Centralisation of corporate governance framework for Islamic financial institutions

Abd Hakim Abd Razak

doi:10.1108/ijif-08-2017-0020

Abd Hakim Abd Razak

Open Access

https://doi.org/10.1108/ijif-08-2017-0020

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Abstract

PurposeThe purpose of this paper is to supply basic insights into the principle ofshūrā(consultation) in Islamic banking, the idea of a centralised approach to the corporate governance of Islamic financial institutions (IFIs), the roles of a centralised Sharīʿah board as the highest authority on Sharīʿah issues and its distinguishing features from a de-centralised system and the advantages and disadvantages of the two governance systems.Design/methodology/approachIn analyzing these, the paper adopts the critical legal studies approach and refers to the provisions of the Qurʾan and Sunnah,ijmāʿ(consensus) of Sharīʿah scholars and recent Islamic banking reports.FindingsDespite the fact that the double-digit growth of the current US$2tn Islamic banking industry is a promising sign for its further expansion – expecting to cross the US$6.5tn mark by 2020 – there remains concern over the lack of standardization or rather the diversified approaches to the corporate governance of IFIs across key Islamic banking regions.Practical implicationsThere has been much debate surrounding the issue of whether the Islamic banking industry requires a centralised Sharīʿah board at the state level to complement the Sharīʿah boards at the IFIs’ individual level in providing better supervision of the Sharīʿah-compliance of IFIs. The fact that the industry is already equipped with two prominent standard-setting agencies in the form of the AAOIFI, the IFSB does little to suggest that best governance practices – which centre around the themes of consistency, harmony and uniformity – are on the horizon, at least not whilst their issued standards and guidelines remain voluntary for IFIs.Originality/valueAll in all, it is aspired that this paper may assist the reader in evaluating the pros and cons of the whole concept of Sharīʿah board centralisation.

Highlights

While some theories could work well and productively when applied in real life, others may require certain adjustments before they work
There is a 60 per cent and 40 per cent difference on bayal-wafa and bayal-dayn, respectively (Shaharuddin et al, 2012). These findings demonstrate the absence of uniformity in Islamic banking fatwas adopted by Islamic financial institutions (IFIs) within these key Islamic banking markets
71 per cent viewed the central bank as responsible for setting up and maintaining this board (Dar et al, 2016). This is similar to the industry report by Deloitte (2010), which highlighted that 57 per cent of the executives, practitioners and policymakers of the Islamic banking industry in the Middle East expressed a preference for the adoption of a centralised Islamic corporate governance system over the decentralised

Summary

Introduction

While some theories could work well and productively when applied in real life, others may require certain adjustments before they work. Application of a theory is not practically viable. These were highlighted by the corporate failures suffered by a number of high-profile IFIs within the last two decades. The 2008 global financial meltdown affected a number of IFIs such as Kuwait Finance House, Al-Rajhi Bank, Al-Hilal Bank and Noor Islamic Bank of the United Arab Emirates. The problems of the Al-Hilal Bank and Noor Islamic Bank of the United Arab Emirates prompted a bailout from the Emirate of Abu Dhabi when the crisis began affecting the Dubai Government (El Baltaji and Permatasari, 2010; Walton, 2011)

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