Date post: | 04-Jun-2018 |
Category: |
Documents |
Upload: | syedtahaali |
View: | 222 times |
Download: | 0 times |
of 21
8/13/2019 IDB Lecture Series IFSB
1/21
GUIDING PRINCIPLES ON CORPORATE
GOVERNANCE OF INSTITUTIONS OFFERINGISLAMIC FINANCIAL SERVICES (IIFS):
An Insight of the Exposure Draft
Madzlan Mohamad Hussain
Project Manager
IDB Lecture Series
23 May 2006
8/13/2019 IDB Lecture Series IFSB
2/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
2
PRESENTATION OUTLINE
Defining CG and stakeholders in thecontext of institutions offering Islamic
financial services (IIFS)
Corporate Governance (CG) issues
specific to IIFS
An insight of the Exposure Draft of the
IFSB Guiding Principles of CG for IIFS
(ED3)
8/13/2019 IDB Lecture Series IFSB
3/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
3
DEFINING CORPORATE GOVERNANCEA defined set of relationships between a companysmanagement, its Board of Directors, its shareholders and
other stakeholders which provides the structure throughwhich:
the objectives of the companyare set; and
the means of attaining those objectives and monitoring
performance are determined.
In the context of IIFS, good CG should encompass: a set of organisational arrangements whereby the actions
of the management of IIFS are aligned, as far as possible,
with the interests of its stakeholders;
provision of proper incentives for the organs of
governance such as the Board of Directors, SSB andmanagement to pursue objectives that are in the interests
of the stakeholders and facilitate effective monitoring,
thereby encouraging IIFS to use resources more
efficiently; and
compliance with Islamic Shar`ahrules and principles.
8/13/2019 IDB Lecture Series IFSB
4/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
4
DEFINING STAKEHOLDERS
BCBS paper:
Stakeholders include employees, customers,suppliers and the community. Due to the unique
role of banks in national and local economies and
financial systems, supervisors and governments
are also stakeholders [of banks].
From Islamic financial services perspective:
Community should particularly connotes theMuslim Ummah.
Customers does not refer to conventionaldepositors and borrowers but to Investment
Account Holders (IAH) and Current Account
Holders.
8/13/2019 IDB Lecture Series IFSB
5/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
5
ISLAMIC VIEWPOINTS ON IMPORTANCE
OF GOOD GOVERNANCE
The concept of vicegerency - Accountability to
God as well as to others. Ethics of IIFS are set
out not only in contracts and residual contracts
but ultimately accountability to God.
Amongst the code of ethics set out in the
Quran: Honest fulfilment of all contracts (Al-Midah:1)
Prohibition against betraying any trust (Al-Anfl:27)
Prohibition against deriving income from cheating,
dishonesty or fraud (liImrn:29)
Prohibition against bribery to earn unfair advantage (Al-
Baqarah:188)
Prohibition against concealing evidence (Al-Baqarah:283),
for e.g. to manipulate prices
8/13/2019 IDB Lecture Series IFSB
6/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
6
SPECIFICITIES OF IIFS
In addition to general banking matters, organs of
governance of IIFS also need to attend to: Shar`ahcompliance
Ethics & social responsibility (in line with the
concept of vicegerency)
Interests of IAH, especially unrestricted Potential conflicts of interest between shareholders
and unrestricted IAH especially where the funds
are commingled - issues of asset allocation & riskappetite
Transparency in financial reporting, e.g. calculation
of Murib share (where funds are commingled)and profit distribution
8/13/2019 IDB Lecture Series IFSB
7/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
7
CORPORATE GOVERNANCE ISSUES
IN IIFS Protection of Investment Account Holders (IAH)
Like investors in Collective Investment Schemes (CIS), IAHare exposed to potential conflict of interest with the
management of an IIFS, which may look after the interest of
shareholders at the expense of IAH.
As in the case of securities regulators, this requires more
emphasis on fiduciary responsibility or establishment of
detailed regulations designed to monitor potential conflicts of
interest.
Furthermore, adequate disclosure of relevant information
about the IIFSinvestment objectives and policies, operationalguidelines that govern the relationship between the IIFS and
IAH, etc. should be made available. Albeit IAH may have no representation in the organs of
governance such as the Board of Directors or Shar`ahSupervisory Board, they have every right to expect
accountability and transparency on investment made on their
behalf.
8/13/2019 IDB Lecture Series IFSB
8/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
8
Shar`ahSupervisory Board (SSB) SSB is a specific organ of governance. It should be
concerned with monitoring Shar`ah compliance and notjust issuing fatwas.
Since SSB members may lack monitoring skills, auditors and
audit committee should act in concert to assist SSB.
Transparency in financial reporting The current financial reporting practices of IIFS do not
provide adequate information to their IAH regarding the
revenues and expenses accruing to their particular
investment fund
IAH is rightfully entitled to transparency, e.g. calculation ofMuribshare and profit allocation
CORPORATE GOVERNANCE ISSUES
IN IIFS (2)
8/13/2019 IDB Lecture Series IFSB
9/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
9
CURRENT STATUS OF CG AWARENESS
AMONGST IIFS (1)IDB Survey (2002) highlights:
Majority of the regulators of IIFS share the view that thereis no difference between the risks involved in thebusiness of IIFS and conventional banks. This perceptionmay explain why for most regulators there is no
justification to establish separate regulatory regime and
supporting institutions for IIFS. The status of corporate governance in IIFS is influenced
by internal and external factors.
Majority of the IIFS (57.1%) are good in their overallcorporate governance status. 14.3 % are excellentwith21.4% are fair and only 7.1% are poor in their overallcorporate governance status.
[Note: This may be a rather flattering characterisation. Itdepends on the criteria for this judgement. The IFSBs criteriaare surely more demanding.]
8/13/2019 IDB Lecture Series IFSB
10/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
10
CURRENT STATUS OF CG AWARENESS
AMONGST IIFS (2)IFSB Survey (2004) highlights:
Strong awareness amongst IIFS on theimportance of good governance.
Majority IIFS offer only unrestricted IA, and evenfor those offering restricted IA they do not address
the IAHsrisk appetite. Smoothingof returnshas not been proven as a
widespread practice, however it is appropriatethat the practice be accepted with caution in orderto avoid it being used to mislead the IAH on the
performance of the IA. SSB have become almost a compulsory feature of
Islamic finance. However their cost and efficiencycontinue to be a major concern.
8/13/2019 IDB Lecture Series IFSB
11/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
11
SCOPE OF THE ED (1)
CG aspects already covered OECD BCBS IOSCO FRC/FSA
Companies
Directors/The Board
Remuneration/Compensation
Accountability and Audit
Relations with Shareholders
Shareholders
Rights and Key functions
Equitable Treatment
Other Stakeholders
Employees/Manager
Regulator/Supervisor
Disclosure and Transparency
The issue of IIFS accountability and transparency to its customers,
particularly IAH , as well as Shar`ahcompliance, have not been covered or
contemplated in any of the above documents.
Filling in the Gaps
8/13/2019 IDB Lecture Series IFSB
12/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
12
The ED aims to cover these aspects:
Information environment and transparency: specifying and enforcing appropriate disclosure
requirements
fostering auditors independence and enforce therelevant and applicable auditing standards
the focus is very specifically on protection of theIAHs interests not to overlap with generaltransparent reporting which would be covered bythe Transparency and Market Discipline Standard
Organs of governance:
safeguarding interests of IAH, especially theunrestricted
adequate monitoring of Shar`ahcompliance
SCOPE OF THE ED (2)
8/13/2019 IDB Lecture Series IFSB
13/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
13
General Governance Approach in IIFS 1
Principle 1.1IIFS shall establish a comprehensive
governance policy framework which
sets out the strategic roles andfunctions of each organs of
governance and mechanisms for
balancing their accountabilities to
various stakeholders.
8/13/2019 IDB Lecture Series IFSB
14/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
14
General Governance Approach in IIFS 2
Principle 1.2IIFS shall ensure that the reporting of
their financial and non-financial
information meets the requirements of
internationally recognised accountingstandards which are in compliance with
Shar`ah rules and principles and are
applicable to the Islamic financialservices industry as recognised by the
supervisory authorities.
8/13/2019 IDB Lecture Series IFSB
15/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
15
Rights of IAH 1
Principle 2.1IIFS shall acknowledge the IAHsrightsto monitor the performance of their
investments and the associated risks,and put into place adequate means to
ensure that these rights are observed
and exercised.
An example of such means is the proposed Governance
Committee.
8/13/2019 IDB Lecture Series IFSB
16/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
16
Rights of IAH 2
Principle 2.2IIFS shall adopt a sound investment
strategy which is appropriately aligned
to the risk and return expectations ofIAH (bearing in mind the distinction
between restricted and unrestricted
IAH), and be transparent in smoothing
any returns.
8/13/2019 IDB Lecture Series IFSB
17/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
17
Sharia Compliance 1
Principle 3.1IIFS shall have in place an appropriate
mechanism for obtaining Shar`ah
rulings, application of fatwas andmonitoring of Shar`ah compliance inall aspects of their products and
operations.
8/13/2019 IDB Lecture Series IFSB
18/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
18
Sharia Compliance 2
Principle 3.2
IIFS shall comply with the Shar`ahrules and principles as expressed in
the rulings of the IIFSs Shar`ahscholars. The IIFS shall make these
rules and principles available to the
public.
8/13/2019 IDB Lecture Series IFSB
19/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
19
Transparency of Financial Reporting
Principle 4.1
IIFS shall make adequate and timely
disclosure to IAH and the public, ofmaterial and relevant information on
the investment accounts that they
manage.
8/13/2019 IDB Lecture Series IFSB
20/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
20
OUTCOMES EXPECTED FROM THE ED
SPECIFICALLY,
Adoption of OECD and BCBS recommendations willimprove IIFS Board and Directors andManagementsawareness of the importance of goodgovernance
Due recognition of IAHsrights and risks as residualclaimants will lead to appropriate protection of IAH
More professional approach for Shar`ahcompliancewill mitigate compliance and reputational risks of IIFS
Increased transparency in financial and non-financial
reporting by IIFS will inculcate better risk
management structure and discipline culture
amongst IIFS
8/13/2019 IDB Lecture Series IFSB
21/21
Presented at the IDB Lecture SeriesCopyright reserved IFSB 2006
23 May 2006
21
THANK YOU FOR LISTENING
Contact details:
E-mail: [email protected]/[email protected] Website: www.ifsb.org
mailto:[email protected]/mailto:[email protected]://www.ifsb.org/http://www.ifsb.org/mailto:[email protected]:[email protected]/