Title: Legal Risks and Good Governance for the Growing Islamic Finance Industry
1Legal Risks and Good Governance for the Growing
Islamic Finance Industry
Hamid Yunis Partner
2Contents
- Fundamentals of Islamic (Shariah Compliant)
Finance - Basic requirements and philosophy
- Overview of Islamic Finance Market
- Types of Islamic Finance Products
- Basic Assumptions
- Additional Matters
- Use of Islamic Finance in Different Market
Sectors - Governance
- Background
- Products and processes
- Regulator/operator issues
- Specific issues
- International Guidance
- Basel
- IFSB Standards
- General Principles
- Non executive functions
- Conclusion
1
3- Fundamentals Islamic (Shariah) Finance
- Quranic (Shariah Law) principles
- Riba (interest/unjustified rewards/unlawful
gain) - Gharrar (uncertainty, risk, speculation)
- Halal (religiously permissible)
- Haram (not religiously permissible)
- Qard Hasan (good loan)
- Al-Wadia (safekeeping).
2
4- Basic Requirements and Philosophy
- true risk sharing
- no exploitation of a weaker position
- not socially unproductive
- not economically wasteful
- promotes economic and social development and
- charitable (zakat).
3
5Overview of Islamic Finance Market
- Islamic and Dual Banking Systems
- Retail Islamic finance products offered for a
number of years, some low key e.g. Middle Eastern
banks, others high profile e.g. HSBC - Islamic Windows in major Global Banks
- Islamic Bank of Britain
- Primary Market initially basic finance products
- Compatibility with conventional products
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6- Types of Islamic Finance Products
- Equity
- Trade Financing
- Asset Financing
- Lending
- Wholesale Retail Products
- loans
- partnership investments
- forex
- fund transfers
- letters of credit
- securities safe keeping
- investment management and device
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7- Al-Wadia (safekeeping) usually not remunerated
- Takaful (Insurance)
- Funds Work
- SUKUK/Securitisation (Capital Secondary
Markets) and - Derivatives/Funds Management.
6
8- Basic Assumptions
- Underlying asset must be acceptable
- Different interpretations on what proportion of
asset must not be haraam - Proposed structure of transaction has to be
acceptable - No prohibited activities (proportionate approach)
- Need to account for regulatory requirements and
comply with two sets of law (Shariah and law of
country)
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9- Additional Matters
- Zakat (specified amounts to be allocated from
disposable income) - Shariah Boards competition, pragmatic
approaches - Urf (custom)
- Darura (overriding necessity)
- Maslaha (general interest to justify)
- Hiyal (ruse)
8
10Use of Islamic Finance in Different Market Sectors
- Real Estate
- Project Financing
- Co-financings (Power, LNG, Oil Gas)
- Retail Banking
- Depositors
- Investment Account Holders
- General Leasing
- Ijara
- Asset Finance
- Bond (SUKUK) Issuance
- Private Equity Funds
- Insurance (Takaful)
- Capital Markets (Sukuk/Arboun/Salaam)
9
11GovernanceBackground
- Developing, structuring and marketing Shariah
compliant financial products can be cumbersome
and complex - IIFS needs to account for regulatory requirements
and comply with two sets of jurisprudence/law
(Shariah and the law and regulations of relevant
jurisdiction)
10
12Products and Processes
- Products and Processes need to be effective from
the following viewpoints - Understandable
- Competitively priced
- Tax effective
- Available and transparent
- Not administratively burdensome
- Not alien to regulatory requirements
- Governance of institution offering Islamic
financial services needs to be the same
11
13Regulator/Operator Issues
- Scope for the continuing development of good
corporate governance in the field of Islamic
finance - No inconsistency with Shariah
12
14Specific Issues
- Islamic finance industry needs to, in particular,
focus on issues regulators will be concerned with
- Remember that Shariah-compliance will not
normally be an issue for non-Islamic countries or
where Shariah is not part of a general legal
framework - Shariah Supervisory Board presence and scrutiny
therefore essential
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15Specific Issues (cont)
- Islamic finance industry regulators need to
consider regulation of Shariah Supervisory Board - Islamic financing industry need for a unified
front to regulators - Standardisation of models used, terminology and
treatment - Dissemination of codes of best practice
- Practical Adaptability
14
16Guidance
- Many forms of International and National Guidance
available - OECD principles
- UK Stock Exchange Combined Code
- Cadbury Report
- Hempel Report
- Higgs Report
15
17Guidance (cont)
- France/Germany different forms of governance
models - US Sarbannes-Oxley
- Other/Corporate Governance Standards
- Country Specific
- Accounting and Industry Specific
- IFSB guidance
- Principles outlined
- Comply or Explain
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18Basel
- Basel Committee on Banking Supervision
- 1999 paper
- 2006 paper
17
19General Principles
- Establish Good Governance Policy as a principle
of Shariah - Monitoring and work of
- Board Committees
- Executive Management
- Shariah Supervisory Board
- Internal and external auditors
- Different Stakeholders
- Mechanisms of balancing the roles of different
stakeholders i.e.) shareholders, management, IAHs
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20Non Executive Functions
- Role of non-executive directors/managers
- Guidance
- Oversight
- Compliance issues
- Future compliance policy
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