Research Seminar - Wednesday 7th October

Sheharyar S Hamid, School of Law, University of Warwick

Are Modern day Islamic financial institutions following good corporate governance practices: An issue based analysis?

With the recent mushroom growth of the Islamic financial institutions (IFI’s), a lot has been praised about the industry. The narrative surrounding the IFI’s has mostly been regarding the positive aspects, mostly praising the industry as being ethical and risk averse. There is no doubt that the industry has made some phenomenal leaps in terms of growth and innovation across many jurisdictions over the last fifteen years. However a true critical appraisal seems to be lacking in most of the academic and practitioners circles. One major aspect of that lack of critical appraisal is around the fact that almost all IFI’s are in essence registered corporations which means that they fall under the local jurisdiction’s corporate laws and thus need to comply with local and international corporate laws and corporate governance frameworks. This is compounded by the fact that IFI’s are unique in their nature as being dictated by religious law and norms and thus all activities undertaken by IFI’s have to be Sharia compliant, which makes it even more difficult to regulate them. In essence IFI’s need to comply with three separate regulatory/ supervisory regimes i.e. the local jurisdiction’s laws and regulations, International best practices (like the Basel accords etc) and Sharia Norms to be truly sharia compliant.

Even though some work has been done by the two leading international standard setting bodies for IFI’s like the IFSB (Islamic financial Services Board) and AAOIFI (Audit and accounting organisation for Islamic financial institutions) by publishing standards of good corporate governance and reporting. However this paper argues that there is still major scope to improve further upon those standards if IFI’s have to be truly risk averse and sound financial institutions. In light of the established practices of the IFI’s this paper carries out an issues based analysis of the contemporary IFI’s working in common law jurisdictions and discusses such corporate governance issues that need further attention by the academics, regulators and standard setting bodies to allow the industry to be truly Sharia complaint as well as sound robust financial institution that can compete internationally.