Corporate Governance Systems And Islamic Principles Finance Essay

2.0 Introduction to Islamic Banking

Muslim rules have stated clearly that all concern minutess have to follow the equity behaviour stated in Islamic jurisprudence where no party should derive any kind of unequal intervention therefore when an investing occurs between two parties both the parties should split the net income or loss harmonizing to the concern position ( Schon ; 2009 ) . Muslim rules related to pecuniary minutess have stated clearly that no injury or usage of harmful merchandises is allowed to be conducted under the Islamic concern ( Schon ; 2009 ) . Therefore ; Gambling, harlotry and similar undertakings should be banned from utilizing Islamic money as a tool of minutess ( Schon ; 2009 ) .

2.1 Principles behind Islamic Banking

Two basic rules behind Islamic banking are the sharing of net income and loss ( PLS ) , significantly, the prohibition of aggregation and payment of involvement. In fact, roll uping involvement is non permitted under Islamic jurisprudence. Islamic banking refers to a system of banking or banking activities that is consistent with Islamic jurisprudence and rules and guided by Islamic economic sciences ( Sipra, 2002 ) .

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2.3 Muslim Banking around the World

Present Islamic finance has exist globally since the 1970.Currently, Islamic finance represent little but turning fragment of the planetary finance industry ( Ariss 2010 ) . Estimates diverge of the entire size of the assets held globally under Islamic finance, runing upwards from 800 billion and with growing rates of 10 % to 15 % yearly over the past 10 old ages. Indeed, United Kingdom has announced inductions to reserve London as a chief participant in the Islamic finance industry ( Kerr, 2007 ) ; the planetary market for Islamic bonds known as Sukuk us estimated to be $ 70 billion presently and is projected to make $ 100 billion by 2010.Global issue of Islamic bonds has increased more than five-fold from 2004 to 2007. Assetss of the top 500 Muslim Bankss expanded 28.6 % to $ 822 billion at year-end 2009 Islamic industry size is estimated to be at 400 billion USD with growing of 15 % per annum.

Demand for Islamic banking merchandises and service is turning, Islamic banking has developed into a full fledge system, today Islamic Bankss are working in 75 states beside that there are many fiscal establishments from the conventional banking systems have lunched Islamic banking Windowss working side by side with Muslim Bankss to get the better of the turning market demand on Islamic merchandises and services. In Malaysia and Bahrain Islamic Bankss are working at parallel with conventional Bankss take parting in the overall money transacted ( Scribd ; 2010 ) .

In some states, such as Iran, Sudan and Pakistan, Islamic bank are the lone mainstream fiscal establishments. In others, they exist within concurrence with conventional banking. The Arab Gulf part and Southeast Asia, led by Malaysia, traditionally have been the major centres for Islamic banking. In recent old ages Islamic banking has expanded into Africa, peculiar in Sudan ( Tahir 2007 ) .

Sudan has full fiscal system running at a national degree by Islamic finance and banking rules, Iran besides have switched to to the full working Islamic banking system in malice of the conceptual reading differences.UK, Euro states and many other states have initiated Islamic banking engagements by leting Muslim Bankss to get down making concern ( Tahir 2007 ) .

Chart 2.1 is demoing that Iran is the higher ranked in Islamic banking assts followed by Saudi Arabia and Malaysia. Indeed, Bahrain has 10 Islamic Bankss compare with 19 Bankss in Sudan. In fact, Iran, Sudan and Pakistan to the full operate as a full chief watercourse Islamic banking system.

Chart 2.1 Break Down of the World ‘s 100 Muslim Banks

Beginning: Asiatic Banker Research

Bahrain have a big concentration of Islamic banking in the Middle East where it hosts 26 establishments offering different merchandises and services including commercial banking, offshore banking, investing banking and fund direction, Bahrain besides purse a double banking system where conventional and Islamic banking are treated every bit by the Bahrain Monetary Agency, Bahrain besides hosts the freshly created liquidness direction centre and the international Islamic fiscal market, to organize the operation of Islamic banking around the universe. Malaysia has a comprehensive Islamic banking industry where conventional and Muslim Bankss are working at a competitory environment ; the conventional Bankss are allowed to open Islamic Windowss. The portion of Islamic banking operation in Malaysia has grown from a nothing to 8 per centum in 2003 where the authorities in Malaysia has a program to heighten that to 20 per centum by 2011. There is a turning involvement for Islamic finance and a concern chance for loaners in the United States where Islamic banking is mostly exists in the personal place mortgages ( Tahir 2007 ) .

Chart 2.2 explains that the issue of Sukuk fiscal records for approximately 10 % of the comprehensive Islamic finance industry, subsequent to fast growing over the past decennary. Accumulative entire issues topped the nonliteral grade of $ 100 billion at year-end 2009, compared with less than $ 500 million at year-end 2001. The market is easy resuscitating after a major lag in 2008. Sukuk issues numbering $ 23.3 billion in 2009 clearly outpaced the $ 14.9 billion registered in 2008 and regained some land against record issues of $ 34.3 billion in 2007.

Chart 2.2 Sukuk Issuance in one million millions USD from 2001 to 2009

Beginning: ( Poor ‘s ” 2010 )

2.6 Definition of Corporate Governance

The bureau job arises because of the relationship between the proprietors and the direction. The dirt in corporate administration made the bookmans specifying corporate administration based on the job work outing position or corporate personal businesss position. In add-on, most definition provinces that internal administration mechanism involves board of managers and ownership construction while external involves taking over market and legal system.

Research workers have defined corporate administration in a assortment of ways, and the most widely cited definitions follow. A definition by the finance commission on corporate administration in Malaysia in the study on corporate administration ( 2002 ) stated that: “ Corporate administration is the procedure and construction used to direct and pull off the concern and personal businesss of the company towards heightening concern prosperity and corporate answerability with the ultimate aim of recognizing long term stockholder value, whilst taking history the involvements of other stakeholders ” . This indicates that corporate administration is non merely applied to the stockholders but the other stakeholders as good.

2.7 Corporate Governance System around the World

2.7.1 Anglo-saxon Corporate Governance System

The Anglo -Saxon system is taking by the chief beginning of house ‘s finance. Therefore, the chief concentration of Anglo-Saxon corporate administration is the stockholder involvement where the rule is applied by given the right to each stockholder to vote pursuant to that the jurisprudence found to be protecting the stockholder against the direction where a stockholder can be found misapplying the company money which might impact the stockholder wealth. The composing of the Anglo-Saxon corporate administration system is one board of managers representing of executives and non-executives. The executive managers are directors of the corporations ; whereas the non-executive managers are stand foring the stockholders to supervise the director in their twenty-four hours to twenty-four hours concern. Both executive and non-executives managers ‘ members are appointed and dismissed by general assembly of stockholders. ( Denis and McConnell 2003 ) .

2.7.2 Germanic Corporate Governance System

The Germanic corporate administration system trades with the house as an independent economic entity which may profit to stockholders and stakeholders in the house. States which implement this system utilize two board systems dwelling of a supervisory board and pull offing board. Supervisory board chief responsibilities are to name the pull offing dismiss pull offing board and to measure direction public presentation. Germanic corporate administration system considers the bank as the chief beginning of finance. Therefore, the bank has a important vote right in stockholder ‘s stockholder ‘s assembly and besides represents stockholders ‘ involvement in a supervisory board ( Odenius ; 2008 ) .

2.7.3 Latin Corporate Governance System

The Latin corporate administration system is considered more flexible compared with old Systems. In a context of board of managers, Latin corporations have an option to choose either one board as Anglo-Saxon system or two boards as in Germanic System, stockholders have more influence in the Latin system i.e. in Gallic statute law, stockholders can take a manager, which overrule on a portion one ballot system. ( Aguilera and Ermoli 2005 )

2.7.4 Nipponese Corporate Governance System

The board of managers in Nipponese system comprises a board of managers, an office of representive managers and an office of hearers. The president is the seldom the chair adult male of the board. Banks have high influence on the determination devising of the direction in the Nipponese system. ( Allen ; and Zhao ; 2007 )

2.7.5 Muslim Corporate Governance.

The corporate administration in Islamic banking is based on Islamic jurisprudence and rules. The administration of the Bankss is capable to credence of the rules and criterion of Shariah. Islamic corporate administration tenseness on all the parties involved in the organisation to pattern Islamic jurisprudence rules. Since Muslim Bankss in many ways are similar to the conventional Bankss ; the being of a proper frame work of corporate administration is a affair of desperate necessity ( Pellegrini 2006 ) .

However, in conformity with the fact that Islamic banking and conventional banking are different because Islamic banking activities are underlined by Islamic jurisprudence it ‘s non appropriate for Islamic banking to deviate from Islamic patterns.Thus, the duty is on Muslim Bankss to guarantee that all activities are capable to Shariah jurisprudence credence ( Pellegrini 2006 ) .

In footings of guidelines and rules constructed in conformity with Islamic jurisprudence there are many standardising bureaus ; theses bureaus include the Islamic fiscal service board ( IFSB ) , the accounting and scrutinizing organisation for Islamic fiscal establishments ( AAOIFI ) , and International Islamic evaluation bureau ( IIRA ) ; are of the of import organic structures concerned with ordinances heightening the supervising in Islamic fiscal establishments ( Grais and Pellegrini 2006 ; Pellegrini 2006 ; Wafik Grais 2007 ) .

Research workers have conceptually explained the differences attributed to corporate administration rules in Islamic jurisprudence and corporate administration rules in non Islamic jurisprudence, the proposed considerations largely concentrated on Shariah supervisings, financing manners and hazard directions. In add-on, Islamic finance bookmans have supported the account of theoretical base of Islamic banking and finance on stakeholder theory sing that any party who affect of get affected by the activities conducted in the Islamic fiscal establishment is a stack holder of the Islamic fiscal establishment ( BAHJATT ; 1997 ; Chapera 2004 ; Abu-Tapanjeh 2009 ) .

Table 1.1 focal points on the differences between the organisation for economic cooperation and development ‘s rules and Islamic rules where exclusive authorization is to Shariah, society is a stakeholder and the sense of equality between different parties involved in the corporation procedure. Islamic position on corporate administration, to some extent, resembles to the stakeholder theoretical account. Indeed, it provides a more solid justification sing who can measure up as a stakeholder and what are the rights and duties that both houses and their assorted stakeholders may presume.

Table 1.1 Corporate Administration from Islamic Prospective

OECD Principles and Annotation

Muslim Principles

Sing the footing for an effectual corporate administration model

Promotion of transparent and efficient markets with regulation of jurisprudence and division of duties

Promotion of concern within ethical model of Shariah, Believes in net income and loss, Primacy of Justice and societal public assistance with societal and religious duties, Prohibition of involvement

The rights of stockholders and cardinal ownership maps

Basic stockholder rights, Engagement in Decision-making at the general meetings, Structures and agreements markets for corporate control, Ownership rights by all stockholders including institutional stockholders, Consultative procedure between stockholders and institutional stockholders

Property as trust from God, Sole Authority is God, Society as stakeholders, Accountability non merely to stakeholders but besides to God, the ultimate proprietor

The just intervention of stockholders

Protection to minority and foreign stockholders

Merely and equity of value

The function of stakeholders in corporate administration

In making wealth, occupations and sustainability of financially sound

Enterprises

Islamic answerability to Falah and societal public assistance orientation, Haram/Halal duality in dealing, Social & A ; single public assistance from both religious and stuff

Disclosure and transparence

Matters sing corporation, Financial state of affairs, Performance, ownership and

Administration

Accountability with Shariah conformity, Socio-economic aims related to houses ‘ control and answerability to all its stakeholders, Justice, equality, truthfulness transparence, Wider answerability with written every bit good as unwritten revelation

The duties of the board

Strategic counsel, Monitoring of direction, Accountability to company and stakeholders

Accountability non merely to company or board or stakeholders but besides to Allah the ultimate authorization who leads to welfare and success, Holistic and integrative counsel, Negotiation and co-operation, Consultation and consensus seeking for each determination with related stakeholders

Beginning: ( OECD 1999 ; Abu-Tapanjeh 2009 )

Unlike the known corporate administration systems where the resolution of bureau struggle is one of the of import issues related to the administration mechanisms. Muslim corporate administration laid the affair and activities of the bank to Shariah supervisory board and chief Shariah board at the cardinal bank of the state. Therefore, each party involved in the dealing and activities of the bank is stakeholder.

The Islamic finance activities have the duty towards employees, community and related parties of organisation. The staff in Islamic bank should move harmonizing to Islamic rules and adhere to the instruction of Islam. Accounting criterions in the Islamic bank should see that Islamic banking is involvement free banking ( M ; 2007 ) .

Shariah supervisory board ( SSB ) has the authorization to reject any of the undertakings which is non in conformity with their outlook. Indeed, the procedure of the Shariah reexamining the activities is one of the basicss of Islamic banking dealing. The Shariah reexamining procedure includes hazard direction, scrutinizing commission and Shariah research maps ( Hamzah 2009 ) .

.

Figure 2.1 is explicating the procedure of The Shariah supervisory board where Shariah board receives the new undertakings and merchandises before they are presented to the clients in order to guarantee the Shariah conformity. Shariah board procedure will oversee bank activities and procedures in order to guarantee the Shariah conformity. Shariah supervisory board has the duty to heighten the Islamic banking cognition among the employees in the Islamic Bankss.

Figure 2.1 Shariah Board Process

Beginning: ( BNM 1 October 2005 )

The board of managers is committed to the determinations made by the Shariah supervisory board irrespective of whether the bulk O.K. or disapprove. The meeting of the board normally is held sporadically or whenever the state of affairs require ( DIB 2010 ) .

2.8 Principles of Islamic Corporate Administration

The Islamic fiscal service board ( IFSB ) is an international guidelines and ordinance organisation that concentrate on bettering the consistence and soundness of the Islamic fiscal services establishments by publishing planetary criterions and rules for the industry, largely distinguishable to include establishments which deal under Islamic jurisprudence ( IFSB 2006 ) .

The rules is concerned about heightening the procedure of the Islamic Bankss under a proper mechanism related to Shariah jurisprudence which high spot and explicate what are the responsibilities and duties related to stakeholder in the Islamic bank. The rules detail the procedure and construction of administration in the Islamic to accomplish the optimal smooth of return to stakeholders ( IFSB 2006 ) .

As per the rules guidelines its of importance to run into to rules because that will assist supplying a typical revelation peculiarly fiscal statements for internal audit which deliver a great duty to the stakeholders, so it besides endorses the Basel I, II and the rules of corporate administration in Bankss, so as to guarantee the safety of Islamic banking and to supply protection for the assets and rights of clients of Islamic Bankss promoting committedness to the determinations of ( IFSB ) .The sitting criterions by IFSB for Islamic fiscal establishments involve the treatment on the mechanism to equilibrate between different stakeholders in the organisation including the responsibilities and duties, the board of managers and fiscal coverage demands ( IFSB 2006 ) .

Table 2.1 presents the chief rules for Islamic fiscal establishments including Islamic Bankss which must adhere to Islamic jurisprudence including administration mechanisms, right of investing history holders, and conformity with Islamic Shariah regulations and the transparence of history coverage.

Table 2.1 the Guiding Principles of Islamic Financial Service Board IFSB

Principle 1.1: IIFS shall set up a comprehensive administration policy model which sets out the strategic functions and maps of each organ of administration and mechanisms for equilibrating the IIFS ‘s answerabilities to assorted stakeholders.

Principle 1.2: IIFS shall guarantee that the coverage of their fiscal and non-financial information meets the demands of internationally recognized accounting criterions which are in conformity with Shariah regulations and rules and are applicable to the Islamic fiscal services industry as recognized by the supervisory governments of the state.

Principle 2.1: IIFS shall admit IAHs ‘ right to supervise the public presentation of their investings and the associated hazards, and put into topographic point equal agencies to guarantee that these rights are observed and exercised.

Principle 2.2: IIFS shall follow a sound investing scheme which is suitably aligned to the hazard and return outlooks of IAH ( bearing in head the differentiation between restricted and unrestricted IAH ) , and be transparent in smoothing any returns.

Principle 3.1: IIFS shall hold in topographic point an appropriate mechanism for obtaining opinions from Shariah bookmans, using Fatwa and supervising Shariah conformity in all facets of their merchandises, operations and activities.

Principle 3.2: IIFS shall follow with the Shariah regulations and rules as expressed in the opinions of the IIFS ‘s Shariah bookmans. The IIFS shall do these opinions available to the populace.

Principle 4: IIFS shall do equal and timely revelation to IAH and the populace of stuff and relevant information on the investing accounts that they manage.

Beginning: International Islamic Finance Services Board ( IFSB 2006 )

2.8.1 Ownership

Muslim Bankss steering rules permit the bank to represent the capital from original and foreign resources, in regard to the rate of sedimentation and topographic point of sedimentation of the capital fund, it will be decided by the adept authorization, Islamic bank will represent a modesty fund and every twelvemonth an specific sum of net income will be kept in this fund from the net income after paying of revenue enhancement and Zakat at the clip measuring the minimal plus Islamic bank will take into consideration the balance of Savings Account, Investment Account, other sedimentation liabilities including the hard currency in manus & A ; other liabilities as directed by the adept authorization ( Sole 2008 ) .

2.8.2 Board Size

The rules of Islamic banking enhances the executions of Basel I, II and III In explicating the board size demand in Islamic Bankss, the administration codification recommended that the impact of size should be examined on the board effectivity. However there is no specified Numberss of the board recommended. It is in line with the above-named statements that a board should non be excessively large or excessively little. However, the Islamic Bankss should let a board with active engagement and has the ability to do effectual determinations and executing their maps ( Sole 2008 ) .

2.8.3 Qualifications

As portion of the administration sweetening attempt, IIFSB in its listing demands requires all managers of Islamic Bankss to set about uninterrupted preparation and instruction betterment procedure. It aims at act uponing corporate thought on administration issues among the managers ( Kasri 2008 ) .

2.8.4 Disclosure

As the Islamic fiscal services industry increases its activities in the planetary fiscal scaffold, IIFS requires the Muslim Bankss to stay by globally recognized coverage criterions. IIFS is hence guaranting that the coverage of fiscal and non-financial information is in harmoniousness with world-wide recognized accounting criterions, peculiarly those applicable to Islamic fiscal services. Islamic bank will name an hearer every twelvemonth, which is to be approved by the adept authorization ( Sole 2008 ) . The chief rules heightening the universe banking system are the Basel rules. Basel is a commission concentrating on formulating criterions for Bankss particularly those guidelines which help to keep the hazard degree and safety against fiscal crisis. The Basel commission ‘s criterions have been traveling through broad betterment from clip to another.

Basel I in 1998 required the states to hold a minimum capital demand for Bankss ; most of the focal point was on recognition hazard. Basel I instructed the Bankss with international presence to keep capital equal to 8 % of the hazard weighted assets. Following that, the Basel II introduced in 2004 was promoting all states to follow the ordinances proposed on their banking system. Indeed, Basel II was the creative activity quandary of banking Torahs and ordinances against jobs that may originate peculiarly in capital direction and hazard direction. Then, Basel III was a reacting betterment to fiscal crisis where the commission instructed the Bankss to keep apportion of its capital to continue against unnatural loss ( Sole 2008 ) .

Critically, Muslim Bankss were already heightening the rules of Basel III which is been translated in their fiscal position after the crisis as they have non been affected by crisis same as the conventional Bankss. ( Networking 2010 )

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