Abstract
This paper examines relevancy of corporate financial policies and documents similarities and/or differences of how profit maximization goal is viewed by Islamic banking institutions (IBIs). Management of the firm is ultimately responsible for maximizing profits and increasing shareholder value, however this challenging task may get plagued by agency problems as well corporate financial policy conflicts. Agency problem is real and it is assumed to occur in most companies worldwide. However, the theory’s controversial nature and its narrow focus have not really convinced many scholars whether agency theory in fact provides any broad benefits to firm’s stakeholders or not. Scholars seem to be divided into two camps on agency theory. Some authors think that agency theory pays too much attention to short-term goal of share price valuation and it hardly provides any real answers to firm’s real problems. On the other hand, some proponents of this theory believe agency theory’s useful impact on capital markets.
Highlights
In very basic terms, finance can be defined as management of monetary funds; such as money or/and other valuable securities which can be converted into money
Policy makers, politicians, regulatory agencies, and banking professionals who are part of the Islamic financial industry should take this unique opportunity to improve upon things like; establishing effective financial infrastructure; better transparency in financial reporting; well-functioning regulatory system; cooperation with the work of global financial reforms; and creating the right kind of policies to encourage better development of the Islamic banking industry to foster strong future growth
This paper began with looking at two conflicting positions on agency theory – On one hand; a group of authors arguing that agency theory has a narrow focus that pays too much attention to short-term goal of profit maximization and its influence on stock price valuation
Summary
Finance can be defined as management of monetary funds; such as money or/and other valuable securities which can be converted into money . The early forms of most Islamic banks’ business model was explicitly based on interest free safe-keeping (wadiah) service and some trading activities based on profit-loss sharing where assets (money in savings accounts) from customer deposits were used to engage in various trades and in return any realized profits were shared between banks and their account holders. These banks were not commercial banks as we know today and they certainly did not charge or pay out interest (riba) to their customers as this was clearly forbidden by the Quran. After the 2008 financial crisis lost some steam and stabilized, it has left behind staggering millions of people without jobs; thousands of failed businesses; tens of millions of people with washed-away life savings; and not surprisingly, deeply shaken investor confidence
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