Abstract

The Islamic finance industry is growing at a rapid rate. Its products and services are widely offered all over the world. The ultimate vision of the emergence of Islamic finance industry is to avoid the prohibited practices of conventional financial institutions such as interest, uncertainty, gambling, and investment in prohibited items. If Islamic Financial Institutions (IFIs) manifest by excluding this vision, then they have failed in their mission. Consequently, shari’ah risk, i.e., non-shari’ah compliant risk is the main risk that IFIs must manage to maintain its distinguished status as shari’ah compliant institutions. Shari’ah governance is used as the guideline to mold the operational practices of IFIs to achieve the mission of shari’ah compliance. For this purpose, the shari’ah committee members are the main players for implementing good shari’ah governance practices. However, due to the limited authority of Shari’ah committee members in performing their tasks, IFIs are voluntarily exposed to Shari’ah risk. This paper highlights the current Shari’ah governance problems and proposes that the authority of Shari’ah committee should be enhanced for better Shari’ah governance practices. Problems with current Shari’ah governance practices are mostly due to fatawa variation, non-harmonization of Shari’ah governance practices and products, variance in the four schools of thought, and limited support from IFI management in discharging their full responsibilities such as their involvement in the Shari’ah review process and audit. This paper is set to develop Shari’ah governance guidelines.

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