This document discusses Shari'ah supervision in modern Islamic finance. Shari'ah supervision ensures financial products and services comply with Islamic legal principles. It involves oversight from product development through ongoing monitoring. Qualified Shari'ah supervisors with expertise in Islamic law and finance provide certification that gives consumers confidence. Effective Shari'ah supervision is independent, involves communication between supervisors and management, and can educate consumers about Islamic finance. As the Islamic finance sector has grown, so too has Shari'ah supervision developed to meet increasing demands and complexity.

1. Shari`ah Supervision
in Modern Islamic Finance
by Yusuf Talal DeLorenzo
supervision will be a part of an Islamic legal perspective and is
S hari`ah supervision may
be thought of as the single
Islamic product or service from
the time of its development, to
its launch, and throughout the
period it is offered. At the stage
therefore lawful to them.1 Such
certification, generally
documented
in a formal fatwa
most important distinction of research and development, (Shari`ah position paper), may
between a conventional and a or of drafting contracts or be thought of as a form of due
truly Islamic financial venture. offering diligence. In effect, the Shari`ah
For, while a business may memorandums, Shari`ah supervisor, or supervisory
attempt to represent itself as supervision, in one form or board, performs this due
“Islamic,” unless it has qualified another, should be an active diligence
Shari`ah supervision, it has no participant. By including on behalf of consumers
way of certifying that its Shari`ah supervision and advice who are without access to the
services, at the earliest stages, details of what is offered to
products, and operations are management them and, likewise, without the
actually Shari`ah-compliant. In may save costly legal fees experience or qualifications to
the emerging Islamic financial that may be required at a later evaluate those details in light of
sector, therefore, Shari`ah stage if elements of the proposed Shari`ah teachings. By assuming
supervision is not a matter to business/contracts need responsibility for the
be taken lightly. Public to be modified to comply with Shari`ah compliance of an
confidence, Shari`ah principles and precepts. Islamic financial institution,
in any sector, is always Generally speaking, if including its policies and
an important consideration; Shari`ah supervisors are to practices,
and in the financial sector its certify Shari`ah supervision
importance is paramount. a venture, they will insist places itself in a position of
Shari`ah supervision signifies a on being a part of its directly representing the
real commitment on the part of development; religious
management to the principles or at least to having interests of the Muslim
of transparency and access to the details of whatever investor or consumer; and by
accountability went into the development or making every possible effort to
in the matter of Shari`ah structuring of the product, ensure that an Islamic financial
compliance. instrument, service, or product is halal, the services
enterprise. performed by Shari`ah supervi-
What is Shari`ah Supervision? Moreover, once a product sors are directed toward the
While it may be convenient is launched, Shari`ah supervision investor, or the consumer.
to explain Shari`ah supervision may take the form of Undoubtedly, as a result of
as a religious audit (especially ongoing monitoring through these efforts, Islamic financial
to Western observers and periodic audits. Such audits institutions and their
regulators), may be undertaken by means management
its scope is far more of site visits, document reviews, will also benefit. But certainly
comprehensive. In essence, or consultation with the primary beneficiary is
Shari`ah supervision is the management the Muslim consumer who can
process of ensuring that a at regular intervals. rest assured that his/her money
financial is being put to use in ways that
product or service complies Purpose accord with the teachings of
with Islamic legal precepts and The most obvious and Islam. It is for this reason that
principles, either by its immediate purpose of Shari`ah Shari`ah supervision may also
conforming supervision is to certify for be characterized as consumer
(to one degree or practicing Muslim consumers advocacy.
another) to a recognized Islamic and clients that the financial
legal norm or by its not violating product or service being offered
the same. Ideally, Shari`ah to them is acceptable from an
Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo
1

2. Background Chief among these Obviously, a Shari`ah supervisor
Since many if not most of the considerations will be someone with a
dealings or operations of Islamic is the product or background in the classical
banks may be considered operation itself. An Islamic Shari`ah sciences. In particular,
novel, in the sense that these home financing alternative, for however, supervisors need to
were unknown in the times of example, is a complex affair have studied the fiqh al
the classical jurists, there is a and will undoubtedly benefit mu`amalat or rules concerning
very real need for reliable from the collective opinions of transactions developed by the
opinions a diversified Shari`ah Board. classical jurists and expanded
on these dealings; legal The same will be true of a upon by later generations of
and academic opinions derived commercial Shari`ah scholars. Most Shari`ah
from authentic Shari`ah sources or investment banking supervisors have produced
by the means and methodologies operation. An Islamic mutual academic
established by generations fund, on the other hand, may work or studies on one
of Muslim jurists. Then, while it require a single supervisor, aspect or another of these rules.
may indeed be possible for an especially if it has licensed itself In addition, such a background
individual to come up with to an index provider like the presupposes facility in the
authoritative opinions on these Dow Jones Islamic Market classical
issues, it soon became clear to Indexes, and is set up to do no Arabic language and the
the newly established Islamic more than track the index. An ability to deal directly with legal
banks that it would be better to actively managed fund, however, texts, glosses, and commen-
have the collective opinions of a even if it is licensed to an taries in that language. In
group of scholars. Moreover, index, may require more than addition
the banks soon learned that it one supervisor. These are to all this, an understanding
was best to appoint scholars considerations of modern finance, markets,
with specializations in the field that have to do with and economics is also clearly
of fiqh al mu`amalat, and who the nature and requirements of required. Finally, an effective
also had working knowledge of the supervision itself. At the Shari`ah supervisor must be
modern financial markets and same time, marketing familiar with international
practices. Then, by means of considerations business
qualified Shari`ah supervision, may also be of importance practices (`urf) and have
Islamic banks may assure their to management. If a product an appreciation for regulatory
clients and investors that the or service is to be marketed environments. For these reasons,
operations they undertake are internationally, for example, or the English language is
reviewed in all of their details in a market in which Muslims especially important. One more
for compliance with the from different parts of the point that should be kept in
principles world are found (like the US mind is the supervisor’s ability
and precepts of the and UK), then it may be in the to work with a team, oftentimes
Shari`ah. By means of such a interest of management to in a cross-disciplinary and
review, by such a group of engage several scholars, each cross-cultural environment.
experts, the banks and financial from a different part of the Generally speaking, today’s
institutions may clearly Muslim world. Whatever the Shari`ah supervisors possess the
demonstrate case, prudence dictates that qualifications and characteristics
that their transactions there be at least three supervisors discussed above. In addition,
and dealings conform to Islamic for any Islamic financial many Shari`ah supervisors
legal norms. undertaking. Moreover, have benefited from the
experience exposure
Elements of Shari`ah has shown that at least afforded by multiple board
Supervision: one of the members needs to membership. Then, while at the
Numbers reside in the same country or present time there are no
Shari`ah supervision may be region as the operation, so as to standard
performed by an individual be readily available for qualifications for Shari`ah
supervisor/advisor, or by a consultation, supervisors, it is to be hoped
board of supervisors/advisors, even on short notice. In that, in the future, and as the
commonly known as a Shari`ah some cases, too, a Shari`ah Islamic financial sector grows,
Supervisory Board.2 Whether supervisor will maintain an graduate level programs will be
an institution has a board or a office and keep regular hours at developed for the specific
single supervisor is its own the bank or financial institution. purpose
choice. Generally speaking, of preparing new generations
however, such a choice is Elements of Shari`ah of scholars with all of the
informed by several Supervision: requisite skills. At present,
considerations. Qualifications however, the number of people
Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo
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3. qualified to serve as Shari`ah at the pleasure of the company’s possibilities for enhancing
supervisors is limited. Board of Directors, and not be Muslim
My own suggestion in regard subject to management. Under consumer awareness of, and
to preparing scholars for a such an arrangement, the Board appreciation for, Islamic
future in Shari`ah supervision is will be free to approve or financial
twofold.3 Firstly, Islamic disapprove services and products. For
financial of what management example, the Dow Jones Market
operations may appoint, in does, or proposes to do, solely Indexes developed and
addition to its full Shari`ah on the basis of Shari`ah/legal supported
Board members, junior members considerations. Of course, this a course on the Principles
who will participate in is not to say that a Shari`ah of Islamic Investing that
discussions, Board will automatically was offered to students of the
prepare memos and become a thorn in the side of Dow Jones University on the
briefs, take notes, and perform management. On the contrary, internet. Unfortunately, the
research and other tasks for the most Shari`ah Boards operate in course is no longer available,
Shari`ah Board, but who will the spirit of cooperation and though efforts are underway for
not have full status as voting accommodation. its revival at another venue.
Shari`ah Board members. Likewise, several Islamic
Secondly, Elements of Shari`ah financial
junior members may be Supervision: institutions supported the
appointed on a rotating basis, Communication effort to produce the Guide to
such that each will serve, much An essential element in the Islamic Investing in cooperation
like a law clerk for a serving success of any undertaking is with the Lightbulb Press; and
judge in the United States, for a communication. This is equally others are supporting the Guide
period of one year. By means of true in regard to Shari`ah to Islamic Home Acquisition. In
this rotating arrangement, many supervision. short, every institution offering
scholars will have an opportunity To begin with, there Islamic financial services needs
to learn first hand about must be clearly delineated lines to concern itself, to one degree
the workings of Shari`ah of communication between or another, with issues of
supervision. management and Shari`ah consumer
Moreover, as junior supervision. Oftentimes, an education. Obviously,
members become increasingly Islamic financial institution will the chief concern will be to
more familiar with modern appoint one of its executives, provide information about their
business norms and practices, it whether from business own products. But, generally
will become easier for them to operations, speaking, Muslim consumers
analyze situations and think finance, or legal, to act as need to know that Islamic
through options, with the result liaison with the supervision. financial alternatives exist. They
that their contributions to the This person will be responsible need to know that these
work of the Shari`ah Supervisory for coordinating and alternatives
Boards will become increasingly documenting are viable, from both a
valuable. Obviously, such regular meetings, arranging religious viewpoint and a
junior members will be for the requirements of Shari`ah practical
compensated supervision, following up on one. And they need to
for their efforts, decisions and suggestions, and know that these are competitive
though not at the same level as processing and channeling and worthy of their trust. These
the full board members. communications to and from are the basics of such an
supervision. When board education.
Elements of Shari`ah members Obviously, there is much
Supervision: live on different continents more that can be done. In a
Independence and work in different time service-oriented market that is
In order to be effective, zones, the work of such a driven by competition, the
Shari`ah supervision must be coordinator firms with the better services
independent. In addition, the can be challenging. will have the most success.
decisions of the supervisor/s Shari`ah supervision that
must be binding on management. Elements of Shari`ah engages in consumer education
If these steps are not Supervision: enhances service, not to mention
taken, the credibility of the Education consumer confidence.
supervision, and the company, The correlate of consumer
will be in question. The advocacy is consumer education. Shari`ah Supervision Then and
recommendation In making this observation Now
of AAOIFI is that I mean to refer to the world of As the sector goes, so goes its
Shari`ah supervision must serve Shari`ah supervision. Perhaps
Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo
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4. nothing could be more obvious. welcome step was taken to and Auditing Organization of
In the days when Islamic promote Islamic Financial Institutions
banking the efforts of individual (AAOIFI) in Bahrain held that it
was in its infancy, Shari`ah scholars. This was the “New was sufficient to call such a body
supervision, too, was feeling its Voices” competition, sponsored a “Shariah Board.” In order to be
way. With little or no exposure by the US-based Guidance more readily understandable to
to modern finance, Shari`ah Financial Group, in which regulators in Muslim-minority
supervisors faced a very steep scholars were invited to submit countries, such as the US and
learning curve. To begin with, their original work to a jury of Europe, there is nothing wrong
in the fifties and sixties, there experts; and the best paper was in using another name, like
was very little in terms of awarded a substantial dollar Ethical
literature prize. Advisory Board.
on the subject. The State My own experience has led 3 I am pleased to report that
Banks of a handful of Muslim me to a view of the future of one of these suggestions has
countries sponsored conferences Shari`ah supervision that been implemented by one of the
on “Islamic Economics” includes increasingly informed groups with which I work; and
and Shari`ah scholars were discourse by enlightened that the other will be
invited to contribute. These Shari`ah scholarship. It may be implemented
early papers and presentations difficult to achieve consensus in the coming year by
led to more concerted efforts on every issue, but the important another.
and scholarship. With the thing is that our Shari`ah
advent of Islamic banking in scholars are now able to speak
the seventies, and a real with authority on these issues.
demand for Shari`ah supervision, Moreover, cross-disciplinary
there was more incentive collaboration on projects in
for such academic efforts. which there is active
Indeed, the development of the participation
sector, and the development of by lawyers, Shari`ah scholars,
the various sets of expertise and business professionals
required to give it momentum will bring more innovation to
went hand in hand. Today, after the industry and further enrich
the passing of over thirty years the emerging academic
since the first Islamic banks discourse.
opened their doors for business, Innovation and creative
Shari`ah supervision continues thinking have always been a
to improve and evolve. part of development; and it is
Globally, a number of different clear that the Islamic financial
efforts to increase our industry is developing in ways,
understanding of Islamic and on a scale, that were
finance are underway. unimaginable only a few
Universities decades ago.
offer courses on various
subjects in Islamic Finance __________________________
today, not only Economics; and
several important graduate Footnotes
dissertations 1 The operative religious/legal
have been published principle in this matter is one
in English and Arabic. Journals regarding collective and
on the subject of Islamic individual
finance are published regularly. responsibility. In cases where
Websites devoted to the subject expertise is required for the
are available on the internet. good of the community, such as
Learned academic bodies like expertise in medical, or political,
the OIC Fiqh Academy in or military affairs, the principle
Jedda, AAOIFI in Bahrain, the is that as long as the community
IIBI in London, the IIIT in produces individuals capable of
Cairo, and the Fiqh Academy in dealing with such matters, the
India have produced volumes community will have performed
of literature on the subject; and its duty, or fard kifayah.
everywhere scholars are at 2 The First Annual Conference
work. Recently, at a conference on Shari`ah Supervision
on Islamic Finance in Dubai, a held last year by the Accounting
Shari’ah Supercision in Modern Islamic Finance Yusuf Talal DeLorenzo
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