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A consensus-based corporate governance paradigm for Islamic banks

Monal Abdel-Baki (Department of Economics, School of Business, The American University in Cairo, New Cairo, Egypt and Durban University of Technology, Durban, South Africa)
Valerio Leone Sciabolazza (University of Rome “La Sapienza”, Rome, Italy)

Qualitative Research in Financial Markets

ISSN: 1755-4179

Article publication date: 1 April 2014

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Abstract

Purpose

Islamic banking is a viable sustainable banking model that has shown resilience to financial crises. The aim of this research is to design a consensus-based ethical and market-driven corporate governance index (CGI) to boost financial performance and ensure compliance with Islamic rulings.

Design/methodology/approach

The design of the CGI is the outcome of the feedback obtained from a cross-country survey to measure bank efforts in enhancing corporate governance (CG) throughout the ten-year period of 2001-2011. The CGI is divided into six core CG themes and 40 sub-themes.

Findings

First, the results of the multiple regression analysis show a consistent positive relationship between CG and financial performance metrics. Second, the authors detect misaligned compensation structures for directors. Third, poor governance leads to higher risk exposures.

Research limitations/implications

CG in Islamic banks is yet an evolving discipline and infant practice. This research aims to introduce a CGI that should be updated and improved as the discipline evolves.

Practical implications

The research concludes by proposing a CG paradigm. The outcome of the research could also be of use to both Islamic banks and to the rapidly growing sustainable banking sector in designing a similar CGI and CG model incorporating the ethical features of sustainable finance.

Social implications

The core ethos of Islam are: avoiding the exploitation of the needy, avoiding excessively risky transactions, avoiding unethical transactions and justice, equity and income redistribution. If properly applied, Islamic banking will display all features of sustainable finance as well as enhance social welfare.

Originality/value

To the best of the authors' knowledge, this is the first CGI that is based on an ethical and all-inclusive input of all stakeholders.

Keywords

Acknowledgements

JEL classification – G21, G32, P43.

Citation

Abdel-Baki, M. and Leone Sciabolazza, V. (2014), "A consensus-based corporate governance paradigm for Islamic banks", Qualitative Research in Financial Markets, Vol. 6 No. 1, pp. 93-108. https://doi.org/10.1108/QRFM-01-2013-0002

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited