Governance and Risk in Africa

Size: px

Start display at page:

Download "Governance and Risk in Africa"

Corey Fletcher
8 years ago
Views:

1 Governance and Risk in Africa Islamic Finance and Corporate Governance: What role can key institutions play in advancing governance in Africa? Abubaker B. Mayanja ABL Associates

2 Governance and Risk in Africa ADVANCING CORPORATE GOVERNANCE IN AFRICA 2

3 Governance and Risk in Africa Political Governance in Africa is characterized by a continuum from Monarchy to Democracy, unstable constitutions and forceful change sometimes Recently some political power shifting to Regional Institutions such as; IGAD, AU, ICGLR that have reduced risk. Regional Economic blocks influence trade and economic policy. Risks- Political Instability, Low income nations-thin markets, Macro economic vulnerabilities due to weak exports, Skills gap-hr weaknesses, Weak Institutions, Low capital base, Banking Risks- Traditional risks-moral Hazard and Asymmetric Information, Non performing assets, 3

4 Regional Blocks in Africa Currently, there are eight RECs recognised by the AU, each established under a separate regional treaty. They are: Arab Maghreb Union (UMA) Common Market for Eastern and Southern Africa (COMESA) Community of Sahel-Saharan States (CEN-SAD) East African Community (EAC) Economic Community of Central African States (ECCAS) Economic Community of West African States (ECOWAS) Intergovernmental Authority on Development (IGAD) Southern African Development Community (SADC) 4

5 Corporate Governance ADDRESSING GOVERNANCE ISSUES SPECIFIC TO ISLAMIC FINANCE INSTITUTIONS 5

6 The purpose of Corporate Governance Compliance- Legal-Tax, Financial and Technical Strategy coherence to safeguard and grow shareholder value Vision, Mission, objectives and competitive position, Islamic Finance: Sharia Compliance Management and Sharia board-interaction which one has the final say and where do we draw the line, Corporate Social Responsibility Qard Hasan Corporate Growth & Sustainability Increase revenues and profitability Identification,Management and Control of Risks 6

7 Organisation Design Illustration Vision/Mission Values/ Operating principles Strategies Objectives Culture Systems Structure Processes Performance measures People

8 Corporate Governance-Islamic Financial Institutions Directors Board Committees Management reporting to board Board of Directors Shari 'a Supervisory Board Internal Auditor Head CSR & Qard Hasan Audit Committee Internal Auditor 8

9 Organisation Structure Board of Directors Shari 'a Supervisory Board CEO CFO & Head Support services COO & Head Technical Services Marketing and Sales channels Support Services- Accounts, IT, HR& Admin., Legal and Shari' a compliance Technical Services- Underwriting(Takaful), Product managers-banking 9

10 What risks Islamic Finance Leaders should be worried about? Islamic Finance risks- Legal Framework still under formation In diverse jurisdictions: Common Law, Civil Law, Sharia Law, Pluralistic high capital buffer due to nature of transactions Taxation Risk taking Equity Changing Technology-core banking systems and Delivery channels such as Mobile banking are reshaping micro competitiveness Africa Risks slow legislation and introduction due to Islamophobic misconceptions Political Instability Corporate Fraud and Corruption 10

11 What risks Islamic Finance Leaders should be worried about? Cont. Ecosystem Risks Monetary Policy and Central Banking role to have treasury instruments for Liquidity Traditional Islamic Banking should be supported by Ijara(leasing), Takaful(insurance) and Merchant Banking(raising secondary Capital), Capital Market Instruments-Sukuk International Ecosystem Risk Insurance: Re-Takaful International Standards for Governance, financial products & Instruments and Auditing 11

12 Africa Legal Systems are diverse Map of the Legal systems of the world (en)" by Maximilian Dörrbecker (Chumwa)

13 How should we minimize risks in Africa TACKLING RISK IN KEY AFRICAN MARKETS 13

14 Tackling Risk in Key African Markets Adopt International Best Practice from Conventional Banks Internal Audit Function reporting to the Management Board Directly to minimize fraud & regulatory compliance (tax etc) risk Introduce Shariah Internal Audit Function reporting to the Board Independent Directors Basel Committee on Banking Supervision (BCBS) made recommendations to improve banking sector transparency, capital reserve and lending practices Political Risk Insurance is a musthttps:// and that of IDB insurance arm will unlock FDI the most reliable source of growth for small open economies 14

15 Tackling Risk in Key African Markets-cont. Increase support to regional bodies such as: IGAD, ICGLR, AU to minimize conflict Support Integration through regional economic groupings: Political, legal, economic; partners are unlikely to resort to force to resolve differences Support Market Access- fifty+ years of Aid have not transformed Africa. The Trade paradigm seems to transcend the Aid Paradigm for inclusive economic growth to increase incomes and bankability of projects WTO rules and market access key to tackling key macroeconomic risks of growing current account deficits and associated weakness of currencies that render inflation uncontrollable leading to unstable macroeconomic conditions 15

16 Sustainable development of Islamic Finance in Africa and Corporate Governance WHAT DO KEY STAKEHOLDERS NEED TO DO 16

17 Corporate Governance & Standards Multilaterals and Regulators should ensure that Institutions join The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) AAOIFI is an Islamic international autonomous not-forprofit corporate body that prepares; accounting, auditing, governance, ethics and Shari'a standards for Islamic Financial Institutions and the industry. Promote professionalism -CIPA, the Shari a Adviser and Auditor "CSAA", and the corporate compliance program to enhance HR compliment and governance AAOIFI Standards: Total of 88 standards issued: (a) 48 on Shari a, (b) 26 accounting, (c) 5 auditing standards, (d) 7 governance, (e) 2 codes of ethics 17

18 Strategic Direction for Islamic Finance To consider a Universal Banking Model that takes a holistic view of Financial Services and its key elements of; Retail/commercial Banking, Investment Banking, Insurance and Fund Management. Synergies that increase share of the wallet selling several financial products such as; Insurance, investment products and credit to the same client under the same brand increases efficiency and profitability 18

19 Strategic Direction-Uganda Case Study Universal Banking Model- Share of wallet with Sharia Focus Retail Bank Investment Merchant Bank - Insurance Pension Funds Management Introduce Islamic Banking Unit to prepare for the launch when the law allows Increase mobile and internet banking engagement Stock Brokerage IPO underwriting Fixed Income Currency and Commodities(FICC) Establish a Takaful Insurance to Tap into IDB funding Establish Unit Bank of Uganda Capital Markets Authority Insurance Regulatory Authority Uganda Retirement Benefits Authority 19

20 Strategic Holding Co. Shareholders Board of Directors Holding Co. Sharia Council Retail and Commercial Banking Co. Investment Banking/Brokerage Co. Insurance Services Co. Fund Management Zakat & Waqf Trustee Pension Management Non-Banking Subsidiary- Leasing Co. Sharia Compliant Universal Banking Model : Recommend starting with Insurance Services Co Fund Management Brokerage Islamic Banking window with ring fenced capital 20

21 IDB Strategy-Ecosystem and Delivery Channels The Islamic Development Bank (IDB) and its affiliates have come up with a strategy to develop the Islamic finance industry in Africa In this strategy, the IDB group is prepared to provide financial resources including equity and technical support etc to a group of financial institutions that can invest in banking, insurance, re-insurance, leasing, mortgage finance and financial institutions operating in the sukuk market. The idea is to provide synergy and cohesion for the nascent Islamic finance industry so that it can survive and be sustained whenever it is established 21

22 IDB Strategy-cont. IDB strategy advocates introduction of Sharia a compliant Private companies support will be channeled through- Islamic Corporation for the Development of the Private Sector(ICD) to develop Islamic Finance Channels the following channels Ijara(Islamic Leasing) Mortgage Islamic Banks-Trade finance Takaful-(Islamic Insurance/ Re-Insurance) Sukuk bonds-capital Markets 22

23 Islamic Finance Institutions: way forward Should be keen on aligning strategy to that of the IDB to attract the funding and technical support of a very strong international multilateral development institution Locating Hubs-OIC and IDB member state status countries Potential to make local and International strategic alliances for technical support and share capital contribution IFIs Should Locate Head Quarters in the countries that have the status to enable capital access and support from IDB 23

24 Africa favourable Key trends to Watch Micro Finance Better Management of Natural Resources and unlocking of raw untapped Natural Resources Political Stability and democracy gains Integration will unlock growth and reduce conflict Micro Finance and Social Impact Investment The middle class is emerging 24

25 Key Institutions that will impact on Islamic Finance OIC- Networking for opportunities IDB and its affiliates- Leading Multilateral support for development, technical and Financial capital formation Central Bankers-Legislation, Regulation and Systemic Risk Management through compliant instruments Established Islamic Banks should be encouraged to go to Africa Multilateral Guarantee Agency-Political risk Insurance ICT- Technology to manage IFIs 25

The development of Islamic banking and the Omani Experience

The development of Islamic banking and the Omani Experience Growth of Islamic Banking Industry Remarkable growth, both in terms of size and reach, has been witnessed in the Islamic Finance Industry. Market