External Sharī‘ah audit and review committee Vis‐a‐Vis Sharī‘ah compliance quality and accountability: A case of Islamic banks in Bangladesh

• Published date: 01 February 2022
• Author: Md. Kausar Alam,Abu U. F. Ahmad,Aishath Muneeza
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2364

ACADEMIC PAPER

External Sharī‘ah audit and review committee Vis-a-Vis

Sharī‘ah compliance quality and accountability: A case of

Islamic banks in Bangladesh

Md. Kausar Alam

1

| Abu U. F. Ahmad

2

| Aishath Muneeza

3

1

Faculty of Economics and Management,

Universiti Putra Malaysia (UPM), Seri

Kembangan, Malaysia

2

Islamic Economics Institute, King Abdulaziz

University, Jeddah, Saudi Arabia

3

School of Professional Studies, International

Centre for Education in Islamic Finance

(INCEIF), Kuala Lumpur, Malaysia

Correspondence

Md. Kausar Alam, Faculty of Economics and

Management, Universiti Putra Malaysia (UPM),

Seri Kembangan, Malaysia.

Email: kausarflorence@gmail.com

External Sharī‘ah Audit (ESA) is a control mechanism meant for formulating an objec-

tive view by an independent Sharī‘ah audit team about the obligation of Islamic

banks' (IBs) management, personnel and other divisions towards Sharī‘ah compliance.

This study principally aims to examine the relevancy of ESA and review committee in

enhancing the level of Sharī‘ah compliance quality and accountability of IBs in

Bangladesh. The study examines data from 17 respondents obtained via semi-

structured interviews and secondary sources in library. This study establishes that

Sharī‘ah officers of IBs in Bangladesh are unable to perform audit functions properly

which indicates the limitations of current Sharī‘ah audit functions. The study dis-

covers the need for an independent ESA for proper auditing of IBs' operations in

Bangladesh with a view to Sharī‘ah compliance. Thus, an ESA and review committee

is imperative to enhance the quality of Sharī‘ah compliance and ensure accountability

of all divisions within IBs. This audit is to be provided either by Bangladesh Bank

(BB), the central bank of the country or a third party such as Islamic chartered

accountants' firms or Sharī‘ah audit firms. The study would contribute to existing lit-

erature on the importance of ESA and its conditions in Bangladesh. The study also

provides some instructions for global Islamic banking practice on the issues exam-

ined. The study contributes to agency, stakeholder and legitimacy theory via

highlighting the inability of Sharī‘ah auditors to perform their function independently

and efficiently.

1|INTRODUCTION

Sharī‘ah noncompliance is a risk in Islamic finance that signifies the

possibility of nonconformity with Sharī‘ah in the operations of Islamic

financial institutions (IFI). By regulation in many jurisdictions, Islamic

financial institutions (IFIs) are required to ensure proper Sharī‘ah audit

function for effective management and possible mitigation of Sharī‘ah

noncompliance risk in their operations. Islamic banks (IBs) shall ensure

at all costs that rules of Sharī‘ah are not compromised as complying

with them is the essence of Islamic banking. In this regard, a Sharī‘ah

audit function is required to ensure that all operations of IFIs adhere

to Sharī‘ah principles and to detect breaches of those principles. This

function is practiced in such a systematic way that would identify and

rectify breaches of Sharī‘ah principles. The practice of Sharī‘ah audit is

in line with the Islamic institution of hisbah (ombudsman), a tradition

of accountability embedded in Islam aimed at “promoting what is right

and forbidding what is wrong”which, according to Imam Ghazali, is

fard kifayah—an obligation dischargeable by individual(s) on behalf of

a community (Imran, Ahmad, & Bhuiyan, 2012). The Islamic principle

of hisbah is provided for by Al-Quran in chapter Al–Imran, verse 104.

As an institution, hisbah has been practiced throughout the history of

Muslim civilizations since the time of Prophet Mohammad (pbuh). The

practice is with view to, among others, protect consumers in the mar-

ketplace from exploitation and malpractice of traders who may

deceive them (Imran et al., 2012). The person responsible for holding

others accountable via the institution of hisbah is called muhtasib.

Received: 25 June 2020 Accepted: 8 August 2020

DOI: 10.1002/pa.2364

J Public Affairs. 2022;22:e2364. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of10

https://doi.org/10.1002/pa.2364