Adaptation of New Institutional Theory in Shariah Governance Practice, Structure and Process

Transcription

1. Md . Kausar ALAM, Yusuf KARBHARI, Md. Mizanur RAHMAN/ Journal of Asian Finance, Economics and Business Vol x No x (2020)xx-x 1 Print ISSN: 0000-0000 / Online ISSN 0000-0000 doi:10.13106/dddd.2020.vol0.no0.00 Adaptation of New Institutional Theory in Shariah Governance Practice, Structure and Process Md. Kausar ALAM1, Yusuf KARBHARI2, Md. Mizanur RAHMAN3 Abstract Purpose: The study aims to delineate Shariah Governance Framework (SGF) by applying the components of New Institutional Theory (NIT) to provide understanding of how Islamic banks theoretically influence Shariah Governance (SG) practice, structure, and process. Design/methodology/approach- As it is a conceptual paper, this paper has prepared based on an analytical approach to show how such institutions could provide a more effective system in relation to the contents, procedures, and practices for the multiple users in the SG process of Islamic banks. Findings- The paper critically explores the adoption of NIT for the development of SGF with its existing practice, structure and procedure. Utilizing NIT, a proposed theoretical framework has developed for exploring the SG through its major components i.e., ‘isomorphism’ and ‘legitimacy’. Essentially, this study illustrates a theoretical foundation for the practical implementation of SGF in Islamic banks. It is stated that NIT can offer a useful framework by which homogenous structures, comprising guidelines, standards, and practices become recognized and authorized as a satisfactory standard corporate exercise. Thus, the proposed theoretical framework would be beneficial in understanding and exploring the SGF. Conclusion: The application of this SGF could help to justify the key dimensions of NIT with its overall formation, function, and practices that might also help to attain legitimacy. Besides, the regulatory bodies can develop and maintain an effective SGF for its Islamic banking and finance industry by taking into account the organizational culture, individual country mythologies, and the different pressures applied by diverse authorities towards the proper implementation of SG strategies. This study only covers the Islami Banks. However, future researchers are suggested to consider applying NIT in other areas of Islamic finance, such as Islamic Insurance (Takaful), Islamic micro finance, non-bank financial institutions, and Islamic cooperative institutions. Keywords : Conceptual Framework, Islamic Banks, New Institutional Theory, Shariah Governance Framework. JEL Classification Code : M48 G15 G18; G21; G28; G38. 1. Introduction12 According to Global Islamic Finance Report (GIFR, 2018), the estimated amount of the world’s Islamic finance in 2017 was $2.4 trillion with an estimated exponential growth rate of 6.02%, making it one of the fastest emerging industries worldwide. The prevalence of Islamic finance is also evident by its accomplishment towards society (Abdelsalam et al., 2014; Farag et al., 2014; Platonova et al., 2016) and economic growth (Gheeraert, 2014; * Acknowledgements (if any): The authors would like to tahnks to Editor -in -Chief and anonymous reviewers for their comments and suggestions for the improvement if the manuscript. 1 First Author and Corresponding Author. PhD, Faculty of Economics and Management, Universiti Putra Malaysia, Selangor, Malaysia [Postal Address: 19/B, Flat Sri Serdang Block 4, Serdang, Selangor, 43400, Malaysia] Email: kausarflorence@gmail.com 2 Prof. Dr. Yusuf Karbhari, Reader in Accounting, Department of Accounting and Finance, Cardiff Business School, Cardiff University, Gheeraert and Weill, 2015). In particular, the rapid development of Islamic Financial Institutions (IFIs) has also highlighted the need for Islamic finance strategies to fit into the national and worldwide financial structures (Archer et al., 2010). In particular, the rapid development of Islamic Financial Institutions (IFIs) has also highlighted the need for Islamic finance strategies to fit into the national and worldwide financial structures (Archer et al., 2010). AbuColum Drive, UK. CF10 3EU.Email: karbhari@cardiff.ac.uk 3 Dr. Md. Mizanur Rahman, Associate Professor, Department of Business Administration, Metropolitan University Sylhet, Bangladesh. Email: mrahman@metrouni.edu.bd ⓒ Copyright: The Author(s) This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://Creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted noncommercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
2. 2 First Middle LAST , First Given FAMILY, First Given SURNAME / Journal of Asian Finance, Economics and Business Vol x No x (2020)xx- x Tapanjeh (2009) also observed that any Islamic system devoid of a suitable moral and ethical foundation is unlikely to succeed in influencing a comprehensive governance system. As IFIs are formed entirely on Shariah principles, the activities of these institutions must be in absolute conformity with the religious doctrine. Therefore, IFIs have to ensure the Shariah compliance in their overall functions. Prior researchers have mentioned that Shariah compliance is the ultimate goal of Islamic banks (Ahmad and Haron, 2002; Metawa and Almossawi, 1998; Rashid et al., 2014) and that religious compliance provides the legitimacy and stimulates the confidence to both shareholders and stakeholders (Karim, 1990a; 1990b). For example, Ullah (2014) observed that customers of Islamic banks in Bangladesh were attracted to them mainly due to the banks’ Shariah compliance and not because of the banks’ capacity to earning profits. Therefore, governance from an Islamic perspective, albeit parallel to the Anglo-American model, is much more sophisticated (Karbhari et al., 2018). In fact, the supervision and management of religious compliance require a complex set of governance structures to ensure that Islamic banks are providing the religious and social legitimacy that stakeholders require. In principle, it is the boundaries specified by Islamic principles and the workings of a Shariah Supervisory Board (SSB)3 that constitute the main mechanisms of a Shariah Governance Framework (SGF). Particularly, from a stakeholder’s perspective, SG plays a significant role similar to conventional Corporate Governance (CG), which is used to estimate the extent of compliance of operational activities to ensure the maintenance of religious and ethical observance of Islamic banks. The principles prescribed by Islam differ markedly from conventional governance systems, ; there are widespread normative (Islamic spiritual philosophies and values) and critical reviews in relation to the uniqueness of Islamic governance frameworks (Lewis, 2005; Rahman, 1998; Choudhury and Hoque, 2006; Kamla et al., 2006; Abu-Tapanjeh, 2009; Williams and Zinkin, 2010). In articulating SG 3 The AAOIFI was established specifically in 1991 to serve the needs of the Islamic finance industry. The AAOIFI defined the SSB as “an independent body entrusted with the duty of directing, reviewing, and supervising the activities of IFIs for the purpose of Shariah compliance and issuing legal rulings pertaining to Islamic banking and finance” (AAOIFI, 2005). Moreover, IFSB-10 has also defined “as a particular body set up or employed by the IFIs with the combination of Shariah scholars to implement and apply its SG structures” (IFSB, 2009). guidelines, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB)4 are the two main organizations that prescribe the Shariah guidelines and standards. The difference between these two organizations is that the IFSB is more connected with regulators; whereas, the AAOIFI focuses at the individual institutional level (Hasan, 2011). While the guidelines and governance standards of those organizations are not mandatory, the principles embedded in those documents are taken into consideration by policy makers and institutions alike. In this study, it was assumed that New Institutional Theory (NIT) which was proposed by (Meyer and Rowan, 1977; Zucker, 1977; DiMaggio and Powell, 1983; Scott, 1995) can offer a suitable theoretical basis. However, with the assumption of NIT, it is possible to substantiate the impacts that stimulate persistence and legitimacy of Islamic banks’ structural practices. These may include components such as social environments, cultures, rules, customs and history, and monetary policies, whilst recognizing that resources are also significant (Baumol et al., 2009; Bruton et al., 2010; Hirsch, 1975; Lai et al., 2006; Roy, 1997). According to NIT, the societal, political, external, and financial pressures affect corporate policies and managerial decision-making as organizations intend to implement proper practices or legalize their practices in the eyes of all other stakeholders (Jennings and Zandbergen, 1995; North, 1990). NIT is also acknowledged to be a theoretic posture that stresses rational myths, isomorphism, and legitimacy (Scott, 2014). Intuitively, NIT emphasizes imitation rather than enhancing resolutions, practices, and structures; because institutions look to similar institutions for signals to suitable behavior (Marquis and Tilcsik, 2016). In effect, NIT describes ‘how’ organizations are responsible socially in relation to the nature of practices. Simply put, NIT specifies the guidelines for connecting individuals and institutions. However, the three commonly used theories, such as ‘agency’, ‘steward’, and ‘stakeholder,’ focused the ownership control, interest of the managers, and benefit of the other parties, but it is unexpected that 4 Started in 2003, IFSB is similar to AAOIFI and is a standard setting organization dedicated to establishing the structure of IFIs. The key objectives are to outline policies to guide the IFI in Shariah compliance in its financial and banking business. From inception, IFSB has published a total of 30 standards, comprising of 22 guiding principles, 6 guidance notes, and 2 technical notes for the development of IFIs (IFSB, 2019).
3. Md . Kausar ALAM, Yusuf KARBHARI, Md. Mizanur RAHMAN/ Journal of Asian Finance, Economics and Business Vol x No x (2020)xx-x 3 none of the theories outline the roles, functions, and powers of agents, stewards, stakeholders, and other related parties by highlighting accountability, independence, competence, confidentiality, transparency, and disclosure by outlining the SG structure, procedures, and rules (Hassan, 2012). In this regard, in order to overcome this limitation, this study has adopted NIT, which describes the operational guidelines and procedures for an organization. Unsurprisingly, prior research on NIT has paid attention to research in the field of conventional corporate governance (CG) (Yoshikawa et al., 2007; Chakrabarty and Bass, 2014; Morrison, 2014). For example, corporations have developed their own governance strategies to appear rigorous rather than t o comply with strict guidelines (Okhmatovskiy and David, 2012), developed voluntary self-ruling strate gies to anticipate the application of obligatory ones (Glachant, 2007, Delmas and Montes-Sancho, 2010 ), and strengthened their societal image to move at tention of stakeholders from the field of criticism ( McDonnell and King, 2013). However, these studies have failed to include a detailed theoretical exposition of the SGF of IFIs or have offered only negligible discussion. In our perspective, NIT offers a useful framework for understanding how existing practices and standards amongst similar conventional organizations influence the way regulation is interpreted and implemented. Therefore, it is important to adopt NIT in the area of Islamic banks and their SG practices, structures, and processes, not only to a large global Muslim following, but also to the wider international financial community. To the best of our knowledge, there is no prior study that has explored an Islamic SGF through the lens of NIT. From this standpoint alone, this is our study’s main contribution adding a novel dimension to the literature in several ways. First, because it was focused on the key influences of SG mechanisms in the light of NIT, our study provides insight into how Islamic banks theoretically influence the development of SGF and how the working methods, content, procedures, and practices of SG benefit and affect the multiple stakeholders associated with Islamic banks. Second, because SG reveals an entwined relationship between governance and regulation, examining this relationship through an NIT lens helps identify the missing link between how Islamic banks impact regulation in society and in what manner they ensure religious compliance. Third, since NIT emphasizes attaining legitimacy as the main aim for institutions to safeguard their existence (Meyer and Rowan, 1977), it is obligatory that they abide by the norms and belief structures dominant in the firm’s setting (Scott, 1995; Meyer and Rowan, 1977; DiMaggio and Powell, 1983) because, organizational isomorphism in terms of the structural and procedural achieves organizational legitimacy (Dacin et al., 2002; Suchman, 1995). Therefore, this new institutionalism tactic is pertinent to this present study from the perspective of examining what organizations can do in order to realize how they may develop and formulate their SG frameworks. Thus, by considering isomorphic behavior, our study extends the literature on Islamic banking and finance as it offers a theoretical basis for understanding the structure of SG implemented by Islamic banks. In sum, this study explores the intricate relationship between NIT and SGF and argues that the acceptance of SG, as a management tool, can be explained by the concept of the coercive, mimetic, and normative aspects of organizational isomorphism (DiMaggio and Powell, 1983), organizational dependency (Pfeffer and Salancik, 1978) and organizational legitimacy (Ashforth and Gibbs, 1990; Scott, 2014). The next section provides a discussion relating to NIT and outlines the main components of SGF. Section 3 describes the main requisites of NIT and highlights the application of NIT to Islamic banks. Section 4 provides a discussion of the conceptual framework of SG based on NIT. The final section offers the conclusions of the study and highlights policy implications and directions for future research. While this has not been deliberated on in prior SG and NIT literature, it was believed that resource mechanisms within a SGF might influence institutions to implement practices to achieve quality compliance. 2. Literature Review 2.1 New Institutional Theory The foundations of NIT were first brought to attention by researchers such as Meyer and Rowan in their influential work after 1970s on the impact of education as an organization (Meyer, 1977; Meyer and Rowan, 1977). Scott and Meyer’s investigation on the significance of educational institutions for social and symbolic perceptions regarding the characteristics of education (Meyer and Scott, 1983), Zucker’s research on the area of established corporate life (Zucker, 1977), and DiMaggio’s and Powell’s works on the establishment of organizational arenas (DiMaggio and Powell 1983) all provided a firm foundation for NIT. Generally, the theory and investigation into NIT has attracted researchers to investigate issues on CG
4. 4 First Middle LAST , First Given FAMILY, First Given SURNAME / Journal of Asian Finance, Economics and Business Vol x No x (2020)xx- x structure, accounting standards, heterogeneous policies of large institutions, the enlargement of the European Union, public operation strategies in US corporations, and on human rights legislation (Powell, 2005). In principle, NIT is based on the political and resilient features of societal structure as it reflects the procedures through which structures, comprising systems, norms, routines, and guidelines become recognized as influential rules for social conduct (Scott, 2014). Diverse mechanisms of NIT also illustrate how these components are formulated, diffused, implemented, and modified over time and space; and how they fall into decline. For example, Scott (2014) has emphasized that organizations are societal constructs that have gained stronger resilience and comprise of cultural-cognitive, normative, and regulative components that, together with accompanying resources, deliver constancy and meaning towards community life. Expanding this discourse, DiMaggio and Powell (1983) have advanced the work of Meyers and Rowan’s (1977) work on isomorphism to the organizational level (i.e., micro level) from the social level (macro level). They defined organizational isomorphism on the basis of Hawley’s (1968) explanation as a compelling procedure that compels one component in a population to be similar to other components within a similar environment. They outlined three isomorphic procedures, such as ‘coercive’ to attain legitimacy, ‘mimetic’ to eliminate uncertainty and ‘normative,’ for professionalization. H owever, ‘coercive’ isomorphism originates from the external pressures of the organizational changes or from the general cultural expectations along with pressures from large groups, depositors, accounting policy setting agencies, regulators, stock exchanges, and others (DiMaggio and Powell, 1983; Carruthers, 1995). In addition, ‘mimetic’ pressures are said to be created due to the uncertainty which forces institutions to follow and implement the more successful organization’s activities (Carruthers, 1995). Apart from this uncertainty, lack of clear objectives, limited diversity of institutions, limited proper models, ambiguous environment, and inappropriate structures, systems, and procedures are also the causes to create mimetic pressures (DiMaggio and Powell, 1983). To become successful, institutions are compelled to apply the same structures, systems, and procedures of successful institutions. Conversely, the ‘normative’ isomorphism signals how a group of members from similar professions run their activities in a similar manner in diverse institutions (Carruthers, 1995), while, the professions rely on the ‘normative’ procedures and attempt to form cultural rules that are relevant to their goals and opinions (Scott, 1995). Moreover, Granlund and Lukka (1998) highlighted that pressure might also arise from financial reasons, coercion from organizations, normative resulting from proper social behavior, and the intention to mimic superficially successful practices. Table 1: An overview of new institutional theory framework Pillars Regulative Normative Cultural-Cognitive Basis of compliance Expedience Social obligation Basis of order Regulative Rules Binding Expectations Taken for Grantedness understandings Consultative schema Mechanisms Coercive Normative Mimetic Logic Instrumentally Appropriateness Orthodox Indicators Certification Accreditation Common beliefs Shared logics of action Isomorphism Affect Rules Laws Sanctions Fear Guilt/Innocence Shame/honor Certainty/ confusion Basis of legitimacy Legally sanctioned Morally governed Comprehensible Recognizable Culturally supportive Shared Source: Scott (2014). In this context, Scott (2014) suggested three main pillars of organizations (shown above in Table 1), as the regulative, normative and cultural-cognitive. Regulative pillar emphases regulations and related procedures (North, 1990) while normative pillar focuses on the prescriptive, evaluative and mandatory
5. Md . Kausar ALAM, Yusuf KARBHARI, Md. Mizanur RAHMAN/ Journal of Asian Finance, Economics and Business Vol x No x (2020)xx-x 5 measurements of community life (Scott, 2014) and cultural-cognitive pillar recommends that the mutual ideas which establish the nature of social authenticity generate the surroundings over which sense is produced (Scott, 2014). These three pillars have been conceptualized alongside three other measurements, which are obligation (the step to which performers are liable to follow), accuracy (the step to which guidelines specify obligatory conduct), and delegation (the scope to which third bodies have been approved power to implement guidelines). Here, the regulatory procedure is anticipated to show high standards in these dimensions; whereas, the normative system displays lower standards. The three-pillar structure demonstrates how important matters and operations are established (Fligstein and Brantley, 1992). Basically, these three pillars provide the three interconnected but distinct foundations of legitimacy (Scott, 2014). Besides, these pillars provide a base for study when it moves towards institutional decision constructing (Grosse and Trevino, 2005). 2.2 Shariah Governance Framework SG is a system that informs Islamic institutions on how to follow principles in directing business activities in accordance with the rules prescribed in religious doctrine. The IFSB (2009) defined SG as a system of structural procedures, where IFIs assure Shariah compliance throughout its operational activities. In addition, the central bank of Malaysia, namely Bank Negara Malaysia (BNM) (2010), also outlined the SGF of an Islamic financial institution to comprise of: (i) the BOD oversight on overall operational activities of IFI’s regarding the Shariah compliance aspects; (ii) a SSB with skilled members who are capable of outlining the issues of Islamic finance and deliver rigorous judgements; (iii) effective management accountabilities to provide sufficient properties and skilled employees to support every function related to the execution of SG, ; (iv) an internal Shariah review directed in a constant process; (v) a continuous Shariah audit, at least once annually, confirming that the IFIs’ main functions and operational activities abide by Islamic principles; (vi) a risk management procedure to recognize all probable Shariah doubtful risks and, where suitable, corrective actions that are required to be taken to lessen risk; (vii) an in-house research unit to perform Shariah research; and (viii) issuance and propagation of Shariah resolutions to key stakeholders. As the ultimate goal of SGF is Maqasid al-Shariah (or the objectives of Shariah), it is believed that a sound SG would inevitably lead institutions operating in the Islamic finance landscape towards achieving its ultimate aim. To achieve this goal, Islamic banks should implement Shariah principles with regards to improving the quality of Shariah compliance and for this reason, effective SG guidelines are required. Arguably, it is SSB, which is the embodiment of an SG paradigm. This SSB plays a significant role in ensuring Shariah principles within the activities of Islamic banks and financial institutions. Conversely, shareholders also have the right to participate in the resolution process and strategy making structure to safeguard the benefit of stakeholders than merely focusing on the maximization of profit. Therefore, the overall tactic of a SG structure emphasizes that both the ex-ante and ex-post procedures are important fragments of a reliable governance system where the ex-ante procedure comprises the deliberation of Shariah resolutions and scrutinizing for Shariah compliance is essential before announcing a product into the market (Kasim et al., 2013). After offering the products and services, IFIs undertake an ex-post procedure, namely, an in-house Shariah review to efficiently accomplish Shariah compliance risk that may result at any time. In describing the functions, guidelines, and standards, several international standard-setting organizations have been established, but the two renowned international institutions are AAOIFI and IFSB that assist IFIs to achieve their objectives. In general, the AAOIFI standards tend to cover the accounting treatments of Islamic finance and, to date, AAOIFI has published a total of 109 standards containing 35 accounting standards, 57 Shariah standards, 9 governance standards, 6 auditing standards, and 2 code of ethics (AAOIFI, 2019). In reality, the notion of “effective governance” places emphasis on organizations to fulfill their fiduciary duties and responsibilities to the foremost stakeholder group (i.e., the shareholders). This is exemplified in governance strategies and tactics of management for achieving CG efficiency (Brennan and Solomon, 2008; Davis, 2005; Parkinson, 1993). As a result, prior studies in accounting and finance have concentrated on this aspect of governance where responsibility had been illustrated but only as corporate responsibility towards shareholders (Brennan and Solomon, 2008). This was demonstrated in previous empirical studies relating to the BOD and its role in aligning management interest with those of shareholders over its supervision and monitoring role (e.g. Dalton et al., 2003; Johnson et al., 1996; Mizruchi, 1983). For these reasons, information disclosure to enhance transparency becomes even more critical in Islamic banking.
6. 6 First Middle LAST , First Given FAMILY, First Given SURNAME / Journal of Asian Finance, Economics and Business Vol x No x (2020)xx- x 3. The Adoption of NIT in Shariah Governance Practice, Structure and Process Based on the pioneering studies of (Meyer and Rowan, 1977; Zucker, 1977; DiMaggio and Powell, 1983; Scott, 1995), it was recognized that NIT to be acceptable for the study of SGF in Islamic banks. The fact that attention is political and imitates the comparative control of structured benefits (DiMaggio and Powell, 1991) or the underpinning of the difference between results and procedures is irrelevant (Covaleski et al., 1996). Drawing on NIT and, in particular, the notion of isomorphic behavior, the motivation of this paper is to draw a theoretic portrayal of the structure of SG by examining the relationships between NIT and SGF. Therefore, the adoption of SGF as a management tool can be explained by the concept of the coercive, mimetic and normative aspects of organizational isomorphism (DiMaggio and Powell, 1983), organizational dependency (Pfeffer and Salancik, 1978), and organizational legitimacy (Ashforth and Gibbs, 1990; Scott, 2014). NIT is used to outline the SG structure, and policies for the development of better policies, systems, and structures. This application is to enhance the practices’ quality, image, performance, and legitimacy and to increase the confidence of all stakeholders of the Islamic banks. In outlining SG structure, NIT delivers a beneficial structure (a combination of isomorphism, and legitimacy) for realizing the social, economic, and legal effect on the countries and institutions, and their tactical replies to those effects (Covaleski and Dirsmith, 1988; Carruthers, 1995; Brignall and Modell, 2000; Khadaroo, 2005). It also suggests that the components of proper structures, strategies, and processes are usually generated from the mythologies relating to suitable social and economic customs (DiMaggio and Powell, 1983). In this case, SGF also provides the overall guidelines, strategies, and procedures for Islamic banks to carry out, monitor, and control their activities. SG structure ensures fairness to all stakeholders to be informed about the improvement of transparency and accountability (Majeed et al., 2015) by stimulating Islamic principles (Mittal et al., 2008). However, though the companies are compelling to follow the regulatory rules, organizational environment or diversified organizational actions or strategies but they can reply towards the institutional pressures in a diversified way (Oliver, 1991; Greenwood and Hinings, 1996). In this regard, Oliver (1991) also theorized that institutions reply to organizational pressures that influence them by applying the strategies of acquiescence, avoidance, defiance, and manipulation. The acquiescence tactic signifies that organizations accept and follow organizational pressures by altering their individual structures and processes to adopt broadly acknowledged practices and processes. Besides, institutions can avoid the requirement to follow organizational pressures by covering their noncompliance. After all, only few corporations, at their individual risk, can ‘defy’ instructions and suitable standards to dismiss, stimulate, or criticize organizational pressures. Still, others can attempt to ‘manipulate’ rules and standards by striving to impress and regulate them. Essentially, NIT suggests that organizations implement structures, systems, and processes which are apparent as legitimate in the social order to enhance their probabilities of existence. These corporations are performing their activities with coercive, normative, and mimetic pressures in their organizational setting and continually set acquiesce, compromise, avoid, defy and manipulate tactics to react to these pressures. The below figure 1 shows a conceptual paradigm of SGF based on NIT. Figure: A Paradigm for Examining SGF using NIT Source: Alam (2019). In sum, the institutional procedure in SG establishes the SSB as the moral guardian of the structure because it serves as the conscience of Islamic bank stakeholders. Therefore, the establishment of SSB becomes crucial as it plays a pivotal role in the SG structure of IFIs. NIT further allows a structure for recognizing the social, financial, and legal impacts on jurisdictions and institutions, and their tactical reactions to those effects (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Covaleski and Dirsmith, 1988; Carruthers, 1995; Brignall and Modell, 2000; Hussain and Hoque, 2002; Khadaroo, 2005). Finally,
7. Md . Kausar ALAM, Yusuf KARBHARI, Md. Mizanur RAHMAN/ Journal of Asian Finance, Economics and Business Vol x No x (2020)xx-x 7 NIT highlights the structural, strategic, and procedural components that commonly originate from the mythologies about societal and economic practices (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). After all, mythologies are universal faiths about broadly acknowledged rules which have developed within a social order and have obtained acceptability over time (Meyer and Rowan, 1977). Prior research elucidates that NIT has a rich contribution to make in the field of religious institutions by focusing on the concepts of procedural, symbolic perceptions and social legitimacy (DiMaggio, 1998). For the religious organizations, DiMaggio (1998) specified that symbolic procedures assist to establish the institution. In this context, Islamic banks’ corporate image might be described by two perspectives, such as ‘institutional image’ and ‘performative image’ based on NIT. The image of Islamic banks can comprise of being Islamic, modest, fair, and reliable, and with a clear institutional image, along with being friendly, truthful, pleasing, leading, trustworthy, and protected (performative images). In this case, the ‘institutional image’ is the central concern for Islamic banks because they perform their banking functions in accordance with the Shariah principles and because Shariah compliance is the main motivator for Muslims. Interestingly, the study by Hoq, Sultana, and Amin (2010) has revealed that ‘institutional image’ has a positive influence towards trust, which enhances customer loyalty. Furthermore, the name image, privacy, practical experience, endorsements of customers, contacts and family inspiration, and excellence in services are similarly significant to the customers in their decision-making process in choosing a bank (Metawa and Almossawi, 1998; Yeo and Yussuf, 2010). Studies on ‘corporate image’ in relation to Saudi Arabian Islamic banks suggest that these elements affect corporate image where corporate management play a dominant role (Yeo and Yussuf, 2010). The authors have also reported that the managing procedures and communication systems of large commercial banks in Saudi Arabia have a direct impact on ‘corporate image’. In this regard, the Shariah is the most significant factor to customers and even the slightest Shariah violation could motivate customers to switch banks. Rashid et al. (2013) comparatively examined Islamic banks in Bangladesh, Malaysia and the GCC region. They focused attention on the inclination of Islamic bank customers towards efficiency and satisfaction from the perspective of Shariah and found Islamic banks to be “too customercentric and efficiency driven” (p. 359) at the expense of Shariah. In addition, researchers like Ul-Haq (2012) observed, “banks are not individual corporations; they operate in an environment of “secular living, which at its core, are consumerist and often criticized for being exploitative” Similarly, Abdul-Baki and Uthman (2017) highlighted that Islamic banks are not detached institutions; , as they operate alongside conventional banks that do not provide same mission and vision. It is also stated that even scholars have long argued that Islam provides an alternative with any philosophy of life and that includes both capitalism and socialism and that these may not be able to co-exist (Abdul-Baki and Uthman, 2017). Even researchers such as Tinker (2004) highlighted that Islam also competes with capitalism in a noticeable and occasionally melodramatic way. He argued that similar to Christianity, Islam exhibits a multiplicity of postures towards capitalism. Given this apprehension, the societal objectives of Islamic banks and any assessment on the performance of Islamic banks is only suitable when the system of Islamic banking is presented in its pure form rather than being affected by the isomorphic pressures arising from culture. Thus, the success of Islamic banks’ societal ends is only attainable when the entire structure is purely Islamic. A further component of NIT is organizational legitimacy, which prescribes that Islamic banks need to attain legitimacy to survive. Legitimacy here denotes the implementation of sound practices realized as being suitable (DiMaggio and Powell, 1983). Organizational legitimacy is also defined as an authorization given by exterior parties (Pfeffer and Salancik, 1978; Ashforth and Gibbs, 1990). Basically, organizational legitimacy is the acknowledgment of an institution by its outside monitoring bodies and other authorities (Meyer and Rowan, 1977; Meyer and Scott, 1983; DiMaggio and Powell, 1983), where the identity of these authorities is significant and this legitimacy is a vital idea in NIT, working like a key-point of a massively extended hypothetical instrument (Suchman, 1995). A legitimate corporation is one whose standards and activities are similar with legitimacy imparting categories. assuming of course, that organizational legitimacy is the accreditation of a corporation by outer groups, and the identity of these groups are significant. This endorsement is conferred by public procecutors as a regulatory authority (Pfeffer and Salancik, 1978; Ashforth and Gibbs, 1990), such as the government, or government agency (i.e., a regulator), which controls the organization, the public, through public opinion, setting and upholding standards of adequacy, and the professionals over the systems (Meyer and Rowan, 1977; Meyer and Scott, 1983; Galaskiewicz, 1985; Baum and Oliver, 1991; Elsbach,
8. 8 First Middle LAST , First Given FAMILY, First Given SURNAME / Journal of Asian Finance, Economics and Business Vol x No x (2020)xx- x 1994). Furthering the debate, Carpenter and Feroz (2001) asserted that effective organizations and governments are those that attain legitimacy by the general public and stakeholders by resorting to legitimacy rituals to establish societal and financial stability. As a result, proficiency is not the only way of existence; attaining the legitimacy and belief is also another very significant strategy for Islamic banks. In this case, the Islamic banking industry has to face various pressures from governments as well as from regulatory authorities. 4. Conclusion This study highlights that it is through NIT that an effective SGF can best be developed and applied, as NIT provides the procedures, by which homogenous structures, comprising guidelines, standards, and practices become recognized and authorized as a satisfactory standard corporate exercise. Attention is also drawn to three key complementary mechanisms that emerge in the context of Islamic banks, their legitimacy, and quality of Shariah governance. First, ‘Institutional isomorphic modification’ is regarded as the aspiration of organizations to implement homogeneous structures, policies, and procedures in line with other organizations operating in a similar environment. This can be achieved through three factors, which include (a) ‘coercive’ isomorphism stemming from administrative effect, (b) ‘mimetic’ isomorphism emanating from the ordinary replies to ambiguity, and (c) normative isomorphism, which is connected to professionalism and proficiency (DiMaggio and Powell, 1983). Second, is the issue of organizational legitimacy which arises from the official perception that a corporation’s existence depends on its need to obey societal or religious norms of acceptable behavior ascending from the position deliberated by external parties such as government, the community, or the professions (Meyer and Rowan, 1977; Covaleski and Dirsmith, 1988; Deephouse, 1996). Finally, a well combination of the infrastructures, power and functions of the BOD and management and the interaction with the SSB in influencing quality Shariah compliance. After all, proponents of SSB claim that the incorporation of an effective SSB as an internal mechanism of SG increases the reliability, integrity, and legitimacy of Islamic banks. As with other studies, this research has beneficial implications. First, the study is not only useful for Islamic banks but also for regulators operating in different jurisdictions. Regulators can develop and maintain an effective SGF for its Islamic banking and finance industry by taking into account the organizational culture, individual country mythologies, and the different pressures applied by diverse authorities towards the proper implementation of SG strategies. Second, international regulators such as the AAOIFI and IFSB can also take advantage by reexamining their SG guidelines and standards to improve SG practices in line with NIT. Based on our findings, NIT is an appropriate lens for explaining differences in governance practices across countries. For now, future researchers are being suggested to consider applying NIT in other areas of Islamic finances, such as Islamic Insurance (Takaful), Islamic micro finance, non-bank financial institutions, and Islamic cooperative institutions. Such studies would substantially add to the prevailing literature. Future studies can also address how NIT justifies the influences of government policy, national laws, and regulations in the formation of an over-arching centralized SGF as already practiced in several Islamic economies. A further innovative area of research is for researchers to employ quantitative or qualitative methodology to comparatively examine the governance frameworks adopted by different Islamic jurisdictions. This would provide valuable insights into the similarities, differences, and prospects for governance standardization across the Islamic world. Undoubtedly, such efforts would lead to a much broader understanding of the issues surrounding SG and quality compliance. Reference AAOIFI. (2005). Governance Standards for IFIs, No. 1-5, Bahrain, AAOIFI. Accounting and Auditing Organization for Islamic Financial Institution. http://aaoifi.com/standard/ accounting-standards/lang=en. AAOIFI. (2019). Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions. Retrieved from http://aaoifi.com/?lang=en on December, 15, 2018. Abdelsalam, O., Duygun, M., Matallin-Saez, J.C., and Tortosa-Ausina, E. (2014). Do ethics imply persistence? The case of Islamic and socially responsible fund. Journal of Banking and Finance, 40, 182–194. Abdul-Baki, Z., and Uthman, A.B. (2017). Exploring the “social failures” of Islamic banks: a historical dialectics analysis. Journal of Islamic Accounting and Business Research, 8(3), 250-271.
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