The Foundations of Islamic Banking

The Foundations of Islamic Banking

Theory, Practice and Education

Edited by Mohamed Ariff and Munawar Iqbal

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Chapter 6: Development of Legal Issues of Corporate Governance for Islamic Banking

Ishaq Bhatti and Maria Bhatti

Subjects: economics and finance, financial economics and regulation, islamic economics and finance


Ishaq Bhatti and Maria Bhatti 1.0 INTRODUCTION Although there is currently no unified understanding of ‘corporate governance’ under Islamic financial law, a model of Islamic corporate governance (ICG) may be proposed by reconciling Shari’ah law objectives with the ‘stakeholder model of corporate governance’. This is viable due to the emphasis Shari’ah law places on property and Islamic financial contractual rights. Furthermore, such a model is also analogous to the proposed OECD principles emphasizing the mechanism of business ethics, decision making, bookkeeping and final accounts and adequate disclosure and transparency. This chapter discusses the concept, framework and structure of ICG and then considers whether such a model is viable in today’s multi-faith and multicultural society of 21st century and the challenges it might face. The rest of this chapter is organised as follows. The next section begins with explaining in brief the concept of ICG and its implication in the Islamic financial industry. The fundamentals of the business ethics of ICG are given in section 3 which explains the two main unique features of ICG. Section 4 describes the general framework and decision-making processes and elaborates on the fundamental institution of Hisbah on which the process of ICG is really built. It elaborates on disclosure processes, professional and honest bookkeeping and the process of complete transparency for all parties involved in contracts. The structure of the ICG model is given in section 5 with a question as to whether this model is applicable in the high-tech environment and financial sophistication of...

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