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 7: Corporate Governance and Islamic Banks

Michael T. Skully

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


Michael T. Skully 1.0 INTRODUCTION Corporate governance has been a buzzword of the decade with governments worldwide seeking to strengthen their rules and regulations on how the management and directors of publicly listed companies behave toward their shareholders. While much recent academic research has been directed at the impact of these changes – particularly the Sarbanes Oxley Act of 2002 – the governance of banks has received less academic attention. This is odd given that most researchers realise that banks are different and so exclude them from their samples. These differences are many and include such factors as the opaqueness and lack of transparency in bank operations and reporting, their excessively high leverage (two-centuries-old capital adequacy problem) compared to normal corporations, the presence of other stakeholders particularly depositors, their special regulatory treatment (special laws and regulators), any moral hazard issues related to deposit insurance and ‘too-big-to-fail’ policies, and all the important externalities associated with bank failure. If commercial banks are different, then Islamic banks are probably even more so. True, they have all of the characteristics of a commercial bank but some important differences too. This chapter examines Islamic bank governance in respect to its goals and objectives, Shari’ah supervisory boards, investment account holders, internal governance structure and external governance matters. 2.0 GOALS AND OBJECTIVES If Islamic banks are different from conventional commercial banks, then it is probably a result of the function of their goals and objectives. As Akhtar (2006, p. 2) explains, their uniqueness ‘stems from two principle elements: (i)...

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