Sunday, January 4, 2009

Juhaidi: Good corporate governance needed in Shariah banking

By Juhaidi Yean Abdulah
Over the past two or three decades, Islamic banking and finance has emerged as another important discipline and served as a viable alternative of financial intermediation. It has gained credibility and respect worldwide. As a matter of fact, Islamic bankers today are looking to marry that potential with China's rapid growth.
But while Muslims can be justifiably proud of the success of Islamic banking, issues on accountability and good corporate governance should not be taken for granted. Islamic banks are no less prone to suffer breaches of fiduciary responsibilities or consequences of weak governance structure. As a custodian of public funds, maintaining integrity and confidence in banking sector is vital towards ensuring the stability and soundness of the Islamic financial system.
Islamic financial institutions therefore need to be complemented and reinforced with good corporate governance. As such, transparency in the conduct of banking institutions facilitated by proper accounting standards that reflect the true and fair value of banking operations would certainly lead to greater accountability and responsibility on the part of the bank's management.
On the other hand, the consequences of weak corporate governance and accountability are not only financial but could include social, environmental and political as well.
The collapse of the Bank of Credit and Commerce International (BCCI) in 1992 is still fresh in our minds. A weak due diligence and governance process on the part of several Islamic banks especially in the verification of Shariah compliance cost them significant amount of losses. It was reported then that one of the Islamic financial institutions involved had 25% of its assets placed with the BCCI.
Perhaps, as a response to numerous calls worldwide, a study on ethical, developmental and environmental considerations in finance was endorsed by a number of financial institutions a few years ago. Those institutions were initially invited by the then UN secretary general Kofi Annan in January 2004 to participate in his initiative on implementing universal principles in business (originally launched in 2000).
The brilliant study was labeled "Who Cares Wins: Connecting Financial Market to a Changing World". The gist is of the report is to provide "recommendations by the financial industry to better integrate environmental, social and governance (ESG) issues in analysis, asset management and security brokerage".
The participating institutions provide a general framework for a new "Islamic Finance" identity, strongly suggesting that "the way that ESG issues are managed is part of companies' overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risk, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover these issues can have strong impact on reputation and brands, an increasingly important part of company value."
In all three areas of ESG, Islamic finance has golden opportunities to redefine the brand name in a manner than enhances its' providers' profitability and market value, increase access to the fast-growing potential market segment of middle-class Muslims, and enhances its ability to recruit top-drawer talent from that same market segment of its products.
Indeed, Islam strongly advocates all forms of positive governance. These values and ethical conduct have already been inbuilt and inherent in the Muslim community. Islamic corporate governance and accounting serves through its underlying principles of economic well-being of the ummah, universal brotherhood, justice and equitable distribution of income.
For Islamic banking institutions, good corporate governance and accountability of the highest order should have already been embedded in all aspects of their operations. While the virtues of Islam have always advocated good corporate governance and accountability, the challenge lies in its application.
(The writer was a consultant to the National Economic Action Council, NEAC, from 2002-2004. He also served as a press secretary to a Cabinet minister from 1995-2008. This article was published in THE MALAYSIAN RESERVE issue of Jan 5, 2009)

No comments: