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Legal Risks and Good Governance for the Growing Islamic Finance Industry

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Legal Risks and Good Governance for the Growing Islamic Finance Industry Hamid Yunis Partner Karachi December 2006 Contents Fundamentals of Islamic (Shariah Compliant ... – PowerPoint PPT presentation

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Title: Legal Risks and Good Governance for the Growing Islamic Finance Industry


1
Legal Risks and Good Governance for the Growing
Islamic Finance Industry
Hamid Yunis Partner
  • Karachi
  • December 2006

2
Contents
  • Fundamentals of Islamic (Shariah Compliant)
    Finance
  • Basic requirements and philosophy
  • Overview of Islamic Finance Market
  • Types of Islamic Finance Products
  • Basic Assumptions
  • Additional Matters
  • Use of Islamic Finance in Different Market
    Sectors
  • Governance
  • Background
  • Products and processes
  • Regulator/operator issues
  • Specific issues
  • International Guidance
  • Basel
  • IFSB Standards
  • General Principles
  • Non executive functions
  • Conclusion

1
3
  • Fundamentals Islamic (Shariah) Finance
  • Quranic (Shariah Law) principles
  • Riba (interest/unjustified rewards/unlawful
    gain)
  • Gharrar (uncertainty, risk, speculation)
  • Halal (religiously permissible)
  • Haram (not religiously permissible)
  • Qard Hasan (good loan)
  • Al-Wadia (safekeeping).

2
4
  • Basic Requirements and Philosophy
  • true risk sharing
  • no exploitation of a weaker position
  • not socially unproductive
  • not economically wasteful
  • promotes economic and social development and
  • charitable (zakat).

3
5
Overview of Islamic Finance Market
  • Islamic and Dual Banking Systems
  • Retail Islamic finance products offered for a
    number of years, some low key e.g. Middle Eastern
    banks, others high profile e.g. HSBC
  • Islamic Windows in major Global Banks
  • Islamic Bank of Britain
  • Primary Market initially basic finance products
  • Compatibility with conventional products

4
6
  • Types of Islamic Finance Products
  • Equity
  • Trade Financing
  • Asset Financing
  • Lending
  • Wholesale Retail Products
  • loans
  • partnership investments
  • forex
  • fund transfers
  • letters of credit
  • securities safe keeping
  • investment management and device

5
7
  • Islamic Finance (Contd)
  • Al-Wadia (safekeeping) usually not remunerated
  • Takaful (Insurance)
  • Funds Work
  • SUKUK/Securitisation (Capital Secondary
    Markets) and
  • Derivatives/Funds Management.

6
8
  • Basic Assumptions
  • Underlying asset must be acceptable
  • Different interpretations on what proportion of
    asset must not be haraam
  • Proposed structure of transaction has to be
    acceptable
  • No prohibited activities (proportionate approach)
  • Need to account for regulatory requirements and
    comply with two sets of law (Shariah and law of
    country)

7
9
  • Additional Matters
  • Zakat (specified amounts to be allocated from
    disposable income)
  • Shariah Boards competition, pragmatic
    approaches
  • Urf (custom)
  • Darura (overriding necessity)
  • Maslaha (general interest to justify)
  • Hiyal (ruse)

8
10
Use of Islamic Finance in Different Market Sectors
  • Real Estate
  • Project Financing
  • Co-financings (Power, LNG, Oil Gas)
  • Retail Banking
  • Depositors
  • Investment Account Holders
  • General Leasing
  • Ijara
  • Asset Finance
  • Bond (SUKUK) Issuance
  • Private Equity Funds
  • Insurance (Takaful)
  • Capital Markets (Sukuk/Arboun/Salaam)

9
11
Governance Background
  • Developing, structuring and marketing Shariah
    compliant financial products can be cumbersome
    and complex
  • IIFS needs to account for regulatory requirements
    and comply with two sets of jurisprudence/law
    (Shariah and the law and regulations of relevant
    jurisdiction)

10
12
Products and Processes
  • Products and Processes need to be effective from
    the following viewpoints
  • Understandable
  • Competitively priced
  • Tax effective
  • Available and transparent
  • Not administratively burdensome
  • Not alien to regulatory requirements
  • Governance of institution offering Islamic
    financial services needs to be the same

11
13
Regulator/Operator Issues
  • Scope for the continuing development of good
    corporate governance in the field of Islamic
    finance
  • No inconsistency with Shariah

12
14
Specific Issues
  • Islamic finance industry needs to, in particular,
    focus on issues regulators will be concerned with
  • Remember that Shariah-compliance will not
    normally be an issue for non-Islamic countries or
    where Shariah is not part of a general legal
    framework
  • Shariah Supervisory Board presence and scrutiny
    therefore essential

13
15
Specific Issues (cont)
  • Islamic finance industry regulators need to
    consider regulation of Shariah Supervisory Board
  • Islamic financing industry need for a unified
    front to regulators
  • Standardisation of models used, terminology and
    treatment
  • Dissemination of codes of best practice
  • Practical Adaptability

14
16
Guidance
  • Many forms of International and National Guidance
    available
  • OECD principles
  • UK Stock Exchange Combined Code
  • Cadbury Report
  • Hempel Report
  • Higgs Report

15
17
Guidance (cont)
  • France/Germany different forms of governance
    models
  • US Sarbannes-Oxley
  • Other/Corporate Governance Standards
  • Country Specific
  • Accounting and Industry Specific
  • IFSB guidance
  • Principles outlined
  • Comply or Explain

16
18
Basel
  • Basel Committee on Banking Supervision
  • 1999 paper
  • 2006 paper

17
19
General Principles
  • Establish Good Governance Policy as a principle
    of Shariah
  • Monitoring and work of
  • Board Committees
  • Executive Management
  • Shariah Supervisory Board
  • Internal and external auditors
  • Different Stakeholders
  • Mechanisms of balancing the roles of different
    stakeholders i.e.) shareholders, management, IAHs

18
20
Non Executive Functions
  • Role of non-executive directors/managers
  • Guidance
  • Oversight
  • Compliance issues
  • Future compliance policy

19
21
  • Contact

HAMID YUNIS Taylor Wessing Carmelite 50 Victoria
Embankment Blackfriars London EC4Y 0DX Tel 0207
300 7000 Fax 0207 300 7100 Direct 0207 300
4088 E-mail h.yunis_at_taylorwessing.com Web
www.taylorwessing.com
20
22
Taylor Wessing Offices
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    Hamburg London Munich Paris
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  • Associated office Dubai
  • www.taylorwessing.com

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21
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