Toward Understanding Islamic Corporate Governance Issues in Islamic Finance

Abstract

This article presents recent developments on legal issues associated with corporate governance in the Islamic finance industry based on a contractual pyramid. It presents the Islamic corporate governance (ICG) model and discusses its viability in a 21st‐century corporate structure. The model is based on the institution of Hisba, which demands proper and honest bookkeeping, disclosure, and transparency based on the Shariah principles of Islamic ethics. This article proposes a model of ICG that reconciles the objectives of Shariah law with the stakeholder model of corporate governance. It argues that this may be viable due to the emphasis that Shariah laws place on property and Islamic financial contractual rights. The article also discusses a model of ICG that is consistent with principles outlined by the Organisation for Economic Co‐operation and Development as well as Shariah law. Such a model of corporate governance would encourage capital formation, foster strong markets, and encourage judgment and transparency, which are all principles central to Shariah laws.

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