Shariah Audit in Islamic Financial Institutions (IFIs): A Literature Review

Abstract

Purpose: The objective of this paper is to conduct an extensive literature review on Shariah Audit practiced in Islamic Financial Institutions and finding the research gap in the existing literature. Methodology: The study is based on secondary data. The theoretical framework used in this paper is the Islamic agency theory. Shariah Audit is such a tool that can mitigate the agency problem to a great extent and thereby can ensure good governance. Findings: Shariah Audit provides higher level of assurance by following the rules and regulations of Islamic Shariah. Shariah is the overarching framework for Shariah Audit, which ensures all the activities of the Islamic Financial Institutions (IFIs) comply with Shariah. Where the conventional auditors have limited liability towards investors and creditors, Shariah Auditors have more accountability to all the stakeholders including Allah (SWT), as Muslims believe that their deeds are being watched by the Allah (Muraqabah concept). Thus, the Shariah Audit can ensure good governance. Although there are some challenges in the implementation of Shariah Audit, designing an appropriate Shariah governance framework can resolve the issues. Limitations: The study is based on secondary data only. Primary data may provide more practical insight in the field studied here. Practical Implications: The study can help the regulators to institutionalize this specialized filed and to develop Shariah governance framework. Originality/Value: This is the only study that summarizes all the previous literatures related to Shariah Audit including developing country perspective. The study has suggested the avenue for further research in this area.