Editorial

Citation

Kabir Hassan, M. (2012), "Editorial", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 5 No. 2. https://doi.org/10.1108/imefm.2012.35205baa.001

Editorial

Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 5, Issue 2

An Islamic concept of corporate governance does not significantly differ from its conventional counterpart. Both forms refer to a system where companies are directed, managed and controlled to meet a corporation’s objectives while protecting all stakeholders’ interests and rights. The OECD Principles of Corporate Governance define corporate governance as:

[…] a set of relationship between company’s management, its board, its shareholders and other stakeholders, thereby plays essential function to provide the structure through which the company goals are set and the means of attaining those objectives and monitoring performance are determined (OECD, 2004, p. 11).

This definition shows that the central aim of corporate governance is to ensure transparency, fairness and accountability. This same aim is commendable in Islam. Islamic corporate governance differs in that it has certain unique characteristics and features. It essentially elucidate these differences to refine the definition of corporate governance from the Islamic point of view.

The philosophical foundation of corporate governance under a set of Islamic values necessitates features to ensure Shari’ah compliance. The Islamic belief and value system becomes an additional stakeholder with distinct interests and objectives. Institutional arrangements overseeing the Shari’ah compliance aspects of business and operations complement existing corporate governance framework in IFIs. There is, however, an absence of specific models of corporate governance in Islamic literature. The Shari’ah governance system is exclusive and unique to the corporate governance framework in IFIs which makes it unlike its conventional counterparts Hasan and Hassan (2011).

The need for good and efficient Shari’ah governance system is crucial to Islamic corporate governance given the failure and financial scandal of some IFIs. Additionally, there is as huge potential implication of Shari’ah non-compliance risk because of community and customer expectations. The Shari’ah board plays an essential role in supervision, monitoring, auditing and issuing legal rulings. A board is the central part of a Shari’ah governance system. It profoundly influences the day-to-day practice of finance by providing advisory and consultative services to IFIs.

Sound and proper Shari’ah governance systems must accompany the tremendous growth of Islamic finance sector worldwide. Complex responsibilities challenge the Shari’ah board to meet the expectations of different stakeholders. An effective Shari’ah governance system both enhances and strengthens the function of Shari’ah board and its related institution in meeting these expectations.

The IFSB-10 defines a Shari’ah governance system as one where:

[…] a set of institutional and organizational arrangements through which IFIs ensure that there is effective independent oversight of Shari’ah compliance over the issuance of relevant Shari’ah pronouncements, dissemination of information and an internal Shari’ah compliance review (IFSB, 2009, p. 2).

This definition can be divided into three essential components:

1. 1.

   The existence of a set of institutional and organizational arrangements. This role refers to the Shari’ah board and related bodies like internal audit departments or a Shari’ah division.

2. 2.

   The effective independent oversight of Shari’ah compliance. This concept indicates the aims and objectives of the Shari’ah governance system providing efficient mechanisms for Shari’ah compliance.

3. 3.

   The method of providing Shari’ah pronouncements, dissemination of information and internal Shari’ah compliance reviews. This function involves the overall Shari’ah governance processes that covers both ex ante and ex post aspects of Shari’ah compliance framework.

The first paper “The conflicts of interest inside the Shari’a supervisory board” by Samy Nathan Garas explores the relation between the conflicts of interest in the Shari’a Supervisory Board (SSB) in the Islamic financial institutions (IFIs) and six independent variables. These variables are the SSB executive position, the SSB remuneration, the relation between the SSB members and the Board of Directors (BoD), and the multiple memberships in Islamic funds, issuers of Islamic bonds (Sukuk), and companies trading in capital markets. Six hypotheses and tested by ordinary least square regression are used to examine the variables. Data was collected using a questionnaire sent to shareholders, the BoD, and the SSB members of all IFIs in the Gulf Cooperation Council (GCC) countries. Results indicate that the SSB executive position, the relation between the SSB members and the BoDs, and the membership in Islamic funds and issuers of Islamic bonds are significantly related to the conflicts of interest. Remuneration and membership in companies trading in capital markets have an insignificant relationship. The paper does not address the impact of SSB ownership in the IFIs, or the relation between the SSB and the shareholders, or the impact of the corporate governance codes on the relationship between the IFI and the SSB. The paper provides practical implications to the SSB members and the BoD in the IFIs and calls for setting a maximum number of SSBs for each SSB member.

The second paper “Market liberalization and volatility of returns in emerging markets: the case of Qatar Exchange” by Salem and Abdallah examines whether stock market liberalization creates excess stock return volatility in the Qatar Exchange (QSC). The study uses simple analysis of variance and the EGARCH model with dummy variables. Results reveal no change in market volatility following the partial removal of the restrictions on foreign participation. Results suggest that the degree of persistence in volatility is high. This implies that once volatility increases, it remains high over a long run. In addition, conditional volatility tends to rise when the absolute value of the standardized residuals are large. The return volatility was found to be symmetric. This is contrary to what has been previously found in the literature. Additional research implications show that volatility persistence and clustering may imply an inefficient stock market. Policy makers should emphasize and direct their attention toward increasing the efficiency of the stock market in response to the findings.

The third essay “Ethics education: an assessment case of the American University of Science and Technology – Lebanon” by Hejase and Tabch assesses the level of business ethics education in one of the Lebanese educational institutions. The American University of Science and Technology (AUST) was examined to elucidate how the Faculty of Business and Economics’ curriculum is set to meet the national and regional markets’ requirements for sound business education. The study reveals several factors effecting business ethics education at AUST. Factors studied include students’ ethics literacy and ethical perceptions, students’ attitudes towards ethical issues, ethics and personal actions, personal morality, religious and ethical business conducts, and the impact of formal business ethics education as implemented in the university’s curriculum. Recommendations include providing formal coverage of an ethics chapter in all business fields and objectively exposing the differences in applications as related to culture and national preferences. Also recommended was reinforcing the use of case studies on ethics dilemmas and making such studies obligatory for all majors. Results can be used by Middle Eastern educational institutions to analyze Western ethics’ outcomes and practices and to perform a series of research projects to address the differences between these two cultures in perception, applicability, sensitivity to beliefs and their influence on the way business is conducted in Lebanon and the surrounding Arab nations. This paper found that an individual’s religious entity and beliefs may make a difference in the formation of ethical judgment and decision making.

The fourth essay “Assessing the effect of interpersonal communications on employees’ commitment and satisfaction”, by Awas and Alhashemi uses survey research and quantitative research methodology to investigate employees’ motives for communicating with their superiors and co-workers. It also measures employee satisfaction and commitment to their organization. Research identifies pleasure, escape, relaxation, control and inclusion as motives explaining why people communicate with each other and how they relate to each other. The findings revealed a relationship between these motives and satisfaction and commitment. Employees report a moderate commitment with their co-workers as well as superiors. The results additionally showed strong relationships between the control, affection, inclusion, escape and relaxation motives. The authors advocate strengthening communication ties to encourage more healthy interpersonal relationships by using jointly-constructed reality. This approach was found most effective because it goes beyond information processing. Involving people in creating the mission and vision of the organization and developing corporate values brings positive results. In addition, the organization’s commitment can be enhanced through job enrichment coupled with matching the individual’s values to those of the organization besides. The authors also recommend finding ways and means of improving job satisfaction through different strategies such as improving the quality of the supervision, decentralizing of power and counseling.

The fifth paper “Scales and technical efficiencies in Middle East and North African (MENA) micro financial institutions” by M. Kabir Hassan, Benito Sanchez and Geoffrey Ngene investigates technical and scales efficiencies of micro finance institutions (MFI) in Middle East and North Africa (MENA) countries in providing financial services. The study uses a non-parametric data envelopment analysis (DEA) approach to estimate the production technology in order to trace sources of inefficiencies. The authors find low technical efficiency for all MFIs under both intermediation and the production approaches of DEA methodology. This means that MFIs are wasting input resources (input oriented inefficient) and are not producing enough outputs (making loans, raising funds, and obtaining more borrowers per staff). The authors suggest that policy makers and managers should channel their efforts to improve resources/input utilization by MFIs to achieve higher level of production.

I hope you will enjoy this issue of the Journal.

M. Kabir Hassan