Towards a comprehensive framework of Shari`ah governance for Islamic banks in Indonesia

Abstract

Conventional banks are unlike Islamic banks. The distinguishing factor between conventional banks and Islamic banks is compliance with Shari` ah principles. Therefore there is a need for a mechanism that can monitor and ensure the compliance of Islamic banks with Shari` ah principles. Hence. Shari` ah governance has the potential to act as the requisite guiding mechanism. In view of the dearth of literature and specific studies on Shari` ah governance of Islamic banks in Indonesia, this study aims to explore the state of Shari` ah governance as practiced by Islamic banks in Indonesia, particularly in reference to the Shari` ah public bank (Bank Umum Syari`ah). This study proposes a comprehensive framework of Sharl`ah governance for Islamic banks in Indonesia. This study examines the existing Good Corporate Governance guidelines for Islamic banks in Indonesia, the Regulation of Central Bank of Indonesia (Peraturan Bank Indonesia) No. ll/33/PBI!200 2009 and Circulatory Letter (Surat Eadaran) 81 No.l2/13/DPbS 2010. This is done by looking at the comprehensiveness as well as the issues missing from the existing guidelines. A comparison is then ventured with standards issued by top leading organizations and country, namely IFSB (Islamic Financial Services Board), AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and BNM (Bank Negara Malaysia). In view of the relative dearth of available data and information on Shari` ah governance practices, structured and semi-structured interviews were conducted to obtain the real picture of Shari` ah governance practices in Indonesia. This study found that the existing guidelines are not sufficiently comprehensive. Additional elements such as risk management which oversees the Shari` ah non-compliance risk and Shari` ah audit must be integrated in the existing guidelines. However, the limitation of this research is that it only proposes the most comprehensive framework for Islamic banks in Indonesia. There is therefore a need for future research to ascertain the levels of implementation of the proposed framework.