Research in Corporate and Shari'ah Governance in the Muslim World

Theory and Practice

Toseef Azid, Ali Abdullah Alnodel, Muhammad Azeem Qureshi, Toseef Azid, Ali Abdullah Alnodel, Muhammad Azeem Qureshi

• Publisher: Emerald Publishing Limited
• Year: 2019
• Print ISBN: 9781789730081
• eBook ISBN: 9781789730098
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Corporate governance is oriented around the values of fairness, transparency and accountability. The comprehension and measurement of these objectives is subject to the social and economic attributes of the corporate arena. Significant bodies of intellectual work have approached an assessment of corporate governance from perspectives such as differences in management practices, economic advancements, financial management, as well as regional and country constituents. But little is known about the Islamic perspective on the conceptualization, structure and practice of corporate governance. 

Research in Corporate and Shari'ah Governance in the Muslim World: Theory and Practice aims to address a critical disciplinary gap between Islamic theory and the practice of the corporate sector in the Muslim World. Adopting a critical approach, the book sheds light on the impact of corporate governance on the economies of the Muslim world. It presents an examination of:  

• Corporate governance in Islamic financial institutions 
• The efficiency of the Islamic Jurisprudence system 
• The common conceptual grounds of corporate structure in the Muslim World  
• The composition of business leaders in the Muslim World 

Using standard tools of analysis, the book presents a logically consistent synthesis of key variables with critical economic reasoning. It extends the conventional scope of corporate governance to form a basis for common understanding of how it operates in the Muslim world. The book will prove useful to those who research, study and practice in this field.

Chapter 1

Islamic Shari’ah and the Principles of Corporate Governance: An Introduction

Abdurrahman bin Abdulaziz Alaqil

Abstract

This chapter aims to provide the fundamental grounds in shari'ah for corporate governance. It searches the main sources of Islamic teachings around the main pillars for corporate governance and describes the basic norms built for the foundation of corporate governance in the Islamic framework. This chapter also provides numerous original evidences linking principles of corporate governance to the main objectives of shari'ah. In the end, this chapter presents the review of the included chapters in the current volume.

Keywords: Shari’ah; corporate governance; Quran; Sunnah; justice; accountability; transparency

Financial crises, administrative corruption, and the ensuing economic collapses in most societies have demonstrated the need for a system providing three basic pillars: justice, accountability, and transparency, through which controls and means of control are put into place, ensuring good governance and safeguarding the rights and interests of all parties involved in the firms. It would also limit the uncontrolled behavior of the executive management, and align the role of the board of directors with the objectives of the parties associated with these firms. This system is later known as the “corporate governance.”

In light of this situation, intensive studies in different economies and countries have sought to measure the impact of governance principles and applications in achieving the objectives for which the firm was established, and the extent to which the interests of different parties in firms are taken into account. It observes that good governance practices improve performance and productivity of firms, reduce administrative corruption, and thus enhance economic growth and welfare of the society. A number of studies have considered the issue of corporate governance in Islamic societies, but these were largely preoccupied with the practical aspects and did not link governance system with the values and principles of the early stages of Islamic societies that play a fundamental role in determining its primary objectives.

The economic collapses, financial crises, economic decline, and administrative corruption witnessed by most of the Muslim communities despite their endowments of huge physical and human resources led to the idea of compiling this volume. It aims at surveying the sources of Islamic legislation to examine the extent of the suitability of the contemporary governance applications for Islamic communities as well as their authenticity from the shari’ah perspective. This is very important for the Islamic communities because of the vital role Islamic legislations play in shaping the behavior of Muslims which makes these legislations a very influential factor in the proper application of corporate governance.

1.1. The Islamic Perspective of Governance

1.1.1. Human Nature

The basic inclination of humans is dominated by injustice and ignorance. Allah (swt) says:

Truly, We did offer Al-Amanah (the trust or moral responsibility or honesty and all the duties which Allah has ordained) to the heavens and the earth, and the mountains, but they declined to bear it and were afraid of it (i.e. afraid of Allah’s Torment). But man bore it. Verily, he was unjust (to himself) and ignorant (of its results). (33:72)

This means that the majority of people lack knowledge, and fairness; however, the believer is complemented by learning and justice, which are the origins of virtue, while others remain at the original position of ignorance and injustice. The human being was also described with miserliness and niggardliness.¹ The Prophet (PBUH) says: “Thou could not be a believer until thou love for your brother what thou love for yourself” (Sahih Al-Bukhari). Humans were also natured toward despotism.² This despotism becomes more evil with the gaining of more possessions. Shari’ah has set rules and regulations that govern human behavior and determine the bases for rights to realize justice among the people.

1.1.2. The Individual and the Group

A group is, in essence, a number of individuals who are tied together by common interests and objectives. Individuals cannot isolate themselves from their communities and live all alone. Rather, by their very nature, they are destined for participation and communication.³ The Islamic view toward the individual and the group is a comprehensive and balanced one. It pays attention to the group and individuals in the same way. It neither completely ignores the group as done in capitalism nor does it give importance to the group at the expense of individual as in socialism. Thus, each individual and group has their rights in Islam without any infringement on either party’s rights.

1.1.3. Sensing Social Responsibility

Islam bestows several responsibilities to the individual within the community. Among these are one’s responsibility toward oneself, one’s family, the community, and the universe as a whole. The individual is responsible as prescribed by the Islamic shari’ah. As the Prophet (PBUH) says:

Surely! everyone of you is a guardian and is responsible for his charges: The Imam (ruler) of the people is a guardian and is responsible for his subjects; a man is the guardian of his family (household) and is responsible for his subjects; a woman is the guardian of her husband’s home and of his children and is responsible for them; and the slave of a man is a guardian of his master’s property and is responsible for it. Surely, every one of you is a guardian and responsible for his charges. (Sahih Bukhari Vol. 9, Book 89, No. 252)

This responsibility is a great source of benefits in this world and in the hereafter. The responsibility of the community toward individual and the responsibility of the individual toward community are intertwined. Indeed, in this system there is a strong bond among believers, as the Prophet (PBUH) says: “Truly the faithful are to one another like components of a building – each part supports the other” (Muslim and Bukhari); and “the faithful are like a single body: If his eye suffers, then his constitution will suffer; and if he has headache, then his whole system will suffer” (Muslim).

1.1.4. Keeping the Rights of All Parties

The Islamic shari’ah seeks to preserve all rights that underlie the worldly and religious aspects of people’s lives. Thus, one of the shari’ah’s objectives is to maintain the five necessities, which are: religion, life, mind, offspring, and property. Legislations were made to maintain these five necessities, since life cannot be sustained without any one of them.

A basic tenet of the Islamic shari’ah is the sanctity of Muslim’s wealth. Allah (swt) says:

O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent. And do not kill yourselves (nor kill one another). Surely, Allah is the Most Merciful to you. (4:29)

The Prophet (PBUH) said: “Your blood and money are impermissible to you.”

1.1.5. Conflict of Interest

Without divine guidance, human being is self-centered and would infringe on other people’s rights and might even take over other people’s wealth through illegal ways. This leads to injustice and corruption in the society which would threaten the whole underlying system of the society. Hence, the Islamic shari’ah laid down the foundations and regulations which would govern people’s relations and transactions with the target of justice. The Islamic shari’ah strives to protect simultaneously public and private interests. However, if there is a conflict between them, then priority goes to the public interest.

1.1.6. Efficiency and Work Perfection

Islam urges for the perfection and articulation of work. The Prophet (PBUH) says: “Allah loves when one of you is doing something that he does it in the most excellent manner” (Al-Qaradawi, 1995); and Allah (swt) says: “And spend in the cause of Allah (i.e., jihad of all kinds, etc.) and do not throw yourselves into destruction (by not spending your wealth in the cause of Allah), and do good. Truly, Allah (swt) loves Al-Muhsinun (the good-doers)” (2:195).

1.1.7. Agent and Client

Cooperation among members of Islamic society is another teaching of Islam. Allah (swt) says: “Cooperate in righteousness and piety, and do not cooperate in sin and aggression. And fear Allah, indeed Allah is severe in penalty.” One aspect of this legitimate cooperation is called agency arrangement. The agency arrangement involves one person authorising another to accomplish a legitimate work for him. Allah (swt) decreed the agent–client law, whereby He allowed the human being to authorize someone to do things on his behalf. Both client and agent must be adult, sensible, and rationale one.

1.1.8. Concentration of Wealth/Power

In most countries, we observe concentration of wealth in the hands of a few rich families. In that way, due to the pressure of family, incompetent family members become managers, or following the status quo governance is deteriorating (Morck & Steier, 2005). However, Islam discourages the concentration of wealth in few hands. The Qur’an says:

Whatever spoils from the dwellers of the township Allah has bestowed on His messenger, shall belong to Allah, His messenger, messenger’s relatives, and to the orphans, the needy and the travelers in need; so that it may not become the property of the rich among you. Whatever Allah’s messenger gives you, take it and from whatever he forbids you, refrain from it. Fear Allah, for Allah is stern in retribution.” (59:7)

1.2. Islamic Principles of Governance

As discussed above, Muslims are required to protect and look after their property. To do this, the Islamic jurisprudence provides a framework of financial system based on the core principles of transparency, accountability, and justice. The Islamic jurisprudence also explains the issues related to partnership, contract, and agency that outline corporate governance.

1.2.1. Justice

1.2.1.1. Justice (Adala) in Islam. Adala is derived from al adal, which means “straightness”⁴; straightness is contrary to injustice and despotism. Another term related to justice is fairness (al qist), which in Arabic means straightness. It means there is no discrimination among the shareholders/investors regarding the position they have in the corporation and the nationality they belong to, and they have the right to question about the dividends and other matters. There is a consensus among the shari’ah scholars that without justice the whole system will be spoiled and corrupted. The famous Muslim social scientist Ibn Khaldun says that if people have no trust in the existing system and they assumed that whatever they are earning is not being protected by the existing system, so they will leave their hope and will not participate in the economic activities. In his opinion, this will have a negative impact on the growth and welfare of the economy and consequently there would be big economic and financial chaos in the economy. On the other hand, if they believe that their property and their earnings are protected by the system, then they will strive more for the earnings. This can only be done if justice prevails in the economy.

Allah (swt) says in the Qur’an: “Indeed, Allah orders justice and good conduct and giving to relatives and forbids immorality and bad conduct and oppression. He admonishes you that perhaps you will be reminded” (16:90); also, the Qur’an says:

So to that [religion of Allah ] invite, [O Muhammad], and remain on a right course as you are commanded and do not follow their inclinations but say, “I have believed in what Allah has revealed of the Qur’an, and I have been commanded to do justice among you.” Allah is our Lord and your Lord. For us are o...

Table of contents

• Cover
• Title
• Chapter 1 Islamic Shari’ah and the Principles of Corporate Governance: An Introduction
• Part I: Corporate Governance and Shari’ah Governance: Islamic Perspective
• Part II: Corporate Governance and Role of Islamic Audit and Accounting
• Part III: Corporate Governance and Islamic Financial Institutions: Theoretical Perspective
• Part IV: Cooperative Governance: Country Studies and Muslim World
• Index