The Organization for Economic Cooperation & Development (OECD) defined Corporate Governance as, “Corporate Governance, CG, involves a set of relationships between an entity’s management, its Board, its shareholders & other stakeholders. CG, also provides the structure through which the objectives of the entity are set, and the means of attaining those objectives and monitoring the performance. Good CG, should provide proper incentives for the Board & management to pursue objectives that are in the interests of the entity, the shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently”.
This definition of OECD was adopted by Basel Committee for banking business and many other international organizations including the World Bank. It almost, becomes the most appropriate definition we are pursuing in our endeavors to implement the corporate governance principles.
With reference to the growing Islamic Finance, I would like to mention that, all Islamic finance entities including Islamic banks and Islamic insurance companies (Takaful \ Taawun) are guided by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) rules. Such rules, are covering the necessary details for the Corporate Governance principles for Islamic Finance.
The 1st principle of AAOIFI for Corporate Governance, gives the guidelines for the appointment of the Sharia Board, their number, remuneration and relevant jurisdiction in Islamic Finance organizations. The task of the Sharia Board is to make sure that Islamic Finance organizations are performing their duties as per Sharia rules, directives & instructions.
The 2nd principle of AAOIFI, gives the guidelines for the Superior Sharia Supervision for Islamic Finance organization. The Sharia Supervision role, is to make sure that the duties performed or to be performed are in complete compliance to Sharia rules. This constitutes the primary duty of the Sharia Supervision.
The 3rd principle of AAOIFI, gives guidelines for the Internal Sharia Supervision Dept. in each Islamic Finance organization. This Dept., links the relation between the Islamic Finance organization and the Superior Sharia Supervision and makes sure that the daily business is not violating Sharia.
The 4th principle of AAOIFI, gives the guidelines for the establishment of the CG Committees. The Board in each Islamic Finance organization shall establish such committees, as the audit & governance committee, the executive committee, the remuneration committee … etc..
The 5th principle of AAOIFI, gives the guidelines for the independence of the Sharia Boards.. The independence here is a major yardstick that gives the required creditability for the Sharia Board.
There are other Corporate Governance principles adopted and issued by AAOIFI, and they are to be followed carefully and maintained by the Islamic Finance organizations.
In this connection and with respect to Corporate Governance principles, we could easily say that, Islamic Finance, is similar-to-non when it comes to the (relatively new) issue of corporate governance. Islamic Finance is labeled with the notion and the obligatory demand that it must be complying totally and completely satisfying all principles embodied in the glorious sharia rules.
If any Islamic finance activities are not in total compliance to such “Devine” rules, for any reason whatsoever, they will not be accepted nor termed as Islamic Finance business.
Compliance & total adherence to the glorious rules and principles of Sharia is a basic cornerstone rule in each and every transaction or type of business that is classified as Islamic Finance. This golden basic rule, calling for Sharia total compliance denotes that all Islamic activities are ranking in the same line with corporate governance rules. This, we could say, is due to the fact that the newly adopted corporate governance rules call for steady, clear and transparent rules to be applicable all through so as to achieve the best required end-results for all concerned parties including, among others, the stakeholders.
In all and every transaction that relates to Islamic Finance, the “Sharia Advisory Board” supervising such entity is strictly under a lawful obligation to confirm that the concerned transaction is acceptable and does not nor violate Sharia rules & directives. The concerned transaction, will only take its legal identity and the “halal” label after getting the required “go-ahead” as the primary acceptance & final approval from the Sharia Advisory Board. This kind of legitimacy process of “halal process” is not available nor required vis-a-vis other transactions i.e. non-Islamic transactions (conventional banking transactions).
The approval and or acceptance of the transaction by the “Advisory Sharia Board” is a kind of a certificate or a legitimate “pass-way” to process the deal since it complies to the required norms of Sharia rules (Islamic jurisprudence). This “pass-way”, as it is, is an approved certificate of full transparency. In other words, this certificate, signifies that such transactions are fully transparent to the acceptable level as required by the corporate governance prevailing rules. Thus, we could say that, dealings in Islamic finance are by their nature dealings that are completely satisfying the corporate governance rules.
Islamic finance is accountable and adhering to accountability on the basis that the deal is not in money only, as compared to non-Islamic or conventional banking, rather it is part of the transaction through different approved products. By virtue of this partnership association with the client, Islamic finance is accountable in case there is any failure. Accountability or sharing the risk, is an important factor in Islamic banking and this point is an important factor in corporate governance rules.
Sharing the risk requires many steps including transparency in all matters related to the transaction. Transparency in Islamic banks, as a fact, is an important factor needed for corporate governance. Another important issue, is the fact that corporate governance implementation aims for maintaining ethical working environment. Here comes the fact that, Islamic finance & Islamic banking is purely ethical by nature as its directive rules and guidance are from Allah – Jala Jalawu.
Herein, we have to admit that, corporate governance rules are greatly benefiting from Sharia rules and they are taking such rules as their foundation base. From here, comes the strong & deep relationship between Islamic finance from one hand and corporate governance rules from the other hand…. Based on this, we could say that the new corporate governance rules are already there in Islamic rules from their inception…
Dr . AbdelGadir Warsama Ghalib
Founder & Principal Legal Counsel
Dr.AbdelGadir Warsama Consultancy
E-mail : awarsama@warsamalc.com
