Legal and Corporate Governance Framework for Islamic Banks in Pakistan

Abstract

As custodians and trustees of public money, Islamic banking institutions (IBIs) must have a good reputation that cannot be achieved without a strong legal and corporate governance (CG) framework. The base for good governance inside financial institutions including IBIs in any jurisdiction is provided by the legal framework of the country, since the respective roles and responsibilities of corporate governance players inside IBIs are derived from the established law. In this study, the general legal and corporate governance framework for the banking sector in Pakistan is discussed. It is found that unfortunately the Islamic banking sector, which has great potential, is functioning without a proper legal cover which is a challenge for good governance as well as transaction implementation of IBIs, especially for the unilateral promises by the counterparties and hence for their soundness in future. Therefore, proper law must be promulgated, wherein all the respective roles and responsibilities of different CG players are declared mandatory, followed by punitive consequences in instances of non-compliance by them. Also, all the transactions should be given legal validation, which should resolve the issue of breaching any of the different contracts by the counterparties, especially their unilateral promises.