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E-ISSN 2722-4708 | P-ISSN 2302-3783
Volume 9, No 2, December, 2021, pp. 113-125

113

The Legal Reform Policy on the Shariah Supervisory Board
Role’s in Indonesian Shariah Banks
Devi Triasari a,1,* , Francesco de Zwart a,2
a Faculty of Law, University Adelaide, Australia
1 devi.triasari@adelaide.edu.au*; 2 francesco.dezwart@adelaide.edu.au

* corresponding author

ARTICLE INFO

Article history
Received: April 13, 2021
Revised: October 3, 2021
Accepted: October 30, 2021

Keywords
Legal Reform;
Shariah;
Bank;

ABSTRACT
As Muslim majority country, Indonesia experiences the mushrooming
of banks based on Islamic values (called shariah banking). The
existence of sharia banking is followed by legal policies intended to
support the progress of the business sector, including regulations
regarding the Sharia Advisory Board, but the question is whether the
policy is effective in the development of sharia banking in Indonesia.
Adherent to that context, this study aims to examine the issues faced by
the Sharia Supervisory Board in Indonesia. This study argues that there
are at least fifth substantial problems related to the policies of the Sharia
Supervisory Board in Indonesia, namely: (1) not all Shariah Supervisory
Boards in Islamic business units have supported by a strong legal basis
on which their operations are inducted to; (2) members of the Shariah
Supervisory Board are appointed mostly based on their charisma and
popularity in society, not of their knowledge and experience in related
field; (3) ideally Shariah Supervisory Board must have recognized the
banking system before becoming Shariah Supervisory Board, but the
basic knowledge is not easy to understand when entering on technical
issues; (4) many Shariah Supervisory Boards are not focused on shariah
banks supervision duty because of their multi profession; (5) lack of
advice related to product innovation and social needs issues.
This is an open access article under the CC–BY 4.0 license.

1. Introduction

Based on a survey in 2010, the number of people who embraced Islam in the world was
1,723,607,136. Even further, in 2060, Pew Research predicts that when population growth in the
world is expected to reach 32% in the next few decades, Muslim population growth will increase by
70%, from 1.8 billion in 2015 to get about 3 billion years in 2060. Thus, the rapid development of
Islam is causing the development of banks that run on Islamic principles or so-called ‘Shariah
Banks’ also which cannot be avoided. This can be seen from the increasing number of Shariah
Banks throughout the world over the last four decades. Islamic countries and even non-Islamic
countries are now starting to consider Shariah Banks to be applied in their respective jurisdictions.
For example, the United Kingdom is the first western country to implement Shariah bonds. This was
then followed by Germany who began launching Shariah Bank for the first time in 2016 (Saeed et
al., 2021). Following this, Japan is seriously looking to consider implementing Shariah products.
This is because Shariah Banks are believed to have advantages when compared to western banks.
One of these advantages related to Islamic Banking is avoiding various kinds of losses in the

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financial crisis. The Shariah Banks strength’ is believed due to restrictions on the types of bonds that
are allowed based on Shariah principles.
Indonesia is a country with the most significant number of Muslims in the world. Even so, this
fact does not make Indonesia an Islamic country that exclusively applies Shariah Law in the nation's
life. If we look at history, Indonesia is a former Dutch colony that later gained its independence in
1945. This made Indonesia adopt the Dutch legal system known as civil law. Indonesia uses a civil
law legal system where the important characteristic of this legal system is the codification of
legislation. However, if it is found that the existing legislation is inadequate, legal reform is the best
solution to benefit both for government and society. Indonesian legislation that implements the
regulations and detail about Shariah Banks, particularly the Shariah Supervisory Board, is Law No.
21 of 2008 concerning Shariah Bank and its implementing regulations, which will be explained
further in Chapter III (Juhro et al., 2020).
In addition to Indonesia’s Act No. 21 of 2008, other countries also have a regulatory basis that
regulates specifically related to the Sariah Banks. This has resulted in the regulation of Shariah
Banks in a country often different from the arrangement of Shariah Banks in other countries. For the
arrangements of Shariah Banks to have uniformity, the international standard is required. One of the
international standards governing Shariah Banks can be found in the International Shariah Standards
of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Indonesia
itself, through its representatives from the Indonesian Ulema Council, is one of the Shariah Board
members at the AAOIFI. The AAOIFI itself is an international non-profit organization founded in
1991 which has several missions, one of which is to provide guidelines for international Islamic
financial practice based on the principle of Shariah. This study attempts to compare the regulation of
the Shariah Supervisory Board in Indonesia and whether it meets the international standards set by
AAOIFI. If not, then what kind of legal reform is needed for the future implementation of the
Shariah Supervisory Board’s Role in Shariah Banks to be more optimal (Wasiaturrahma et al.,
2020).
Widespread in kinds of literature, the term ‘Shariah Law’ is a synonym of Islamic Law. Islamic
Law itself is an integral part of Islamic Faith. If one embraces Islam, he or she will automatically be
bound by Islamic Law because Islamic Law is kaffah (whole) and touches every dimension of the
life of His adherents. But, in reality, when this Islamic legal system meets with other legal systems
in a state jurisdiction, Islamic Law cannot be used in its entirety. For example, Indonesia is using the
civil law system of former Dutch colonialism. Although most of the population of Indonesia
embraces Islam, it does not necessarily cause Indonesia to use Islamic Law or cause Indonesia to
become an Islamic state. Indonesia only uses Islamic Law in certain areas, such as marriage,
inheritance, and Shariah. This is in line with the majority of legal scholars who say that the Islamic
State is not only determined by demographics (where or not the people are adherents of Islam in a
country) but includes whether or not and how its government use Shariah Law. Indonesia is a
country with the most significant number of Muslim followers globally, but the Indonesian
government does not exclusively use Islamic Law as a whole but in certain areas only (Qoyum et al.,
2021).
2. Results and Discussion

2.1. The Organizational Structure of Shariah Banking in Indonesia
Before discussing more the organizational structure of Shariah banking in Indonesia, let us first
review corporate governance, both single-tier and dual-tier. Corporate Governance (CG) explains
the relationship between the various participants in the company, which determine the direction and
performance of the company (Siswantoro, 2014). In a two-tier board system, the structure of
corporate governance, called the board, is divided into two groups. The first group is called the
supervisory board. This supervisory board consists of an independent non-executive director and a
not independent non-executive director. The non-executive director does not carry out day-to-day
operations within the corporation but has the same responsibilities as the executive director of
corporate operations. Fig 1. Comparison of corporate governance of single-tier, dual-tier, and
Shariah Banks in Indonesia.

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Single Tier

Dual Tier

Shariah Bank in Indonesia

General
Meeting

General
Meeting

General Meeting of
Shareholder

Board

Supervisory
Board
Chair
CEO

Management
Board

Board of
Commissioners

Shariah
Supervisory
Board

Board of
Directors

Fig. 1. Comparison of corporate governance of single tier, dual tier, and Shariah Banks in Indonesia.

Fig 1 show, in a one-tier board system, the role of the supervisory board and the implementing
board are made in one. This is referred to as the board of directors. There are four types of board
structures in a one-tier board system. The first type, all the executive directors, are board members.
Top managers are also included as board members. This type of type is widely used by small
companies, family companies, and start-up businesses. The second type, membership board of
directors is filled by executive directors as members of the majority and non-executive directors as
members of minorities. The third type is the opposite of the second type. The majority of board
members are non-executive directors, some of whom are independent directors. In the latter type, all
non-executive directors are board members. Non-profit organizations widely use this type of board.
This structure is actually similar to a two-tier structure that is widely used by mainland European
countries. Which corporations adopt models and systems in Indonesia. Indonesia's governance
model can be considered to follow the European Continental pattern. Some of the features that refer
to this system are, company law in Indonesia is adopted according to "French civil-law tradition" of
Continental Europe, the use of two-tier board system structures as found in various Continental
European countries, the concentration of ownership of the company to a group of people, dominant
sources of financing companies from outside the company in the form of debt (external-bank
financing), as well as the illiquidity of the capital market and the ineffectiveness of market control
mechanisms.
2.2. The Difference among Indonesian Ulema Council, National Shariah Board, and Shariah
Supervisory Board Indonesia
One of the differences between Shariah financial institutions and conventional financial
institutions is the obligation of compliance fulfillment on Shariah principles. Every implementation
of business activities in Shariah financial institutions must fulfill compliance with Shariah principles
implemented in its products, services and operations. Compliance with Shariah principles is a form
of contractual implementation in Shariah banking based on Shariah principles (Zuhroh et al., 2015).
Every Shariah financial institution, especially Shariah banking, must have a reliable governance
model and the right strategy to encourage the implementation of strong and effective corporate
governance in Shariah environment. Another fundamental difference between a Shariah Bank and a
conventional bank is the prohibition of interest on a Shariah Bank and the role of the Shariah
Supervisory Board in each bank to oversee all forms of Shariah Bank operations (Shaban et al.,
2014).

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In line with the development of Shariah financial institutions in the homeland, there is also a
growing number of Shariah Supervisory Board to oversee each of these institutions. The variety of
Shariah Supervisory Boards in each Shariah financial institution is something to be grateful for and
to watch out for. The vigilance is related to the possibility of a different fatwa between the Shariah
Supervisory Board and the other Shariah Supervisory Board. As an umbrella of Islamic institutions
and organizations in Indonesia, the Indonesian Ulema Council considers the need to establish a
National Shariah Board and oversees all institutions, including Shariah Banks (Trinugroho et al.,
2018).
In Indonesia, the institution responsible for issuing fatwas in order that Shariah Bank meets
Shariah principles is the National Shariah Board established by the Indonesian Ulema Council. The
National Shariah Board was formed in 1997 and was the result of the recommendation of the
Shariah Mutual Fund Workshop in July of the same year. This institution is autonomous under the
Indonesian Ulema Council, led by the Chairman of the Indonesian Ulema Council and Secretary
(ex-officio). The daily activities of the National Shariah Board are run by the Daily Executing
Agency with a chairman and secretary as well as several members (Rizvi et al., 2020).
The more complex the problems faced by Shariah Financial Institutions are now demanding the
increasingly alert of the National Shariah Board towards the innovations of products needed by the
community. This is to promote and enhance the growth of Shariah Financial Institutions in the
country. The National Shariah Board is an institution established by the Indonesian Ulema Council
which has the function of performing the duties of the Indonesian Ulema Council in dealing with
issues related to the activities of Shariah financial institutions. One of the main tasks of the National
Shariah Board is to examine, explore and formulate the values and principles of Shariah law to be
used as guidance in transaction activities in the Shariah financial institutions. Through the Shariah
Supervisory Board oversees the implementation of Shariah principles in the system and management
of Shariah financial institutions (Trinugroho et al., 2021).
The National Shariah Board is an independent institution in issuing fatwas as references related
to economic, financial, and banking issues. The role of the National Shariah Board is crucial to
improving Shariah banking and maintaining the compliance of Shariah banks against Shariah law.
As of July 2007, the National Shariah Board has issued 61 Fatwa related Islamic financial products.
The task of the National Shariah Board in the field of finance and banking is as an authority body
providing advice to related institutions (Bank Indonesia, Ministry of Finance, or Investment Board)
concerning the operations of Shariah banking or other Shariah financial institutions, coordinating
Shariah issues on finance and Shariah banking, and analyzing and evaluating Shariah aspects of the
scheme or new products proposed by other Islamic banking and finance institutions (Kamla &
Alsoufi, 2015).
To further streamline the role of the National Shariah Board on Shariah financial institutions, the
Shariah Supervisory Board is established as the representative of the National Shariah Board at the
relevant Shariah financial institution. Shariah Supervisory Board is a body authorized to supervise
and closely observe the activities of Shariah financial institutions so that the institution will always
follow the rules and principles of Shariah. Therefore, the Shariah Supervisory Board is basically a
handshake of the National Shariah Board in realizing the fatwas decided by the National Shariah
Board (Kamla & Haque, 2019).
The Shariah Supervisory Board in Indonesia is appointed through the General Meeting of
Shareholders on the recommendation of the National Shariah Board. In addition, the role of the
National Shariah Board as an institution that has authority in issuing fatwas related to various forms
of Shariah Financial Institution products, especially Shariah Banks, has an important role and must
be supported with strong legal force. The Shariah Supervisory Board shall be owned by every bank
operating its business under Shariah principles, whereby the Shariah Supervisory Board is an
independent institution established by the National Shariah Board, and the Shariah Supervisory
Board shall follow the fatwa issued by the National Shariah Board (Hassan & Aliyu, 2018).
Shariah Supervisory Board acts as the supervisor of Shariah financial institutions, namely
Shariah Banks, Takaful Insurance, Shariah Capital Market, etc., so that all institutions are following
the demands of Shariah Law. Supervision in addition to aspects of Shariah financial products also

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includes management and administration of Shariah financial institutions to conform with Shariah.
On the other hand, the Shariah Supervisory Board is a part of the Shariah financial institution
concerned, which is placed on the approval of the National Shariah Board. The role of the Shariah
Supervisory Board is to oversee the business activities of Shariah financial institutions to comply
with Shariah principles and regulations which the National Shariah Board has filed. While, the main
function are the first, as an advisor and adviser to the board of directors, head of Shariah business
unit and head of Shariah branch office on matters relating to aspects of Shariah; and secondly, as a
mediator between Shariah financial institutions and the National Shariah Board in communicating
proposals and suggestions for product and service development from Shariah financial institutions
(Lassoued et al., 2018).
In conducting its duties Shariah Supervisory Board is required to follow the fatwa of the National
Shariah Board, oversee the business activities of Shariah financial institutions in order not to deviate
from the Shariah rules and principles that have been filed by the National Shariah Board and report
the business activities and the development of financial institutions regularly supervised to the
National Shariah Board, at least twice a year (Bitar & Tarazi, 2019). Thus, the Shariah Supervisory
Board in the financial institution is obliged to direct, review and oversee the activities of financial
institutions to be believed that they comply with the rules and principles of Shariah Law. The fatwa
of the Shariah Supervisory Board binds the Shariah financial institution. Internally and normatively,
to guarantee the jurisdiction of a Shariah financial institution, there is a provision that every Shariah
financial institution is required to have Shariah Supervisory Board. In Shariah banks, the Shariah
Supervisory Board is placed at one level with the Board of Commissioners at each Shariah bank.
Such a position aims to make the Shariah Supervisory Board more authoritative and has the freedom
of opinion in providing guidance and direction to all directors in the bank in cases related to the
application of Shariah banking products. Therefore, the appointment of Shariah Supervisory Board
members is conducted by the general meeting of shareholders of a shariah bank after the names of
members of the Shariah Supervisory Board are approved by the National Shariah Board (Mollah &
Zaman, 2015).
After supervision, the Shariah Supervisory Board will make regular statements regarding the
conformity of Shariah financial institutions with Shariah principles. Typically, published in the
annual report of Shariah financial institutions concerned. In addition, the Shariah Supervisory Board
also examines and recommends new products from institutions that are monitored in terms of
conformity with Shariah principles, especially guidelines and fatwas issued by the National Shariah
Board. Thus, the National Shariah Board is the agency authorized to establish and issue fatwas of
Islamic Law regarding economic and financial activities. Meanwhile, the Shariah Supervisory Board
is the institution responsible for overseeing the implementation of the fatwa of the National Shariah
Board in the field by Shariah economic and financial institutions. Thus, the responsibility of the
Shariah Supervisory Board organizationally is to the National Shariah Board, its credibility to the
community and morally to Allah SWT.
In fact, supervising and directing Shariah financial institutions to encourage the implementation
of Shariah principles in economic and financial activities is the task of the National Shariah Board
domiciled in Jakarta. However, due to the limited number of its members and the increasing number
of Shariah finance scattered throughout the archipelago, so its supervision is submitted to the
Shariah Supervisory Board. The Shariah Supervisory Board is obliged to directly observe the
implementation of a Shariah financial entity to not deviate from the provisions filed by the National
Shariah Board. Shariah Supervisory Board sees the aspects of management and administration
broadly should be in accordance with Shariah, and most of all legitimize and supervise the products
of shariah banking in accordance with the provisions of Shariah and applicable law.
The Shariah Supervisory Board, which is the representative of the National Shariah Board placed
in Shariah financial institutions, has the following roles following the fatwa of the National Shariah
Board, formulate the issues that require the approval of the National Shariah Board, reporting
business activities as well as the development of Shariah financial institutions that are supervised to
the National Shariah Board at least once a year (Salem et al., 2021). The other roles of Shariah
Supervisory Board in every Shariah financial institution are, provide advice to directors, head of
Shariah business unit and head of shariah financial institution branch on matters relating to shariah

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aspect, conduct supervision, both actively and passively, especially in the implementation of the
fatwa of the National Shariah Board and provide direction/supervision on products/services and
business activities in accordance with the principles of Shariah, a mediator between Shariah
financial institutions with the National Shariah Board in communicating proposals and suggestions
of product and service development from Shariah financial institutions that require study and fatwa
from the National Shariah Board.
In Bank Indonesia Circular Letter No.8/19/DPBS, it is formulated that the role of Shariah
Supervisory Board are, to ensure and to monitor the suitability of bank operations against the fatwa
issued by the National Shariah Board, to asses shariah aspects of operational guidelines and products
issued by banks, to provide opinion of shariah aspect to the implementation of bank operation as a
whole in bank publication report, to review new products and services for which there is no fatwa
for fatwas to the National Shariah Board; and to submit reports on results of Islamic supervision.
After obtaining a picture of the differences between the Indonesian Ulema Council, the National
Shariah Board, and the Shariah Supervisory Board above, the diagrams below can further clarify the
relationship of the three in their role in shariah banking in Indonesia.
2.3. Comparison of the Position and Function of the Fatwa Institution in United Arab
Emirates State
If in Indonesia, the institution in charge of issuing fatwas in an institution is called Shariah
Supervisory Board, and then in other countries there are various names that are used as follows table
1.
Table 1.

No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

Term used of Shariah Supervisory Board in Islamic Bank around the world

Islamic Banks around the World
Al-Baraka Islamic Investment Bank
Bank Islam Malaysia Berhad
Belt Ettanwil Tounsi Saudi, Tunisia
Dubai Islamic Bank
El-Gharb Islamic Bank of Sudan
Faisal Islamic Bank of Kibris Ltd.
Faisal Islamic Bank of Bahrain
Islamic Bank Bangladesh Limited
Islamic Bank of Bahrain
Islamic Co-op Dev.Bank of Sudan
Jordan Islamic Bank
Kuwait Finance House
Qatar International Islamic Bank
Tadamon Islamic Bank of Sudan
Islamic Banks in Malaysia
Islamic Banks in Pakistan
Islamic Banks in Uni Emirat Arab
Islamic Banks in Indonesia

Term used
Shariah Commitee
Shariah Supervisory Cuncil
Shariah Advisor
Shariah Supervisory Board
Shariah Supervisory Board
Religius Supervisory Board
Religius Supervisory Board
Shariah Council
Religious Control Commitee
Shariah Supervisory Board
Shariah Advisory Board
Fatwa and Shariah Supervisory Authority Board
Religious Supervisory Committee
Fatwa and Research Department
Shariah Supervisory Council
Shariah Board
Shariah Supervisory Board
Shariah Supervisory Board

Table 1 shows, the after knowing the differences between the Indonesian Ulema Council, the
National Shariah Board and the Shariah Supervisory Board in the previous section, as well as the
use of different terms for the Shariah Supervisory Board in other countries, below are some
examples of the status and function of fatwa institutions in other countries. The history of
establishing Islamic Banks in Malaysia began with the establishment of Bank Islam Malaysia
Berhad, which was established in 1983. The birth of Bank Islam Malaysia Berhad is also
accompanied by the formation of Shariah Supervisory Council, whose job is to supervise Bank
Islam Malaysia Berhad operations do not deviate from the provisions of Shariah Law. With the
development of the Islamic banking system in Malaysia, Shariah Supervisory Council is also tasked
to oversee the conventional banking that offered Shariah banking services in early 1993.
Along with the development of Shariah banking in Malaysia, the Malaysian government
established the highest Shariah authority in Malaysia, namely National Shariah Advisory Council
which was established on May 1, 1997. This institution serves as the holder of the highest authority
in deciding Shariah issues in Shariah financial institutions, either bank or non-bank. The National

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Shariah Advisory Council is in the organizational structure of Bank Negara Malaysia. National
Shariah Advisory Council members are appointed by the board of directors of Bank Negara
Malaysia for a period of three years and may be re-elected in the following period. The purpose of
the National Shariah Advisory Council was to act as the sole body of authority to advise BNM,
relate to banking operations and Shariah Insurance, coordinate Shariah issues on Islamic finance and
banking, including shariah insurance; and analyze and evaluate the Shariah aspects of the proposed
new product or scheme by banking institutions and takaful companies (Abdullah et al., 2015).
With the establishment of the National Shariah Advisory Council, the duty of the Shariah
Supervisory Council residing in Shariah financial institutions is only to oversee the operation of the
financial institutions under its supervision as to whether it violates the guidelines and fatwas issued
by the National Shariah Advisory Council. The existence of the National Shariah Advisory Council
within the structure of the central bank will improve the responsiveness and effectiveness of
decision-making and fatwas related to Shariah issues faced by Shariah banking and insurance. This
is in contrast to Indonesia, where National Shariah Board is a non-governmental or independent
institution. The establishment of the National Shariah Advisory Council in the structure of Bank
Central in Malaysia has resulted in the limited independence of the Shariah council because it
follows the rules of the government. The Shariah council is not a self-contained, independent
institution but is under the board of directors of the central bank (Izzeldin et al., 2021).
The highest Shariah authority in finance and banking in Pakistan is in the Shariah Board. It is
formed in the structure of the State Bank of Pakistan organization. Members of the Shariah Board
are composed of two prominent Islamic scholars, an accountant, a lawyer, and a banker. The duties
of the Shariah Board are not different from those of Shariah councils in general, among others: a)
acting as the sole body of authority providing advice to the State Bank of Pakistan in relation to the
operation of Shariah banking; b) coordinating Shariah issues on Shariah finance and banking, and c)
analyze and evaluate the Shariah aspects of the new product scheme proposed by banking
institutions.
The existence of Shariah Board within the central bank will improve the responsiveness and
effectiveness of decision making and fatwas related to Shariah issues faced by Shariah banking.
However, the independence of Shariah Board is limited also because it is not an independent
institution and its members come from various disciplines. The structure of Shariah Board consists
of several related fields, among others, Shariah experts, banking experts, accounting experts,
lawyers and other experts. Shariah council consists of 5 people; the two are Shariah experts.
The United Arab Emirates State establishes the highest Shariah authority institution that serves as
the stipulation of Shariah provisions from Shariah financial institutions. This institution was
established under Article 5 of Federal Law No. 6 of 1985. The authority of this institution is as the
holder of the highest Shariah power in the United Arab Emirates. Members of the Shariah Authority
in the United Arab Emirates are not limited to becoming Shariah Supervisory Councils at the
existing Sharia financial institutions in the country. Not much different from the fatwa institution in
Indonesia which certain Islamic organizations also own, in United Arab Emirates countries, there
are also many private Mufties. The number of Mufties gives freedom to the community to follow the
mufti that they believe, or the Shariah financial institution is entitled to appoint its own Shariah
Supervisory Board, without any recommendation from the State Fatwa Institution.
2.4. Issue of Supervision of Shariah Supervisory Board in Shariah Bank
According to Bank Indonesia research results with the cooperation of Ernst and Young has been
discussed in one seminar at the end of 2008 at Bank Indonesia, one of the main problems in the
implementation of risk management in Shariah Banks is the role of Shariah Supervisory Board
which is not optimal and must be improved in the future. The role of Shariah Supervisory Board, if
not optimal to Shariah compliance practice, resulted in the destruction of the image and credibility
of Shariah Banks. This will affect public outlook and judgment, which may further undermine
public confidence in Sariah Banks. Of the monitoring and inspection indicators reported by Bank
Indonesia, there are still various operational systems of Shariah Banks that are not in compliance
with the principles of compliance with Shariah values (Mateev & Bachvarov, 2021).

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There are some of the weaknesses of the Shariah Supervisory Board in Indonesia. Firstly, not all
Shariah Supervisory Boards in Islamic business units have a strong positive legal basis on which
their operations are operational. The business units, only those in the form of Limited Liability
Companies have a strong positive legal basis for the operation of Shariah Supervisory Board,
namely Article 32 of Law No. 21 of 2008. In comparison, the positive legal basis related to the
operation of the Shariah Supervisory Board in other business units does not yet exist. This absence
is due to the lack of any law regulating such business units to operate in Shariah or the absence of
further regulation by the authorities explaining the operational details of the Shariah Supervisory
Board. The absence of clear legal and regulatory rules regarding its operations is certainly not a
trivial matter. If this happens, it will certainly result in loss of public confidence to continue working
and investing with shariah business units because it is possible to ignore the principles of Shariah by
the manager of shariah business.
Secondly, members of the Shariah Supervisory Board are appointed because of their charisma
and popularity in society, not because of their scholarship in economics and Shariah banking.
Shariah, Supervisory Board members, are considered not fully understand the concept of Shariah
economy, so the quality of supervision is questioned. Shariah financial institutions operate under
different platforms with an Islamic worldview, while Islamic finance institutions also require new
types of accounting and auditing. The distinction between Shariah audits and conventional audits is
one of them lies in the aspect of Shariah which is the main basis of the implementation of Shariah
audit which is not accommodated by conventional audit. Thirdly, in general, Shariah Supervisory
Board must know the banking system since basic knowledge and debriefing before becoming
Shariah Supervisory Board have been undertaken, but the basic knowledge is not easy to understand
banking practices, especially when entering on technical issues, let alone to create a new product. In
practice, the banks explain what is related to the problems and developments of banks, after that just
discuss and resolve various banking problems.
Fourthly, many Shariah Supervisory Boards are not focused on supervision of Shariah Banks.
One of them is due to having multiple positions both in government agencies such as lecturers and
also due to activeness in other organizations. There are two issues related to the competence of
Shariah auditors, first in terms of quality is the unequal competence of Shariah auditors in the
knowledge of accounting and Shariah. Second, in terms of quantity that is still a limited number of
Shariah auditors owned by Indonesia. As a country with a majority of its population is Muslim, the
number of Shariah auditors owned is still very limited. In Indonesia alone, these audit practitioners
are still looking for appropriate rule guidelines, framework regulation, as well as the competence
and independence of Shariah auditors. Fifth, lack of advice related to product innovation and social
needs issues. The current product is only murabaha and wakalah on murabahah. Previously there
are also multi-service products but only some time. While in the issue of social good, banks only
channeled the qard al-hasan funds and have never seen any further social problems.
2.5. Optimizing the Role of Sharia Supervisory Board
Based on the above issues, it is necessary to optimize the role of the Shariah Supervisory Board
through legal reform. Firstly, the Shariah Supervisory Board of the Shariah business unit must have
a strong positive legal basis to become its operational base. It should not be just a business unit in
the form of limited liability company, which has a positive legal basis. The government needs to
immediately establish a positive legal basis related to the operation of the Shariah Supervisory
Board in other business units. The government should immediately issue arrangements for such
business units to operate in Shariah like a business unit in the form of a Limited Liability Company.
Secondly, Shariah Supervisory Board must primarily understand product knowledge in terms of
Shariah provisions inherent in a product. Ideally, the Supervisory Board of Shariah, besides
mastering Shariah principle also understood well the ins and outs of banking management. The
Indonesian Ulema Council as the supreme body responsible for the fulfillment of Shariah principles
shall determine the classification of the expertise of the parties who may be appointed to the
National Shariah Board or the Shariah Supervisory Board. For example, in Sudan, members of the
Department of Fatwa and Research and the Higher Shariah Supervisory Board are people who have
expertise in Islamic jurisprudence, law and economics (accounting). For certain professions,
certification is required to ensure competence and expertise in a particular field. For example,

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accountants and auditors are required by law to be certified as Certified Public Accountants (CPAs),
or Certified Internal Auditors (CIAs). When Shariah audits require special skills and abilities, the
competence requirements of auditors should also have a professional standard in the field of Shariah.
Therefore, Shariah auditors must also have Shariah auditor certification or Certified Shariah
Auditors to ensure that Shariah auditors are able to audit and ensure Shariah compliance. In this
case, legal reform is needed in relation to the necessity of certification issuance of the parties who
hold the positions of the National Shariah Board and Shariah Supervisory Board are really tested for
their ability (Elamer et al., 2020).
Third, rules are needed to ensure that the Shariah Supervisory Board has the expected
competence in conducting proper and effective oversight. In this case, it requires special competence
in the field of banking or insurance and other fields. In addition, structural training is necessary for
the Shariah Supervisory Board to understand the object of supervision so that the expected
supervision is more effective and correct so that the practice is following or not following the
principles of Shariah i.e. avoid maysir, gharar, riba and vanity. These requirements and training
should be conducted strictly and systematically. Similarly, facilities support the supervision of
whether related to the provision of information facilities and seminars regularly, especially to update
information and insights about Shariah banking.
Organizational behavioral experts must have a concept of competence that is understood as a
combination of skills and abilities. Ability to demonstrate stable characteristics is related to a
person's maximum physical and mental abilities. Skill, on the other hand, is a unique capacity to
manipulate an object. The world of formal or informal education has a strategic role in preparing
Shariah auditors. Furthermore, this Shariah audit can be incorporated into the curriculum of the
lecture so as to produce a double graduate of accounting and Shariah which raises the internalization
of accounting and Shariah competencies. In addition, in the course can also be equipped with a
debriefing of technical skills audit. The involvement of Shariah scholars is considered very
important to participate in promoting Shariah audits. In this case the government needs legal reform
related to the need for arrangements on the need to provide training to the Shariah Supervisory
Board about practice on the field before serving in an institution. The requirement to become a
Shariah Supervisory Board is regulated by Indonesian legislation appears to be insufficient detail,
tend to be theoretical, and has not yet reached the provision of training to the Shariah Supervisory
Board. In addition, the Indonesian government can also cooperate with both formal and non-formal
education institutions that are able to provide graduates who compete theoretically and practically to
become Shariah Supervisory Board.
Fourth, in the case of supervisory execution where it is found that the level of supervision
intensity is less, this is evident from the level of the supervisory visit of the Shariah Supervisory
Board to the Shariah Banks that are not in accordance with the rules that require minimal
supervision done every month. One of the causes is the rush of the Shariah Supervisory Board,
where most of the Shariah Supervisory Board has dual positions in other workplaces, so the Shariah
Supervisory Board is impressed as "additional or side work". Inadequate supervision can lead to
loopholes for banks to manipulate or discontinue bank activities, according to Shariah. Therefore,
effective and measurable monitoring system breakthroughs with high intensity are required. The
intensity of supervision is not sufficiently predicted with time limits, but supervision can ensure that
every transaction runs according to shariah. The position of the Shariah Supervisory Board is not an
additional but important and serious post.
Even if necessary, every transaction in a Shariah Bank must be witnessed directly by the Shariah
Supervisory Board. This requires the government to carry out legal reforms related to the intensity
of the Shariah Supervisory Board in conducting supervision of Shariah Banks that should be
supplemented to really be able to monitor in detail the transactions conducted by shariah banks. In
addition, the Indonesian government must limit the Shariah Supervisory Board not to double
positions so that it can focus on its primary task to supervise Shariah banks in compliance with
Shariah principles. In this case, Bank Indonesia, the government must immediately issue regulations
or make changes on the existing legal basis to add legal reform. To the fifth, in the case of the new
product development in Sharia Banks, the role of Shariah Supervisory Board is very minimal or can
be called none. Almost all products offered are murabaha schemes. This indicates that the

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progressive role of the Shariah Supervisory Board to oversee and provide new or innovative inputs
has not been well implemented.
In the practice setting, the Shariah Supervisory Board should understand that the needs of the
developing community should be responded by the proper product stipulation in accordance with the
definition contained in the National Shariah Board's fatwa on a product. In this context, Shariah
Supervisory Board may encounter problems of choosing service products whose solution is disputed
about its sophistication because it contains grey meanings. The expertise of the Shariah Supervisory
Board, in this case, shall be tested, whether the customer's request is denied or accepted, determined
by the depth of product knowledge in the definition of the fatwa of the National Shariah Board. The
definition of Shariah operations relates to the certainty that all products offered and transactions
executed by Shariah Banks are in accordance with the opinion of the Shariah Supervisory Board and
the provisions of the National Shariah Board. Consequently, the competence of members of the
Shariah Supervisory Board should always be honed properly. The government should be able to
encourage the Shariah Supervisory Board to update its knowledge of Shariah Bank products to keep
up with the times and not be inferior to the breakthroughs issued by conventional banks. Here the
government needs to add regulation in order that the Shariah Supervisory Board should be able to
provide innovation inputs to Shariah Banks.
Indonesia is the country with the highest number of Muslims in the world. This fact has resulted
in many Shariah Banks scattered in Indonesia. Indonesian legislation discusses Shariah Banks,
particularly with the Shariah Supervisory Board No. 21 of 2008 concerning Shariah Bank and its
implementing regulations. The term Shariah Law is a synonym of Islamic law. There are four
sources of Islamic law, namely, Al Qur’an, Hadith, Ijma, and Qiyas. Shariah Law has strict rules on
what is prohibited based on Shariah principles, among others: usury is crueller than adultery, usury
is destruction, all who are involved in usury will be cursed by Allah SWT, the perpetrators of usury
will be entered into the river of blood, usury includes signs of the coming of the Day of
Resurrection, be usury users will be threatened to become monkeys or pigs, usury is like the dangers
of shirk, the usurers are mild like a man who married his own mother, users of usury likened
someone who damages the Muslim honor, Allah will admit the perpetrators of usury, the treasure is
a little though it looks a lot, and it can hinder from the forgiveness of Allah SWT According to
theory, there are two types of corporate governance adopted by countries in the world, namely single
board and dual board. Shariah banking in Indonesia certainly uses a dual board system. What is
unique here is the existence of an institution called the Shariah Supervisory Board which specifically
oversees the implementation of Shariah principles conducted by Shariah Banks. The Shariah
Supervisory Board in Indonesia is responsible to the National Shariah Board established by the
Indonesian Ulema Council, the highest clerical organization in Indonesia. The Shariah Supervisory
Board, the National Shariah Board, and the Indonesian Ulema Council are responsible for
overseeing the implementation of shariah principles in Indonesia. This Shariah Supervisory Board
has many terms in other countries but has the same task to oversee the implementation of shariah
principles by an institution.
The Shariah Supervisory Board under the AAOIFI (Accounting and Auditing Organization of
Islamic Financial Institutions) has provided standards for Shariah Supervisory Board, composition,
and related aspects such as regulations, reports and so on. AAOFI provides an overview of the
implementation of this Shariah Standard in a guidebook published in November 2017. Below are 12
main points of Shariah Standard No. (29) AAOFI on the regulation of how fatwas can be issued in
an institution that applies the principles of Shariah: Scope of the Standard, Definition of Fatwa and
Istifta, Shari'ah Ruling on Fatwa and Istifta, Scope of Fatwa (Content), Conditions on Mufti Fatwa
Issuers), Duties of the Institution That Seeks Fatwa, Methods and Means of Fatwa, Fatwa Controls,
Text of Fatwa, Fatwa Manuscript (Document) Retreat from a Mistaken Fatwa, Morals of Fatwa
(Ethics of Fatwa Issuers). Indonesia itself has several regulations relating to this Shariah Supervisory
Board from the highest regulatory order in the form of law up to regulations issued by Bank
Indonesia and the Financial Services Authority. These laws and regulations are Law Number 21
Year 2008, Law Number 40 Year 2007, PBI. 6/17/PBI/2004, PBI no.6/24/PBI/2004, PBI no.8/3/
PBI/2006, PBI no.11/33/PBI/2009, and the Financial Services Authority Regulation Number 30/
POJK.05/2014. After reviewing the existing legislation in Indonesia, starting from the law until the
regulations issued by Bank Indonesia and the Financial Services Authority, basically the general

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description set by AAOFI has been applied in the legislation in Indonesia. No legislation is found
that is directly contrary to Shariah Standard of AAOFI.
Meanwhile, the optimization of the role of the Shariah Supervisory Board that must be
immediately carried out by the Indonesian government through legal reform are as follows: First, the
government needs to immediately establish a positive legal basis related to the operation of the
Shariah Supervisory Board to business units other than those in the form of Limited Liability
Companies. The government should immediately issue arrangements for such business units to
operate in Shariah like a business unit in the form of a Limited Liability Company. Secondly, the
government needs to immediately conduct legal reform related to the need for certification issuance
of the parties who hold the positions of the National Shariah Board, and Shariah Supervisory Board
really tested its ability. Thirdly, the government needs legal reform with regards to the need for
arrangements on the need to provide training to the Shariah Supervisory Board about practices on
the ground before serving in an institution. In addition, the Indonesian government can also
cooperate with both formal and non-formal education institutions that are able to provide graduates
who compete both theoretically and practically to become Shariah Supervisory Board. Fourth, the
government must immediately conduct legal reform related to the intensity of the Shariah
Supervisory Board in supervising the Shariah Bank that should be supplemented so that it can really
supervise in detail the transactions conducted by Shariah Banks. In addition, the Indonesian
government must limit the Shariah Supervisory Board not to double positions so that it can focus on
its main task to supervise Shariah Banks in compliance with Shariah principles. Fifth, the
government should be able to encourage the Shariah Supervisory Board to update its knowledge of
Shariah Bank products to keep up with the times and not be inferior to the breakthroughs issued by
conventional banks. Here the government needs to add in order that the Shariah Supervisory Board
should be able to provide innovation inputs to Shariah Banks.
3. Conclusion

There are several issues regarding Shariah Supervisory Board in Shariah Bank. Firstly, not all
Shariah Supervisory Boards in Islamic business units have a strong positive legal basis on which
their operations are operational. Of all the business units, only those in the form of Limited Liability
Companies have a strong positive legal basis for the operation of Shariah Supervisory Board,
namely Article 32 of Law No. 21 of 2008. Secondly, the Shariah Supervisory Board members are
appointed for their charisma and popularity in society, not because of their knowledge in economics
and Shariah banking. Thirdly, in general, Shariah Supervisory Board must know the banking system
since basic knowledge and debriefing before becoming Shariah Supervisory Board have been
undertaken, but the basic knowledge is not easy to understand banking practices, especially when
entering on technical issues, let alone to create a new product. Fourthly, many Shariah Supervisory
Boards are not focused on the supervision of shariah banks. One of them is due to having multiple
positions both in government agencies such as lecturers and due to activeness in other organizations.
Fifth, lack of advice related to product innovation and social needs issues.

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