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By Bernardo Vizcaino
SYDNEY, Dec 5 (Reuters) - Islamic banks need to strengthen their risk management and sharia compliance functions, a report published on Tuesday said, as momentum grows for updating corporate governance practices in the industry.
The report by the World Bank and the Bahrain-based General Council for Islamic Banks and Financial Institutions (CIBAFI) aims to encourage further action by regulators to strengthen the sector’s governance.
The findings are based on a survey of 77 Islamic banks across 22 countries, covering the industry’s core centres in the Gulf region and Southeast Asia and extending to Islamic banks in Africa and Europe.
The global financial crisis has spurred awareness of corporate responsibility over the past decade, but regulations covering Islamic banks have not always kept pace with the industry’s growth.
Islamic commercial banks are estimated to hold around $1.3 trillion in assets globally and the sector is now considered systemically important in several countries including Saudi Arabia, Qatar, Malaysia and the United Arab Emirates.
The report found risk governance was a weak spot for Islamic banks, recommending increased use of independent directors and strengthening the role of risk management officers.
Sharia governance is another area of relative weakness, despite being a unique feature of Islamic banks.
This is partly because not all jurisdictions have implemented provisions at a national level, the report said.
Islamic banks traditionally establish an internal board of scholars to rule on whether their products are religiously permissible, but the boards’ effectiveness can vary.
“Here the big issues are the lack of diverse experience of the members on the sharia board and the infrequency of sharia board meetings,” the report said.
Around two thirds of banks sampled had a sharia review unit, but most banks’ sharia boards appear to meet less than six times a year, and they often lack members with diverse technical backgrounds.
Among the main policy recommendations was the development of a new or revised standard for corporate governance that is specific to Islamic banks, as well as improvements in conflict of interest policies and sharia-related disclosures.
There are already some regulatory efforts underway that could spur further action across the industry.
In September, Bahrain’s central bank issued new corporate governance rules for its Islamic banks that mandate external sharia audits.
Malaysia is also in the process of updating its own sharia governance rules, with an exposure draft released by Bank Negara last month. (Reporting by Bernardo Vizcaino; Editing by Eric Meijer)