334 AN INTRODUCTION TO ISLAMIC FINANCE
fi duciary duties of managers is counterproductive and leads to sub - optimal
results. The important point is that each stakeholder is given the freedom
of bargaining to protect their rights and there are systematic institutional
arrangements in place to provide protection and to mediate where disputes
and disagreements arise.
Institutional arrangements can be part of system - wide infrastructure
surrounding the governance structure of the fi rm. For example, because
contracts are invariably incomplete, judicial interpretations can fi ll in the
gaps. It is permissible to regard employment law, consumer law, tort law, as
well as judicial rulings and administrative regulations, as part of the con-
tracts that various stakeholders have with the fi rm. Similarly, the concept
of the Shari’ah boards, which ensure that the operations and code of con-
duct of the Islamic bank are in accordance with the rules of the Shari’ah, is
unique to the Islamic fi nancial system. However, having a board for every
fi rm, as is the case at present, is not effi cient, as only one set of rules is
needed for all fi rms for appropriate corporate governance based on the
Shari’ah. This same idea can be extended to a system - level board consisting
of scholars from different disciplines including Shari’ah, economics, fi nance,
and commercial law, to ensure that rules are so framed and enforced that
economic agents fully comply with their contractual obligations to all the
stakeholders.
To summarize, the Islamic economic system fully endorses a stake-
holder view of governance based on Islam’s principles of the preservation
of property rights and the sanctity of contracts. The corporate governance
model in an Islamic fi nancial system can be derived from a comprehensive
understanding of the principles of Islam.
Quality of Leadership
In Islam, the behavior expected of a fi rm is no different from that expected
of any other member of society. The fi rm’s economic and moral behavior is
shaped by its managers acting on behalf of the owners and it becomes their
fi duciary duty to manage the fi rm as a trust. Consequently, it is incumbent
upon managers to ensure that the fi rm’s behavior conforms to the principles
and the rules of Shari’ah and such compliance will ultimately lead to the
development of trust, responsibility, and accountability.
Shari’ah governs the behavior of leaders no less stringently than that of
individuals. Although each member of society is expected to exhibit high
moral values in the observance of contracts and covenants, many scholars
are of the view that these requirements apply with even greater force to
the actions of leaders. Therefore, a breach of faith on the part of a leader
is more heinous in its nature and more serious in its consequences than a
similar breach by an ordinary individual.
The current fi nancial crisis has highlighted the role of managers and
corporate leaders in shaping the crisis: the lack of transparency, greed, mis-
representation, fraud, and breach of trust displayed by certain fi nancial