1.

Name and explain using relevant examples the 10 Importance issues in implementing
corporate governance good practice in Islamic banking institutions
Answers

2. In the Islamic and conventional bank, who is responsible for good governance?

Answer
 Primary responsibility rests with bank boards and senior
 Bank supervisors have an important role to play by providing guidance & assessing bank
practices
 Others can promote good governance
► Shareholders
► Depositors & customers
► Employees
► Auditors
► Banking industry associations
► Credit rating agencies
► Governments, securities regulators and stock exchanges
3. Explain the 8 principles for bank boards and senior management as recommended by the
Basel committee guidance on corporate governance
Answers
► Principle 1: Board qualifications, capabilities and responsibilities
► Principle 2: Board’s role regarding the bank’s strategic objectives and corporate values
► Principle 3: Lines of responsibility & accountability
► Principle 4: Ensuring oversight by senior management
► Principle 5: Auditors and internal control functions
► Principle 6: Board & key executive compensation
► Principle 7: Transparent governance
► Principle 8: “Know your operational structure”
4. Discuss the OECD principles on corporate governance and show how they enhance good
governance in the Banking industry
Answer
A. Corporate governance (CG)
 A set of behavioural patterns: vis-à-vis shareholders, stakeholders and boards
 A normative framework: Legal and voluntary norms
B. OECD Principles

Address both areas:

► « Best provisions on behaviour »

 active ownership by institutions and intermediaries
 competent boards
 LT value increasing behaviour of companies
C. Key normative requirements, e.g.: Shareholder protection and equitable treatment
under the law.

they enhance good governance in the Banking industry are

• Reduces equity risk

► Equity exposure of larger numbers of households

► CG signals information asymmetries and probability of expropriation of shareholder
value

• Improves performance: With good corporate governance, companies can improve their
earnings potential

• Improves institutions

► Lack of properly functioning private institutions and corporations impacts on growth by

limiting access to equity financing and
► The distribution of income within a society
5. Discuss the importance of business ethics in banking business in general and is it any
different from Islamic banking business.
Answers
Companies experience ‘social blowback’ when stakeholders perceive that they have
breached their deal with society
Good business ethics is a prerequisite for good strategic management.
 A. Ethics:
► ethics is the key to a good business reputation
► Within it is important that everyone in each business sector ensure that trust
and wealth are guarded by the institution
B. Relations between ethics and business:
► “If people within business and non-business organisations are to build their
reputation on integrity and are sensitive to the ethical dimensions of their
decisions, they must be guided by sound moral standards
► The need for ethics:
► Without ethics, non-acceptable behaviour would result in chaos and disorder
(Stewart, 1996)
► Without ethics people would not trust finance professionals to act with
integrity
► Without ethics insider trading would result in an unjust advantage over other
traders
► Without ethics conflict might happen between a stakeholder and shareholder’s
interest.
C. Corporate Governance:
► Ethics of the business and financial institutions can be achieved with good
corporate governance
► Such as good board practice
► Disclosure and
► Transparency
► Maintaining shareholders rights, and
► Commitment to good corporate governance

comparison between general & islamic perspectives

A. legal interpretation:
 General: In our society today, legal interpretations are based on contemporary and often
transient values and standards.
Islamic perspective: It is guided by the Shariah and a collection of previous fiqh rulings

B. Organization factors

General: organisations can affect of influence the behaviour of participants. One of the
essential sources of organizational influence is the degree of commitment of the
organizationals leader to ethical conduct. This commitment may be communicated through a
code of ethics, policy statement etc

Islamic Perspective: Organisation that engages in Halal business can foster ethical
behaviour through the development of an islamic code of ethics

C. Individuals’ factors

General: factors shaping one’s ethical behaviour includes individual background and
upbringing, peer influence, life experience, situational factors, religion and personal values.

Islamic Perspective: individual’s upbringing is guided by the Quran and Sunnah

6. Define corporate social responsibility (CSR) and its importance in Islamic banking and
financial business?
Answers
In general terms, CSR encompasses the responsibilities that businesses have to the
societies within which these businesses operate. The European Commission defines CSR
as “a concept whereby companies decide voluntarily to contribute to a better society and
a cleaner environment.”
Specifically, CSR suggests that a business identify its stakeholder groups and incorporate
their needs and values within its strategic and operational decision-making process.
 Mandatory forms
 Screening of investments
 Earning prohibited by sharia
 Responsible dealings with the clients
  Employees
 Zakat

7. Discuss the challenges in identifying the object of a corporate responsibility

The challenges are identified, the most important of which are: lack of transparency,
proposal of general criteria, neglection of the main business stakeholder and not
introduction of criteria relative to the CSR outcome. Giving attention to the above
challenges, a more complete assessment methodology can be made
Answer
8. Discuss the lawful and prohibition matters in business transaction that set the ethical
standard in islamic banking and finance.
Answer
1. Dealing in Prohibited (Haram) Items
Dealing in unlawful items such as carrion (dead meat), pigs and idols is strongly prohibited in
Islam. Dead meat would mean the flesh of any bird or animal dead from natural causes, without
being properly slaughtered in an Islamic way. A Muslim, therefore, will not eat the flesh of such
an animal or bird. Flesh of an electrocuted animal, or of an animal killed by the blow of a blunt
weapon, and of the strangled one is also proscribed in Islam. Also proscribed is the flesh of the
animal that has been killed or slaughtered in ways other than Islamic. It is, therefore, not
permissible for a Muslim to trade in dead meat. Likewise, trading in pork or intoxicants and sale
of idols and statues is not permitted in Islam
2. Sale of Al-Gharar (Uncertainty, Risks, Speculation)
In Islamic terminology, this refers to the sale of a commodity or good which is not present at
hand; or the sale of an article or good, the consequences or outcome of which is not yet known;
or a sale involving risks or hazards where one does not know whether at all the commodity will
later come into existence
3. Arbitrarily Fixing the Prices
Islam grants absolute freedom to traders provided they adhere to the code of lawfulness. It does
not, therefore, encourage the practice of price–fixing and leaves the traders to earn the profits
from each other within the lawful limits. As a matter of principle public authorities are not
allowed to fix the prices of commodities by force. This is because rise and fall in the prices are
linked to various factors other than the greediness of the traders and fixing the prices may
endanger both public and private interests
 4. Hoarding of Foodstuff
The Arabic word for hoarding is Ihtikar. It means storing foodstuffs or withholding them in
expectation of rise in their prices. Sometimes, a handful of traders operating in the market buy
the entire quantity of an item, rice for example, and store it up with the object of selling it later at
the time of scarcity to draw maximum profit out of it and to dictate the prices. The consumers are
left with no choice but to purchase the article concerned from the one who hoards, as he is the
only one in the market who holds it.
5. Exploitation of one’s Ignorance of Market Conditions
One of the most common unethical practices in modern business is to exploit one’s ignorance of
market conditions. Sometimes it may happen that a buyer arrives in a town with objects of prime
and general necessity for selling them in the market
6. Al-Najsh (Trickery)
The term Al-Najsh means an action in which a person offers a high price for something, without
intending to buy it, but just to cheat or defraud another person who really means to buy it. The
person practising it may collaborate with the seller to offer high prices in front of the buyers
merely as a means to cheat them.
7. Cheating and Fraud in Business Transactions
The traders and businessmen generally have a tendency to motivate the customers by adopting
fraudulent business practices. Islam strongly condemns all such practices in business transactions
(Al-Ghashsh).
8. Giving Short Measures
Another form of deceit is to manipulate weights and measures. It refers to the act of taking full
measures from others and giving them short measures in your turn. Giving short measures was a
common malaise plaguing the pre-Islamic days