Principal-agent relationship issues in Islamic banks: a view of Islamic ethical system

Abstract

Purpose This paper aims to discuss and explore the unique agency issues in Islamic banks which give rise to different agency conflicts exist in Islamic banks as compared to conventional banks. In addition, this paper critically examines agency theory in Islamic banking perspective by incorporating Islamic ethical considerations in the principal–agent setting. Design/methodology/approach This is a conceptual paper, and the discussions revolve around the review of literature of which important sources have been cited in a way that demonstrates a reasonable understanding of the topic. It attempts to create a discourse around the inclusion of Islamic ethical system in understanding the governance structure of Islamic banks. Findings This paper concludes that Islamic ethical system embedded in the Islamic banks business activities shapes Islamic banks into organisations that place higher ethical considerations than conventional banks. Therefore, Islamic banks are likely to have less severe agency problems relative to their conventional counterparts. Research limitations/implications Because of the chosen research approach, the research results may lack generalisability. Therefore, researchers are encouraged to test the proposed propositions further. Practical implications As the discourse generated by the paper, it can ultimately enhance the understanding of Islamic governance structure in the perspective of agency issues. Social implications As the discourse generated by the paper, it can ultimately enhance the understanding of Islamic governance structure in the perspective of agency issues. Originality/value The paper attempts to bring to attention the important aspect of principal–agent relationship within the Islamic banking structures and explain the role of incorporating Islamic ethical system in enhancing the understanding of the principal–agent relationship.

Do the Characteristics of Internal Audits and Compliance Functions Affect Sharia Compliance?

“…The findings in this study do not support the research conducted by Khalid et al, (2017) which indicated that work programs have a positive effect on the effectiveness of sharia supervision. The findings in this study, according to Rahman (2008) in Khalid et al, (2017), appear to indicate that sharia supervision in Islamic banks is not currently implemented comprehensively, and fails to cover all the problems with sharia in the financial, social, organizational structure, and management ethics aspects (Khalid et al, 2017;Zainuldin et al, 2018).…”

“…Sharia compliance thus reflects the prinsciple of halal transactions in Islamic banks, discarding the elements of usury, gharar, maysir, and zalim. For Muslims, sharia compliance in their economic activities satisfies a spiritual need by protecting their property from prohibited deeds (Zainuldin et al, 2018).…”

“…As a result, the pursuit of sharia compliance is mandatory for Islamic banks to sustain the credibility and legality of halal products and services, along with securing public trust in the Islamic banking system (Haridan, Hassan, & Karbhari, 2018). To strive for sharia compliance, each Islamic bank has a Sharia Supervisory Board (SSB) to monitor and control any mechanism minimizing activities that are not in accordance with sharia principles (Zainuldin, Lui, & Yii, 2018).…”

The Islamic economy: its origin, its world view and its claims

“…Some authors think that Islamic ethics is the answer to all governance problems and that there is no need to look further. Zainuldin et al (2018), after elaborating on the various governance problems in Islamic banks, blithely state that consultative consultation, that is allowing all stakeholders to contribute to the decision-making process, is the way to ensure that Islamic ethics rule the process so that everybody takes account of other peoples' interests and no dishonesty will occur. As Islamic ethics is based on presumed divine revelation, it is important to support any proposal with references to the prophet Muhammad and Zainuldin et al argue that consultative (shuratic) decisionmaking characterized the leadership of the prophet and the caliphs (the worldly and spiritual leaders of the Muslim community) after him.…”

Tuah Sebagai Sarana Pengembangan Etika Pengelola Keuangan Negara

“…Ti dak ada keterpisahan antara satu dengan yang lainnya. Konsep inilah yang peneliti ba ngun dalam membentuk etika profesi penge lola keuangan negara dan membedakannya dengan penelitian lain sebagaimana kajian yang dilakukan oleh Afou (2017), Zainuldin et al (2018), dan Zubairu et al (2019) yang memotret etika profesi akuntan dalam per spektif Islam semata tanpa melibatkan re alitas spiritual sebagai konsep deep ecology dalam kajiannya.…”