The issuance of the Financial Services Authority Regulation, or Peraturan Otoritas Jasa Keuangan (POJK) No 2 of 2024 and its implementation guidelines in the Financial Services Authority Circular Letter or Surat Edaran Otoritas Jasa Keuangan (SEOJK) No. 15/SEOJK.03/2024 mark a crucial turning point for the Shariah banking sector in Indonesia. NAJIM NUR FAUZIAH and HABIBULLAH analyze.
As an implementation of the mandate under Law No 4 of 2023 on the Development and Strengthening of the Financial Sector, or Undang-Undang Pengembangan dan Penguatan Sektor Keuangan (UU P2SK), this new regulatory framework establishes comprehensive and modern Shariah governance standards for both Shariah commercial banks (Bank Umum Syariah) and Shariah business units (Unit Usaha Syariah).
The core aspect of this new regulation is the shift in the role of Shariah oversight from being a mere paper formality to becoming an active key element that shapes the bank’s policy direction. Previously, Shariah oversight was often passive, serving only to grant final stage approval when a product was ready for launch.
Mollah & Zaman (2015) prove that the Shariah supervisory board (SSB) has a significant positive impact on Shariah bank performance only if they actively exercise a supervisory role, whereas the impact becomes insignificant if they function merely as advisers. The need for this shift is further reinforced by Muhfiatun’s (2023) findings on Shariah banks in Indonesia, which indicate that the previous function of the SSB indeed tended to focus more on advisory rather than supervisory roles.
Through the latest POJK and SEOJK, Shariah oversight is now required to be involved from the outset in the entire planning and management process of the bank.
By aligning national regulations with international standards, such as the Islamic Financial Services Board (IFSB) Standard No 10 and the General Guidelines for Indonesian Sharia Entity Governance, the OJK aims to emphasize that Shariah compliance is no longer a mere paper formality. Shariah compliance has now become the fundamental foundation for maintaining bank credibility, managing risk and enhancing public trust.
Redefining the role of the SSB
The most fundamental shift in POJK 2/2024 and SEOJK 15/2024 lies in the strengthening of the SSB’s position. Under this new regulation, the SSB is now officially aligned with the board of commissioners and the board of directors as primary bank executives (key parties). This alignment reinforces that Shariah compliance holds equal importance with business decisions and financial management.
In addition to elevating the SSB’s status, this regulation directly addresses structural challenges frequently observed in the global industry. Grais & Pellegrini (2006) identified that SSBs often face potential conflicts of interest because they are appointed by the management they oversee, while also suffering from a lack of dual competency, where scholars proficient in both Fiqh and modern banking operations are rare. Although POJK 2/2024 has raised the position of the SSB to be on par with bank leadership, the level of SSB independence in practice still faces real challenges. As long as the remuneration schemes and appointment mechanisms for the SSB remain technically tied to the general meeting of shareholders and management recommendations, the potential for conflicts of interest is not entirely eliminated.
Therefore, SSB independence cannot merely exist on paper within the organizational structure; it also requires guaranteed freedom from financial influence by management. Only then can the SSB remain truly objective and possess the courage to make firm decisions if any board of directors policy deviates from Shariah principles. Addressing this issue, POJK 2/2024 establishes requirements for independence, cross-disciplinary competency and more explicit and binding SSB authorities: ranging from approving new products and halting activities that deviate from Shariah principles to providing direct input regarding the bank’s strategic policy direction.
Synergy of the three Shariah governance functions
To ensure operational effectiveness of supervision, POJK 2/2024 and SEOJK 15/2024 mandate banks to establish three primary supporting functions for the SSB including Shariah compliance, Shariah risk management and internal Shariah audit. These three functions operate at the daily operational level to identify potential risks, test compliance and submit periodic reports to the SSB as the basis for decision-making.
In addition to internal oversight, this new regulation introduces a mandatory external Shariah review conducted by an independent public accounting firm or public accountant. Grais & Pellegrini (2006) emphasize that combining an internal audit focused on daily operations with an independent external review is the most effective mechanism for objectively assuring Shariah compliance. The involvement of an independent party not only provides a neutral assessment but also reinforces the legitimacy of the SSB’s supervisory results in the eyes of the public and investors.
However, strengthening this governance architecture comes with the consequence of increased compliance costs including fair remuneration adjustments for the SSB alongside their increasingly complex duties and responsibilities, as well as substantial operational burdens. While large-scale Shariah commercial banks can accommodate this relatively easily, for Shariah business units or small-scale Shariah banks, the mandatory establishment of these three specialized functions and external audits poses a unique challenge, particularly regarding budget allocations and the fulfillment of human resources possessing dual competencies in Shariah compliance, risk management and audit.
Strategic implications
The implementation of POJK 2/2024 and SEOJK 15/2024 brings significant strategic impacts for both Shariah commercial banks and Shariah business units:
• Shariah commercial banks: This new governance framework elevates the bank’s credibility standards at the global level. By adopting international standards such as IFSB 10, Shariah commercial banks gain stronger competitiveness, higher transparency and greater appeal to international investors and financial partners.
• Shariah business units: This regulation serves as a highly crucial milestone in preparing for the spin-off process into an independent Shariah bank. Strengthening the three governance functions and the role of the SSB ensures that Shariah business units already possess a mature operational foundation and Shariah compliance culture before operating independently.
Overall, this regulatory reform not only clarifies the supervisory structure but also serves as a primary catalyst for healthier, more accountable and sustainable growth within Indonesia’s Shariah banking industry.
Conclusion and recommendations
The issuance of POJK 2/2024 and SEOJK 15/2024 has successfully elevated Shariah governance standards in Indonesia. By placing the SSB as part of the primary executives and strengthening its three supporting functions, this regulation ensures that Shariah compliance serves as a main pillar in safeguarding public trust and industry sustainability.
To ensure the optimal implementation of this new regulation, the following constructive recommendations are proposed for stakeholders:
• Shariah banking: Management needs to update bank governance policies, guidelines and procedures by incorporating key points from POJK 2/2024 and SEOJK 15/2024, while continuously enhancing the technical capacity and understanding of personnel within the Shariah compliance, risk management and internal Shariah audit functions. Additionally, adjustments to daily operational systems must be carried out promptly to ensure seamless coordination flows with the SSB.
• SSB: SSB members are required to continuously update their understanding regarding developments in modern financial products, fintech and banking risk management. This is essential to enable the SSB to provide strategic, solution-oriented input rather than mere administrative approval.
• Regulator (OJK): OJK is expected to provide periodic guidance and interactive discussion forums during this regulatory transition period. This will assist the industry in addressing technical field challenges swiftly and accurately.
Through collective commitment from all parties, this governance reform will serve as a solid milestone in establishing an Indonesian Shariah banking industry that is excellent, highly competitive and globally trusted.
Najim Nur Fauziah is a postgraduate student at IIUM Institute of Islamic Banking and Finance. She can be contacted at najimnur863@gmail.com. Habibullah is member of the Shariah supervisory board of Permata Bank. He can be contacted at habib.rsd@gmail.com.
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