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

Growth and Current

Development of SWFs

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.

Thank You Questions and Comments