Hassan, Abul; Sohail, M. Sadiq; Munshi, Md Mah uzu Rahaman
A icle
Sha īʿah go e nance and agency dynamics o Islamic
banking ope a ions in he Kingdom o Saudi A abia
ISRA In e na ional Jou nal o Islamic Finance
P o ided in Coope a ion wi h:
In e na ional Sha i'ah Resea ch Academy o Islamic Finance (ISRA), Kuala Lumpu
Sugges ed Ci a ion: Hassan, Abul; Sohail, M. Sadiq; Munshi, Md Mah uzu Rahaman (2022) : Sha īʿah
go e nance and agency dynamics o Islamic banking ope a ions in he Kingdom o Saudi A abia,
ISRA In e na ional Jou nal o Islamic Finance, ISSN 2289-4365, Eme ald, Bingley, Vol. 14, Iss. 1, pp.
89-106,
h ps://doi.o g/10.1108/IJIF-12-2020-0252
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/302024
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Sha 
ıʿah go e nance and agency
dynamics o Islamic banking
ope a ions in he Kingdom o
Saudi A abia
Abul Hassan
Cen e o Resea ch Excellence o Islamic Banking and Finance,
King Fahd Uni e si y o Pe oleum and Mine als, Dhah an, Saudi A abia
M. Sadiq Sohail
Managemen and Ma ke ing, King Fahd Uni e si y o Pe oleum and Mine als,
Dhah an, Saudi A abia, and
Md Mah uzu Rahaman Munshi
School o Accoun ing and Law, Uni e si y o Glouces e shi e, Chel enham, UK
Abs ac
Pu pose –This s udy aims o in es iga e and poin ou he a ia ions o agency heo y in he con ex o
Sha 
ıʿah go e nance in Islamic banking ope a ions in he Kingdom o Saudi A abia (KSA).
Design/me hodology/app oach –The s udy ollowed he app oach o quan i a i e Co po a e
Go e nance Index (CGI) by compu ing he Go -index (Gompe s e al., 2003) and he Go -sco e (B own
and Caylo , 2004; Sa ieddine, 2009) o examine co po a e go e nance (CG) issues using p ima y as well as
seconda y da a. The p ima y da a was gene a ed om h ee ull- ledged Islamic banks (IBs) and nine
adi ional banks wi h Islamic banking wings, all ope a ing in he KSA. The app oach was o p o ide an
insigh in o he agency s uc u e in he con ex o Islamic banking, which may lead o a ade-o be ween
he con o mi y o Sha 
ıʿah (Islamic law) ules and p ocesses ollowed in sa egua ding he igh s o
in es o s.
Findings –The majo i y o he Islamic banking se ices ha a e su eyed in his s udy acknowledge he
signi icance o Sha 
ıʿah go e nance and ha e implemen ed he undamen al me hods, in con o mi y wi h his
sys em. Ce ain laws in Sha 
ıʿah go e nance p inciples pe aining o audi , con ol and anspa ency a e
epo ed.
P ac ical implica ions –The esea ch ou comes will be in aluable o IBs aiming o imp o e exis ing SG
p ac ices. I also has implica ions o IB manage s o design s a egies while complying wi h egula ions and o
p o ec he in e es s o all in es o s wi hou b eaching he e hics o Sha 
ıʿah.
O iginali y/ alue –This pape adds o iginal alue o he body o knowledge on agency ela ionship by
analysing he dynamics o agency heo y in he unique and complex con ex o Sha 
ıʿah go e nance o IBs o
hose o e ing Islamic p oduc s in he KSA. The esul s can be used as a aluable eedback o imp o emen o
Sha 
ıʿah go e nance in he banking sys em in he KSA and he Gul egion a la ge.
Keywo ds Agency dynamics, Boa d o di ec o s, Co po a e go e nance, Financial epo ing, Islamic banking,
Sha 
ıʿah go e nance
Pape ype Resea ch pape
Sha 
ıʿah
go e nance in
Islamic
banking
89
© Abul Hassan, M. Sadiq Sohail and Md Mah uzu Rahaman Munshi. Published in ISRA In e na ional
Jou nal o Islamic Finance. Published by Eme ald Publishing Limi ed. This a icle is published unde he
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h ps://www.eme ald.com/insigh /0128-1976.h m
Recei ed 7 Decembe 2020
Re ised 21 Decembe 2020
21 June 2021
8 Sep embe 2021
10 Sep embe 2021
28 Oc obe 2021
Accep ed 30 Oc obe 2021
ISRA In e na ional Jou nal o
Islamic Finance
Vol. 14 No. 1, 2022
pp. 89-106
Eme ald Publishing Limi ed
e-ISSN: 2289-4365
p-ISSN: 0128-1976
DOI 10.1108/IJIF-12-2020-0252
In oduc ion
Financial ins i u ions become exposed o agency issues when a sepa a ion be ween owne ship
and con ol causes senio execu i es o p io i ise hei own in e es s o e hose o sha eholde s
(Fama and Jensen, 1983). Any po en ial con lic o in e es ha may a ise should be looked in o,
elimina ed and managed app op ia ely. Each inancial ins i u ion should aim o main ain a
unc ion o compliance and moni o ules o compliance, egula ions and policies. The objec i e
mus be o se and en o ce a clea line o accoun abili y and esponsibili y. Such p ac ices will
lead o de eloping mechanisms ha will align wi h he in e es o manage s and sha eholde s,
leading o inc eased con ol o he inancial ins i u ion (Gompe s e al.,2003).
When o ganiza ional s uc u es de ia e om hei mains eam con en ional p inciples, he
agency ela ionships and co po a e go e nance (CG) issues become mo e complex (Kapopoulos
and Laza e ou, 2007;Hu and Izumida, 2008). Rele an ly, wo ene s o he Islamic inancial
sys em (IFS) comp ise solid go e nance and implan ed mo al alues. The mo al esponsibili y
and e hical sense in Islamic banks (IBs) a e an icipa ed o educe agency-led implica ions such as
lowe ing necessa y isk- aking ac ions (Alam e al.,2020). Unlike con en ional banks ha pe mi
manage s o ge in ol ed in ea ning coun less p o i s (Ramchand an e al.,2017), i is leas
encou aged in o ganiza ions ope a ing wi h Islamic mo al and/o e hical p inciples
(Ha-B ookshi e, 2015). A Sha 
ıʿah supe iso y boa d (SSB) is inco po a ed in Islamic inancial
ins i u ions (IFIs) which ac s as a supplemen a y bu i al elemen in hei CG p ocess (Nom an
and Ha on, 2019). In con o mi y wi h Sha 
ıʿah p inciples o educe he managemen ’s
oppo unis ic beha iou , he SSB ac s on behal o s akeholde s and ca ies ou he esponsibili y
o ce i ying and moni o ing all inancial con ac s and bank ac i i ies (Abdesalam e al.,2016).
Some o he p e ious s udies ha e ocused on mul ilaye and dual in e nal go e nance
s uc u es ha a ec he pe o mance o Islamic banks (IBs) and he SSB sys em (Mohammed
and Muhammed, 2017); CG and ea nings managemen nexus in he Islamic banking sys em
(Abdesalam e al.,2016); and impac s o CG on he pe o mance o IBs (Mollah and Zaman, 2015;
Nom an and Ha on, 2019). Howe e , empi ical esea ch on Sha 
ıʿah go e nance (SG) wi h espec
o agency heo y using a sample o he Middle Eas e n IBs is e y limi ed, and any p e ious
s udy using such a sample om he Kingdom o Saudi A abia (KSA) can ha dly be ound.
Gi en he abo e backd op, he majo aim o his pape is o examine heagency ela ionships
in he speci ic con ex o Islamic banking ope a ions in he KSA and hence make an impo an
con ibu ion o ill in he abo e-men ioned gaps in he li e a u e. Mo e clea ly, his s udy will
sc u inize he go e nance issues acing IBs in he KSA and hei e ec i eness in mi iga ing
p oblems associa ed wi h agency aims, and hence de elop an unde s anding o he
dis inc i eness o agency heo y in he Islamic banking con ex . By making a de ailed
examina ion o he ope a ions o IBs and hei cu en p ac ices, he s udy will build a heo e ical
base, which can hen be used o o e come he challenges aced in he applica ion o he agency
heo y in he con ex o Islamic inancial ins i u ions (IFIs). Fu he con ibu ion o his s udy is
made by in es iga ing he impac o go e nance p ac ices on ins i u ional pe o mance.
The majo aim o his pape is add essed by accomplishing ou speci ic objec i es:
(1) o sc u inize he applica ion o he agency heo y in Islamic bankingope a ions in he KSA;
(2) o h ow ligh on he exclusi i y o he agency p oblem in he Islamic banking
indus y a ising om he du y o manage s o abide by he Sha 
ıʿah and sepa a e
cash low and managemen igh s o accoun holde s;
(3) o pe o m an empi ical examina ion o he go e nance p ac ices and egula o y
amewo k o IFIs in managing he agency issues, ope a ions and pe o mance; and
(4) o de elop a subs i u e model o go e nance p ac ice o add ess he adi ional and
exclusi e agency issues in o de o secu e e u n on in es men , sa egua d he
in e es o accoun holde s and, a he same ime, uphold Sha 
ıʿah p inciples.
IJIF
14,1
90
The pape is o ganised in i e sec ions. The second sec ion conduc s a li e a u e e iew o
agency issues in he Islamic banking con ex and p esen s an o e iew o he banking sec o
in he KSA. Sec ion h ee p esen s he esea ch me hodology used in his esea ch. The nex
sec ion highligh s he empi ical esul s. Las ly, he i h sec ion d aws he conclusion and
discusses implica ions o u he esea ch.
Li e a u e e iew
Sha 
ıʿah go e nance issues
The Accoun ing and Audi ing O ganiza ion o Islamic Financial Ins i u ions (AAOIFI) has
issued se en s anda ds on he SG o IFIs. I has also issued se e al guidelines o membe s o
he SSB o ensu e membe s’independence and limi he numbe o c oss-membe ships. These
a e essen ial a eas o SG ha demand ample conside a ion om Islamic inance egula o s
wi h ega d o accoun abili y, anspa ency and compliance wi h Sha 
ıʿah p inciples. These
a e also impo an o encou aging public suppo on he e ique e and sanc i y o business
p ocesses o IFIs.
In he ma e o pe iodic e iew o compliance in SG p ocedu es, he ollowing s eps a e
adop ed: e iew p ocedu e planning, execu ing he e iew p ocedu es along wi h he
wo king pape p epa a ion, and las ly, documen a ion s ages in which conclusions and
epo s should be p esen ed o he sha eholde s (AAOIFI, 2017).
Agency issues in Islamic banking
Acco ding o G assa (2013), he Sha 
ıʿah go e ns all aspec s o Islamic banking and inancial
ins i u ions and adds alue o he p e ailing CG composi ion o IBs. Consequen ly,
compliance wi h he Sha 
ıʿah equi es ha speci ic CG p inciples be applied wi hin he
Islamic banking sys em. The pa icipa ion o SSB membe s in he CG pu sui s o an IB gi es
ise o some unique issues, such as con iden iali y, compe ency, independency, consis ency
and disclosu e. G assa e al. (2018) u he add anspa ency and epu a ion in he lis o
issues ha a ise due o he in ol emen o SSB membe s in he IB’s CG sys em. I may be
no ed ha SG in he ma e o disclosu e and epo ing e e s o he communica ion o
Sha 
ıʿah in o ma ion o all conce ned s akeholde s (AAOIFI, 2017).
The Qu ʾ
an p ohibi s ib
a(in e es ), gha a (unce ain y), maysi (gambling) and
indus ies such as hose ela ed o po nog aphy, po k p oduc s o alcoholic be e ages, and
hese equi emen s mus be aken in o accoun by he SSB membe s and IBs’p ac i ione s in
o de o comply wi h Islamic ju isp udence. Fu he mo e, SSB membe s ough o know he
de ails o inancial p oduc s o ensu e he compliance o IFIs and o he egula ed bodies (Sole,
2007). In hei empi ical s udy on p incipal-agen con lic s and isk- aking beha iou o IBs,
Fayed and Ezza (2017) indica ed ha he con lic s be ween he p incipal and agen a e
conspicuous in bo h IBs and con en ional banks mainly due o he con as ing and
s a is ically signi ican e ec o he igh s o sha eholde s on isk- aking beha iou .
Fu he mo e, hey ound ha he con lic be ween he p incipal and agen is inna e in
con en ional banks wi h ega d o hei impac on pe o mance.
Zainuldin e al. (2018) in hei s udy c i ically examined he agency heo y om he
pe spec i e o IBs and in eg a ed e hical conside a ions wi hin a p incipal-agency se ing.
They ound ha SG oo ed in IBs’business ac i i ies enables hem o gi e mo e impo ance o
e hical issues as compa ed o con en ional banks. This also implies ha IBs a e less likely o
ha e agency p oblems as compa ed o con en ional banks.
To add ess he agency issues, inancial ins i u ions ha e adop ed di e en go e nance
sys ems (Beasley, 1996;Bebchuk e al., 2004;Nom an and Ha on, 2019;Nawaz e al., 2021).
The p oblems associa ed wi h agency in Islamic banking ope a ions call o a sepa a e
in es iga ion. The e a e se e al easons o his. The i s is due o he di ec ela ion be ween
Sha 
ıʿah
go e nance in
Islamic
banking
91
he abb al-m
al ( inancie ) and he mud
.a 
ıb(en ep eneu ) in banking ope a ions, which
essen ially makes a dis inc ion be ween Islamic and con en ional ope a ions by widening he
pa i ion be ween owne ship and con ol in he unde lying agency heo y. An impo an
sou ce o sepa a ion a ises om he ac ha IBs’adminis a o s ha e o maximise he alue
o in es men s o sha eholde s in a Sha 
ıʿah-compa ible app oach (A che e al., 1998).
Mo eo e , he con ac s be ween he bank and he accoun holde equi e he bank o sha e
only p o i s, and no he losses o isks (mud
.

a abah accoun ), he eby p e en ing he accoun
holde om in e ening in und managemen . This migh p o ide an oppo uni y o IB
manage s o gain pe sonal bene i , which is de imen al o he in e es o accoun holde s
(Ka im and A che , 2002). The e o e, i is essen ial o ensu e an o ganiza ional s uc u e
which sepa a es he cash low igh s o accoun holde s and hei con olling igh s.
Secondly, conside ing he phenomenal g ow h o IFIs, s udies examining agency
dynamics in his indus y a e o pa amoun impo ance. Islamic banking ope a ions ha e
been in oduced in o e 50 coun ies, spanning bo h Muslim and non-Muslim na ions. I is
es ima ed ha he e was an inc ease in he agg ega e wo h o IFIs om US$2.19 n in 2018 o
US$2.44 n in 2019 (S anda d and Poo ’s, 2020). The Islamic inancial se ices indus y
con inues o g ow a 11.4% on a yea -on-yea basis, and i main ained i s g ow h momen um
in 2019. This g ow h was no ed o be mainly d i en by signi ican imp o emen s in he
Islamic banking and capi al ma ke segmen s (IFSB, 2020). Mo e impo an ly, e en du ing
he global economic down u n, he Islamic inancial se ices indus y managed o egis e a
posi i e albei slowe g ow h a e han he yea ending 2018.
In he con ex o he KSA, he banking sec o deposi s (bo h con en ional banks and IBs)
egis e ed a 2.9% g ow h in 2019 (IFSB, 2020). On he con a y, IBs obse ed a 2.3% g ow h
in hei deposi s in he same yea , alongside a 2.4% g ow h in hei asse s, esul ing in an
o e all 0.91% g ow h a e o he banking sec o in he KSA in 2019. Like hei con en ional
pee s, IBs in o he Gul Coope a ion Council (GCC) na ions such as Bah ain, Kuwai , Qa a
and he Uni ed A ab Emi a es (UAE) saw slow balance shee g ow h expansion in he
inancial yea 2018. The g ow h in deposi s in he GCC is no ed as ollows: Kuwai (4.2%),
Qa a (1%), he KSA (6.2%) and he UAE (4.2%). This g ow h in deposi s has happened o
he i s ime in he las i e yea s (S anda d and Poo ’s, 2020).
Thi dly, while published s udies (Hassan and Chachi, 2007;Sa ieddine, 2009;Alam e al.,
2020) shed ligh on se e al issues con on ing IFIs and p opose possible mi iga ing
mechanisms, e y ew o hose ha e examined he agency issues empi ically. Published
epo s by Choudhu y and Hoque (2006),Sa ieddine (2009),Nom an and Ha on (2019),Alam
e al. (2020), among o he s, hin ed a he exis ence o some in ensi ied agency issues in IBs bu
did no add ess he challenges aced by he indus y. In he con ex o he KSA, no such
s udies on agency dynamics a IFIs ha e been obse ed.
The banking sec o in he KSA
Regula o y bodies: The KSA has 12 banks. Th ee o hem a e ull- ledged IBs and he
emaining nine a e con en ional banks wi h Islamic wings. Two main egula o y bodies
o e see inancial ins i u ions in he Kingdom, no ably he Saudi A abian Mone a y Agency
(SAMA) and he Capi al Ma ke Au ho i y (CMA).
Since i s es ablishmen in 1952, SAMA has been playing a i al ole in he es ablishmen
and ad ancemen o he Kingdom’s inancial sys em. I s majo unc ions include issuing he
Saudi Riyal (SAR), he na ional cu ency o he KSA; wo king as he go e nmen ’s banke ;
egula ing comme cial banks; o e seeing he o eign exchange ese es o he Kingdom;
implemen ing mone a y policies o ensu e he s abili y o exchange a es; os e ing g ow h
and sa egua ding he soundness o he inancial sys em, among o he s.
In 2003, he CMA was o icially es ablished unde he Capi al Ma ke Law, pu suan o
Royal Dec ee No. M/30. This is a public ins i u ion wi h comple e inancial, legal and
IJIF
14,1
92

go e nmen al so e eign y, epo ing di ec ly o he C own P ince and Depu y P emie o he
Kingdom. The co e esponsibili ies o he CMA a e o con ol and de elop he capi al ma ke
o he Kingdom, o mula e and/o amend ules and egula ions om ime o ime, and
implemen he Capi al Ma ke Law ha aims o p o ide a conduci e in es men en i onmen .
The e olu ion o Islamic inancial p oduc s: The Al-Rajhi In es men Company i s
in oduced Islamic inancing h ough mu 
abah
.ah (cos plus ma k-up) ope a ions in 1985.
S a ing i s ope a ions om Riyadh, he Kingdom’s capi al and holding s ong Islamic alues,
Al-Rajhi ac ed as a o eign exchange p o ide and soon gained a epu a ion as a leading
p o ide o Islamic inancial se ices in he Kingdom. As o inancial yea 2017, Al-Rajhi
e ained i s p ominen posi ion in he coun y’s banking sec o , eco ding a 15.4% sha e o
he o al banking asse s in he Kingdom (Al-Rajhi, 2017).
Based on mu 
abah
.ah ansac ions, he i s Islamic mu ual und (In e na ional T ade
und) was in oduced by he Na ional Comme cial Bank (NCB) in 1987. By mid-1990, pay oll
disbu semen o employees was made h ough banks, and his measu e pa ed he way o
enhancing inancing ope a ions and educing isks o de aul . Du ing his pe iod, o he i s
ime, he NCB de eloped equi y guidelines o Sha 
ıʿah compliance. This was a majo
b eak h ough, as global index p o ide s began o adop hese guidelines.
Recen ly, in he capi al ma ke , he NCB b ough i s o al asse s unde managemen ―bo h
local and in e na ional ― o US$32bn as a inancial yea 2017. The NCB has g adually
posi ioned i sel as one o he bigges Sha 
ıʿah-complian comme cial ins i u ions globally. In
2017, he NCB eme ged as he only Saudi pa ne o he issuance o go e nmen
ṣ
uk
uk,
which amoun ed o US$9bn (NCB, 2018).
In 1999, he in e -bank ans e sys em (SARIE) was in oduced o u he educe
ope a ional isk and o acili a e se lemen s, in e -bank ans e s and clea ance ope a ions. In
2001, an inno a i e Islamic inancial ool called Taysee (which means acili a ion) was
in oduced o di ec ly p o ide liquidi y o cus ome s who a ail o loans in a Sha 
ıʿah-
compa ible model, based on he p inciples o mu 
abah
.ah.
Un il ecen ly, 12 banks o e Islamic p oduc s and o e 75 Islamic mu ual unds ope a e
in he Kingdom (NCB, 2018). A g owing numbe o cus ome s demand ha IBs p o ide
e idence o Sha 
ıʿah compliance in all hei banking and in es men ope a ions. Mos
cus ome s p e e Islamic banking and inancial se ices, whe eas a ela i ely smalle
segmen op s o adi ional banking when he o me is no a ailable (Hasan, 2010).
Resea ch me hodology
Fo his s udy, a su ey comp ising 38 ques ions was de eloped and sen o he 12 banks ha
o e ei he pa ial o ull- ledged Islamic banking se ices in he KSA on 12 No embe 2019.
The pu pose was o in es iga e he Islamic banking p ac ices and hei e icacy in esol ing
agency issues. The su ey add essed mul iple issues such as consciousness o CG p inciples,
e ec i eness o he Boa d o Di ec o s (BOD), e ec i eness o he SSB, he igh s o Islamic
accoun holde s (IAHs), audi ing, and p ecision and cla i y o inancial epo ing. Besides he
su ey, senio IB-adminis a o s in he KSA we e in e iewed in o de o ex ac necessa y
in o ma ion on CG p ac ices in IBs.
To examine he e ec o CG on Islamic banking pe o mance, he s udy ollowed an
app oach simila o he compu a ion o he Go -index by Gompe s e al. (2003) and he Go -
sco e by B own and Caylo (2004) and Sa ieddine (2009) o es ablish a quan i a i e index o
CG. This index compu es and agg ega es alue based on he ollowing c i e ia:
(1) sepa a ing he posi ions o he Chie Execu i e O ice (CEO) and he Chai man;
(2) unc ioning o an audi commi ee;
(3) nomina ed membe s o he CG commi ee;
Sha 
ıʿah
go e nance in
Islamic
banking
93
(4) ope a ing a code o CG;
(5) sepa a ing he in e nal con ol unc ion om in e nal audi depa men s;
(6) making pe iodic disclosu e o in o ma ion o he public;
(7) epo ing o he sha eholde s by ex e nal audi o s;
(8) ha ing ep esen a i es o IAHs on he boa d;
(9) sha eholde s appoin ing he SSB; and
(10) p o ision o epo ing by SSB o he sha eholde s.
These c i e ia ha e been iden i ied by nume ous published s udies and a e conside ed
e lec o s o sound CG (Ande son e al., 2004;B own and Caylo , 2004;IFSB, 2005a;
Sa ieddine, 2009).
As men ioned abo e, da a ega ding CG issues was collec ed om 12 IBs in he Kingdom.
Fo each bank, one poin was gi en in he index o each o he exis ing p inciples o CG.
Based on he ou comes, he o e all mean alue o he CG disclosu e index by dimension and
an o e iew o he co ela ions be ween hese a iables a e highligh ed in Tables 1 and 2.
Using he mean alues, he Islamic banking ope a o s in he KSA a e di ided in o wo
g oups: high and low go e nance g oups. Wi hin he o me g oup, banks ha e a highe
go e nance index alue while hose in he lowe g oup ha e lowe index alues. A numbe o
pe o mance measu es we e compu ed o each o he g oups wi hin an ins i u ion o assess
he linkage be ween CG and i s accomplishmen s. These p ocesses included indica o s o he
ope a ing pe o mance and size, i.e. employee size, asse alues, e enues ea ned and ne
p o i g ow h yea -o e -yea du ing he pe iod o s udy. The o he measu es included we e
indica o s o s ock pe o mance and app aisal comp ising ma ke capi aliza ion, 12-mon h
and 6-mon h index-adjus ed e u ns, p ice- o-ea nings a io (P/E) and p ice- o-book- alue
a io (P/BV).
Analysis and discussion
Table 1 epo s he o e all mean alue o he CG disclosu e index (CGDI) by dimension.
I shows he CGDI sco e o 51.8%, indica ing ha he CG disclosu e index is jus abo e he
a e age. Looking a he di e en dimensions, he able also highligh s ha he componen s o
he boa d s uc u e and SSB a e highe wi h sco es a 62 and 69% espec i ely, whe eas audi
commi ee, anspa ency and disclosu e p esen ed lowe sco es in he CGDI.
Table 2 p o ides an o e iew o he co ela ions be ween he a iables, as lis ed in he
esea ch me hodology sec ion abo e.
Dimension o co po a e go e nance CGDI (%)
Boa d s uc u e 62
Risk managemen 53
T anspa ency and disclosu e 46
Audi commi ee 45
Sha 
ıʿah Supe iso y Boa d (SSB) 69
In es men accoun holde s 36
O e all index 51.8
Sou ce(s): Au ho s’own
Table 1.
Co po a e go e nance
disclosu e index
(CGDI) by dimension
IJIF
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94
No. o
employees
To al asse
(TA)
Ma ke cap
(Mk Cap)
To al
e enue
(TR)
Re enue
g ow h
(Re G )
Ne
p o i s
Ne p o i s
g ow h (ne
p o i s G )
P ice
ea nings a io
(P/E)
P ice- o-
book- alue
a io (P/BV)
12-mon hs
e u n
TA 0.92** 0.921**
Mk Cap 0.89 0.78*
TR 0.95 0.99** 0.89
Re G 0.82 0.68 0.63 0.71
Ne p o i s 0.95 0.99** 0.81* 0.99** 0.72
Ne p o i s
G
0.50 0.26 0.53 0.52 0.07 0.45
P/E 0.44 0.63 0.27 0.59 0.20 0.58 0.45
P/BV 0.12 0.27 0.13 0.18 0.31 0.16 0.13 0.27
12-mon hs
e u n
0.48 0.56 0.43 0.54 0.60 0.53 0.01 0.84* 0.03
6-mon hs
e u n
0.54 0.65 0.45 0.60 0.69 0.63 0.15 0.85* 0.30 0.33
Sou ce(s): Au ho s’own
Table 2.
Co ela ions
Sha 
ıʿah
go e nance in
Islamic
banking
95
Se en execu i es and i e membe s o he SSB esponded o he p ima y su ey. Table 3
highligh s he o ganiza ional ea u es o he sample. Fo example, he mean sco e o he
sample in e ms o numbe o employees is 1,361, he mean book alue o asse s is
SAR139.11m and he mean ne p o i is SAR2.60m.
De elopmen o go e nance c i e ia
In he KSA, he e a e no sepa a e laws o IBs. All IBs he e o e con o m wi h he gene al laws
ha a e pe inen o con en ional banks; howe e , all con en ional banks in he KSA ha e
sepa a ely main ained Islamic banking windows. Thei asse s and accoun s a e no mixed
wi h hei con en ional banking asse s and accoun s in o de o emain wi hin he legal
egula o y en i onmen . Fu he mo e, addi ional s anda ds and egula ions a e en o ced
when necessa y. Zahe and Hassan (2001),Choudhu y and Hoque (2006) and Hassan and
Chachi (2007) ha e emphasized he esponsibili ies o bank adminis a o s and he alue o
go e ning policies and p ocedu es ha ecognise he impo ance o Islamic banking se ices.
All hese s udies obse ed he cen al bank o Saudi A abia’s adop ion o speci ic measu es o
manage agency issues and o p o ec he in e es s o IAHs. The SAMA ocuses on
implemen ing he egula ions o sa egua d he e u ns o IAHs and esol e he exclusi e
agency issues aced by IAHs.
Table 4 lis s he laws ha p esen ly egula e he unc ions o IBs in he KSA. A ho ough
examina ion o hese egula ions p o ides a ascina ing unde s anding o he in e ace be ween
agency issues and Islamic banking unc ions. In he KSA, IAHs a e gi en a supe io amoun o
secu i y, enabling hei isk le els o app oach hose o adi ional bank deposi o s, a he han
ha o in es o s. Howe e , only es ic ed in es men accoun s, which ea n sa e e u ns a e
pe mi ed. These di e ences e eal supe iso y disag eemen s be ween Sha 
ıʿah law and he
con en ional inancial ma ke s, la gely because Sha 
ıʿah law o bids he eceip o ixed e u ns
on money o in e es o all ypes. The e o e, he legal guidelines discussed abo e may be use ul
in p e en ing he exploi a ion o IAHs’ igh s. Manipula ions, i any, in he igh s o he accoun
holde s may lead he IBs o depa om hei main p inciples o isk-and- e u n sha ing,
sugges ing he possibili y o incong ui ies be ween p inciples and p ac ice.
S udies o Chong and Liu (2009) men ion ha he ac ual p ac ices o mos IBs de ia e
equen ly om hose equi ed by he Sha 
ıʿah codes. Fo ins ance, some IBs a e claimed o
ha e ixed paymen a angemen s (mu 
abah
.ah) in place, disguised as p o i -loss sha ing
mechanisms (such as mud
.

a abah and mush
a akah) because o he agency p oblem. In his
ega d, one o he app op ia e ways o ease agency di icul ies is o an o ganisa ion o ha e a
ull disclosu e policy. This would con ain in o ma ion on how he capi al is managed, he
pu pose o he p incipal and agen , and he p esen pe o mance o he o ganisa ion.
Ano he issue is he lack o e icien in o ma ion sha ing be ween he con ac ing pa ies.
Ex ensi e disclosu e o da a om he en ep eneu (agen /mud
.a 
ıb) ha adminis e s he
und on behal o a und p o ide (p incipal/ abb al-m
al) can help o lessen dis o ion and
assis in aking decisions. Some o he me hods ha may be unde aken o p e en
asymme ic in o ma ion a e: adop ion o compa ible incen i e con ac s, applica ion o bo h
sec o and inancial sc eening and supe ising p ocesses, implemen a ion o Islamic social
lea ning ac i i ies and adop ion o Islamic codes o beha iou (Abalkhail and P esley, 2002).
Mean Minimum Maximum
Numbe o employees 1,360.86 –4,554.00
Asse alues (in SAR m) 139.11 43.32 307.71
Ne p o i (in SAR m) 2.60 0.50 6.80
Sou ce(s): Au ho s’own
Table 3.
O ganiza ions’
cha ac e is ics
IJIF
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Theo e ical P oposi ion 4. The dis inc i e go e nance models ha p o ide oppo uni ies
o he sa egua ding o IAHs and con o m o he Sha 
ıʿah
p inciples would be mo e success ul han hose ope a ing
en i ely acco ding o p o i mo i es.
Conclusion
The s udy ocuses on IBs as a p oxy o he IFIs ope a ing in he KSA. I d aws a en ion o he
exclusi i y o he agency p oblems o igina ing om he ac ions o manage s (in acco dance
wi h he Sha 
ıʿah) and he pa i ion be ween cash low and he igh s o con ol o IAHs. The
s udy inqui ed in o he in luence o go e nance p ac ices o hese ins i u ions o elie ing
agency p oblems and wi h espec o ope a ions and accomplishmen s. The indings indica e
ha he majo i y o he su eyed IBs ecognize he impo ance o and he jus i ica ion o
inco po a ing go e nance p ocedu es. This is in ag eemen wi h he esul s o Sa ieddine
(2009), who ecommended some use ul ools o go e nance ha included he BOD, SSB and
in e nal con ol depa men s —wi h equi ed c eden ials and conduci e s uc u e — o
alle ia e agency issues. On he con a y, i is obse ed ha sho comings in he p ac ical
implica ions o go e nance s ill ail o esol e agency issues. Howe e , a s ic compliance is
ye o be accomplished.
The ou comes o his esea ch also highligh ha he IBs wi h a supe io alue in he index
o con en ional and idiosync a ic go e nance sys ems appea o be mo e ewa ding (in e ms
o p o i s, s ock pe o mance and s ock alua ions) han hei coun e pa s wi h lowe index
alues. This inding is also in ag eemen wi h a simila se o obse a ions o
Sa ieddine (2009).
In conside a ion o he ac ha he e a e only 12 banks ope a ing in he KSA, o which
only Al-Rajhi Bank, Al-Bilad and Alinma Bank a e ull- ledged IBs while he es o he banks
ha e Islamic wings, he in o ma ion used and he esponses ecei ed in his s udy we e o
limi ed na u e. Likewise, he examina ion o he ela ion be ween CG and i s accomplishmen s
has been subjec o a small sample o IBs in he KSA and cons ained o a single yea o
pe o mance me ics. The e o e, he esul s p esen ed and analysed in his esea ch a e no
en i ely ee om c i icism. I is sugges ed ha u u e s udies mus unde ake in-dep h
analysis in o he agency p oblems wi h espec o SG in he KSA. P esen s udies ha e no
in es iga ed hese issues comp ehensi ely. Fu u e s udies mus examine SG issues in he
KSA wi h la ge da a.
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Abou he au ho s
Abul Hassan, Ph.D., is an Associa e P o esso and Resea ch Scien is II a he In e disciplina y Cen e in
Finance and Digi al Economy, KFUPM Business School, King Fahd Uni e si y o Pe oleum and
Mine als, Dhah an, Saudi A abia. His a ea o esea ch in e es is in digi al ans o ma ion in banking
and Islamic inance.
M. Sadiq Sohail, Ph.D., is a P o esso a KFUPM Business School, King Fahd Uni e si y o Pe oleum
and Mine als, Dhah an, Saudi A abia. His ecen esea ch in e es is in he a ea o co po a e go e nance.
He is a p oli ic esea che and has published o e hund ed a icles in well-known jou nals. M. Sadiq
Sohail is he co esponding au ho and can be con ac ed a : [email p o ec ed]
Md Mah uzu Rahaman Munshi is pu suing his Ph.D. a Glouces e shi e Uni e si y, UK in he a ea
o co po a e go e nance.
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
www.eme aldg ouppublishing.com/licensing/ ep in s.h m
O con ac us o u he de ails: [email p o ec ed]
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