A qualitative investigation into shariah governance attributes, supervision procedures and auditing in Saudi Islamic banks
The primary aim of Islamic banks (IBs) is to fulfill stakeholders’ needs for operational conformity to religious precepts. However, Saudi Arabia does not either issue any regulations related to Islamic banking nor special license for IBs, thereby, treating them on equal terms with the conventiona...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
2020
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/90668/1/GSM%202020%202%20-%20IR.pdf |
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| Summary: | The primary aim of Islamic banks (IBs) is to fulfill stakeholders’ needs for operational
conformity to religious precepts. However, Saudi Arabia does not either issue any
regulations related to Islamic banking nor special license for IBs, thereby, treating
them on equal terms with the conventional banks. This is so in spite of the fact that
Saudi Arabia is the largest player in the global Islamic finance sector, with total assets
worth US$ 343b in 2015 and expected to rise to US$ 766b by 2020. At the same time
most of previous research focused on customer aspects and disclosure and these
studies are narrow in their approach and employed quantitative methods. Thus, this
study seeks to investigate the extent to which Saudi Islamic banks and Islamic
windows are complying with Shariah by exploring their current procedures of Shariah
governance (SG). It employed agency theory, institutional theory and stakeholder
theory in explaining governance mechanizes and factors affecting the Shariah
compliance. In an attempt to attain the main objective of the research, this study
explored the current Shariah governance system used by Saudi banks and the factors
affecting the system. In addition, it also identified the current roles, attributes and
procedures followed by SB members, identified the current attributes and functions of
Shariah auditors, and investigated the procedures related to Shariah non-compliant
income. Furthermore, the study followed a qualitative research approach by using
semi-structured interviews with fifty selected participants related to SG in all Saudi
IBs, four full-fledged Islamic banks (FFIBs) and eight Islamic windows (IWs) of
conventional banks. The participants were categorized into two: internal and external
participants. The internal participants include Shariah board (SB) members, Shariah
department staff, internal auditors and managers whereas the external include
individuals working with organizations other than the banks e.g. staff of Saudi Arabian
Monetary Authority (SAMA), Islamic Economic Institute (IEI), Higher Institute of the
Judiciary and Islamic Research and Training Institute (IRTI), General Authority of
Zakat & Tax (GAZT) and Saudi Organization of Certified Public Accountants (SOCPA). In addition to supplemented analysis of relevant archival evidence such as
audit checklist for some products.
Result of the study indicated that there was no specific SG system used in Saudi IBs.
However, the system can generally be divided into two types. First, restricted SG
system which focuses on the roles and attributes of SB members but ignores Shariah
audit, applicable in most of IWs. Second, FFIBs applied comprehensive system which
focuses with the roles of SB members and Shariah audit. In addition, the findings
explored some factors affecting the system of SG such as, the major shareholders, the
market, reputation of the banks and SAMA. The results revealed that the role of SB
members can be identified as advisory, supervisory, executive or the combination of
all the three together. However, the role of SB was advisory and supervisory in all
FFIBs except one FFIB the role combined all the three. The study found that there
were four important factors related to SB attributes namely: appointment,
independence, transparency and confidentiality and competence of SB. In addition,
the results found that there were two important factors related to operational
procedures of SB i.e. meeting and decision and the issues related to new products. The
results indicated that the main attributes related to Shariah audit were responsibilities,
effectiveness and independence of Shariah auditors in Saudi IB. However, the
significant functions were the scope and the procedures of Shariah audit. The research
also found that there are two types of sources for Sariah non-compliant income (SNCI)
generated in Saudi FFIBs and IWs. Some of IWs purify and distribute unlawful
income while others do not. Instead, they refer such incomes to the conventional wing
of the same bank. This study contributed to the existing body of knowledge on Shariah
governance in general and Shariah governance in Saudi Arabia in particular. In
addition, the study introduced significant role of internal audit in assuring Shariah
compliance regardless of the role play by SB members and Shariah departments.
Saudi regulators are expected to find this study informative in terms of the current
practices of Shariah governance, issues and challenges faced by the Saudi IBs.
Likewise, Saudi IBs may use the findings of this study in realizing the best practices
within the sector of Saudi IBs. |
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