Outsourcing the Islamic Way : A Look into the Challenges Faced by Financial Institutions

Fuelled by the growth of Islamic finance, banks and other financial institutions are increasingly seeking to outsource their non-core business functions. The benefits of outsourcing have already been well documented in literature and while it is good business sense to indulge in outsourcing when required, it becomes a matter of concern when it comes to outsourching Shariah compliancy. Although there is a great avenue for growth in outsourcing, the industry must be conscious of the risks involved. This article addresses the issues and challenges in outsourcing Shariah approval for banks that do not have their own Shariah advisory board. This unique perspective into outsourcing by Islamic banks divulges into the Shariah risks, governance issues and Shariah arbitraging. For instance, when dealing with consultancy firms that contract Shariah scholars, the issue of rubber stamping is created. This becomes a problem because in many cases these scholars are not held accountable for their actions as the board of directors would be, hence leading to a conflict of interest between Shariah scholars and banks. Furthermore, it is established that subsiding this risk can be done through a convergence of Shariah opinions and a greater need for collaboration between the private sector, the government and regulatory bodies is required.