Abstract
Sharī’ah governance in Islamic banking institutions is as essential and significant as corporate governance in modern corporate organizations. It consists of arrangements en-suring the compliance of Sharī’ah rules and principles in Islamic banking transactions. The objective of this paper is to investigate the Sharī’ah audit mechanism and the challenges faced by Islamic banking institutions after the implementation of Sharī’ah governance framework issued by the State Bank of Pakistan (SBP). Our findings suggest that although Sharī’ah audit is considered as a distinctive activity from conventional audit, still more training will be required for external audit firms and employees of IFIs. Our study also concludes that the idea of SBP Sharī’ah board is a right step towards the future conflict resolution; however, this governance framework may have certain financial implication for IFIs.