Proposed governance principles of Islamic sovereign wealth funds
| Proposed Islamic governance principles for SWFs (authors contribution based on BNM principles) | |
|---|---|
| 1. Board composition and structure: the board should be independent of the owners, which are mostly governments in case of SWFs. The board should be very active, strong and experience to manage the fund. The experts from relevant fields are required to be on board | 7. Qualification of the board and management: the directors on board, Shariah advisory board and key executives should have enough and relevant qualification, skills and experience to be appointed on the board |
| 2. Board composition and type of directors: the board should contain several types of directors to make it independent like a private mutual fund. The board should maintain a balance among directors’ appointments, and they should be representative of different stakeholders, for example; directors as representative of shareholders, directors from a private mutual fund, from a central bank, ministry of finance and outside directors as well | 8. Board committees and their functions: the SWFs should have the following committees: audit committee, Shariah committee, risk management committee, governance committee and investment committee. An SWF must have following committees on the board, and it is required their regular meetings with disclosure. These committees should be very independent in their task. The responsibilities, task, authorities and functions of these committees should be adequately defined |
| 3. Board responsibilities and board committees: the primary function of the board is work as a bridge among owners (government) and the management of the fund. The board is responsible for formation of the board committees like (i) risk management, (ii) audit committee, and (iii) governance committee, (iv) Shariah committee and (v) investment committee | 9. Remuneration and conflict of interest: there should be a formal and transparent procedure for fixing the compensation of boards and management. There should not be any conflict of interest; the person who is involved in the decision-making process should work for the benefits of the SWFs |
| 4. Shariah advisory board: the SWFs should have independent Shariah advisory board that should be based on the experts. The advisory board should directly report to the parliament/government and perform main functions related to Shariah review and audit | 10. The separation between the owner (government) and management: the government should not be involved in direct management and control of the funds. The board, Shariah advisory board and management should be independent |
| 5. Implementation and monitory of Shariah principles/law: it is responsibility of owners, board, boards committees, Shariah advisory board and Shariah audit committee to implement and monitor the implementation of the Shariah principles/law for every investment and transaction | 11. Board performance and meetings: the board, Shariah advisory board should meet regularly and furnish the complete record of the meeting. There should be a formal way of analyzing the performance of the boards and board committees |
| 12. Risk management and disclosure: the risk management committee, investment committee and board itself should actively perform the function of risk management. The risk related to every transaction must be managed and appropriately disclosed in annual reporting | |
| 13. Transparency, disclosure and communication: the SWFs should develop a proper system of discussion at both levels; vertical and horizontal and inner and outer. There should be a separate department that will perform these actives. There should pre-defined system and mechanism of disclosure and to be monitor by the boards by following multiple Santiago principles (GAAP) and Islamic finance principles. The SWFs should develop, adopt and implement the both Santiago principles, Shariah principles and any other accounting requirements under Islamic finance, such as rules, standards by AAOIFI, IFSB, and IIFMO. The SWFs actively must increase their annual reporting, in the form of annual review, quarterly review, governance and ethical investment report, etc. | |
| Proposed Islamic governance principles for SWFs (authors contribution based on BNM principles) | |
|---|---|
| 1. Board composition and structure: the board should be independent of the owners, which are mostly governments in case of SWFs. The board should be very active, strong and experience to manage the fund. The experts from relevant fields are required to be on board | 7. Qualification of the board and management: the directors on board, Shariah advisory board and key executives should have enough and relevant qualification, skills and experience to be appointed on the board |
| 2. Board composition and type of directors: the board should contain several types of directors to make it independent like a private mutual fund. The board should maintain a balance among directors’ appointments, and they should be representative of different stakeholders, for example; directors as representative of shareholders, directors from a private mutual fund, from a central bank, ministry of finance and outside directors as well | 8. Board committees and their functions: the SWFs should have the following committees: audit committee, Shariah committee, risk management committee, governance committee and investment committee. An SWF must have following committees on the board, and it is required their regular meetings with disclosure. These committees should be very independent in their task. The responsibilities, task, authorities and functions of these committees should be adequately defined |
| 3. Board responsibilities and board committees: the primary function of the board is work as a bridge among owners (government) and the management of the fund. The board is responsible for formation of the board committees like (i) risk management, (ii) audit committee, and (iii) governance committee, (iv) Shariah committee and (v) investment committee | 9. Remuneration and conflict of interest: there should be a formal and transparent procedure for fixing the compensation of boards and management. There should not be any conflict of interest; the person who is involved in the decision-making process should work for the benefits of the SWFs |
| 4. Shariah advisory board: the SWFs should have independent Shariah advisory board that should be based on the experts. The advisory board should directly report to the parliament/government and perform main functions related to Shariah review and audit | 10. The separation between the owner (government) and management: the government should not be involved in direct management and control of the funds. The board, Shariah advisory board and management should be independent |
| 5. Implementation and monitory of Shariah principles/law: it is responsibility of owners, board, boards committees, Shariah advisory board and Shariah audit committee to implement and monitor the implementation of the Shariah principles/law for every investment and transaction | 11. Board performance and meetings: the board, Shariah advisory board should meet regularly and furnish the complete record of the meeting. There should be a formal way of analyzing the performance of the boards and board committees |
| 12. Risk management and disclosure: the risk management committee, investment committee and board itself should actively perform the function of risk management. The risk related to every transaction must be managed and appropriately disclosed in annual reporting | |
| 13. Transparency, disclosure and communication: the SWFs should develop a proper system of discussion at both levels; vertical and horizontal and inner and outer. There should be a separate department that will perform these actives. There should pre-defined system and mechanism of disclosure and to be monitor by the boards by following multiple Santiago principles (GAAP) and Islamic finance principles. The SWFs should develop, adopt and implement the both Santiago principles, Shariah principles and any other accounting requirements under Islamic finance, such as rules, standards by AAOIFI, IFSB, and IIFMO. The SWFs actively must increase their annual reporting, in the form of annual review, quarterly review, governance and ethical investment report, etc. | |
Notes: The table presents the governance principles presented by authors. The primary source of these principles is Bank Negara Malaysia (BNM) in 2013. However, we recommend amendments keeping in view the scope of SWFs
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