Toward a Comprehensive Theoretical Framework for Shariah Governance in Islamic Financial Institutions

The industry of Islamic banking is one of the fastest growing industries in the world with the annual growth rate of 17.6 per cent and total global assets of US$1.7 trillion in 2013 (Ernst and Young Report, 2014). Despite this remarkable growth, the issue of corporate governance in Islamic financial institutions (IFIs) has not received due attention in the academic as well as the professional fields of Islamic finance (Alnasser and Muhammed, 2012). It is worth noting that there are inherent differences between Islamic and conventional banking systems due to the fact that the functions of Islamic banks must be compliant with Islamic rules and principles (Shariah) which comes from the Holy Quran and Sunnah according to which the payment of interest, speculation and financing of specific illicit transactions such as pork and alcohol is prohibited (Bhatti and Bhatti, 2009). Islamic banks operate also based on the profit and loss sharing principle which stipulates that banks as well as the investors share the risks associated with business ventures (Beck et al, 2013). Nevertheless, the scope of Islamic corporate governance (ICG) extends beyond the conventional corporate governance (CCG) which operates largely in the interests of management and shareholders to include the spiritual aspects as well as the worldly needs of people. In other words while the western systems of corporate governance are based on self-interest, the ultimate goal in ICG is Maqasid al Shariah (objectives of Islamic law) (Bhatti and Bhatti, 2009).