The Importance of Governance in Financial Institutions: The Palestinian Islamic Bank as a Model

In recent decades, institutional governance has become one of the most important pillars upon which modern financial institutions are based, due to its pivotal role in enhancing trust, ensuring sustainability, and achieving a balance between the interests of various parties, especially in the banking sector, which is considered one of the most sensitive and impactful sectors on economic and social stability. In light of the economic and financial challenges, increased regulatory requirements, and growing stakeholder awareness, adherence to the principles of sound governance has become a strategic necessity rather than merely an organizational choice.

In the Palestinian context, the importance of governance in financial institutions is particularly prominent, given the specificity of the economic and political environment, limited resources, and the sensitivity of the banking sector in supporting development and economic resilience. The experience of the Palestinian Islamic Bank in applying governance principles is seen as an important model, being one of the most prominent Islamic banks operating in Palestine, which combines adherence to modern banking standards with Sharia-compliant regulations.

The Specificity of Governance in Financial Institutions and Islamic Banks

Governance in financial institutions carries more significance compared to other sectors, due to these institutions' reliance on depositors' funds, their role in directing credit and investment, and their direct impact on financial stability. In Islamic banks, this importance increases due to dual oversight, as these banks are subjected to both traditional banking supervision and Sharia oversight to ensure that operations comply with Islamic law.

Governance in Islamic banks includes additional dimensions, the most notable of which are:

• The existence of an independent Sharia supervisory body.
• Adherence to principles of justice and risk-sharing.
• Promotion of ethical values and social responsibility.
• Achieving a balance between profitability and adherence to Sharia.

The Regulatory Framework for Governance in Palestine

The Palestinian banking sector is overseen by the Palestinian Monetary Authority, which has issued a set of instructions and regulations related to governance in accordance with international standards, such as the Basel Principles for Banking Governance, and disclosure and transparency standards. These instructions include requirements concerning the formation of boards of directors, the independence of their members, and the establishment of committees derived from them (such as the Audit Committee, Risk Committee, and Governance Committee), in addition to enhancing internal control systems and risk management.

In this context, governance serves as an essential tool for enhancing trust in the Palestinian banking system, protecting depositors' rights, and supporting financial stability, especially in an environment characterized by high risks and uncertainty.

The Palestinian Islamic Bank: A General Overview

The Palestinian Islamic Bank was established to be a national Islamic banking institution that contributes to supporting the Palestinian economy and providing financial services compliant with Islamic law. Since its inception, the bank has sought to establish sound governance principles as a fundamental element in building a strong banking institution capable of achieving growth and sustainability while maintaining the trust of customers and investors.

The Palestinian Islamic Bank is distinguished by its geographical spread, diversity of services, and its focus on financing productive sectors and supporting small and medium-sized enterprises, aligning with its developmental and social role.

Application of Governance Principles in the Palestinian Islamic Bank

First: The Composition of the Board of Directors and Its Independence

Corporate governance at the Palestinian Islamic Bank emphasizes building a balanced and effective board of directors, characterized by a high degree of independence and professional competence, in accordance with international best practices and the guidance of the Palestinian Monetary Authority. In this regard, the board includes three independent members with specialized professional and academic competencies in banking, finance, legal, and administrative fields, which enhances the objectivity of decisions, limits conflicts of interest, and supports effective oversight of executive management.

The board also includes a representative of minor shareholders, which reinforces the principle of justice and protects shareholder rights, ensuring that the voice of this group reaches the decision-making process and enhances investor confidence in the fairness and transparency of governance.

This balanced composition of the board contributes to enhancing the quality of strategic oversight, achieving a balance between expertise, independence, and representation of various stakeholders, positively reflecting on institutional performance and sustainability.

Second: The Role of the Board of Directors

The board of directors is the cornerstone of the governance system at the Palestinian Islamic Bank, overseeing the establishment of overall policies, setting strategic directions, and monitoring the bank's overall performance. The board is committed to standards of efficiency, expertise, and independence to ensure balanced decisions serving the interests of the bank and all stakeholders.

The board also has responsibilities related to approving credit policies, adopting risk management systems, monitoring financial and operational performance, and ensuring compliance with the regulations and instructions issued by supervisory authorities.

Third: Committees Derived from the Board of Directors

To enhance governance, the Palestinian Islamic Bank relies on specialized committees derived from the board of directors, each meeting at least three times a year, with a total exceeding 30 meetings annually, including the most prominent of these committees:

• Financing Committee: This is one of the most important committees of the board, responsible for establishing general financing policies, approving Sharia-compliant frameworks for Islamic financing products, and monitoring the quality of the financing portfolio to ensure a balance between growth, risk management, and compliance with Islamic law.

• Investment Committee: This is a pivotal committee that focuses on establishing the bank's investment policies, studying and approving investment opportunities, and monitoring investment performance in accordance with the bank's strategy, acceptable risk levels, and sustainability requirements.

• Audit Committee: This committee oversees the integrity of financial reports, the effectiveness of internal control systems, and compliance with accounting standards, in addition to coordinating with internal and external auditors.

• Risk Committee: This committee is responsible for developing and monitoring risk management policies of all kinds (credit, operational, market, and compliance) to ensure the safety of the bank's financial position, and it branches into an executive risk committee and business continuity committee formed from the bank's senior executive management.

• Governance Committee: This committee is concerned with developing and applying corporate governance policies, promoting transparency, and ensuring adherence to best practices. Derived from this committee is the Environmental, Social, and Governance (ESG) Committee, chaired by a board member and includes representatives from executive management, reflecting the integration between strategic guidance and practical implementation of sustainability principles.

• Incentives and Rewards Committee: This committee is responsible for establishing fair and transparent policies for incentives and rewards, ensuring a balance between performance incentives and linking rewards to long-term strategic objectives while limiting high-risk behaviors.

• Corporate Social Responsibility Committee: This committee oversees the bank's programs in the field of social responsibility, supporting community development, and enhancing financial inclusion, aligning with Islamic values and the bank's developmental role and global sustainable development goals.

• Digital Transformation Committee: This committee focuses on digital strategies, developing electronic banking services, and enhancing innovation and cybersecurity to keep pace with technological transformations in the banking sector.

Fourth: The Sharia Supervisory Board and Its Role in Governance

The Sharia supervisory board at the Palestinian Islamic Bank is a fundamental component of the governance system, ensuring that all banking products and services comply with Islamic law. The board operates with complete independence, providing reports to the board of directors and the general assembly, which enhances transparency and trust among the bank's customers.

The integration between institutional governance and Sharia governance is one of the strongest points in the experience of the Palestinian Islamic Bank.

Fifth: Executive Management and Accountability

The executive management at the Palestinian Islamic Bank is committed to implementing the policies and strategies approved by the board of directors, working within a clear framework of powers and responsibilities. The management is subjected to the principle of accountability through effective internal control systems and periodic performance evaluation, ensuring the achievement of strategic objectives without compromising governance principles.

The Impact of Governance on Performance and Sustainability

Adhering to governance principles at the Palestinian Islamic Bank has led to a range of positive outcomes, the most notable of which are:

• Enhancing depositor and customer trust.
• Improving the quality of administrative and credit decisions.
• Reducing risks and enhancing crisis management capability.
• Supporting sustainable growth and achieving a balance between profitability and social responsibility.
• Providing equal employment opportunities based on competence and professionalism.
• Enhancing the bank's reputation locally and regionally.

Challenges and Development Prospects
Despite the significant progress in applying governance, the Palestinian Islamic Bank, like other Palestinian financial institutions, faces several challenges, such as:

• Complications of the economic and political environment.
• Market and resource limitations.
• The ongoing need to develop human competencies.
• Keeping up with rapid developments in regulations and international standards.

Addressing these challenges requires enhancing a culture of governance at all levels, investing in capacity building, and updating systems and policies to ensure the sustainability of institutional performance.

Conclusion
Corporate governance is a fundamental pillar for the success and sustainability of financial institutions, especially in the Islamic banking sector. The Palestinian Islamic Bank presents a practical model for the importance of adopting sound governance by building a comprehensive system based on transparency, accountability, independence, and Sharia compliance.

In light of the challenges facing the Palestinian economy, there is a growing need to strengthen governance practices as a strategic tool to support financial stability, achieve sustainable development, and build financial institutions capable of serving the community and economy efficiently and responsibly, attracting investors since applying sound governance in any institution contributes to attracting investors through its good reputation, stable performance, and high transparency in its operations.

 

*PhD in Islamic Economics and Finance