Sharī‘ah risk and corporate governance of Islamic banks
Abstract
Purpose
The purpose of this paper is to help directors, senior management, and stakeholders of Islamic banks understand sharī‘ah risk, a crucial consideration in the corporate governance of Islamic banks, and its impact on these banks.
Design/methodology/approach
This conceptual paper links dispersed insights drawn from the emerging body of sharī‘ah governance literature, and the guidance issued by the Basel Committee on Banking Supervision (BCBS), the Islamic Financial Services Board (IFSB), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) with new insights to clarify the sharī‘ah risk that Islamic banks face.
Findings
Sharī‘ah risk, an operational risk, poses a credible hazard to Islamic banks and their stakeholders. Possible consequences of sharī‘ah non-compliance include higher costs, financial losses, liquidity problems, bank runs, bank failure, industry smearing and financial instability. This study defines shariah risk, identifies credit, legal, compliance, market, and reputational risk that it may evoke, and categorizes its causes and events.
Research limitations/implications
Future research could empirically test the ideas posited. In this paper claims were substantiated by logic and examples.
Practical implications
The study devises an instrument for assessing sharī‘ah risk, and suggests measures for directors, senior management, and regulators to mitigate this risk.
Originality/value
This is the first study to focus on the implications of sharī‘ah risk, delineate examples of events and incorporate them within the BCBS operational risk causes, and develop a tool for measuring sharī‘ah risk.
Keywords
Acknowledgements
©2013 Karim Ginena. Thanks to Professor Ehsan Feroz and two anonymous reviewers for their insightful feedback, Wijdan Tariq and Bahnaz Ali for their team spirit, and Fatma Taha, Abdel Megied Ginena, and Ladan Davallow Ghajar for their continuous encouragement.
Citation
Ginena, K. (2014), "Sharī‘ah risk and corporate governance of Islamic banks", Corporate Governance, Vol. 14 No. 1, pp. 86-103. https://doi.org/10.1108/CG-03-2013-0038
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Authors