Rasheed Mohammed Al Maraj: Corporate governance and Shari'a
compliance in Bahrain
Welcome speech by His Excellency Rasheed Mohammed Al Maraj, Governor of the Central
Bank of Bahrain, at the AAOIFI (Accounting and Auditing Organisation for Islamic Financial
Institutions) Annual Shari'a Conference, Manama, 7 May 2012.
* * *
Excellencies, distinguished guests, ladies and gentlemen, this conference comes at an
important time for the Islamic financial sector. This conference 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.
So I thought in this Welcome Address I would talk about one area where the Central Bank,
as a regulator and as a member of AAOIFI has a special interest. And that subject is
Governance.
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.
So against this background of improving levels of disclosures, the CBB will be making further
efforts through its review of its corporate governance and business conduct rules to raise the
bar for corporate governance. The review of the CBB corporate governance requirements
has already finished its first stage of internal review. The next will be consultation with the
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, we 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.
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.
Thank you.