An investigation of shari`ah governance practices of Islamic Financial Institutions (IFI) operating in Sri Lanka

Abstract

Islamic Banking and Finance as an alternative banking and finance method is one of the fastest growing industries in the world. With double-digit growth rate, the operations of Islamic Financial Institutions had been accepted and adopted in more than 75 countries. The crux of any Islamic Financial Institution is to adhere and comply with the Shariah rules and precepts. The mechanism to ensure Shariah compliance in all its operation is carried out by Shariah Governance. Shariah Governance practices vary according to the legal and regulatory requirement in their respective countries. Having a strong Shariah Governance framework, structure and process will ensure development and growth of Islamic Banking and Finance industry nationally and internationally. Various studies show that the lack of rigour is shown in Shariah Governance practices in non-Muslim countries. Thus, the purpose of this study is to examine the Shariah Governance practices and its effectiveness in Islamic Financial Institutions operating in Sri Lanka. A comparative study of Shariah Governance practices in different types of Institutions, namely Islamic Banks, Islamic Banking windows, Takaful operators and Islamic Finance companies are explored. The research design employed to achieve the objectives and questions established in this study uses the sequential exploratory mixed method. A combination of both qualitative and quantitative investigation where the first phase of investigation is conducted through qualitative method followed by quantitative method. The qualitative investigation is supported by content analysis and semi-structured interviews, which are analysed manually using a thematic approach, followed by a quantitative study using survey questionnaires from operators analysed through Partial Least Squares (PLS) path. Findings show that full-fledged Islamic Finance operators have written documents representing the Shariah Governance process, while other Institutions follow AAOIFI Shariah Governance standards in general. The interview with the Shariah Board members reveals that currently Shariah Governance practices are effective, but requires improvement and state support in the future. Out of six hypothesis developed in relations to the constituents of Shariah Governance, three were accepted, namely Shariah Board, Board of Management and Shariah Audit have an effect on the effective Shariah Governance practices and three are rejected namely, Transparency, regulation and standards does not affect the effectiveness of Shariah Governance practices in Sri Lanka. Based on the findings appropriate recommendations are put forth that will strengthen the Shariah Governance practices in Sri Lanka.