Religious governance, regulation and standardisation : evidence from Malaysian Islamic banks.

Abstract

This study explores the modus operandi and regulatory influence of the pioneering Malaysian dual-layer governance system where, besides an Islamic bank’s in-house religious board, supervision is undertaken by the country’s Central Bank via its own Shariah Advisory Council (SAC). Data was collected by means of an in-depth interview survey with SAC members, Central Bank compliance officers, Bank Chairmen and members of Shariah boards, CEO’s and other senior executives. We find that the procedures asserted by this over-arching governance structure contributes to standardising practice without hampering creativity when innovating new products. Considerable bureaucracy is also found to exist due the the current approval process impeding efficient decision-making. In addition, we find the SAC to be decisive in resolving disputes from the widespread use of the ‘legal reasoning’ (or Ijtihad) principle exercised by boards providing the much needed confidence and market discipline required by stakeholders. Finally, we highlight how this form of banking operates best when left to a country’s own governance framework rather than imposing international regulation for this nascent industry.