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

2. Contents
1. Fundamentals of Islamic (Shariah Compliant) Finance
 Basic requirements and philosophy
2. Overview of Islamic Finance Market
 Types of Islamic Finance Products
 Basic Assumptions
 Additional Matters
3. Use of Islamic Finance in Different Market Sectors
4. Governance
 Background
 Products and processes
 Regulator/operator issues
 Specific issues
 International Guidance
 Basel
 IFSB Standards
5. General Principles
 Non executive functions
6. Conclusion
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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”).
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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;
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7.  Islamic Finance (Cont’d):
 Al-Wadia (safekeeping): usually not remunerated;
 Takaful (Insurance);
 Funds Work;
 SUKUK/Securitisation (Capital & Secondary Markets); and
 Derivatives/Funds Management.
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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)
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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)
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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)
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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
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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
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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
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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
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20. Non Executive Functions
 Role of non-executive directors/managers
 Guidance
 Oversight
 Compliance issues
 Future compliance policy
19

21. Contact:
HAMID YUNIS
Taylor Wessing
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Blackfriars
London
EC4Y 0DX
Tel: 0207 300 7000
Fax: 0207 300 7100
Direct: 0207 300 4088
E-mail: h.yunis@taylorwessing.com
Web: www.taylorwessing.com
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