This document discusses governance and risk in advancing Islamic finance in Africa. It addresses the roles that key institutions can play and outlines some recommendations. Specifically, it discusses: 1) Political and economic risks facing Africa like instability, weak institutions, and vulnerabilities. Regional economic blocks can help reduce some risks. 2) Corporate governance issues specific to Islamic finance institutions, including the interaction between management and Sharia boards. 3) Risks Islamic finance leaders should consider, like legal frameworks still developing, technology changes, and ecosystem support needs. 4) Recommendations for minimizing risks in key African markets like adopting international banking standards and increasing regional integration and market access.

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

2. ADVANCING CORPORATE
GOVERNANCE IN AFRICA
Governance and Risk in Africa
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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,
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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)
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5. ADDRESSING GOVERNANCE ISSUES
SPECIFIC TO ISLAMIC FINANCE
INSTITUTIONS
Corporate Governance
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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
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7. Vision/Mission
Values/ Operating principles
Strategies
Objectives
Culture
Systems
Structure
Processes
PeoplePerformance
measures
Organisation Design Illustration

8. Corporate Governance-Islamic
Financial Institutions
Management
reporting to
board
Board
Committees
Directors
Board of
Directors
Shari 'a
Supervisory
Board
Internal Auditor
Head CSR & Qard
Hasan
Audit Committee Internal Auditor
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9. Organisation Structure
• Support Services- Accounts, IT, HR& Admin., Legal and Shari' a compliance
• Technical Services- Underwriting(Takaful), Product managers-banking
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Board of Directors
Shari 'a Supervisory
Board
CFO & Head
Support
services
COO & Head
Technical
Services
CEO
Marketing
and Sales
channels

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
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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
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12. Africa Legal Systems are diverse
Map of the Legal systems of the world (en)" by Maximilian Dörrbecker (Chumwa) -
https://commons.wikimedia.org/wiki/File:Map_of_the_Legal_systems_of_the_world
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13. TACKLING RISK IN KEY AFRICAN
MARKETS
How should we minimize risks in Africa
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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 must-
https://www.miga.org/ and that of IDB insurance arm
will unlock FDI the most reliable source of growth for
small open economies
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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
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16. WHAT DO KEY STAKEHOLDERS
NEED TO DO
Sustainable development of Islamic Finance in Africa and Corporate
Governance
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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-for-
profit 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
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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
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19. Strategic Direction-Uganda Case Study
Universal Banking Model- Share of wallet with Sharia Focus
-Retail Bank
Introduce Islamic
Banking Unit to
prepare for the launch
when the law allows
Increase mobile and
internet banking
engagement
Bank of Uganda
Investment
Merchant
Bank
Stock Brokerage
IPO underwriting
Fixed Income
Currency and
Commodities(FICC)
Capital Markets
Authority
Insurance
Establish a Takaful
Insurance to Tap
into IDB funding
Insurance
Regulatory
Authority
Pension
Funds
Management
Establish Unit
Uganda Retirement
Benefits Authority
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20. Shareholders
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
Board of
Directors
Strategic Holding Co.
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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
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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
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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
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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
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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
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