INVESTORS’ RIGHTS, TRANSPARENCY AND INFORMATION IN EQUITY BASED ISLAMIC FINANCE: AN EXPLORATION INTO ISLAMIC PRIVATE EQUITY IN THE GCC

Abstract

Islamic principles encourage the use of risk-sharing modes of financing and private equity is one of the organizational formats that uses these instruments. However, there has been no in-depth study on Islamic private equity (IPE) that examines the issues arising in implementing equity-based financing. IPE involves an investment where Islamic Financial Institutions (IFIs) and investors are bound together by a contractual relationship that is greatly influenced by trust. Private equity relationships involve investments in different projects and ventures on a risk-sharing basis with not much known, especially about the post-investment period. Furthermore, private equity is considered to be one-sided agreements since there is no room to negotiate pre-investment, little or no voting power post-investment, a process to resolve conflict of interest matters is lacking and accounting is off the balance sheet. All of the above gives rise to a potential conflict of interest and makes the availability of market information essential to the investors. Thus, enhancing the transparency and flow of information can be the strategic factor in developing the Islamic private equity market (IPE). Moreover, in IPE investors depend highly on the Shari’ah Supervisory Board (SSB) supervision and oversight for ensuring Shari’ah compliance, yet the independence of SSB is questioned.
Given the above, the aim of the study is to explore the relationship between the investors and IFI investing in IPE across the GCC, reflecting on investors’ rights and compliance with the principles and goals of Shari’ah. The study followed an inductive approach, using athe mixed model, combining qualitative and quantitative data collection and analysis techniques. Participants: investors (Islamic and conventional), IFIs and Shari’ah scholars, were selected using sampling and judgmental techniques. The results were analysed using descriptive and inferential statistical methods. The findings indicate that transparency and investor communication is lacking and IFIs need to improve on the disclosure mechanism towards their investors. The governance of the investment structure and of the IFI management, the ability to negotiate, and the independence of Shari’ah supervision and review are some of the key issues that would need to be addressed/strengthened to enhance the investors’ confidence. Regulations are to be navigated towards enhancing transparency, publicity and accountability. The desire is not only for regulations on the availability of information, but also to ensure they are enforced and consequences may result from non-compliance. In addition, in introducing an independent set-up, SSB independence can be enhanced. Furthermore, with the concept of IPE investment being a contractual agreement, an effective supervision, contract enforcement and legal system is required.