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Corporate governance and social responsibility in Islamic Financial Institutions

Hussein Elasrag

Corporate governance and social responsibility in Islamic Financial Institutions

Copyright © 2015 Hussein Elasrag All rights reserved. ISBN-10:1512362603 ISBN-13:978-1512362602

Islam provides a basis and guideline for living one’s life. Within this, there is a very detailed concept of ethical and social behaviour which allows us to deduce that the concept of social responsibility automatically has a role in Islam. This is a critical point that must be firstly understood as the role of moral ethics has been underpinned in Islam for over 1400 years whilst the concept of CSR remains relatively new for businesses today.The scope of this book is to briefly outline some of the major aspects of Islam which give consideration for businesses and their push towards Corporate Social Responsibility. It considers the belief system of Islam and how this belief has a significant underpinning of social behaviour.



CONTENTS

1 INTRODUCTION 2

FUNDAMENTALS OF THE ISLAMIC FINANCE

SHARI'AH LAW DEFINED QUR'AN SUNNAH HADITH QIYAS IJMA IJTIHAD ISSUES RELATING TO INTERPRETATION AND APPLICATION OF SHARI'AH LAW KEY SHARI'AH PRINCIPLES AND PROHIBITIONS RELEVANT TO FINANCE Prohibition on usury and interest (riba) No uncertainty (gharar) in commercial transactions Making Money from Money is not Permissible REGULATION OF ISLAMIC FINANCE Basic Islamic financial instruments Islamic bonds (Sukuk) : ISLAMIC BANKING LEADING ORGANIZATIONS OF ISLAMIC FINANCE Shari'ah Boards AAOIFI IFSB IIRA IIFM 

1 11 15 16 16 16 16 17 17 17 17 18 20 23 24 26 42 49 53 54 55 56 57 58

Hussein Elasrag

IILM

Corporate governance and social responsibility in Islamic Financial Institutions

59

3 CORPORATE GOVERNANCE IN ISLAMIC FINANCE: BASIC CONCEPTS AND ISSUES 61 A. B. 1. 2. 3. 4. C. D. E. 5. 6. 7. 8. 9. 4

DEFINITION OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE SYSTEM AROUND THE WORLD ANGLO-SAXON CORPORATE GOVERNANCE SYSTEM GERMANIC CORPORATE GOVERNANCE SYSTEM LATIN CORPORATE GOVERNANCE SYSTEM JAPANESE CORPORATE GOVERNANCE SYSTEM SHARI'AH GOVERNANCE IN ISLAMIC FINANCE DEFINITION AND SCOPE OF SHARI'A GOVERNANCE SYSTEM SHARI'AH GOVERNANCE MODEL FROM REGULATORY PERSPECTIVE REACTIVE APPROACH PASSIVE APPROACH MINIMALIST APPROACH PRO-ACTIVE APPROACH INTERVENTIONIST APPROACH EFFECTIVE CORPORATE GOVERNANCE

A. THE BOARD OF DIRECTORS B. SENIOR MANAGEMENT C. REGULATORY AND INTERNAL FRAMEWORKS 1. PROACTIVE APPROACH AND INTEGRATED CORPORATE AND SHARĪ'AH GOVERNANCE 2. SUPERVISION AND ENFORCEMENT 3. DISPUTE SETTLEMENT 4. WELL-CONCEIVED BY-LAWS AND INTERNAL POLICIES D. ATTRIBUTES OF THE SHARI'AH BOARD ON INDEPENDENCE 1. METHOD OF APPOINTMENT

63 71 71 72 72 73 73 77 80 81 82 82 82 83

2. 3. 4. 5.

CODE OF CONDUCT PROFESSIONAL BODY REMUNERATION POLICY ATTRIBUTES OF THE SHARI'AH BOARD ON CONFIDENTIALITY

106 107 108 108

5 SOCIAL RESPONSIBILITY IN ISLAMIC FINANCIAL INSTITUTIONS

110

THE CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY: DEFINITIONS AND HISTORY ISLAMIC CORPORATE SOCIAL RESPONSIBILITY THE CONCEPTS OF BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY BENEFITS OF CORPORATE SOCIAL RESPONSIBILITY CHALLENGES FOR ISLAMIC CORPORATE SOCIAL RESPONSIBILITY

114 115 125 126 132 146

APPENDICES

149

APPENDEX1 : KEY PLAYERS IN CORPORATE GOVERNANCE (CG) OF ISLAMIC FINANCIAL INSTITUTIONS (IFIS) 150 APPENDEX2 :GLOSSARY

153

APPENDEX3: LIST OF ABBREVIATIONS

161

92 95 99 101

APPENDIX 4: G S 7 CORPORATE SOCIAL RESPONSIBILITY CONDUCT AND DISCLOSURE FOR ISLAMIC FINANCIAL INSTITUTIONS 166

101 102 103 104 105 105