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Rationality of fourth party in legitimacy theory: Shariah governance of Islamic financial institutions

Md. Kausar Alam (Department of Business Administration, South Asia School of Business, University of South Asia, Dhaka, Bangladesh and Founder, Research Methodology Tools and Systems (rm2s), Dhaka, Bangladesh)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 20 May 2021

Issue publication date: 21 June 2021

293

Abstract

Purpose

The purpose of this paper is to focus on conceptualizing the origin of legitimacy, the legitimation process and its trustworthiness toward the people, regulators, society and stakeholders. In achieving the purpose of the study, an inclusive research gap concerning the roles of the Shariah Supervisory Board (SSB) as a Shariah regulatory authority or an internal mechanism of Shariah Governance Framework (SGF) in the development and formation of Islamic financial institutions (IFIs) would also be addressed.

Design/methodology/approach

The paper implements an analytical approach to investigate the legitimation process of SSB, and its presence, significance, as well as credibility to the stakeholders.

Findings

This study proposes an additional authority of legitimacy, namely, SSB/Shariah regulatory authority, along with regulators, professionals and people. These could be derived from the internal mechanism of Shariah Governance (SG) practices of IFIs. The study also proposes another type of legitimacy (ethical/Shariah legitimacy) that derives from the organizational SG practices through its internal mechanisms. The formation of SSB is mandatory and more significant for the isomorphic identification of IFIs, SG system, legitimacy and broader acceptance to stakeholders.

Research limitations/implications

The rational argument shows that SSB legitimates the overall functions of IFIs, SG practices, processes and structures. It is more apposite because it has substantial validity, dominance, recognition and acceptability along with three external bodies. Besides, IFIs and their SG do not have the proper value to the general people, society, regulators and other stakeholders without the legitimization of SSB. Thus, theorists and academicians may consider SSB as the fourth party of legitimacy along with three legitimacy providing authorities (regulators, professionals and people).

Originality/value

The paper focuses on illustrating and extending the border knowledge concerning the legitimacy from SG and how do SSBs legitimize IFIs and enhance their credibility to the general people, government, society and other stakeholders. The paper first clarified the internal legitimacy concerning SGF and contributed to the area of Islamic finance, legitimacy, institutional theory, legitimacy theory and internal legitimacy.

Keywords

Citation

Alam, M.K. (2021), "Rationality of fourth party in legitimacy theory: Shariah governance of Islamic financial institutions", Journal of Islamic Accounting and Business Research, Vol. 12 No. 3, pp. 418-438. https://doi.org/10.1108/JIABR-08-2019-0154

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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