Skip to main content
SpringerLink
Log in

Toward a Comprehensive Theoretical Framework for Shariah Governance in Islamic Financial Institutions

  • Chapter
Islamic Finance

Abstract

The industry of Islamic banking is one of the fastest growing industries in the world with the annual growth rate of 17.6 per cent and total global assets of US$1.7 trillion in 2013 (Ernst and Young Report, 2014). Despite this remarkable growth, the issue of corporate governance in Islamic financial institutions (IFIs) has not received due attention in the academic as well as the professional fields of Islamic finance (Alnasser and Muhammed, 2012). It is worth noting that there are inherent differences between Islamic and conventional banking systems due to the fact that the functions of Islamic banks must be compliant with Islamic rules and principles (Shariah) which comes from the Holy Quran and Sunnah according to which the payment of interest, speculation and financing of specific illicit transactions such as pork and alcohol is prohibited (Bhatti and Bhatti, 2009). Islamic banks operate also based on the profit and loss sharing principle which stipulates that banks as well as the investors share the risks associated with business ventures (Beck et al, 2013). Nevertheless, the scope of Islamic corporate governance (ICG) extends beyond the conventional corporate governance (CCG) which operates largely in the interests of management and shareholders to include the spiritual aspects as well as the worldly needs of people. In other words while the western systems of corporate governance are based on self-interest, the ultimate goal in ICG is Maqasid al Shariah (objectives of Islamic law) (Bhatti and Bhatti, 2009).

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 109.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 139.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 139.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Similar content being viewed by others

References

  • AAOIFI (2005) Governance Standard for IFIs, No. 1 Shariah Supervisory Board (SSB): Appointment, Composition and Report. Bahrain: AAOIFI.

    Google Scholar 

  • Abu-Tapanjeh, A.M. (2009) Corporate governance from the Islamic perspective: A comparative analysis with OECD principles. Critical Perspectives on Accounting 20(5): 556–567.

    Article  Google Scholar 

  • Abdul Rahman, A., Abu Bakar, B. and Sayfie, W. (2005) Syariah Governance of Islamic Banks: Perceptions of Responsibility and Independence of Syarah Advisors. Corporate Governance: An Islamic Paradigm. University Putra Malaysia, pp. 20–34.

    Google Scholar 

  • Abdul Gafoor, A.L.M. (1995) Interest-Free Commercial Banking. Groningen, Netherlands: Apptec Publications.

    Google Scholar 

  • Aduda, J., Chogii, R. and Magutu, P.O. (2013) An empirical test of competing corporate governance theories on the performance of firms listed at the Nairobi Securities Exchange. European Scientific Journal 9(13): 107–137.

    Google Scholar 

  • Akhtar, S. (2006) Syariah Compliant Corporate Governance. In: Nasser Saidi, Keynote Address by the Governor of the State Bank of Pakistan at the Annual Corporate Governance Conference, Dubai, United Arab Emirates, November. Hawkamah Institute for Corporate Governance.

    Google Scholar 

  • Alnasser, S.A.S. and Muhammed, J. (2012) Introduction to corporate governance from Islamic perspective. Humanomics 28(3): 220–231.

    Article  Google Scholar 

  • Ansoff, H.I. (1987) The emerging paradigm of strategic behavior. Strategic Management Journal 8(6): 501–515.

    Article  Google Scholar 

  • Arthurs, J.D. and Busenitz, L.W. (2003) The boundaries and limitations of agency theory and stewardship theory in the venture capitalist/entrepreneur relationship. Entrepreneurship Theory and Practice 28(2): 145–162.

    Article  Google Scholar 

  • Asutay, M. (2007) Conceptualisation of the second best solution in overcoming the social failure of Islamic banking and finance: Examining the overpowering of homoislamicus by homoeconomicus. International Journal of Economics, Management and Accounting 15(2): 167–195.

    Google Scholar 

  • Azid, T., Asutay, M. and Burki, U. (2007) Theory of the firm, management and stakeholders: An Islamic perspective. Islamic Economic Studies 15(1): 1–30.

    Google Scholar 

  • Beck, T., Demirgüç-Kunt, A. and Merrouche, O. (2013) Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance 37(2): 433–447.

    Article  Google Scholar 

  • Bhatti, M. and Bhatti, I. (2009) Development in legal issues of corporate governance in Islamic finance. Journal of Economic and Administrative Sciences 25(1): 67–91.

    Article  Google Scholar 

  • Bhatti, M. and Bhatti, M.I. (2010) Toward understanding Islamic corporate governance issues in Islamic finance. Asian Politics & Policy 2(1): 25–38.

    Article  Google Scholar 

  • BNM (2010) Shari’ah Governance Framework for Islamic Financial Institutions. Kuala Lumpur: Bank Negara Malaysia.

    Google Scholar 

  • Cadbury, A. (1992) Report of the committee on the financial aspects of corporate governance (Vol. 1). Gee.

    Google Scholar 

  • Carney, M. (2005) Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship Theory and Practice 29(3): 249–265.

    Article  Google Scholar 

  • Casper, M. (2012) Sharia boards and d Sharia compliance in the context of European corporate governance. Available at SSRN 2179412.

    Google Scholar 

  • Chapra, M.U. (2000) The Future of Economics: An Islamic Perspective. Islamic Foundation, UK.

    Google Scholar 

  • Chapra, M.U. and Ahmed, H. (2002) Corporate governance in Islamic financial institutions. Occasional Paper No. 6, Jeddah, IRTI/IDB.

    Google Scholar 

  • Chapra, M.U. (2007) Islam and Economic Development: A Strategy for Development with Justice and Stability. New Delhi, India: Adam Publishers.

    Google Scholar 

  • Clarke, T. (ed.) (2004) Theories of Corporate Governance. New York: Routledge, pp. 1–31.

    Google Scholar 

  • Daily, C.M., Dalton, D.R. and Cannella, A.A. (2003) Corporate governance: Decades of dialogue and data. Academy of Management Review 28(3): 371–382.

    Google Scholar 

  • Davis, J.H., Schoorman, F.D. and Donaldson, L. (1997) Toward a stewardship theory of management. Academy of Management review 22(1): 20–47.

    Google Scholar 

  • Deegan, C., Rankin, M. and Tobin, J. (2002) An examination of the corporate social and environmental disclosures of BHP from 1983–1997: A test of legitimacy theory. Accounting, Auditing & Accountability Journal 15(3): 312–343.

    Article  Google Scholar 

  • DeLorenzo, Y.T. (2012) Shariah supervision in modern Islamic finance. In 4th Annual Harvard Forum on Islamic Finance Vol. 20, May.

    Google Scholar 

  • Donaldson, L. (1990) The ethereal hand: Organizational economics and management theory. Academy of Management Review 15(3): 369–381.

    Google Scholar 

  • Donaldson, L. and Davis, J.H. (1991) Stewardship theory or agency theory: CEO governance and shareholder returns. Australian journal of management 16(1): 49–64.

    Article  Google Scholar 

  • Donaldson, T. and Preston, L.E. (1995) The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review 20(1): 65–91.

    Google Scholar 

  • Dühnfort, A.M., Klein, C. and Lampenius, N. (2008) Theoretical foundations of corporate governance revisited: A critical review. Corporate Ownership & Control 6(2): 424–433.

    Google Scholar 

  • Dusuki, A.W. and Abdullah, N.I. (2007) Maqasid al-shari’ah, maslahah and corporate social responsibility. The American Journal of Islamic Social Sciences 24(1): 25–45.

    Google Scholar 

  • Dusuki, A.W. and Abozaid, A. (2007) A critical appraisal on the challenges of realizing Maqasid Al-Shariaah in Islamic banking and finance. International Journal of Economics, Management and Accounting 15(2): 143–165.

    Google Scholar 

  • Eisenhardt, K.M. (1989) Agency theory: An assessment and review. Academy of Management Review 14(1): 57–74.

    Google Scholar 

  • Elena, G.C. (2012) Theoretical framework for corporate governance. Ovidius University Annals, Economic Sciences Series 12(1): 493–498.

    Google Scholar 

  • Ernst & Young (2014) World Islamic Banking Competitiveness Report 2013–2014. Ernst & Young, UK.

    Google Scholar 

  • Fama, E.F. and Jensen, M.C. (1983) Separation of ownership and control. Journal of Law and Economics 26(2): 301–325.

    Article  Google Scholar 

  • Freeman, R.E. (1984) Strategic Management: A Stakeholder Approach. Boston, MA: Pitman.

    Google Scholar 

  • Freeman, R.E. (1994) The politics of stakeholder theory. Bus Ethics Quart 4(4): 409–421.

    Article  Google Scholar 

  • Gibson, K. (2000) The moral basis of stakeholder theory. Journal of Business Ethics 26(3): 245–257.

    Article  Google Scholar 

  • Gibson, J., Ivancevich, J. and Donnelly, J. (1991) Organizations. Homewood, IL: Irwin.

    Google Scholar 

  • Grais, W.M. and Pellegrini, M. (2006) Corporate Governance in Institutions Offering Islamic Financial Services: Issues and Options. Vol. 4052. USA: World Bank.

    Google Scholar 

  • Guthrie, J., Petty, R. and Ricceri, F. (2006) The voluntary reporting of intellectual capital: Comparing evidence from Hong Kong and Australia. Journal of Intellectual Capital 7(2): 254–271.

    Article  Google Scholar 

  • Hamza, H. (2013) Sharia governance in Islamic banks: Effectiveness and supervision model. International Journal of Islamic and Middle Eastern Finance and Management 6(3): 226–237.

    Article  Google Scholar 

  • Haniffa, R. and Hudaib, M. (2007) Exploring the ethical identity of Islamic banks via communication in annual reports. Journal of Business Ethics 76(1): 97–116.

    Article  Google Scholar 

  • Hart, O. (1995) Corporate governance: Some theory and implications. The Economic Journal 105(430): 678–689.

    Article  Google Scholar 

  • Hasan, Z. (2009) Corporate governance: Western and Islamic perspectives. International Review of Business Research Papers 5(1): 277–293.

    Google Scholar 

  • Hasan, Z. and bin Hasan, Z. (2012) Shari’ah Governance in Islamic banks. Edinburgh: Edinburgh University Press.

    Google Scholar 

  • Hill, C.W. and Jones, T.M. (1992) Stakeholder-agency theory. Journal of management studies 29(2): 131–154.

    Article  Google Scholar 

  • Hofstede, G. (1980) Culture’s Consequences. Beverly Hills, CA: Sage.

    Google Scholar 

  • Holsti, O.R. (1968) Content analysis. The Handbook of Social Psychology 2: 596–692.

    Google Scholar 

  • IFSB (2006) Guiding Principles on Corporate Governance for Institutions (other than insurance institutions) Offering Only Islamic Financial Services. Kuala Lumpur: Islamic Financial Services Board.

    Google Scholar 

  • IFSB (2009) Guiding principles on Shariah governance systems, http://www.ifsb.org (accessed 20 January 2014).

    Google Scholar 

  • Iqbal, M. and Llewellyn, D.T. (eds.) (2002) Islamic Banking and Finance: New Perspectives on Profit-Sharing and Risk. UK: Edward Elgar Publishing.

    Google Scholar 

  • Iqbal, Z. and Mirakhor, A. (2004) Stakeholders model of governance in islamic economic system. Islamic Economic Studies 11(2): 43–64.

    Google Scholar 

  • Jensen, M.C. (2001) Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance 14(3): 8–21.

    Article  Google Scholar 

  • Jensen, M.C. and Meckling, W.H. (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3(4): 305–360.

    Article  Google Scholar 

  • Kasri, R. (2009) “Corporate governance: conventional vs. Islamic perspective”, Working paper, Social Science Research Network, available at: http://ssrn.com/abstract=1685222 (accessed 25 April 2014).

    Google Scholar 

  • Karim, R.A.A. (2001) International accounting harmonization, banking regulation, and Islamic banks. The International Journal of Accounting 36(2): 169–193.

    Article  Google Scholar 

  • Kasim, N., NuHtay, M.S.N. and Salman, S.A. (2013) Shariah governance for Islamic capital market: A step forward. International Journal of Educational Research. Universiti Teknologi MARA 1: 1–14.

    Google Scholar 

  • Kasim, R.S.R. and Shamsir, N.F.M. (2012) Innovative governance framework for global Islamic microfinance institutions. In: Innovation Management and Technology Research (ICIMTR), 2012 International Conference on (pp. 71–74). Malaysia: IEEE, May.

    Chapter  Google Scholar 

  • Kohlbacher, F. (2006) The use of qualitative content analysis in case study research. In Forum Qualitative Sozialforschung / Forum: Qualitative Social Research 7(1).

    Google Scholar 

  • Lahsasna, A. (2011) Introduction to Fatwa, Shariah Supervision & Governance in Islamic Finance. Malaysia: Cert Publications.

    Google Scholar 

  • Leung, S., Richardson, G. and Jaggi, B. (2014) Corporate board and board committee independence, firm performance, and family ownership concentration: An analysis based on Hong Kong firms. Journal of Contemporary Accounting & Economics 10(1): 16–31.

    Article  Google Scholar 

  • Lewis, M.K. (2005) Islamic corporate governance. Review of Islamic Economics 9(1): 5.

    Google Scholar 

  • Licker, P. (2007) Stewardship models of it governance: Beyond agency theory. In: Charles Petersen, Proceedings of the Midwestern Decision Sciences Institute Annual Conference, 13–14 April, Chicago, IL: International Journal of Operations and Quantitative Management.

    Google Scholar 

  • Macey, J.R. (2004) Positive political theory and federal usurpation of the regulation of corporate governance: The coming preemption of the Martin Act. Notre Dame Law Review 80: 951.

    Google Scholar 

  • Minhas, I.H. (2012) Shari’ah Governance Model (SGM) and Its Four Basic Pillars. Islamic Finance News (Malaysia), published by Red Money Publication. http://ssrn.com/abstract=2153106.

    Google Scholar 

  • Omar Hasan Sr., K. (2001) Medical confidentiality. Islamic Medical Education Resources-03.

    Google Scholar 

  • Organisation for Economic Co-operation and Development (2004) OECD Principles of Corporate Governance 2004. Paris: OECD Publishing.

    Google Scholar 

  • Pande, S. (2011) The Theoretical Framework for Corporate Governance. Available at SSRN.

    Google Scholar 

  • Perrow, C. (1986) Complex Organizations: A Critical Essay. Vol. 3 New York: McGraw-Hill.

    Google Scholar 

  • Roberts, R.W. (1992) Determinants of corporate social responsibility disclosure: an application of stakeholder theory. Accounting, Organizations and Society 17(6): 595–612.

    Article  Google Scholar 

  • Rowley, T.J. (1997) Moving beyond dyadic ties: A network theory of stakeholder influences. Academy of Management Review 22(4): 887–910.

    Google Scholar 

  • Sacconi, L. (2006) A social contract account for CSR as an extended model of corporate governance (I): Rational bargaining and justification. Journal of Business Ethics 68(3): 259–281.

    Article  Google Scholar 

  • Safieddine, A. (2009) Islamic financial institutions and corporate governance: New insights for agency theory. Corporate Governance: An International Review 17(2): 142–158.

    Article  Google Scholar 

  • Shleifer, A. and Vishny, R.W. (1997) A survey of corporate governance. The Journal of Finance 52(2): 737–783.

    Article  Google Scholar 

  • Siddiqui, S.H. (2001) Islamic banking: true modes of financing. New Horizon 109: 15–20.

    Google Scholar 

  • Toutounchian, I. (1998) Labour’s income share in an Islamic economic framework: A proposal. Humanomics 14(4): 136–165.

    Article  Google Scholar 

  • Turnbull, S. (2000) Corporate governance: Theories, challenges and paradigms. Gouvernance: Revue Internationale 1(1): 11–43.

    Google Scholar 

  • Ullah, M.H. (2013) Compliance of AAOIFI Guidelines in General Presentation and Disclosure in the Financial Statements of Islamic Banks in Bangladesh. International Journal of Social Science Research 1(2): 111–123.

    Article  Google Scholar 

  • Williamson, O.E. (1979) Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics 22(2): 233–261.

    Article  Google Scholar 

  • Yusoff, W.F.W. and Alhaji, I.A. (2012) Insight of corporate governance theories. Journal of Business and management 1(1): 52–63.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Accounting, International Islamic University, Malaysia

    Siti Normala Sheikh Obid (Associate Professor) & Babak Naysary (PhD Candidate)

Authors
  1. Siti Normala Sheikh Obid
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Babak Naysary
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. University of Edinburgh Business School, UK

    Tina Harrison  & Essam Ibrahim  & 

Rights and permissions

Reprints and permissions

Copyright information

© 2016 The Editor(s)

About this chapter

Cite this chapter

Obid, S.N.S., Naysary, B. (2016). Toward a Comprehensive Theoretical Framework for Shariah Governance in Islamic Financial Institutions. In: Harrison, T., Ibrahim, E. (eds) Islamic Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-30918-7_2

Download citation

Publish with us

Policies and ethics

Search

Navigation