Socially responsible investment: insights from Shari'a departments in Islamic financial institutions

Abstract

Islamic financial institutions (IFIs) are emerging as prominent players in the financial world and are increasingly known for their conservative socially responsible investment (SRI). Being the Shari'a regulators and monitors of IFIs, the Shari'a departments are expected to implement the Islamic perspective of SRIdrawn from Shari'a principles -in their respective institutions. The purpose of this paper is to develop an SRI framework applicable to IFIs and other Shari'a compliant entities and assess its applicability within Shari'a departments of two Islamic banks. This paper involves cross-case analysis based on interviews with Shari'a department officials in two settings differentiated by their respective independence. The proposed framework consists of required, expected and desired SRI aspects as applicable to IFIs. The findings reveal that the required aspects are uniformly observed by the two cases. There are, however, variations when it comes to observing the expected and desired ethical SRI aspects that may be driven by the independence of the Shari'a boards. This inconsistency and non-adherence of expected and desired aspects may lead to reputational risks in the long run.

Islamic work ethics and individualism in managing a globalized workplace: Does religiosity and nationality matter?

“…The Social facet (SWE) accounted for 21.6% of explained variance in IND. It was in congruence with the assertion of prior researchers (Abu-Saad, 2003;Ali & Al-Owaihan, 2008;Ullah, Jamali, & Harwood, 2014) that IWE emphasize obligations towards employees along with contribution to society. The attitudinal facet (AWE) significantly supplemented the explained variance in IND by 3.6%, which endorsed the findings of Sager, Yi, and Futrell (1998) and regarding work ethics and its linkage with employee attitude.…”

The type and quantity of corporate social disclosures of German ‘Universal’ banks

“…Broadly defined as the ''manifestation of the practice by which organizations communicate their social and environmental impacts and responsibilities to different stakeholders'' (Menassa 2010: 5), the quality and extent (quantity) of these disclosures differ across different industries and according to the characteristics of the disclosing party as argued by Branco and Rodrigues (2008). Accordingly, the banking industry, a customeroriented sector, has social responsibility priorities in financing sustainable development of economic activities (Relano and Paulet 2012;Prior and Argandoña 2009;Scholtens 2009;Hermes et al 2005;Murdoch 1999) through socially responsible investment and lending policies (Ullah et al 2014;Simpson and Kohers 2002). The impact of such policies is of public interest since the banking industry has high public visibility (Menassa 2010;Branco and Rodrigues 2008;Miles 1987) and its services are considered as public goods (Miles 1987).…”

The effects of Shariah board composition on Islamic equity indices' performance

“…Five principles distinguish Islamic financial products: the prohibition of explicit interest rates ( riba ); the prohibition of transactions that are subject to excessive uncertainty ( gharar ); the prohibition of specific markets or products (i.e., pork, alcohol, weapons); profit and loss sharing between contractual parties (Minhat & Dzolkarnaini, ); a direct link of each financial operation to the real economy (Usmani, ). To ensure Shariah conformity in all transactions and activities, each financial institution sets up a Shariah board, which is a part of a larger Shariah department, together with a Shariah compliance unit and a Shariah audit/review unit (Ullah et al, ). The main purpose of the board is to guarantee that every financial institution operates in conformity with Islamic principles and ethics (Rammal, ).…”

“…Moreover, there are just a few recent papers investigating Islamic corporate governance (Najeeb & Ibrahim, 2014;Ullah et al, 2014;Wooi & Ali, 2017). The only studies attempting to evaluate the impact of Shariah scholar reputation on Islamic finance involve sukuk (Godlewski et al, 2014) and banks (Grassa, 2016;Mollah & Zaman, 2015;Mollah et al, 2017).…”

“…Second, we contribute to governance and board composition issues by explicitly considering the impact that the characteristics of Islamic scholars (Ullah et al, 2014) can have on Islamic portfolios through the Islamic screening criteria they impose. In fact, while there are few studies investigating the impact of Shariah boards on Islamic bank performance (Mollah, Hassan, Al Farooque, & Mobarek, 2017;Mollah & Zaman, 2015), ratings (Grassa, 2016) and Islamic bonds, or sukuk (Godlewski, Turk-Ariss, & Weill, 2014), there is a dearth of literature dealing with the impact of Shariah boards on Islamic indices' risk and performance.…”