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.

offer to purchase substantially all of the assets of lehman ’ s brokerdealer, the new york fed used this financing to facilitate a transition of certain broker - dealer operations from lehman to barclays. once judge peck of the united states district court for the southern district of new york approved the arrangement at the end of the week, those operations were in barclays ’ hands. while there was nothing truly “ orderly ” about the lehman bankruptcy, the new york fed ’ s overnight financing of the lehman broker - dealer avoided further market disruption. this piece of the overall lehman story is rarely told, and yet it deserves attention. in contrast, lehman brothers international europe ( lbie ), the u. k. broker - dealer, was immediately placed into administration, its employees were sent home without paychecks, and the u. k. broker - dealer had no opportunity to wind down its positions. as such, its counterparties ’ positions were likewise frozen, which created liquidity problems and significant market exposures as asset prices moved in the wake of lehman ’ s failure. conclusion in conclusion, let me say a few words about regulatory reform and the tools we had to work with. i mentioned earlier the guarantee tool that the congress added when the eesa was enacted. another important development is the dodd - frank legislation, which promises more effective comprehensive consolidated supervision of systemically significant organizations like lehman. this supervision will demand higher levels of capital and liquidity, precisely the type of medicine that lehman needed. systemically significant non - banking financial companies, like lehman, will also be obliged to submit resolution plans which will help to avoid some of the problems experienced after lehman filed its chapter 11 petition. further, if a systemically significant organization like lehman needs to be resolved, dodd - frank creates a new resolution procedure that should facilitate a more orderly winddown. thank you again for the opportunity to appear before you today, and i look forward to answering your questions.