Corporate Governance in Islamic Financial Institutions
Corporate Governance in Islamic Financial Institutions
Corporate Governance in Islamic Financial Institutions
Professor Dr Rashidah Abdul Rahman Deputy Director, Accounting Research Institute (ARI) Universiti Teknologi MARA, Malaysia [email protected]
Global Development of Islamic Finance Development of Islamic Finance in Malaysia Corporate Governance Framework in Islamic Financial Institutions Risk Profile in Islamic Banks Empirical Findings
Islamic finance was first introduced into the mainstream global banking system in the early 1960s
Islamic Bank of Britain (2004) Islamic Dev. Bank, Jeddah (1973) Dubai Islamic Bank, UAE (1975) Faysal Islamic Bank, Sudan (1977) Kuwait Finance House (1977) Bahrain Islamic Bank (1979) Islamic Bank of Brunei (1992) Bank Islam Msia Berhad (1983) Bank Muamalat, Indonesia (1992) Islamic Bank of Thailand (2002)
Today, Islamic finance with operations in more than 300 financial institutions and more than 80 takaful operates globally
Estimated size of Islamic banking assets more than USD$1.0 trillion; Global market capitalization of DJMI>USD 10 trillion; 350 Shariah-compliant funds established globally;
COMMITMENT LEVEL
MALAYSIA, KUWAIT, SAUDI ARABIA, DUBAI, BAHRAIN
CLUSTER 4
CLUSTER 3 CLUSTER 2 CLUSTER 1
SPORDIC DEVELOPMENT
MARKET REACH
Source: Creating & promoting the value propositions of Islamic Finance: Enter the next Phase by Dr. Mohamad Nedal Alchaar, Secretary General Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI)
Inception stage
Instituting foundations of Islamic finance & financial inclusion
Islamic Banking Act 1983 Takaful Act 1984 Government Funding Act 1983 1st full fledge Islamic bank 1st full fledge takaful company IIUM was established in 1983 1983 1993
Islamic windows 2nd Islamic bank 2nd takaful company Islamic money market Shariah Advisory Council at BNM
FSMP 10 year roadmap Foreign Islamic banks Islamic subsidiaries New takaful & retakaful licences Tax neutrality policy
IBFIM SIDC INCEIF ISRA BNM Act 2009 IIIBF, IIUM 2005
2001
FSMP Financial Sector Masterplan, IBFIM - Islamic Banking and Finance Institute of Malaysia, SIDC Securities Industry Development Corporation, INCEIF International Centre for Education in Islamic Finance, ISRA International Shariah Research Academy for Islamic Finance
Facilitate establishment of takaful operators Takaful Act 1984 Over the years Proven to be a viable financial intermediation channel Fulfill needs of Muslims & nonMuslim Success enable expansion into new areas and products
Governance
Legal & Regulatory
-Islamic Banking Act -Takaful Act -Government Funding Act -Capital Market Services Act -New foreign legal firm
Diversified Players
Islamic Bank & Takaful Companies Banking
Islamic Capital Market -17 Islamic banks -16 Islamic windows -3 International Islamic Banks -14 International Currency Business Units
Dispute Resolution
-Judicial system:dedicated high court -KL Regional Centre for Arbitration -Financial Mediation Bureau
Labuan IBFC
Capital Market
Takaful
Financial markets
Money Market
-Islamic interbank money market -Diverse shot-term Islamic money market instruments
-8 takaful operators -4 retakaful operators -1 International Takaful Operator -7 International Currency Business Units
Fund Management
Capital Market
-58% of outstanding bonds are sukuk -88% Shariah counters -143 Islamic unit trust fund
-9 licensed Islamic fund management companies -35 fund management companies with Islamic mandates
is a set of organisational arrangements whereby the actions of the management of institutions offering Islamic financial services are aligned, as far as possible, with the interest of its stakeholders; provision of proper incentives for the organs of governance such as the BOD, Shariah Supervisory Board and management to pursue objectives that are in interests of stakeholders and facilitate effective monitoring, thereby encouraging IIFS to use resources more efficiently; and comply with Islamic Shariah rules and principles (IFSB, 2006, pp.33)
Shariah Board
Corporate Governance
Internal Arrangement
External Arrangement
Trustee/ guarantor
Mudaraba facilitator
Shareholder
Depositor
Stake Holder
a comprehensive governance policy framework reporting of their financial and non financial information acknowledge the right of investment account holders adopt a sound investment strategy mechanism for Shariah scholars applying fatawa and monitoring make adequate and timely disclosure
Shariah Governance Framework Model for Islamic Financial Institutions by Bank Negara (Central Bank) Malaysia
review (mutabaah)
UNIQUE
ISLAMIC BANK
GENERIC
CREDIT RISK
OPERATIONAL RISK
MARKET RISK
LIQUIDITY RISK
Strategic
Legal
Fiduciary
Reputation
Transparency
Regulatory compliance
19
Based on IFSB
INTERNAL PROCESS
Policy/ procedures Documentation
PEOPLE
Employee negligent Communication
SYSTEM
o System support o System monitoring o System design
EXTERNAL EVENT
Regulation Political Outsourcing Fraud (External fraud)
Marketing/
Selling Control framework
Knowledge/ skill
Unauthorized activities
21
6.
7.
22
5.93 6.02
5.85 5.93
0.5
0.00 0.01
0.27 0.15
VARIABLES
MALAYSIA
PAKISTAN
OVERALL
Coefficient
CONSTANT URM RI RAA RM Adjusted R2 F-statistic Prob. (Fstatistic) 3.33 0.713 0.317 0.421 0.446 0.357 3.163** 0.000
Prob.
0.050* 0.113
Coefficient
3.29 0.708
Prob.
Coefficient Prob.
0.011** 0.150 0.031** 0.045** 0.543
119
165
284
Abdul Rahman , Syed and Dean (2013), J of Islamic Economics, Banking & Finance, forthcoming
5.39
4.83
5.32
0.03
-0.163
-0.072
5.92
5.02
5.81
0.00
-1.508
2.378
5.85
5.00
5.74
0.00
-1.200
1.371
Abdul Rahman , Syed and Ismail, submitted to Spanish J of Finance and Accounting
Significant
Significant
Step 3, Path c
Figure 1:The Expected Results from Four Hierarchical Regressions (Where, ME= mediator variable, IV=independent variable, DV=dependent variable)
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