Can fraud in Islamic financial institutions be prevented using high standards of shariah governance?

Abstract

Purpose

This study aims to scrutinize the modus operandi of global financial frauds in Islamic financial institutions and assesses whether those frauds can be prevented using High Standards of Shariah Governance.

Design/methodology/approach

A qualitative research methodology is deployed to conduct this study by analyzing and scrutinizing academic journals, reports, regulatory guidelines and articles.

Findings

The findings in this study show that the modus operandi ranges from bribery, forged documents, unlawful profiteering, credit limit allowance ignorance, Ponzi scheme, culprit collaboration from inside and outside the banks. This paper also argues that the centralized and high-standard Shariah governance framework better prevents fraud by providing better Shariah supervision and risk management measures.

Research limitations/implications

The observations in this study are limited to financial fraud at Islamic financial institutions that happened in the 21st century with more than $100m in financial loss or penalty.

Originality/value

This study may contribute significantly by providing insight for regulators to strengthen the Shariah governance framework in their respective countries. It also benefits Islamic financial institutions by enhancing their capacity to anticipate future financial fraud.

Citation

Swandaru, R. and Muneeza, A. (2022), "Can fraud in Islamic financial institutions be prevented using high standards of shariah governance?", International Journal of Law and Management, Vol. 64 No. 6, pp. 469-485. https://doi.org/10.1108/IJLMA-07-2022-0162