Corporate governance and risk management: An evaluation of board responsibilities in western and Islamic banks
DOI:
https://doi.org/10.18559/ebr.2024.1.1004Keywords:
Shari'ah, corporate governance, risk management, governance codes, islamic bankingAbstract
This research aims to explore the role of the board in cor-porate governance (CG) and risk management within the context of Islamic banking. Given the global reach of fi-nancial institutions, it is important to compare and evalu-ate the unique position of Shari’ah committees or Shari’ah Supervisory Board (SSB) in addressing the unique risks of Islamic banks. Using a comparative analysis, this study evaluated risk management guidelines in the CG codes of the United Kingdom, Germany, Saudi Arabia, and Malaysia. It found that board were ultimately responsible for risk management, regardless of the governance structure, and Shari’ah-related risks fell under the board’s purview. An innovative blend of Western CG frameworks and Islamic principles enhanced governance robustness through the strategic collaboration between board and SSBs.
Downloads
References
Abdul Rahman, A. R. (2010). An introduction to Islamic accounting theory and practices. CERT Publication.
View in Google Scholar
Adalsteinsson, G. (2014). The liquidity risk management guide: From policy to pitfalls. John Wiley & Sons.
View in Google Scholar
Adams, R. B., & Mehran, H. (2003, March). Is corporate governance different for bank holding companies?https://ssrn.com/abstract=387561
View in Google Scholar
Aguilera, R. V., & Cuervo-Cazurra, A. (2004). Codes of good governance worldwide: What is the trigger? Organization Studies, 25(3), 415-443.
View in Google Scholar
Alam, M. K., Miah, M. S., Siddiquii, M. N., & Hossain, M. I. (2020). The influences of board of directors and management in Shari’ah governance guidelines of the Islamic banks in Bangladesh. Journal of Islamic Accounting and Business Research, 11(9), 1633–1647.
View in Google Scholar
Alatassi, B., & Letza, S. (2018). Best practice in bank corporate governance: The case of Islamic banks. Economics and Business Review, 4(4), 115–133.
View in Google Scholar
Aljifri, K., & Khandelwal, S. K. (2013). Financial contracts in conventional and Islamic financial institutions: An agency theory perspective. Review of Business & Finance Studies, 4(2), 79–88.
View in Google Scholar
Alnasser, A, S., & Muhammed, J. (2012). Introduction to corporate governance from Islamic perspective. Humanomics, 28(3), 220–231.
View in Google Scholar
Al-Kahtani, F. S. (2014). Corporate governance from the Islamic perspective. Arab Law Quarterly, 28(3), 231–256.
View in Google Scholar
Al-Malkawi, H. A. N., & Pillai, R. (2018). Analyzing financial performance by integrating conventional governance mechanisms into the GCC Islamic banking framework. Managerial Finance, 44(5), 604–623.
View in Google Scholar
Al-Suwailem, S. I. (2008). Islamic economics in a complex world: Explorations in agent-based simulation. The Islamic Research and Teaching Institute (IRTI).
View in Google Scholar
Archer, S., & Karim, R. A. A. (2007). Specific corporate governance issues in Islamic banks. In R. A. A. Karim, & S. Archer (Eds.), Islamic finance: The regulatory challenge (pp. 394, 310). John Wiley & Sons.
View in Google Scholar
Barnea, A., Haugen, R. A., & Senbet, L. W. (1985). Agency problems and financial contracting. Prentice Hall.
View in Google Scholar
Bhatti, M., & Bhatti, M. I. (2010). Toward understanding Islamic corporate governance issues in Islamic finance. Asian Politics & Policy, 2(1), 25–38.
View in Google Scholar
Bhimani, A. (2009). Risk management, corporate governance and management accounting: Emerging interdependencies. Management Accounting Research, 20(1), 2–5.
View in Google Scholar
Bowen, G. A. (2009). Document analysis as a qualitative research method. Qualitative Research Journal, 9(2), 27–40.
View in Google Scholar
Bryman, A. (2001). Social research methods (4th ed.). Oxford University Press. Brunnermeier, M. K., & Yogo, M. (2009). A note on liquidity risk management. American Economic Review, 99(2), 578–583.
View in Google Scholar
Central Bank of Malaysia (2010). Shari’ah governance framework for Islamic financial institutions (SGF 2010). Bank Negara Malaysia. https://www.bnm.gov.my/documents/20124/761709/20110101_S_G_0001.pdf/b3d6f2a1-7d8a-3052-ab30-15b81978e333t=1579232895311
View in Google Scholar
Chapra, M. U., Khan, S., & Al Shaikh-Ali, A. (2008). The Islamic vision of development in the light of maqasid al-Shari’ah. Islamic Economic Studies, 15(1), 1–52.
View in Google Scholar
Charny, D. (1998). The German corporate governance system. Colombia Business Law Review, 145.
View in Google Scholar
Cioffi, J. W. (2006). Corporate governance reform, regulatory politics, and the foundations of finance capitalism in the United States and Germany. German Law Journal, 7(6), 533–561.
View in Google Scholar
Committee on the Financial Aspects of Corporate Governance, & Cadbury, S. A. (1992). The financial aspects of corporate governance: Report of the Committee. Gee.
View in Google Scholar
Crowther, D., & Seifi, S. (2010). Corporate governance and risk management. Bookboon.
View in Google Scholar
De Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), 2570–2580.
View in Google Scholar
Deloitte. (2018). Audit committee resource guide. Centre for Board Effectiveness.
View in Google Scholar
Doğan, B., & Ekşi, İ. H. (2020). The effect of board of directors characteristics on risk and bank performance: Evidence from Turkey. Economics and Business Review, 6(3), 88–104.
View in Google Scholar
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO gover- nance and shareholder returns. Australian Journal of Management, 16(1), 49–64.
View in Google Scholar
Durkheim, E. (1982). The rules of sociological method. The Free Press.
View in Google Scholar
El-Hawary, D., Grais, W., & Iqbal, Z. (2007). Diversity in the regulation of Islamic financial institutions. The Quarterly Review of Economics and Finance, 46(5), 778–800.
View in Google Scholar
Farag, H., Mallin, C., & Ow-Yong, K. (2018). Corporate governance in Islamic banks: New insights for dual board structure and agency relationships. Journal of International Financial Markets, Institutions and Money, 54, 59–77.
View in Google Scholar
Fayed, M., & Ezzat, A. (2017). Do principal-agent conflicts impact performance and risk-taking behavior of Islamic banks? Topics in Middle Eastern and North African Economies, 19(2).
View in Google Scholar
Fernandes, C., Farinha, J., Martins, F. V., & Mateus, C. (2017). Supervisory board, financial crisis and bank performance: Do board characteristics matter? Journal of Banking Regulation, 18, 310–337.
View in Google Scholar
FRC. (2018). UK corporate governance code. Financial Reporting Council. https://www.frc.org.uk
View in Google Scholar
Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge University Press.
View in Google Scholar
Friedman, M. (2007). The social responsibility of business is to increase its profits. In W. C. Zimmerli, M. Holzinger, & K. Richter (Eds.), Corporate ethics and corporate governance (pp. 173–178). Springer.
View in Google Scholar
Geeta, R., & Prasanna, K. (2016). Governance and risk interdependencies among family owned firms. Corporate Ownership & Control, 13(2), 390–407.
View in Google Scholar
Gelter, M., & Puaschunder, J. M. (2021). COVID-19 and comparative corporate governance. Journal of Corporation Law, 46, 557–629.
View in Google Scholar
Gennaro, A., & Nietlispach, M. (2021). Corporate governance and risk management: Lessons (not) learnt from the financial crisis. Journal of Risk and Financial Management, 14(9), 419.
View in Google Scholar
Gouiaa, R. (2018). Analysis of the effect of corporate governance attributes on risk management practices. Risk Governance & Control: Financial Markets & Institutions, 8(1), 14–23.
View in Google Scholar
Grais, W., & Pellegrini, M. (2006). Corporate governance and Shariah compliance in institutions offering Islamic financial services. World Bank Publications.
View in Google Scholar
Grassa, R., & Matoussi, H. (2014). Corporate governance of Islamic banks: A comparative study between GCC and Southeast Asia countries. International Journal of Islamic and Middle Eastern Finance and Management, 7(3), 346–362.
View in Google Scholar
Gupta, P. P., & Leech, T. J. (2014). Risk oversight: Evolving expectations for board. EDPACS, 49(3), 1–21.
View in Google Scholar
Godlewski, C., Ariss, R. T., & Weill, L. (2014). Do the type of sukuk and choice of shari’a scholar matter? International Monetary Fund.
View in Google Scholar
Haben, P. (2020). EBA statement on additional supervisory measures in the COVID-19 pandemic. https://policycommons.net/artifacts/11329859/eba-statement-on-additional-supervisory-measures-in-the-covid-19-pandemic/12218676/
View in Google Scholar
Hasan, M., & Dridi, J. (2010). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(02), 163–200.
View in Google Scholar
Hassan, K., & Lewis, M. (Eds.). (2007). Handbook of Islamic banking. Edward Elgar Publishing.
View in Google Scholar
Heracleous, L. (1999). The board of directors as leaders of the organisation. Corporate Governance: An International Review, 7(3), 256–265.
View in Google Scholar
Hubbard, D. W. (2020). The failure of risk management: Why it’s broken and how to fix it. John Wiley & Sons.
View in Google Scholar
IFSB. (2006). Guiding principles on corporate governance for institutions offering only Islamic financial services (excluding Islamic insurance (takaful) institutions and Islamic mutual funds). Islamic Financial Services Board.
View in Google Scholar
IFSB. (2009). Guiding principles on conduct of business for institutions offering Islamic financial services. Islamic Financial Services Board, 1.
View in Google Scholar
Iqbal, Z., & Mirakhor, A. (2011). An introduction to Islamic finance: Theory and practice. John Wiley & Sons.
View in Google Scholar
Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure. In R. I. Tricker (Ed.), Corporate governance: Value, ethics and leadership (pp. 77–132). Gower.
View in Google Scholar
Karim, R. A. A., & Archer, S. (2002). Islamic finance: The regulatory challenge. John Wiley & Sons.
View in Google Scholar
Khan, M. M., & Bhatti, M. I. (2008). Islamic banking and finance: on its way to globalization. Managerial Finance, 34(10), 708–725.
View in Google Scholar
Lam, J. (2014). Enterprise risk management: From incentives to controls. John Wiley & Sons.
View in Google Scholar
Letza, S., & Sun, X. (2004). Philosophical and paradoxical issues in corporate governance. International Journal of Business Governance and Ethics, 1(1), 27–44.
View in Google Scholar
Letza, S., Sun, X., & Kirkbride, J. (2004). Shareholding versus stakeholding: A critical review of corporate governance. Corporate Governance: An International Review, 12(3), 242–262.
View in Google Scholar
Mallin, C. A. (2016). Corporate governance. Oxford University Press.
View in Google Scholar
McNulty, T., Florackis, C., & Ormrod, P. (2012). Corporate governance and risk: A study of board structure and process. ACCA Research Report 129.
View in Google Scholar
Muhammad, H., Migliori, S., & Mohsni, S. (2023). Corporate governance and firm risk-taking: The moderating role of board gender diversity. Meditari Accountancy Research, 31(3), 706–728.
View in Google Scholar
OECD. (2010). OECD principles of corporate governance. OECD Publishing.
View in Google Scholar
OECD. (2014a). 2014–2015 Review of the OECD principles of corporate governance. https://www.oecd.org/daf/ca/2014-review-oecd-corporate-governance-princi-ples.htm
View in Google Scholar
OECD. (2014b). Risk management and corporate governance. OECD Publishing.
View in Google Scholar
Permatasari, I. (2020). Does corporate governance affect bank risk management? Case study of Indonesian banks. International Trade, Politics and Development, 4(2), 127–139.
View in Google Scholar
Permatasari, D., & Yuliyanto, A. R. (2016). Analysis of financial performance: The ability of distribution of islamic bank financing. ASEAN International Conference on Islamic Finance. https://research.unissula.ac.id/file/publikasi/211413024/333A-ICIF2016-bu_devi.pdf
View in Google Scholar
Pillai, R., Al-Malkawi, H. A. N., & Bhatti, M. I. (2021). Assessing institutional dynamics of governance compliance in emerging markets: The GCC real estate sector. Journal of Risk and Financial Management, 14(10), 501.
View in Google Scholar
Power, M. (2009). The risk management of nothing. Accounting, Organizations and Society, 34(6–7), 849–855.
View in Google Scholar
Ragin, C. C. (2014). The comparative method: Moving beyond qualitative and quantitative strategies. University of California Press.
View in Google Scholar
Rehman, A. A. (2020). Islamic finance takes on COVID-19. United Nations Development Programme.
View in Google Scholar
Safieddine, A. (2009). Islamic financial institutions and corporate governance: New insights for agency theory. Corporate Governance: An International Review, 17(2), 142–158.
View in Google Scholar
SAMA (2020). Sharia governance framework for banks in the Kingdom. Saudi Arabian Monetary Authority. https://www.sama.gov.sa
View in Google Scholar
Squires, B., & Elnahla, N. (2020). The roles played by board of directors: An integration of the agency and stakeholder theories. Transnational Corporations Review, 12(2), 126–139.
View in Google Scholar
Sundararajan, V. (2007). Risk measurement and disclosure in Islamic finance and the implications of profit sharing investment accounts. Islamic Economics and Finance, 121, 121–152.
View in Google Scholar
Sundararajan, V., & Errico, L. (2002). Islamic financial institutions and products in the global financial system: Key issues in risk management and challenges ahead. IMF Working Paper WP/02/192, pp. 3–25.
View in Google Scholar
Udayasankar, K. (2008). The foundations of governance theory: A case for the resource-dependence perspective. Corporate Ownership & Control, 5, 164–172.
View in Google Scholar
Van Greuning, H., & Bratanovic, S. B. (2009). Analyzing banking risk: A framework for assessing corporate governance and risk management (3rd ed.). World Bank Publications.
View in Google Scholar
Van Greuning, H., & Bratanovic, S. B. (2020). Analyzing banking risk: A framework for assessing corporate governance and risk management. World Bank Publications.
View in Google Scholar
Wadsworth, M. (2020, February 12). Box ticking is bad for corporate governance. Financial Times. https://www.ft.com/content/60254af5-deaa-40bd-86c8-6655967fb7f3
View in Google Scholar
Winterbottom, J. (2014). Strengths of banking in emerging markets. International Banker. https://internationalbanker.com/banking/strengths-banking-emerging-markets/
View in Google Scholar
Woods, M. (2009). A contingency theory perspective on the risk management control system within Birmingham City Council. Management Accounting Research, 20(1), 69–81.
View in Google Scholar
Yanikkaya, H., Gumus, N., & Pabuccu, Y. U. (2018). How profitability differs between conventional and Islamic banks: A dynamic panel data approach. Pacific-Basin Finance Journal, 48, 99–111.
View in Google Scholar
Zein, I. M., Al-Ahsan, A., & Zakaullah, M. A. (2008). Qur’anic guidance on good governance. In A. al-Ahsan & S. B. Young (Eds.), Guidance for good governance: Explorations in Qur’anic, scientific and cross-cultural approaches (pp. 9–37). International Islamic University Malaysia and Caux Round Table.
View in Google Scholar
Zarrouk, H., Ben Jedidia, K., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46–66.
View in Google Scholar
Downloads
Published
Versions
- 2024-10-14 (2)
- 2024-03-29 (1)
Issue
Section
License
Copyright (c) 2024 Bchr Alatassi, Rekha Pillai
This work is licensed under a Creative Commons Attribution 4.0 International License.
