Higher Ethical Objective (Maqasid al-Shari’ah) Augmented Framework for Islamic Banks: Assessing Ethical Performance and Exploring Its Determinants

Abstract

This study utilises higher objectives postulated in Islamic moral economy or the maqasid al-Shari'ah theoretical framework's novel approach in evaluating the ethical, social, environmental and financial performance of Islamic banks. Maqasid al-Shari'ah is interpreted as achieving social good as a consequence in addition to well-being and, hence, it goes beyond traditional (voluntary) social responsibility. This study also explores the major determinants that affect maqasid performance as expressed through disclosure analysis. By expanding the traditional maqasid al-Shari'ah,, we develop a comprehensive evaluation framework in the form of a maqasid index, which is subjected to a rigorous disclosure analysis. Furthermore, in identifying the main determinants of the maqasid disclosure performance, panel data analysis is used by including several key variables alongside political and socioeconomic environment, ownership structures, and corporate and Shari'ah governance-related factors. The sample includes 33 full-fledged Islamic banks from 12 countries for the period of 2008-2016. The findings show that although during the nine-year period the disclosure of maqasid performance of the sampled Islamic banks has improved, this is still short of 'best practices'. Through panel data analysis, this study finds that the Muslim population indicator, CEO duality, Shari'ah governance, and leverage variables positively impact the disclosure of maqasid performance. However, the effect of GDP, financial development and human development index of the country, its political and civil rights, institutional ownership, and a higher share of independent directors have an overall negative impact on the maqasid performance. The findings reported in this study identify complex and multi-faceted relations between external market realities, corporate and Shari'ah governance mechanisms, and maqasid performance.

Analysing Islamic banking ethical performance fromMaqāṣid al-Sharī‘ahperspective: evidence from Indonesia

“…For instance, El-Gamal (2006) argued that IBs failed to serve Maqās id al-Sharī'ah objectives since they attempt to replicate the substance of conventional financial practices of CBs. Mergaliyev et al (2019) argued that IBs were strongly criticised for not fulfilling the objectives of Sharī'ah or 'human and social well-being', even though they have been successful in mobilising financial resources. For example, IBs focused their strategies towards financial returns instead of securing ethical and social objectives, which require them to serve communities and not only 'markets', in order to compete with conventional financial institutions.…”

“…Therefore, it is fair to examine whether IBs have adopted the Sharī'ah objectives over time to enhance their unique features such as social justice and economic welfare. As Mergaliyev et al (2019) underline, IBs are expected to emphasise their socio-economic, social, ethical and environmental performance as institutions of Islamic moral economy.…”

“…Based on the higher ethical objective (Maqās id al-Sharī'ah), Islamic Banks (IBs) are expected to be more attuned in achieving social good than the conventional banks, whose operations aim to secure shareholder profit maximisation (Mergaliyev et al 2019). This is because Maqās id al-Sharī'ah is a set of Islamic ethical values and morals that covers a different aspect of life to achieve the goal of Sharī'ah (Ahmad 2011), which promote social well-being to all humankind (Hassan and Aliyu 2018).…”

“…Critics argue that IBs do not realise the true Maqās id al-Sharī'ah aims and objectives, while IBs are expected to promote social welfare in order to fulfil the Sharī'ah objective (Salma Sairally 2013). Several scholars (El-Gamal 2006;Dusuki and Bouheraoua 2011;Dar 2012;Mergaliyev et al 2019) argue that in theory, IBs are working toward socio-economic goals, such as poverty alleviation, social justice, and welfare issues. However, in practice, it is believed that IBs focus more on profit maximisation.…”

Focusing Project Financing for Growth and Realizing the Higher Objectives of Shar¯ı‘ah

“…The Bank Negara Malaysia (2019) issued, after due consultation process, a guidance document, "Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF)" in November 2019 to promote VBI in Malaysia. It is a "key development in the right direction to shape the future of IBFIs in a more humane sense by considering the interests of other stakeholders beyond capital" (Mergaliyev, Asutay, Avdukic, & Karbhari, 2019). Further, the social impact financing in the areas of education, healthcare, and housing has been in focus since 2010 in a number of countries.…”