In late 2016 the Central Bank of Kuwait (CBK) made a significant change to the Islamic financial services (IFS) sector. Like most regulators in the region, the CBK has traditionally taken a universal stance on its conventional and sharia-compliant financial institutions, regulating both segments simultaneously and only making exceptions where required by the provisions of sharia. Until now, the CBK had allowed the proprietary sharia boards of individual banks to assume much of the regulatory burden, making rulings on new products and processes as they saw fit; but this is in the process of changing.
This self-regulation model is common in the GCC and offers numerous benefits over a more centralised approach, like in Malaysia. One of the most frequently cited advantages is the speed with which in-house sharia boards can grant approvals. For Islamic institutions, being able to submit product or service innovations to their own sharia board is usually quicker than gaining permission from a centralised body, which is a significant factor in an industry competing against conventional institutions with an already well-established range of approved products. Moreover, from the point of view of sharia innovation, the proliferation of boards and scholars in a non-centralised regulatory system provides for more interpretations of Islamic law, thereby fostering an intellectually richer environment more conducive to product innovation.
However, a dispersal of sharia oversight also brings challenges. Some believe the absence of an apex sharia institution in Kuwait raises the possibility of regulatory disharmony, as interpretations of some of the finer points of Islamic law differ from one institution to the next. Defenders of the decentralised system point out that many sharia scholars sit on numerous boards, and in this way a consistent application of sharia to new products being developed in the market is easily achieved. While data on sharia boards is scarce, this defence is ostensibly built on solid ground: a 2008 study of sharia scholars in the GCC, carried out by Funds@Work, an investment industry strategy consultant, found that 68% of all sharia board positions throughout the region were shared by only 21% of active scholars. However, while the concentration of sharia board positions may be useful in terms of regulatory consistency, some pockets of the IFS industry have voiced their concerns over the phenomenon. One issue frequently cited by opponents of the system is the possibility of conflict of interest, as sharia scholars on propriety boards are effectively paid by the same bodies whose products and services will be ruled on.
Recent regulation by the CBK tackles this issue head on, seeking to limit the opportunity of a small number of scholars to control the regulatory arena. The new directive, which must be fully implemented by January 2018, introduces guidance covering the independence of sharia boards, as well as criteria that must be met by sharia scholars. Sharia scholars must have a minimum of five years of relevant industry experience, and will only be permitted to serve on the boards of three Islamic banks in Kuwait. Moreover, scholars are required to attend a minimum number of sharia board meetings during the year or risk losing their eligibility.
The CBK’s goals of these rule changes are to increase the accountability of the nation’s various sharia boards, and encourage consistency and timeliness in their rulings. In return for their compliance with the new regulatory structure, Kuwait’s sharia scholars will be granted more muscle within the market: once the framework is fully implemented, the rulings of sharia boards will be binding on banks’ managements. This represents an important advancement. While banks have tacitly followed the advice of their respective boards when dealing with sharia rulings, the explicit connection between the decisions of the board and management actions has been lacking from the regulatory framework. Rather than hinder the development of the segment, it is hoped that more comprehensive supervision will allow for more consistent and sustainable growth.