As the level of innovation increases in a more liberalised and deregulated environment, a governance framework that is more principle-based rather than rule-based becomes relevant. The approach would thus need to develop the broad but clear guidance, standards and core principles rather than prescriptive rules and regulations. The process would involve identifying the risks and ensuring that the institutions have the capacity and mechanisms of internal controls and the systems to undertake and manage the recognized risks. While good governance is indispensable, the relevant principles needs to be applied in a manner that is in harmony with the nature of the different transactions peculiar to Islamic finance. In particular, the framework should endeavour to engender the support of all the stakeholders of the Islamic financial institutions. This entails having in place the systems that will ensure that the obligations to all the major stakeholders - the customers, depositors, investors, entrepreneurs, owners and the community at large - are met with integrity and with adherence to the rules and regulations. Indeed, in an environment where businesses needs to balance between the interests of the various stakeholders which at times could be conflicting, an appropriate governance framework for active checks and  BIS Review 39/2005  1  balances becomes particularly important. While the roles of shareholders and board of directors are certainly critical, it should not diminish the roles of the other stakeholders. Secondly, there must be robust corporate governance framework at the institution level with the shareholders and the board as key players.

At the institution level, corporate governance is essentially about how the company is managed and controlled and the manner to ensure proper accountability for those in-charge. Central to the corporate governance framework is thus to ensure integrity, strong internal controls and risk management practices. In this connection, the shareholders' greatest influence is in the appointment of both the independent and non-independent directors; to ensure the selection of those who are able to set clear direction and drive for effective corporate governance at the institutional level. The shareholders have a role to ensure that the board comprises a good mix of competent persons with relevant experience to provide effective representation. The board of directors must be able to protect the long-term objectives of the institution and provide leadership for good governance by setting a clear corporate governance framework for the institution, and effectively monitoring its implementation. The institutional broad governance framework will serve as the focal point of reference for management and staff in relation to corporate governance. It is also a manifestation of the institution's vision and strategy to achieve good governance whereby shareholders and other outside stakeholders are able to evaluate the level of commitment of the institution towards enhancing good governance. Islam strongly advocates all forms of positive governance. The design of the framework however, should not be made in isolation of the universal values expounded in the existing governance principles and standards that are consistent with Islamic principles.