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Independent entity must for Sharia supervision Al-Hashel addresses scholars

 KUWAIT CITY, Feb 11, (RTRS): An independent legal entity should oversee the way in which Islamic financial institutions certify they are following sharia principles, Kuwait’s central bank governor Mohammad Al-Hashel said in a speech to industry scholars. The comments by Kuwait’s central bank chief could reignite debate over the role of sharia scholars, as regulators around the world begin to take a more active role in monitoring the gatekeepers of Islamic finance. Boards of sharia scholars at financial institutions rule on whether activities and products follow religious principles such as bans on interest payments and pure monetary speculation. They are also involved in audits that determine whether the institutions are operating in a compliant manner. At the same time, the scholars are on the payroll of the Islamic banks which they vet, an arrangement contrary to good governance, Al-Hashel said in his speech, delivered at a December conference and recently published on the central bank’s website.

“Usually, the responsibility for fatwa (religious rulings) and subsequent sharia audit is assigned to the sharia supervisory authority maintained by most Islamic financial institutions. This practice is by no means in line with the sharia supervision governance fundamentals.” Traditionally, scholars have mostly practiced self-regulation, leaving the process open to accusations of conflicts of interest. The growing role of Islamic finance in some national economies is now prompting government watchdogs to pay more attention to the sector.

Last year, for example, Malaysia overhauled its Islamic finance rules, giving it greater oversight over banks and scholars, who are now legally accountable for the financial products they approve and liable to fines and prison time for wrongdoing. Bahrain’s central bank will release a new regulatory framework for Islamic insurance this quarter, in a review of standards which the regulator hopes will improve governance as well as profitability. Pakistan’s central bank is revising rules on sharia governance and liquidity management for Islamic banks. Al-Hashel said there should be clear and specific professional frameworks for the duties and responsibilities of sharia authorities and their audit function. “We can consider the idea of establishing an independent legal entity that will take the responsibility for the regulation and development of the work of sharia audit and supervision,” he said. Al-Hashel did not elaborate on how such a body might operate in Kuwait, or say whether Kuwait was likely to establish one.

But his proposal may strike a chord in the Islamic finance community, because loose regulation of scholars is acknowledged by many people in the industry to be an obstacle to growth. The creation of an independent legal body could see scholars independently reviewing the work of their peers, a format pioneered by Malaysia but mostly absent in the Gulf. Establishing the body would involve challenges but it could take its cues from the conventional financial auditing profession, said Al-Hashel, who replaced veteran policymaker Sheikh Salem Abdul-Aziz Al-Sabah as central bank head in March 2012

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