Ensuring Shariah compliance in Islamic financial institutions as an essential interest of shareholders

Islamic financial institutions are committed to conduct their business in compliance with the rules of Islamic Shariah. In order to ensure their Shariah compliance and win the trust of their shareholders and other stakeholders they usually implement a special type of corporate governance called ‘Shariah corporate governance’. The key feature of this governance policy is the appointment of a Shariah supervisory board in the internal structure of the institution. IFIs around the world operate under three main regulatory and supervisory systems of Shariah corporate governance. Some countries apply a centralised system, while others implement a decentralised system, yet others completely lack this regulation and supervision. Nevertheless, with all the measures taken by the IFIs and jurisdictions, Shariah corporate governance still encounters some problems that might jeopardise its effectiveness in achieving its objective of ensuring proper Shariah compliance in IFIs. Therefore, this thesis argues that shareholders of IFIs – as the third main pillar of corporate governance alongside the institution and the authority – need to play their role as stewards and actively engage with their investee IFIs. It is believed that Shariah compliance is an important interest to these shareholders, and therefore they are expected to defend this interest. It is essential that shareholders of IFIs are equipped with specific rights in Shariah corporate governance especially toward the SSB and the IFI’s Shariah compliance in order to engage more with their institutions. Also, their activism needs to be encouraged and guided with some regulatory rules. In this context it is important for shareholders, especially institutional shareholders, to utilise their power and use all possible means to ensure the delivery of a proper Islamic business by the institutions they invest with. There is no doubt that shareholders might face some obstacles to their activism, however this should not stop them from practising their stewardship role