imprudent business conduct had been crossed. by now i am sure you will be asking what relevance do these comments on the conventional industry have for shari ’ a - compliant institutions. my answer is : a great deal. if we examine carefully the trends in islamic banking in the years prior to the crisis, we can see that there are important similarities between the practices of islamic financial institutions and those of conventional ones. this should not be surprising because high returns require high risks, and the high returns achieved by islamic banks could only be generated by taking on a corresponding degree of risk. it is not difficult to see the parallels between conventional and islamic finance during the years prior to the crisis. just like conventional institutions, islamic financial institutions increasingly funded long - term assets with short - term funding. although the assets and liabilities were structured in a shari ’ a - compliant manner, the degree of maturity mismatching was just as great as practiced by conventional institutions. in some cases, for example where the asset involved a long - term development project, the degree of maturity mismatching was significantly greater than that practiced by conventional financial institutions. islamic financial institutions did not invest in cdos or other structured financial products, and thus were saved from exposure to the “ toxic ” debt that triggered the financial crisis. nonetheless, the assets in which they did invest were just as illiquid as structured financial products, and in the past two years have been just as difficult for them to sell. thirdly, like their conventional peers, islamic financial institutions also greatly increased their leverage. they did so in a shari ’ a - compliant manner, but balance sheets expanded on the back of static capital levels, just as they had done in conventional banks. despite the extraordinary returns earned during the period of rapid expansion, capital was not retained in the institution but was distributed to shareholders in the form of dividends and to staff in the form of bonuses. although the parallels between conventional finance and islamic finance in the years prior to the crisis are not total, there are enough of them to suggest that many of the lessons are the same. conventional banks are being forced by market pressures and by regulators to rethink the business models that they developed in the years prior to the crisis. regulators are forcing them to pay more attention to leverage and the need for high quality liquid assets. market pressures are also forcing these banks to become less ambitious in their growth strategies and to concentrate on their core businesses of deposit - taking and lending. the

rasheed mohammed al maraj : the corporate governance code of the kingdom of bahrain welcome address by his excellency rasheed mohammed al maraj, governor of the central bank of bahrain, at the launch of the proposed new corporate governance code, manama, 16 march 2010. * * * distinguished guests, ladies and gentlemen : it gives me great pleasure to be with you here today and to take part in the launch of the proposed new corporate governance code for all public companies in the kingdom of bahrain. although this initiative has been led by the ministry of industry and commerce, the central bank has been involved at all stages in the development of the new code and we are strong supporters of it. we will be working with the financial sector and listed companies on the implementation of both the spirit and letter of the new code. although high standards of corporate governance are essential for all publicly listed companies, they are especially important for firms in the financial sector. if i may refer back to the speech that i gave at the world islamic banking conference in december of last year, financial institutions – and banks in particular – are not like other corporations where directors need to consider only the interests of shareholders. financial institutions have a special position of trust in that they are charged with looking after other people ’ s money. this means that the interests of creditors, depositors, policy holders, and clients need to have equal weight with those of shareholders and the decisions taken by the board of directors. recognition of the directors ’ fiduciary responsibilities is, therefore, an essential element of corporate governance for banks and other financial institutions. unfortunately, the global financial crisis has provided many illustrations of failures of corporate governance. there is common pattern behind many of the failed financial institutions of the last 18 months. in many cases, the chief executive was a dominant figure who made sure that he alone took all important decisions. there was no culture of open debate and discussion within the senior management of these institutions, with the result that other members of the board of directors did not feel able to challenge the chief executive ’ s decisions. many bank boards lacked banking experts. individuals were recruited to the board of banks for their connections rather than for their knowledge of the banking industry and their ability to ask the right questions. in the case of many failed banks the standards of corporate governance fell far short of what should have been expected. it was the board of directors that should have challenged the aggressive growth strategies pursued by some chief executives. it was the board of directors