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.

. we can set entry and licensing conditions to make it difficult for those who are dishonest or incompetent to set up firms or to work in the industry. we can require firms to have adequate financial resources to back the promises that they make, and adequate control systems to ensure that they can properly identify and manage the risks that they are taking. we can also mandate training and competency requirements for staff who deal directly with a firm ’ s customers. however, a regulator cannot be everywhere at once. nor should we aim to be. to a very large extent, maintaining public confidence in financial firms is the job of the firms themselves and their employees. as regulators we cannot set rules that ensure that people will behave honestly and with integrity. those are values that must come from within, they must be part of a firm ’ s culture. only an industry that takes seriously the need for ethical standards will be able to grow and prosper and to offer its customers the services they require. bis central bankers ’ speeches for this reason, i am very pleased that the cisi has chosen the subject of “ integrity at work ” for its first interactive seminar in bahrain. by encouraging participants to debate real life case studies, to consider their responses to them, and to suggest ways to deal with these problems, this learning environment will encourage participants to think more deeply about the ethical implications of their work place actions. as i mentioned earlier, bahrain is on course to have the largest cisi membership outside the uk. this fact demonstrates the already strong emphasis that firms in bahrain place on the importance of integrity and trust. it also illustrates one of bahrain ’ s many continuing strengths as a financial centre, our deep pool of qualified and experienced financial sector professionals. factors such as these will ensure that we can move on from recent events and remain at the forefront of financial centres in the mena region. thank you for your attention. bis central bankers ’ speeches