Islamic Finance: Shariah and Corporate Governance

 

Corporate governance is the system by which companies are directed and controlled and involves adopting structures and processes which incorporate the values of fairness, transparency and accountability, and corporate governance through shariah operation subject to an additional layer of compliance with shariah rules and principles.

Shariah governance consist of three components which are shariah board, shariah review and shariah audit. Every single Islamic Bank must have a Sharia Supervisory Board to assure that the Islamic Bank meets shariah compliance. Shariah Supervisory Board should be involved in Accounting policy. This statement is also supported by Abdallah (1994) in Syafei (2010), which the Shariah Supervisory Board is also responsible for running audit ex ante and ex post to justify whether the operation of Islamic bank already meets the sharia compliance. The Accounting and Auditing Organizaton for Islamic Financial Institution (AAOIFI) has provided standards on Shariah Supervisory Board, Shariah review and internal shariah review under its governance standards (AAIOIFI, 1999).

Meanwhile, at national level it has a National Shariah Board that have duties to issue fatwa on each Islamic finance products. The fatwa is also as their reference in giving opinions related with the bank's activities and transactions.

Shariah governance is part of corporate governance, thus, good and effective of Shariah supervisory board should reflect the issue of independence, transparent, accountable, responsible and fair.

The impact of good practice of corporate governance:

• Corporation: the corporation with better practice of corporate governance are more profitable and better performance
• Society: threre will be a great impact on the society with higher level of satisfaction that the transactions and business are being done under the shariah guidelines and the haram elements have been removed, it will bring society to close each other and social security would have been assured at greater extent.
• Economy: It will bring leaving very good signs on the economy with the sense of being purified economic activities and involving the factor of production at maximum possible level by efficiently utilizing the natural resources to boost the economic activities to get the level of economies of scale. Being harmonized with true islamic economic system corporate governance will be a pivotal tool and motivation for the factor of productions and participants of economic systems