Special Report

The age of Wiki-leaks, social-media and Al-Jazeera, has enabled people across Tunisia, Egypt, and elsewhere to expose and galvanize people’s frustrations with their governments.  Indeed, corruption in all its forms has been one of the main reason for the major inequities created in these societies and perhaps is its root cause.

In this special report, we look at Corruption in the mostly Muslim majority 57  Organization of Islamic Conference (OIC) countries.  We focus specifically on the business community, its common corrupt practices or environment, and opportunities of curbing its cancerous effects.  This disease of corruption has been crippling the OIC economies and societies for far too long.  However, the recent revolutions in Tunisia, Egypt and now Libya provide some hope, perhaps indicating that the people may drive not just political change, but economic change as well.

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Dismal State of Corruption in Muslim Countries

Transparency International (TI) is a global civil society organization focused on fighting corruption.  It defines corruption as the abuse of entrusted power for private gain. TI has more than 90 chapters worldwide and an international secretariat in Berlin.

Based on the TI Index, 51 of the 55 OIC member countries covered by this list are corrupt. 38 of which would fall under the severely corruption band of 2.9 score or below!

TI’s Corruption Perception Index (CPI) measures the perceived level of public-sector corruption around the world. The CPI is a good initial tool to see the state of corruption in various countries. The 2010 report  covered 178 countries covering perception of bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts.

TI’s Corruption Percept Index
Ranking: Least corrupt to Most. Score:  1 (Highly Corrupt) to 10 (Very Clean) (Filtered for OIC member countries; 55 countries covered, top 10 and bottom 6 shown)[table id=9 /]Source: Transparency International. To see the full OIC list click here

Although not focusing on the private sector, this report paints a disturbing picture of the prevalent public-sector corruption in Organization of Islamic Conference (OIC) member countries which has direct implications to the private sector .   The list ranks countries on a scale of 1 (Highly Corrupt) to 10 (Very Clean.)  Countries below the score of 5 are considered corrupt in some significant way.

Given this criteria, the report states that 51 of the 55 OIC member countries covered on this list are corrupt.  Of the 51 covered countries, 75% (38 countries) would fall under severe corruption band of 2.9 score or below!  Another way to see this would be that OIC member countries form 42% of the corrupt nations on this list while they only represent 8% of the non-corrupt nations.

Qatar (7.0 score) comes out to be the least corrupt amongst OIC member countries followed by United Arab Emirates (6.3 score), Brunei (5.5 score), and Oman (5.3 score.)

The most corrupt countries from the OIC (bottom of the list) were Somalia, Afghanistan, Iraq, Uzbekistan, Turkmenistan, and Sudan all with a score of less than 2.

Amongst the large OIC economies, Indonesia (2.8) , Pakistan (2.3) and Iran (2.2) have the worst scores.  Other large economies fare relatively better Saudi Arabia (4.7), Malaysia (4.4), Turkey (4.4) but still below the the score of 5 and with ample corruption issues.

The cleanest, non-corrupt nations in the world, according to this list are Denmark, New Zealand, and Singapore all with a score of 9.3. 

Corrupt Sectors/ Institutions

Click image to see full illustration

TI’s Corruption Perception Index (CPI) covers just the public sector.  However, the CPI also serves as a strong and ominous indicator of structural corruption inherently prevalent in the private sector, given the major role played by the central governments of the OIC member countries in their respective corporate sectors. This is confirmed by the fact that the institutions considered most corrupt are usually government related entities, as shown in the table.

TI’s Pakistan Chapter concluded a local survey in June 2010 on Corruption Perception in Pakistan (CPI score 2.3, CPI rank #143).  The survey revealed that the Police remain the most corrupt public institution, followed by the Electric Utility, coming in at second most corrupt, and the Land Administration office rounds out the top three most corrupt institutions in Pakistan’s public sector. A similar study conducted in Indonesia (another major OIC market with high perceived corruption) shows that the Police, Customs, and Immigration institutions are the key purveyors of bribery.

In terms of business sectors, the TI Pakistan report showed that Builders/Contractors were perceived to be the most corrupt (see table).   This assertion is supported by findings of the global study of Industries most prone to corruption, which shows Public Works/Construction as most prone to corruption.

Click image to see full illustration

Prevalent Forms of Corruption

When looking at the wide array of ways and types of corruption, it is fair to say that evil geniuses are hard at work.  Its impact is catastrophic and lives and livelihoods are affected.  Below is a breakdown of some of the main ways corruption takes place; please note, this is not a comprehensive list – but rather just a snapshot – of deviant business tactics.

Both big and small

Corruption happens at individual level, or by big and small business and public entities who engage in it as part and parcel of their culture and processes.

Types of Corruption: DinarStandard Illustration
Click to see full Illustration

Indeed corruption is both small and big.  Practiced on a smaller scale corruption usually involves relatively small amounts of money, including bribery (grease money or speed payments). Whereas “big corruption” is most dangerous – where policy making and business collude to design and implement projects and initiatives compromised by corrupt practices.  In big infrastructure projects for example, government officials in the process of making decisions of significant economic value, routinely demand bribes or kickbacks for ensuring that tenders or contracts are awarded to specific contractors.

Main forms

The main forms of corruption can be broken down as follows:

  • Cronyism/ Nepotism: Favoritism in appointing for posts, promotions
  • Bribery: The most common and prevalent form of corruption. Kickbacks, ‘Speed money.’
  • Embezzlement:  Theft of public property or money.
  • Fraud: Procurement fraud, insider trading, money laundering, price fixing, accounting irregularities, etc.
  • Extortion: Threatening with authority to extract favors
  • Grey areas: Gifts, client expenses.

To gather some opinions on corruption, DinarStandard spoke to a number of executives from Pakistan, Bangladesh, Turkey and Indonesia.

In Pakistan a “personal bribe” seems to be the most common unethical business practice. Athar Mian, a technology executive, lists: “Personal bribes, misleading information followed by deliberate delays.” He says that unnecessary regulation can also be a problem because “all rules can be interpreted or re-interpreted to your tastes.”

In Turkey, tax evasion, bribery, smuggling, and domination attempt of a target market are the norm. Yakup Kocaman, a market analyst, relayed that some small and medium size companies employ workers illegally in order to reduce employment cost. “Total cost of a legal worker is USD 600 , which is far higher than competitors like China and India.”

Corrupt practices thus limit formation of competitive market environment for both local and global companies. “Foreign investors prefer to enter the more stable markets like banking, insurance, telecom, energy and hesitate from less-regulated markets such as textile, apparel, tourism and construction”, Kocaman said. The Turkish government is actively working to minimize bribery.

Kristanto Santosa, Executive Director, Business Innovation Center in Indonesia, explained that bribery exists in Indonesia because it falls under a gray area. “Many business people consider bribery common practice and ‘ethical’ even though it is formally illegal.”

Samiur Rahman, a Bangladesh based entrepreneur, points to infancy of markets as a contributing factor to corruption. “For example, in a country, such as, Bangladesh that was liberated in 1971 — existing laws come from 3 sources: British, East Pakistan Pre-1971, and Bangladesh Post-1971. This contributes to both gaps and overlaps (in addition to confusion) and regulatory arbitrage.”

Why it matters: The Business case

World Bank’s 2008 estimates show that the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.

Corruption risk is a business reality today with a major cost to companies and national economies.  The UN Global Compact report on business corruption summarizes the economic impact by stating that, “corruption impedes the development of markets, drives away investment, increases the costs of doing business, and undermines the rule of law.”

World Bank’s 2008 estimates show that the cost of corruption equals more than 5% of global GDP (US $2.6 trillion), with over US $1 trillion paid in bribes each year.

This corruption adds up to 10% to the total cost of doing business globally, and up to 25% to the cost of procurement contracts in developing countries.

Another way to look at it is that for a business moving from a country with a low level of corruption to a country with medium or high levels of corruption is found to be equivalent to a 20% tax on foreign business.  Thus, corruption levels are an important factor for corporations to consider when analyzing the economic feasibility and impact of expanding or moving operations into an emerging market.

A 2008 PwC report looked at the business case for an effective anti-corruption program by surveying 400+ global executives.  “45% of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks, 39% say their company has lost a bid because of corrupt officials, and 42% say their competitors pay bribes.”

They also highlighted that, “If corruption was discovered, 55% say the most severe impact would be to corporate reputation. This is greater than the combined total of those who say legal, financial and regulatory impacts would be the most severe.”

Why it matters: Ethical/ Islamic Underpinning

“And O my people! Give full measure and weight in justice and reduce not the things that are due to the people, and do not commit mischief in the land, causing corruption.” The Noble Qur’an – Hud 11:85

Certainly, core principles of ethics and morality as it relates to economic corruption are universal.  So for those communities and environments (family, education, etc) that value good morals, corruption’s catastrophic impact on others in society and community would be a big concern.

For believing Muslims, there’s added concern of accountability to God for acts of corruption.  There is indeed a strong emphasis in Islam against corruption and in support of just and equitable transactions.  Below are just a couple references from Quran and the Hadith (sayings and actions of the Prophet Muhammad, peace, mercy and blessings be upon him.)

“And O my people! Give full measure and weight in justice and reduce not the things that are due to the people, and do not commit mischief in the land, causing corruption.” The Noble Qur’an – Hud 11:85

I heard the Prophet (saaws) saying, “Any man whom Allah has given the authority of ruling some people and he does not look after them in an honest manner, will never feel even the smell of Paradise.”  Sahih Muslim – Volume 9, Book 89, Number 264, Narrated Ma’qil

Leadership of any sort, including managing a business and/or team, is seen as a heavy undertaking, in terms of both practical and spiritual liability, requiring a high level of responsibility in both morality and ethics.  Given this strong emphasis on just and equitable dealings in Islam, one would naturally expect a low affinity towards corruption in Muslim markets.  Unfortunately, in practice (as shown earlier), Muslim markets are notoriously corrupt.  Perhaps this is a function of lack of awareness of Islamic principles governing business transaction amongst the local professionals.  More likely than not, the rampant corruption is an indicator of a weakness of ‘Imaan,’(belief in God) and ‘Taqwa’ (God consciousness)?  Interestingly, TI’s Pakistan report showed that while 71% said people get involved in corruption “under duress,” still 29% said it is done “voluntary.”  Sadly, this is  certainly a sign of losing Islamic and moral character in exchange for a quick, unethical, and undeserved economic return.

Corruption Controlling Guidelines for businesses

So what can be done?  When corruption has infested so many aspects of a business environment, how can it be controlled?  Fortunately, there are many institutions across the world and Muslim markets who are striving to eradicate corruption and push to establish a just and equitable business environment.

The “UN Global Compact” is an initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. Its Anti-Corruption efforts are driven from UN Convention against Corruption (Principle 10.)

The UN Global Compact has an online anti-corruption tools inventory. The inventory is intended to guide companies through various initiatives and tools to help curb unethical dealings.  These tools provide anti-corruption guidelines and integrity systems, training, whistle-blowing systems and reporting.

Building an Ethical Culture
  1. Commit to ethical business practices
  2. Talk to your employees
  3. Make rules and communicate them
  4. Make it part of everyday business practice
  5. Have an open door
  6. Apply discipline
  7. Recognise ethical behaviour
  8. Report corruption
  9. Consider collective action

Source:  Anti-corruption guide for South African SMEs

TI’s local chapters in Bahrain, Turkey, Pakistan, Malaysia, Indonesia and other places also support businesses in instituting anti-corruption practices and policies.

The global consultancy PriceWaterhouseCoopers, published a report on “Confronting Corruption”. The report presents five steps to establishing a better anticorruption program that cover, 1)Risk analysis, 2) Implementation, 3) Sanctions process, 4) Help lines, 5) Monitoring.

Similarly, an anti-corruption guide for South African SMEs presents ten steps to building an ethical culture as shown in the table.

Conclusion

Corporate corruption is an epidemic plaguing the highly interconnected economies of the modern world, and unfortunately, the OIC countries are no exception.  In fact, the OIC countries are some of the worst sources of corruption in the global economy.  The Prophet Muhammad (SAW) shunned corrupt practices long before any form of index was formulated, some 1400 years ago. OIC countries need to seriously look at the implications of their gray areas and “permissible” corrupt practices, and make a concerted effort to return to these core principles of justice and morality as advocated by Islam.  Morality demands it, divine accountability demands it, and such practices do not bode well with the international market.  Sustained corruption will only cause the uncontrollable growth of inefficiencies and overhead to aggregate, resulting in heavy economic loss.  Countries, companies, and institutions alike with low tolerance for corrupt practices will not work with massively corrupt environments, and will naturally close opportunities of potential investments in corrupt markets.

As leaders in the OIC markets are awakening to a higher level of accountability and responsible governance, demanded by its grass roots revolutions, driven by the rejection by the people of corrupt regimes, we hope the tide of corruption in these markets will start changing as well.  The question now is how does this momentum of change translate to the business sectors?  Will a consumer revolution also demand accountability of business leaders?

As the respected scholar Shaykh Ibn Taymiyyah said, “This is why those who are in authority are of two groups: the Scholars and the Rulers. If they are upright, the people will be upright; if they are corrupt, the people will be corrupt.”

See Related Report:

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Corruption is a vast topic indeed and we have just touched its surface.  Please join us with your comments below, or on our Facebook page.

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