Omar Mustafa Ansari Head of Islamic Financial Services Group
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Transcript of Omar Mustafa Ansari Head of Islamic Financial Services Group
Omar Mustafa AnsariHead of Islamic Financial Services Group Ernst & Young Ford Rhodes Sidat HyderA member firm of Ernst & Young Global Limited
Governance for Islamic mutual fund industry
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 2Al Huda CIBE – Conference on
Islamic Funds & Investments
Outline
► Governance for Islamic Financial Institutions► Corporate governance – What and Why► Fundamental pillars of corporate governance► Corporate governance models – a comparison► Islamic corporate governance model
► Governance standards – AAOIFI and IFSB► Principles of governance► Introduction to IFSB – 6: Guiding Principles on
Governance for Islamic Collective Investment Schemes► Key issues – points of focus
Governance for Islamic financial institutions
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 4Al Huda CIBE – Conference on
Islamic Funds & Investments
What is corporate governance?
Organization for Economic Cooperation and
Development (OECD)
“Corporate governance is the system by which companies are directed and
controlled, in the interest of
shareholders and other stakeholders, to sustain and enhance
value”.
Cadbury Committee
“It is a system by which companies are
directed and controlled”.
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 5Al Huda CIBE – Conference on
Islamic Funds & Investments
Why corporate governance?
► Corporate governance is a crucial part of financial institutions and banking industry as a whole.
► Banks and financial institutions play a significant role in the economy and they should adhere to strong corporate governance standards to:► ensure stakeholders’
satisfaction; and ► confidence in the banking
and financial system.
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 6Al Huda CIBE – Conference on
Islamic Funds & Investments
Impact of good corporate governance
On the society
More open, transparent society Corruption prevention Rule of law: fair and orderly Promoting ethical wealth creation
On the economic system
Revitalizing market economy
Sustainable economic growth
Positive development on capital market
More globally competitve
Increasing competitiveness
through fair competition
On the organization
Increasing firm value Lowering cost of capital Enhancing capital efficiency
Protection of shareholders' rights
Safeguard of stakholders' interest
It is all about having a better organization, a better socially responsible society and a better financial and economic system.
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 7Al Huda CIBE – Conference on
Islamic Funds & Investments
Incentives for the financial services industry
•Adoption of Internationally accepted governance standards will help them to achieve their corporate aims.
Individual banks
•By increasing the compliance in the system the industry can attract depositors, borrowers, counter parties and the investors.
Banking Industry
•To protect their sponsorship against all risks and ensure that wealth is multiplied.
Shareholders
•Strengthen banking sector and discourage fraud and misrepresentation.
Regulators
•At large makes sure that social reward is maximized
Society
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 8Al Huda CIBE – Conference on
Islamic Funds & Investments
Fundamental pillars of corporate governance
Accountability•Clarifying governance roles
and responsibilities•Supporting voluntary efforts
to ensure the alignment of managerial and shareholder interests
•Monitoring by the Board of Directors capable of objective and sound judgment
Transparency•Timely disclosure of adequate
information concerning corporate financial performance
1
2
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 9Al Huda CIBE – Conference on
Islamic Funds & Investments
Fundamental pillars of corporate governance
Responsibility•Responsibility should be
accepted by those having the authority to make decisions
•Corporations also need to have compliance with relevant laws and regulations that reflect the society’s values
Fairness•Safeguards the interest of
stakeholders and protection of their rights
3
4
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 10Al Huda CIBE – Conference on
Islamic Funds & Investments
Corporate governance models – a comparison
•Principal – agent model
•Relationship of managers vs. shareholders
Anglo-Saxon or “neo liberal” approach
•Stakeholders’ model
•Relationship of managers vs. stakeholders
The European model
•Stakeholders’ model + Shariah
•Answerable to Allah Almighty
Islamic corporate governance model
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 11Al Huda CIBE – Conference on
Islamic Funds & Investments
Islamic corporate governance model
Allah SWT proclaims in Quran:“Men who celebrate the praises of Allah standing, sitting, and lying down on their sides, and contemplate the wonders of creation in the heavens and the earth, (with the thought): "Our Lord! Not for naught Hast thou created all this! Glory to Thee! Give us Salvation from the penalty of the Fire” (3: 191).
This verse provides fundamental principle of governance where everything created by Allah has a purpose and human being is created to be the world’s vicegerent. By putting a trust to mankind as a vicegerent, Allah plays actively roles to monitor and involve in every affairs of human being and He is aware and knowing everything all the times.
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 12Al Huda CIBE – Conference on
Islamic Funds & Investments
Islamic corporate governance model – why different?
Corporate Governance
Shariah Compliance
Additional Fiduciary
Responsibil-ities
Islamic Corporate
Governance
Shariah compliance
Establishment of Shariah Board / Appointment of Shariah Advisor
(SA)
Establishing sound Shariah
compliance mechanism
Fiduciary responsibiliti
es
Additional governance committee
The enhancement in the role of BOD / Audit Committee / Shariah Board / Shariah Advisor
Governance standards – AAOIFI and IFSB
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 14Al Huda CIBE – Conference on
Islamic Funds & Investments
Governance standards issued by AAOIFI and IFSB
• 1: Shari’a supervisory board: appointment, composition and report• 2: Shari’a review• 3: Internal Shari’a review• 4: Audit and governance committee for IFIs• 5: Independence of Shari’a Supervisory Board• 6: Statement on governance principles for IFIs• 7: Corporate social responsibility conduct and disclosure for
Islamic financial institutions
• IFSB 3: Guiding principles on corporate governance for institutions offering only Islamic financial services (excluding Islamic insurance (takaful) institutions and Islamic mutual funds)
• IFSB 6: Guiding principles on governance for Islamic Collective Investment Schemes
• IFSB 8: Guiding principles on governance for takaful (Islamic insurance) undertakings
• IFSB 10: Guiding principles on Shariah governance systems for institutions offering Islamic financial services
Principles of governance
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 16Al Huda CIBE – Conference on
Islamic Funds & Investments
Principles of governance
Effective Shariah compliance
Appropriate governance structures
Transparent interactions
between SSB and management
BOD is responsible for
Shariah compliance
Fair treatment of equity holders
Voting rights
Communication with the IFI
Appoint BOD and SSB members
Ensure fair disclosure
Equitable treatment of fund providers
Equitable and unbiased
treatment for all stakeholders
Access to adequate and
timely information
Mechanism to safeguard against risk of inequitable
treatment
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 17Al Huda CIBE – Conference on
Islamic Funds & Investments
Principles of governance(Contd.)
Fit and proper conditions
Criteria for appointment of
BODs, SSB members, and management
Transparent selection
Based on predefined set of
criteria
Oversight
BOD responsible for implementing and monitoring
policies
Set tone for risk, compliance and
other control activities
Audit and governance committee
Implementation of governance framework
Monitor governance framework
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 18Al Huda CIBE – Conference on
Islamic Funds & Investments
Principles of governance(Contd.)
Committee’s composition
Non-executive members of the
BOD
Maintain its independence from executive authority
Risk management
BOD involved in setting the risk
appetite
Policies and systems for risk:
-identification-reporting
- mitigation
Management responsible for assessing and
managing of risks
Conflicts of interest
Identify situations of potential
conflicts of interest
Appropriate governance structures
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 19Al Huda CIBE – Conference on
Islamic Funds & Investments
Compensation policy oversight
Appropriate governance structures in
relation to remuneration
policies
Compensation policies should be independent and
transparent
Disclosures
Maintain high standards of
transparency and market discipline
Financial and other
performance measures should
be accurate, adequate and
timely
Code of conduct and ethics
Policies and procedures to be consistent with
Shariah
Principles of governance(Contd.)
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 20Al Huda CIBE – Conference on
Islamic Funds & Investments
Comparison of functions – Islamic and conventional financial institutions
FunctionsTypical financial
institutionsAdditions in IIFS
Governance Board of Directors Shariah Board
Control Internal auditorExternal auditor
Internal Shariah review unitExternal Shariah review
Compliance Regulatory and financial compliance officers, unit or department
Internal Shariah compliance unit
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 21Al Huda CIBE – Conference on
Islamic Funds & Investments
Summary of governance framework for Shariah compliance for IFIs
Islamic financial institution
BOD
Audit Committee / ACG
Shareholders
Internal Shariah Audit / Shariah
Review / Shariah Compliance
AAOIFI & IASB
External Auditors
IFSB
Prudential Regulations / Standards
Central Bank
SSB
AAOIFI Standards
IFSB – 6Guiding Principles on Governance for Islamic Collective Investment Schemes
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 23Al Huda CIBE – Conference on
Islamic Funds & Investments
Islamic Collective Investment Scheme (ICIS) – Definition
► Under the guiding principles, Islamic Collective Investment Scheme (ICIS) is defined as any financial scheme which meets all of the following criteria:► investors have pooled their capital contributions in the fund
where their share is divided into units and the right to share profit or losses in the pool;
► fund is established and managed in accordance with Shariah rules and principles; and
► it is a separate entity in terms of financial assets and liability.
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 24Al Huda CIBE – Conference on
Islamic Funds & Investments
Principles set out by the IFSB – 6
• To establish a comprehensive governance policy framework ensuring appropriate governance structure and procedure are in place
• Continuously adopt international best practices
General Governance approach of ICIS
• Accurate and timely disclosure of information to reflect the true picture of ICIS investment profile and its associated risks
Transparency in disclosure
• Ex ante and Ex post Shariah Compliance controls are in place• Effective Shariah governance system• The review of Shariah compliance of ICIS by internal auditors / Shariah review
Compliance with Shariah rules and principles
• It focuses on the practices followed by ICIS operators to influence the movement or shuffling of funds
• Appropriate precautions are undertaken that no such practice of funds movements are carried out
Additional protection for ICIS investors
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Key issues – point of focus
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 26Al Huda CIBE – Conference on
Islamic Funds & Investments
Key issues : organs of governance and Shariah compliance controls at entity level
► BOD / Audit Committee – additional functions
► HR► Hiring ► Training
► Shariah compliance function► Resources► Reporting line► Independence vs. product
development
► Shariah Audit► Internal ► External► Supervisory
► Policies, procedures and systems
► Shariah Rating► Shariah compliance► Fiduciary responsibility
23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariPage 27Al Huda CIBE – Conference on
Islamic Funds & Investments
Key issues – focus required: SSB and SAs
► Right forum – board or advisor
► Right responsibilities ► Support► Advise► Supervise► Judge and decide
► Report► What to? ► How to?
► Independence► Objectivity – state of
mind / from the heart► Influence
► Teachers / school of thoughts
► Peers► Management
► Capability
Thank you