cg in islamic finance

8/3/2019 Cg in Islamic Finance

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Good Governance in Islamic Finance

By Hany Abou-El-Fotouh

The capital markets in most of the emerging financial markets are undertaking regulatory

reforms with a view to making capital markets more attractive for domestic and foreigninvestments. Islamic financial institutions are taking serious initiatives to, among others;

ensure higher transparency and accountability within the financial markets, particularlyregarding publicly traded companies. For that reason, good corporate governance is

essential ingredients for the development of a vibrant and sound Islamic finance industry.

The concept of corporate governance was proposed as a result of increasing awareness onthe importance of the need to protect the rights of all stakeholders, including minority

shareholders. Whilst the term corporate governance is relatively new, the concept is

essentially not strange to Islam.

The term corporate governance has gained importance only in the last two decades.Although there are a large number of documents and works about this subject, its effectshave not yet been fully spelled out.

Corporate governance has been defined in many ways;

The Organization for Economic Cooperation and Development (OECD) defines

corporate governance as set of relationships between a companys management, its

board, its shareholders and other stakeholders.

The UK Combined Codes definition is Corporate governance is the system by which

Companies are directed and controlled..

Regardless of the various definitions, corporate governance has mainly to do with

transparency, accountability and fairness.

Good Corporate Governance:

Good corporate governance is more than a good idea. It encourages flow of investments,lowers the cost of capital, and supports strong capital markets. Corporate governance

represents structures and processes that entail individuals carrying out business whilst

exercising professional discretion in a way that exhibits integrity, judgment, andtransparency. These principles are essential to Sharia and Islamic finance.

The OECD Principles of Corporate Governance focus on:

Accountability: Ensure that management is accountable to the Board and the Board isaccountable to shareholders;

Fairness: Protect shareholders rights; treat all shareholders - including minorities

equitably and provide for effective redress for violations;

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Transparency: Ensure timely and accurate disclosure on all material matters, i.e. the

financial situation, performance and ownership;

Responsibility: Recognize the legal rights of stakeholders.

Teachings of Shariabind fairness and honesty to the main principles of any conduct

including transactions. We may strongly argue that good corporate governance isconsistent with Sharia-compliant financial conduct which prohibits fraud,

embezzlement, misstatement and other patterns of dealings that cause abuse, injustice and

gharar(risk, uncertainty, and hazard).

Is Islamic Corporate Governance Model Different?

The question remains: How corporate governance of an Islamic financial institution is

different from a conventional counterpart? The Islamic model of corporate governance

would first look at the transactional structure to see whether the transaction involveselements that invalidate the gains or profits. The conventional governance practices do

not perform a similar function (except for the related party, self-dealing etc. transactions).

On the other hand, it ensures that the transactions do not contravene the corporate code of

business ethics and cross the line that the law has drawn.

Since Sharia represents a major source of legislation in most of the Muslim countries, it

plays an important role in the legislative and regulatory development in such countries. Itis not unlikely that some Muslim countries would rely on Sharia for possible future

implementation of corporate governance, whether in the form of any code or regulations.

For example, Sharia provides the proper platform for codifying the fiduciary duties andrelated ethical practices. These practices are the foundation of principles of good

corporate governance as outlined in OECD Principles of Corporate Governance.

Basically we strongly may conclude that modern corporate governance practices areconsistent with Sharia.

The OECD Corporate Governance Principles emphasize more disclosures and rights to

shareholders. Capital markets ensure strong enforcement of such rights. Hence,protection of minority interest is considered crucial for stronger capital markets. For that

reason legal protections to the minority shareholders and their strong enforcement

promote the local and international investors to invest in the emerging markets.

Sharia has mandated similar or higher importance to such issues for doing business. Like

modern governance practices, the Islamic corporate governance modle requiresapplication of modern and higher standards of minority protection against expropriation,

more disclosures and transparency and effective accountability.

With this outlook and as Sharia does not indicate any upper limit for better regulation,the contemporary drive for achieving higher standards in corporate governance do not

appear to be conflicting with Sharia. Consequently, the Islamic financial institutions

would have no problem in meeting the modern corporate governance practices.

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Who Are the Major Stakeholders In Islamic Financial Institutions?

There are a number of key players and stakeholders in Islamic Financial Institutions:

Shareholders: they would be interested in protecting the value of their equity in the

financial institution and obtain a good rate of return.

Demand Depositors: they would be interested in guaranteeing the valued of theirdeposits and have ready access to their funds whenever they would like to do so.

Investment Depositors: Murabaha contract holders with Islamic banks through which

they supply funds while banks would invest them properly. They would be interested in

protection of principal and obtain a good rate of return.

Regulators: Having legal power to monitor the daily activities of Islamic financialinstitution, they would be interested in preventing systemic problems and crises,

protection of quality of financial products and efficiency of the financial system.

Financial Market Authorities: They set minimum standards for transparency and

disclosure and would be interested in having efficient financial market.

Islamic Finance Community: Would benefit from standardizing financial Islamic

products, contracts and practices.

The public: would be interested in obtaining quality financial services at competitiveprices.

In view of the above, in order to have a good corporate governance mode, the board ofdirectors, management as well as the auditors of an Islamic financial institution should

perform their professional duties with the objectives of satisfying the needs of the

shareholders and Allah as well. Corporate governance aims to enhance accountability,

transparency and trustworthy. These values are crucial in Islam.

The Sharia Supervisory Board Role in Corporate Governance

Part of the internal governance structure of the Islamic financial institution and appointed

by shareholders of the institution. Its main function is to review and ensure that alltransactions, contracts, products and applications relating to the Islamic financial

institution comply to Sharia rules and principles with the specific fatwa, rulings and

guidelines that have been issued

In order to establish a good corporate governance framework, the Sharia Supervisory

Board may have to extend their jurisdiction to cover governance issues of this nature.

Conclusion

According to The Islamic Financial Services Board (IFSB) there is no single model ofcorporate governance that can work well in every country; each country or even each

organization should develop its own model that can cater for its specific needs and

objectives.

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From the standpoint of Islam, deeds are more significant than sheer words, slogans,

rhetoric or lectures, as highlighted in one verse of the Quran: "Why do you say that

which you do not do?. Corporate governance should be practiced in the form of deedsand actions. Only when actions speak louder than words, can a good corporate culture

come forward and protect the welfare of all stakeholders in today's corporate world.

About The Author:

Hany Abou-El-Fotouh is Chief of Staff & Group Board Secretary, CI Capital Holding - the

investment banking arm of Commercial International Bank which is the largest private bank in

Egypt . He provides advice and direction to the Board and management with respect to corporate

governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENA

region. Founder of the Middle East Compliance Officers' Forum (MECOF), he has been honored

for his work in promoting compliance culture and awareness in the MENA region. He was also

voted as Corporate Governance Officer of the Year (2011).

Hany writes articles to different newspapers and journals on a variety of subjects. He is a publicspeaker and professional trainer. Previously, he worked in various senior positions in leading

banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque Saudi Fransi

among others.

Hany is a certified member of the Association of Certified Anti-Money Laundering Specialists

(ACAMS) and Certified Director by Egyptian Institute of Directors.

http://www.linkedin.com/in/ hanyfotouh

[email protected]

Tags: ISLAMIC FINANCE, BANKING, GOVERNANCE, BOARD,

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