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Risk Management and Corporate Governance Failures in Islamic Banks: A Case Study

Alhammadi, Salah; Archer, Simon; Asutay, Mehmet

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Authors

Salah Alhammadi

Simon Archer



Abstract

Purpose: The purpose of this paper is to show how the choice and ongoing evaluation of a firm’s business model, as a matter of strategic guidance, are key aspects of corporate governance (CG), with particular reference to risk management (RM) in Islamic banks. Design/methodology/approach: This research uses a case study approach, with a single case, which was chosen as it fits very well the purpose of this research. The data collection was based largely on documentary evidence. Company data were collected from company annual reports, press releases and legitimate web sites. The ORBIS Bank Focus database was also used to produce a comparative financial analysis. Findings: The study findings illustrate how an apparently successful business model may fail due to an inherent instability that could have been identified through the application of careful risk analysis (including stress testing) in the choice and ongoing evaluation of the business model, which robust CG and strategic guidance require. In particular, Arcapita’s problems illustrate the dangers to Islamic financial institutions (IFI) from business models that involve undue exposure to liquidity risk. Practical implications: The issues raised in the paper are important in that Islamic banking and finance is an integral part of the global banking and finance industry. Investors and regulators are now requesting corporate management to provide improved service to shareholders and other stakeholders alike. IFI rely on the confidence of investors and market participants, just like conventional institutions and when this confidence erodes, it may prove difficult to regain. Social implications: The global credit crisis of 2008 caused significant difficulties to firms, especially financial institutions, even with substantial government intervention in the economy, which raised some issues of CG and ethics. Originality/value: This paper extends the knowledge of the potential effects of weaknesses in CG and RM, with specific reference to strategic guidance in the choice and ongoing evaluation of a firm’s business model, especially in relation to the Islamic banking sector. It also provides a telling illustration of the need for the enhancements of the Basel Committee’s prudential requirements set out in the various Basel III documents.

Citation

Alhammadi, S., Archer, S., & Asutay, M. (2020). Risk Management and Corporate Governance Failures in Islamic Banks: A Case Study. Journal of Islamic Accounting and Business Research, 11(9), 1921-1939. https://doi.org/10.1108/jiabr-03-2020-0064

Journal Article Type Article
Acceptance Date Jul 19, 2020
Online Publication Date Sep 2, 2020
Publication Date 2020
Deposit Date Jul 24, 2020
Publicly Available Date Sep 9, 2020
Journal Journal of Islamic Accounting and Business Research
Print ISSN 1759-0817
Publisher Emerald
Peer Reviewed Peer Reviewed
Volume 11
Issue 9
Pages 1921-1939
DOI https://doi.org/10.1108/jiabr-03-2020-0064
Public URL https://durham-repository.worktribe.com/output/1265577

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Copyright Statement
This article is made available under a Creative Commons Attribution Non-commercial International Licence 4.0 (CC BY-NC 4.0) and any reuse must be in accordance with the terms outlined by the licence.





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