6 Features of Effective Boards in Islamic Banks

Oct 7


Hany Abou-el-Fotouh

Hany Abou-el-Fotouh

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Throughout the globe,6 Features of Effective Boards in Islamic Banks Articles increasing attention is being devoted to the performance of board of directors. As a result of the global financial crunch, stakeholders show greater interest in understanding the failure of thin-surfaced cosmetic corporate governance and address the defects of the board of directors in exercising the fiduciary oversight responsibility. The board of an Islamic bank is no exception. If something could be considered a teachable lesson, it is how to build an effective board which can exercise proper oversight on the management of Islamic bank.

In general, the board cannot perform its role effectively if its members do not have reputation for moral integrity and are not technically qualified. They must be aware of risks and complexities involved in the banking industry. In an Islamic system they must have the additional qualification of being aware of all Islamic teachings related to business and finance.

The key features are:

1. Clear understanding of roles and responsibilities.

The board, CEO and management team should develop clear understanding of the board’s role, responsibilities, authority and organizational relationships. Lack of clarity and/or misunderstanding of what is the role and responsibilities of the board often lead to governance problems. In order to have an effective board, it is necessary for the board members, management team, and employees to understand their respective responsibilities and authority.

2. Support and leadership of CEO.

The CEO should be committed to building a strong governance structure and practices. The questions are whether or not the CEO believes in the importance of governance and how strongly he is committed to board development. Trying to build a strong board without the CEO’s interest and commitment is like driving a car with the brakes on.

3. Solid board development program.

The concept of “board development” is not defined consistently in the conventional and Islamic banking organizations. Usually, a comprehensive board development program should include the following:

- A constant process for measuring the board’s changing needs for expertise

- An active effort to attract board members who can meet those needs

- A well-planned orientation program for new board members

- A comprehensive, needs-based board education program

- An on-going board evaluation process

- A "governance committee" to take responsibility to oversee the board development program

4. Adequate resources to assist the board and its committees.

 It is not possible for a board or its committees to function efficiently without staff and logistical support. Boards need good secretarial, technical, and consultative assistance. Unfortunately, in many banking organizations support is still limited to scheduling meetings, packaging and mailing meeting materials, and taking minutes. This simple support model is largely inadequate today. The quality of board performance is enhanced by top-quality staff support. For some board committees—such as Audit Committee—independent advice and counsel by persons or firms with direct responsibility to the committee is very important. Board members and CEOs who plan to have effective boards should evaluate their existing infrastructure and be prepared to invest more resources to support the board and its committees;

5. On-going access to important information.

Effective boards should have well-constructed board and committee agendas that focus the members’ time and energy on key governance priorities. The board should receive accurate and relevant information (not excessive and/or unanalyzed data) in a timely fashion. They also require board and committee agendas that are linked directly to key strategic issues and governance priorities.

Effective board meetings should focus on matters that involve interactive deliberations, rather than passive listening to reports and presentations; Moreover, they use “consent agendas” for routine items that require formal board action but no deliberation, and for which the essential information can be read before the meeting. Effective board meetings do not start with routine reports which is often boring and a waste of the board’s energy. They also minimize repetition of matters that can and should be handled at the committee level. Board committees can be delegated to perform certain functions on behalf of the board as long as delegation of responsibility and accountability are clearly defined.

6. Sound board culture.

A good board culture is characterized by proactive engagement of its members, a consistent pattern of constructive dialogue and debate, and enlivened decision-making processes. Effective boards should be more inquisitive and dynamic in carrying out their fiduciary responsibilities. Many boards have developed a culture of passivity and that boards must engage in active, independent, and informed oversight of the bank’s business and affairs, including its senior management.

All boards have a culture that has developed over time and each culture has many elements. Governance cultures vary to a great extent from bank to bank and strengthening that culture is extremely important to improving board effectiveness. Banks whose boards are involved, interactive and proactive are more likely to perform better than similar banks with less engaged boards.

Suggestions for Board Members  and CEOs

Boards who share a commitment to improving the quality of governance may wish to consider the following steps.

First, they are encouraged to initiate and complete a serious re-examination of their board, including how it is organized, what it does, and how it does it. To be useful, such a review should be close and thorough. This requires strong board chairman and CEO leadership, the board’s willingness to look at itself objectively, and readiness to make changes.

Second, directors need to reflect on their review findings and decide what kind of board they want to have and what it will take to achieve that vision.

Third, boards and CEOs should set clear priorities and timetables for strengthening their governance. The priorities and timetable for these changes should be practical;   Responsibilities and expectations should be clearly defined, with specific target dates for progress reports and formal recommendations.

Fourth, the board chairman should assign long-term responsibility for building (or refining) a board development program to a standing committee (preferably Corporate Governance Committee). However, board development should be viewed as an on-going process.

Strong leadership by board members and strong support from the CEO and management team are essential. Effective governance is rewarding in many ways, but it is hard work and requires sustained leadership and organizational support. Boards that embrace a real commitment to continuous improvement and that invest the necessary effort will increase their ability to provide effective governance for their organization.

About The Author

Hany Abou-El-Fotouh is Chief of Staff  & Group Board Secretary, CI Capital Holding - the investment banking arm of Commercial International Bank which is the largest private bank in   Egypt . He provides advice and direction to the Board and management with respect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENA region. Founder of the Middle East Compliance Officers' Forum (MECOF), he has been honored for his work in promoting compliance culture and awareness in the MENA region

Hany writes articles to different newspapers and journals on a variety of subjects. He is a public speaker and professional trainer.  Previously, he worked in various senior positions in leading banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque Saudi Fransi among others

Hany is a certified member of the Association of Certified Anti-Money Laundering Specialists (ACAMS) and Certified Director by Egyptian Institute of Directors

http://www.linkedin.com/in/ hanyfotouh