COMMENT

September 2005
NewHorizon
Corporate governance is about effective management of company and the accountability of senior management. It has always been important and is becoming increasingly so to the governments and increasingly active investors in developed countries where a number of financial failures, frauds and questionable business practices have adversely affected investor confidence. Investor confidence is the key to success in any market. Investors want safety of their investment, which is ensured through proper Corporate Governance by the management of the company entrusted with such investment. Government enacts laws, which ensure proper Corporate Governance without creating bureaucratic hurdles in efficient operations. Recent Corporate governance practices have evolved over time and different code of corporate governance was developed like the OECD code of corporate governance.

Corporate governance had its origins in the 19th century arising in response to the separation of ownership and control following the formation of joint stock companies. The owners or shareholders of these companies, who were not involved in day to day operational issues, required assurances that those in control of the company, the directors and managers, were safeguarding their investments and accurately reporting the financial outcome of their business activities. Thus, shareholders were the original focus of corporate governance however, current thinking recognises a company’s obligations to society generally in the form of stakeholders.

Since the latter part of 2001, the already lively debate on Corporate Governance has become a turbulent issue due to big corporate scandals like Enron, WorldCom and new Law like Sarbana – Oxley Act are introduced to prevent this in future.

Islamic Financial Institutions are no exception to this best practice of governance but there is one extra layer of supervision in the form of Shariah Committee or the Shariah Supervisory Board. Powers of Shariah Supervisory Boards differs from one Islamic Financial institution to another, but their objective is common in that business should be run in compliance with Shariah rules for benefit of stakeholders which, in the case of Islamic financial institutions, also include ordinary account holders. Islamic banking could not be inducted without the guidance and assistance of Shariah scholars. They played an important role in the development of the system. The system had the confidence of the Muslims who had faith that the scholars were leading the system on the right path.

Advancement of technology has turned the world into a global village. Business practices are continually changing due to development of technology, professionalism and easy access from one market to other. Business structures are now very complex and getting their know-how is not an easy task. As the numbers of institutions offering Islamic Banking products are increasing and also the products range, the role of Shariah scholars are becoming more than ever important.

Islamic Financial Institutions have to compete with the well-established and prosperous world of conventional banking. It is a challenge for Shariah scholars to have proper knowledge and training to be able to scrutinise the business operations and management’s policies adequately so that the principles of Shariah are not going to be compromised for the sake of keeping competitive returns for shareholders, the operations remain transparent and in accordance with the spirit of Islam rather than following the conventional system with a few changes here and there.

The Shariah Committee and Board members must have an understanding of Shariah rules accompanied with a reasonable knowledge of the business environment, nature of investments, cliental base, investor’s tastes and the culture in which business is being run. They need to also be trained in business practices. The professional involvement of the Shariah board and transparency in assisting in the decision-making process will be helpful in restoring trust in Islamic banking products.

Lack of codification of Shariah rules and their application in different jurisdictions with changes has created some confusion in the minds of customers. Satisfying customers that products are Shariah compliant is the foremost important step and the challenge for Shariah scholars. Also, establishing standards for Shariah rulings cannot be overemphasised in this regard. They are vital part of a mix which will play an important role for the growth of the Islamic Banking Industry. For this reason Shariah scholars will require to change their existing practices and work together to face the challenge with boldness and creativity in the interpretation of Shariah rules. Peoples' confidence in the Shariah scholars is the bedrock of Islamic banking. If our Shariah scholars lose the confidence of the people, Islamic banking will have a sad end. We hope it will not happen. Our scholars will face this challenge and win the confidence of customers.

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