Toward International Best Practice for an Efficient Sharia Governance Framework in Islamic Financial Institutions in Indonesia: Regulatory Approach

The most crucial challenge faces Islamic Financial Institutions (IFIs) in Indonesia is to ensure the full compliance of the IFIs in its planning, development, and implementation of the products, services, conducts of business and activities with Sharia rules and principles. As many Islamic Finance stakeholders in Indonesia still doubting the IFIs’ compliance with Sharia. After reviewing the draft of Sharia Governance regulation issued by OJK (Indonesia Financial Services Authority) in 2023, we found that there are several points need to be addressed including to propose the obligations and requirements for IFIs that offer Islamic Products and Services to implement International based practice for an efficient Sharia governance framework as per the IFSB-AAOIFI Revised Shariah Governance Framework for institutions offering Islamic financial services in order to increase the confidence level of Sharia compliance among the stakeholders. The framework should be designed by the expert and the experienced team that experience in implementing the best practices of Sharia governance in GCC and Malaysia. The key elements of Sharia governance framework in the IFIs’ level shall contain Sharia Supervisory Board, Head of Sharia, Sharia Compliance function/unit, Sharia Risk function/unit, and Sharia Audit function/unit. Not only that, to strengthen the role of Sharia, the OJK shall have a regulation for the establishment of High Sharia Supervisory Authority (HSSA) in the OJK to harmonize the opinion related to Sharia matters among the IFIs in the regulator level. These elements are expected to perform an oversight role on Sharia matters relating to IFIs’ business activities. This paper also shows that the IFIs that adopt proper Shariah governance framework able to minimize their risk and more profitable.