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Shariah compliance in Islamic financial institutions

Team Leader-Research, Training & Development Unit, Islamic Banking Group, National Bank of Pakistan

Though the efforts towards shariah compliance by Islamic Financial Institutions (IFIs) and regulatory bodies at regional and international levels are worthwhile but keeping in view the general observations regarding prevalent approach, practices and operations of IFIs, some considerations and work must be done beyond the prevalent approach that will lead to real and effective shariah compliance.

As we all know that Conventional Banking & Finance has absolutely a different perspective from Islamic Banking & Finance. These are two different concepts having roots in Conventional Economics and Islamic Economics respectively. Therefore, Islamic banking and finance should not be matched and compared with general banking principles in any sense.

As conventional economic and banking set up has been prevailing for a long time, the conventional mindset of earning money is still present while working even in Islamic banks. Unfortunately, the conventional mindset within this industry and operational set up is the biggest hurdle in the development and implementation of a real economic system. It is a pity reality that the present behavior of Islamic financial industry is not leading towards and clearing the way for the implementation of the Islamic economic system but it is indirectly a supporting tool for accelerating capitalism. The materialistic approach is still in practice and the spiritual approach is missing. To develop real Islamic mindset, there is a need to get rid of conventional concepts, thoughts and structures that are still being followed in the prevalent Islamic banking and finance industry. We have to do Islamic Banking upon real intention and conceptual lines.

The important and immediate considerations required, in this respect, by the regulatory bodies and higher management of Islamic banks may be included, but not limited to, the following:


To make income and profit, the interest based benchmark like KIBOR/LIBOR etc. is still being used by IFIs. No doubt, the transactions are shariah compliant but we cannot achieve the objectives of Shariah while doing this practice and we cannot create a real Islamic mindset as this way of benchmarking is remain considered the concept of earning money over the disbursed money rather than consideration of the income against the dealing in certain asset or commodity etc.

The conventional benchmarking does not pave the way for the further research and development of products and services based on Musharaka and Mudaraba. Therefore, this setup should be replaced by other suitable benchmarks or follow the general social benchmarks according to the demand and supply of the certain assets and commodities etc. in which parties are dealing.


Generally in IFIs, the training is given to the general staff regarding Islamic Banking and finance keeping in view their job nature but one step ahead, there is a need to emphasize the importance of shariah compliance and the base and objectives of Islamic Economics should be communicated to the staff with clear comparison with the ideology and practice of conventional economic system. The training must be given in such a way that the staff of the bank can perform their duties, either in the form of customers’ dealing or other activities and duties etc, without any reference and thinking to the conventional economics and banking transactions.


It is observed that IFIs consider the conventional banking experience even for the key positions in Islamic banks. How the persons with mere conventional experience appointed on the key position in IFIs if they do not have the adequate knowledge regarding Islamic Economics and Islamic business concepts? How we expect shariah compliance from this type of behavior? It is the question that must be catered.

It must be understood that Islamic finance is not the same as conventional finance with respect to concept, theory or practice. Therefore, the people must be appointed, particularly on the supervisory level, after giving proper training and assessment. In this regard, the proper fit and proper criteria must be introduced by the international and regional concerned institutions and authorities.


If we go through the general behavior of Islamic financial industry, we observe that the regulators and IFIs are taking interest and thinking in only introducing shariah compliant alternatives of conventional products and services.

Due to this behavior, the innovation process in Islamic banks has been stopped and Islamic banks are trying to earn from the general prevalent Islamic modes and products and services and their supporting tools like hiba, agency and undertaking etc., as it is very easy to earn rather than go for further research and development that may lead to real Islamic social transactions and achieve real objectives of Islam.

If we try to introduce and launch alternative to each conventional transaction, it may open the door of riba and develop compromising attitude that would not be fruitful and become disaster for the Islamic economic and banking setup in the future.


Since the base, operations and structure of IFIs are absolutely different from the operations and structure of conventional banks then the regulatory treatment must be different as compared to conventional institutions. The same regulations with same terms and conditions must not be applied for IFIs as it is the cause of confusion at every level and cannot develop real Islamic mindset.


In IFIs, it is generally observed that there is a lack of focus upon the customer’s understanding regarding certain transactions. Consequently, the customer does not understand the real nature of transactions and their capacity in the certain Islamic transaction. Due to this behavior, the factor of gharar (excessive uncertainty) arises that is not allowed in Shariah and may make the transaction void.

The management of IFIs and their respective shariah compliance departments must ensure the understanding of the certain execution of transaction at the end of the customer. The concerned institutions and authorities at global and regional levels must also formulate the policy and issue standards to check and ensure the understanding of the customer in this respect.

In this respect, the surety or undertaking may be taken from the representative or concerned officer of IFIs, who is involved in making certain transaction, that the customer understands the nature of particular transaction. The shariah compliance officer may also meet customers to check this important concern. The accounting treatment of the customers may be seen to check the understanding of the customer.

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