CHAPTER 7 23/05/2001 12:03 pm Page 1 7. Corporate governance in Islamic banking INTRODUCTION Previous chapters have examined the overall deposit-gathering and financing activities of Islamic banks, supplemented by case studies of operations in Iran, Sudan, Pakistan, Egypt, Malaysia, Bangladesh, Jordan and Australia (in the order discussed). This chapter provides a study of three banks in Bahrain, but within the context of the literature on corporate governance. From the viewpoint of corporate governance, Islamic banking embodies a number of interesting features since equity participation, risk and profit-andloss-sharing arrangements form the basis of Islamic financing. All have one essential aspect to them, in the sense that they must be real transactions and not purely financial ones, and all parties to the contracts must share in the risk of the transaction by means of profit-and-loss-sharing arrangements. These financial arrangements imply a quite different degree of involvement, and by corollary governance structures, from the conventional model since depositors have a direct financial stake in the bank’s investments and equity participations. In addition, the Islamic bank is subject to an additional layer of controls to be observed since the suitability of its investments and financing must be in strict conformity with the shari’a and meet the expectations of the Muslim community. For this purpose, Islamic banks employ an individual Religious Adviser and/or Board. Our examination of these issues begins with an outline of corporate governance and governance in conventional banking. The chapter then compares the Islamic banking and financial model and its implications...
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