Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services

By Wafik Grais, Matteo Pellegrini. 2006

197 citations recorded by the source corpus.

The structures and processes established within an institution offering Islamic financial Services (IIFS) for monitoring and evaluating Shariah compliance rely essentially on arrangements internal to the firm. By being incorporated in the institutional structure, a Shariah supervisory board (SSB) has the advantage of being close to the market. Competent, independent, and empowered to approve new Shariah-conforming instruments, an SSB can enable innovation likely to emerge within the institution. The paper reviews the issues and options facing current arrangements for ensuring Shariah compliance by IIFS. It suggests a framework that draws on internal and external arrangements to the firm and emphasizes market discipline. In issuing its fatwas, an SSB could be guided by standardized contracts and practices that could be harmonized by a self-regulatory professionals' association. A framework with the suggested internal and external features could ensure adequate consistency of interpretation and enhance the enforceability of contracts before civil courts. The review of transactions would mainly be entrusted to internal review units, which would collaborate with external auditors responsible for issuing an annual opinion on whether the institution's activities has met its Shariah requirements. This process would be sustained by reputable entities such as rating agencies, stock markets, financial media, and researchers who would channel signals to market players. This framework would enhance public understanding of the requirements of Shariah and lead to more effective options available to stakeholders to achieve improvements in Islamic financial services.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/19ea3136c6ac8c11fc29aff389e45fb88a45c102

How researchers see this paper

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In Accounting

1. Sabur Mollah
2. Sherif El-Halaby
3. M. Zaman
4. Wassim Rajhi
5. K. Hussainey
6. S. A. Hassairi
7. R. Grassa
8. A. Bukair

In Economics and Econometrics

1. Sabur Mollah
2. M. Zaman
3. Wassim Rajhi
4. K. Hussainey
5. S. A. Hassairi
6. R. Grassa
7. A. Bukair
8. Azhar A. Rahman

In Finance

1. Sabur Mollah
2. M. Zaman
3. Wassim Rajhi
4. K. Hussainey
5. S. A. Hassairi
6. R. Grassa
7. A. Bukair
8. Sherif El-Halaby

Citations in the corpus

• Determinants of compliance with AAOIFI standards by Islamic banks (2016, background): “Therefore, SSB is the most important distinction between Islamic banks and conventional banks (Farook et al., 2011; Grais and Pellegrini, 2006).”
• Bank performance and board of directors attributes by Islamic banks (2015, background): “The most significant reasons behind these collapses are the collusion of the board of directors (BODs), the audit failures and excessive risk taken by the management (Grais and Pellegrini, 2006).”
• ISLAMIC BANKS AND FINANCIAL STABILITY: A COMPARATIVE EMPIRICAL ANALYSIS BETWEEN MENA AND SOUTHEAST ASIAN COUNTRIES (2013, background): “A large body of descriptive literature discusses risks in Islamic banking (Sundararajan and Errico, 2002; Grais and Kulathunga, 2006; Grais and Pellegrini, 2006) but does so in theoretical terms, while empirical papers focus on Islamic and conventional banking efficiency (Yudistira, 2004; Hamim, Naz”
• Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks (2017, unknown): “The central feature of Islamic banks is the presence of the Shariah Supervisory Board (SSB), consisting of a group of scholars who specialise in Shariah and occasionally have a background in Islamic economics and finance (Grais and Pellegrini, 2006).”
• Islamic Financial Institutions and Corporate Governance: New Insights for Agency Theory (2009, methodology): “Grais and Pellegrini (2006b, 2006c), and Chapra and Ahmed (2002) also suggest the possibility of granting unrestricted IAHs rights similar to the deposit protection granted to debt holders.”
• Shari’ah supervision, corporate governance and performance : conventional vs. Islamic banks (2015, background): “The literature on Islamic banking (e.g., Chowdhury and Hoque, 2006; Grais and Pellegrini, 2006; Hassan, 2011; and Lewis, 2005) however is mainly normative and or theoretical, and there is a lack of empirical research on the governance of IBs.”
• Corporate governance and credit rating in Islamic banks: Does Shariah governance matters? (2015, background): “To assure stakeholders, the bank generally sets up the Shariah board (Grais and Pellegrini 2006).”