The Central Bank of Bahrain (CBB) will make further efforts through its review of corporate governance and business conduct rules to raise the bar for corporate governance for the Islamic banking industry, according to a top official at Bahrain’s apex bank.
Citing intentions of the CBB, the Governor Rasheed M. Al Maraj said the efforts were being made on improving the levels of disclosures and the review of the CBB corporate governance requirements has already finished its first stage of internal review. According to the CBB Governor the next will be consultation with the financial sector.
In his welcome address the Governor CBB told the audience of the AAOIFI Annual Shari’a Conference 2012 that conference comes at an important time for the Islamic financial sector.
Coupled with governance is Shari’a. This is one of the themes of this conference. From the perspective of the CBB as a regulator, Al Maraj added, the CBB have noted that all too often, the approach of banks, particularly conventional banks has been to start with a conventional transaction or product and then try to give it a finishing coat of Shari’a compliant paint.
“Financial institutions must not regard Shari’a compliance as the finishing touch to product development. Instead, product development needs to start from Shari’a principles i.e. Islamic financial institutions must become Shari’a driven,” he added.
“And that is why this conference and the next set of consultations by AAOIFI are going to be so important. If financial institutions and standards setters can address the interest of customers, governance and Shari’a compliance satisfactorily then we can look forward to Islamic finance continuing its growth and reaching its full potential.”
This conference, he said, is focussing on six key areas that both the standard setters and the financial sector must work together upon if Islamic finance is to continue to grow and achieve its full potential.
AAOIFI currently has issued seven standards relating to governance and two standards with respect to ethics. Deficiencies in Governance at financial institutions have been repeatedly highlighted in the past five years following the commencement of the Global Financial Crisis in 2007. Three of the standards issued by AAOIFI specifically refer to governance. The first of these standards concerns the Audit & Governance Committee. In practice, this standard requires the Audit Committee to do rather more than just to review a financial institution’s accounting practices and audit plan. It requires the Committee to review the use of Restricted Investment Accounts’ funds. It emphasises the need to ensure that funds are invested in accordance with terms agreed with the customer. Too often over the past five years we have seen how the interests of customers at both conventional and Islamic banks have been neglected as bank management have focussed on bonuses and share price. If banks neglect customers’ interests, then they will lose those customers. This theme of looking after the interests of customers is carried on in the AAOIFI Governance Principles paper issued in 2005. In particular Principle 3 of this paper warns against inequitable treatment of fund providers. The 2009 AAOIFI Corporate Social Responsibility paper also focuses on dealing responsibly with clients and ‘par excellence’ customer service. If you couple the governance standards with the ethics paper for employees of financial institutions, you find a formidable set of requirements, principles and standards relating to putting the interests of customers first.