The Practices of Corporate Governance and Shariah Governance in Islamic Financial Institutions

Abstract

Prior studies have shown corporate governance in the banking industry has been discussed primarily in the conventional perspective. However, as numerous as the researches have been, there is still not much literature available that thoroughly studies corporate governance and its theoretical foundation from the views of Islam. As a matter of fact, the challenge is greater compared to conventional finance system due to the additional risks it poses. As such, it is highly recommended for Islamic banks and financial institutions to apply a governance system and strategies that are effective as to encourage the adoption of Islamic corporate governance. An efficient and effective Islamic governance system is of the essence when it comes to corporate governance for IFIs, especially given what had transpired with the financial scandals and failure of several Islamic financial firms, and the possibility of what can happen when Shariah is not complied. For the purpose of Shariah compliancy, Islamic corporate governance needs to include an additional layer of governance in its philosophical foundation. In light of this, IFIs need to apply the relevant institutional arrangements not only to monitor their company’s Shariah adherence, but to their operations as well. Due to the lack of Islamic literature when it comes to Islamic corporate governance, IFIs have taken matters into their hand by introducing into their corporate governance structure the Shariah governance system, making it unique compared to any conventional methods. In the light of this, this chapter will attempt to shed light on the basics of corporate governance system and Shariah governance system in Islamic financial institutions (IFIs).