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I would like to share my recent thoughts on the issue of Corporate Governance in Islamic financial institutions featured in the newsletter of Hawkamah, the Institute for Corporate Governance of Dubai International Financial Centre. As part of its Thought Leadership Series, Hawkamah had conducted an exclusive interview with purpose of getting information and enlightening several essential issues pertaining to corporate governance practice of IFIs across jurisdictions. Below is the excerpt of the interview (Also available at http://www.hawkamah.org/news_and_publications/newsletter/files/10.pdf)
Part of Hawkamah’s thought leadership strategy involves engaging scholars with its work to look at Corporate Governance challenges faced by the region. Zulkifli Hasan a Ph.d candidate of University of Durham, UK from Malaysia has recently joined for a three-month program and has been working on the Taskforce on Islamic Financial Institutions (IFIs). His unique research focus is Shari’ah governance and he has analyzed and looked at corporate governance of IFIs in Malaysia, GCC Countries and the UK.
What is Shari’ah governance?
In IFIs, Shari’ah governance mostly refers to the management, establishment and affairs of the Shari’ah board. The Shari’ah board, normally consists of fiqh scholars, practitioners and academicians, is an independent body entrusted with the duty of directing, reviewing, supervising the activities of IFIs for purpose of Shari’ah compliance and issuing legal rulings pertaining to Islamic banking and finance. In carrying out these duties, the Shari’ah board needs sound framework and structure to ensure its independence and effectiveness. On this basis, Shari’ah governance refers to a set of organizational arrangement as to how the Shari’ah board is directed, managed, governed and controlled that ensures the governance structure and framework is in compliance with the principles of Shari’ah. Shari’ah governance aims at ensuring the Islamicity of financial transaction and activities so as to uphold the integrity of the IFIs as inspired by all stakeholders by strengthening the institution of Shari’ah board.
What is the main issue involved in relation to Shari’ah governance system?
As Islamic finance becomes an integral part of the international financial system, it will face numerous challenges. The world has experienced numerous distinct banking crises in the past including the recent crisis which are all based on conventional banking system. In order to prove its resilience and provide for a better alternative to its conventional counterpart, the Islamic financial industry needs to ensure that it will not be a source of such financial instability.
A sound Shari’ah governance system is one of the main contributors that guarantee the stability in IFIs because the integrity of IFIs greatly depends on the status of Shari’ah compliance, the impact of products, professional competence and behaviour towards and observance of Shari’ah norms. For instance, one of the major factors of the 1986 failure of Kleinwort Benson, the first investment bank to introduce an Islamic unit trust, was due to investor’s reservations about the absence of a Shari’ah governance system. Additionally the closure of Ihlas Finance House in Turkey in 2001 was due to poor governance practice and this includes failures of management, control, strategy and regulators.
Therefore it is very important for us to identify challenges and to promote best practice in relation to Shari’ah governance system such as the independence of Shari’ah board, its operative procedures, transparency and disclosure practices, conflict of interest arrangement and competency board and executives. These efforts will bring into focus the needed measures that need to be carried out to strengthen and improve the Shari’ah Governance system in IFIs.
What do you hope to achieve in relation with Shari’ah governance system in IFIs?
IFIs in Malaysia, GCC Countries, the UK and any other part of the world have different set of frameworks. The existing Shari’ah governance framework needs further enhancement and improvement and this is important for the consolidation and sustainable of Islamic finance industry globally. I strongly believe that the need to have effective Shari’ah governance is really crucial which would then strengthen the credibility of IFIs. Failure to provide efficient Shari’ah governance would inevitably lead to serious disruptions in the market which would have dire consequences for Islamic finance industry itself. I personally hope that the future Shari’ah governance framework will be nurtured from the best practices and more importantly will be able to promote additional values to the existing corporate governance framework such as trust, fairness, transparency, credibility, responsibility through the underlying Islamic principles of beliefs (aqidah), Shari’ah and ethics (akhlaq). For this purpose, there must be continuous, thorough and intensive research on the subject of corporate governance of IFIs and I believe that in this aspect, Hawkamah is one of the institutions that can contribute something towards this aspiration.
Sultan Qaboos Grand Mosque, Muscat, Sultanate of Oman