Step to corporate governance

Step to corporate governance

Step to corporate governance Islamic firms globally

Step to corporate governance: What steps have already been taken to ensure corporate governance Islamic firms globally and what further proposals have been made for their future development?

 

Ans. : A well defined and clear organizational structure;

  1. An independent Shariah Supervisory Board responsible for ensuring compliance with Shariah rules and principals in all its activities;
  2. An audit Committee comprising non- executive directors, together with a well –defined internal audit process; and
  3. An internal Shariah review process to provide proactive guidance to management on compliance issues.

The different shariah rulings at present in existence among the different financial institutions make it difficult for financial institutions, regulators and rating agencies outside the Muslim Community to understand the Islamic financial industry, which they can not perceive as being completely transparent, since there is no standard frame work for comparing institutions on the same basis.

In response to this problem and the demand from Islamic institutions, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

Has issued standard on corporate Governance, which provide comprehensive guidance for the structure of the Shariah Board, for the internal shariah review process, and for the relationship between the Shariah Supervisory Board and the external auditors.

The AAOFI has also established a Shariah Board comprising members from various Islamic countries who are cooperating in the development and promulgation of Shariah standards and seeking to harmonise Shariah rulings among Islamic Financial institutions and across national boundaries. It is important that an audit process is established to ensure compliance with the shariah.

Shariah supervisory boards must play an active role in ensuring compliance with Shariah, not showing any leniency in their important role of disallowing income derived from sources, which are in contravention of the Shariah.

The AAOIFI have also developed a core set of accounting, auditing and governance standard for Islamic financial institutions, cooperating with relevant parties all over the world, including international standard- setting bodies and central banks,with a view to having them globally adopts as benchmarks for industry.

Financial institutions in the global market place are taking a more proactive approach to risk management. Qualitative assessments of risks are becoming widely used, control of risk is more active and risk measures are becoming more accurate, giving rise to new tools and organizational structures to manage risk. Those financial institutions which actively manage their risks have a decisive competitive advantage, they undertake risks more concisely, anticipate adverse changes, protect themselves from unexpected events and last, but not lest, gain the expertise to price risk appropriately.

Methodologies such as “ value at risk” and “ capital risk” have now been developed for managing risk. In order to gain competitive advantage, Islamic financial institution must have a clear understanding of the risks inherent in the business and adapt these methods to manage them.

In today’s global conditions, a standardized frame work is important to ensure that the Islamic banking and finance industry is transparent, has a strong corporate governance system and conscious of the need for risk management, all in accordance with international best practice.

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