Ensuring the reinforcement in IFIs through the development of an association/ college of Shari'ah scholars.
The core values of corporate governance ("CG") are, to a large extent, fundamentals of an Islamic society. CG primarily means that the decision making power of the corporate institution is divided between executives, i.e. office holding, and non-executives i.e. those with no office or vested interest. Its secondary meaning is that the activities and decisions of the decision makers i.e. the executive directors and non-executives directors are open to view and scrutiny from all shareholders. Thus, the underlining values are fairness and transparency.
If we take a step backwards into Islamic history we find that the era of the Caliph Umer (May Allah be pleased with him) boasts tremendous examples of fairness and equality without consideration for power or position.
It is narrated that the son of Amr Ibn A'as was fond of horse racing when his father was the Caliph's governer in Eygpt. Once, he raced a local Egyptian and lost. In sheer disappointment at his loss and in anger at the local man, he began beating him with a club saying that he was the son of nobility and that the man had no right to defeat him. This man then went to the Caliph and protested. Amr and his son were summoned to justice and a club was handed to the afflicted man and he asked to repay the beating. Umer (May Allah be pleased with him) then said to Amr: Why have you made servants of men when their mothers bore them free?
This incident is a hallmark of the teachings of Islam. The Prophet (SAW) himself said that he would rather cut his daughter's hand if she stole than compromise the orders of Allah, Islam proposes unrendering fairness and equality at all times and places.
On the matter of accountability the Prophet Mohammad (PBUH) said:
"Each one of you is a guardian, and each guardian is accountable to everything under his care" (Mushka'at)
The interpretation of this hadith into modern business dealings may be that everyone in business transactions/activities is indeed accountable for all their actions. It is the belief of Muslims that they will be accountable for all their actions and the actions of what was entrusted to them in this world and in the hereafter-life. When the basic teaching of this hadith is imported into the operation of corporations it means a high level of fiduciary duty of directors and strong and independent checks on their powers.
Transparency, in verses 282 of Surah al-Baqarah, states a detailed, step-by-step process for transacting:
"O you who believe, when you transact a debt payable at a specified time, put it in writing, and let a scribe write it between you.... And do not be weary of writing it down, along with its due date, no matter whether the debt is small or large. That is more equitable in Allah's sight, and more supportive as evidence, and more likely to make you free of doubt...... when you transact a sale. Neither a scribe should be made to suffer, nor a witness.........." S.2, V.282
This would in the sphere of corporate governance and means that in addition to stringent director duties such duties should also be codified in a code of directors' duties. This would be more beneficial then saying that a "high level" of fiduciary duty is owed by a director to others members of the company. Till recently, a director's duties were unwritten in the United Kingdom but lo and behold, the legislature there has not decided (in line with the Islamic ideology) that they should be properly codified.
Singapore and Australia have also taken similar measures. If we lay down certain duties than have been incorporate into the Companies Act 2006 in the UK we may use this as a yardstick to gage the true independence of Shari'ah Advisors in Islamic Financial Institutions (IFIs), an examination of which is our purpose here.
S174 to exercise reasonable care, skill and diligence
S175 to avoid conflicts of interest
S176 not to accept benefits from third parties
In an IFI, the Shari'ah advisor leads the vision and mission of the institution. They are powerful people in the corporation because they influence everything from the scope of operation to the volume of transactions being conducted to the marketing methods and strategies being used. Corporations seek to meet quarterly, half-quarterly and annually at all costs whereas Shari'ah Advisors or rather Shari'ah control enforcers are there to ensure that 100% Shari'ah compliance is maintained. Thus there is a looming issue of conflict of interest should the Shari'ah officer be an employee of, hold an interest in, or have a non-professional relationship with the IFI.
It can be argued that an advisor does not ensure compliance. An enforcer ensures compliance. IFIs need more Shari'ah compliance enforcers if there is a desire to increase the pace of the growth in the current modern system.
The proposed role of a Shari'ah enforcer in this proposal bears with it all the above stated principles of corporate governance and seeks to ensure independence.
Position of the Shari'ah Advisor:
It is proposed that there must an independent association/ college of Shari'ah scholars through which Shari'ah officers are hired by IFIs and the remuneration of these officers must be provided for by the association/ college itself.
This association/ college will comprise of the top scholars in the country. It will provide them the independence to oppose the transaction of an IFI on Shari'ah grounds without having to consider their financial or non-financial interests. (It doesn't mean at all, at present, that Shari'ah scholars have any financial or non-financial interests, but it is just to recommend upholding the best practices for IFIs).
It is further proposed that the IFI must not have a choice as to which advisor advises it from the association/ college. In the case of Pinochet v Amnesty International, Lord Hoffman was not permitted to adjudicate because of his interest in Amnesty. Lord Hope said: "In view of his links with Amnesty International as the chairman and a director of Amnesty International Charity Limited he could not be seen to be impartial....his relationship with Amnesty International was such that he was, in effect, acting as a judge in his own cause."
It must thus be ensured that the Shari'ah officer is not "a judge in his own cause".
It is best for all correspondence and opinion to be made through electronic medium to ensure that there is no breach of confidentiality and independence. If physical presence is absolutely necessary, Chinese walls must be erected within the IFI.
An association/ college of Shari'ah Scholars will also eliminate the need to have both an advisor and a board. It alone will suffice.
The association/ college may also publish a report of "Shari'ah review and compliance" which allows the public a fair view of an IFI's Shari'ah compliance.
It must never be forgotten that the failure to be Shari'ah-compliant would compromise an unbearable moral cost, which is much more injurious and severe than the loss of economic revenue in terms of public perception and confidence.
The proposal is not one which may be described as financially non-viable or impractical because the reality is that there could be sustainability issue for IFIs without Shari'ah enforcement. If these scholars collect to form an association/ college, IFIs will have to resort to this association/ college and cannot bypass it.
About the Author
Asim Hameed is Product Development, Shari'ah Compliance & Islamic Financial Advisory (PDSC) Dept. at Meezan Bank Limited. He may be contacted at asimhameedkhan@hotmail.com. The author gives thanks to Mr. Haris Essa, Bar-at-Law for his assistance in this article.
© Business Islamica 2012
