346 AN INTRODUCTION TO ISLAMIC FINANCE
Deteriorating Business Ethics and Values
The current fi nancial crisis has also highlighted the issue of a decline in
moral and ethical values in senior management, who seemed to care more
about circumventing regulatory constraints and fi nding loopholes in the law
than about morally correct behavior. Increasing greed and personal empire -
building became the norm on Wall Street, with little emphasis being placed
on producing moral and ethical business leaders.
The following refl ections on some of the corporate governance issues
identifi ed during the crisis may be of benefi t to Islamic fi nancial institutions.
■ (^) In general, if corporate governance is designed and practiced following
Islamic principles governing property rights, contracts, and higher ethi-
cal and moral standards, the intensity of several of the issues confront-
ing the conventional framework will be reduced. While conventional
fi nance also expects business leaders to exhibit ethical behavior, it does
not have a sound enforcement mechanism other than market discipline,
which has come under attack during the current fi nancial crisis. On
the other hand, the Islamic fi nancial system derives its values from the
teachings of Islam and can expect ethical governance from leaders,
managers, and other stakeholders, who follow the rules prescribed by
Shari’ah. Promoting ethical governance fosters trust and formal govern-
ance mechanisms will become more effective in protecting the interests
of stakeholders.
■ (^) Islamic fi nancial institutions should increase transparency and disclo-
sure, both internally and externally. Implementing transparency and
corporate governance standards designed by international institutions
such as the AAOFI and IFSB can enhance transparency in the system.
Table 15.3 shows the guiding principles adopted by the IFSB for the
governance of institutions offering Islamic fi nancial service. All coun-
tries where Islamic fi nance is practiced should consider implementing
these principles. The IFSB has issued similar guidelines for institutions
offering takaful and Islamic funds.
■ (^) Islamic fi nancial institutions should take risk management seriously.
They should put in place mechanisms to measure and monitor risks and
ensure that all types of risks (market, credit, liquidity, operational) are
reported in timely fashion. Generating reports is the fi rst step but the
institutions should ensure that these risk reports are duly reviewed by
senior management and board members. There should be mechanism to
take timely action after the review.
There is no denying that good governance promotes economic growth
and fi nancial stability in the Islamic and conventional fi nancial systems alike.
Despite considerable progress being made in strengthening governance in
the conventional system, the current fi nancial crisis has highlighted several
shortcomings. The governance principles of Islam are much broader in rec-
ognizing and including stakeholders. The ultimate objective of the Islamic