[Date]

IE 5023 - Course Assignment

ETHICS AND GOVERNANCE

Case Study: The Management
Pragmatism of ABC Islamic bank

This assignment paper is partial fulfillment of Master in Islamic

Finance Practice (MIFP)

Lecturer: Prof. Dr. Syed Abdul Hamid Aljunid

Professor of Corporate Governance & Ethics
INCEIF

Student Name:
Fanny Arumsari (1900039)

SEMESTER JANUARY 2019

DATE OF SUBMISSION: 22 ARRIL 2019
 1) What would be your response to Mr Napu? Justify your answer
Corporate governance is the structure and processes for the direction and control of the companies. In its simplest
form, like Adam Smith in wealth of Nation, 1777), it’s vital because the agents of companies, being an agent of other’s
people money. They cannot be asked to watch over it with the same vigilance with which they watch over their own.

Thus, the possibility of conflict of interests between shareholders may arise. In the case of ABC Islamic Bank, the
chairman (Mr. Napu), as the highest officer of an organized company such as a board, a committee, or a deliberative
assembly, have to follow several rules as reference for deciding what to do in systematically good corporate
governance, as breakdown:

Planning

The board charter, guided by the chairman, clearly identifies– • the respective roles and responsibilities of the board,
board committees, individual directors and management; and • issues and decisions reserved for the board. It includes
what can and cannot be done by the agent of companies and the ethical and logic reason behind that.

For now, the case of ABC Company, the issues of power misused happened because there is no govern-separation of
the positions of the Chairman and CEO to promote accountability and facilitates division of responsibilities between
them. In this regard, no one individual can influence board’s discussions and decision-making.

Organizing

Get the materials and preparation of best practice corporate

governance in the world including
a. Malaysia Code of Corporate Governance: a set of best
practices to strengthen corporate culture anchored
on accountability and transparency.
b. The UK Corporate Governance Code (formerly known as the
Combined Code) sets out standards of good practice for listed
companies on board composition and development,
remuneration, shareholder relations, accountability and audit.

By these, the ABC company agents and shareholder will get the clear duties, roles, and responsibilities to benefit each
other in the ethical manner

Actuating

The responsibilities of the Chairman should include leading the board in its collective oversight of management, while
the CEO focuses on the business and day-to-day management of the company. These division will be clearly defined in
the board charter after the planning and organizing steps of good corporate governance

Controlling & Evaluating

After having duties, roles, and responsibilities then Mr. Napu and the chairman can measure the performance of board
of directors and related agent in the companies. Furthermore, this can become the basic to take decision in the future
if agency problem or conflict of interest like what Mr. Biduh doing happened.
 2) Based only on the information given above, what would be the likely risks of Jayland’s Islamic
financial system?
Islamic finance is for all (Gain acceptance since it is consistent with universal values. Many of its tenets contribute to
economic and financial stability; for example, restrictions on overleveraging; linkage of transactional activities to the
real economy and a requirement for strong governance and transparency.

Unfortunately, put all the aforementioned assumption, we should be aware of sharia compliance risk that could
happen in the the current development of Islamic practice which is still in its surface stage. People in the Jolayland
country are not concern with the Islamicity of the Islamic banks as long as the scholars working for the bank certify
their products, in fact, their criticism and movement mindset toward more Islamic thinking can benefit the further
development of Islamic Banking Products.

The others risk that may arise are credit risk as well as credibility risk of Islamic Bank which generate slow development
in Joyaland Islamic financial country. Since the ABC company as the former Islamic bank has not used sharia spirit
products based on PLS, so what crisis happened to conventional bank also can happened to Islamic bank. Moreover, if
iBs keep doing that, their credulity as Islamic institution will be queried by people.

3) Suggest or recommend measures that can be taken to remedy the weaknesses and reinforce the
strength of ABC bank’s corporate governance and Sharia governance practices.

Strength Weaknesses

1. One of the Former Islamic Bank in Jolayland 1. Unaccountable power between shareholder,
country. board of directors, and management that invited
Since that, ABC Islamic bank need to do many the issues of misused power.
innovation to compete with new comer.
2. ABC Company classified as a progressive 2. Research and Development (R&D) for Islamic
business. products in the sharia committee is not running
By look at their possibility to pay the external auditor well.
KWC, hire experience and talented worker, and
agenda to give extra bonuses and remuneration
package to the CEO.
3. Huge market for ABC Islamic bank in Jolayland 3. Conflict of interest happened since there is no
country as the majority of its society is Muslim. mentioned well-measurement of power or
interest in the company.
4. The best practice of board directors meeting and
attendance interval of CEO, chairman. (2 from 2
total board meetings)

Strategy to reinforce strength and overcome weaknesses

- 1st strength to cover 1st Weakness: Separate power

The company should have Planning, Organizing, Actuating and Controlling (POAC) steps to implementation
structure and principle power in the company. By that, it can identify rights and responsibilities of different
participant in the company including board of directors, managers, shareholders, creditor, auditors, regulators,
and stakeholders.
 - 2nd & 3rd Strength to cover 2nd Weakness: Development of R&D

It is mentioned in the case study, that, currently ABC products are only limited to basic Bai’ Bitsaman Ajil (BBA)
which in substance is not unique to conventional banking product of loan/commodity loan. Thus, it required
innovation toward the justice spirit of Islamic products or profit loss sharing, like musyarakah and mudharabah.
In order to develop those ethical-beneficial products, the process of product development must be based on 5
principle of mind which are including discipline mind, synthesizing mind, creative mind, respectful mind, and
ethical mind. By using such principles thinking, the ABC Islamic banks will always can find the answer to every
problem. for example low demand of product in the market then they can expand their market to the SMEs by
investing in crowd funding or Peer to Peer financing which or other instrument with hedge sharia compliance
facilities or lack of capability of sharia committee can be improve by giving high quality trainings in Global
University of Islamic Finance – INCEIF.

- 4th Strength to cover 3rd Weakness:

The ABC Company should consider to have an independent corporate governance committee that specifies the
purpose, responsibilities, and evaluation procedures of the committee. This committee also may be
incorporated with or under the nominating committee to make sure there is no misused power.

Recommended Assessments and Measurements

Mr. Napu should bring several ideas in the next Board meeting to , as breakdown:

1. Board and Board committees evaluation: Referring to the corporate governance rule of New York Stock
Exchange, board of listed companies have to conduct a self-evaluation at least annually to determined whether
the board of committees are functioning effectively.
2. Individual director’s performance: chairman play a key role, outlining the purpose and the process of the
assessment and leading his board to recognize the value of a rigous and regular appraisal system.
3. Corporate governance rating systems for companies: by rating agencies, some financial institutions, and other
organization providing colsultancy like standard amd poor’s 9S&P)

4) As a professional, what ought to be the criteria of an independent director in the case of ABC bank?
Independent directors are the trustees of good corporate governance. An active and involved board consisting of
professional and truly independent directors plays an important role in creating trust between a company and its
investors, and is the best guarantor of good corporate governance. Increasingly, institutional investors internationally
are closely scrutinizing the corporate governance practices and the quality of independent boards before taking
investment decisions. As companies look towards accessing funds from foreign institutional investors and tapping
global financial markets, the credentials of their independent directors will become important.

The nominating and corporate governance committee is responsible for reviewing with the entire Board of Directors,
including the independent ones, from time to time the appropriate skills and characteristics required of Board of
Directors members in the context of the current composition of the Board of Directors. Based on policy, directors
should possess the highest personal and professional ethics, integrity and values, and be committed to representing
the long-term interests of the shareholders. It is also that the composition of the Board of Directors at all times adhere
to the standards of independence and reflect a range of talents, ages, skills, character, diversity and expertise,
particularly in the areas of accounting and finance, management, domestic and international markets, leadership,
corporate governance, and the diagnostics and related industries, sufficient to provide sound and prudent guidance
with respect to the operations and interests of company (shareholder)
 5) Suggest what ought to be the best practice in the relationship between the board, the management
and the other stakeholders.
Top 5 corporate governance best practices that every Board of Directors can engage – and that will benefit every
company.

- Build a strong, qualified board of directors and evaluate performance. Boards should be comprised of
directors who are knowledgeable and have expertise relevant to the business and are qualified and competent,
and have strong ethics and integrity, diverse backgrounds and skill sets, and sufficient time to commit to their
duties.
- Define roles and responsibilities. Establish clear lines of accountability among the Board, Chair, CEO, Executive
Officers and management:
- Emphasize integrity and ethical dealing. Not only must directors declare conflicts of interest and refrain from
voting on matters in which they have an interest, but a general culture of integrity in business dealing and of
respect and compliance with laws and policies without fear of recrimination is critical.
- Evaluate performance and make principled compensation decisions.
- Engage in effective risk management. Companies should regularly identify and assess the risks they face,
including financial, operational, reputational, environmental, industry-related, and legal risks:

6) Recommend how the Central bank ought to regulate and promote the Islamic banks so that
potential risks can be mitigated if not eliminated.
The government has an important role to play. Any new industry call for harnessing and nurturing. Government's
commitment is key but commitment must worth with substantive action. My recommendations will be, as breakdown:

a. - Give incentives like tax deduction (free) based on the percentage business involved in Profit and Loss sharing
products for Islamic and even conventional banking. Naturally, this incentive will motivate banking to innovate
mudharabah and musyarakah contract which can lower sharia compliance risk for hybrid contract that is under
conventional shadow. The sharia spirit also will bring multiplier effect for the Joyaland country since the
products will related to real-high value added sector.
b. Provide liquidity assistance to Islamic banks to ensure that it is operationally capable of accepting equity
collateral based on basel III standard.
c. Provide sharia and governance assistance for new Islamic bank in the country until they can independently
run and provide and integrated report of their activities with detailed information flows; such as annual
financial statements, governance and sustainability reports. It is concise communication about how a
company’s strategy, performance, governance and prospects lead to value creation. It is also as follow up step
of central bank to evaluate the Islamic Banks in the country.