Dubai Islamic finance institutions have more to gain from complying with regulations because their objectives are based on fairness and trust, panelists at a corporate governance conference said.
“There is bigger room for abuse in Islamic finance institutions because investment account holders don’t have board representation, no right in managerial decision-making… they trust you to tell them how much is earned at the end of the year,” said Dr. Assem Safi Al Deen, the Chair on Corporate Governance at the American University of Beirut.
Bigger responsibility
“Islamic finance institutions have a bigger fiduciary responsibility to convey better corporate governance compliance because it feeds the trust of investors.”
Trust is the basis of Islamic finance since its main objective is to eliminate poverty. This can be achieved through fairness, transparency and disclosure, he said.
With the “hyper growth” of Islamic finance institutions compared to their conventional counterparts, they tend to focus on meeting this demand rather than on governance regulations, he noted.
More regulation and internal control are needed in this area because Islamic bank depositors are more likely to withdraw their money from IF institutions if their trust is shaken compared to investors in conventional banking, he said.
Speakers at the panel on corporate governance research in the region also discussed the latest studies in this area.
Organisations that had the most effective corporate governance policies tend to have the best performance on the stock exchange, a study of GCC stock exchanges by MBA students at the Cass Business School showed. “Corporate governance and profitability are connected,” said Dr. Rob Melville, Professor at Cass Business School. Winning practices included transparency, separation of chief executive and chairman, publishing annual reports and having an annual audit committee.
The Middle East is also vastly under-researched in the field of corporate governance due to the lack of good quality data and universities focusing on teaching rather than being research oriented, said Dr. Mohammad Bel Khir, Assistant Professor of Finance at UAE University.
The region could do with sponsorship of research projects in universities and making data available to academics, he noted.
Potential research areas include asking how investors are interested in the governance codes enacted in the region as opposed to their enforcement.
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