Best Practice in Bank Corporate Governance: the Case of Islamic Banks

Abstract

Islamic banks are growing rapidly with annual growth rates of 17.6% between 2009 to 2013 and 19.7% from 2014 to date. This level of growth is projected to continue into the future. Islamic banks now operate in more than 75 countries with a value of approximately $920 trillion of bank assets. Islamic banks are increasingly being seen as good long-term value propositions and are serving both Muslim and non-Muslim customers across international markets. Despite the rapid growth in Islamic finance, the underpinning corporate governance rules and regulations are at an embryonic stage of development with little attention having been paid to them. The purpose of this paper is to help fill that gap by exploring a conceptual model of corporate governance for Islamic banks based on both Islamic finance principles while fused with elements of corporate governance standards from Western theories and codes, primarily the UK, and thereby ensure that good governance is in place in Islamic banks. The paper links the predominant corporate governance theories of Principal/Agent, Stakeholder and Stewardship with practice based corporate governance codes and explores the potential of applying stewardship theory to Islamic banks. Islamic principles emphasis is on real assets rather than debt as is the case in Western Banks and as a consequence this paper offers the conclusion that the more prudent approach to banking used by Islamic banks could be used as a model for Western banks and thereby deliver a more sustainable future and maintain confidence in banks and substitute for the need for taxpayer support, such as the guaranteed deposit scheme, which acts as a backstop under the Western approach.

Do academic and professional institutions promote the awareness and knowledge of Islamic banking and finance in Nigeria?

“…Accordingly, many conventional banks have created Islamic windows that enable them to offer Islamic financial services (Alandejani et al, 2017). These banks are now in existence in more than 75 countries comprising both Muslim and non-Muslims with an approximately $920tn total value of their assets (Alatassi and Letza, 2018).…”

Prudence in Managing and Reporting The Shariah Non-Compliant Income by Malaysian Islamic Banks

“…Prudence in the reporting of Shari'ah Non-Compliance incidents either the reporting of Shari'ah Non-Compliance event or Shari'ah Non-Compliant Income is helpful to guide the users to make economic decision making. As asserted by Alatassi and Letza (2018), the more prudent approach to banking used by Islamic banks could be used as a model for Western banks and thereby deliver a more sustainable future. Furthermore, the approach would boost the public and multiple stakeholders' confidence in banks.…”

Corporate governance and risk management: An evaluation of board responsibilities in western and Islamic banks

“…To address the evident gap in the risk governance literature, this paper provides a comparative analysis of the latest CG reports in leading organisations in both Islamic and Western countries to investigate what constitutes good CG when it comes to risk management and board responsibilities in financial institutions. Previously, Alatassi and Letza (2018) explored the idea of fusing Western CG elements with Islamic principles to create an evolved CG structure led by effective board, who are able to cope with the constant challenges and risks in the contemporary world. Prior research has evinced agency problems and risk-taking behaviour in the Middle East and North Africa-based Islamic banks (IBs) (Fayed & Ezzat, 2017), identified the CG-risk management nexus in conventional banks (Permatasari, 2020), or unveiled risk management in a CG framework (Rehman et al, 2020).…”

“…This evident gap motivated this study-the first that we know of-to examine how a fusion of conventional and Shari'ah--based CG can be applied to risk management practices, particularly considering the board's contribution and responsibilities towards risk management. Furthermore, (Alatassi & Letza, 2018) has previously highlighted the unique position of CG in IBs and proposed a model for further development combining the fundamental philosophical principles of Islam with the theories and practical structures, codes, and systems developed in the West.…”