Shariah Aspects of Business

and Finance
(FBF 20203)

Chapter 7:
Introduction to Shariah Governance &
Standard Setting Bodies
Corporate Governance

▪ Corporate governance is the method by which

a corporation is directed, administered or
controlled.
▪ The principal participants are the
shareholders, management and the board of
directors.

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Corporate Governance from the Islamic
Perspective

▪ A set of organizational arrangements on how

a corporation is directed, managed,
governed and controlled. This provides the
governance structure through which all
stakeholder interests are protected, the
company’s objectives are achieved and the
principles of Shariah are complied with.

3
Role of Corporate Governance in Islamic
Financial Institutions

Promoting corporate fairness

Transparency
Accountability
Protect the rights and interests of all
stakeholders
Comply with Shariah principles
Trustworthiness of the management

4
Governance Risk

▪ It is a risk arising from ▪ Operational risk

failure in governing the ▪ Fiduciary risk
institution, negligence
▪ Transparency risk
in conducting business
and meeting ▪ Shariah risk and
contractual ▪ Reputation risk
obligations, and from a
weak internal and
external environment.

5
Governance Issues of Islamic Financial
Institutions

Name of the Event Cause Year

Institution
Ihlas Finance in Closed weak governance 2001
Turkey
Islamic Bank of Closed More that ZAR50 million 1997
South Africa debts and weak governance
Islamic Investment Closed Shariah non-compliant 1988
Companies of Egypt activities, irresponsible
management

Dubai Islamic Bank Top executives are Major Fraud Case of 2009
charged for USD501 million
malpractice
Bank Islam MYR457 million Weak debt collection and 2005
Malaysia Berhad loss incompetent board of
directors
Tamweel (Middle Top executives are Bribery and unethical profit 2010 6
East) charged
Development of Corporate Governance in IFIs

▪ The Accounting and Auditing Organization

for Islamic Financial Institutions (AAOIFI)
▪ Islamic Financial Services Board (IFSB)
▪ Hawkamah, the Institute for Corporate
Governance
▪ Bank Negara Malaysia (Islamic Financial
Services Act 2013)

7
Theoretical Foundation of Islamic
Corporate Governance
The Anglo-Saxon Model of Corporate
Governance

Cernat, (2004)
9
The European Model

Cernat, (2004)
10
Islamic Corporate Governance Model

11
Choudhury and Hoque, 2004
Comparison between Islamic and Western Model
of Corporate Governance

Aspects Anglo-Saxon Model European Model Islamic Model

Episteme Rationalism and Rationalism and Faith-based rationalism
rationality rationality and rationality derived
from the principle of
tawhid
Rights and To protect the interests To protect the right of To protect the interest
Interests and rights of the the community in and rights of all
shareholders relation to the stakeholders, but subject
corporation to the rules of the
Shariah and ethics
Corporate Shareholders Society controlling Maqasid al-Shariah,
Goal controlling managers corporation for the balancing between profit
for the purpose of purpose of social and social welfare
shareholder’s profit welfare

12
Comparison between Islamic and Western Model
of Corporate Governance

Aspects Anglo-Saxon Model European Model Islamic Model

Nature of Management- Controlling Based on the concept of
Management dominated shareholder- vicegerency and shura,
dominated balanced nature of
management subject to
the principle of Shariah
and ethics
Management One-tier board Two-tier boards; Shariah board and board
Board comprising executive executive and of directors; Shariah
and non-executive supervisory boards board is responsible on
directors are separate the aspect of the Shariah
and ethics

13
Overview of IFSB Corporate Governance
Standard for IFIs

1. General governance approach of IIFS

2. Rights of investment account holders (IAH)
3. Compliance with Islamic Shariah rules and
principles
4. Transparency of financial reporting in
respect of investment accounts

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Shariah Governance
Shariah Governance

“…the set of institutional and

organisational arrangements through which
an Islamic financial institution ensures that
there is effective independent oversight of
Shariah compliance over each of the
following structures and processes.” (IFSB,
2009)
Shariah Governance

These structures and processes are:

1. issuance of relevant Shariah resolutions
2. dissemination of information on shariah
resolutions to the operative personnel of the
Islamic financial institution (IFI)
3. an internal Shariah compliance review or audit
4. an annual Shariah compliance review and audit

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Malaysian Shariah
Governance Model
 Board of Directors
Shariah
Committee

Management

Shariah Risk
Shariah Audit
Management Control
Function
Function

Shariah Governance Framework Model for IFIs in Malaysia 19

 ‫ﺟﺰاك ﷲ ﺧﲑا‬
May Allah reward you
with goodness