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- 1. 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
- 2. 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
- 3. 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 Governments 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
- 4. Growth and Current Development of SWFs
- 5. 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
- 6. 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
- 7. 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
- 8. 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.
- 9. 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.
- 10. 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; Maaad. (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-Shariah) Under the purview of the theory Maqasid al-Shariah, SWFs in Muslim countries should be subject to more comprehensive Islamic rules of governance, disclosure, transparency, and accountability in order to achieve Falaah.
- 11. Recommendations and Suggestions These theoretical underpinnings call for a holistic faith-based approach towards the governance of SWFs in Muslim countries. (Shariah Governance Framework) An independent Shariah 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 Shariah 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 Shariah 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 Shariah. The Shariah review process will cover both ex-ante and ex- post transactions.
- 12. Recommendations and Suggestions Since the idea of Shariah governance framework for SWFs is relatively new. The Shariah governance model should be flexible and suitable enough for the SWF. Not all the current operations and activities of the SWFs can be made Shariah 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.
- 13. Thank You Questions and Comments