ISLAMIC FINANCE PAKISTAN

The Islamic Finance Industry Newsletter

VOLUME 2 ISSUE 9 | SEPTEMBER 2011

Governance in Islamic Financial Institutions

By Muhammad Shahzad Hussain & Ammar Khalid
Race one with another for forgiveness from your Lord and a Garden whereof the breadth is as the breadth of the heavens and the earth, which is in store for those who believe in Allah and His messengers (Surah Al Hadid Ayat No. 21) Inside... Governance in Islamic Financial Institutions Editorial Editorial focuses on Islamic banking and poverty alleviation In the Spotlight Find our read of the month Local and International News Get a glimpse of what has been happening in the world of Islamic finance Institution in the Spotlight Riphah Centre of Islamic Business (RCIB) Upcoming events

Corporate Governance

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According to Organization for Economic Cooperation and Development , 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. Corporate governance signifies the manner in which business and affairs of the corporations are directed and managed by Board of Directors and Senior Management. In short, Corporate governance deals with issues arising out of the interactions between stakeholders.

should ensure compliance with relevant laws and regulations that reflect the societys values. Fairness deals with safeguarding the interest of stakeholders and protection of their rights.

Need for corporate governance

Fundamental Pillars of Corporate Governance

Corporate governance is a crucial part of financial institutions and banking industry as a whole, as the survival of the organizations depend on good governance standards. Banks 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 system.

The fundamental pillars of corporate governance includes: Accountability; Transparency; Responsibility; and Fairness.

Corporate Governance Models The Anglo-Saxon Model

It is also known as market based system. It is considered as the most dominant theory championed by United States and United Kingdom. Market-based system of United Kingdom and United States are characterized by arms length relationship between corporations and investors who are said to be concerned primarily about short-term returns (Frank and Mayer, 2004). It is based on the corporate concept of fiduciary relationship between the shareholders and the managers motivated by profit-oriented behavior. One of the most distinctive aspects of the Anglo-Saxon system is the structure of corporate ownership where the share ownership is widely dispersed and shareholders influence on management is weak.

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.
Accountability helps in clarifying governance roles and responsibilities, supports voluntary efforts to ensure the alignment of managerial and shareholder interests and monitoring by the Board of Directors capable of objective and sound judgment. The second pillar i.e. transparency, deals with timely disclosure of adequate information concerning corporate financial performance. The third pillar of corporate governance, responsibility, highlights that responsibility should be accepted by those having the authority to make decisions and corporations

The European / Stakeholders Model

In this system, companies raise most of their external finance from banks that have close, long term relationships with their corporate customers. The Stakeholders model is focused on a

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Editorial
Islamic banking and poverty alleviation
The sole objective of Islamic banks should only be profit/wealth maximization of its stakeholder or it should work for improvement of the social and economic system of the Islamic society. The perception prevalent that it is the responsibility of the Islamic bank, in particular, to undertake measures to improve the socio-economic conditions of the community. It ignores the fact that Islamic banks are working for the interests of its stakeholders i.e. shareholders and depositors, and the prime objective is to protect the interest of these stakeholders. The responsibility for improving the socio-economic conditions should first fall on the Government and it should be expected to take steps to improve the living conditions and provide basic necessities and by providing them opportunities necessary resources if the general public that should help them out of the poverty cycle and have reliable income. However, putting all the burden on Government does not absolve the corporate activities and individuals from working for the betterment of socio-economic conditions of the community. We have witnessed examples of the public sector in different countries establishing programs for poverty alleviation by providing the household (below the poverty line) employment opportunities such as involving in the construction of roads and pavements, and introduction of vocational training programs to provide them with the skill set to be able to have an opportunity to earn a decent livelihood. In this regard, a number of microfinance initiatives have also be undertaken to encourage the poor to engage in a business activity by providing with the small amount of loans. The Islamic banks can undertake initiative in which the banks will focus (to a certain manageable extent) according to their risk appetite for under privilege sections of the society which could be in form of geographical area or industry/ class of individuals etc. Further the Islamic banks should as a general rule try to facilitate individuals interested in setting up cottage industries or small businesses. By providing financing, the Islamic banks will encourage the entrepreneurship in these sections of the society and the involvement by Islamic banks as partners in the business of micro finance borrowers through different Islamic mode of financing will reduce the default rate amongst the borrowers. The practice of microfinance banks around the world to charge exorbitantly high interest rates from the borrowers and provide small amount of loans which leads to the borrowers remaining in the vicious cycle of borrowing. Contrary, the objective of Islamic microfinance should be to help the poor to establish their own business and eventually have a reliable income stream such that it is not dependent on the financing. In short, the Islamic banks should undertake concrete steps for introducing microfinance initiatives in partnership with public sector or NGOs to reduce or eliminate poverty. Let us know, if you know friends or colleagues who, in your view, may benefit from this newsletter. Send us their email addresses at newsletter.ifp@gmail.com
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Advisory Board
Syed Shahjahan Salahuddin Mufti Irshad Ahmed Aijaz Mufti Najeeb Khan Anwar Ahmed Meenai Mohammad Aslam Mujeeb Beig

Editor-in-Chief
Nusrat Ullah Khan

Associate Editors
Muhammad Shahzad Hussain Arshad Hussain Zubairi Ammar Khalid

Volume 2 Issue 9 | SEPTEMBER 2011

...Contd Governance in Islamic financial institutions

relationship-based model that emphasizes the maximization of the interests of a broader group of shareholders (Adams, 2003 -4). The Stakeholders model of corporate governance is practiced by majority of the European countries such as German, France, and Greece where many large firms are part of social and economic structure. It rejects the three main propositions of the American model namely: all stakeholders have a right to participate in corporate decisions that affect them; managers fiduciary duty to protect the interest of all stakeholder; and the corporations objective to promote the interest of stakeholder and not only shareholders.

Islamic Corporate Governance Framework

Islamic Corporate Governance Model

Islamic Corporate Governance framework is different as the sole objective of the Islamic corporation is not the profit / wealth maximization for its shareholders. Islamic corporation may adopt a totally different model of corporate governance or a modified version of the Stakeholderoriented model as an alternative for its

Framework for Corporate Governance for Islamic Financial Institutions

Islamic corporation may adopt a totally different model of corporate governance or a modified version of the Stakeholder oriented model as an a l t e r na t i v e for its corporate governance framework.
corporate governance framework. The foundation of Islamic faith is Tawhid and the basis for the corporate governance framework also emanates from this concept. However, it is observed that the main objective of many corporations including the Islamic corporations is to maximize the shareholders value of wealth. Islamic economic system try to establish that the firms objective is to maximize the welfare of all stakeholders and not the shareholders alone.
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Governance framework for Islamic Financial Institutions may be different because the institutions must obey a different set of rules i.e. those of the Holy Quran and meet the expectation of the Muslim community by providing Islamic financing modes. In addition, the financial structure of Islamic Financial Institutions (IFIs) is a bit different as their depositors are also the partners, so the IFIs face higher degree of fiduciary duties. Similarly, there are certain additional fiduciary responsibilities regarding charity. Poor governance in IFIs would undermine their credibility as financial businesses offering services in compliance with Shariah. Given the fragile nature of the sector and its ethical foundation, the effect of a corporate governance failure could be particularly damaging. Stakeholders of institutions offering Islamic financial services expect that its operations be carried out in compliance with principles of Shariah. They need a corporate structure that enables such an institution to implement good governance through Shariah compliant operations is therefore, essential. The Islamic corporate governance comprised of three equally important parts including corporate governance, Shariah compliance and additional fiduciary responsibility of Board of Directors. The Shariah compliance is of utmost

importance to IFIs. The IFIs should establish Shariah Board or appoint Shariah Advisor and also establish sound Shariah compliance mechanism to ensure that operation of the IFIs are in compliance with Shariah rules and principles. Additional fiduciary responsibilities involves setting up an additional governance committee or enhancement in the role of BOD/Audit Committee/ Shariah Board / Shariah Advisor. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) have issued standards with respect to governance in IFIs. IFIs shall adopt these standards for establishing a comprehensive governance system and reduce the risk of Shariah non-compliance.

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Personality in Spotlight
Mufti Muhammad Yahya Asim Shariah Advisor Habib Bank Limited - Islamic Banking
Mufti Muhammad Yahya Asim is an M.A in Islamic Studies, Arabic and International Relations and has graduated as a scholar from Jamia Darul Uloom, Karachi, Pakistan. He has also completed the specialization course in Islamic Jurisprudence from Jamia Darul Uloom, Karachi, Pakistan. He has been associated with different Islamic Banks and Islamic Investment Funds in the capacity of Shariah Advisor. Mufti Muhammad Yahya Asim, Shariah Advisor of HBL Islamic Banking, is responsible for advisory for Shariahcompliant banking and supervision of Shariah audit and compliance. Currently, he is also involved in conducting training sessions for HBL Islamic Bank's staff in the area of Islamic finance and has been teaching several subjects of Islamic fiqh since 2002 at Jamia Darul-Uloom, and different business institutes in Pakistan. He has also served as an advisor / member of Shariah Boards of several renowned institutions including: Centre for Islamic Economics; Atlas Investment Fund; and HBL Asset Management. He is also teaching at several branches of Islamic Learning Jamia Darul Uloom and various business institutes in Pakistan. Muhammad Yahya Asim has presented papers in numerous national and international seminars and has delivered lectures at academic institutions. He is also the head of Centre for Islamic Economics Institution, a division of Jamia Darul Uloom Karachi to provide a high standard Islamic banking diploma and certification courses to the banking and insurance professional of Pakistan.

Ask us
By Mufti Ibrahim Essa
Question: I want to know about the definition of Juala and what is the status of Juala contract in respect of its being binding or non binding? Answer: According to Shariah, Juala is a contract in which one of the parties (the Jail) offers specified compensation (the Jul) to anyone (the Amil) who will achieve a determined result in a known or unknown period. In principal, it is not a binding contract, and the general offerer (Jail) or the worker (Amil) is entitled to revoke it unilaterally. However, it becomes binding for the Jail when the worker commences work. If the worker undertakes not to revoke the contract during a specified contract, it is binding on him to abide by the undertaking.

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Volume 2 Issue 9 | SEPTEMBER 2011

Book in the Spotlight

Islamic Asset Management
An Asset Class on its Own? By Natalie Schoon Reviewed by Ammar Khalid
Islamic asset management has been growing at a rate similar to growth of Islamic financial industry as a whole and close to 700 funds have been incorporated in major databases with an estimated funds under management of around $70 billion (2011). This book reviews the Islamic asset management industry in greater detail including the types of funds offered and their operational procedures. The book is divided into eight chapters . In the first chapter, author provides an overview of the principles, norms and v a l u e s Those who read this u n d e r p i n n i n g highly informative book, Islamic finance. The author written by a n highlights those acknowledged industry general principles professional, will acquire that have an impact on Islamic a clear insight into a s s e t Islamic asset management management in particular. and the opportunities it T h e a u t h o r offers to both investors p r o v i d e s a n overview of the and asset managers. way funds are Simon Archer structured i.e. under Mudaraba Visiting Professor, ICMA or Wakala model. Centre, Henley Business The author also School, University of list different types of products Reading. available in Islamic finance that are of use to Shariah compliant fund investor. Furthermore, the author provides an overview of the different types of funds available to the investor, as well as, a high level overview of Islamic asset management market place. The Shariah compliant fund market has evolved significantly since the establishment of first Islamic fund in 1970s and as of the end of 2009, the number of funds listed in the Eurekahedge database was nearing 700 an estimated funds under management of around $70 billion. It is expected that the market will continue to develop as new investment opportunities occur and demand for different types of funds develops. The author focuses on operations of the fund. The operational structure for a generic fund, followed by a description of the different parties and their roles including managing bo ard , Sha ria h Supervisory Board, Management and other support functions are highlighted. Similarly, the processes to be managed by Islamic funds including subscriptions, redemptions, accounting and reporting, payment processing, risk and liquidity management are also discussed in detail. The role and responsibilities of the Shariah Supervisory Board, the mechanics of selecting the Board, governance issues, challenges and some specific issues in asset management are outlined. The book also contains a number of case studies of different types of Islamic funds prevalent in the market including Income funds, Equity funds, Funds of Funds and Exchange traded funds to provide the readers with an overview of the characteristic of different types of fund and their performance. The author concludes that although average size of assets under management is relatively low. However, as track records are becoming available, and the investor confidence is building, the interest in Shariah compliant asset management is likely to increase.

Natalie Schoon, CFA, is head of Product Research at Bank of London and The Middle Easr plc (BLME). Natalie has worked in international financial organizations throughout her career. She holds a PhD in financial analysis, is an accredited trainer for the Islamic Finance Qualification and was appointed Visiting Fellow at the ICMA Centre, Henry Business School, in 2010.
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About the author

Price: Rs. 4,100 Publisher: Edinburgh University Press Available at: Mansoor Stationery Mart
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Local News

Meezan Bank becomes advisor to first-ever Islamic short-term Sukuk

Meezan Bank becomes the advisor and lead arranger for the first ever short-term Sukuk for Kot Addu Power Company Limited (KAPCO). The Sukuk was issued by Kapco to meet its working capital requirements. The issue with a tenor of six months was structured by the Meezan Bank on Musharaka (Shirkat-ul-Aqd) basis. The introduction of short-term Sukuk by Meezan Bank imprints the opening of another much needed avenue for Islamic mutual funds which faces a scarcity of short-term tradable instruments.

Pakistan eyes bigger Islamic finance share

Pakistan shall focus on rural areas to significantly increase the growth of the Islamic Banking industry. Islamic banking, primarily being a faith-driven industry, has a significant potential in Pakistan as the concept directly appeals to the religiously sensitive segment of the society," said Saleem Ullah, director of the Islamic banking department at the State Bank. Islamic banking institutions in Pakistan are encouraged to open new branches in rural areas, where clients are traditionally against the interest based loans.

SBP raises allocation of Export Finance Scheme

The State Bank of Pakistan (SBP) has raised banks limits by 10 percent to Rs. 251 billion under the Export Finance Scheme (EFS) in March end quarter. SBP provided financing facilities under EFS to help exporters meet their working capital requirements. SBP allocated Rs. 251 billion in March end quarter compared with Rs. 228 billion allocation in same quarter of 2010.

Second Modaraba tribunal formed in Karachi

The federal government, in exercise of the powers conferred by Section 24 of the 1980 Modaraba Companies and Modaraba (Floatation and Control) Ordinance, has constituted another modaraba tribunal for Sindh. Earlier, only one modaraba tribunal, consisting of the Judge Banking Court-1, Karachi, was trying all classes of cases in the entire Sindh. Apart from Modaraba cases, it also adjudicates on the civil and criminal cases filed by other financial institutions such as banks, NBFCs and DFIs.

AlBaraka Islamic Bank's ratings affirmed

Capital Intelligence (CI), the international credit rating agency, has affirmed Bahrain-based AlBaraka Islamic Bank (AIB)'s long and short-term foreign currency ratings at BB+ and A3 respectively. These ratings incorporate a one-notch uplift on the basis of AlBaraka Banking Group (ABG) ownership, the parent.

Growing NPLs a challenge for authorities

The Pakistan Economy Watch (PEW) said growing non-performing loans (NPLs) has become a threat for financial system which should be taken as a challenge by monetary authorities. NPLs continue to grow and they have an reached an unprecedented level of Rs. 594.5 billion which should be a source of distress for economic managers trying to bring economy back on track.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.

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Volume 2 Issue 9 | SEPTEMBER 2011

Globe Trotter
NBAD & ADIB execute first Islamic Repo

The National Bank of Abu Dhabi (NBAD) and Abu Dhabi Islamic Bank (ADIB) had executed GCC's first ever Islamic equivalent of the conventional Repo product, a collateralized Murabaha transaction, opening the gateway to an alternative method of liquidity management in the Islamic banking sector. NBAD and ADIB jointly embarked on this initiative to formalise the Master Collateralised Murabaha Agreement (MCMA), thus enabling Islamic banks to utilise their holdings of sukuk.

3 Info Tech receives Best Takaful Technology Company

3 Infotech Ltd., a provider of financial technology solutions and services, received the "Best Takaful Technology Company" at the 5th International Takaful Summit 2011 in London. These annual awards honor companies and practitioners that have contributed the most to the growing Takaful market.

Al Baraka to launch Bank in France by first quarter of 2012

Bahrain based Islamic bankAl Baraka will expand to France next year and expects to launch a bank with a capital of 100 million Euros ($142 million) by the first half of 2012. Al Baraka had announced in 2009 its plan to launch operations in France but had to postpone it due to the financial crisis.

Bahrain Islamic Bank and Al Salam in Merger Talks

Bahrain Islamic Bank and Al Salam Bank are in merger talks to form the Gulf Arab state's third largest bank in Bahrain, with assets of 1.7 billion dinars ($4.5 billion).

Islamic finance honor for Standard & Poor

For the fourth consecutive year, Standard & Poor's Ratings services has been voted Best Ratings Agency at the International Takaful Awards 2011 in London, reinforcing its position as the leading rating agency for Islamic insurers.

CIMA launches Advanced Diploma in Islamic Finance

CIMA held the UK launch of its new advanced diploma in Islamic finance at the Islamic Finance News (IFN) 2011 Europe Forum in London. The qualification is the first advanced diploma in Islamic finance launched by a professional chartered accountancy body.

Central Bank of Oman formulating standards for Islamic banking sector

Central Bank of Oman (CBO) is in the process of forming a central national committee for determining the legal regulations and standards for Islamic banking in the country. According to CBO Executive President, H E Hamoud al Zadjali, coordination with Grand Mufti's Office has already started. CBO will pursue efforts for crystallizing the Islamic banking sector within a legal regulatory environment.

Jakarta Futures Exchange (JFX) will launch Shariah -backed commodity products

The Jakarta Futures Exchange (JFX) will launch Shariah-compliant commodity contracts shortly, according to the director at JFX. JFX plans to launch contracts for several agricultural products, including coffee, cocoa, crude palm oil and rubber in the first stage, with energy products like coal, diesel oil and ethanol to follow.

Disclaimer:
The news included here is on the basis of information obtained from local and international print and electronic media sources. IFP team does not accept any responsibility about their bona-fide.
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Institution in the Spotlight

Riphah Centre of Islamic Business (RCIB)
Riphah Center of Islamic Business (RCIB) has been established to face the challenge of producing socially responsible, ethically and morally inspired managers and leaders to improve the business world. RCIB is taking the inspiration from the divine command O you who believe! Eat not up your property among yourselves unjustly (The Quran 3:29), for designing all its academic and advisory programs. These elements of the Islamic system are the integral part of all the activities of RCIB, and go side by side with the objectives of achieving excellence, knowing that in this competitive world, only those succeed who are the best (And of course, whoever sought the best, will succeed today - The Quran 20:64). Getting the leaders, managers, policy makers recognized nationally and globally for their commitment to ethical business by awarding a credible and internationally recognized charter to those who meet the required standards. For modern financial and commercial institutions, it is wrong to assume that Islamic heritage has nothing to offer or that Fuqaha (Islamic Scholars) have contributing to the development of a global network of ethical businesses and business leaders and policy makers by liaising with similar communities in other parts of the world. Extending frontiers of knowledge to contribute to wellbeing of mankind by conducting original research on issues relating to Islamic business.

Objective of RCIB

Mission

The mission of RCIB include: Creating a community of socially responsible and ethically motivated businesses and business leaders/managers through education, training and research, advising and consulting, maintaining up to date resource centre on all aspects of Islamic business charter to the business leaders and giving managers with respect to their commitment to ethics, values and social responsibility liaising with other world communities committed to ethical and socially responsible business. Developing ethically and socially responsible human capital in the private sector, public sector, government organizations, non-government organizations at national level and global level interested to conduct their business in ethical and socially responsible ways. Improving efficiency and performance of the operations and policies of private businesses, public policy makers, and non profit and welfare organisations, committed to conduct their businesses and policies while adhering to Islamic values/ethics.

The objectives of RCIB include: Developing ethically motivated and socially responsible human resources for: Private sector businesses Public Administration International/foreign businesses Building capacity in the area of Public Policy with Islamic vision Helping Government Organizations and NGOs to enhance the ethical standards of their practices Producing original research through Ph.D Program Promoting ethical and socially responsible business and trading

RCIB - Programs and Services

MBA Islamic Business and Finance MA Islamic Banking and Finance Certificate / Modular Courses Management Consultancy Corporate Training Conferences and Seminars Shariah Advisory Services Research in Islamic Businesses, Finance and Management Resource Center for Islamic Business

Upcoming events
World Islamic Finance Summit 2011 is due to be held on 21-22 September 2011 in Karachi. The summit is being organized by Publicitas Conferences with support from State Bank of Pakistan. Workshop on Profit Distribution Mechanism Islamic banking which will be held on 19-21 October 2011. Workshop on Islamic Housing, REITs and Construction Finance to be held on 12-13 September 2011, organized by Al Huda Centre of Islamic Banking & Economics. The 7th Annual World Islamic Funds and Financial Markets Conference to be held on 26-27 September 2011 in Bahrain. International Summit on Islamic Corporate Finance (ICFS 2011) to be 10-11 October 2011 in Abu Dhabi, UAE
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