Exploring shariah governance factors in internal shariah audit effectiveness : case study of selected Islamic banks in Yemen

Abstract

Internal Shariah audit in Yemen, which is neither centralised nor governed by the Central bank of Yemen (CBY), had caused the adoption of different standards and guidelines as well as policies and practices by Islamic banks. Previous studies found gaps in the banks' internal audit, such as Expectation-Performance Gap, Deficient Performance Gap and Deficient Standards Gap. This study examined the effectiveness of internal Shariah audit in Islamic Banks in Yemen by exploring the mutual relationship between the internal Shariah audit and key elements and principles as factors of Shariah governance based on the Institutional Theory. The Institutional Theory discusses the organisation's normative pressure, coercive pressure, and mimetic pressures arising from the surrounding environment affecting and interacting with the Islamic bank. This research aims to examine their direct impact on internal audit effectiveness regarding SSB, internal Shariah audit mechanism, internal Shariah auditor requirements and, finally, internal Shariah audit practices. In addition, the research aims to assess the current Islamic Bank internal Shariah audit policies and practices adoption of external regulatory requirements and best practices. The third objective is to assess the coherence of the internal Shariah audit framework and effectiveness in Islamic banks based in Yemen to enable internal Shariah audit effectiveness. The primary analysis technique is the pattern matching technique of documented policies and procedures and interview findings for comparing predicted patterns with ones that have been empirically observed and identifying any variance of gaps. The study found the lack of coordination and harmony between external and internal regulatory perspectives on internal Shariah audit requirements as well as the lack of similarity of standardization across Islamic Banks are indicative of lack of coherence of internal audit effectiveness within a self (institution) governance rather than an external governance system. It presents an insightful, unique finding that may affect coherent, consistent, and comparable internal Shariah audit effectiveness development among Islamic banks in Yemen. This study concluded that Institutional Theory is relevant to describe and distinguish the pressures exhibited by the Islamic bank of Yemen and Saba Islamic bank. An importance and uniqueness of this study is that both pertinent external and internal factors related to internal Shariah audit effectiveness are evaluated. This is because analysing only one or a few factors in evaluating any function effectiveness in prior studies may not lead to reliable results. In addition, using primary data along with interviewing key staff in both banks strengthen the findings to be useful as policy guidance for regulators and for future research.