Governance Framework and Business Models in Islamic Financial Institutions in the UAE: Reconciling Shari’ah Compliance with Business Objective

Abstract

While the Islamic financial industry has grown rapidly in different parts of the world in a relatively short period of time, there are concerns raised on its quality. In particular, the industry has been criticized for prioritising business objectives often at the expense of core Shari’ah principles and values. This is done by focusing on the legal formal compliance with Shari’ah rules in structuring financial products and ignoring the broader objectives of Maqasid of Shari’ah.

The aim of the research is to examine the current status of Islamic financial institutions (IFIs) and their respective products in terms of achieving both the business objectives and Shari’ah objectives that include Maqasid of Shari’ah in general and the principle of “justice” in particular. This is done by first developing a conceptual framework for assessing justice in financial products based on Shari’ah texts and then applying the framework to assess three retail products of an Islamic bank in the UAE. Upon identifying that these products overlook several key justice-related considerations, the research explores the underlying causes of the divergence between the business and Shari’ah objectives by focusing on corporate and Shari’ah governance frameworks.

The research employed a multi-method approach in order to achieve its objective, starting with content analysis applied to the texts of the Quran, Sunnah and legal maxims to extract justice-related criteria. This analysis was complemented by a review of the documentations related to the case study products. To evaluate the alignment of these products with the derived justice criteria, the study utilized a leximetrics approach to develop a scoring system for assessing compliance. Additionally, semi-structured interviews were conducted with selected stakeholders to gather qualitative data. This data was analyzed using grounded theory methodology, which involved coding the data, generating concepts, classifying and categorizing those concepts, and ultimately synthesizing them into a final theory that integrates all the components of the research.

The key findings of the research indicate that IFIs often prioritise business objectives, primarily due to their accountability to shareholders. In the absence of binding regulatory requirements, IFIs tend to adopt a minimalistic and legalistic approach to Shari’ah compliance, focusing on formal adherence rather than the substantive objectives of Shariah. The study highlights that the appropriate legal and regulatory frameworks have the potential to empower internal Shari’ah governance organs and enforce governance mechanisms that embed Maqasid of Shari’ah, particularly the substance and ethical essence of financial transactions, into the decision-making processes of IFIs. Such regulatory interventions can facilitate a greater alignment between business goals and Shari’ah objectives. Achieving this convergence and the realization of Shari’ah objectives allow for serving other stakeholders other than shareholders, especially depositors, which is currently an area that IFIs are criticized for not addressing.