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Article
Publication date: 28 January 2014

Karim Ginena

The purpose of this paper is to help directors, senior management, and stakeholders of Islamic banks understand sharī‘ah risk, a crucial consideration in the corporate

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Abstract

Purpose

The purpose of this paper is to help directors, senior management, and stakeholders of Islamic banks understand sharī‘ah risk, a crucial consideration in the corporate governance of Islamic banks, and its impact on these banks.

Design/methodology/approach

This conceptual paper links dispersed insights drawn from the emerging body of sharī‘ah governance literature, and the guidance issued by the Basel Committee on Banking Supervision (BCBS), the Islamic Financial Services Board (IFSB), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) with new insights to clarify the sharī‘ah risk that Islamic banks face.

Findings

Sharī‘ah risk, an operational risk, poses a credible hazard to Islamic banks and their stakeholders. Possible consequences of sharī‘ah non-compliance include higher costs, financial losses, liquidity problems, bank runs, bank failure, industry smearing and financial instability. This study defines shariah risk, identifies credit, legal, compliance, market, and reputational risk that it may evoke, and categorizes its causes and events.

Research limitations/implications

Future research could empirically test the ideas posited. In this paper claims were substantiated by logic and examples.

Practical implications

The study devises an instrument for assessing sharī‘ah risk, and suggests measures for directors, senior management, and regulators to mitigate this risk.

Originality/value

This is the first study to focus on the implications of sharī‘ah risk, delineate examples of events and incorporate them within the BCBS operational risk causes, and develop a tool for measuring sharī‘ah risk.

Details

Corporate Governance, vol. 14 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

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Book part
Publication date: 20 May 2019

Noor Suhaida Kasri

This chapter explores the historical development of shari’ah governance infrastructures in the Malaysian landscape, pre- and post-Islamic Financial Services Act 2013…

Abstract

This chapter explores the historical development of shari’ah governance infrastructures in the Malaysian landscape, pre- and post-Islamic Financial Services Act 2013 (IFSA) and its implications on the industry. This chapter analyzed two approaches developed in the shari’ah governance, namely, the inclusivity and uniformity approach. Inclusivity approach showed that the shari’ah compliance responsibility is shared inclusively by the shari’ah committee together with the institution’s top management. While the uniformity approach showed that the end-to-end shari’ah compliance is achieved through issuance of shari’ah standards that can be easily related by the practitioners into their banking operations and business. The coherence implementation of these approaches has enabled another important stakeholder, the judiciary to have more clarity and certainty in dealing with matters pertaining to Islamic banking and finance. Consumers’ trust and confidence in the financial sector is thereby secured and sustained, hence providing financial stability within the industry, which meets with the expectation and mandate given to IFSA.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

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Book part
Publication date: 20 May 2019

Abstract

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Abstract

Details

Monetary Policy, Islamic Finance, and Islamic Corporate Governance: An International Overview
Type: Book
ISBN: 978-1-80043-786-9

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Book part
Publication date: 20 May 2019

Muhammad Ayub

Shari'ah governance is a major part of governance of Islamic banking institutions (IBIs). Pakistan is the country where pioneering work on Islamic banking and finance has…

Abstract

Shari'ah governance is a major part of governance of Islamic banking institutions (IBIs). Pakistan is the country where pioneering work on Islamic banking and finance has been conducted since 1970s. Major changes were made in 2002 and then in 2015 in the Islamic banking governance framework. This chapter critically analyses as to what extent the shari'ah governance framework’ (SGF) introduced by the State Bank of Pakistan (SBP) in 2015 could be able to ensure compliance of Islamic banks' practices with the principles of shari'ah. The SBP, the regulator of banking system, has been doing its intensive efforts to ensure shari'ah compliance, and as such the SGF introduced by it is a good ‘case study’ on the subject. By applying the descriptive and analytical methodology, it examines the strengths and weaknesses and suggests how the gaps could be filled to make the SGF really effective for achieving the objective.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Keywords

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Book part
Publication date: 20 May 2019

Yaser Ahmed Fallatah, Abul Hassan Farooqi and Salah Al Shalhoob

This chapter highlights the variations of agency theory in the unique and complex context of Islamic banks in Saudi Arabia. The results provide an insight into agency…

Abstract

This chapter highlights the variations of agency theory in the unique and complex context of Islamic banks in Saudi Arabia. The results provide an insight into agency structures in the context of Islamic banking that may lead to trade-offs between shari'ah compliance and mechanisms for protecting the rights of investors. This empirical study finds that most of the surveyed Islamic banks appear to recognize the value of governance and have implemented some basic mechanisms. Certain flaws in governance pertaining to audit, control, and transparency were also noted. The situation gets worse in cases where the investment account holders do not have any representation on the board or any voice for control or monetary rights. Other peculiar models balancing the two key requirements may be effective regarding agency dynamics. This study should motivate the policy makers to tailor the regulations to safeguard the interests of all investors without violating the principles of shari'ah.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Keywords

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Book part
Publication date: 20 May 2019

Noor Aimi Mohd Puad and Zurina Shafii

Shari'ah governance is a vital aspect that ensures internal shari'ah compliance function in Islamic financial industry, including the takaful industry. Shari'ah audit is a…

Abstract

Shari'ah governance is a vital aspect that ensures internal shari'ah compliance function in Islamic financial industry, including the takaful industry. Shari'ah audit is a component of shari'ah governance in any Islamic institution as it independently attests the state of shari'ah compliance. Besides, it contributes towards shari'ah non-compliance risk management and enhances the quality of internal shari'ah audit function. The main aim for this chapter is to discuss the scopes and processes of shari'ah audit function in takaful operation. In addition, a discussion on applicable key controls in takaful operation is also provided. This chapter provides an insight into shari'ah audit implementation in a takaful operator, based on the information solicited from an interview session with its shari'ah auditor. This chapter provides fundamental aspects of shari'ah audit exercise in takaful operation and raises takaful operator's views on the challenges and adequacy of guidelines on shari'ah audit for its effective implementation.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Keywords

To view the access options for this content please click here
Book part
Publication date: 20 May 2019

Mohammad Abdullah and Mohammad Saif Sarwar

To meet the philosophical underpinnings of Islamic financial institutions (IFIs), a sound shari'ah governance framework (SGF) for each and every IFI is vital…

Abstract

To meet the philosophical underpinnings of Islamic financial institutions (IFIs), a sound shari'ah governance framework (SGF) for each and every IFI is vital. Establishment of a proper SGF is central for smooth and effective functioning of an IFI. In the periphery of shari'ah governance (SG), the role of Shari'ah Supervisory Boards (SSB) is considerably crucial. SSB constitutes one of the most important SG elements in a given IFI. One of the central objectives of SGF is to protect and boost the authenticity of IFIs among its stakeholders, which is instrumental for the resilience and growth of the industry. To achieve this, it is required that an end-to-end shari'ah assurance process is functionalised at IFIs. To this end, external shari'ah audit, which is a process of objectively evaluating the entire operations of an IFI from shari'ah perspective and ascertaining that all events are based on shari'ah principles, is of paramount significance.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Keywords

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Article
Publication date: 22 March 2013

Khuram Shahzad Bukhari, Hayat M. Awan and Faareha Ahmed

The purpose of this paper is to explore the perceived importance of management about various corporate governance dimensions being practiced in the Pakistani Islamic…

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Abstract

Purpose

The purpose of this paper is to explore the perceived importance of management about various corporate governance dimensions being practiced in the Pakistani Islamic banking context.

Design/methodology/approach

AHP is applied to analyze the corporate governance indexes and its dimension of five Islamic banks and 12 conventional banks which are providing Islamic banking facilities (Islamic bank window) throughout Pakistan. These dimensions included board of directors (BOD), Shari'ah supervisory board (SSB), audit, investment account holders (IAH), and information disclosure & transparency.

Findings

The study reveals that the most significant dimensions which affect the corporate governance in Islamic banks are BOD and SSB, while the significant factors for Islamic banking windows are almost all dimensions of corporate governance. The correlation, regression, and ANOVA tests are applied to check the contributions of various factors of corporate governance mechanisms. These results indicate that there is a significant difference between Islamic banks and Islamic banking windows regarding the BOD and SSB. On the other hand, no significant difference is seen for the rest of the factors. The dissatisfaction level of customers reduces with the increase in the audit and BOD governance and all other factors have no impact in the case of Islamic banking windows; whereas in Islamic banks, in addition to audit and the SSB, information disclosure also significantly reduces the dissatisfaction level of customers. The concern of customers decreases significantly with the increasing level of IAH in the case of Islamic banking windows whereas in the case of Islamic banks a significant impact is seen for BOD, information disclosure, audit and IAH, but improvement in the governance of these rather increases the concern of customers toward compliance of Shari'ah and SSB has no contribution towards the concern of customers.

Originality/value

This study has practical significance for conventional and Islamic banking policy makers for understanding the requirements of their stakeholders and aligning them with the fundamentals of Shari'ah compliance according to the guidelines provided by the code of corporate governance so as to get better insight into the relationship between customers' motives behind using Islamic banking products.

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Book part
Publication date: 20 May 2019

Mohd Zakhiri Md Nor

This chapter aims to highlight the background of Islamic Financial Services Act 2013 (IFSA). It also highlights experiences of Malaysia in dealing with IFSA. The analysis…

Abstract

This chapter aims to highlight the background of Islamic Financial Services Act 2013 (IFSA). It also highlights experiences of Malaysia in dealing with IFSA. The analysis is tackled along the lines of the background and the constitutional frameworks of the country, the initiatives introduced by the government for the development of shari’ah compliance within the Islamic banking and finance fraternity as well as the relevant organs in carrying out the audit exercises over the Islamic banks and financial institutions in Malaysia. The chapter critically elucidates the implementation of the IFSA and its impact on shari’ah governance. It concludes by suggesting that the areas in the constitutional legal framework of the contemporary Islamic finance in Malaysia support the development of the Islamic banking and finance fraternity as with the shari’ah compliance of the same and it applies to all cooperative society.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

Keywords

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