omar mustafa ansari head of islamic financial services group

Omar Mustafa AnsariHead of Islamic Financial Services Group Ernst & Young Ford Rhodes Sidat HyderA member firm of Ernst & Young Global Limited

Governance for Islamic mutual fund industry

23 April 2012 Governance for Islamic Mutual fund industryBy: Omar Mustafa AnsariAl Huda CIBE – Conference on

Islamic Funds & Investments

Outline

► Governance for Islamic Financial Institutions► Corporate governance – What and Why► Fundamental pillars of corporate governance► Corporate governance models – a comparison► 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

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”.

Cadbury Committee

“It is a system by which companies are

directed and controlled”.



Why corporate governance?

► Corporate governance is a crucial part of financial institutions and banking industry as a whole.

► 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.



Impact of good corporate governance

On the society

More open, transparent society Corruption prevention Rule of law: fair and orderly Promoting ethical wealth creation

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 organization

Increasing firm value Lowering cost of capital Enhancing capital efficiency

Protection of shareholders' rights

Safeguard of stakholders' interest

It is all about having a better organization, a better socially responsible society and a better financial and economic system.



Incentives for the financial services industry

•Adoption of Internationally accepted governance standards will help them to achieve their corporate aims.

Individual banks

•By increasing the compliance in the system the industry can attract depositors, borrowers, counter parties and the investors.

Banking Industry

•To protect their sponsorship against all risks and ensure that wealth is multiplied.

Shareholders

•Strengthen banking sector and discourage fraud and misrepresentation.

Regulators

•At large makes sure that social reward is maximized

Society



Fundamental pillars of corporate governance

Accountability•Clarifying governance roles

and responsibilities•Supporting voluntary efforts

to ensure the alignment of managerial and shareholder interests

•Monitoring by the Board of Directors capable of objective and sound judgment

Transparency•Timely disclosure of adequate

information concerning corporate financial performance

1

2



Fundamental pillars of corporate governance

Responsibility•Responsibility should be

accepted by those having the authority to make decisions

•Corporations also need to have compliance with relevant laws and regulations that reflect the society’s values

Fairness•Safeguards the interest of

stakeholders and protection of their rights

3

4



Corporate governance models – a comparison

•Principal – agent model

•Relationship of managers vs. shareholders

Anglo-Saxon or “neo liberal” approach

•Stakeholders’ model

•Relationship of managers vs. stakeholders

The European model

•Stakeholders’ model + Shariah

•Answerable to Allah Almighty

Islamic corporate governance model



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.



Islamic corporate governance model – why different?

Corporate Governance

Shariah Compliance

Additional Fiduciary

Responsibil-ities

Islamic Corporate

Governance

Shariah compliance

Establishment of Shariah Board / Appointment of Shariah Advisor

(SA)

Establishing sound Shariah

compliance mechanism

Fiduciary responsibiliti

es

Additional governance committee

The enhancement in the role of BOD / Audit Committee / Shariah Board / Shariah Advisor

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

Principles of governance



Principles of governance

Effective Shariah compliance

Appropriate governance structures

Transparent interactions

between SSB and management

BOD is responsible for

Shariah compliance

Fair treatment of equity holders

Voting rights

Communication with the IFI

Appoint BOD and SSB members

Ensure fair disclosure

Equitable treatment of fund providers

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

Criteria for appointment of

BODs, SSB members, and management

Transparent selection

Based on predefined set of

criteria

Oversight

BOD responsible for implementing and monitoring

policies

Set tone for risk, compliance and

other control activities

Audit and governance committee

Implementation of governance framework

Monitor governance framework




Committee’s composition

Non-executive members of the

BOD

Maintain its independence from executive authority

Risk management

BOD involved in setting the risk

appetite

Policies and systems for risk:

-identification-reporting

- mitigation

Management responsible for assessing and

managing of risks

Conflicts of interest

Identify situations of potential

conflicts of interest

Appropriate governance structures



Compensation policy oversight

Appropriate governance structures in

relation to remuneration

policies

Compensation policies should be independent and

transparent

Disclosures

Maintain high standards of

transparency and market discipline

Financial and other

performance measures should

be accurate, adequate and

timely

Code of conduct and ethics

Policies and procedures to be consistent with

Shariah




Comparison of functions – Islamic and conventional financial institutions

FunctionsTypical financial

institutionsAdditions in IIFS

Governance Board of Directors Shariah Board

Control Internal auditorExternal auditor

Internal Shariah review unitExternal Shariah review

Compliance Regulatory and financial compliance officers, unit or department

Internal Shariah compliance unit



Summary of governance framework for Shariah compliance for IFIs

Islamic financial institution

BOD

Audit Committee / ACG

Shareholders

Internal Shariah Audit / Shariah

Review / Shariah Compliance

AAOIFI & IASB

External Auditors

IFSB

Prudential Regulations / Standards

Central Bank

SSB

AAOIFI Standards

IFSB – 6Guiding 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.



Principles set out by the IFSB – 6

• To establish a comprehensive governance policy framework ensuring appropriate governance structure and procedure are in place

• Continuously adopt international best practices

General Governance approach of ICIS

• Accurate and timely disclosure of information to reflect the true picture of ICIS investment profile and its associated risks

Transparency in disclosure

• 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

Compliance with Shariah rules and principles

• 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

Additional protection for ICIS investors

Par

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t II

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IV

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

► Shariah Audit► Internal ► External► Supervisory

► Policies, procedures and systems

► Shariah Rating► Shariah compliance► Fiduciary responsibility



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?

► Independence► Objectivity – state of

mind / from the heart► Influence

► Teachers / school of thoughts

► Peers► Management

► Capability

Thank you

omar mustafa ansari head of islamic financial services group

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