Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

CHAPTER 7

Financial Fiduciary Governance

This chapter focuses on the corporate governance (CG) arrangements of institutions offering Islamic financial services (IIFSs) aimed at protecting stakeholders' financial interests.¹ Many IIFS CG issues are in common with those of their conventional counterparts. Others are distinctive. In particular, IIFSs offer depositors unrestricted investment accounts entailing that they share risks with shareholders but without a voting right. The chapter first reviews internal and external arrangements put in place by IIFSs to protect stakeholders' financial interests. It discusses shortcomings notably in terms of potential conflict of interest between shareholders and holders of unrestricted investment accounts. It then suggests a CG framework that combines internal and external arrangements to provide safeguards to unrestricted investment account holders without overburdening an IIFS's financial performance. The chapter uses a review of 13 IIFSs and regulatory information from countries where IIFSs have developed the most.

The chapter first reviews prevailing internal and external CG arrangements to protect stakeholders' financial interests in an IIFS, and identifies shortcomings. It then suggests measures to overcome these shortcomings.

PROTECTING STAKEHOLDERS' FINANCIAL INTERESTS: PRACTICE AND SHORTCOMINGS

Corporate governance arrangements are generally perceived as structures and procedures specific to the business organization. However, broader ...