Sharīʿah governance and agency dynamics of Islamic banking operations in the Kingdom of Saudi Arabia

Abstract

PurposeThis study aims to investigate and point out the variations of agency theory in the context of Sharīʿah governance in Islamic banking operations in the Kingdom of Saudi Arabia (KSA).Design/methodology/approachThe study followed the approach of quantitative Corporate Governance Index (CGI) by computing the Gov-index (Gompers et al., 2003) and the Gov-score (Brown and Caylor, 2004; Saffieddine, 2009) to examine corporate governance (CG) issues using primary as well as secondary data. The primary data was generated from three full-fledged Islamic banks (IBs) and nine traditional banks with Islamic banking wings, all operating in the KSA. The approach was to provide an insight into the agency structure in the context of Islamic banking, which may lead to a trade-off between the conformity of Sharīʿah (Islamic law) rules and processes followed in safeguarding the rights of investors.FindingsThe majority of the Islamic banking services that are surveyed in this study acknowledge the significance of Sharīʿah governance and have implemented the fundamental methods, in conformity with this system. Certain flaws in Sharīʿah governance principles pertaining to audit, control and transparency are reported.Practical implicationsThe research outcomes will be invaluable to IBs aiming to improve existing SG practices. It also has implications for IB managers to design strategies while complying with regulations and to protect the interests of all investors without breaching the ethics of Sharīʿah.Originality/valueThis paper adds original value to the body of knowledge on agency relationship by analysing the dynamics of agency theory in the unique and complex context of Sharīʿah governance of IBs or those offering Islamic products in the KSA. The results can be used as a valuable feedback for improvement of Sharīʿah governance in the banking system in the KSA and the Gulf region at large.

Investigating the linkage between Shariah board size, liquidity risk and bank stability through an asymmetric lens

“…The Saudi Arabian Monetary Agency (SAMA) stands as the sole regulatory body that oversees IBs. In a recent survey-based study, Hassan et al (2022) reported that all SAbased IBs, be they fully fledged or with Islamic wings, have an SSB composed of four to five members, which is in conformity with AAOIFI's prerequisite. The SSB members are appointed either by the GA or the BoD (Hassan et al, 2022;Grais and Pellegrini, 2006).…”

“…In a recent survey-based study, Hassan et al (2022) reported that all SAbased IBs, be they fully fledged or with Islamic wings, have an SSB composed of four to five members, which is in conformity with AAOIFI's prerequisite. The SSB members are appointed either by the GA or the BoD (Hassan et al, 2022;Grais and Pellegrini, 2006). The SSB members meet at least once per quarter, and their decisions are made through majority voting.…”

“…From this perspective, our study is categorized under the umbrella of the explanatory research design, as it seeks to measure the cause and effect of proposed relationships in research models. Unlike many (nonexperimental) quantitative studies related to the SG topic that have recourse to the survey approach (Hassan et al , 2022), our study rather adopts a research approach combining the correlational-based and predictive-based approaches (i.e. the NARDL approach).…”

“…The SSB members meet at least once per quarter, and their decisions are made through majority voting. IBs treat the SSB rulings as obligatory and, therefore, are taken as binding (Hassan et al , 2022). As there is no central Shariah board (CSB), cases of disagreements and conflicts are referred to the Committee of Banking Disputes (CBD).…”

Mapping of Islamic corporate governance research: a bibliometric analysis

“…It is also mentioned that conventional corporate governance and Islamic perspectives have many different points of view. The most important thing is the placement of the ideology of monotheism in the perspective of Sharia against the ideology of rationalism in the conventional perspective (Hassan et al , 2021).…”