Corporate governance and stakeholders'financial interests in institutions offering Islamic financial services

This paper focuses on the corporate governance arrangements of institutions offering Islamic financial services (IIFS) aimed at protecting stakeholders'financial interests. Many IIFS corporate governance issues are common with those of their conventional counterparts. Others are distinctive. In particular they offer unrestricted investment accounts that share risks with shareholders but without a voting right. This paper first reviews internal and external arrangements put in place by IIFS to protect stakeholders'financial interests. It discusses shortcomings notably in terms of potential conflict of interest between shareholders and holders of unrestricted investment accounts. It then suggests a corporate governance framework that combines internal and external arrangements to provide safeguards to unrestricted investment account holders without overburdening IIFS'financial performance. The paper uses a review of 13 IIFS and regulatory information from countries where IIFS have developed the most.Banks&Banking Reform,Financial Intermediation,Corporate Law,Non Bank Financial Institutions,Investment and Investment Climate

Corporate governance in institutions offering Islamic financial services : issues and options

This paper reviews institutions offering Islamic financial services (IIFS) corporate governance challenges and suggests options to address them. It first points out the importance of corporate governance for IIFS, where it would require a distinct treatment from conventional corporate governance and highlights three cases of distress of IIFS. It then dwells on prevailing corporate governance arrangements addressing IIFS'needs to ensure the consistency of their operations with Islamic finance principles and the protection of the financial interests of a stakeholders'category, namely depositors holding unrestricted investment accounts. It raises the issues of independence, confidentiality, competence, consistency, and disclosure that may bear on pronouncements of consistency with Islamic finance principles. It also discusses the agency problem of depositors holding unrestricted investment accounts. The paper argues for a governance framework that combines internal and external arrangements and relies significantly on transparency and disclosure of market relevant information.Banks&Banking Reform,Corporate Law,Non Bank Financial Institutions,Investment and Investment Climate,Privatization

Corporate governance and Shariah compliance in institutions offering Islamic financial services

The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals'association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.Banks&Banking Reform,Corporate Law,National Governance,Non Bank Financial Institutions,Governance Indicators

Strategic interdependence in the East-West gas trade : a hierarchical Stackelberg game approach

The current and potential benefits of the East-West gas trade are enormous for all participants. Realizing those benefits requires significant upfront investments. But the new, more complex structure of the gas transit system that has emerged following changes in Eastern Europe and the former Soviet Union has created uncertainties that bear on the expected benefits from investment. The authors argue for the existence of stable contracts that would create an environment more conducive to investments and allow all participants to benefit from expansion of the gas trade. As a guide to formulating incentive-compatible, transparent, flexible contracts, they propose a framework based on a Stackelberg game, with three players (a supplier, a transiter, and an importer) under Russia's leadership. They use this framework to analyze the contract modifications that would ensue from changes affecting the gas trade. They concluded that: (a) increased competitiveness of the transiter and supplier through cost reductions would improve the payoffs to all players (the transiter's and supplier's profits and the Western importer's welfare). Strategic behavior on the part of the supplier and transiter would ultimately reduce the price to the importer, enlarging gas demand and reducing costs. If increased competitiveness is the outcome of more costly gas from sources other than Russia, both the supplier's and the transiter's payoffs would improve but the importer's welfare would deteriorate. The supplier and transiter would have leeway to strategically raise their price and transit fee, respectively, while gaining market share. But the importer would face rising costs for gas imports and would lose welfare; (b) an increase in the scope for the importer to substitute between alternative sources of gas improves welfare for all three players. The perception by the supplier and transiter of increased threat of competition leads to a preemptive move not to lose market share. The transiter and supplier reduce the transit fee and supply price, respectively, allowing the importer to face a lower gas price. Import demand expands and welfare improves. The expanded trade more than compensates for the reduction in the transit fee an supply price and allows larger payoffs for transiter and suppliers; and (c) the perception of increased reliability of Russian gas supplies expands demand for Russian gas and leads to the expansion of trade. The supplier and transiter can raise their respective charges with expanded volume, improving their payoffs. The importer's welfare deteriorates as the cost of importing gas rises. The predictability of the players'reactions to changes in the environment would build confidence in the reliability of gas trade and allow its expansion benefiting all participants.Water and Industry,Economic Theory&Research,Environmental Economics&Policies,Energy Trade,Markets and Market Access

Regulating islamic financial institutions : The nature of the regulated

More than 200 Islamic financial institutions (IFIs) operate in 48 countries. Their combined assets exceed $200 billion, with an annual growth rate between 12 percent and 15 percent. The regulatory regime governing IFIs varies significantly across countries. A number of international organizations have been established with the mandate to set standards that would strengthen and harmonize prudential regulations as they apply to IFIs. The authors contribute to the discussion on the nature of prudential standards to be developed. They clarify the risks that IFIs are exposed to and the type of regulations that are needed to systematically manage them. They consider that the industry is still in a development process whose eventual outcome is the convergence of the practice of Islamic financial intermediation with its conceptual foundations. The authors contrast the risks and regulations needed in the case of Islamic financial intermediation operating according to core principles and current practice. They outline implications for approaches to capital adequacy, licensing requirements, and reliance on market discipline. They then propose an organization of the industry that wouldallow it to develop in compliance with its principles and prudent risk management, and facilitate its regulation.Labor Policies,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Financial Intermediation,Banks&Banking Reform,Financial Intermediation,Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Banking Law

Macroeconomic and Distributional Implications of Sectoral Policy Interventions: An Application to Thailand

The paper presents an economy wide framework for policy analysis focusing on structural adjustment in production and trade patterns. The framework, which is named SIAM2, is designed in order to allow the analyst to draw medium-run macroeconomic and distribution implications of alternative policies for structural adjustment. SIAH2 is a multi-sectoral, multi-household general equilibrium model of the Thai economy. It is used here to analyze the response of the economy to a drop in the world prices of oil and to compare two schemes of intervention on the rice market. The analysis shows that if one is concerned with external balance and foreign debt accumulation, it is preferable not to lower domestic energy prices with the drop in world prices. The adverse effect on income distribution is negligible. Comparing manipulations of the tax rate on exports of rice and a buying program in order to increase rice prices and farmers\u27 incomes, the analysis points to the higher efficiency of reducing the export tax rate. The larger the elasticity of the world demand for Thai rice, the greater is the improvement in farmers\u27 income