Governance for Islamic mutual
fund industry
Omar Mustafa Ansari
Head of Islamic Financial Services Group
Ernst & Young Ford Rhodes Sidat Hyder
A member firm of Ernst & Young Global Limited
Outline
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Governance for Islamic Financial Institutions
►
Corporate governance – What and Why
►
Fundamental pillars of corporate governance
►
Corporate governance models – a comparison
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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
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 2
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Governance for Islamic
financial institutions
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”.
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Cadbury Committee
“It is a system by which
companies are
directed and
controlled”.
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Why corporate governance?
►
Corporate governance is a
crucial part of financial
institutions and banking
industry as a whole.
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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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.
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Impact of good corporate governance
It is all about having a better organization, a better socially
responsible society and a better financial and economic system.
On the organization
Increasing firm value
Lowering cost of capital
Enhancing capital
efficiency
Protection of
shareholders' rights
Safeguard of stakholders'
interest
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 society
More open, transparent society
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Corruption prevention
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Rule of law: fair and orderly
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Promoting ethical wealth creation
Incentives for the financial services industry
Individual
banks
• Adoption of Internationally accepted governance
standards will help them to achieve their corporate
aims.
Banking
Industry
• By increasing the compliance in the system the
industry can attract depositors, borrowers, counter
parties and the investors.
Shareholde
rs
• To protect their sponsorship against all risks and
ensure that wealth is multiplied.
Regulators
• Strengthen banking sector and discourage fraud
and misrepresentation.
Society
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
• At large makes sure that social reward is
maximized
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Fundamental pillars of corporate governance
1
2
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Fundamental pillars of corporate governance
3
4
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 9
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Corporate governance models – a comparison
Anglo-Saxon or “neo
liberal” approach
• Principal – agent model
• Relationship of managers vs.
shareholders
The European model
• Stakeholders’ model
• Relationship of managers vs.
stakeholders
Islamic corporate
governance model
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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• Stakeholders’ model + Shariah
• Answerable to Allah Almighty
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
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
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Islamic corporate governance model – why
different?
Corporate
Governance
Shariah
Compliance
Shariah
compliance
Fiduciary
responsibilities
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Additional
Fiduciary
Responsibilities
Islamic
Corporate
Governance
Establishment of
Shariah Board /
Appointment of
Shariah Advisor
(SA)
Establishing sound
Shariah
compliance
mechanism
Additional
governance
committee
The enhancement
in the role of BOD /
Audit Committee /
Shariah Board /
Shariah Advisor
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Governance standards –
AAOIFI and IFSB
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
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Principles of governance
Principles of governance
Effective Shariah
compliance
Fair treatment of
equity holders
Appropriate
governance
structures
Voting rights
Communication
with the IFI
Transparent
interactions
between SSB and
management
Appoint BOD and
SSB members
BOD is
responsible for
Shariah
compliance
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Equitable treatment
of fund providers
Ensure fair
disclosure
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Equitable and
unbiased
treatment for all
stakeholders
Access to
adequate and
timely information
Mechanism to
safeguard against
risk of inequitable
treatment
Principles of governance
(Contd.)
Fit and proper
conditions
Oversight
Audit and
governance
committee
Criteria for
appointment of
BODs, SSB
members, and
management
BOD responsible
for implementing
and monitoring
policies
Implementation of
governance
framework
Set tone for risk,
compliance and
other control
activities
Monitor
governance
framework
Transparent
selection
Based on
predefined set of
criteria
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Principles of governance
(Contd.)
Committee’s
composition
Risk management
BOD involved in
setting the risk
appetite
Non-executive
members of the
BOD
Policies and
systems for risk:
-identification
-reporting
- mitigation
Maintain its
independence from
executive authority
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Conflicts of interest
Management
responsible for
assessing and
managing of risks
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Identify situations of
potential conflicts of
interest
Appropriate
governance
structures
Principles of governance
(Contd.)
Compensation policy
oversight
Disclosures
Appropriate
governance
structures in
relation to
remuneration
policies
Maintain high
standards of
transparency and
market discipline
Compensation
policies should be
independent and
transparent
Financial and
other performance
measures should
be accurate,
adequate and
timely
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 19
Code of conduct and
ethics
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Policies and
procedures to be
consistent with
Shariah
Comparison of functions – Islamic and
conventional financial institutions
Typical financial
institutions
Functions
Additions in IIFS
Governance
Board of Directors
Shariah Board
Control
Internal auditor
External auditor
Internal Shariah review
unit
External Shariah review
Compliance
Regulatory and financial
compliance officers, unit
or department
Internal Shariah
compliance unit
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 20
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Summary of governance framework for Shariah
compliance for IFIs
AAOIFI &
IASB
Islamic financial institution
Shareholders
External
Auditors
IFSB
Prudential
Regulations
/ Standards
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Central
Bank
BOD
SSB
Audit Committee
/ ACG
AAOIFI
Standards
Internal Shariah
Audit / Shariah
Review / Shariah
Compliance
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Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
IFSB – 6
Guiding Principles on
Governance for Islamic
Collective Investment
Schemes
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
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 23
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Principles set out by the IFSB – 6
Part II
Part I
General Governance approach of ICIS
• To establish a comprehensive governance policy framework ensuring appropriate
governance structure and procedure are in place
• Continuously adopt international best practices
Transparency in disclosure
• Accurate and timely disclosure of information to reflect the true picture of ICIS
investment profile and its associated risks
Part III
Compliance with Shariah rules and principles
• 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
Part IV
Additional protection for ICIS investors
• 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
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 24
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Key issues – point of focus
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
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 26
►
►
►
Shariah Audit
► Internal
► External
► Supervisory
Policies, procedures and
systems
Shariah Rating
► Shariah compliance
► Fiduciary responsibility
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
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?
23 April 2012
Al Huda CIBE – Conference on
Islamic Funds & Investments
Page 27
►
Independence
► Objectivity – state of mind
/ from the heart
► Influence
► Teachers / school of
thoughts
► Peers
► Management
► Capability
Governance for Islamic Mutual fund industry
By: Omar Mustafa Ansari
Thank you