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Islamic Finance: The New Regulatory Challenge, 2nd Edition by Simon Archer, Rifaat Ahmed Abdel Karim

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Chapter 21

Specific Corporate Governance Issues in Islamic Banks

Simon Archer and Rifaat Ahmed Abdel Karim

1. INTRODUCTION

Prior to the recent financial crises there was already a growing interest in the corporate governance of banks (Caprio and Levine 2002; Charkham 2003; Levine 2003; Macey and O’Hara 2003). Not surprisingly, this interest has grown further following the crises (Dermine 2011; Kirkpatrick 2009; OECD 2009; Peni and Vähämma 2011).

Banks, like any other organisation, have a number of stakeholders, such as shareholders and debt holders, as well as boards of directors, competitors, and so on. This suggests that the need for a separate analysis of the corporate governance of banks is not self-evident and requires justification. However, the occurrence of the crises supports the view of those (e.g., Charkham 2003, 15) who argue: “Banks are different from the generality of companies in that their collapse affects a far wider circle of people and moreover may undermine the financial system itself, with dire effects for the whole economy.” Further, Caprio and Levine (2002) and Levine (2003) identify three characteristics that they claim warrant an independent discussion of the governance of banks. They argue that banks are generally more opaque than other financial institutions, which fundamentally intensifies the agency problem. Second, banks are exposed to heavy regulation. Third, the widespread government ownership of banks raises specific governance issues.

The debate ...

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