Corporate Governance and Risk Management in Islamic Banking: Integrating Western Principles with Islamic Finance.

Abstract

The dynamic landscape of global finance has witnessed the growth of Islamic banking, which is characterized by its unique adherence to Shari’ah principles and ethical underpinnings. This thesis critically examines the evolving corporate governance (CG) landscape within Islamic banking, focusing on the integration of Western governance frameworks with the ethical foundations of Shari’ah compliance. Through a comparative analysis of CG codes across diverse jurisdictions, including the United Kingdom, Germany, Saudi Arabia, and Malaysia, the research develops a global governance framework that harmonizes profit maximization with the ethical mandates of Islamic finance. By synthesizing Western governance principles—primarily agency theory and shareholder wealth maximization—with the stakeholder-centric model inherent in Islamic finance, this research proposes a governance paradigm that enhances both operational efficiency and ethical responsibility in Islamic banks. The research is underpinned by a pragmatic and hermeneutic philosophical framework, acknowledging the complexities of governance across diverse cultural and regulatory environments. A mixed-methods approach—incorporating both qualitative and quantitative methodologies—offers a holistic analysis of corporate governance structures within Islamic financial institutions. The study is theoretically anchored in agency theory, stakeholder theory, and stewardship theory, which collectively provide insights into the balance between shareholder value maximization and broader ethical obligations in financial institutions. Adopting an integrated thesis approach, this research comprises three peer-reviewed paper- style chapters, two of which have already been published. Each chapter addresses interrelated aspects of CG and risk management in Islamic banking. The findings provide critical insights into the sector’s growth trajectory, the comparative effectiveness of governance structures, and the operational intricacies of Islamic banks. The study highlights the evolving interplay between Western governance frameworks and Shari'ah-compliant financial models, emphasizing the significance of Shari’ah supervisory boards as a distinctive governance feature of Islamic banking. A core focus of this research is the role of corporate boards in shaping risk management strategies, specifically examining the impact of integrating Western CG elements on Shari’ah compliance in Gulf Cooperation Council (GCC) Islamic banks. The study evaluates key governance mechanisms such as board independence, risk oversight, and the function of Shari’ah boards, assessing their implications for financial stability and compliance. A quantitative analysis employing Z-score methodology demonstrates that incorporating Western governance practices—alongside Islamic ethical tenets—can enhance financial stability while maintaining Shari’ah compliance. Ultimately, this thesis advocates for a hybrid corporate governance model that synthesizes Western CG frameworks with Islamic governance principles, offering a robust governance structure tailored to the unique ethical and financial imperatives of Islamic banking. This study provides practical recommendations for policymakers, regulators, and banking professionals, contributing to the global discourse on corporate governance and risk management. By proposing a governance model that aligns financial stability with ethical integrity, this research lays a foundation for future policy developments in the Islamic finance sector.