Ethical legitimacy of Islamic banks and Shariah governance: Evidence from Bangladesh

• Published date: 01 May 2022
• Author: Mosab I. Tabash,Md. Kausar Alam,Md. Mizanur Rahman
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2487

ACADEMIC PAPER

Ethical legitimacy of Islamic banks and Shariah governance:

Evidence from Bangladesh

Mosab I. Tabash

1

| Md. Kausar Alam

2

| Md. Mizanur Rahman

3

1

College of Business Administration, Al Ain

University, Al Ain, United Arab Emirates

2

Department of Accounting and Finance,

Faculty of Economics and Management,

Universiti Putra Malaysia (UPM), Seri

Kembangan, Malaysia

3

Department of Business Administration,

Metropolitan University Sylhet, Sylhet,

Bangladesh

Correspondence

Md. Kausar Alam, Department of Accounting

and Finance, Faculty of Economics and

Management, Universiti Putra Malaysia (UPM),

Seri Kembangan, Malaysia.

Email: kausarflorence@gmail.com

The research paper's fundamental objective is to examine the ethical legitimacy of

the Islamic banks through the two crucial internal mechanisms of Shariah Gover-

nance (SG), that is, Shariah Supervisory Board (SSB) and Shariah officers. A semi-

structured questionnaire has been applied to collect data for attaining the research

objectives. However, 17 respondents have been interviewed who have practical

experiences concerning Islamic banks and SG. The study explores inappropriate SG

practices, reporting, disclosure, and fatwas resolutions, which generate confusion

among the customers and damage Islamic banks' institutional image. Islamic banks do

not follow the proper SG guidelines and Shariah principles. These findings denote a

negative legitimization of Islamic banks and SG practices. The study considerably

contributes to the enhancements of the responsibilities of the national and global

regulatory bodies by providing internal Shariah authorities authorization from their

ethical perspective. This research has numerous unique practical implications for the

Islamic banks and the central bank of Bangladesh, which will help them to apply Sha-

riah principles, improve the SG practices, and enhance Shariah compliance quality.

This research extends the literature concerning SG and the legitimacy, legitimacy the-

ory, and institutional theory of the Islamic banks concerning Bangladesh. This is the

first research that explores the ethical legitimacy of Islamic banks.

1|INTRODUCTION

Since the inauguration, Bangladesh has witnessed rapid growth and

development of Islamic banking in its market share and growth assets.

The development of the Islamic banking industry is exponentially

increasing, and it has a vital role in developing the country. During the

recent world's financial crisis, Bangladesh is one of the less affected

countries because of the Islamic banking system's development

(Wasiuzzaman & Gunasegavan, 2013). As Bangladesh is a Muslim

dominated country, almost all of the conventional banks are trying to

operate Islamic banking branches and windows across the country to

attract the large Muslim people (Rahman, 2014). But, due to the viola-

tion of Shariah issues, in 2015, the central bank of Bangladesh

(Bangladesh Bank) stopped issuing the new license to any bank to

operate the Islamic banking branches and windows parallel with the

conventional banking (Alam et al., 2020). Recently, the central bank

has reissued the license of Islamic banking branches and windows for

conventional banks. Thus, it is reasonable to say that Shariah compli-

ance is one of important components that drives Islamic banks and

their operational activities. Researchers such as Ahmad and

Haron (2002) and Rashid, Hassan, and Ahmad (2014) stated that Sha-

riah compliance is the ultimate goal of Islamic banks and that religious

compliance provides the legitimacy and stimulates confidence of both

shareholders and stakeholders (Tomkins & Karim, 1987). For example,

Ullah (2014) observed that customers of Islamic banks in Bangladesh

were mainly attracted to them due to the bank's Shariah compliance

and not because of the banks' capacity to earn profits. In principle, it

is the boundaries specified by Islamic principles and the workings of a

Shariah Supervisory Board (SSB) that constitute the main mechanisms

of a Shariah Governance Framework (SGF).

The concept of ethical banking started due to the financial crisis,

environment problems, financial inclusion, and the absence of socially

responsible investment. The end of the last century has seen an

increase in ethical factors in business procedures all over the world.

Received: 13 August 2020 Revised: 9 September 2020 Accepted: 11 September 2020

DOI: 10.1002/pa.2487

J Public Affairs. 2022;22:e2487. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of10

https://doi.org/10.1002/pa.2487