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Transcript of farokh_habib
Governance Of Sovereign Wealth
Funds (SWFs):
International Best Practices
Kish Island / Persian Gulf (Nic 2013 / October / 28-29)
By:
Farrukh Habib (Presenter)
Dr. Beebee Salma Sairally
Prof. Dr. Abbas Mirakhor
Presentation Agenda
Introduction, Background and Significance of SWFs
SWFs: Growth and Current Development
SWFs: By Region (Muslims and Non-Muslims Majority Countries)
Governance Framework of SWFs: the Issues
Governance Framework of SWFs: the Santiago Principles
Limitations of the Santiago Principles
Recommendations and Suggestions
Concluding Remarks
Introduction, Background
and Significance of SWFs
Definition:
SWFs are special purpose investment vehicles owned and controlled by governments.
Established Out Of:
BOP Surpluses, Revenues from Privatization, etc.
Excess of Foreign Exchange Reserves
Revenues from Privatization
Commodity Exports (i.e. Oil and Gas)
Not SWFs:
Foreign Exchange Reserves
State-Owned Enterprises
Public Pension Funds
Privately Managed Funds
Attributes:
Long-Term Institutional Investors
Prefer Returns Over Liquidity
High Risk Tolerance
Purposes and Significance:
Protection and Stabilization of the Government’s Budget
Investing the Returns Generated from Commodity Exports
Earning Greater Returns than on Foreign Exchange Reserves
Investing Excess Liquidity Arising from Budget Surpluses, Privatization Revenues and Others
Saving for Future Generations
Categories of SWFs:
Stabilization funds
Saving funds for future generations
Reserve investment corporations
Development funds
Contingent pension reserve funds
SWFs by Region (Muslims / Non-
Muslims Majority Countries)
Source: http://www.swfinstitute.org/fund-rankings/
Assets of SWFs in Muslim Majority Countries and Non-Muslim Majority Countries
Governance Framework of
SWFs: The Issues
Home Countries Efficiency and Performance
Adherence to the Stated Objectives
Stakeholders’ Rights and Their Roles
Information Symmetry between the Governing Body and the Management
Responsibilities of the Governing Body
Proper Internal Risk Management Mechanisms
Host Countries Proper Disclosure and
Transparency
Political or Non-Commercial Objectives behind the Investments
National Security Threat
Privileges because of the Government Association
Accountability
Governance Framework of SWFs: The
Santiago Principles
The Generally Accepted Principles and Practices (GAPP) were developed by the IWG, comprising 26 IMF member countries with SWFs, in 2008.
The GAPP is a comprehensive set of voluntary codes for home countries - commonly known as the Santiago Principles.
Objectives of the Santiago Principles:
To promote global financial stability
Free flow of capital and investment
Legal compliance and proper disclosure
Adherence to commercial goals
Sound governance structure
Coverage of the Santiago Principles:
Legal framework
Institutional and governance framework
Investment and risk management framework
Limitations of the Santiago
Principles
Standardised principles for a group of heterogeneous entities (one size fits all)
Applicability of the principles is subjected to the domestic laws, regulations, requirements and obligations.
Impact of the principles is very minimal.
The principles do not aim to promote the transparency per se; but only a better understanding.
The Santiago Principles are still not sufficient in pursuing the SWFs to observe full adherence to their stated commercial objectives.
Compliance of the SWFs to the Santiago Principles varies from one SWF to another SWF.
The Santiago Principles, for obvious reasons, does not address social, ethical, and religious issues.
Recommendations and
Suggestions
Ethical and responsible investment
New Zealand: Avoids irresponsible investments
Qatar: environmental and humanitarian aspect
Singapore: avoids countries sanctioned by UN security
council
Norway: GPGF has the Ethics Council for the approval
of all the investments made by the fund.
GPGF has been successful in inspiring other market
players to assume social responsibility and impact
investments.
Recommendations and
Suggestions
Governance structure, public disclosure, transparency and accountability of SWFs, especially in Muslim countries, should be improved.
Human beings are subject to greater accountability and fiduciary responsibility in the purview of Quranic concept of life hereafter; Ma’aad. (al-Baqarah 2:4)
The Holy Quran promotes higher transparency levels and disclosure in transactions. (al-Baqarah 2:282)
It also emphasises the faithfulness and honesty in the fulfilment of the contracts and oaths. (Quran 4:135; 5:89; 5:108)
Most importantly Islam provides its own social welfare framework; which seeks to achieve social justice, equity and fairness for the whole society. (Maqasid al-Shari’ah)
Under the purview of the theory Maqasid al-Shari’ah, SWFs in Muslim countries should be subject to more comprehensive Islamic rules of governance, disclosure, transparency, and accountability in order to achieve Falaah.
Recommendations and
Suggestions
These theoretical underpinnings call for a holistic faith-based approach towards the governance of SWFs in Muslim countries. (Shari’ah Governance Framework)
An independent Shari’ah committee for every SWF may be established at the institutional level. The rulings of that committee will be binding only for its own SWF.
The committee will comprise of competent Shari’ah scholars. The experts of other disciplines may also be included in the committee in order to widen the scope of the committee.
The committee will be assisted and facilitated by a Shari’ah review and audit department.
The committee will be vested the responsibility of directing, reviewing, and supervising all the activities and operations of the SWF, according to the principles and requirements of Shari’ah.
The Shari’ah review process will cover both ex-ante and ex-post transactions.
Recommendations and
Suggestions
Since the idea of Shari’ah governance framework for
SWFs is relatively new. The Shari’ah governance model
should be flexible and suitable enough for the SWF.
Not all the current operations and activities of the SWFs
can be made Shari’ah compliant overnight; hence, a
gradual transformation is recommended.
The implementation of such framework should not be
rigid; rather it should be accommodative and facilitative
to the activities of the SWF.