Type: Economics
Pages: 10 | Words: 2929
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The corporate governance model of Islamic nations has its own exceptional characteristics in comparison with the western notion of Anglo-Saxon and the European models. It unites part of Tawhid, neglecting the duty of social wellbeing. This research paper investigates the basic aspects of the Islamic governance with the Western equivalent in the facets of conceptual definition, corporate objective, episteme, essence of management and corporate organization. This research paper investigates the corporate governance in Islamic banking, and it starts with contrasting the governance structures in Islamic banks as well as the concepts of Islamic banking. This research compares Islamic and Western banking, financial pattern and its implications for governance organizations. It intends to offer the general picture on principles of Islamic banking.  

The Islamic Bank

The corporate governance in Islamic finance has been studied methodically in the context of conservative banking markets. However, little information can be found concerning the structures of Islamic banking, in spite the fast development of Islamic banks after the mid 1970s and their growing presence on international financial markets. Today, there are approximately 180 international financial institutions that adhere to Islamic banking and financing concepts.

Islamic banking reflects a different approach in comparison with the traditional banking, and, from the point of view of the corporate governance, it embodies many interesting characteristics since equity contribution, hazard and profit-and-loss sharing preparations from the foundation of Islamic financing. Unlike a traditional conventional bank that is essentially a lender and borrower of finances, an Islamic bank is a partner with its own depositors on one side, and also a partner with businessmen on the other side, once using depositors’ money in the productive investment. Thus, these financial arrangements involve dissimilar stockholder relations and, consequently, governance organizations, from the conventional model as depositors have a direct financial stake in the bank’s investment and equity participations. Furthermore, the Islamic bank is a subject to the extra layer of governance as the appropriateness of its investment and financing has to be in a strict agreement with the Islamic law and expectations of the Muslims. Hence, Islamic banks hire a sharia advisor and board.

Governance structures differ from these under the Islamic banking as any institution has to follow a dissimilar set of regulations – those of the Holy Qur’an – and correspond the expectations of the Muslim society by providing Islamically-appropriate financing modes. These profit-and-loss sharing approaches, in turn, involve dissimilar ties than under interest-based lending and borrowing.

There are two key dissimilarities from the traditional method. First and foremost, an Islamic structure has to serve God. It has to create the characteristic corporate culture, the major aim of which is to develop the collective morality, which, when united with the manufacture of goods, sustains the advancement of the Islamic manner of living. Second, the interest-free banking is founded on the Islamic lawful notions of mudaraba (profit-sharing) and shirkah (partnership). The Islamic bank is imagined as a financial mediator in terms of mobilizing investments from public on the mudaraba foundation and advancing capital to the businessmen on the same foundation.

Literature Review

Simple research methodology by reviewing the current works, concerning the theoretical, hypothetical and foundational structure of the corporate governance of both Western and Islamic approaches, was opted. The works of Siddiqi and Haneef, the existing literatures concerning the Islamic financial thought, confirm that there is a shortage of references and discussion on the issue of the corporate governance from the Islamic viewpoint. Additionally, Mannan, in his collection of abstracts on investigations in Islamic economics, further demonstrates the lack of a specific investigation on Shari’ah power. Only in 1994, Banaga, Ray and Tomkins issue their work External Audit and Corporate Governance in Islamic Banks (Banaga, Ray and Tomkins 1994, p.50-210). One more research was performed by Chapra and Ahmed (2002), where they created the book on the Islamic corporate governance, especially concentrating on the matter of its framework of IFI. Both works, nonetheless, mostly focus on the matter of the auditing, accounting, common framework of the governance of Islamic banks, rather than offering the comparative analysis of the Islamic corporate supremacy with the Western variant.

However, a concise analysis and commentaries on the literatures accessible offer the comparative overview on the fundamental aspects of the Islamic and Western corporate governance approach. The works submit that Islam presents the distinctive features of the corporate governance, with the purpose to uphold and sustain the idea of social justice not merely to the shareholders of the organization, but to the all stakeholders. 

Corporate Governance

The definition of the corporate governance has developed and broadened over the past ten years. The corporate governance attempts to provide institutions with body of regulations and values, as well as a view to guaranteeing good practices guide general management of the institution. It has now come to presuppose the general course of managing a firm and the incentive structure to concentrate on principal-agent matters and guarantee that the executive management serves the long-lasting finest interests of shareholders and sustainable cost of the firm in conformity with the rules and morals of the state. All of the complex aspects, which are included in balancing the power among CEO, board and shareholders, are nowadays considered to be a part of the corporate governance framework, embracing auditing, the balance sheet and off-balance disclosure, as well as transparency.

Over the years, a few institutions have created their own set of principles like the IIF’s policies of the corporate governance and clearness in developing markets that established the code based on criteria, which are considered crucial to inter-national investors.

Both ECD principles and the IIF code widely review five aspects of the corporate governance: minority shareholder protection, accountabilities of board of directors, accounting, transparency of rights and control and the regulatory surroundings. OECD has issued a set of principles of the corporate governance, aiming to offer the framework for the sound corporate governance. Thus, the corporate governance refers to the approach, by which a corporation is directed, administered and controlled. It embraces the laws, influencing that direction, as well as aims, for which it is governed. The corporate governance tools, incentives and controls were evolved to lessen inefficiencies, which arise from the ethical threat and unfavorable selection. The corporate governance is also treated as a course of monitoring performance by using the suitable counter-measures and working with transparency, honesty and accountability. It arranges the manner in which corporations are answerable to shareholders and the society, and additionally the monitoring of the supervisory management of companies in managing their businesses.

Conceptual Definition of Corporate Governance 

Normally, the meaning of the corporate governance may be separated into two senses. Firstly, the corporate governance may be described as the formal system of responsibility of senior management to the shareholders. Secondly, the corporate governance embraces the complete network of formal and informal relations, including the corporate sector and their outcomes for the social order in general. 

The corporate governance is about the manner, in which the boards supervise the administration of an organization by their own managers, and how board members are answerable to stakeholders, shareholders and the firm. In Islam, the conduct expected of an organization is not any dissimilar from the conduct of any other member of the society. As the firm does not have its own conscience, the behavior of managers demonstrates the behavior of the company, and their acts are subject to the same high principles of ethical commitment that are expected from any Muslim. The implications of Islamic worldviews have nurtured a positive input to the efficiency of the corporate governance. Islam underline the practice of justice and fairness, honesty and transparency, as well as the defense of minorities, answerability and sufficient disclosure, just as it prohibits exploitation in all spheres of living, including business dealings. In addition, the three fundamental principles (accountability, transparency and adequate disclosure) of the OECD code, created after several reports and researches, lie beneath a good practice in Islam, which is known since the religion was consolidated 1400 years ago.

The cornerstone of the corporate governance ideas is the defense of rights of claimants, who have entrusted financial assets to the control of a third party to get a return on the investment. Residual claimants can embrace stockholders, bondholders, creditors, depending on the organizational type selected for the particular business activity. The high-quality corporate governance is more than a decent concept. It supports the capital creation, develops the incentives to partake in the value-maximizing conduct, lowers the cost of assets, and promotes strong markets.

Roles of Corporate Governance

In the case of the USA, the function of the corporate governance is concentrated on qualities of a corporation merger and aggressive takeover as instruments for controlling the agency costs. It evolves into other spheres to control managerial avoidance and maximize the shareholder’s value. As the basis of Islamic faith is Tawhid, the foundation for the corporate governance also emanates from this notion. Thus, the Islamic company is a lawful unit, where the principle of the company’s shares owned by the shareholders is based on the equity engagement and earnings sharing ratios. Choudhury and Hoque assert that the objective functions of the corporate governance in Islam is to attain the objective criterion by means of understanding the ties between critical variables supported by policies, programs and strategic alliance. Clear and exact identification of the objective criterion leads to determination of the policies and programs by means of an institutional agreement and exercise of proper tools as required by the firm. These objective functions place Maqasid Shari’ah as the final aim of the corporate governance. The governance in Islam and the Western nations plays extremely crucial roles to correspond to the specific aims of the company. Islam attaches an additional value by insisting the aspect of Maqasid Shari’ah that may not be found in the Western approach. 

Western Concepts of Corporate Governance: The Anglo-Saxon Model

The Anglo-Saxon approach of the corporate governance that is also recognized as the market-based, shareholder-value or principle-agent approach is treated as the most prevailing assumption championed by the USA and the United Kingdom. The market-based scheme is characterized by arm’s length ties among companies and investors, who are supposed to be concerned predominantly about short-term returns. Miller stresses that the corporate governance concerns the shareholders value. The investors are also clients and what drives shareholders-value ideas. 

One of the most characteristic features of the Anglo-Saxon approach is the organization of the corporate ownership, where share possession is broadly detached and shareholders impact on management is weak. That is the ground why in the Anglo-Saxon system, a company actually requires a strong lawful defense to protect shareholders. In brief, the major anxiety of the corporate governance in the Anglo-Saxon model is to defend the interest and rights of shareholders. 

The European Model

One more model of the corporate governance is recognized as the Stakeholders or the European approach. In this model, the organizations raise most of external finance from bank, which have close, long-lasting ties with corporate customers. This model is concentrated on the relationship-based approach, which stresses the maximization of interests of a wider group of shareholders. The European model denies three key propositions of the  American theory, namely all stakeholders have right to partake in corporate decisions, which influence them, manager’s duty to defend the interest of all stakeholder and the corporation’s aim to encourage the interest of stakeholders and not merely shareholders.

The specific characteristic of the European approach of the governance system is the practice of the two-tier scheme, which is recognized as “conseil de surveillance†in Germany and France. It embraces the supervisory board of external directors and disconnected management board of the executive directors, in which the two boards meet unconnectedly.

Islamic Corporate Governance Approach

The corporate governance is not yet as extensively spread in the nations of the Islamic world as in Western economies. Whether or not, it is observed; nevertheless, there is not much discussion or literature on the issue of the corporate governance from the Islamic point of view. To shed light on, it is important to discuss shura as Islamic corporate governance instrument. Shura constitutes one of the four basic concepts in the Islamic opinion on the socio-political structure. The other three are impartiality, fairness, and human dignity. Shura is deeply rooted in the Quran. In the Quran, two variants of political discussion are pointed out. In the first one, Muhammad is asked to talk to his companions, but, finally, makes a decision on his own. In the second one, the group of people of the faithful is depicted as the one that administers their own affairs by the mutual consultation. Muslims search for the specific Islamic foundation for accepting the democratic governance. The initial ground is that for Muslims, the spiritual dimension of continuation extends to include the whole of living. Thus, all matters of social, political or economic importance have to ultimately be related to the fundamental Islamic conceptions and demonstrate to be in accord therewith to obtain a complete public acceptance. The other ground stems from the historical precedent is when the parliaments were established in several Islamic lands in the beginning of this century, it was presupposed they would restrain an authoritarian control, exclude the foreign interference, and merge the national self-government. However, France and Britain that were democratic at home, worked in the contradictory course abroad by strengthening the authoritarian leaders, whom they had installed on the Muslim lands.

It is indicated that any Islamic financial institution has to have the solid governance approach and appropriate strategies, which will promote the adoption of the strong and effectual corporate governance within the Islamic pattern. Once, the Muslim states emerged from the Second World War, the economic society and business and commercial practices in operation were overpoweringly those, inherited from the Western colonial control.

In general, it is noticed that the major aim of the company embracing the Islamic corporate governance is to maximize the shareholder’s value of prosperity. This presupposes that in real practice, numerous Islamic corporations accept the Anglo-Saxon approach of the corporate governance. The supporters of the Anglo-Saxon model endlessly try to protect their model and opponents strongly condemn them, particularly in the aspect of the principle-agent tie or agency troubles. In the context of the Islamic corporate governance, there are several researches, which have been performed, especially IFIs, to come up with alternative variants of the corporate governance. 

According to numerous studies, the Islamic corporation can accept an entirely dissimilar approach of the corporate governance or an altered variant of the Stakeholder-oriented approach as an alternative for its corporate governance structure. The former refers to a corporate governance model established on the concept of consultation, where stakeholders share the same aim of Tawhid or the oneness of Allah, and the latter concerns accepting the stakeholders’ value system with some alterations.  


The structure of the corporate governance approach in Islam has its own exceptional characteristics and presents distinguishing features in comparison with the western model of the Anglo-Saxon and European approach. The research summarizes the diversities of these models and classifies them into four aspects that are the episteme, corporate objective, essence of management, management board and capital-related ownership arrangement. It is worth asserting that the comparison is based on the common features of the Anglo-Saxon and the European concepts. Unquestionably, both models develop, and their characteristics can alter and transmit into the other type and even a convergence.

The basic version of the dissimilarities of the Islamic and Western models of the corporate governance offers the overview of dissimilar approaches of the corporate governance style and structure. In the aspect of epistemological approach, Islam opposes the rationality and rationalism as episteme of the Shari’ah corporate governance and substitutes it with the episteme of Tawhid (oneness of Allah). Whilst the Anglo-Saxon approach prioritizes shareholders’ value alone, and the European model defends all the stakeholder’s rights and interests, the Islamic approach’s objective puts Maqasid Shari’ah as the eventual aim, and this entails the concept of defending interests and rights of all stakeholders within Shari’ah regulations. The essence of management of the Islamic corporate governance theory is premised on two main beliefs of Shura, an integrated, interactive and evolutionary process and the apex level of management of the Shari’ah board, which is in charge to supervise the general corporate activities in order to comply with the Shari’ah main beliefs. In contrast to the Western theory, the essence of ownership organization in the Islamic corporate governance considers shareholders and investment account holders as legal owners, rather than the shareholders alone. The distinctive features of the Islamic corporate governance unite the part of Tawhid, Shura, Shari’ah regulations or the Islamic law and preserve the private aim, without neglecting the duty of social wellbeing.

The approach of the corporate governance system in Western perspective raises the matter of the design of a competent corporate governance arrangement of the IFI within the Islamic paradigm. As observation, the initial study discovers that the corporate governance theory in the Islamic economic system is premised on the epistemological of Tawhid. Moreover, the essence of the corporate governance’s aim is inclined toward the stakeholder value approach, where the governance style aims at defending stakeholders in general. In considering an Islamic view of the classification of stakeholders, it improves the interpretation beyond to those, who partake in governance of corporation to the religion of Islam itself. Thus, the corporate governance theory from the Shari’ah point of view considers Islam as supreme stakeholders beside another stakeholders’ unit. The notion of Islam as a sovereign stakeholder influences the organization of the corporate governance system, where it puts the Shari’ah as the leading law of all affairs of a corporation, which leads to the founding of the Shari’ah board as part of the corporate governance institutions.

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