Inside the Shari’a governance system of an Islamic bank

A common misconception about Islamic banking is that once a financial product is approved by the competent Internal Shari’a Supervisory Committee (ISSC), it is immediately offered to customers to customers without any further oversight. In reality, Shari’a compliance is not a one-time approval but an ongoing governance process that extends throughout the lifecycle of every product or transaction. Much like financial reporting, risk management, or regulatory compliance, Shari’a governance is embedded within the institution’s organizational framework.

As the Islamic banking industry has matured, governance has become one of its defining strengths. Modern Islamic financial institutions operate within a structured system of checks and balances designed to ensure that products are not only conceived in accordance with Islamic principles, but are also implemented and monitored correctly in day-to-day operations.

The first layer of this framework is the ISSC, a panel of qualified scholars appointed to oversee the institution’s compliance with Islamic law. Their responsibilities extend well beyond reviewing new products. They examine contractual structures, assess policies and procedures, issue formal opinions (fatwas), and provide guidance whenever new commercial issues arise.

Importantly, the ISSC does not manage the bank’s business. Like an external auditor, it performs an independent oversight function, allowing management to conduct commercial operations while ensuring that those activities remain consistent with approved Shari’a principles.

Governance does not end once Shari’a approval is issued. Islamic banks also maintain dedicated Internal Shari’a Control and Internal Shari’a Audit functions. These specialist teams review whether products are being implemented exactly as approved. A financing structure may be designed to comply with Shari’a, but if documentation is incomplete, ownership transfers are not properly executed, or contractual procedures are overlooked, compliance could be compromised. Operational discipline is therefore just as important as legal design.

Shari’a auditors regularly examine financing files, transaction records, and operational processes, identifying any deviations from approved procedures. Where breaches occur, corrective measures are implemented, and any income arising from non-compliant activities is treated according to established Shari’a governance requirements. This emphasis on continuous monitoring reflects the principle that compliance is measured not only by intention but also by execution.

The UAE has elevated this governance framework by embedding it directly into federal legislation. Recent banking laws require Islamic financial institutions to establish ISSCs while also maintaining independent Shari’a control and audit functions. These laws clearly define the responsibilities of each body, reducing ambiguity and promoting consistency across the industry. Rather than leaving governance entirely to institutional discretion, the legal framework establishes minimum standards that all Islamic financial institutions must observe.

Above the institutional level sits the Higher Shari’a Authority of the Central Bank of the UAE. This national body provides overarching guidance, approves regulatory standards and issues binding resolutions on matters affecting Islamic financial institutions. By creating a central authority, the UAE has reduced the possibility of conflicting interpretations between banks while strengthening public confidence in the industry’s governance framework.

Customers are not expected to understand the detailed jurisprudence behind every financial contract. Instead, they rely on a robust system of independent oversight, internal controls, and regulatory supervision to ensure that the products they use genuinely comply with applicable Shari’a requirements. If innovation is the driver of the future of Islamic banking, governance is the essential safeguard of its credibility.