamic nance institutions uses the services more of those institutions which hire scholars

who participate on numerous Sharia boards. This situation creates a virtuous circle wherebythe reputation of a scholar triggers an initial recruitment that attracts clients leading to new

rms recruiting the same scholar to benet from the effects of their reputation which in turn

strengthens the reputation more of the said scholar attracting more clients and initiating more

recruitments and so on. This entire process is based on perceptions and is somehow market



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driven. In fact, the ranking of the scholars in a particular market measures only the level at

which they match the aspirations of their clientele. If the difference in religious sensitivity

between Malaysia and the Arabian Gulf countries is considered, it is then only natural to see

strong variations in the composition of the leading groups of scholars in the two regions.

According to the same line of reasoning, some homogeneity in the composition of the

Sharia boards should be expected in countries sharing the same dogma. A closer look at theinstitutions of the countries of the Arabian Gulf leads to an unexpected result: some scholars

positioned at the top of the list in one country are ranked at the end of another one or are not

mentioned at all in anothers. These discrepancies are mainly due to the fact that reputation

is very sensitive to local considerations. The explanation is straightforward: it is necessary

to know a person or to be acquainted with someone who relays a positive feedback about

this person in order to trust them. Hence, an eminent scholar in one country could be less

renowned in another if his good reputation is not conrmed by the proper local circles. As a

matter of fact, the notoriety and reputation of the scholars are closely linked to their inclusionin legitimating networks that are market specic. It is worth noting that these groups are not

mutually exclusive and that it is possible for a scholar to be part of several groups at once.

Some scholars are included in the lists of several countries at the same time. This feature is

extremely important for IFIs. A rm recruiting one of these scholars can benet from their

multiple market representativeness and propose products that can be considered legitimate in

several markets at once.

The bridging effects of Sharia boards

The ability of the scholars to guarantee the products of the IFI that hired them in multiple markets

is not restricted to their region of origin. For example, a famous Malaysian scholar is included

in the lists of top ranking scholars in Bahrain and the United Arab Emirates. Not only do the

rms that recruit him have access to several markets at once, but they also transcend the differ-

ences of religious approaches between Malaysia and the Arabian Gulf countries by being able to

propose credible products and services to the populations of both regions. This choice was made

by several institutions and regulatory agencies in both the Arabian Gulf countries and Malaysia.

A number of scholars share this market bridging ability and their role is of the utmost

importance to the eld as they link almost the entire Islamic nance universe. Exhibit 37.38

shows that almost all the markets are linked except Sri Lanka.

It is common to evaluate the importance of scholars based on their participation in

Sharia boards. On one hand, this proxy permits evaluation by their audience and notoriety.On the other it is an indicator of the importance of the participation of the scholar in the ongo-

ing process of the institutionalisation of the eld. Indeed the density of an identical link leads

to the redundancy of the same discourses in different institutions until the moment at which

the communication becomes unnecessary because the argument is considered as a given fact

or reality: it is institutionalised.

This measurement is signicant but it is of limited value when it comes to the physical

structuring of markets. In this latter case the noteworthy feature is not the capacity of the

scholars to link several markets at once but their ability to ll structural gaps between mar-

kets. In this precise case, their importance is inversely proportional to the number of scholars



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linking specic markets through Sharia boards interlocks. The scholar who is the only onebridging two different markets plays a more critical role than another scholar who has a

wider international presence but who is not the only link between markets. For example, Dr

Abdul Hamid Zarie has a vital importance for the Egyptian market. He sits both on the Shariaboards of the ? [Author query: is there a reason for this question mark here?] Faysal Is-

lamic BankEgypt and the Emirati Millennium Private Equity and he is the only scholar link-

ing Egypt (C14) to the international Islamic nancial market through the UAE (C4) [Author

query: does (C14) and (C4) refer to an exhibit if so which one?].

Exhibit 37.3

Market linkage through Shariascholars

Legend: C1: Bahrain, C2: KSA, C3: Kuwait, C4: UAE, C5: Qatar, C6: Malaysia,C7: Singapore, C8: Indonesia, C9: Bangladesh, C10: Pakistan, C11: India, C12: Sri Lanka,C13: Lebanon, C14: Egypt, C15: Jordan, C16: Various MEA, C17: South Africa,C18: Sudan, C19: Various Africa, C20: UK, C21: USA, C22: Various West.


C1

C2

C3

C4

C5

C6

C7

C8

C9

C10

C11

C12

C13

C14

C15

C16

C17

C18

C19

C20

C21

C22

C1 1 1 1 1 1 1 1 1 1 1 1 1

C2 1 1 1 1 1 1 1 1 1

C3 1 1 1 1 1

0 0

0

0 0

0 0

0 0

0

0 0

0

0

0

00

0

0

0

0

0

0 0

1 1

C4 1 1 1 1 1 1 1 1

C5 1 1 1 1 1 1 1 1

C6 1 1 1 1 1 1 1 1

C7 1 1 1 1 1 1 1 1 1 1

C8 1 1 1 1

C9 0 0 0 0 0

0 0 0 0

0 0 0

0 0 0 0 0 0 0

0 0 0 0 0

0

0

0

0

0 0 0 0

0 1 1 1

C10 1 1 1 1 1 1 1 1 1 1 1

C11 1 1 1 1 1 1 1 1

C12 0 0 0

0 0

0

0

0

0 0

0 0 0

0 0

0 0

0 0

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0 0

0 0 0 0

0 0

0 0 0 0 0 0 0

00 0

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C13 1 1 1 1 1 1 1 1 1

C14 0 1

C15 1 1

C16 1 1 1 1

C17 1 1 1 1 1 1 1 1

C18 1 1 1 1

C19 1 1 1 1 1 1C20 1 1 1 1 1 1 1 1 1 1 1 1

C21 1 1 1 1 1 1 1 1

C22 1 1 1 1 1 1 1 1

1

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1 1 1 1 1

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1 111

1

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The case study of the Lebanese Islamic banks

The case of the Lebanese Islamic banks exemplies how rms can use the legitimating and

linking capacities ofSharia boards to their own strategic benet. The rst Islamic bank wasfounded in Lebanon in 1992 when Al Baraka BankLebanon began its operations. At that time

Lebanon did not have any specic dispositions regulating the sector and Al Baraka worked

according to the dispositions of the Lebanese duciary9 contract law (No 520 dated June

1996). In 2004, the parliament approved a law authorising Islamic banking. Al Baraka Bank

Lebanon transformed then in a fully edged Islamic bank and three other banks (Arab Finance

House, Lebanese Islamic Bank and BLOM Development) were launched. A takaful company(Al Aman Takaful Company) also operates in the country.10

These nancial institutions work in a parsimonious environment. The Lebanese potential

market for Islamic nance products is small. The country is inhabited by 4 million people

divided among 17 religious factions. The Muslim residents regroup approximately 60% of thegeneral population and are mainly distributed among the Sunni and Shiite sects. The partisansof these two religious groups live most of the time in harmony but will not consider as valid or

binding thefatwas issued by the clerics of the other party. In order to cater to the needs of bothcommunities, Lebanese IFIs had to include in their Sharia boards eminent representativesof the two sects (see Exhibit 37.2[Author query: please conrm this is the correct exhibit

number]). This decision solves only part of the difculties of these institutions as they are also

confronted by another serious problem.

Lebanon enjoys a service oriented economy with tourism and banking as the two main

growth sectors. Unsurprisingly, the wealth is located in the regions where these two industries

have a stronger presence: the towns usually situated on the Mediterranean seashore. Giving

that the urban population is traditionally much more lenient with religious matters than the

inhabitant of the countryside and that the attitudes of people towards Islamic banking are

directly linked to the intensity of their religious feelings, researchers have established that

the notion of a single Islamic nance market made of believers thirsty for Sharia-compliantnancial operations is a myth. The Muslim customers are actually split up in four segments

out of which only one is made of people that are ready to sacrice returns and/or services for

full Sharia compliancy.11 They represent statistically a small portion of the Islamic markets(20%). In Lebanon, this chunk of the population is mainly located outside the main cities and

controls limited resources. The rest of the potential clientele of Islamic banks is either not

ready to sacrice performance for Sharia compliancy which is considered as bonus (40%),

looks for the best performance regardless of the banks identity (30%) or simply refuses theidea of dealing with an IFI (10%). The combination of these features has a dramatic effect on

the situation of Lebanese Islamic banks: their captive market cannot generate the turnover

needed for their development while they directly confront conventional banks on the main

Lebanese markets. In this context, Islamic banks have a weak competitive position compared

to their competitors who benet from the reputation they have built over the years, their expe-

rience, professional networks, economies of scale and so on.

The common and logical move for rms facing an intense competition in a precise mar-

ket is to look for alternative markets that can safely nurture their growth. In the case of the

Lebanese Islamic banks, this meant expanding into neighbouring countries. But to operate in



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a foreign country, Islamic institutions must rst acquire a minimum level of legitimacy in the

targeted country. This can be achieved by hiring scholars that are recognised locally in the new

market and can be utilised as a worthy source of reference. All the Lebanese IFIs seem to have

opted for this solution and have recruited scholars renowned outside of Lebanon. The structure

of the typical Lebanese Sharia board is represented in Exhibit 37.4.

Lebanese institutions are cooperating with Sheikh Abdel-Latif Mahmoud al Mahmoud(Lebanese Islamic Bank), Sheikh Nizam Yakubi (Arab Finance House) and Dr Abdul-Satar

Abu Ghuddah (Al Baraka-Lebanon, BLOM Development, Arab Finance House, Al Aman

Takaful Insurance). By making this selection these rms seem to have targeted mainly theArabian Gulf area: Sheikh Yakubi and Dr Abu Ghuddah are listed among the top ranking

scholars of Bahrain and the Emirates while Sheikh Mahmoud al Mahmoud works almost ex-

clusively with Bahraini institutions. It is also worth noting that Dr Abu Ghuddah is also listed

in the Saudi top scholars list and that four institutions out of ve have decided to recruit him

on their Sharia boards. This choice is logical as the inhabitants of these regions have alwayshad historically close ties with the Lebanese banks. Exhibit 37.5 illustrates these networks.

Professionalstructure

Shariaboard

ISLAMIC

BANK

Legitimacy in local Sunnimarket segment

Legitimacy in local Shiitemarket segment

Local Sunnischolar

Local Shiitescholar

Legitimacy in

internationalmarkets

Internationalscholars

Exhibit 37.4

The legitimating effect of Shariasupervisory boards

Source: [Author query: please supply details. If authors own, please stateAuthors own.]



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Despite its theoretical importance, the role of Sharia boards as doors to accessing newmarkets comes only second to their role as legitimating factors reducing the liability of newness

of the Lebanese Islamic banks. Most of the Islamic institutions in Lebanon were created less

than ve years ago and have a greater risk of disappearing compared to older rms according

to statistics. Age itself is not the direct cause of success or failure, what is at stake is a variety of

conditions, problems and organisational characteristics grouped under the umbrella of liability of

newness12 that accompanies the rst years of operations. According to specialists, organisations

have difculties to properly ll the positions assigned to them by their markets, to set operating

procedures, to create a culture and learn skills. They also suffer from the high costs associated

with research and structuring. Moreover, these rms must establish new working relationships

with strangers and deal with the uncertainty associated with creating ties with those who use their

services. Organisations will ounder during their rst years of existence until stakeholders start

to perceive them as reliable and accountable.13 It is worth noting that the length of this integrating

process can be shortened and many problems can be overcome if the concerned organisation can

connect more with the stakeholders in their environment.14

In this respect, Sharia boards play a crucial role. By ascertaining that the operations of theinstitutions that hired them are Sharia-compliant, they conrm the ability of the rm to answer

NY ASA

ABBAFH BLOM

ALM

Markets

BahrainUAEKSA

AAT LIB

Financial institutions

Scholars: ALM: Sheikh Abdel-Latif Mahmoud al Mahmoud, ASA: Dr. Abdel-SatarAbu Ghuddah, NY: Sheikh Nizam Yakubi.Financial Institutions: AAT: Al Aman Takaful Insurance, ABB: Al Baraka-BankLebanon, AFH: Arab Finance House, BLOM: Blom Development, LIB: LebaneseIslamic Bank.

Scholars

Exhibit 37.5

The regional potential markets of Lebanese Islamic financial institutions




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Young IFIs do not have this level of operations and they seldom implement such control

measures during the early period of their activity. In fact, when they craft their rst operations

they somehow reinvent the wheel. The presence of seasoned scholars on their boards saves

them a lot of research, development time and resources. It is difcult to imagine a scholar who

would transmit insider information without ruining their reputation and losing their position as

a respected and qualied scholar but nothing prevents the scholars from advising the institu-

tion about the outcome of a research project (is it going to lead to a dead end or not?), the type

of documentation needed for certain instruments, the type of problems to be envisioned and so

on. This type of intervention based on the implicit knowledge accumulated out of experience

is similar to the action of consultants or lawyers.

The institutionalisation effect of Sharia boards

The diffusion of specic routines through interlocks is not restricted to Islamic nance.Numerous studies of conventional interlocking directorates suggest that they inuence the

dissemination of particular corporate practices.17 In doing so, they lead to the clustering of the

elds subunits regrouping people that share the same rules and routines.

This outcome is critical for the establishment and development of Islamic nance as a eld.

One of the main problems that the sector faces is the possibility for different Sharia boards to is-sue differentfatwas, concerning the same event, according to the school of thought to which thescholars are afliated. This situation creates a climate of uncertainty that IFIs dislike. A growing

number of specialists are voicing their concern and calling for the convergence and harmonisa-

tion ofSharia interpretation as a condition to preserve and enhance the growth of the sector.The fact is that this synchronisation is presently going through Sharia interlocks and is

facilitated by some of the particularities of this structure. Unlike conventional interlocks, Shariaboards linkages do not circulate techniques or routines as such but the interpretations that lead

to their elaboration. In other words, they diffuse knowledge. This nuance makes all the dif-

ference. It transforms these Sharia boards interlocks in scientic-like professional networks.The parallel between the two structures is clearer when their main properties are compared. On

one hand, scientic networks are independent and span organisations, which is also the case of

Sharia boards interlocks. On the other hand their inner hierarchy is based on the knowledgeof their members: when one of the afliates encounters a problem, he turns to those who have

better knowledge or a higher status rather than referring to someone like himself.18 The same

type of relationship characterises the functioning ofSharia boards. Asked about his role in a

board headed by Dr Abu Ghuddah, a junior scholar answered: Nothing, I listen I learn. Heexplains that Dr Abu Ghuddah knows about references and documents he never heard about and

that his only choice was to listen and learn. When facing the same situation in another organi-

sational setting, it could be reasonably expected that this junior board member will relay to his

colleagues the analysis of Dr Abu Ghuddah and the nature of the decisions adopted previously.

This initiative will most probably lead to the adoption of the same decision by the new audience

if all its members are of a lesser rank than Dr Abu Ghuddah. This process naturally takes place

within the limits of the network in which Dr Abu Ghuddah and this junior scholar are embedded.

Interlocks usually link a limited number of companies and the diffusion of new practices

leads, in the best case scenario, to the creation of pockets of specic sub-cultures within one



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427

professional eld. In Islamic nance, things are slightly different. The second interesting pecu-

liarity of the Sharia boards networks is their size. They are huge and can cover almost all theeld of Islamic nance. Let us consider the case of Sheikh Nizam Yakubi: he was recruited by

67 rms and he is currently working with 68 scholars hired by 146 other institutions creating

a secondary network of 214 rms (out of 286 IFIs registered)! Exhibit 37.6 illustrates this.19

1 3

3

3

1

1

1

1

1

1

6

1

7

7

7

11

1

1

8

1

1

1

20

24

3

3

S138S227

S13S19

S39

S49

S73

S85

Nizam

Yakubi

S102

S141

S164S186S222

S250

S308

S309

S358

S373

S37

S254

S361

S34

S179

S201

S136

S232

S283

S276

S99

S88

S385

S12

S511

12

11

4

4

4

S12: A. al Manea; S13: A. Mutlaq; S19: A. al Khulai; S34: A. Barakatullah; S39: M.

Mekkaoui; S49: A. Abbadi; S51: A. Abu Ghuddah; S73: A. Engku Ali; S85: A. Murakabi;

S88: A. al Nashmi; S99: A. al Qoradahi; S102: A. Kurdi; S136: E. al Anezi; S138: E. Abo-

Shaqrah; S141: F. Hadi;; S164: H. Ahmad; S179: H. Hassan; S186: I. Zakki; S201: K. al

Mathkour; S222: M. al Olama; S227: M. Laldin; S232: M. al Gari; S250: M. Kamali; S254:

M. Imran Osmani; S276: M. Taqi Usmani; S283: M. Bakr; S308: N. Hammad; S309: N.

Adlani; S358: S. Musa; S361: S. al Dareer; S373: W. Hadi; S385: Y. DeLorenzo.

Exhibit: 37.6

Sheikh Nizam Yakubi's network




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428

This network includes famous and less renowned scholars. According to the theory of

scientic networks, there cannot be any conict of opinion between Sheik Yakubi and the

scholars of lesser knowledge or status as they should automatically adopt his point of view.

The situation is totally different when Sheikh Yakubi meets his peers. He is in contact with

some of the best ranking scholars of the eld. These scholars share practically the same knowl-

edge and have almost the same status. It is therefore possible to reach a situation whereby

divergences between them lead to stalemates. This is in reality a remote possibility. Everyone

who attended Sharia board sessions afrm that the scholars are rst of all looking for a con-sensus. An example is a lawyer who witnessed a disagreement between two famous scholars

during a meeting at a Lebanese Islamic bank. She explained that the two scholars discussed

the issue for hours to nd a satisfactory solution and when they did, she said, both of them

approved the fatwa. Moreover, the scientic literature proposes that individuals who havedirect relationships with each other are more likely, over time, to think or behave similarly.20

As indicated in Exhibit 37.7,21 [Author query: please conrm this exhibit number is cor-rect also please check the footnote is correct: there are no arrows in this exhibit] the

scholars we have studied chair many Sharia boards at once and have numerous occasions tomeet and work together.

S12: A. al Manea; S51: A. Abu Ghuddah; S232: M. al Gari; S283: M. Bakr; S385: Y. DeLorenzo;S3212: N. Yakubi.

Source:[Author query: please supply details. If authors own, please state Authors own.]

Exhibit 37.7

Participation of scholars commonly in Shariaboards

[Author query: provide explanation for numbers in circles?]

6

6

14

3

1 14

3

5

24

514

9

2

16

22

S51

S385S283

S312S232

S12



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429

Conclusion

The networks of scholars, through the Sharia boards in which they participate, tend to create

a sort of elite of the profession who implicitly coordinates and sets the major guidelines andpositions of the eld when the board members meet. This is a common feature of the dynam-

ics of interlocking directorates and networks. In the case of Islamic nance, this feature is

enhanced by the size of the Sharia boards interlocks. For example, Sheikh Yakubis network,which completely dominates the eld, can directly disseminate the point of view of the lead-

ing scholars in 146 institutions out of the 286 rms that constitute the eld of Islamic nance

and to almost the entire eld through the secondary network. Under these circumstances, the

effect that scholars have on the eld goes well beyond the synchronisation initially explained.

As a matter of fact, Sharia boards directly participate in the institutionalisation of the eld.The recurrence of identical fatwas are imprinting Islamic nance with their content till thepoint where a ruling becomes a given principal or decree. This phenomenon is very close to

Ijma. Institutionalisation, like Ijma, chooses a specic practice, among many others, basedon an interpretation of events, promotes it and incorporates it in the mindset that structures the

activities of a eld, a population or a culture.22

The stakes of the ongoing process of the institutionalisation of the eld are high. It will

ultimately lead to the adoption of a nal form for Islamic nance and the relationship the eld

has with conventional nance. Would it be completely independent and meant only for Mus-

lims? Would it be a subset of conventional nance that will transform its operations to permit

their extension, in a Sharia compliant form, to new markets? Would it complete conventionalnance by creating a future hybrid form of nance with a general ethical underpinning? Would

it be something else? There is not a predened plan. In fact, the decision is made every day

through the practices of individual organisations put together.

Biblography

Accounting and Auditing Organisation for Islamic Financial Institutions, Sharia supervisory boards:appointment, composition and report, Accounting, auditing and governance standards for Islamic

nancial institutions, Accounting and Auditing Organisation for Islamic Financial Institutions,Manama, 2004.

Chua, W.F., and Petty, R., Mimicry, director interlocks, and the interorganisational diffusion of a quality

strategy: a note,Journal of Management Accounting Research 11, 1999, pp. 93104.Davis, G.F., Agents without principles? The spread of the poison pill through the intercorporate net-

work,Administrative Science Quarterly, 1991, pp. 583613.Ernst & Young, The Islamic funds and investments report, Ernst & Young, 2008.Galaskiewicz, J., Professional networks and the institutionalisation of a single mind set, American

Sociological Review 50(5), 1985, pp. 63958.Galaskiewicz, J., and Wasserman, S., Mimetic processes within an interorganisational eld: an empiri-

cal test,Administrative Science Quarterly, 1989, pp. 45479.Hager, M.A., Galaskiewicz, J., and Larson, J.A., Structural embeddedness and the liability of newness

among non-prot organisations, Public Management Review 6(20), 2004, pp. 15988.Hannan, M.T., and Freeman, J., Organisation ecology, Harvard University Press, Cambridge, 1989.Haunschild, P.R., and Beckman, C.M., When do interlocks matter? Alternate sources of information and

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Mizruchi, M.S., What do interlocks do? An analysis, critique, and assessment of research on interlock-

ing directorates,Annual Review of Sociology, 1996, pp. 27198.Selznick, P., TVA and the grass roots, Harper and Row, New York, 1949.

Stinchcombe, J.V., Social structure and organisation, In March, J.G. (ed.),Handbook of Organisation,Rand McNally, Chicago, 1965.

1. Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 2004.2. Regulatory agencies and central banks are excluded from this count.3. Accounting and Auditing Organization for Islamic Financial Institutions, 2004.4. For information, AAOIFI has recruited 19 scholars in its board, the Islamic International Rating Agency 18 and the

Malaysian Security Commission 16.5. AAOIFI (2004) recommends appointing the Sharia board by the shareholders during their annual general meeting

upon the recommendations of the board of directors.6. DeLorenzo, Y.T. (2000). [Author query: further details for this reference?]7. Oman did not report any IFI and is excluded from the group.8. Each line and each column are related to one country the identity of which is designated by a code letter. The

shaded areas printed with the number 1 indicate that at least one institution in each of the markets considered is

linked by a Sharia board interlock.9. A duciary is an individual, a corporation or an association holding assets for another party and having most often

the legal authority and duty to make decisions regarding nancial matters on behalf of the other party (beneciary).10. The author did not consider the case of the Lebanese conventional banks that offer Islamic services outside Leba-

non or nancial institutions that include Islamic solutions in their portfolios of services.11. Ernst & Young, 2008.12. Stinchcombe, 1965.13. Hannan and Freeman, 1989.14. Hager et al, 2004.15. DeLorenzo, Y.T. (2000). [Author query: further details for this reference?]16. Sheikh Yakubi: 67 SSBs; Dr Abu Ghuddah: 51 SSBs.17. Chua and Petty, 1999.18. Galaskiewicz, 1985.19. The numbers in the circles are the codes of the scholars. The numbers at the extremity of each arrow is the count

of new institutions added by each scholar. The persons that are not adding elements to the network (35 people) are

not represented in the gure.20. Galaskiewicz and Wasserman, 1989.21. The number printed in the circles represent the number ofSharia boards that the scholars linked by an arrow share.

[Author query: no arrows on exhibit 37.7 change?]22. Ijma proceed directly by decree while institutionalisation is based on the repetition of the practice.

rethinking the strategic significance of sharia supervisory boards

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