LABUAN INTERNATIONAL CAMPUS

SCHOOL OF INTERNATIONAL BUSINESS & FINANCE

GE31303 ETHICS AND GOVERNANCE OF ISLAMIC FINANCE

INDIVIDUAL ASSIGNMENT [WRITING ASSESSMENT]

Cooperate Governance and Corporate Social Responsibility from Islamic Perspective

PREPARED FOR:

DR. MUHAMMAD BIN AHMAD

PREPARED BY:

NUR HAFIZAH BINTI ABDUL AZIZ BG 10110354

SUBMISSION DATE:

30th MAY 2013

Corporate Governance and Corporate Social Responsibility in Islamic Perspective 2013

TABLE OF CONTENTS
Introduction .................................................................................................................................................. 2 Chapter 1: CORPORATE GOVERNANCE IN ISLAMIC PERSPECTIVES ..................................... 3 1.1 Concept and Definition ...................................................................................................................... 3 1.2 The Development Corporate Governance In Islamic Financial Institution .................................... 3 1.3 The Role of Corporate Governance in Islamic Financial Institutions (IFS) ................................... 4 1.4 Foundational Dimension of corporate gorvernance ......................................................................... 4 1.4.1 Tawhidi and Shuratic Process ..................................................................................................... 4 Chapter2: Corporate Social Responsibilities in Islamic Perspective........................................................... 5 2.1 Definition and the concept of Corporate Social Responsibility (CSR) .......................................... 5 2.2 Taqwa paradigm ................................................................................................................................. 5 2.3 Implication of Shariah in CSR ........................................................................................................... 6 Conclusion .................................................................................................................................................... 6 REFERENCES ............................................................................................................................................. 7

Corporate Governance and Corporate Social Responsibility in Islamic Perspective 2013

INTRODUCTION

Corporate Social Responsibility (CSR) and Corporate Governance (CG), can be define by its feature as an issue of companys management systems. Corporate Social Responsibility is based on self-regulatory principles linked to the internal and external management of the company. Corporate Governance is point to an idea of companys governance and management issue s.According to the Australian Parliamentary Joint Committee on Corporations and Financial Services, compared to CSR, CG is a broad issue of company management practices. It involves the ways of board of directors and the relationship between the boards, management and shareholders. . In conventional view, they are set by laws, regulation and corporate governance guidelines. In other hand, this concept has a little contrast in Islamic view. Islam is a way operating framework that for every aspect of how the business is conducted according to Shariah Law. Although in Islamic way always promoted principles that covering values such as fairness, equality and morality of the main orders, its not easy to combine it into an Islamic corporate governance standard and to implement it. Nowadays, most of Islamic companies still use the conventional corporate governance standard which may against Shariah Law. In this paper, is discussing and draw a review on corporate governance from the Islamic perspective, addressing the importance of understanding about the Corporate Governance and the Corporate Social Responsibility according to Islamic perspective.

Corporate Governance and Corporate Social Responsibility in Islamic Perspective

CHAPTER 1: CORPORATE GOVERNANCE IN ISLAMIC PERSPECTIVES

1.1 CONCEPT AND DEFINITION

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In Islam, corporate governance is referring to asset of organizational arrangement on how a corporation is directed, managed, governed, and controlled. Its providing the governance structure through which all stakeholders interest is protected, the object be is achieved and the principle of Shariah are complied with. In the context of Islamic Financial Institution (IFI), the Islamic financial services (IFSB) Guiding principles on corporate governance for Institutions Offering Only Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions And Islamic Mutual Funds) (IFSB3).The IFBS defines corporate governance : As a set of relationship between a companys management its board of di rectors (BOD) its shareholders and stakeholders which provides the structure through which the objective of the company are set and the means of attaining those objectives and monitoring performance are determined. From the definition that was provide by IFSB-3 we can conclude the important point about corporate governance of the Shariah requirement which is: The general function objective of corporate governance as a set relationship with stakeholders. The requirement of compliance with Shariah rules and principles

1.2 THE DEVELOPMENT CORPORATE GOVERNANCE IN ISLAMIC FINANCIAL INSTITUTION In the 1970s, there are many issues arose when the corporation and the conventional banks which opened Islamic windows and branches carrying their business without pending the interest and right s of all stakeholders. When the several IFIs like Ihlas Finance House in Turkey fail and need a good and efficient governance system was considered crucial. As the result, a few international infrastructure institutions were established with the objective to support the Islamic financial sector. These include Accounting and Auditing Organization for Islamic Financial institutions. (AAOIFI) and the Islamic Financial Services Board (IFSB) which specially established inter alia to strengthen the corporate governance of IFIs. And others is remaining to support infrastructure for the implementation of Islamic Finance.
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Corporate Governance and Corporate Social Responsibility in Islamic Perspective

1.3 THE ROLE OF CORPORATE GOVERNANCE IN ISLAMIC FINANCIAL INSTITUTIONS (IFS) The objective of corporate governance is promoting corporate fairness, transparency and accountability. In IFIs, its beyond the framework goes beyond the relationship between the shareholders, BOD, management and stakeholders including relationship with God. It also to reassure stakeholders that their activities full comply with Shariah principle Other than that, the stakeholder also need to be assured that IFIs also maintain and improve growth and are able to prove efficiency, stability and trustworthiness. 1.4 FOUNDATIONAL DIMENSION OF CORPORATE GORVERNANCE 1.4.1 Tawhidi and Shuratic Process Corporate governance in Islam is founded on the epistemological aspect of Tawhid and the embedded Shariah rules and principles where the former refer to the principle on consultation (shura), in which all stakeholders share the same goal of Tawhid on the oneness of Allah s.w.t. Everything that created by Allah has a purpose and human is created to be the vicegerent of God. From the principle of Tawhid, its defines a firms obligation and objectives to include a large group of stakeholder than the stakeholder alone. Dreyfus & Rainbow (1983) defined episteme as the total set of relation that unite, at a given period, the discursive practices that give rise to epistemological figures, science, and possibly formalized systems. Furthermore, it also donates the concept of accountability or taklifi, indicate that everyone is accountable to God for their own deeds. Inspired by this paradigm of Tawhid that acknowledge stakeholders as vicegerent, firm and corporate have a fiduciary to uphold the principle of justice via the Shuratic process. Shuratic process is the methodology that is employed in decision making for corporate governance by the Islamic firms .Socio-scientific systems are employed in both the institution and organizational corporate governance models. Stakeholders oriented approach The corporate governance model in an Islamic economic system to be a stakeholdercentered model which the governance style and structure protect the interest and right of all stakeholders rather than the shareholder per se. Corporate governance based on stakeholders model comprises two fundamental concepts of Shariah principles of property right and contractual framework. The definition of stakeholder refer to the shareholders per se or to who have an active participation in the decision making process include non-investor and nonstakeholders.
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Corporate Governance and Corporate Social Responsibility in Islamic Perspective

CHAPTER2: CORPORATE SOCIAL RESPONSIBILITIES IN ISLAMIC PERSPECTIVE

2.1 DEFINITION AND THE CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY (CSR) Corporate Social Responsibility (CSR) is an industry in its own right nowadays. CSR outlines the ideal standard of behavior of a firm from a socially oriented perspective. CSR refer to a firms social obligation discharged on a voluntary basis. In the Islamic view, CSR is offer an integralistic spiritual view based on the teachings of Quran and the Sunnah and provides a better alternative philosophy framework for mans interaction with nature and his fellowmen. Hence, the moral and ethical principles derived from divine revelation are more enduring, eternal and absolute (Ahmad, 2002; Ahmad, 2003), thus may serve as better guidelines for corporation when exercising their business and social responsibilities simultaneously. According to Ahmad (2003), the rational faculties can and should only be used to complement, support and strengthen the ethics and morals as framed within the Shariah. Companies at this level manifest their social responsibilities based on the belief that a company should be socially responsible regardless of the financial consequences, positive or negative. This belief is enshrined in the Islamic worldview, guided by Shariah. Their commitment to societies is the manifestation of the taqwii-paradigm or God-consciousness, which also reflects their comprehension of the Islamic principles such as vicegerency or trusteeship and justice. This is the highest order moral position representing the Islamic view of CSR. 2.2 TAQWA PARADIGM To understanding the Shariah is taqwa which refer wariness of God or God consciousness. It guarantees that the social fabric because people then become voluntarily committed to achieving the central goals of human welfare or falah. Moreover it plays a unity role which binding the community together to form the result of equality, solidarity and freedom. A person with a taqwd-paradigm is imbued with a strong understanding that their role in this world is to manage and develop the world in accordance with the Shari'ah. This means harmonizing and integrating material well-being with moral-spiritual values," which in turn determines their fate in this world and in the hereafter (Hasan, 2002) Furthermore, it defines the nature of human beings' relationship with God, with each other and with the natural

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Corporate Governance and Corporate Social Responsibility in Islamic Perspective

environment. Four important points emerge from this framework which is; (i) Human dignity; (ii) Free will; (iii) Equality and rights and (iv) Trust and responsibility.

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2.3 IMPLICATION OF SHARIAH IN CSR The concept of CSR in Islam is covered a wide definition which to hold taqwa dimension (God-consciousness) by which corporation as group of individuals, to suppose the roles and responsible as servants and vicegerents in all conditions. Hence, they lastly responsible to God, as well as the resources they are using and managing. This responsibility to God is a function of the intrinsic quality of the Muslims lives as a trust from God. The Islamic society will avoid conflict interests among members of the society, since everybody have their purpose in their life that to serve to God. This will lead the society to cooperate and success in life to obtain the happiness or al-falah. Furthermore, when life is guided by the proper relationship with God, the persons daily interaction and activities will motivated by the values of honesty ,fairness, respects the law ,kindness and tolerance. With Islamic guidance, with its will lead to justice and brings about a balance between the right of individual and their duties and responsibilities towards others.

CONCLUSION
This paper provides an overview of corporate governance and the corporate social responsibility according Islamic perspective. To conclude, the corporate governance has its similarities and some of common of principle with western theory .But Islam adds additional value to the existing governance framework which its emphasizes on the element of Shariah, faith and ethics. The concept of CSR is not only for to Islam, as it is deeply in Shariah. The concept of vicegerency (khalifah) not just of shareholders financial resources , but also of society s economic resources holding their property in trust for the benefit of society as a whole and ultimately attaining the blessing of God. To implementing a good CSR practice in their business conduct embracing issues such as good environmental practice, occupational safety, social benefit and harmless activities. The Taqwa paradigm inspires a firm to operate their company and business in a responsible manner regardless of the financial consensus. The both component seem give a positive effect to Islamic institutions.

Corporate Governance and Corporate Social Responsibility in Islamic Perspective 2013

REFERENCES

K.Lewis, M. (2005). Islamic Corporate Governance. Review of Islamic Economics , 25. Kasri, Rahmatina Awaliah, Corporate Governance: Conventional vs. Islamic Perspective (2009). Available at SSRN: http://ssrn.com/abstract=1685222 or http://dx.doi.org/10.2139/ssrn.1685222 Mohamed, J. A. (2007). Corporate Social Responsibility in Islam. New Zeland: Auluck University of Technology. Sulaiman Abdullah Saif Alnasser, Joriah Muhammed, (2012) "Introduction to corporate governance from Islamic perspective", Humanomics, Vol. 28 Iss: 3, pp.220 231