Since retiring to Malaysia, he has advised international clients on strategic and financial matters for projects in Vietnam, Malaysia and Pakistan, and has provided Islamic and conventional banking training programs for banks and other financial institutions in Asia-Pacific and the Middle East.
Corporate Governance and Shariah Compliance Islamic finance helped sustain economic growth throughout the Muslim world 1 during the Middle Ages. The last three decades witnessed its revival, notably following the first oil price shock of Beyond the surge in liquidity, its reemergence was prompted by the introduction of innovative Islamic financial products and a demand by Muslim populations for financial services compatible with their religious beliefs.
More recently, the industry has received a new impetus. It can be ascribed to an uncertain performance of western financial markets, a perception of increased risk for Gulf Cooperation Council capital in traditional financial markets, a renewed surge in oil prices, an expressed demand from Muslim communities in Western countries, and the development of managerial skills specific to Islamic financial services.
The Governor of the Bahrain Monetary Agency conveyed the sense of the roots of the IIFS when he stated that "Islamic banks have grown primarily by providing services to a captive market, to people who will only deal with a financial institution that strictly adheres to Islamic principles". To that effect, a number of countries have put in place laws and regulations for IIFS, and international bodies have been established to adapt standards applying to conventional financial services and promote harmonization of practices.
Their stability, financial performances and ability to intermediate resources will depend on stakeholders' confidence in individual institutions and the industry. A particular confidence feature in respect of Islamic financial services is the requirement of conveying to stakeholders that their financial business is conducted in conformity with their religious beliefs.
Corporate governance arrangements, internal and external to the corporate entity include structures and procedures that should provide sufficient comfort the business is conducted in accordance with stated objectives, in particular compliance with Shariah. The reliance on independent bodies reflects the currently limited role that market discipline can play in ensuring such compliance.
Hirschman contended that stakeholders generally have two ways of reacting to performance deterioration in business organizations. The other is for the stakeholder to agitate and exert influence for change from within the organization.
The potential role that these two mechanisms can play in upholding conformity with Shariah is constrained by the perceived complexity of Islamic financial instruments and their limited "commoditization". The diversity of jurisprudence on permissible transactions, and the limited disclosure of relevant and reliable financial information compound the difficulty.
In addition, market participants and other stakeholders are likely to lack sufficient knowledge of Shariah or of financial principles, or of both, to judge the transactions of IIFS.
In line with the foregoing, compliance with Shariah is primarily ensured through organs internal to the IIFS.
At the same time, a broader enabling institutional environment, sometime referred to as external corporate governance is being put in place. In the following the paper reviews in section two, prevailing internal arrangements that deal with Shariah compliance in individual IIFS; it examines the CG issues involved, and proposes measures to strengthen their effectiveness.
Section three considers external arrangements that complement the ones adopted by individual institutions to promote compliance with the Shariah. The concluding section summarizes the overall strengths and weaknesses of existing arrangements.
II Internal CG Arrangements for Shariah Compliance The approach most widely adopted currently is to establish independent bodies of knowledgeable agents. These bodies are usually internal to the institution and part of its Page 5 governance structure.
They include Shariah Supervisory Boards and Shariah review units. The following first analyzes existing arrangements and then considers options to strengthen them.
This report is often an integral part of the Annual Report of the Islamic financial institution. In practice an SSB's tasks may vary according to provisions stipulated in the articles of association of the financial institution or those stipulated by national regulators.
These often refer to SSBs' general duty to ensure Shariah compliance of transactions and, less frequently, indicate areas of competence, composition and decision-making. Table I provides an overview of practices in selected countries that have introduced guidelines or legislative references on the functioning of SSBs.
The first Page 7 concerns the independence of the SSB from management. Generally members of the SSB are appointed by the shareholders of the bank, represented by the Board of Directors.
As such, they are employed by the financial institution, and report to the Board of Directors. Their remuneration is proposed by the management and approved by the Board. The SSB members' dual relationship with the institution as providers of remunerated services and as assessors of the nature of operations could be seen as creating a possible conflict of interest.
In principle, SSB members are required to submit an unbiased opinion in all matters pertaining to their assignment.
However, their employment status generates an economic stake in the financial institution, which can negatively impact their independence. The opinions of the SSB may, for example, prohibit the bankZ.
HasanShari’ah governance in islamic financial institutions and the effect of the central bank of Malaysia Act Journal of International Banking Law and Regulation, 3 (), pp. - The workshop is exclusively designed to provide comprehensive and practical knowledge on Shariah compliance review, audit and governance for Islamic financial instutions.
It will also highlight and discuss relevant scope, scale and procedures related to the Shariah . The Shariah Governance Framework for the Islamic Financial Institutions (the Framework) is designed to meet the following objectives: (i) sets out the expectations of the Bank on an IFI’s Shariah governance.
Although Islamic financial institutions operate around the world in both predominately Muslim and non-Muslim countries, there are few states that have included provision for Shari'ah governance in their banking, insurance or capital market laws.
Date: 6th December , Venue: Kuala Lumpur - Shariah Governance, Advisory, Audit & Risk Management for Islamic Financial Institutions. the process of shariah compliance/auditing from Islamic financial institutions (IFIs) in Malaysia on the issues of standards for shariah auditing, auditors qualifications .