THE EFFECTS OF SHARIAH SUPERVISION ON THE FINANCIAL PERFORMANCE OF THE

ISLAMIC FINANCING INSTITUTIONS IN BANGLADESH

Md. Mohidul Islam, Abul Bashar Bhuiyan, Hafsah Ahmad

*Corresponding and presenting author’s Name:

1. Md .Mohidul Islam & and Email Address: [email protected]

2. Dr. Abul Bashar Bhuiyan: Senior Lecturer at Faculty of Business and Accountancy (FBA),
University Selangor (Unisel), Sha-Alam, Malaysia E-mail: [email protected]

3. Dr. Hafsah Ahmad:Deputy Dean(Academic),Faculty of Business and Accountancy, Malaysia E-

mail:[email protected]

ABSTRACT:

The essential cause of this paper is to assessment to justify the effects of Shariah Supervision on
financial overall performance of the Islamic Financing Institutions (IFIs) in Bangladesh. The find out
about carried out generic search to gather empirical articles via using of key phrases of shariah
governance and overall performance in the Islamic Financing Institutions in special online database
especially, Google Scholars, Springer Link, Wiley, Science Direct, JSTOR, Emerald full text, Scopus,
and EBSCO HOST etc. The summary of empirical literature published that Shari’ah supervisory
boards positively effect on Islamic economic overall performance when they perform a supervisory
role, but the affect terrible when they have solely an advisory position .In addition the impact of
Sharia Supervisory Board (SSB) and Shariah Control Department (SCD).

Key words: Shariah Supervision, Islamic Financing Institutions, Shariah Supervisory Board and
performance.
INTRODUCTION:

slamic financial institutions are the blanket term for all economic establishments that function in line
with the Shari'ah. Generally, in order to be regarded an Islamic monetary institution, there ought to be
a Shari'ah board which act as two more layer of governance in the IFIs modifies their governance
structure from “single-layer” as in the traditional ones into “multi-layer” governance(Mollah &
Zaman, 2015) . On the others hand an Islamic financial organization must follow the Shari'ah
regulations and principles(Abu-Tapanjeh, 2009). Moreover the Shari'ah Supervisory Board is a set of
body of student certified to difficulty a fatwa on the Shari'ah-compliance of a monetary product.
There are conflicting statistics about the dimension and whole quantity of Islamic monetary
establishments globally.

Shari’a supervision occupies an vital position in the governance structure of IFI’s. The significance of
Shari’a supervision is derived from five unique sources namely: religious, social, economic, legal, and
governance Islamic monetary institutions have given all increase patterns but Islamic banking may be
capable to win over the majority of clients from the Muslim world as properly as in Western
enterprise and financial markets. that constitutes almost 24 per cent of the world's(Outlook, 2016).
population (over 1.3 billion), and other moral companies throughout the globe in instances
ahead(Khan & Bhatti, 2008). In latest years, the Islamic finance sector has grown rapidly, by using
almost 11.5 percent between 2010 and 2015, while the traditional economic machine grew by way of
3.2 p.c between 2010 and 2014.3 At end-2015, the area was valued at $1.88 trillion,4 accounting for
almost 1% of complete monetary property worldwide.

Shariah excellent imaginative and prescient in Islamic financial institutions (IFIs) differs from
conventional monetary establishments because they are managed by two boards: the Board of
Directors (BOD), and the Shari’a Supervisory Board (SSB). The BOD within an IFI has a comparable
role and characteristic to that of a standard board; however, the SSB is a panel of Shari’a pupils who
act independently from different governance organs(Garas & Pierce, 2010b) which heading off usury,
prohibiting gharar, difficulty about legal activities, and focusing on creating justice(Khir, Gupta, &
Shanmugam, 2008). On the other hand Shariah Control Department(SCD) follows the instruction,
opinion and fatwa of Shariah Supervisory Board(Nathan, 2010).

The study shows the effect of Shari’ah supervision on the monetary performance specially boards
now not negatively have an effect on on Islamic finance overall performance when they function a
supervisory role, but the influence is not nice when they have only an advisory role. The effect of
board structure (board size and board independence) and CEO electricity (CEO-chair duality and
internally recruited CEO) on the overall performance of Islamic banks is standard bad(Mollah &
Zaman, 2015).

Islamic monetary institutions and conventional monetary institutions follows some frequent policies
and law but shariah associated economic establishments have to Maqasid Shari’ah base norm that has
a direct connection with the Islamic economics, finance, banking and financial improvement as
determined by many studies.(Uddin, 2016). Islamic monetary establishments hold sharia governance
that has some particular principles mainly shariah Supervisory Board (SSB) by dint of its
accountability, transparency and assert inability of an Organization. Corporate governance is
contrasted with the method to company governance in mainstream literature. Also the same Islamic
theoretical and philosophical background of corporate governance is examined from the twin (mixed)
Islamic economic and institutional perspective. There are main difference between Islamic Financial
Institutions (IFIs) and non-Islamic Financial Institutions (IFIs) sharia rules and guidelines and shariah
non-compliance risk. Shariah governance practice, however, looks to be limited to exercising Shariah
compliance (Choudhury & Hoque, 2006). The learn about has highlighted whether or not the
influence on financial performance of eight full flagged Islamic Bank, seven full flagged Islamic
insurance and two other Islamic Financial mutual fund in Bangladesh.

2.0 BACKGROUND OF THE STUDY:

2.1 CONCEPT OF SHARIAH SUPERVISION:

The word Shariah Supervision consist of two words generally which mean follow the root of
Almighty and Supervision mean carefully observation. But literally Shariah Supervision mean has
broad sense that is mentioned as bellow:

SHARIAH:

“Shariah is an Arabic time period used to designate Islamic law. It in the beginning referred to a
course trodden via camels to a water source, and the oftentimes used Arabic phrase al-shariah al-
islamiyah may be translated as “the Islamic way(Jones, 2005 ). In the case of Islamic law, the way is
one that leads the righteous believer to Paradise in the afterlife Like Judaic law, which influenced
western criminal systems, Islamic regulation originated as an necessary part of the religion. Sharia, an
Arabic word which means "the proper path," refers to ordinary Islamic law. The Sharia comes from
the holly Quran, the sacred e book of Islam, which Muslims consider the genuine word of God.
Accordingly, Shari’ah governance (SG) can be defined as the device that control and direct the SSBs
for compatibility with Shari’ah rules(Grassa, 2013)

Islamic laws and regulations are recognized as Shari‟ah and the find out about of them is Islamic
jurisprudence. Shari‟ah governs all aspects of Islamic matters inclusive of faith, worship, economic,
social, political, and cultural components of Islamic societies. The rules and legal guidelines are
derived from three essential sources, particularly the Holy Qur‟an, Sunna (the exercise and subculture
of the Prophet Muhammad and Ijtihad (the reasoning of qualified scholars). Further elaboration and
interpretation of the regulations dictated by way of the Holy Qur‟an and Sunna are provided by
certified pupils in Islamic jurisprudence with the aid of Ijtihad, an interpretative process which is
carried out within the framework of the Qur‟an and Sunna. Islamic Shari’a has described conflicts of
interest as offenses (haram). One hadeeth says “leave that which makes you doubt for what does no
longer make you doubt” (Hadeeth from Mohammed al-Hassan bin Ali narrated by Al-Tirmidhi; Al
Nesaa’i; and Ahmed).

SHARI’A SUPERVISION:

Basically Shari’a supervision is the system of monitoring, accountability; take care of, supervising
pursuing, guiding and following up within the ambit of shariah norms) defines Shari’a supervision as
“looking at the monetary transactions to defend them from Shari’a offense”, which starts at the
inception of new contracts and merchandise to make sure their compliance with Islamic Shari’ah
supervision takes specific forms, namely: Shari’a Supervisory Board (SSB), Shari’a consulting firms,
or Shari’a advisor. Out of this form SSB ls the most common and huge structure of
supervision(Nathan, 2010). The AAOIFI governance standard (2008, No. 1, Para 7) recommends
three contributors at least in the SSB with one member at least dwelling in the same IFI’s country.
The SSB is a panel of three Shari’a students or greater who serve one IFI. Having three contributors in
the SSB brings four benefits. Both exterior auditors and Shari’a supervisors are comparable in their
independence, authority, and reporting to the shareholders as they characterize the shareholders in
controlling the IFI’s activities.

Nevertheless, they differ from each other in three aspects. First, the external audit starts at the give up
of the financial period, whilst Shari’a supervision starts offevolved before the transaction begins
(preventive audit), continues with the transaction to make certain appropriate execution (remedial
audit), and evaluations the transaction upon completion to make certain its compliance with Shari’a
(complementary audit). Second, the exterior auditor takes a form of public audit company that offers
offerings to many clients, whilst Shari’a supervision takes three forms: SSB, Shari’a consulting firms,
and Shari’a advisor. Third, the exterior auditor evaluates the overall performance of his purchaser in
opposition to the accounting concepts and nearby regulations, while Shari’a supervisors use Islamic
Shari’a as the only useful resource for their fatwas, which are binding to the IFI and can't be revoked.
The external auditor collaborates with Shari’a supervisors in reviewing the ideal implementation of
fatwas during his annual audit. In addition to the exterior supervision, each CFIs and IFIs maintain
inside manipulate way of life by means of inclusive of inside audit function in their operations. The
interior auditor measures the effectiveness and efficiency of the operations, ensures compliance with
legal guidelines and regulations (Fernández-Laviada, 2012). Thus, in Islamic CG, organizational
management objectives and goals also meet the objectives set via the almighty Allah. Islamic point of
view of CG comes from Islamic epistemology to premise on the divine oneness of God(and & Alam,
2013).

2.2. SHARIHA SUPERVISION IN ISLAMIC FINANCE:

Despite being viewed as a cutting-edge phenomenon, Islamic finance is as ancient as the faith itself
with its standards exceptionally originated from the Quran, which used to be disclosed some 1400
years ago. Some principles of Islamic finance stem from prior Abrahamic traditions, even as some
historical Islamic finance instruments have been adjusted into present day conventional products such
as letters of savings and cheques, Bond, .etc. and later to meet the transactions units at first Local
savings banks had been mounted in Mit Ghamr, Egypt, in 1963. Many researchers consider these
banks to be the first banks barring hobby in Islamic society. However, these banks merged with
government banks in1967 for political reasons (Al-Marwyne, 1985). In addition, the key purpose of
an IBF system is to comply with the guiding standards of the Quran rather than to maximize returns as
in a conventional financial system (Zaher & Hassan, 2001). Thus Islamic company governance
specially the governance buildings of Islamic finance zone contributed to the Islamic financial
Institutions, despite its rapid increase considering the mid-1970s and their increasing presence on
world monetary markets (Hasan, 2008) Islamic monetary market additionally prolonged at gradually.
The early years of Islamic finance – the Nineteen Seventies and Nineteen Eighties – can be
characterised as excessive expectations and little experience. When Islamic finance used to be
introduced, not only to Muslims but additionally to the rest of the world, it was regularly heralded as a
special financial device based on Qur‟an and Sunna. The International Institute of Islamic Banks and
Islamic Economics used to be established in1981by the International Union of Islamic Banks in
response to sustained growth in the range of Islamic banks and the want for qualified personnel
(Arabic and Islamic universities have been unable to provide such folks to fill the shortage). The
Turkish Federative State of Cyprus was chosen to be the headquarters of the institute for political
reasons (Shehata, 2006).p. 19 The establishment of the Supreme Supervisory Commission on Fatwa
and Shariah was installed in 1983. According to (Shehata, 2006), p. 20) the fee had several essential
objectives. First, the commission aimed to examine all the fatawas launched by using the supervisory
boards and fatawa committees of the Islamic financial institutions that have been individuals of the
International Union of Islamic Banks and to give opinions related to their adherence to shariah
principles. Moreover the world is being speedy innovated and the Islamic monetary institutions itself
growth it’s neologism activities. To adopted the neologism things to do of the Islamic economic
institutions two the AAOIFI was mounted in 1990.The objective of this organization is to prepare
accounting, auditing, governance, ethical, and shariah standards for Islamic economic establishments
and the Islamic finance industry(Alharbi, 2015). After twenty centuries the software of science used to
be viewed from every nock and nook and difficult policies and guidelines arise confusion to the some
regions as a so The Islamic Financial Services Board was installed in 2002. It issues guiding standards
and standards for the Islamic economic industry to make sure its soundness and balance(Alharbi,
2015). In the identical way the Islamic International Foundation for Economics and Finance was
installed in 2004 as one of the bodies of the Muslim World League. The foundation‘s headquarters are
positioned in Riyadh, Saudi Arabia, and in accordance to the foundation‘s website (Islamic
International Foundation for Economics and Finance 2006, translated from Objectives section),
(Alharbi, 2015) its objectives are to guide for the coordination and integration amongst scientific
research institutions in the discipline of Islamic economics;-(i)found a scientific body devoted to
developing Islamic economic theory;(ii)explore the future purposes of Islamic financial theory;
(iii)develop the Islamic monetary model;(iv) discover tools, models, and merchandise that will check
the software of Islamic monetary theory; and(v)contribute to finding alternative solutions to the issues
of the typical monetary system.

Shariah Supervision in Islamic monetary enterprise in Bangladesh is being extreme contributed after
establishing Islamic Bank Bangladesh limited particularly, besides stopping that has been continuing
for the reason that 1983 in Bangladesh properly, the sphere of utility of Islamic regulation has
extended past household matters into economics and finance. Actually Corporate governance in
Islamic finance in Bangladesh was began opening in 1983 via passed various legal guidelines in
parliament which relied on sharī‘ah standards such as the Islamic Banking Act 1983, Government
Investment Act 1983, and Takaful Act 1984, as well as government tips concerning Islamic financing
scheme for civil servants buying homes and motor vehicles, Islamic pawn stores and opening of
Islamic banking windows in conventional banks, which clearly prolong the sharī‘ah into the sphere of
public life(Kamali, 2000). In this way Shariah Supervision in Islamic economic industry in
Bangladesh has delivered a new dimension in Islamic monetary enterprise

The SSBs problems are linked to the Shariah board carried out functions, the necessary troubles
associated to these functions encompass independence, confidentiality, competence, consistency, and
disclosures(Grais, 2006) . Corporate governance particularly Shariah governance consist with some
variables that is Shariah Control Department(SCD), Shariah supervisory Board(SSB) which directly
or not directly have an impact on on the association performance. The find out about shows Shari’ah
supervision boards now not negatively influence on Islamic banks’ performance when they function a
supervisory role, however the influence is not superb when they have only an advisory role. The
impact of board shape (board size and board independence) and CEO electricity (CEO-chair duality
and internally recruited CEO) on the overall performance of Islamic banks is ordinary bad (Mollah &
Zaman, 2015).

The find out about shows that the disclosure of a imaginative and prescient and mission
announcement Shari’ah supervisory boards(SSB) are negatively related with performance, whilst the
disclosure of merchandise and services and commitment toward employees are positively associated
with performance.(Zaki, Sholihin, & Barokah, 2014) . The researchers determined three variables that
manage on the overall performance of SSBs.(Nathan, 2010) . On the different hand, some preceding
research centered seven explanatory variables has big relationships with IFI’s performance. These
elements are SSB Size, SSB doctoral qualification, SSB reputation, complete exchange in the SSB
composition and SSB remuneration. Large SSB size, more scholars with PhD degree in bettering the
overall performance of IFIs. In contrast, the SSB reputation, official pupils - cross-memberships in
specific SSBs across countries, SSB remuneration records a poor affect on performance. (Nomran,
Haron, & Hassan, 2016).

2.5 CONCEPTUAL FRAMWORK OF SS AND PERFORMANCE:

Shariah Supervision mechanisms:

Performance indicators;
Shariah Supervisory Board (SSB)
Return on Assets (ROA)
Shariah Control Department (SCD)
Return on Equity (ROE)

Controlling mechanism

IFIs size and age

METHODOLOGY:

This is the overview find out about which has examined the outcomes of Shariah Supervision on the
Financial Performance of the Islamic Financing Institutions (IFIs) in Bangladesh from the flow of
present literature. In this study, we carried out everyday search with the aid of the identify the
consequences of Shariah Supervision on the Financial Performance of the Islamic Financing
Institutions in Bangladesh in specific on line database sources such as Google Scholars, Springer
Link, Wiley, Science Direct, JSTOR, Emerald full text, Scopus, and EBSCO HOST etc. From this
search we found variety of journal articles, conference and different sorts of work, which we have
read to decide which articles need to be protected in the review of this paper. After reading totally
most applicable articles have gathered these had been discovered as the quality suit within targets of
the present troubles about social entrepreneurship development as nicely as poverty alleviation. The
evaluation have examined on the foundation of objectives, strategies and findings therefore of the all
gathered empirical studies

4.0 EMPIRICAL FINDINGS:

Nathan.S evaluates the role and performance of Shari’a Supervisory Boards (SSB) within Islamic
Financial Institutions (IFIs) of the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia, and United Arab Emirates). Although the SSB has a significant impact on
an IFI’s performance, there has been little empirical research on the SSB performance. This study is
unique in measuring empirically the relation between five variables and SSB performance. Data has
been collected through a questionnaire from 76 Shari’a Supervisory Boards, 73 Boards of Directors,
and 59 shareholders of IFIs in the GCC countries during 2009. The researchers found three variables
that have a positive impact on the performance of SSBs: the number of SSB meetings, the
qualifications of SSB members, and the evaluation of each member. Furthermore, the work of the
Shari'a control department was found to have a negative impact on SSB performance. There was no
statistically relationship between SSB performance and SSB position within the IFI organization
structure. This study fills a literature gap in corporate governance by evaluating the impact of a
religious board upon the performance of financial institutions. The study provides a theoretical
framework for measuring SSB performance using internal variables. This study offers insights to
GCC regulators, central banks, and other IFI stakeholders concerning SSB performance. In addition, it
provides guidance to SSB members in improving their performance and strengthening their relations
with other governance organs.(Nathan, 2010)

Mollah, S. and M. Zaman. The performance and accountability of boards of directors and
effectiveness of governance mechanisms continue to be a matter of concern. Focusing on differences
between conventional banks and Islamic banks, examine the effect of (i) Shari’ah supervision
boards, (ii) board structure and (iii) CEO-power on performance during the period 2005–2011. The
study found Shari’ah supervision boards positively impact on Islamic banks’ performance when they
perform a supervisory role, but the impact is negligible when they have only an advisory role. The
effect of board structure (board size and board independence) and CEO power (CEO-chair duality and
internally recruited CEO) on the performance of Islamic banks is overall negative. Our findings
provide support for the positive contribution of Shari’ah supervision boards but also emphasize the
need for enforcement and regulatory mechanism for them to be more effective (Mollah & Zaman,
2015).

Injas, M. M. Y., M. S. Haron, et al examined The Shariah Supervisory Board (SSB) plays an
important role in the Islamic banking system, and it has an important impact on their performance and
stability. The study concentrates on the banking system and on the SSBs as an important part of it.
The study aims at showing the impact of the SSBs on the Islamic bank stability. It also reveals the
importance to be Independent department in the implementation of its decisions. The study concluded
that SSBs is a significant department in the Islamic bank like the other departments. The interference
of it decision-making and management could adversely affect for the Islamic bank(Injas, Haron,
Ramli, & Injas, 2016)

Nomran, N., R. Haron, et al. examined the performance of Shari‟ah supervisory board continues to
be a matter of concern especially for Islamic banks across countries that have a different regulatory
environment. This study aims to examine the effects of Shari‟ah supervisory board characteristics on
Islamic banks‟ performance using a sample of 15 Malaysian banks for the period from 2008 to 2015.
Seven Shari‟ah supervisory board characteristics were employed as explanatory variables which are
the board size, cross-membership, doctoral qualification, reputation, experience, total change in the
SSB composition and remuneration. By employing random-effects GLS and GMM method for a
robustness check, it was found that five out of the seven explanatory variables have significant
relationships with Islamic banks‟ performance. These factors are SSB Size, SSB doctoral
qualification, SSB reputation, total change in the SSB composition and SSB remuneration. (Nomran,
et al., 2016)

.Hirtle, B., A. Kovner, et al did introduce a novel instrument to identify exogenous variation in the
intensity of supervision across U.S. bank holding companies based on the size rank of a bank within
its Federal Reserve istrict. We demonstrate that supervisors record more hours at the largest banks in a
district, even after controlling for size and other characteristics. Using a matched sample approach, we
find that these “top” banks are less volatile, hold less risky loan portfolios, and engage in more
conservative reserving practices, but do not have lower earnings or slower asset growth. Given that
these firms are subject to similar rules, our results support the notion that supervision has a distinct
role as a complement to regulation(Hirtle, Kovner, & Plosser, 2016).

CONCLUSION AND RECOMMENDATIONS:

The find out about shows Shari’ah supervision boards (SSB) now not negatively have an impact on on
IFIs’ overall performance when they perform a controlling role, but the have an effect on is no longer
wonderful when they have solely a guiding role. The impact of board structure, in particular shariah
Supervisory Board (SSB) and shariah Control Department (SCD) on the performance of IFIs is basic
negative. The learn about shows that the disclosure of a vision and mission announcement Shari’ah
supervisory boards and shariah Control Department (SCD) are negatively related with performance,
while the disclosure of merchandise and services and dedication toward personnel are positively
related with performance. The researchers located that two two variables mechanisms that have a
fantastic effect on the performance of SSBs and the Shariah Control Department (SCD) follow of
SSB’s activities. Furthermore, there was once no statistically relationship between SSB performance
and SSB position within the IFI agency structure.

The find out about has also examined the impact of sharia supervision on overall performance of IFIs
but there are existing of Shriah manage branch with economic specialist as properly as top education
historical past key character of SSB that extensively affect on performance. Another necessary
remember of the find out about that Sharia’s supervision is operation basis when supervisory position
is order foundation influences the overall performance therefore, SSB and SCD make contributions to
the greater attention, and high-quality function for supervision, as properly as any coverage
implications are situation to numerous necessary caveats, regards to IFI’s performance.

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