"Is Your Investment in Performance-Based Bonds Protected? Transparency and Accountability as the Key to Success!"
Prepared by: Majd Kimrakji
PhD Researcher in Law
December 2024
Introduction
Performance-Based Bonds are an innovative financial tool that allows issuers to achieve their specified financial and developmental goals.
In this context, transparency and accountability play a vital role in ensuring the effectiveness of this tool, as returns on investment depend on performance.
To achieve these goals, it is essential to integrate both local and international governance systems into one framework, and to utilize modern technologies such as blockchain to enhance financial oversight and transparency, thus building trust among all parties involved.
1. Potential Risks and How to Mitigate Them through Transparency and Accountability Despite the significant benefits of Performance-Based Bonds , there are potential risks that investors should be aware of. Some of these risks include:
? Actual Performance Risks: Since returns on Performance-Based Bonds depend on achieving specific goals, there is always the possibility that the projects will not meet the expected targets. This may lead to a decline in returns or even a loss of part of the investment.
? Limited Transparency Risks: If there is a lack of disclosure or absence of accurate financial reports, investors may face unclear information regarding how funds are being used or the status of the project.
? Financial Manipulation Risks: In the absence of independent oversight or financial auditing, financial reports may be subject to manipulation, which could harm the credibility of the bonds and increase risks for investors.
2. The Role of Transparency and Accountability in Reducing These Risks
Definition of Transparency: Transparency is a globally recognized concept, defined by organizations like Transparency International and the Organization for Economic Co-operation and Development (OECD).
? Transparency International defines transparency as "the disclosure of information by governments, institutions, or companies in a clear and accurate manner, allowing relevant stakeholders (such as citizens or investors) to review and understand this information easily.
? OECD emphasizes the need for full and clear disclosure of all information related to financial and administrative activities to ensure fairness and equality in economic decision-making.
Implementing Transparency in Projects Funded by Performance-Based Bonds :
Transparency is a core element that ensures the success of Performance-Based Bond Transparency can be assured through periodic disclosures and independent financial reports prepared by external entities, enabling investors to monitor project progress in real-time.
Practical Approach: To effectively implement transparency, a legal approach should be taken that focuses on establishing regulatory rules to ensure accurate monitoring. This could be based on the laws governing public joint-stock companies in countries such as the UAE and Saudi Arabia.
3. How the Issuer of Bonds Can Benefit from the Legal Framework for Public Joint-Stock Companies?
? UAE:
? Saudi Arabia:
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4. The Role of Independent Financial Reports and Auditing in Ensuring Transparency and the Role of Blockchain Technology
Independent financial reports play a vital role in ensuring transparency, as they allow investors to verify how funds are being used and ensure that projects are progressing as planned. In this context, blockchain technology contributes to enhancing transparency by providing a decentralized and tamper-proof ledger.
Advantages of Blockchain:
? It allows investors and auditors to verify financial transactions in real-time.
? It helps ensure the credibility of financial reports and supports independent auditing.
5. How Continuous Evaluation Mechanisms Contribute to Achieving the Set Goals
Continuous evaluation is a fundamental part of the governance system that ensures Performance-Based Bonds -funded projects meet their goals as planned. Through periodic evaluation, any deviations from the targets can be identified and corrected promptly. Additionally, blockchain contributes to precisely tracking project progress, which enhances the evaluation process.
6. The Role of the Governance Committee in Ongoing Monitoring and Ensuring Compliance with Standards
The governance committee is a key tool in ensuring that projects funded by performance-linked bonds achieve their goals within a framework of transparency and accountability. In both the UAE and Saudi Arabia, companies listed in financial markets adhere to strict governance standards enforced by bodies such as the Saudi Capital Market Authority (CMA) and the UAE Securities and Commodities Authority (SCA).
Conclusion:
Is Your Investment in Performance-Based Bonds Protected?
Yes, your investment in Performance-Based Bonds can be protected if transparency and accountability are present in the bond issuance process.
By continuously disclosing performance reports and having independent financial oversight, investors can ensure that their investments are managed efficiently and achieve financial and developmental goals. Moreover, utilizing modern technologies like blockchain can further enhance transparency, reducing risks and increasing confidence in Performance-Based Bonds .
References:
? Transparency International [https://www.transparency.org]
? OECD Governance Principles
? Federal Law No. (32) of 2021 on Commercial Companies – UAE
? Royal Decree No. (M/132) dated 1/12/1443 on Commercial Companies – Saudi Arabia
? UAE Securities and Commodities Authority (SCA): [www.sca.gov.ae]
? Saudi Capital Market Authority (CMA): [www.cma.org.sa]