Who Decides What Is Sharia-Compliant? Inside the Scholars, Boards and Rulebooks of Islamic Finance

A bank designs a new US$200 million financing product. Its lawyers approve the documentation. The regulator is satisfied with capital, liquidity, disclosure and consumer-protection requirements. The tax department confirms the structure will not be punished for having two asset transfers instead of one.

The product is still not ready.

Someone must answer another question:

Is it Sharia-compliant?

That sentence sounds as though there should be a single authority somewhere issuing a universal yes or no. There is not.

Islamic finance has internationally influential standards bodies, national Sharia councils, institution-level supervisory boards, specialist scholars and centuries of jurisprudence across legal schools. Some jurisdictions centralize authority. Others leave far more responsibility with each financial institution. Scholars can agree on first principles and disagree sharply about a modern structure built from them.

This is why two banks can look at essentially the same product and reach different Sharia conclusions.

It is also why the words “approved by our Sharia board” deserve the same follow-up that a banking lawyer would ask of any regulatory claim: approved by whom, under which standards, in which jurisdiction, and with what continuing oversight?

There is no Islamic finance pope

Islam has no single worldwide ecclesiastical office that functions as a universal financial supreme court.

The Qur’an and Sunnah provide primary sources. Islamic jurisprudence developed through jurists, legal schools and methods of interpretation. Modern Islamic finance then had to apply that inheritance to corporations, central banks, derivatives, securitizations, floating benchmarks, payment cards and digital assets.

The result is an ecosystem rather than a hierarchy.

A simplified map looks like this:

That ecosystem is both a strength and a source of friction.

It allows jurisprudence to adapt rather than waiting for one global authority. But it can also create uncertainty, inconsistent product acceptance and “Sharia arbitrage,” where a transaction rejected by one board is taken to another that will approve it.

What a Sharia supervisory board actually does

The popular image is a group of scholars reading a contract once and placing a religious stamp on the cover.

Good Sharia governance is much broader.

A supervisory board or Sharia committee may review product structures before launch, examine contractual documents, set conditions, issue or adopt rulings, oversee the institution's Sharia-compliance function, review non-compliant income, monitor remedial action and report to stakeholders.

That last part matters. A product can be designed correctly and implemented incorrectly.

Suppose an Islamic bank's murabaha documentation requires the bank to buy an asset before selling it to the customer. The paperwork is flawless. But operational staff routinely execute the customer sale before the bank has acquired title.

The legal sequence has collapsed.

Sharia governance therefore has to reach into operations, not merely product design. AAOIFI's governance standards include Sharia review, compliance, internal audit and supervisory-board architecture. The IFSB's standards similarly treat Sharia governance as a financial-stability and consumer-confidence issue, not simply a religious advisory service.

AAOIFI: probably the most important global Sharia rulebook

The Accounting and Auditing Organization for Islamic Financial Institutions AAOIFI—is based in Bahrain and publishes standards covering Sharia, accounting, governance, audit and ethics.

AAOIFI describes its Sharia standards as a major global compilation of contemporary fiqh al-mu'amalat reasoning and notes that they are adopted by various central banks and financial authorities either mandatorily or as guidance.

That wording is important.

AAOIFI standards are highly influential. They are not automatically statutory law in every country where Islamic finance operates.

A regulator may adopt all of them, some of them, use them as reference material, issue local standards derived from them or pursue another framework.

So when someone says, “AAOIFI says X,” there are two separate questions:

1. What does the AAOIFI standard actually require?

2. Does the relevant institution or jurisdiction have to follow it?

Confusing those questions is one of the easiest ways to write sloppy Islamic-finance analysis.

The IFSB plays a different role

The Islamic Financial Services Board is not simply another Sharia-fatwa organization.

Its work is closer to the prudential standard-setting world occupied by institutions such as the Basel Committee, adapted to the specific risks of Islamic financial services. It publishes standards and guidance for banking, capital markets and takaful, including corporate and Sharia governance.

In July 2025, the IFSB adopted IFSB-31: Guiding Principles for Effective Supervision of Sharia Governance.

The standard makes an institutional point that deserves attention: weaknesses in Sharia governance can generate legal, operational and reputational risk, undermine public trust and potentially affect financial stability. It also explicitly recognizes that jurisdictions use different legal and institutional frameworks.

That is a sophisticated way of saying something very practical:

A bank's Sharia failure can become a banking-risk event.

Imagine a major Islamic bank announcing that a widely sold product was never compliant. Customers may demand remediation. Contracts may be challenged. Income may need purification or adjustment. Reputation can collapse. Funding behavior can change.

Sharia governance therefore sits inside risk management.

Malaysia shows what centralized authority looks like

Malaysia provides one of the clearest examples of a national centralized model.

Bank Negara Malaysia's Sharia Advisory Council was established in 1997 and is described by BNM as the highest Sharia authority for Islamic finance in Malaysia. The Central Bank of Malaysia Act 2009 strengthened its status. BNM states that courts and arbitrators dealing with relevant Islamic-finance matters must refer to SAC rulings and that such rulings are binding in the statutory framework.

As of 2026, the Council includes scholars and experts with backgrounds spanning Sharia, finance, accounting, audit and law.

The advantage of this model is certainty.

If every Malaysian bank independently reached its own conclusion about the same basic contract, consumers and courts could face a fragmented market. Central rulings can harmonize practice and reduce the risk that identical products are permissible at Bank A and impermissible at Bank B.

The tradeoff is centralization. A national authority necessarily makes choices among legitimate jurisprudential positions and market practices.

Other markets can be more decentralized

Not every jurisdiction follows Malaysia.

In more decentralized models, individual institutions maintain their own Sharia boards and rely on international standards, local law and their scholars' reasoning. Regulators may supervise governance without themselves issuing substantive religious rulings.

The IFSB deliberately recognizes these differences rather than prescribing one universal institutional diagram.

That means a product's acceptance can be jurisdiction-sensitive.

The classic example is tawarruq, discussed in Part 2. Organized commodity structures are widely used in some markets, while the International Islamic Fiqh Academy has rejected organized forms meeting the conditions it identified as prohibited circumvention.

The practical consequence is significant: a multinational Islamic financial institution cannot assume that one Sharia approval travels everywhere as easily as a software license.

Who are the scholars?

Islamic financial institutions typically seek scholars with deep training in Islamic jurisprudence and, increasingly, serious familiarity with modern finance.

That combination is difficult to find.

A scholar can understand classical sales law brilliantly and still need specialists to explain how a total-return swap, bankruptcy-remote SPV or central-counterparty margin system actually works. A conventional finance lawyer can understand the instrument perfectly and have no competence to rule on Sharia.

Strong governance therefore becomes interdisciplinary.

The best product review can involve:

• Sharia scholars;

• banking and capital-markets lawyers;

• accountants;

• treasury professionals;

• risk officers;

• tax specialists;

• operations teams;

• technology architects;

• regulators.

The scholar's job is not to become all of those people. It is to understand the transaction accurately enough to rule on what it actually does.

If the technical description supplied to the scholar is incomplete, the resulting approval can be perfectly reasoned and practically wrong.

The “celebrity scholar” problem

As Islamic finance grew, a relatively small number of internationally recognized scholars served on multiple Sharia boards.

That produced obvious benefits. Experienced scholars brought consistency, market credibility and knowledge accumulated across institutions and jurisdictions.

It also produced governance concerns.

How many boards can one person meaningfully supervise? Does a scholar paid by the institution remain sufficiently independent? Can repeated appointments concentrate influence? What happens if the same scholar has reviewed competing products? How should conflicts be disclosed?

These are not accusations against individual scholars. They are standard governance questions.

Conventional finance asks similar questions about directors, auditors, rating agencies, consultants and compensation committees. Islamic finance has to ask them about Sharia decision-makers because those decision-makers can determine whether billions of dollars of activity are religiously acceptable to customers and investors.

AAOIFI governance standards and national frameworks increasingly address independence, appointment, decision-making, compliance functions and audit precisely because Sharia governance cannot rely on personal reputation alone.

A fatwa is not a magic certificate

The word fatwa is often misunderstood outside Islamic contexts. In commercial jurisprudence, it can simply refer to a scholarly legal opinion.

For a financial product, the important questions include:

• What facts were presented to the scholar or board?

• Which documents were reviewed?

• What conditions were attached to the approval?

• Does the opinion cover only the structure or also implementation?

• Is ongoing monitoring required?

• What happens when the product changes?

If a software team changes the transaction flow six months later, the original approval may no longer describe reality.

This is especially important for fintech. A Sharia board might approve a contractual model, while the code implements a different settlement sequence. In programmable finance, compliance has to migrate from PDF documents into system logic.

What happens when scholars disagree?

They can disagree for several reasons.

Different jurisprudential schools

Islamic legal schools developed different rules and methods on some commercial questions. A practice accepted under one analysis may be rejected or constrained under another.

Different factual characterization

Two scholars can agree on law and disagree about what the product really does.

One sees genuine commodity ownership. Another sees a circular cash-financing device.

Different views of necessity and market custom

Modern finance creates situations with no exact classical analogue. Scholars can differ in how much weight to give commercial necessity, custom, public interest or analogy.

Different approaches to form and substance

Some scholars may consider a sequence of individually valid contracts sufficient if each satisfies its conditions. Others may focus more heavily on the combined economic objective and reject a sequence they see as circumvention.

This last disagreement sits near the heart of modern Islamic finance.

“Sharia-compliant” and “Sharia-based” are not the same criticism

Industry critics sometimes distinguish products that are merely “Sharia-compliant” from finance that is “Sharia-based” or genuinely aligned with the objectives of Sharia.

The language is not perfectly standardized, but the criticism is useful.

A transaction can satisfy the technical conditions of recognized contracts while producing an economic outcome almost identical to conventional debt. Critics argue that an Islamic financial system should pursue broader objectives—fairness, genuine risk sharing, economic development, avoidance of exploitation—rather than stop at formal validity.

The response is that legal compliance cannot be dismissed as “mere form.” Law works through forms. Ownership, consent, possession and contract type are not decorative.

A sophisticated position holds both ideas at once:

Formal validity matters, and formal validity alone may not exhaust the ethical ambition of Islamic finance.

That is a much better frame than choosing between “all Islamic finance is authentic” and “all Islamic finance is fake.”

What if a product is later found non-compliant?

The answer depends on the institution, governing documents, jurisdiction and nature of the problem.

Possible consequences can include:

• corrective restructuring;

• stopping further use of the product;

• customer remediation;

• disposal or “purification” of non-compliant income;

• enhanced controls;

• reporting to the Sharia board or regulator;

• reputational damage;

• legal disputes.

This is why Sharia compliance functions and internal Sharia audit exist. The goal is not merely to obtain initial approval but to maintain compliance through the product lifecycle.

AAOIFI's governance standards explicitly address mechanisms such as Sharia review, compliance and internal audit. The IFSB's 2025 supervisory standard places responsibility and accountability inside a broader governance framework.

Courts introduce another legal system

A financing contract can be Sharia-approved and still be governed by English law, Malaysian law, New York law or another secular legal system.

What happens if the parties later dispute whether the transaction complied with Sharia?

That depends enormously on the jurisdiction and drafting.

Malaysia has built statutory machinery connecting courts and arbitrators to its central Sharia council. In other jurisdictions, a court may treat Sharia questions as contractual matters, expert-evidence questions or issues outside its role. Choice-of-law clauses can create additional complications.

This should sound familiar to readers of the Jewish-law series: religious commercial law and state commercial law can occupy the same contract without becoming the same legal system.

A sophisticated Islamic-finance agreement therefore needs more than theological approval. It needs enforceable secular-law documentation that produces the intended outcome if the parties actually end up in court.

A five-question due-diligence test

Whenever a bank, fintech or investment manager says a product is Sharia-compliant, ask:

1. Which Sharia standard or jurisprudential basis is being used?

AAOIFI? National rules? Institution-specific scholarship? A combination?

2. Who approved it?

An internal adviser? Independent Sharia board? National authority?

3. Is the approval public?

Can customers see the board, opinion, certificate or key reasoning?

4. Who checks implementation?

Is there an internal Sharia compliance function and audit process?

5. What happens after a breach?

A governance framework is incomplete if it defines compliance but not remediation.

These questions do not replace a scholar's judgment. They tell you whether the institution has built governance around that judgment.

The practical takeaway

Sharia boards in Islamic finance are not ornamental religious committees. They sit at the junction of jurisprudence, product engineering, governance and reputation.

AAOIFI provides a powerful international standard-setting framework. The IFSB addresses supervisory architecture. National systems such as Malaysia's can create centralized legal authority. Institution-level boards interpret and monitor products. None of these layers, by itself, creates a single worldwide rulebook.

That pluralism explains why disagreement persists over tawarruq, certain sukuk, derivatives, digital assets and other modern instruments.

The right question is therefore not simply:

“Is this Islamic?”

It is:

“According to which authority, using which reasoning, implemented under which controls, and enforceable under which law?”

That is the level at which Islamic finance stops being a marketing label and becomes a governance system.

Key terms used in this article

Further reading and primary references

1. AAOIFI, Shari'ah Standards and Governance Standards: AAOIFI and e-standards.

2. Islamic Financial Services Board, IFSB-31: Guiding Principles for Effective Supervision of Sharia Governance (2025): IFSB.

3. Bank Negara Malaysia, Shariah Advisory Council: BNM.

4. Frank E. Vogel and Samuel L. Hayes III, Islamic Law and Finance: Religion, Risk, and Return.

5. Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice.

6. Muhammad Taqi Usmani, An Introduction to Islamic Finance.

Continue the series

Previous: Part 4 — Sukuk

Series hub: Money Under Islamic Law

Next: Part 6 — Before SWIFT: Hawala, Credit Transfers and Muslim Commercial Networks

• Related: Part 2 — Murabaha and Tawarruq and Part 10 — Islamic Finance Meets Stablecoins.