Toward a Comprehensive Theoretical Framework for Shariah Governance in Islamic Financial Institutions

Obid, Siti Normala Sheikh; Naysary, Babak

doi:10.1007/978-3-319-30918-7_2

Cited by 13 publications

(17 citation statements)

References 41 publications

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“…Nonetheless, theories that are deliberated in the literature go well beyond the three and include many other theories such as class hegemony, managerial hegemony, transaction cost theory, institutional theory and prospect theory (Mallin, 2013;Cuevas-Rodriguez, Gomez-Mejia & Wiseman, 2012). The three theories discussed above are the most commonly referred to when considering corporate governance of both Islamic and conventional banks (Obid & Naysary, 2014).…”

Section: Theoretical Underpinningmentioning

confidence: 99%

“…The agency problem was recognized in the literature of Islamic finance by many scholars such as Safieddine (2009), Obid and Naysary (2014). Moreover, Safieddine (2009) argued that Islamic banks suffer from a more complex agency problem accrued from the separation of not only management and ownership but also from the separation between cash flow and control.…”

Section: Agency Theory Versus Stewardship Theorymentioning

confidence: 99%

“…Therefore, any attempt to develop a corporate governance model of Islamic banks should take into consideration the additional complexities of agency. On the other hand, some scholars, including Bhatti and Bhatti (2009), Obid and Naysary (2014), argued that corporate governance in Islamic banks should be based on the stewardship theory since all the parties of the bank are viewed as stewards and perform their duties in the 'spirit of partnership in line with Islamic beliefs . Finally, Obid and Naysary (2014) present what they call a'development of an integrated theoretical framework of Sharia governance' .…”

Section: Agency Theory Versus Stewardship Theorymentioning

confidence: 99%

“…Despite the strong moral principles there is the ever-present danger of the agency costs, particularly in the case of Islamic banking when you have a more complex agency problem caused by the existence of investment account holders which suffer from a lack of representation under the traditional governance structure (Safieddine, 2009). This paper adopts a theoretical stance aligned with the ideas presented by Davis et al (1997); Obid and Naysary (2014) that there is no one-best fit theory for all organisations and applicable under all circumstances. This paper embraces the idea of reconciling the different theories to recognize which one is leading to a better governance structure serving the best interest of major stakeholders.…”

Section: The Case Of Islamic Banksmentioning

confidence: 99%

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

Alatassi¹,

Letza²

2018

EBR

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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.

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Section: Theoretical Underpinningmentioning

confidence: 99%

Section: Agency Theory Versus Stewardship Theorymentioning

confidence: 99%

Section: Agency Theory Versus Stewardship Theorymentioning

confidence: 99%

Section: The Case Of Islamic Banksmentioning

confidence: 99%

See 2 more Smart Citations

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

Alatassi¹,

Letza²

2018

EBR

View full text Add to dashboard Cite

show abstract

“…Although a plethora of studies exists relating to Islamic finance, there is negligible prior research that explicitly examines religious governance from a theoretical standpoint. Explaining Shariah governance concerning managerial frameworks, three theories, namely, agency theory (Jensen and Meckling, 1976), stewardship theory (Donaldson and Davis, 1991) and stakeholder theory (Freeman, 1984), have generally been espoused in prior literature (Obid and Naysary, 2014; Al-Nasser Mohammed and Muhammed, 2017). However, when examining these competing theories, Obid and Naysary (2014) highlighted some limited ideas had been highlighted connected with Shariah governance which includes issues on accountability, independence, transparency, disclosure, competence and confidentiality.…”

Section: Introductionmentioning

confidence: 99%

Relevance of the application of institutional theory in Shariah governance of Islamic banks

Karbhari

Alam

Rahman

2020

PRR

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Purpose Prior studies on Islamic finance provide a limited linkage between organizational theory and the complex Shariah governance framework embraced by Islamic banks worldwide. This paper aims to show the relevance of the application of “institutional theory” in the Shariah governance framework of Islamic banks. Design/methodology/approach This study applied library research to investigate the application of institutional theory in the Shariah governance framework of Islamic banks. The authors also critically reviewed prior empirical and review papers for accomplishing the research objectives. Findings Based on the critical review, the authors found that institutional theory is the most influential in progressing Shariah governance as it contributes toward the organizational image, helps to achieve religious legitimacy, and inspires a more robust regulatory environment. In addition, a well-designed Shariah governance framework is driven by institutional theory and that could assist in providing guidelines, strategies and procedures for Islamic banks to better conduct; monitor and control their social, religious and accountability obligations. The authors also highlighted the societal, economic and legal environment of Islamic banks in relation to the propositions of institutional theory. They emphasize that a well-designed Shariah governance framework driven by institutional theory could assist in providing guidelines, strategies and procedures for Islamic banks to better conduct, monitor and control their social, religious and accountability obligations. Research limitations/implications This study highlights institutional theory to serve best the development of operational strategies and structures of Islamic banks including the roles, functions and powers of the various stakeholders including regulators and those involved in the Shariah governance process of Islamic banks. The authors recognize the institutional theory to perform a key role in enriching the structural framework of Islamic Financial Institutions. This study is heavily dependent on prior research rather than empirical investigations. The authors did not cover other Islamic finance areas (such as Islamic insurance, Islamic microfinance and Halal industries). Thus, future researchers can apply institutional theory in Shariah governance practices and implementations of setting up rules by the regulators and respective institutions. Originality/value To the best of the authors’ knowledge, this is the first study that attempts to show the importance of the application of institutional theory in Shariah governance of Islamic Banks. Thus, this study, therefore, adding a novel dimension to the literature by arguing why institutional theory, is more pronounced (as compared to the other theoretical frameworks) in the formation and discharge of the roles, powers and functions by the different governance organs (such as regulators, the board of directors, management and Shariah supervisory board) operating in this unique corporate governance landscape.

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External Sharī‘ah audit and review committee Vis‐a‐Vis Sharī‘ah compliance quality and accountability: A case of Islamic banks in Bangladesh

Alam

Ahmad

Muneeza

2020

Journal of Public Affairs

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External Sharī‘ah Audit (ESA) is a control mechanism meant for formulating an objective view by an independent Sharī‘ah audit team about the obligation of Islamic banks' (IBs) management, personnel and other divisions towards Sharī‘ah compliance. This study principally aims to examine the relevancy of ESA and review committee in enhancing the level of Sharī‘ah compliance quality and accountability of IBs in Bangladesh. The study examines data from 17 respondents obtained via semi‐structured interviews and secondary sources in library. This study establishes that Sharī‘ah officers of IBs in Bangladesh are unable to perform audit functions properly which indicates the limitations of current Sharī‘ah audit functions. The study discovers the need for an independent ESA for proper auditing of IBs' operations in Bangladesh with a view to Sharī‘ah compliance. Thus, an ESA and review committee is imperative to enhance the quality of Sharī‘ah compliance and ensure accountability of all divisions within IBs. This audit is to be provided either by Bangladesh Bank (BB), the central bank of the country or a third party such as Islamic chartered accountants' firms or Sharī‘ah audit firms. The study would contribute to existing literature on the importance of ESA and its conditions in Bangladesh. The study also provides some instructions for global Islamic banking practice on the issues examined. The study contributes to agency, stakeholder and legitimacy theory via highlighting the inability of Sharī‘ah auditors to perform their function independently and efficiently.

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Toward a Comprehensive Theoretical Framework for Shariah Governance in Islamic Financial Institutions

Cited by 13 publications

References 41 publications

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

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

Relevance of the application of institutional theory in Shariah governance of Islamic banks

External Sharī‘ah audit and review committee Vis‐a‐Vis Sharī‘ah compliance quality and accountability: A case of Islamic banks in Bangladesh

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