CORPORATE GOVERNANCE

Corporate Governance

Why corporate governance in Islamic banks has been more stable than commercial banks due global financial crisis?

Introduction

Companies need certain rules and regulation so that they can performance their operation in a standardize way. Without any stated guidance, company is unable to perform with different scenarios that occur in the economy. As there is a strong relationship between the economy of eth country and company performance, company usually set up a body that develops rules and regulation for the company according to the Laws. During financial crisis, companies who have appropriate corporate governance were able to keep check and balances on their accounts such as Islamic Banks. The purpose of this paper is to evaluate the reasons why corporate governance in Islamic banks has been more stable than commercial banks due global financial crisis.

The paper has been structure five chapters; the first chapter will be introducing the main concept of conventional and Islamic financial institutions perspective along with their Importance in financial institutions and risk management, Aims and objectives of this paper, Methodology. The second chapter will be Literature Review which will comprises of previous and existing conceptual, theoretical and foundational framework of corporate governance of the conventional and Islamic banks. Third chapter will be on reasons for Global financial crisis that will cover the Primary cause of the crisis from conventional institutions perspective, financial crisis from Islamic financial perspective and Conventional and Islamic suggested solutions of the financial crisis. In the fourth chapter, a comparative discussion will take place regarding Conventional corporate governance in UK during financial crisis, Islamic corporate governance in Saudi Arabia during financial crisis and last chapter will comprises of the results and conclusion.

Chapter 1: Overview of the Concept

Corporate Governance

The technique through which banks and companies direct, control and administer the operation. It comprises of laws and customs that impact on the direction along with the goals for which it has been governed. The corporate governance mechanisms have been developed in order to reduce inefficiencies that develop from adverse selection and moral hazard. Beside this, it is also utilize to monitor performance through enforcing suitable counter measure and addressing these measures with appropriate concept like integrity, transparency and lastly accountability.

In simple words, the concept of Corporate Governance is related to the distribution of rights and responsibilities within management. This management consists of board of directors, shareholders, minority shareholders and other stakeholders. The company with a good corporate governance means that its internal control system, disclosure of information in the annual reports and shareholders rights are well guaranteed and protected (World Bank).

Moreover, simple definition of corporate governance according to Ahmad and Gombak is that:

“Companies, local or international, are funded by shareholders, managed by the top management (CEOs), and overseen by the board of directors. Managing the relationship of these three groups is called corporate governance”.

Corporate Governance in Banking Sector

Particularly, the corporate governance should be operated differently in banking sector compared to other financial sector (Tandedinlin, Kaaro, Mahadath & ...