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Journal of Business Ethics

, Volume 124, Issue 4, pp 623–632 | Cite as

Islamic Corporate Governance: Risk-Sharing and Islamic Preferred Shares

  • Mohammad Al-Suhaibani
  • Nader NaifarEmail author
Article

Abstract

The recent financial crises (including the Asian and subprime crises) indicated the need to reinforce corporate governance mechanisms in emerging and developing market economies. Corporate governance refers to all the factors that affect firm processes (including, among others, financing strategies). Firms must avoid debt financing instruments and adopt financing instruments that allow for “risk-sharing” rather than “risk-shifting” because all recent financial crises were, in essence, debt crises. The primary objective of this paper is to examine the principles of risk-sharing promoted by Islamic finance and study their implications for corporate governance. The secondary objective of this paper is to propose a pricing model for a new risk-sharing financial instrument (Islamic preferred shares, IPS) that was recently discussed by Zarka and Al-Suhaibani (Shariah-compatible preference shares: The Sharia Basis and Economic Rationale. Working paper, SABIC Chair for Islamic Financial Market Studies, 2012). We study the implications of this new instrument as a powerful tool for corporate governance in the case of Islamic markets. We explain the possible contribution of IPS to agency cost reduction, Sharia screening costs and ethical corporate governance.

Keywords

Risk-sharing Islamic finance Corporate governance Agency cost Ethical finance Islamic preferred shares Pricing model Monte Carlo simulations Sharia screening 

Notes

Acknowledgments

The paper was financially supported by the SABIC chair for Islamic Financial Market Studies, Al Imam Mohammad Ibn Saud Islamic University (IMSIU). We greatly appreciate the consistent support of Professor Muhammad Anas al-Zarka during the course of this work.

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.Department of Finance and Investment, College of Economics and Administrative SciencesAl Imam Mohammad Ibn Saud Islamic University (IMSIU)RiyadhSaudi Arabia

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