Corporate governance in Islamic banks - Essay Example

Research Proposal – Corporate governance in Islamic banks Background The types of strategic decisions taken by modern organizations depend on the targets set by their leaders (Blumenthal, 1994); in many cases the initiatives taken are proved to be ineffective as there is no provision for updates in a firm’s technology or policies – a fact that renders a firm weak towards its competitors. In this context it is suggested that ‘an organization can remain flexible so that it does not become committed to products, technology, or market approaches that may become outdated’ (Parnell, 2003, 16). On the other hand, there are issues, like the local culture and the market conditions that may lead firms to the need for developing autonomous strategic plans (Douglas et al., 1989, 440). It is at this point that the strategies used by firms in the international market can be differentiated; however, it seems that the policies adopted by firms that operate in the same market can present similarities (Gooderham et al., 1999, 507) – maybe under the influence of the common origin or the common environment – social, cultural and commercial. In accordance with the above, the examination of the strategies of firms that have similar cultural characteristics could be easy to be developed – however, when reference is made to a region which is characterized by strong turbulences in all industrial sectors – like the Middle East, then the above effort is made more challenging. Current study focuses on the examination of corporate governance in Islamic banks. There is no limitation to a specific country – rather reference is made to all banks that operate in accordance with the Islamic banking system – no matter if they also participate in the international market. Islamic countries are heavily based on the oil production; however, the services sector is also well developed; an indicative example is Saudi Arabia where the 74% of the local population has been found to work in the services industry (MSN Encarta, 2007); in another study it is noted that ‘in 2000 Saudi Arabia was ranked fortieth in terms of earnings from commercial services, with an income of 4.8 billion dollars’ (Wilson, 2004, 82). It is clear from the above that banking industry is well developed in Islamic countries; the specific sector has an important role in the management of profits generated from the oil industry – for this reason the identification of the various aspects of corporate governance used in Islamic banks is considered be extremely valuable for the identification and the evaluation of these countries economies – assumptions could also made on the importance of corporate governance on the development of performance of firms that operate in the banking industry. At the next level, the examination of corporate governance in Islamic banks would help to understand the potential contribution of these institutions in the development of the economy of Western economies – where branches of Islamic banks exist. In order to understand the value of this study it would be necessary to refer to the content of corporate governance. Various definition have been given for corporate governance. An indicative one is that of Pedersen (1999) who noted that ‘corporate governance - the mechanisms by which companies are controlled and directed - is a complex subject that consists of owner-manager relations, stakeholder relations, board structures and practices, management compensation, capital structure, company law, and other variables’ (Pedersen, 1999, 45); from another point of view corporate governance is characterized ‘as the top management process that manages and mediates value creation for, and value transference among, various corporate claimants in a context that ensures accountability to these claimants’ (Fort, 2000, 829); in the same context, corporate governance is described as a tool for enhancing the control of stakeholder on a specific organization (Buck et al., 2005, 42). It is clear from the above that corporate governance is usually developed in accordance with the interests and the perceptions of a firm’s leading team – usually the firm’s board; however, there are specific rules that needs to be applied. OECD (2004) presents the legal framework in which a firm’s corporate governance has to be developed. In the context of these rules it is stated that ‘all shareholders should be treated equally’ (OECD, 2004, 18). In the case of banks, the development of corporate governance practices may be differentiated compared to the organizations in other industrial sectors; the high risk involve in banking activities would be the major criterion for the rules including in the corporate governance scheme developed by firms in the banking industry (Cebenoyan et al., 2004, 19). 2. Aims and Objectives Current study focuses on the examination and evaluation of the corporate governance in Islamic banks; in this context, the study’s aims and objectives could be summarized as follows: a) identification of the aspects of corporate governance in modern organizations, b) examination of the role of corporate governance in banks – particular reference will be made to Islamic banks, c) presentation and analysis of the role of depositors in Islamic banks, d) explanation of the position of stockholders in Islamic banks, e) presentation and justification of the obligations of employees in Islamic banks, f) identification of the level at which the Sharia law is applied on Islamic banks – i.e. whether the principles of Sharia law are strictly followed by employees of all levels in Islamic banks. Finally, it will the benefits and pitfalls of corporate governance in Islamic banks will be clearly explained. 3. Research Methodology The research on the study’s subjects – as presented in the previous section – will be divided in three parts: a) the literature review, i.e. the review of all scientific material published on the issues under examination, b) the statistical data, i.e. data published by governmental and non – governmental organizations in relation to the study’s issues and c) the empirical research, which will be conducted through a survey; a questionnaire will be used for gathering the relevant data; the criteria on which the participants will be chosen and any other issue related with the empirical research will be discussed analytically in section 3c below. 3a. Literature Review The studies that have been published in the literature – including books, journals and other material of similar type – will be employed in the research over this study’s issues (Rogers, 2005). The studies that will be used in the literature review section of current paper will be chosen using specific criteria: a) only recent studies will be included in the literature – this means that studies that have been published earlier from 2005 will not be used in the literature part of this paper, b) only studies that are directly related with the study’s issues will be included in the literature – other studies – that do not refer directly to the study’s issues – would be included only if they were the only resource available for the evaluation of one of the issues under examination, c) studies that are not accepted by the scientific community – referring to the studies that include controversial views – will not be used in this paper; only views that have been adequately supported – in terms of the application of the rules of scientific validity – will be included in the literature section of current study. 3b. Research on statistical data As noted above, statistical data will be part of the material used in this study; the data included in this study should be related with the study’s issues, in other words they should help to the identification and the explanation of this study’s issues – as explained in the aims and objectives section above. An important criterion for the incorporation of the data in the study will be their validity; despite the fact that there is no way to examine the credibility of the data there could be a safe method to ensure their validity – only data published by governmental and non-governmental will be used in this study – however, specifically for the non – governmental organizations it should be checked whether their operation is legally justified – i.e. if these institutions are licensed in the context of the law of the particular country. 3c. Survey 3c1.Questionnaire In the context of the survey conducted for this study, a questionnaire will be developed – see Appendix; the questionnaire will include 12 questions which are followed by potential answers – the participants can choose among the existing answers the one that best express their perceptions on the issue discussed in the particular question. The questionnaire will be sent to the participants through the e-mail – if necessary it may be sent by fax also; a time limit of 5 days will be set to the participants in order to return the questionnaire completed. After receiving the completed questionnaire the researcher could start working on putting data on categories – the evaluation of the findings would take place at a future time – in accordance with the development of the various phases of the particular project. 3c2. Participants Employees in Islamic banks will be asked to participate in this study; the communication with the employees will be made via the phone or via the e-mail; at a first phase 65 employees will be informed on the survey required for the development of this study – in accordance with the success or not of the initial communication with employees a second attempt of contacting them will take place. Participants would not be less than 50. There will be no criterion for identification of participants apart from their work in the specific sector; in this context employees in all organizational positions will be asked to participate in the survey; age or gender will not be criteria for choosing participants; however, these characteristics could be used when categorizing the questionnaires – in order to produce a series of assumptions related with the willingness of participants to support the survey but also the differentiations in the perceptions of employees on the study’s issues in accordance with the specific characteristics – age, gender, position in the firm and so on. 3c3. Data analysis As noted above, the questionnaires gathered through the survey will be categorized using specific criteria like: a) the country of work, b) the age of the participant, c) the position of the participant in his organization, d) the gender of the participant; other criteria should be also added if they would be considered as necessary for the increase of the study’s credibility. The data included in the questionnaires will be critically analysed – in other words the analysis will be based on the literature and the statistical data retrieved through the relevant research – no software program will be used, as in the case of regression analysis (Broussard, 2006); on the other hand, since there will be a graphical representation of the results it will be easy for the reader to understand the general framework of the empirical research. 4. Time Framework The study will be developed in two phases: the first phase involves in the gathering of the necessary material; in the second phase the text of the study will be written. The first phase is expected to take up to 4 weeks; the specific period is going to be divided as follows: about 10 days will be spent on the study of literature and the research on published statistical data – in the context described in the Research Methodology section above – 2 days will be required for contacting the participants – through the e-mail – and sending the questionnaire. 5 days have been set as a time limit for the return of the completed questionnaires – these five days – i.e. while waiting the completed questionnaires – could be spent on further study on literature and the statistical data. The next step – after receiving the completed questionnaires – would be the analysis of the data. In this context, the following tasks should be developed: a) the data should be divided in accordance to a series of criteria – for example, the age and the position of participants in their organization, b) the data should be critically analysed using the views of the literature and the statistical data related with the relevant issues, c) the data should be represented through appropriate diagrams – i.e. graphics. All these tasks would require about 10 days to be completed. About 3 more days would be also required in order to review the material – of all types as explained above – identify most important parts – those that should be definitely included in the study and make a diagram for the development of the study –– hierarchy will exist in the writing of the study’s text. The writing of the study would take about 15 days; in other words, the completion of the study would require 45 days – with the possibility of a 5 days extension in case of any unexpected problem. 5. Facilities - resources A series of facilities will expected to be used for the development of current study; a computer with Internet connection will be necessary in order to search for scientific studies that have been released on the study’s subjects; the WWW will be also useful in order to search for statistical data and other scientific material published both by governmental and non governmental organizations – always in relation with the issues that are under examination in current study. A fax machine would be possibly required in order to communicate with organizations and retrieve necessary data – where there is no such material published through the WWW; the fax machine would be also required in order to communicate with those participants – referring to the individuals that will participate in the survey conducted for this study – that do not have access to the Internet or they do not wish to participate in the survey through the Internet. At a next level, the university library will be used for the development of the literature section of current study – books and journals that are relevant with the study’s subjects will be examined – studies that have been published on this study’s issues will be presented and critically analysed in the literature section. During the study the need for additional support – for example, discussion with researchers that have worked on the specific issue – may appear. The methodology and the resources that will be used for the development of the study have been set through current proposal; any potential changes on the methodology and resources will be made only if there are many signs that the framework set for the development of the study – through this research proposal – should be modified as it has become unachievable – one or more conditions have been changed without the consent or the knowledge of the researcher References Blumenthal, R., Kargar, J. (1994), ‘Successful Implementation of Strategic Decisions in Small Community Banks’ Journal of Small Business Management 32(2): 10-22 Broussard, L. (2006) Understanding Qualitative Research: A School Nurse Perspective. The Journal of School Nursing, Vol. 22, No. 4, 212-218 Buck, T., Shahrim, A. (2005) The Translation of Corporate Governance Changes across National Cultures: The Case of Germany. Journal of International Business Studies, 36(1): 42-69 Cebenoyan, A., Strahan, P. (2004) Risk management, capital structure and lending at banks. Journal of Banking and Finance, 28(1): 19-43 Etzioni, A. A. (1964), ‘Modern organizations’ Englewood Cliffs, NJ: Prentice-Hall Fort, T., Schipani, C. (2000) Corporate Governance in a Global Environment: The Search for the Best of All Worlds. Vanderbilt Journal of Transnational Law, 33(4): 829-859 MSN Encarta (2007) Saudi Arabia, available at http://encarta.msn.com/encyclopedia_761575422_6/Saudi_Arabia.html OECD Principles of Corporate Governance (2004), available at http://www.oecd.org/dataoecd/32/18/31557724.pdf Parnell, J.A. (2003). Five Critical Challenges in Strategy Making. SAM Advanced Management Journal, 68(2): 15-25 Pedersen, T., Thomsen, S. (1999) Business Systems and Corporate Governance. International Studies of Management & Organization, 29(2): 43-54 Porter, M.E., Millar, V.E. (1985), ‘How Information gives you competitive advantage’ Harvard Business Review July-August Rogers, R. (2005) Hierarchical qualitative research teams: refining the methodology. Qualitative Research, Vol. 5, No. 4, 437-454 Sandelowski, M. (2004) Using Qualitative Research. Qualitative Health Research, Vol. 14, No. 10, 1366-1386 Wilson, R., Al-Salamah, A., Malik, M., Al-Rajhi, A. (2004) Economic Development in Saudi Arabia. London and New York: RoutledgeCurzon Questionnaire 1. How long have you been working in the particular position? Less than six months More than six months More than 2 years More than 7 years 2. Are you aware of the principles of Sharia law especially in regard to the corporate governance of your organization? Yes No Partially 3. Do you think that the principles of Sharia law are strictly followed by your organization? Yes No Partially 4. Do you think that Islamic banking system is advantageous compared to the Western banking system? Yes No Partially 5. Who is most benefited by the use of Sharia law by Islamic banks? The depositors The stockholders The employees 6. Which is the major advantage of Islamic banking for depositors? Limitation of risk Participation in the organization’s strategic decisions Chances for profit even in periods of financial crisis 7. Which is the major advantage of Islamic banking for shareholders? Limitation of risk Participation in the organization’s strategic decisions Chances for profit even in periods of financial crisis 8. Which is the major advantage of Islamic banking for employees? Inter-organization support Limitation of risk for unfair dismissal High level of inter-organization communication and cooperation 9. Which are the main obligations of employees in Islamic banks? Use of principles of Sharia law in their daily activities, both in the organization and outside Be aware of the principles of Sharia law in regard to the banking arrangements 10. Are employees in Islamic banks given sufficient training on Sharia law – by your experience? Yes No It depends on each institution’s strategic plan 11. Which is the major disadvantage of the corporate governance in Islamic banks? The application of Sharia law is not always closely monitored Employees are not always aware of the principles of Sharia law involved in various financial arrangements There is no plan for support by the state 12. Would existing relationship between Sharia law and Islamic banking system be changed/ updated? Yes No Read More