The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

The key difference between Islamic banks and their conventional counterparts is that the former abides by the principles of Islamic law (Shari'ah). However, some Islamic banking products are criticized for not fulfilling the Shari'ah requirements as these closely mimic conventional products. The article discusses how traditional Islamic contracts are used to structure Islamic modes of financing during contemporary times. To understand the choice of financing modes used by Islamic banks, the product development process is examined and the role of Shari'ah related bodies in these institutions (Shari'ah unit/department and Shari'ah supervisory board/committee) in this process is outlined. The article contends that the choice of modes of financing used by Islamic financial institutions depend on external and internal factors. In some cases Islamic banks choose controversial modes of financing as these are the only ones that are feasible under the legal and regulatory regimes they operate under. In other cases the choice of inferior modes may result from competing internal organizational considerations whereby economic factors overshadow Shari'ah requirements. The article highlights the role of Shari'ah related bodies within a bank in ensuring Shari'ah compliance of products.

This article examines the effects of disaggregated government expenditure on investment using fixed- and random-effect methods. Using the government budget constraint, the analysis explores the effects of tax- and debt-financed expenditure for the full sample, and for subsamples of developed and developing countries. In general, tax-financed government expenditure crowds out more investment than debt-financed expenditure. Expenditure on social security and welfare reduces investment in all samples while expenditure on transport and communication induces private investment in developing countries. Copyright 2000 Western Economic Association International.

Purpose This study aims to investigate the relationship between corporate governance and Shariah non-compliant risk (SNCR) that is unique for Islamic banks. The study examines the roles of Shariah committee along with the board of directors in mitigating SNCR. Design/methodology/approach The paper empirically investigates the implications of characteristics of board of directors and Shariah committee on the SNCR by using a sample of 29 full-fledge Islamic banks from Malaysia and Indonesia over the period 2007-2017. All data is hand collected from the Islamic banks' annual reports with the exception of country-level data collected from the World Bank database. Findings The results show that banks with a smaller board size and higher proportion of independent board members are likely to have lower SNCR. The findings also indicate that the financial expertise and higher frequency of Shariah committee meetings reduces the SNCR. Collectively, the analysis shows that banks with strong corporate governance environments reduce SNCR. Practical implications The findings of the study shed light on the relationship between corporate governance practice, Shariah committee characteristics and SNCR. The results can be used by different stakeholders such as policymakers, boards of directors and senior management of Islamic banks to mitigate SNCR. Originality/value This study extends the literature on corporate governance and risk-taking by including additional dimensions of governance and risk type. The corporate governance mechanism at the board level is complemented by including the Shariah committee characteristics and SNCR which is relevant to Islamic financial institutions is examined.

On the basis of the principles established in Shari'ah, financial services impact both risk management and the financial system supervision. In the context of Islamic financial institutions around the globe, proficient risk management has increasingly gained importance in their attempts to adapt to the challenges and issues brought about by globalization. In this study, the researcher aimed to provide an insight into the major challenges faced by Islamic banks in their quest for development in the current global financial system. It also attempted to determine specific and general risks faced by banks in general and in their institutionalization. Moreover, this paper also stressed on the development and enhancement of current financial tools and organizational planning that facilitate sufficient and effective operational environment for Islamic financial institutions.

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