The role of regulatory and supervisory institutions for shariah governance on Islamic banking in Pakistan :| a comparison with Malaysian practice

Abstract

This research attempts to analyze the role of three main institutions related to Islamic banking and finance in Pakistan which are the State Bank of Pakistan (SBP), it’s Shari'ah Advisory Committee (SAC) and the Shari'ah boards of Islamic banking institutions (IBIs) in regulating and supervising the practice of SShari'ah governance at IBIs. Considering the sound regulatory and supervisory arrangement of Malaysian Shari'ah governance practice, the main objective of the research is to critically analyze the role of these three institutions in Shari'ah governance while comparing it with the role performed by Bank Negara Malaysia (BNM), its Shari'ah Advisory Council (SAC) and the Shari'ah Committees of IBIs in practicing Shari'ah governance in Malaysia. Applying descriptive methodology, the research mainly depends on the data collected from secondary sources such as the regulatory guidelines, policy documents, standards and directives issued by central banks of Malaysia and Pakistan as well as research articles, papers and books on subject matter. The research findings reveal that the basic regulatory arrangement for Shari'ah governance practice is similar in both countries. The similar aspects indicate that the central banks in the two countries play their regulatory roles under the auspices of their central Shari'ah advisory bodies. Likewise, at the industry level, a Shari'ah Governance Framework has been implemented in both countries where the affairs of IBIs are supervised by institutional Shari'ah bodies. The research has discovered that there are no legal provisions dedicated to the regulatory arrangements of SBP for Shari'ah governance practice which need an adequate legal support. In addition, some regulations have inconsistencies and are not defined distinctively to cater the regulatory needs of IBIs. Considering the significant role of central SAC, its composition, criteria for appointment and resolutions are yet to be supported with legal provisions and specified regulations so it could reflect the apex position in the Shari'ah governance of IBIs. The establishment of Shari'ah board at IBI, its composition and membership affiliation lack legal basis and sound regulatory arrangement. It requires additional members with diversified qualifications to meet the challenges of the dynamics of Islamic banking industry, and restriction to single board membership to avoid conflict of interest. Besides, there should be a regulatory arrangement for assessing the performance of Shari'ah boards to ensure accountability and productivity of the members. Also, the role of the Shari'ah board should be made comprehensive and independent. In order to ensure consensus and produce conclusive ruling, the role of the Shari'ah board in IBI should be made supreme while the other organs such as Shari'ah compliance department and Shari'ah review functions should facilitate the role of the Shari'ah board.