Why Islamic Financial Institutions in Need for Corporate Governance Essay

Why Islamic Financial Institutions in Need for Corporate Governance Legal Framework - Essay Example Islamic finanical systems were particularly sucessful in the pre-colonial era but were methodologicaly replaced by conventional financial institutions during the colonial era. However over the last thirty or so years, Islamic financial institutions have been making a formidible comeback. Today Islamic financial systems have not only been established in Islamic states, but also internationally. Moreover, a number of conventional banks are also offering Islamic financial services evidencing the global acceptance of Islamic financial institutions. According to the World Bank, Islamic fiancial services are offered globally via 284 financial institutions in 38 countries which are Islamic and non-Islamic states. Like any financial institution, good and effective corporate governance is necessary for the effective and efficient functioning of the institution and for the protection of stakeholder interests. The stakeholder insterest are not always monetary in nature and can include ethics, values and/or religion. For Islamic financial institution, the amin interests of stakeholders is that the institution offering Islamic financial services comply with Shariah principles. Thus Shariah-compliant functioning in an Islamic financial insitution is the key component of corporate governance in Islamic financial institutions. ... However over the last thirty or so years, Islamic financial institutions have been making a formidible comeback. Today Islamic financial systems have not only been established in Islamic states, but also internationally. Moreover, a number of conventional banks are also offering Islamic financial services evidencing the global acceptance of Islamic financial institutions.1 According to the World Bank, Islamic fiancial services are offered globally via 284 financial institutions in 38 countries which are Islamic and non-Islamic states.2 Like any financial institution, good and effective corporate governance is necessary for the effective and efficient functioning of the institution and for the protection of stakeholder interests. The stakeholder insterest are not always monetary in nature and can include ethics, values and/or religion. For Islamic financial institution, the amin interests of stakeholders is that the institution offering Islamic financial services comply with Shariah p rinciples. Thus Shariah-compliant functioning in an Islamic financial insitution is the key component of corporate governance in Islamic financial institutions.3 The challenge for Islamic financial institutions in formulating good and effective corporate governance constructs is reconciling Shariah-compliant principles with the interests of all stakeholders.4 The stakeholder relationship in Islamic financial institutions is different from conventional financial institutions because profit and risk sharing principles change the nature of the stakeholder relationship.5 Moreover, the definition of property also changes the Islamic financial institution’s perspective on corporate