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Title : Comparative study of sharia laws and Indian banking laws on Corporate
Governance and Corporate Social Responsibility in Banking and Finance
Ecosystem

Conference Paper · November 2022

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Title : Comparative study of sharia laws and Indian banking laws on Corporate
Governance and Corporate Social Responsibility in Banking and Finance Ecosystem.

Abstract:
Banks are one of the most important economic wings of any country. In this modern time,
money and its necessity are very important. A developed financial system of the country
ensures to attain development. A bank provides valuable services to a country. To attain
development there should be a good developed financial system to support not only the
economic but also the society. So, a bank plays a vital role in the socio-economic matters of
the country.
Corporate governance is an age-old concept which provides for a set of transparent
relationships between an institutions management, its board, shareholders and other
stakeholders. Corporate Governance is now recognised as a paradigm for improving
competitiveness. Now corporate governance has become a more dynamic concept and a not a
mere static one.

Corporate governance principles and codes in Islamic banks based on Sharia laws have been
developed in different countries and issued from Central banks, stock exchanges, corporations,
institutional investors, or associations (institutes) of directors and managers with the support
of governments and international organisations. There is, of course, no single recognised best
model of corporate governance.
Corporate governance in sharia requires to abide by a set of rules called the Islamic Rules or
Sharia Principles. These rules govern the banks operations and transactions in accordance with
Islamic principles derived from the Quran and Hadith.
In Islamic banking, Sharia currently has a crucial role which is not limited to governing bank
transactions and operations. Its role extends to monitoring and supervising the roles of all
individuals within the banking system.

The law relating to Banking in India today is the outcome of gradual process of evolution
before 1949. The Indian companies Act 1913 contained special provisions relating to banking
companies, which were inadequate and were subsequently incorporated in the comprehensive
legislation passed in 1949 under the name of Banking Regulation Act 1949. This Act was
suitably amended a number of times to insert new provisions and to amend the existing ones
to suit the needs of changing circumstances.

This proposed paper examines as follows, while using derived method of study based on
published data.

o What is framework instituted in sharia and Indian banking laws for effective
management and control of banking Business.

o What are new Key areas can be initiate to bring new developments regarding Corporate
Social Responsibility through sharia laws in Indian banking legal Framework

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 o What role sharia law can play in effective control and management of Banking and
Finance.

o Comparative study of implications of sharia law and Indian banking law on

development of socio-economic ecosystems.

Keywords: corporate governance, banking sector, sharia law, Islamic banking, Indian
banking law.

Introduction

One tool which is playing an integral role in managing any commercial entity in today’s
contemporary time is corporate governance. Corporate governance is the mechanisms through
a Corporate is not only controlled but it is a process, through which Corporate is effectively
managed. It is a way through which commercial entities such as commercial bank, financial
institutions, non-banking financial institutions are directed in order to obtained desired
outcomes. The need for good governance has become almost a mantra in analyzing any
wrongdoing which as been committed, mitigating such occurrence. governance encompasses
the processes by which organisations are directed, controlled and held to account. It includes
the authority, accountability, leadership, direction and control exercised in an
organisation. Greatness can be achieved when good governance principles and practises are
applied throughout the whole organisation and that’s why governance is important. It preserves
and strengthen stakeholder confidence – nothing distracts an organisation more than having to
deal with a disgruntled stakeholder group caused by a lack of confidence in the governing body.
And on the positive side, a supportive stakeholder base can generate benefits for the
organisation though social and emotional support, intangible but very valuable attributes that
all organisations should strive to achieve and sustain.
What does Governance mean?

The system by which entities are directed and controlled. It is concerned with structure and
processes for decision making, accountability, control and behaviour at the top of an entity.
Governance influences how an organisation’s objectives are set and achieved, how risk is
monitored and addressed and how performance is optimised Governance is a system and
process, not a single activity and therefore successful implementation of a good governance
strategy which requires a systematic approach that incorporates strategic planning, risk
management and performance management. Like culture, it is a core component of the unique
characteristics of a successful organisation.

Institute of Company Secretaries of India “Corporate Governance is the application of best

Management Practices, Compliance of Laws” in true letter and spirit and adherence to
ethical standards for effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders.” Corporate governance is a
system that guides the conduct of the people within an organization, as well as the direction of

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the organization itself. Corporate governance is altogether different from the daily operational
decisions and activities that are executed by the management of an organization.

Sharia Perspective on Governance

Basically, the concept of corporate governance from an Islamic perspective does not differ
much from the conventional definition as it refers to a system by which companies are
managed, directed and controlled with the purpose of meeting the corporation objective by
protecting all the stakeholder’s interest and rights. Uniquely, the context of corporate
governance within the Islamic paradigm present certain exceptional characteristics and features
in comparison with western theories.

Islamic concept of governance is faith based theoretical framework of corporate governance I

consider it as a theory pertaining to decision making processes that employ the premise of
Islamic soico-scientific epistemology of Tawhid.

Islamic socio-scientific principles underpinned by the deific oneness of Allah religion has been
the historically most widespread and effective instrumentality of legitimation”, and this is
certainly the case in the Islamic world. As in the west, corporate governance plays a significant
role in ensuring Islamic organisations achieve their objectives and aims; unlike in the west,
these aims must take into account. Objectives of Islamic law. However, since these also
stipulate that an organisation’s major aim should be to maximise shareholders’ profits and
protect their interests, in practice, many Islamic corporations espouse the Anglo-Saxon or
western approach to corporate governance

The Tawhid and Sharia’s (Islamic law)

Since the Islamic faith is grounded on the principle of Tawhid (Al-Faruqi, 1995), corporate
governance theory also originates from this perspective. Allah says in the Holy Qur’an:

“Men who remember Allah standing, sitting, and lying down on their sides, and contemplate
the (wonders of) creation in the heavens and the earth (with the saying): ‘Our Lord Not for
naught hast thou created all this! Glory to Thee! Give us Salvation from the Chastisement of
the Fire.” (3:191)

In this verse, the fundamental principle of governance is expressed; all of God’s creatures have
a purpose behind their existence, and this purpose lies in being the world’s vicegerent. While
entrusting mankind with this responsibility, Allah is still all- aware and all-knowing (Chapra,
1992). Since Allah knows everything, and all mankind is accountable to Him, this means that
within the corporate governance paradigm also, all parties are accountable and responsible for
their actions before Allah.

The principle of accountability features several times in the Qur'an. According to Surah
Ibrahim Verse 51: “that Allah may require each soul according to its desert; and, verily, Allah
is swift in calling to account”. Individuals are held to be accountable both to Allah and to the
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Muslim community for their actions and words, whether bad or good. The verse: “O you who
believe! When ye deal with each other, In transactions involving future obligations In a fixed
period of time, Reduce them to writing” (Al- Baqarah Verse 282) urges full and truthful
disclosure, while Surah Al-Anfal (Verse 27) enjoins trustworthiness: “O you who believe!
Betray not Allah and his Messenger, nor betray knowingly your Amanat (things entrusted to
you and all the duties which Allah has ordained for you)”. Thus, corporate employees are
required to pledge that they will conform to standards of ethical behaviour in their business
dealings, and all forms of cheating and usury are prohibited

As the paying of interest is not permitted under Islamic teaching (Choudhury and Hoque,
2006), the financial system is instead based on cooperative instruments such as Mudharabah
and Musharakah. Lewis (2001) explains that in a Mudharabah partnership, one partner takes
on the managerial role and the other partners are stakeholders, while in a Musharakah
partnership, all partners share managerial responsibility, whatever the extent of their
involvement.

Banking Regulation Act, 1949

The Banking Regulation Act, 1949 or BRA Act 1949 is a regulation in India that manages all
banking firms in India. Passed as the Banking Companies Act 1949, it came into power from
Sixteen March 1949 and changed to Banking Regulation Act 1949 from first March 1966. It
has been in Jammu and Kashmir since 1956. At first, the law was material just to banking
organisations. In 1965 it was developed to make it suitable to helpful banks and to present
different changes. The Banking Regulation Act, 2020 came up after it was altered to bring the
cooperative banks under the management of the Reserve Bank of India. The Act gives a system
under which business banking in India is directed and controlled. The Act supplements the
Companies Act, 1956.

The Act gives the Reserve Bank of India (RBI) the ability to permit banks, have regulation
over shareholding and casting ballot rights of investors; oversee the arrangement of the sheets
and the board; manage the activities of banks; set down guidelines for reviews; control ban,
consolidations and liquidation; issue mandates in light of a legitimate concern for public great
and on banking strategy, and force punishments. In 1965, the Act was revised to incorporate
cooperative banks under its domain by adding Section 56. Cooperative banks, which work just
in one state, are shaped and run by the state government. Yet, RBI controls the permitting and
directs the business operations. The Banking Act was an enhancement to the past acts
connected with banking.

The Banking Regulation (Amendment) Bill, 2020 was presented in Lok Sabha by the Minister
of Finance, Ms Nirmala Sitharaman, on March 3, 2020. The Bill tries to alter the Banking
Regulation Act, 1949, concerning cooperative banks. The Act directs the working of banks and
gives ideas from different angles, for example, authorising the board, and activities of banks.
The Act doesn’t matter to specific cooperative organisations.

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Review of literature.

1) An Islamic perspective on governance by Zafar Iqbal & Mervyn k. Lewis (2009)

studied and observations was that many provision of sharia laws can be implemented
to bring more effective and customer-oriented relationships for mutual benefits in
Indian legal framework
2) Shariah governance in Islamic banks by Zulkifili Hasan (2012), After studding found
that concept of zero interest based banking could be turn into reality in Indian
perspective after having further debate and decision.

Research methodology.

This paper is descriptive in nature. The study has been carried out on based on the collection
of the relevant secondary data which is collected from the various sources such as published
reports, books, articles published in different journals and newspapers, parodical, conferences
paper, working paper of different organisation or individuals and blogs of websites etc.

framework instituted in sharia and Indian banking laws for effective management and
control of banking Business.

As per Banking Regulations Act.

• The Banking Regulation Act provides the capacity to RBI to permit banks and the
regulation of the shareholding awards capacity to RBI to direct the arrangement of the
boards and the executives’ individuals from banks
• It additionally sets down bearings for reviews to be overseen by RBI, and control
consolidating and liquidation
• RBI issues directives on banking strategy in light of a legitimate concern for public
interest and can force punishments whenever required
• Co-operative Banks were formed under this act in the year of 1965

Prohibition of Trading (Section 8): According to Section 8 of the Banking Regulation Act, a
bank can’t straightforwardly or in a roundabout way manage trading or bargaining of products.
Anyway, it might bargain the transactions connected with bills of trade for reduction or
exchange.

Non-banking asset (Section 9): A bank can’t hold any non-movable property, but obtained
except its utilisation, for any period passing a long time from the date of securing thereof. The
organisation is allowed, inside a time of seven years, to arrange or exchange any such property
for working with its removal.

Management (Section 10): These standard expresses that each bank will have one of its
directors as Chairman on its Board of Directors. It additionally expresses that at least 51% of
the complete number of individuals from the Board of Directors of a bank will comprise people
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who have extraordinary information or practical involvement with bookkeeping, farming,
banking, financial aspects, money, regulation and others.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Banks in India are required to keep a minimum of 4% of their net demand and time liabilities
(NDTL) in the form of cash with the RBI. These currently earn no interest. The CRR needs to
be maintained on a fortnightly basis, while the daily to be at least 95% of the required reserves.
In case of default on daily maintenance, the penalty is 3% above the bank required applied on
the number of days of default multiplied by the amount by which the amount falls short of the
prescribed level.

Over and above the CRR, a minimum of 22% and a maximum of 40% of NDTL, which
is known as the SLR, needs to be maintained in the form of gold, cash or certain approved
securities. The excess SLR holding can be used to borrow under the Marginal Standing Facility
(MSF) on an overnight basis from the RBI. The interest charged under MSF is higher than
the repo rate by 100 bps, and the amount that can be borrowed is limited to 2% of NDTL. (To
learn more about how interest rates are determined

Provisioning.

Non performing assts are classified under 3 categories: substandard, doubtful and loss. An asset
becomes non-performing if there have been no interest or principal payments for more than 90
days in the case of a term loan Substandard assets are those assets with NPA status for less than
12 months, at the end of which they are categorized as doubtful assets. A loss asset is one for
which the bank or auditor expects no repayment or recovery and is generally written off the
books.

For substandard assets, it is required that a provision of 15% of the outstanding loan amount
for secured loans and 25% of the outstanding loan amount for unsecured loans be made. For
doubtful assets, provisioning for the secured part of the loan varies from 25% of the outstanding
loan for NPAs that have been in existence for less than one year, to 40% for NPAs in existence
between one and three years, to 100% for NPA’s with a duration of more than three years,
while for the unsecured part it is 100%.

he primary banking regulator in India is the Reserve Bank of India (RBI). The RBI has wide-
ranging powers to regulate the financial sector. These include prescribing norms for setting up
and licensing banks (including branches of foreign banks in India), corporate governance,
prudential norms and conditions for structuring products and services.

Its other functions include, among other things:

• Setting monetary policy.

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 • Regulation of money, foreign exchange, government securities markets and financial
derivatives.
• Debt and cash management for the government.
• Oversight of payment and settlement systems.
• Currency management.

Other authorities for compliance and Due diligence for effective corporate governance.

India has several other financial sector regulators, including the:

• Securities Exchange Board of India (“SEBI”), which is the regulatory authority for the
securities market in India.
• Insurance Regulatory and Development Authority of India (“IRDAI”), which
regulates the insurance sector.
• Insolvency and Bankruptcy Board of India (“IBBI”), which regulates the process
relating to conducting insolvency proceedings under the Insolvency and Bankruptcy
Code (“IBC”).

The RBI often liaises closely with the SEBI, IRDAI and, where required, other financial sector
regulators, to regulate banking activities which interact with other financial activities.

As per Sharia (Islamic) Law.

Since the Islam is a way of life, there are rules when it comes to finances as well. These rules,
called the Shariah law, form the basis for Islamic finance. Shariah law prohibits usury, the
payment and collection of interest (Riba), as well as restrictions on investing with certain types
of businesses; for instance, it is strictly prohibited to deal with companies that sell alcohol, pork
or tobacco, as well as companies that produce media such as gossip columns or pornography,
and dealing with firearms or any sort of ammunition. Muslims are strictly prohibited to invest
in savings account as they generate Interest.

Basic Principles.

A number of principles form the building blocks of Sharia-compliant finance. Islamic finance
bans certain commonly accepted practices in the world of traditional finance. Islamic banking
stresses the importance of avoiding riba (charging excessive interest). Another overarching
concept is the avoidance of gharar: deceptive or speculative practices.

Paying and Charging Interest.

Islamic law is wary of lending with interest payments. It views lending relationships as
favouring lenders. The law considers charging excessive interest, or riba, to be exploitative.
There isn’t a consensus on what constitutes excessive interest, but the most extreme
interpretation prohibits all forms of interest charged on loans.
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Morally Forbidden Business Activities

Islamic finance prohibits investing in businesses engaged in activities that the Sharia considers
morally questionable, such as selling tobacco, alcohol, or pork.

Islamic Finance Bans Speculative Behaviour.

According to the concept of maisir, speculative investing violates Sharia law. This includes
gambling or other contracts that generate wealth from uncertain future events. The law regards
creating wealth based on chance to be an activity that is not productive.

Derivatives Contracts and Short-Selling.

Despite the prohibition on speculative practices, or maisir, there are Sharia-compliant versions
of certain financial instruments that include speculative elements. For example, the
International Swap Derivatives Association created the Sharia-complaint ISDA Master
Agreement. This template allows Islamic financial markets to engage in options, futures, and
other derivatives trading.

Types of Islamic Finance Arrangements.

Certain types of traditional banking financing arrangements are not compliant with Sharia law.
The following financing activities conform with Islamic law:

Profit-and-Loss Sharing Partnership (Mudarabah)

Mudarabah is also known as profit-and-loss partnership. This involves two partners: one who
provides the capital and another who is responsible for managing the capital. The partners agree
to split the profits based on agreed upon percentages.

Leasing (Ijara) and Islamic Finance.

Leasing, known as ijara, is generally compatible with the principles of Islamic finance. It
involves one party leasing property in exchange for predetermined payments. The lessor must
own the leased property for the duration of the leasing period. Ownership gradually transfers
to the lessee until they eventually become the owner at the end.

Islamic Forwards (Salam and Istisna)

Islamic forwards, also known as salam and istisna, are governed by many conditions. Under
the forwards contract, the price for the item must be prepaid in full. This is in exchange for
specific goods that will be delivered to the buyer. The various conditions governing Islamic
forwards help prevent it from violating the principle of gharar, or deception.

Profit-and-Loss Sharing Joint Venture (Musharakah)

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Musharakah, also known as a profit-and-loss sharing joint venture or equity participation
contract, is generally compatible with Islamic finance principles. It involves an agreement
among partners to contribute capital and profits based on a predetermined ratio. As equity
partners, they all share in the losses in portion to the amount of capital they invested. In
addition, the equity partners are liable for the actions of the other partners.

Continuing Growth of Islamic Finance

Islamic finance is still considered to be in the early stages of its development. One of the
organizations spearheading initiatives to foster the sector’s growth is the world bank. In
partnership with the government of Turkey, the World Bank has established the Global finance
development Based in Istanbul, this policy institute is a hub for conducting research, advancing
ideas, and advising countries interested in developing financial institutions based on Islamic
finance principles.

Corporate Social Responsibility under Indian legal framework .

The concept of Corporate Social Responsibility has been introduced by Companies Act, 2013.
Section 135 of the Companies Act, 2013 deals with provisions related to Corporate Social
Responsibility. Ministry of Corporate Affairs (MCA) has, vide its notification dated February
27, 2014 notify the provisions of Corporate Social Responsibility to be applicable w.e.f. April
01, 2014.

Governing Provision under Companies Act, 2013

The topic of Corporate Social Responsibility has been regulated by Section 135 of the
Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules,
2014.Corporate governance mechanism is a company internal control mechanism that aims to
ensure management applies the principles of good corporate governance. The principles of
good corporate governance include the principles of accountability, transparency,
responsibility, and fairness in the management of the company. The implementation and
reporting CSR is one form of the realization of principles of good corporate governance.
However, good corporate governance can only be realized through a good corporate
governance structure Therefore, the structure of corporate governance is believed to influence
the implementation and reporting of CSR.

Corporate Social Responsibility under Sharia law framework.

In order to protect the social justice and welfare for the society, it is a need for businesses to
integrate the engagement of their businesses and CSR activities in Shariah governance
framework. One of the current developments of corporate governance in the Western country
is to promote the Corporate Social Responsibility (CSR) which is now a renowned concept all
over the world but not a new concept in Islam The discussion on CSR from an Islamic
Generally, the concept of CSR is based on religious values resulting from the principle of
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‘ibadah and da’wah (Muhammad Yasir & Zakaria Bahari,. Man was created by Allah to be the
vicegerent in this world as mentioned in Surah Al-An’am :165, “It is He who hath made you
(His) agents, inheritors of the earth: He hath raised you in ranks, some above others: that He
may try you in the gifts He hath given you: for thy Lord is quick in punishment: yet He is
indeed Oft-forgiving, Most Merciful.” [Qur’an, Al-An’am: 165] Based on the above verse,
Man is created as a caliph of Allah which carries specific duty and responsibility to manage
the world according to the teaching of Islam in order to ensure that justice is maintained.
Besides it is the social responsibility of Muslims to always benefit the people and they cannot
cause harm in any form on this earth. In addition, social responsibility in Islam can be found
from the hadith of the Prophet: ‘Abdullah ibn ‘Umar reported: The Messenger of Allah, peace
and blessings be upon him, said, “Every one of you is a shepherd and is responsible for his
flock. The leader of the people is a guardian and is responsible for his subjects: a man is the
guardian of his family and is responsible for his subjects, a woman is the guardian of her
husband’s home and of his children and is responsible for them, and the slave of a man is a
guardian of his master’s property and is responsible for it. Surely, every one of you is a
shepherd and responsible for his flock.” (Sahih Bukhari, No. 7138, 1229). Thus, the hadith
shows that every individual is accountable and responsible towards others be it as a leader,
husband, wife and even a slave. Islam has shown us a wonderful system in a way to protect
each individual's interests and consequently the rights of each party are protected. Helping
other people is a social responsibility as a Muslim and regarded as a good deed (‘amal salih) in
order to get Allah’s blessing. Apparently social responsibility is a very impressive concept and
practice which has been rooted in Islamic teaching fundamentally. In fact, Allah promise to
reward for those who doing a social responsibility for the pleasure of Allah. Undoubtedly, this
concept can be extended to all natural or artificial persons such as businesses and corporation

The relationship of CSR and Maslahah.

The term Maslaha can be interpreted as benefit, welfare or interest. Some modern Muslim
scholars, divided Maslahah into three categories such as: Daruriyyat (the essentials), Hajiyyat
(the complementary), and Tahsiniyyat (the embellishments). Using the principles of maqasid
shari’ah and maslahah in the CSR, a corporate or management can use the three categories to
make a decision when implementing CSR as well as to avoid any conflicts of interest that may
arise from stakeholders. The importance of Dharuriyat in CSR is to safeguard the basic
necessities of stakeholders such as religion, life, intellect, posterity and property as well as
public good in general for example by providing them safety and healthy workplace and
adequate prayer rooms to employees. Secondly, the importance of Hajiyyat in CSR is to
eliminate any hardship that may be faced by the person even though it may not give any danger
to the basic necessities of stakeholder for example giving training and enhancement human
quality programs to the employees to produce a skills worker for the company and lastly,
the importance of Tahsiniyyat in corporate social responsibility is to participate in communal
activities or programs that helps poor and needy .

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Conclusion.

In this paper we studied the Comparative study of sharia laws and Indian banking laws on
Corporate Governance and Corporate Social Responsibility in Banking and Finance
Ecosystem. Nowadays, CSR becoming a trend for a company even though there are a lot of
criticism which against the practice of CSR. Most of the company incline to integrate the
concept of CSR in the corporate governance of the company. Good corporate responsibility
will reflect a good governance of the company which gives them a high reputation to attract
the institutional investors who are very concerned with their ethical investment.

In Islam, considering the interest of the public is very important rather than individual
interests. The Maqasid Shariah and Maslahah provide a framework for corporation in making
decisions in managing their businesses and CSR activities according to priorities of the three
level of maslahah. It also offers a general guideline for managers of corporations as a filter
mechanism to resolve the ethical conflicts that unintentionally appear while applying CSR
programs and initiatives. The concept of Maslahah also requires understanding the Islamic
principle of avoiding any harmful activities to others while involving in its business and
economic activities.

References.

1) Chapra, M. U. (n.d.). The Future of Economics: An Islamic Perspective. Leicester: The

Islamic Foundation.
2) Hasan, Z. (2009). Corporate governance: Western and Islamic perspectives.
3) https://governancetoday.com/GT/GT/Material/Governance__what_is_it_and_why_is_
it_important_.aspx
4) MasteringGlobal_Corporate_Governance.pdf (icsi.edu)
5) Islamic Finance Under Sharia Law: An Introduction (carpenterwellington.com)
6) https://taxguru.in/company-law/corporate-social-responsibility-law-interpretations-
companies-act-2013.html
7) ICSI framework on corporate governance.

Submitted by,

SUSHIL K. SONKAR

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