The Role of the Shariah Supervisory Board in Islamic Banking

Taifur Rahman :

The Shariah Supervisory Board (SSB) plays a crucial role in ensuring that Islamic banking operations conform to Islamic jurisprudence (Fiqh al-Muamalat).

In Bangladesh, where Islamic banking has grown significantly since the 1980s, the SSB is integral part to maintaining the credibility and integrity of the sector.

It acts as a religious authority within each Islamic financial institution, guiding product development, operational practices, and financial decision-making in line with Shariah principles.

Every full-fledged Islamic bank or Islamic window of a conventional bank in Bangladesh is required to establish an SSB. The formation of the SSB must be approved by the bank’s Board of Directors.

SSB members are usually appointed based on their scholarly credentials, particularly in Islamic jurisprudence (Shariah) and Islamic finance.

According to theBangladesh Bank Guidelines(2020), An SSB must consist ofat least 5 members, including at least 3 Shariah scholars, preferably with experience in Fiqh al-Muamalat, 1 professional with banking or financial background(e.g., economist, accountant) and1 legal expert or academic.SSB Members must possess academic qualifications in Islamic Studies, Fiqh, or Usul al-Fiqh, while experience in Islamic finance or banking is strongly preferred.

Some members may also hold positions in national or international Islamic finance organizations like AAOIFI, IFSB, or CIBAFI.

Shariah Supervisory Board reviews, approves, or rejects new financial products.

It ensures compliance with Islamic legal principles, especially the prohibition of Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling).

It advises the bank’s management and board on Shariah issues and set policies for profit-sharing, zakat calculation, and charitable distributions.

SSB oversees periodic Shariah audits conducted by internal or external Shariah audit teams, reviews audit reports and ensures that any non-compliance is addressed promptly.

It may recommend purification (cleansing of earnings) if any income is derived from non-permissible sources.

It conducts workshops and training for bank staff to enhance Shariah compliance as well as promotes awareness of Islamic banking principles among stakeholders.

Independent Shariah compliance report is published annually.This report is included in the bank’s annual report and submitted to Bangladesh Bank.

The Bangladesh Bank issued comprehensive guidelines in 2020 to standardize the structure and functioning of SSBs across Islamic banks. Key features include mandatory SSB for all Islamic banks.

There is defined tenure (typically 3 years, renewable).No conflict of interest is allowed such as members cannot serve more than one bank simultaneously.

Bangladesh Bank can conduct external Shariah audits to ensure proper governance.

SSBs have been instrumental in promoting trust and authenticity in Islamic banking.

They’ve contributed to the development of innovative Shariah-compliant products, such as Diminishing Musharakah, Takaful, and Shariah-based microfinance.

However, challenges remain in ensuring consistent Shariah interpretation and the availability of highly qualified scholars.

The Shariah Supervisory Board (SSB) serves as the religious conscience and compliance authority within Islamic banks in Bangladesh.

Its influence extends beyond religious endorsement-it plays a pivotal role in risk management, product development, and regulatory compliance.

As Bangladesh’s Islamic banking sector continues to grow, strengthening the independence, capacity, and transparency of SSBs will be key to achieving Shariah authenticity, public confidence, and sustainable financial inclusion.

Following the July 2024 uprising and its attendant economic and institutional shocks, Bangladesh Bank instituted a coordinated set of regulatory and supervisory measures aimed at stabilizing and strengthening the Islamic banking sector.

The central bank responded both by proposing new legislation to standardize Islamic banking operations and by tightening its on-site and off-site supervision of Shariah-based institutions.

In November 2024, a draft Islamic Banking Companies Act was published to provide a single, clearer legal framework for Islamic banks and to address structural inconsistencies that complicated oversight.

https://www.islamicfinancenews.com/daily-cover-story-bangladeshs-central-bank-issues-draft-of-islamic-banking-companies-act-2024-to-regulate-and-standardize sector.html?utm_source=chatgpt.comTo remove competitive distortions and clarify legal status, the draft envisaged measures that would restrict conventional banks from operating full Islamic banking businesses alongside conventional operations.

Bangladesh Bank also created a dedicated Islamic Banking Regulations and Policy function within its organizational structure to centralize policymaking, improve coordination, and accelerate implementation of reforms.

Complementing structural changes, the central bank intensified inspection and compliance activity issuing targeted circulars, expanding inspection teams and establishing follow-up mechanisms to ensure corrective actions were taken promptly.

In the monetary sphere, the Bank maintained a tighter policy stance in the second half of 2024 to contain inflationary pressures and to protect banking sector liquidity, a decision that directly influenced Islamic banks’ funding costs and asset-liability management.

Supervisory priorities were recalibrated to emphasize asset quality, provisioning, capital adequacy and liquidity coverage ratios in Islamic banks, with examiners applying conventional prudential metrics adapted for Shariah-compliant products.

Shariah governance was elevated as a formal regulatory objective: Bangladesh Bank signaled stronger requirements for board-level Shariah committees, independent Shariah audit functions, and clearer disclosure of Shariah rulings and product documentation.

Regulators additionally promoted alignment with recognized international standards and best practices including engagement with AAOIFI principles on a ‘comply-or-explain’ basis to improve transparency and cross-border consistency.

To safeguard depositors and market confidence, the central bank tightened reporting obligations and mandated more granular, timely supervisory returns from Islamic banking windows, branches and standalone Islamic banks.

https://eng.munabulletin.com/bangladesh/news/562?utm_source=chatgpt.comAnti-money-laundering and counter-terrorist financing controls received parallel attention, with supervisory guidance updated to reflect the specific product flows and risk profiles of Shariah-compliant financing.

The combined effect of legal reform, institutional redesign, enhanced supervision and governance upliftment has been to reduce regulatory ambiguity, strengthen prudential oversight and improve the resilience of Islamic banks to external shocks.

Implementation remains a work in progress, however, and Bangladesh Bank has signaled ongoing monitoring, periodic review and further rule-making where gaps are identified.

Collectively, these measures are expressly intended to restore public confidence, align the sector with international norms, and support a stable, transparent, and resilient Islamic banking industry in Bangladesh.

(The writher is a banker and columnist) Email:[email protected]