Ethical legitimacy of Islamic banks and Shariah governance: Evidence from Bangladesh

Abstract

The research paper's fundamental objective is to examine the ethical legitimacy of the Islamic banks through the two crucial internal mechanisms of Shariah Governance (SG), that is, Shariah Supervisory Board (SSB) and Shariah officers. A semi‐structured questionnaire has been applied to collect data for attaining the research objectives. However, 17 respondents have been interviewed who have practical experiences concerning Islamic banks and SG. The study explores inappropriate SG practices, reporting, disclosure, and fatwas resolutions, which generate confusion among the customers and damage Islamic banks' institutional image. Islamic banks do not follow the proper SG guidelines and Shariah principles. These findings denote a negative legitimization of Islamic banks and SG practices. The study considerably contributes to the enhancements of the responsibilities of the national and global regulatory bodies by providing internal Shariah authorities authorization from their ethical perspective. This research has numerous unique practical implications for the Islamic banks and the central bank of Bangladesh, which will help them to apply Shariah principles, improve the SG practices, and enhance Shariah compliance quality. This research extends the literature concerning SG and the legitimacy, legitimacy theory, and institutional theory of the Islamic banks concerning Bangladesh. This is the first research that explores the ethical legitimacy of Islamic banks.

Why does Shariah governance framework important for Islamic banks?

“…Since the selected participants for the interviews are regulators, SSB members, Shariah department executives, and finally, the field experts from Bangladesh, they are directly related to SG functions in Islamic banks. In general, 17 respondents have been interviewed for accomplishing the research study (Alam, 2020;Alam et al, 2020aAlam et al, , 2020bAlam et al, , 2020cAlam et al, , 2020dTabash et al, 2020) and they are symbolically coded for instance Regulatory Aspects (RA) for regulators, Shariah Practitioners (SP) for SSB members and Shariah department executives, and Experts (E) for field experts concerning the Islamic banking and SG knowledge (Alam et al, 2020a;b;d, e). Table 2 shows the background information of the interviewees.…”

“…The obtaining of external resources is a significant belief of any organization for tactical and strategic management. This theory emphasizes on corporation requirements to be used as the resources from another source in the setting and which describes the insufficiency resources can enhance the company to follow new structures that use different resources (Pfeffer and Salancik, 1978;Sherer and Lee, 2002;Samuel et al, 2019;Tabash et al, 2020). Therefore, this theory has been applied in illustrating actions of the corporation, the appointment of BOD and executives, agreement structure, business strategies and linkage with the external corporate interactions (Wu and Dong, 2020;Jubilee et al, 2018;Sharif and Yeoh, 2014).…”

“…[E#4] However, the respondents (E#1; SP#2; SP#5) opined that the SG system plays an essential role to ensure the suitable practices of Islamic rules and regulations, ensure Shariah compliance in the instruments, products, operations, practices, and management of IFIs and without this guideline, it is impossible to ensure Shariah compliance. Consequently, it becomes incumbent for IFIs to establish governance structures to provide confidence that the organizations' activities are fully compatible with the values and customs of the society in which they serve and, in so doing, provide legitimacy and confidence to customers and the broad spectrum of stakeholders (Banaga et al, 1994;Grais and Pellegrini, 2006;Tabash et al, 2020). The adoption of sound Shariah guidelines ensures that an IFI manages its operational activities properly to ensure Shariah compliance and protect the interest of all concerned stakeholders (Alam et al, 2019).…”

“…Therefore, it is significant for IFIs to have a robust SGF for enhancing the confidence of the customers in the overall activities. IFIs should accomplish the basis of social rules and norms in specific nations and thus depicting legitimacy and guarantee Shariah compliance among the customers and numerous stakeholders (Banaga et al, 1994;Grais and Pellegrini, 2006;Tabash et al, 2020). The recent global financial crisis in 2008 has brought Islamic finance to the attention of investors who were dissatisfied with conventional banks (Johnes et al, 2014).…”

The practices of Shariah governance systems of Islamic banks in Bangladesh

“…Islamic banks accomplish internal Shariah reviews on current and accomplished activities in ensuring Sharīʿah-compliance, which is most associated with the SSB direction, monitoring and guidance (Alam et al , 2020d; Rahman, 2014). Tabash et al (2020) stated a negative legitimacy of the Islamic banks and their SG from the ethical concept of legitimacy theory over two main SG mechanisms (such as SSB and Shariah department officers) in the context of Bangladesh. Therefore, studies recommending external Shariah audit and review committee, as well as Shariah rating for the improvement of Sharīʿah-compliance of the Islamic banks in Bangladesh (Alam et al , 2020e).…”