Quality Corporate Governance - Feature

5/22/2009

Mufti Ehsan Waquar Ahmad is associated with Emirates Global Islamic Bank as a Member
Shariah Committee and Manager Shariah Compliance. He graduated as a Mufti and did his
Masters from Karachi University. Currently he is pursuing his MBA from IoBM (CBM) in
Banking and Finance.
Around the world, increased focus has been made on the performance of board of directors and
supervisory boards. Especially during the current financial catastrophe, stakeholders have
established enormous concerns about failure of ventures and deficiencies in new business ideas
and plans that seems disguised under the cosmetic corporate governance.
Islamic financial institutions in this scenario need to adapt extra vigilance. Corporate
Governance is nothing but a gist of moral integrity. Of course Governance cannot be performed
without technical awareness and required skills. Bravo to State Bank of Pakistan (SBP) for
regulating the affairs in such a wonderful manner. The SBP has provided guidance and support
from time to time to facilitate the institutions and simultaneously secure the interest of
stakeholders.
I would like to draw readers' attention on some of the key features essential for governing an
institution effectively. Usually committees are formed within the BOD and in case of Islamic
financial institutions; Shariah Supervisory Boards (SSB) are constituted to perform specific
functions. They have a set of responsibilities that they need to perform in order to secure the
interest and surely the funds of the shareholders. In order to perform these functions, two things
are of major concern, moral integrity and sound knowledge base with required expertise.
An audit committee within the BoD, should consist of directors who are at least aware of some
audit functions in order to comment and oversee the functions of the auditors. This will not only
enhance efficiency of the management and the auditors in particular but the responsibility and
decision generated will be of very high quality. Similarly, the Shariah Supervisory Board while
commenting on the Shariah matters needs to be proficient enough to understand and deliver the
appropriate verdict. It is usually misunderstood that the SSBs' objective is just to pronounce
Shariah no matter if the business is forgone. I do not mean to say that they should compromise
on Shariah but they should not restrict themselves by turning down the solution only rather they
should be innovative enough to address the problems, remove the bottlenecks and come up with
a solution or a practical alternative that can secure the stakeholders interest also. Here if a certain
member of a particular committee is not competent enough to address an issue, isn't that matter
pertains to immorality? An incompetent person commenting on a matter about which he has no
expertise may be considered unethical. How can one justify himself while playing with
insufficient skills thus hampering the interest of those who rely upon him.
It is also mistaken by the Shariah personnel that the management doesn't want to comply with
Shariah. On the contrary, the management has a feeling that these Shariah experts do not have
enough expertise to handle and solve the problems. When we say that a transaction has to be
aligned with Shariah it means that there are certain limitations that are explicitly addressed in
Islam. Making this statement lucid, there is an alternate to a Haram meat that is not slaughtered
according to the prescribed way in Islam, but there is no alternate to pork and that is the
limitation.
If a person desires to have an alternate solution for pork and feels that the Shariah experts are not
competent enough, then it is his mistake. Any board, committee or group assigned to perform a
task should develop a clear understanding; particularly in case of Islamic financial institution
they must understand that they have provided an indemnity to the stakeholders. The funds they
collect will be invested only in Shariah compliant avenues. It is because of their commitment that
the stakeholders rely and believe that the funds placed within these institutions will be secured
and will be managed in accordance with the Shariah principles. At this point they have to realise
that they have a greater responsibility in order to uphold the expectation of the stakeholders.
For the management, the directors and the CEO, this fiduciary relationship can be very well
understood with the help of an example. When the bank asks the customer to provide an
undertaking in case of Ijarah financing, what if the customer at a particular point of time,
breaches his promise, especially when the forced sale value incurs a loss? Naturally we will have
a negative notion, a feeling of displeasure. Moving ahead, in future we will never trust such
customer considering the incredibility on his part. Similarly when the management, the BoD or
broadly the institution breaches its indemnity to perform in accordance with Shariah, loses its
trust which will ultimately destroy its long-standing goodwill among public. This trust deficit
once developed will not only harm the institution but will harm the industry at large.
It means that the board members and the management should adopt a clear vision, strategy with
strong corporate values to direct the activities of IFIs. They should establish high level of ethical
values and professional standards. They should be committed to build a strong compliance
structure. Without their commitment it seems tearing two ends apart. In order to achieve this
target there are some effective suggestions that are pivotal for the development of a Quality
Board.
A comprehensive board development program should be introduced that should at least consist
of the following;
" A need for expertise development through comprehensive education program
" A governance committee that not only monitors the management activities but the board's
development program also
" Committee on different activities should have an external expert advisor or professional if the
competent resource is unavailable or until developed within the board itself
" Committees or boards should have a structured set of activities related to the functions they are
responsible for
" Each board member should invariably perform certain functions and undertake some
responsibilities
A quality board culture is exemplified by hands-on engagement of its members, those involved
in decision-making to secure the wider interests of all stake holders.
Disclaimer: The ideas contained in the article are writer's views and not necessarily the
institution has any concurrence with these.