Shariah board interaction and external shariah auditing practices for shariah compliance and financial technology adoption in Malaysian Islamic banks

The Shariah boards have the ultimate authority in providing Shariah assurance to stakeholders of Islamic banks. However, prior studies have highlighted a serious concern regarding the lack of Shariah board competencies and the absence of an adequate Shariah audit framework. This could result in Shariah boards operating ceremonially and not fulfilling their task diligently. To strengthen the capabilities of Islamic banking in the field of digital finance development and ensure strict compliance with Shariah standards, the establishment of external auditors specialized in Shariah compliance has been emphasized. A study was conducted to understand the roles played by both Shariah boards and external Shariah auditors in facilitating the seamless integration of financial technology (FinTech) within Islamic banks while ensuring Shariah compliance. The study drew insights from 34 perspectives, including Islamic scholars and practitioners from the FinTech and Islamic banking sectors in Malaysia. This qualitative approach was augmented by an analysis of Islamic bank annual reports from 2016-2022. Through cross￾tabulation analysis, the study scrutinized patterns concerning technological advancements, namely Shariah board backgrounds, digital product offerings, and FinTech collaborations. The analysis reveals an upward trend in digital product offerings and FinTech collaborations among Islamic banks. This trend underscores the critical importance of diverse backgrounds within Shariah boards, ensuring their adeptness in effectively navigating potential risks and challenges to FinTech innovations. The insights derived from interviews highlight the robust Shariah audit portfolio held by external Shariah auditors, thereby enhancing the quality of Shariah compliance assurance currently issued by the Shariah board. The respondents emphasized that Shariah boards should primarily focus on their role as advisers, setting guidelines for including FinTech in Islamic banking. However, there was considerable consensus among the majority of respondents who strongly agreed that an effective audit mechanism with a strong background in auditing, Shariah and cognitive digital technology skills would contribute to the development of FinTech and ensure high-quality compliance with Shariah principles by external Shariah auditors. This passage highlights the benefits of utilizing FinTech solutions such as blockchain management systems (BMS) to improve the effectiveness and efficiency of external Shariah auditors when assessing Shariah compliance on FinTech adoption in Islamic banks. However, the study also points out some practical concerns such as the lack of standardized guidelines on Shariah auditing, the additional cost that Islamic banks may have to bear, and the potential conflicts between an external Shariah auditor and the Shariah board due to different interpretations of Shariah. These challenges make it difficult for Islamic banks to establish a comprehensive framework for external Shariah audits while ensuring Shariah compliance and navigating the complexities of FinTech adoption. To overcome these hurdles, regulatory bodies need to establish standardized guidelines for Shariah auditing processes, clarify the distinct roles of Shariah boards and external Shariah auditors, and encourage the adoption of more efficient audit solutions through FinTech. By doing so, Islamic banks can improve their adaptability and competitiveness in an increasingly digitalized financial landscape while maintaining Shariah compliance.

Text 125475 - Full Text.pdf Download (4MB) Text SPE 2024 24 - Declaration Form.pdf Restricted to Repository staff only Download (969kB) Text SPE 2024 24 - Full Text.pdf Restricted to Repository staff only Download (4MB) Official URL or Download Paper: http://ethesis.upm.edu.my/id/eprint/18891

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