Article by Hamad020211- True Bnking

8/7/2019 Article by Hamad020211- True Bnking

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CORPORATE GOVERNANCE FOR ISLAMIC

FINANCIAL INSTITUTIONS

INTRODUCTION

In the Modern day world, Corporate Governance has gained lots of importance, it

refers to the set of practices, systems and policies and laws affecting the way a

body corporate is directed, administered or controlled. Corporate governance

defines the relationships among many players involved and the goals which a

company is pursuing. However the prime stakeholders are the common

shareholders instead of the board of directors and the management while some

stakeholders interested indirectly are employees, suppliers, customers, banks and

other lenders, regulators, the relevant business environment even the community

at large, whose role cannot be ignored.

Corporate governance aims at promoting fair corporate practices, transparency and

accountability. The corporate governance structure specifies the rights and

responsibilities of the board, managers, and shareholders with other stakeholders. It

spells out the rules and procedures for making corporate decisions which also

measures the ability of an organization to mitigate strategic risks.

A strong structure of Corporate Governance aims at accountability (both formal and

informal) of the senior management in a body corporate (or a trust) to the larger

number of stakeholders/shareholders by setting up the entire network or

procedures defining the relations shown by the corporate sector with relatedconsequences to the society at large supported by a system of legal and regulatory

mechanism.

STRUCTURE OF CORPORATE GOVERNANCE

The role of the board of directors is to provide entrepreneurial leadership for thecompany in a prudent manner providing effective controls enabling themselves toassess and manage the risks. It is the responsibility of the board to set thecompanys strategic aims, ensuring the provision of the necessary financial and

human resources for the company to meet its objectives and review managerialperformance. The board have to set the companys values and standards byensuring the understanding that its obligations to its shareholders are met.

Corporate Governance requires that, every company should be headed by an

effective board/management which is collectively responsible for the success of the

company making their decisions objectively in the overall interest of the company.


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How Good CORPORATE GOVERNANCE (CG)?

While examining the impact of corporate governance on economic development,

many of the modern day researchers have identified some empirical evidences

which brought positive effects of good CG on the performance of an institution

which include the following:

Lenders and other investors are more likely to extend financing to a businessif they are comfortable with its CG arrangements, including the clarity andenforceability of creditor rights.

Good CG tends to lower the cost of capital, by conveying a sense of reducedrisk that translates into shareholders readiness to accept lower returns.

Good CG is proven to lead to better operational performance.

It reduces the risks of contagion from financial distress.

Reduced the internal risk through raising investors perception of risk andwillingness to invest, it increases the robustness and resilience of firmstowards external shocks.

Due to the fiduciary nature of their activities, financial institutions are considered as

trustees, entrusted with the assets of investors. It therefore, becomes obligatory for

banks to act in their best interest when holding, investing, or otherwise handling

their property. It is difficult for an outsider to control or evaluate bank managers as

they are not able to influence boards, alter the risk composition of assets, or hide

information on loan quality. The general operations and structure of the banking

system inevitably reduces the effectiveness of a competitive environment which by

itself ensures good CG.

RESPONSIBILITIES of the BOARDS and RIGHTS ofSHAREHOLDERS

The board have two sets of functions as prescribed by the Company Law:

First, they are legally responsible for formulating and implementing businessstrategy on behalf of the entire shareholders to ensure all business activities beingconducted in a manner, which complies with company law and other legalrequirements.

Second, the board is the primary institutional mechanism by which the shareholders

render for the executives appointed to manage the assets on their behalf beingaccountable for their stewardship.

A system of accountability and disclosure has two essential elements i.e.shareholders rights and information disclosure.

Now, the rights of shareholders consist of the right to vote at the Annual GeneralMeeting (AGM) and any other shareholder gatherings that may be called throughout


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the year to appoint and/or dismiss from office any or all directors and to determinedtheir conditions of employment, term of office, and remuneration of the board.

The board have to maintain a balance among executive and non-executive directors(and in particular independent non-executive directors) so that no individual orsmall group of individuals can dominate boards decision taking.

CORPORATE GOVERNANCE and the VALUE for

SHAREHOLDERS

There is no argument that the foremost objective of CG arrangements for

conventional businesses is the protection of shareholders rights. The fundamental

question of corporate governance is how to assure financiers that they get a return

on their financial investment. While the reference to finance and financiers may

also include creditors, the primary focus of their review is on shareholders

protection. Indeed the distinction of management and finance is targeted at theseparation of ownership and control. Thus, the major feature of shareholders value

based CG is the design of incentives that lead managers to pursue the maximization

of shareholders wealth.

CORPORPORATE GOVERNANCE in IFIS

Stakeholders value is central to every Institution including the Islamic Financial

Institutions (IFIs), and is generally incorporated in mission Statements if we analyze

the selection of mission statements of IFIs. However, all IFIs focus on two broad sets

of objectives:

(a) Compliance with Shariah principles, and

(b) Provision of excellent services.

The Compliance with Shariah falls into the following three

categories.

i. First being the most widely understood, includes the conduct of financialbusiness in accordance with the principle of prohibition of Ribaa and Gharar.

ii. Second particularly covers the furthering of social objectives of Islam in theshape of promotion of social benevolence by providing the services aimed at

reviving social solidarity organized on the basis of mutual benefit.iii. Third aspect of Shariah compliance is the development and promotion of an

integrated Islamic financial system which must be covering all the new trendsin the modern economy within the rules of Islamic Shariah.

These Islamic Shariah rules make up a set of Shariah objectives aimed at

providing the excellent services to the society, which can be considered as under:


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a) Service to the community as a whole, referring primarily but not

exclusively to the Muslim community (Ummah).

b) Promoting the interests of all parties related including shareholders,

depositors, and employees; regardless of their religion.

c) Developing the professional and ethical qualities in their management and

staff so as to facilitate the above two as a permanently acceptable practice.

CONCLUSION:

Corporate Governance arrangements by the IFIs are mostly modeled along those of

the conventional corporate bodies or regular shareholdings, though their explicit

mandate is to promote social welfare and pursue stakeholders value. This

configuration leads to a distribution of rights and responsibilities that essentially

leaves control with shareholders. The most notable variation for IFIs in Corporate

Governance structure is the presence of a Shariah Board of Scholars and a

Shariah Review Committee which jointly ensure compliance with the Islamic law.

The conventional corporate governance does not bother about the Haram business

(prohibited by Quran and Sunna). Shariah Compliance clearly prohibits the trade of

alcohol, tobacco, gambling (maisir) and pork products and elements of gharar

(uncertainty), riba (usury, all kind of interest), betting(speculation) which is not

prohibited by the conventional corporate law.

Shariah compliance decisions affect all IFIs stakeholders with true spirit of Quran

and Sunnah though Fatawa by the Shariah Supervisory Boards and the Review

Committees is vital at all levels considering the peculiar aspects of the transactions.

In addition, all and external stakeholders have their respective rights and say in

governance structures, which will call for effective training and spirit from all the

staff in these institutions, making the IFIs clearly the distinctive from the

Conventional Banking and Financial Institutions.

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Article by Hamad020211- True Bnking