Corporate Governance From Shariah Perspeective: A Comparative Study of Pakistani and Malaysian Corporate Governance For Islamic Financial Institutions

Abstract

Corporate governance is basically the system of internal structure(rules, practices and procedures) for operating, directing and controlling the companies, and involves protecting the interests of company‟s stakeholders such as directors, managers, auditors and shareholders. With the emergence of Islamic financial institutions (IFIs), a new aspect ofShari‘ah compliance has been introduced into corporate governance‟s goals. If these institutions do not withhold Shari‘ah compliance in their activities, there seems no reason for their existence. This goal of Shari‘ah compliance therefore becomes integral part of the governance in the IFIs. Therefore, thisstudy is conducted to assess the compatibility of provisions of the existing Pakistani and Malaysian governance systems, with the Islamic corporate governance principles. The study also includes comparative analysis of the provisions of Pakistani legal regime relating to corporate governance practices inside Islamic banks with the Malaysian regime. The purpose of this comparison is to highlight the distinctive characteristics of Malaysian corporate governance system, and based on such distinctions, to further suggest measures for more viable and efficient shariah complaint corporate governance system for Islamic banks in Pakistan. The research methodology followed in this work is qualitative in nature. The provisions of Pakistani and Malaysian corporate governance regimes are analyzed in the light Islamic corporate governance principles. Both primary and secondary has been used. The data relating to existing literature is mainly collected from books and journal papers of secondary nature. For the purpose of analysis, the Pakistani statutory laws, that is, the Banking Companies Ordinance, 1962 and Companies Ordinance 1984 have been taken from statutes, whereas Malaysian statutory Act i.e. the Islamic Financial Services Act, 2013 has been referred from the Malaysian central bank‟s website. All other guidelines, instructions and shar‘iah governance frameworks of both the countries have been accessed from the websites of respective central banks of both viii the countries, except the code of corporate governance, 2012 of Pakistan, which has been obtained from the website of Securities and Exchange Commission of Pakistan (SECP). As far as the Islamic corporate governance principles namely khilafah (vicegerency), amanah (trusteeship), mas’oliyyah (accountability) and shafafiyyah (transparency) are concerned, they have been obtained from the original sources of Islamic law i.e. Quran,Sunnah of the Prophet Mohammad (Peace Be On Him) and the Ijma„ (Consensus of Legal Opinion). The researcher found that most of the provisions of both the regimes are compatible with the Islamic principles; however, there are some provisions from which these principles cannot be verified such as the provisions of the SGF do not provide any punishments for the non-compliances with the Islamic Law. Further, by comparing the Pakistani and Malaysian regimes of corporate governance, the researcher found that Malaysian regime have distinctive characteristics, such asproper statutory law that defines roles and responsibilities of different corporate governance players; at least one members of Shariah Committee is appointed on BODs; SC members have specialized degree in Islamic financial matters; presence of Shariah Risk Management and Shariah Research Function. These are the strengths of Malaysian regime, which are lacking in the Pakistani regime. Therefore, it is suggested that Pakistani regime also cover the above functions so that the goal of more viable and shariah compliant system of corporate governance is achieved.