Higher Ethical Objective (Maqasid al-Shari\u2019ah) Augmented Framework for Islamic Banks: Assessing Ethical Performance and Exploring Its Determinants

Arman Mergaliyev,Yusuf Karbhari,Alija Avdukic,Mehmet Asutay

doi:10.1007/s10551-019-04331-4

Arman Mergaliyev, Yusuf Karbhari + Show 2 more

Open Access

https://doi.org/10.1007/s10551-019-04331-4

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Abstract

This study utilises higher objectives postulated in Islamic moral economy or the maqasid al-Shari’ah theoretical framework’s novel approach in evaluating the ethical, social, environmental and financial performance of Islamic banks. Maqasid al-Shari’ah is interpreted as achieving social good as a consequence in addition to well-being and, hence, it goes beyond traditional (voluntary) social responsibility. This study also explores the major determinants that affect maqasid performance as expressed through disclosure analysis. By expanding the traditional maqasid al-Shari’ah,, we develop a comprehensive evaluation framework in the form of a maqasid index, which is subjected to a rigorous disclosure analysis. Furthermore, in identifying the main determinants of the maqasid disclosure performance, panel data analysis is used by including several key variables alongside political and socio-economic environment, ownership structures, and corporate and Shari’ah governance-related factors. The sample includes 33 full-fledged Islamic banks from 12 countries for the period of 2008–2016. The findings show that although during the nine-year period the disclosure of maqasid performance of the sampled Islamic banks has improved, this is still short of ‘best practices’. Through panel data analysis, this study finds that the Muslim population indicator, CEO duality, Shari’ah governance, and leverage variables positively impact the disclosure of maqasid performance. However, the effect of GDP, financial development and human development index of the country, its political and civil rights, institutional ownership, and a higher share of independent directors have an overall negative impact on the maqasid performance. The findings reported in this study identify complex and multi-faceted relations between external market realities, corporate and Shari’ah governance mechanisms, and maqasid performance.

Highlights

Islamic banking and financial institutions (IBFIs) emerged during the mid-1970s as ‘commercial banks’ to fulfil the religiously constructed financial needs of individual Muslims
Since the theoretical framework of Islamic Moral Economy (IME) implies that Islamic Banks (IBs) should conduct their financial operations in an ethical manner with social impact consequences, this study aims to fill the gap by going beyond the classical corporate social responsibility measures to assess their ‘social and ethical responsibility’
Further empirical studies are required to determine the factors affecting the performance of IBs in light of maqasid al-Shari’ah, a task this study aims to fulfil in this paper

Summary

Introduction

Islamic banking and financial institutions (IBFIs) emerged during the mid-1970s as ‘commercial banks’ to fulfil the religiously constructed financial needs of individual Muslims. They are considered value-oriented financial institutions shaped by the principles, morals and ethical norms of Islam. IBFIs are expected fulfil the normative expectations of IME as articulated by maqasid al-Shari’ah or ‘objectives of the Shari’ah’ (Asutay 2013; Asutay and Yilmaz 2018), which is defined as ‘promoting human and social well-being’ (Chapra 2000). The nature of organised tawarruq creates debt and increased further financialisation, and is subjected to strong criticism, which was, ruled unlawful or Shari’ah non-compliant by the International Islamic Fiqh Academy but it is used liberally by the majority of Islamic banks due to market pressure, as indicated by the statistics in the case of Malaysia

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