Corporate Governance from the Islamic Perspective

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Arab LawQuarterly

Corporate Governance from the Islamic Perspective

Faleh Salem al-Kahtani1Brunel Law School, UK

Abstract

This article investigates corporate governance from an Islamic perspective and offers a definition of Islam as well as the sources that underpin Islamic law: i.e., the Qurʾān and Sunnah as primary and ijmāʿ (consensus) and qiyās (analogical reasoning) as sec-ondary sources. Islamic objectives are highlighted by focusing on māl (wealth) and tawḥīd (Unity/Oneness of Allah). The Islamic vision on values is appraised by illustrat-ing accountability (ḥisāb), justice (ʿadālah), consultation (shūrā), integrity (amānah), truthfulness (ṣiddiq), sincerity (ikhlāṣ), intention (niyyah), and brotherhood (ukhu-wah). However, points of view on models of corporate governance differ greatly between Islamic and Western (Anglo-American) law. It has been argued that corpo-rate governance from an Islamic perspective does not represent a modern model. This article discusses the advantages it has to offer for Saudi corporate governance.

Keywords

Islamic perspective – corporate governance – Islamic values

1 Introduction

Over the past decade, interest in corporate governance from an Islamic per-spective has increased dramatically, particularly in Saudi Arabia. Muslim scholars have studied corporate governance in order to examine its religious efficacy for tackling malpractice and corruption, i.e., wrongdoings seen as the main impetus behind national and international market-related corporate

1 Ph.D., 2013. E-mail: [email protected].

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arab law quarterly 28 (2014) 231-256

scandals.2 Consequently, Muslim scholars postulate that Islam provides a basis for delimiting corporate governance practices.3 Abdul Rahman hopes that Islamic financial institutions or even global corporations might benefit if Islamic principles and values were incorporated into habitual business practices.4

From both Islamic and Western perspectives, corporate governance moni-tors all essential company activities and assigns rules and procedures for decision-making to which participants must adhere when striving to reach their goals. The Islamic perspective brings additional values to corporate gover-nance as it relies on objectives for which there is no substitute in Western cor-porate governance.5 Having said this, the aims of corporate governance from an Islamic perspective are to amend those corporate legal regimes founded in the Muslim world, to impose Islamic objectives and values in day-to-day business and corporate dealings, to challenge the concept of Islamic social jus-tice and, most importantly, to encourage Muslims, whether as individuals or participants in corporations, to perform their worldly activities in accordance with Islamic law, thus attaining Allah’s blessings.6

Therefore, the primary aim of this article is to examine whether applying Islamic principles to corporate governance will prove beneficial, and, if so, to what extent would the Saudi regulator (Capital Market Authority Board) take advantage of this supposition if approved. One should remember that Saudi Arabia, one of the largest and most important countries in the Muslim com-munity (ummah), is a major player with respect to religious, legal, commercial and economic issues. The Sharīʿah is the primary national law in Saudi Arabia.7

2 Muhammad al-Gamal, Islamic Bank Corporate Governance and Regulations: A Call for Metallization (unpublished, 2005), p. 9.

3 Lillian Miles and Simon Goulding, ‘Corporate governance in Western (Anglo-American) and Islamic communities: Prospects for convergence’, Journal of Business Law 2 (2010): 126.

4 Abdul Rahim Abdul Rahman, ‘Issues in corporate accountability and governance: An Islamic perspective’, American Journal of Islamic Social Sciences 15(1) (1998): 60.

5 Zulkifli Hasan, Corporate Governance from Western and Islamic Perspectives, Paper Presented at the Annual London Conference on Money, Economy and Management (Imperial College, London, 2008), p. 4.

6 Maria Bhatti and Ishaq Bhatti, ‘Toward understanding Islamic corporate governance issues in Islamic finance’, Asian Politics and Policy, 2/1 (n.d.): 26. Also, Rifaat Abdel Karim, ‘The nature and rationale of a conceptual framework for financial reporting by Islamic banks’, Accounting and Business Research 25(100) (1995): 285.

7 Basic Law of Governance 1992, Art. 1, which states that ‘The religion in Saudi Arabia is Islam and the constitution is the Book of Allah and the Sunnah (traditions) of His Messenger’.

233Corporate Governance from the Islamic Perspective


This article has been divided into six sections. Section 1 discusses and defines Islam both as a religion and source of law. In the Saudi context, the Qurʾān and Sunnah are discussed as primary and ijmāʿ (consensus) and qiyās (analogi-cal reasoning) as secondary sources of law. Section 2 analyses Islamic objec-tives. Section 3 sets out the Islamic vision for human values. Section 4 studies whether corporate governance principles, when supplemented by Islamic law, can attain their goal. Section 5 evaluates evidence from Saudi Arabia. Finally, Section 6 provides a summary.

2 Islamic Legal Sources Defined

Islam is defined as being the direct word of Allah as transmitted through the Prophet Muhammad and written down in the Holy Qurʾān.8 Its value sys-tem, articulated through Sharīʿah law, provides the guidelines which Muslims should follow during their worldly lives, on personal, social, political and intel-lectual levels.9 Therefore, the words and deeds of each Muslim should mir-ror the ethical standards prescribed by Islamic law, perceived as fair and true.10 Kamali states: ‘Sharīʿah refers to commands, prohibitions, guidelines and prin-ciples that Allah has addressed to mankind pertaining to their conduct in this world and salvation in the next.’11

In Arabic, the word sharī ʿah literally means the way to the source of life but today refers specifically to the Islamic legal structure defined by the Qurʾān and Sunnah. In this respect, Sharīʿah law can be applied to the principles of corpo-rate governance which regulates all aspects of corporate life. It is commonly known that each Muslim must fulfil five specific obligations: to believe in the Unity/Oneness of Allah (shahāda), to pray five times a day at a designated time (ṣalāt), to fast during the month of Ramadan each year (sawm), to perform the pilgrimage (hajj) to Mecca at least once if possible, and to pay alms (zakāt).12 As the Prophet Muhammad observed:

8 Muhammad Abu Zahra, The Origins of Islamic Jurisprudence, Arabic edn. (Cairo: Dār al-Nahda, 1970), p. 12.

9 Asyraf Dusuki and Nurdianwati Abdullah, ʿMaqāṣid al-sharīʿah, maslahah and corporate social responsibility’, American Journal of Islamic Social Sciences 24(1) (2005): 30.

10 Mervyn Lewis, ‘Islamic corporate governance’, International Association for Islamic Economics, Review of Islamic Economics 9(1) (2005): 14.

11 Muhammad Kamali, Sharīʿah Law: An Introduction (London: One World Book Ltd., 2008), p. 14.

12 Timur Kuran, ‘The economic system in contemporary Islamic thought: Interpretation and assessment’, International Journal of Middle East Studies 18(2) (1986): 135.

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Islam is based on the following five principles: to testify that nothing has the right to be worshipped but Allah and Muhammad is Allah’s apostle; to offer [compulsory congregational] prayers dutifully and perfectly; to pay zakāt [obligatory charity]; to perform the hajj [pilgrimage to Mecca]; to observe the fast during the month of Ramadan.13

Muslims traditionally view Sharīʿah law as essential and universally acknowl-edge that Islamic jurisprudence is based on two primary sources: i.e., the Qurʾān and Sunnah. Among the secondary sources of Islamic law, only ijmāʿ (consensus of opinions) and qiyās (analogical deduction) are applied in Saudi Arabia as basis for juristic principles.14 These four cornerstones of Islamic law can also serve as basis from which to study corporate governance.15 In other words, the sources of Islamic law are fundamental to the development of this theory into a corporate governance ideal as well as to its successful application. Note that it is these sources of Islamic law to which Saudi regulators refer when reviewing laws or regulations.16 Therefore, Islamic law sources and their pos-sible relationship to corporate governance will be discussed briefly.

2.1 The Holy QurʾānComposed of 114 chapters (sūrāt) containing 6236 verses (ayāt), the Qurʾān opens with Sūrah al-Fatiḥah and closes with Sūrah an-Nās.17 The Qurʾān is considered to be the divine word of Allah handed down during a period of more than 23 years through the Prophet Muhammad until his death. It is the primary source for Sharīʿah law and stipulates the moral, philosophical, social, political and economic foundations upon which society should be established. Allah says that: ‘[. . .] And We have sent down to you the Book [the Qurʾān] as an exposition of everything, a guidance, a mercy, and glad tidings for those who have submitted themselves [to Allah as Muslims].’18

13 Muhammad al-Bukhari, Ṣaḥīḥ al-Bukhārī, Ḥadīth No. 7, (Saudi Arabia: Darussalaam for Publication and Distribution, 1999), p. 13.

14 Abd Rahman al-Shalhoub, Constitutional Order in Saudi Arabia between the Law and Comparative Law, Arabic edn., (Riyadh: King Fahd National Liberary, 1999), p. 38.

15 Hajjaj Abd Jabbar, ‘The Sharīʿah Supervisory Board: A potential problem in Islamic finance?’, Company Lawyer 29/1 (2008): 29.

16 Article 7 of the Basic Law of Governance suggests that the ‘Government in Saudi Arabia derives its authority from the Book of Allah and Sunnah of the Prophet, which are the ultimate sources of reference for this law and the other laws of the State’.

17 Supra note 8, at 24.18 Holy Qurʾān 16:89 (King Fahd Complex for Printing of the Holy Qurʾān, translated by

Muhammad Taqi and Muhammad Muhsan, 2012).



The Qurʾān addresses issues such as unity/oneness of Allah (tawḥīd), modes of worship, judicial proceedings, politics and government, crimes and pun-ishments, marriage and divorce as well as details financial transactions ( fiqh al-mu‛amalāt),19 mainly trade. Mortgages, trust, contracts, economics, and deeds of sale may be challenged in support of the theory of corporate gover-nance, as well as of those indications that are mentioned in corporate gover-nance, by researchers from an Islamic perspective.20

2.2 The SunnahAnother primary source of Islamic law is the Sunnah, i.e., a compilation of cus-toms and traditions (Ḥadīth) that narrate the Prophet’s sayings and deeds.21 Diverse Qurʾānic texts advise Muslims to accept the Prophet’s Sunnah, espe-cially those narratives derived from an authentic chain of transmission (isnād ). Allah articulates: ‘And whatsoever the messenger [Muhammad] gives you, take it; and whatsoever he forbids you, abstain [from it]’.22 The Sunnah can lend support in the crucial task of applying corporate governance from an Islamic perspective with regard to such values as accountability, transparency, and jus-tice. Such Islamic values discussed according to Prophetic traditions will be clarified below.

2.3 IjmāʿIjmāʿ (consensus of opinions), or agreement between religious scholars and jurists (mujtahidūn) on issues affecting the Muslim community, is one of the sec-ondary sources for Islamic law.23 Moreover, the Prophet encouraged ijmāʿ when he said: ‘My community shall never agree on an error’.24 Especially nowadays,

19 Abdul Wahab Kalhaf, Islamic Jurisprudence, Arabic edn., (Kuwait: Dār al-Kalam, 1986), p. 54.

20 Volker Nienhans, Corporate Governance in Islamic Banks, Islamic Financial Architecture: Risk Management and Financial Stability (Jeddah: Islamic Research and Training Institute, Islamic Development Bank (IDB), 2003), p. 301.

21 Supra note 8, at 28.22 Qurʾān 59:7. Allah also says ‘He who obeys the messenger [Muhammad] has indeed

obeyed Allah, but he who turns away, and then we have not sent you [O Muhammad] as a watcher over them’ (Qurʾān 4:80).

23 Supra note 8, at 34.24 Muslim ibn al-Hajjaj Nisaboori, Ṣaḥīḥ Muslim, Ḥadīth No. 5107, (Saudi Arabia: Darussalaam

for Publication and Distribution, 1999), p. 975. Allah reports ‘And whoever contradicts and opposes the messenger [Muhammad] after the right path has been shown clearly to him, and follows other than the believers’ way, we shall keep him in the path he has chosen, and burn him in hell—what an evil destination’ (Qurʾān 4:115).

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ijmāʿ is of particular importance since Muslim clerics are expected to deal with large numbers of sophisticated laws to satisfy the needs of Muslim societies in terms of developing corporate jurisprudence. One might therefore propose that ijmāʿ will prove beneficial for corporate governance when Muslim cler-ics opine with expertise on issues within their fields of inquiry and thereafter apply a consensus of opinions accordingly to corporate governance.25

2.4 QiyāsQiyās (analogical deduction) is another secondary source for Islamic law. In some cases, a precedent can be found among the original sources of Islamic law upon which to base a ruling. However, analogical reasoning is often required in Islamic jurisprudence (uṣūl al-fiqh) to deduce new rulings on the basis of past practices.26 Qiyās is therefore a point of departure for decision making, but should not be instigated when relevant evidence is available in the above-mentioned sources of Islamic law, namely the Qurʾān, the Sunnah, and ijmāʿ upon the defined topic.27 As Khadduri points out, Islamic decision making was advanced by Caliph ʿUmar when he laid down the four Islamic sources of law to the judge of Basra to be used in a particular sequence (Qurʾān, Sunnah, ijmāʿ and then qiyās) to reach a new injunction.28

Qiyās has become a major principle, as well as aid to help alter Muslim social interactions.29 This phenomenon demonstrates the necessity of apply-ing qiyās injunctions for promulgating successful international laws in Islamic countries. For instance, during their last meeting, the International Islamic Fiqh Academy discussed their concerns about having to re-rule on positive international financial and market regulations in order to work on the basis of Islamic legislation.30

3 Islamic Objectives

First and foremost, the five Islamic objectives (maqasid al-sharīʿah) which Muslims strive to achieve in life are preservation of wealth (māl), faith/religion

25 Supra note 19, at 302.26 Abdur Rahman Doi, Sharīʿah: The Islamic Law, (UK: TaHa Publishers, 1984), p. 70.27 Maren Hanson, ‘The influence of French law on the legal development of Saudi Arabia’,

Arab Law Quarterly 2 (1987): 274.28 Majid Khadduri, ‘Nature and sources of Islamic law’, George Washington Journal of

International Law and Economics 3 (1953): 7.29 Bryan Turner, ‘Revisiting Weber and Islam’, British Journal of Sociology, Nv. (2010): 161. 30 For more information, see http://www.fiqhacademy.org.sa/ [accessed: 1 November 2012].



(tawḥīd or Unity/Oneness of Allah), life (nafs), intellect (ʿaql ) and posterity (nasl).31 Two of these major goals that relate to corporate governance practices are wealth (māl) and the unity/oneness of Allah (tawḥīd), which will therefore be discussed in the forthcoming sub-sections.

3.1 Islamic Objective of WealthRecent developments in corporate governance have amplified the need for a better understanding of the Islamic objective preservation of wealth (māl ) as distinguished from Western practices.32 In Islam, accumulating wealth is con-strained by directives found in the above-stated Islamic legal sources, particu-larly those in the Qurʾān and Sunnah, which prohibit usury or interest (ribā), gambling (qimār) and uncertainty (gharār). Notably, the Islamic objective of wealth encourages the use of contracts and the paying of alms (zakāt).33

3.1.1 Undertaking of ContractsIt may be argued that globally almost all corporate governance principles con-centrate on sustaining stakeholder benefits, since they have entered into con-tracts with said corporations. This principle has been mentioned in corporate governance from the Islamic perspective as the undertaking of contracts.34 The Islamic objective of wealth addresses the undertaking of contracts, by which Muslims shall record details of their business transactions for use when and where necessary.35 Islamic law offers a specific perspective on how financial reporting and accounting practices should be executed in terms of the Islamic objective of wealth.36 Allah says:

O you, who believe! When you contract a debt for a fixed period, write it down. Let a scribe write it between you in justice. Let not the scribe refuse to write as Allah has taught him. So, let him write and let the one who has the obligation dictate. And let him fear Allah, his Lord, and not leave anything out of it.37

31 Supra note 9, at 31.32 Mervyn Lewis, ‘Islam and accounting’, Accounting Forum 25(2) (2001): 117.33 Supra note 14, at 29.34 Zamir Iqbal and Abbas Mirakhor, ‘Stakeholders model of governance in Islamic economic

system’, Islamic Economic Studies 11(2) (2004): 22.35 Muhammad Qattan, Sharīʿah Supervision: The Unique Building Block of Islamic Financial

Architecture, (Jeddah: Islamic Financial Architecture: Risk Management and Financial Stability, Islamic Research and Training Institute, Islamic Development Bank (IDB), 2003), p. 275.

36 Supra note 31, at 118.37 Qurʾān 2:282.

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Moreover, the focal point when drawing up contracts is that transactions will be fair for all contracting parties. Therefore, no contract should be concluded when the contracting parties express disagreement.38 Allah declares that: ‘O you, who believe, eat not up your property among yourselves unjustly except it is a trade amongst you, by mutual consent. And do not kill yourselves [nor kill one another]. Surely, Allah is most merciful to you.’39

Corporate governance practice must be based on contracts undertaken with company managers. In this regard, a corporation must complete its contracts with Muslim managers according to specific Islamic principles for conducting business. Altogether, Islamic corporations should respect their contracts and not hold sway over their debtors. Contracts should clearly identify the nature of products being bought/sold as well as specify the rights and obligations of both buyer and seller in order to avoid any conflict in the future.40

3.1.2 Paying of AlmsPaying of alms (zakāt) is a distinctive feature of the Islamic objective of wealth.41 It is undisputable that zakāt is only offered in certain situations: e.g., to help the poor (masākin), the handicapped, people in debt, orphans, the unemployed and prisoners.42 Allah says:

As sadaqāt [here it means zakāt] are only for the fuqāra’ [poor] and the masākin [poor], and those employed to collect [the funds], and to attract the hearts of those who have been inclined [towards Islam], and to free the captives, and for those in debt, and for Allah’s cause [i.e., for mujahidūn—those fighting in a holy battle] and for the wayfarer [a trav-eller who is cut off from everything]; a duty imposed by Allah. And Allah is All-Knower, All-Wise.43

38 Omar Chapra, Islam and the Economic Challenge (Leicester: Islamic Foundation and the International Institute of Islamic Thought, Publishing and Distributing Islamic Books, Riyadh, 1992), p. 15.

39 Qurʾān 4:29. 40 Supra note 2, at 129.41 Supra note 31, at 29. 42 Supra note 11, at 136. 43 Qurʾān 9:60. Allah says: ‘And that which you give in gift to others, in order that it may

increase your wealth by expecting to get a better one in return from other people’s property, has no increase with Allah; but that which you give in zakāt [charity or tax] seeking Allah’s countenance, then those, they shall have manifold increase’ (Qurʾān 30:39).



Kuran opines that zakāt resembles a basic replacement scheme for wealth: i.e., a means of taking from the wealthy and giving to the poorest among Muslims.44 This idea is supported by Rice, who noted that the wealthiest Muslims are not valid rulers of their wealth bur rather trustees who should pay out their wealth in accordance with the rationing of trust.45

Moreover, the process of collecting zakāt is based on the assertion that alms must be remunerated on all capital that has not been put to use for a complete lunar year. Zakāt is calculated at 2.5% for personal capital and 10% for capital derived from investors and corporations.46 It is remarkable that government agencies charge with collecting and distributing zakāt have been established in many Islamic countries, including Saudi Arabia, Bahrain and Pakistan. In particular, the purpose of the Saudi Department of Zakāt and Income Tax is to manage and collect zakāt on commercial goods from Saudi individuals and institutions as well as to direct and collect taxes from non-Saudi individuals and foreign corporations that do business in the country.47

Due to their sacred obligation to pay zakāt, Muslims who recompense zakāt not only accomplish their obligation to the State but also purify their wealth and obey Allah’s directive.48 In other words, because paying zakāt is inevitable in Islam, Muslims would be expected to make remunerations more willingly than Westerners paying income tax in non-Muslim countries.49

There is a link between corporations and the payment of zakāt because individuals are thought to have a sense of social responsibility. In particular, the purpose of zakāt is to help needy individuals with their costs of living in a just manner, without mistreating others, so that the whole community will benefit. The best way to achieve this is when a corporation is obliged by corporate governance to make donations similar to the giving of alms from an Islamic perspective: namely, by making donations to, e.g., medical institutions; allocating funds for humanitarian aid and child welfare; educat-ing the young; providing for the needs of low-income groups; and engaging

44 Timur Kuran, ‘Islamic economics and the Islamic sub-economy’, Journal of Economics Perspectives, 9(4) (1995): 159.

45 Gillian Rice, ‘Islamic ethics and the implications for business’, Journal of Business Ethics, 18 (1999): 348.

46 T.E. Gambling and R.A.A Karim, ‘Islam and social accounting’, Journal of Business Finance and Accounting 13(1) (1986): 40.

47 For more information, see the Official Website of the Saudi Department of Zakāt and Income Tax at: http://www.dzit.gov.sa/en/ [accessed: 1 November 2012].

48 Supra note 31, at 118.49 Supra note 43, at 159.

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in patronage and sponsorship of, e.g., sports, science and culture. Such volun-tary actions, although encouraged by the government through e.g. preferen-tial taxes, will eventually raise the sense of corporate social responsibility as a key element in corporate governance, causing them to become highly valued by society.

3.1.3 Prohibition of Usury or InterestThe prohibition of usury or interest (ribā) results in social justice, in accor-dance with the blessings of Allah.50 Moreover, the prohibition of ribā has been examined by a number of Islamic economists because of its potential threat for unfair gain.51 Kuran discusses ribā to demonstrate the pre-Islamic exercise of demanding the balance owed from a borrower who is unable to make resti-tution according to the previously agreed upon timetable. Therefore, prevent-ing ribā is simply a means of avoiding actions that may prove to be socially harmful.52 In other words, the greatest drawback of ribā is the unjust transfer-ral of wealth from the poor to the wealthy. However, accumulation of wealth may be delimited in the hands of the most wealthy;53 as the saying goes, ‘the rich get richer, while the poor get poorer’. Allah reiterates that:

Those who eat ribā [usury or interest] will not stand [on the day of res-urrection] except like the standing of a person beaten by Satan leading him to insanity. That is because they say: trading is only like ribā, whereas Allah has permitted trading and forbidden ribā. So, whosoever receives an admonition from his lord and stops eating ribā shall not be punished for the past; his case is for Allah [to judge]; but whoever returns ribā, such are the dwellers of the fire—they will abide therein.54

50 Supra note 31, at 117.51 Muhammad Ayub, Understanding Islamic Finance, (UK: John Wiley & Sons, 2007), p. 44. 52 Supra note 43, at 156.53 Hans Visser, Islamic Finance: Principles and Practice, (UK: Edward Elgar Publishing Ltd.,

2009), p. 38.54 Qurʾān 2:275. Allah also says ‘O you who believe! Eat not ribā [usury] doubled and

multiplied, but fear Allah that you may be successful’ (Qurʾān 3:130). Allah tells us ‘O you who believe! Be afraid of Allah and give up what remains [due to you] from ribā [usury] [from now onward], if you are [really] believers. And if you do not do it, then take a notice of war from Allah and his messenger but if you repent, you shall have your capital sums. Deal not unjustly [by asking more than your capital sums], and you shall not be dealt with unjustly [by receiving less than your capital sums]’ (Qurʾān 2:278).



The Prophet Muhammad said: ‘Avoid the seven great destructive sins. Then the people asked: O Allah’s apostle, what are they? Then, he informed them that the destructive sins include eating up ribā [usury or interest].’55

Under Islamic jurisprudence, the two most well-known types of ribā are: ribā an-nasīʾah and ribā al-fadl. The first type of usury is usually related to loan transactions, where an exchange is concluded with or without surplus from one of the counter-values. In other words, ribā an-nasīʾah is an increase in the total debt owed to a deferment in repayment during a determined time frame. Ribā an-nasīʾah is therefore interest-based lending, i.e., remuneration for lend-ing or borrowing money. For example, ribā an-nasīʾah occurs whenever a credi-tor offers money to a debtor for a set period of time at a determined amount of interest to be compensated monthly. Such interest often ensues as credit in conventional financial dealings.56 The second type of usury is ribā al-fadl that arises with the price of a calculation by the debtor to the creditor in exchange for supplies of the same type or of low for better quality: i.e., money for money, dates for dates, wheat for wheat, rice for rice, gold for gold and silver for sil-ver. Ribā al-fadl is also forbidden because it could be used to enter into ribā an-nasī’ah dishonestly, thus causing jeopardy and doubt. In addition to avoid-ing ribā al-fadl, in any exchange, materials should be equivalent and delivery prompt.57

Thus, from an Islamic perspective, corporations should not grant credit, or any other form of loan, and then require the debtor to pay interest in order to profit from a financial transaction. Loans should be granted on the basis of mutual financial aid, thus becoming a matched interest-free loan. Furthermore, to increase profits from any financial activity, corporations can simply buy the shares of other corporations to make profits in the form of dividends.58

3.1.4 Prohibition of GamblingGambling (qimār) is defined as the unpredictable flow of money to accrue wealth by playing games of chance.59 Allah says: ‘They ask you [O Muhammad]

55 Muhammad al-Bukhari, Ṣaḥīḥ Bukhārī, Ḥadīth No. 28, (Saudi Arabia: Darussalaam for Publication and Distribution, 1999), p. 639.

56 Angelo Venardos, Islamic Banking and Finance in South-East Asia: its Development and Future (UK: World Scientific Publishing Ltd., 2006), p. 63.

57 Supra note 50, at 53.58 Supra note 4, at 6.59 Hajj Abd Jabbar, ‘Islamic finance: Fundamental principles and key financial institutions’,

Company Lawyer 30(1) (2009): 25.

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concerning alcoholic drink and gambling, say: In them is a great sin and [some] benefit for men, but the sin of them is greater than their benefit.’60

In terms of corporate governance, gambling may be akin to playing the stock market, whereby players take excessive risks to enhance their wealth. Such gambling has become typical in countries where the Anglo-American corporate governance model prevails. Continuing the discussion on qimār, in terms of corporate governance, securities market players, especially corpora-tion managers and market traders, should not take excessive risks on the stock exchange when selling and buying shares to accumulate wealth. In this regard, when addressing corporate governance, legal regulations should be developed in such a way that trading on stock exchanges is not equivalent to qimār.61

3.1.5 Prohibition of UncertaintyThe term uncertainty (gharār) means risk-taking, or being engaged in ambigu-ous financial activities such as the trade in birds or fish prior to their capture.62 In addition to ensuring financial justice, the Islamic objective of wealth (māl) is concerned with tackling gharār and removing it from financial transactions and contracts. As a result, this objective requires that goods and services should be valuable, moveable, recognisable and non-harmful.63 Otherwise, they will be invalidated under the suspicion of uncertainty (gharār).64

3.2 Islamic Objective of the Oneness of AllahFirst and foremost, the term Unity or Oneness of Allah (tawḥīd) is generally understood to mean man’s awareness of Allah’s inimitability or unity and His permanence or continuity in all things.65 The significance of this concept is that it liberates humans from their reliance on other human beings and inspires believers to recognize that His unity is all-encompassing.66

60 Qurʾān 2:219.61 Supra note 4, at 7.62 Supra note 50, at 56. Also, Allah says ‘O you who believe! Intoxicants [all kinds of alcoholic

drinks], and gambling and al-ansab and al-azlam [arrows for seeking luck or decision] are an abomination of Shaitan’s [Satan] handiwork. So avoid [strictly all] that [abomination] in order that you may be successful’ (Qurʾān 5:90).

63 Supra note 50, at 60.64 Supra note 58, at 26.65 Muhammad Haneef, ‘The Islamic worldview, and Islamic economics’, IIUM Journal of

Economics and Management 5(1) (1997): 39.66 Abdel Bashir, ‘Ethical norms and enforcement mechanism in profit-sharing arrangements’,

Mid-Atlantic Journal of Business 34(3) (1998): 261. It is narrated that when the Prophet Muhammad (PBUH) sent his governor to Yemen, he said to him: ‘You are going to a nation



In Islam the concept of unity or oneness (tawḥīd) imparts three connota-tions for man’s relation with Allah: (1) that of Allah’s lordship (tawḥīd rubu-biyyah), which means that everything emanates from Him as Lord of the Universe, Cause of all Causes, who merits all honour and appreciation; (2) that Allah’s 99 excellent names (tawḥīd asmā wa sifāt) are preserved and honoured by all believers; and (3) that believers direct all forms of worship to Allah alone (tawḥīd ʿibādah).67 It has been said that the Unity/Oneness of Allah is the soil in which Islam takes root which presents a point of variance from the Western approach to corporate governance whereby religious and secular affaires are held separate since religion is solely a personal concern. This methodology does not make sense from an Islamic perspective because the Unity/Oneness of Allah invalidates any separation between worldly life and religion. As stated above, Islam provides directives which govern all aspects of a believer’s life, including politics, economy, commerce, ethic and social values.68 Therefore, the concept of unity/oneness of Allah is the most distinguishing feature of Islamic corporate governance, i.e., to attain the will of Allah and receive His blessing, all Muslims must watch over their behaviour in word and deed. Life in this earthly world and in the hereafter should be in accordance with Islamic principles.69

To satisfy Allah’s requirements for sanctification while conducting business, Muslims (whether individually or in corporations) should seek to undertake their diverse obligations, such as performing well to benefit the community or maximising income without compromising shareholder value.70 Furthermore, business dealings should be stimulated and carried out according to the con-cept of tawḥīd.71 This bring us to the statement that corporate governance from an Islamic perspective should encourage corporations to conduct business with a sense of fairness, which, of course, is one of the principles of global corporate governance. More specifically, company managers should carry out their responsibilities and obligations honestly. To this end, board directors

from the people of the scripture, so let the first thing to which you will invite them, be the tawḥīd of Allah’; see Muhammad al-Bukhārī, Ṣaḥīḥ Bukhārī, Ḥadīth No. 469, (Saudi Arabia: Darussalaam for Publication and Distribution, 1999), p. 1649.

67 Saleh al-Fawzaan, Explaining the Meaning There is no God but Allah, and Derives from its Effects, Arabic edn. (Madina: Islamic University, 2002), p. 23.

68 Supra note 4, at 6.69 Supra note 66, at 261.70 Nabil Baydoun and Roger Willett, ‘Islamic corporate reports’, ABACUS 36/1 (2000): 80.71 Supra note 7, at 20.

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should exhibit an outstanding sense of duty and corporations should treat all shareholders equally.72

To conclude, tawḥīd is the very stimulus for Sharīʿah law and Islamic values, since it reveals the need for habitual dedication and personal devotion in both religion and law, in politics and economics, in one’s belief and actions.73 Tawḥīd requires one to embrace Islamic values, namely accountability (ḥisāb), justice (ʿadālah), integrity (amānah), truthfulness (ṣiddiq), brotherhood (ukhuwah), and sincerity (ikhlāṣ). According to Chapra, tawḥīd is a necessity that ensures human awareness of moral values, basic equity, brotherhood, social justice and honesty.74 Such values will be examined in the next section.

4 Islamic Values

It can be argued that global corporate governance principles and codes of prac-tice established over the last decade not only focus on achieving profit maxi-misation or economic proficiency but also ensure that corporations are guided in accordance with ethical standards beneficial to society at large.75 Islamic values are significantly controlled according to the above-mentioned Islamic principles and objectives76 directed towards the reliability of human behaviour as well as the endorsement of public welfare and perfection.77 Islamic values should be undertaken by Muslims in their financial endeavours to avoid caus-ing harm to others and to continue respecting their individuality.78 Islamic val-ues, moreover, can counteract negative aspects such as greed, selfishness and scarcity that might otherwise lead to financial and business irregularities and corruption. For instance, outlawing exorbitant rewards to board members and top executives would force corporations to waive their values in transactions and compliances.79 As Hassan and Salleh noted:

72 Fuad al-Omar, The Role of Values and Ethics in Enhancing the Confidence of Shareholders, Customers and Investors: International Experiences, Methods and Models, Arabic edn., (Cairo: Seminar of the Organisation for Economic Institutions, 2008), p. 5.

73 Supra note 10, at 17.74 Supra note 37, at 13. 75 S. Gooden, ‘Participation of stakeholders in the corporate governance of Islamic financial

institutions’, New Horizon 114 (2001): 12-15.76 Supra note 44, at 347.77 Ibid., at 348.78 Supra note 31, at 108.79 Supra note 72, at 1.



It is man who is involved in the process of managing the business of the company towards achieving its mainstream goal of maximising the wealth of its owners. The codes of upholding trust, maintaining integrity, exercising transparency and accountability would remain as mere noble codes if the issues of man, his values, ethics and moral conduct are not tackled in the first instance.80

The Islamic vision on values consists of a variety of ethics that are underlined in corporate governance as follows.

4.1 AccountabilityAccountability (ḥisāb) is seen as significant in support of Islamic corporate governance. The term ḥisāb implies Allah’s inclusive accountability towards humans who are accountable to Him in all things. The importance of this term is demonstrated by its occurrence eight times in various Qurʾānic verses (ayah, pl. ayāt).81 Allah says: ‘Did you think that I had created you in play [without any purpose], and that you would not be brought back to me?’82

Furthermore, the Prophet Muhammad points out that man is accountable in such issues as religion, politics, society and family83 and advocates that:

Every one of you is a guardian, and accountable for what is in his custody. The ruler is a guardian of his subjects and accountable for them; a hus-band is a guardian of his family and is accountable for it; a lady is a guard-ian of her husband’s house and is accountable for it. So, all of you are guardians and accountable for your wards and things under your care.84

When searching for the possible roots of accountability in Islam’s early cus-toms and traditions, it cannot be overlooked that, at the onset of the Islamic empire, early Muslims did exercise something resembling modern account-ability. ʿUmar Ibn al-Khaṭṭāb, the second Islamic Caliph, ensured that the hajj

80 Nik Hassan and Mohammed Salleh, Corporate Governance from the Islamic Perspectives, (Kuala Lumpur: IKIM, 2002), p. 100.

81 Supra note 31, at 113. 82 Qurʾān 23:115. Allah also says ‘Does man think that he will be left neglected [without being

punished or rewarded for the obligatory duties enjoined by his Lord Allah on him]?’ (Qurʾān 75:36). Allah additionally reports that ‘The hearing, and the sight, and the heart, of each of those one will be questioned [by Allah]’ (Qurʾān 17:36).

83 Muhammad al-Shafie, Liability and Penalty in the Holy Qu’rān, Arabic edn., 1982, p. 41.84 Muhammad al-Bukhari, Ṣaḥīḥ Bukhārī, Ḥadīth No. 592, (Saudi Arabia: Darussalaam for

Publication and Distribution, 1999), p. 546.

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or pilgrimage to Mecca was also a time when local governors and their sub-ordinates, as well as members of the public at large, could prove themselves accountable to the Caliph himself in terms of the affairs of state at the time.85

Thus, we can propose that accountability in terms of Islamic corporate governance can be achieved when Muslims become aware that, through their conduct, albeit financial or otherwise, they will be called to account by Allah on the day of judgement: including company executives held accountable to board directors and shareholders; board directors being held accountable to shareholders; auditors being held independently accountable to all sharehold-ers; majority shareholders being held accountable to minority shareholders; and companies themselves being held accountable for their actions before the government and society as a whole.86 Thus, Islamic accountability naturally encompasses the same principle as specified by the OECD for corporate gover-nance: ‘The corporate governance framework should ensure the strategic guid-ance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.’87

4.2 JusticeJustice (ʿadālah) is an essential value in Islam, since it excludes segregation and monopoly as well as promises equitable circulation of wealth,88 as expressed in a Qurʾānic verse:

O you who believe, stand out firmly for justice, as witnesses to Allah, even though it be against yourselves, or your parents, or your kin, be he rich or poor, Allah is a better protector to both [than you]. So follow not the lusts [of your hearts], lest you avoid justice; and if you distort your witness or refuse to give it, verily, Allah is ever well-acquainted with what you do.89

85 Abbas al-Akkad, Omar Genius, Arabic edn. (Beirut: Modern Library, 2008), p. 46. 86 Supra note 72, at 18.87 Organisation for Economic Co-Operation and Development, OECD Principles of Corporate

Governance, 2004, p. 58.88 Supra note 34, at 277. 89 Qurʾān 4;135. Allah says ‘Indeed we have sent our messengers with clear proofs, and

revealed with them the scripture and the balance [justice] that mankind may keep up justice’ (Qurʾān 57:25). Allah further says, ‘O you who believe, stand out firmly for Allah as just witnesses; and let not the enmity and hatred of others make you avoid justice. Be just: that is nearer to piety; and fear Allah. Verily, Allah is well-acquainted with what you do’ (Qurʾān 5:8).



Thus, one might argue that, in terms of Islamic corporate governance, a cor-poration might be applying justice when it deliberates upon the wishes of its shareholders and tries to avoid unfair business transactions. Justice should be maintained and guaranteed among all parties to corporate governance, while ensuring that corporations maintain fair business dealings with their competi-tors.90 In addition, shareholders should be treated with equity and fairness by corporate management, while steering clear from and preventing unjust and treasonable actions.91 Allah says:

[Dāwūd (David) said immediately without listening to the opponent] he has wronged you in demanding your ewe in addition to his ewes. And, verily, many partners oppress one another, except those who believe and do righteous good deeds, and they are few.92

4.3 ConsultationConsultation (shūrā) is a worthy factor for the achievement of corporate governance from an Islamic perspective. Consultation implies a guarantee that decisions are made in line with Islamic legislation. According to Abdul Rahman, consultation would involve an enforced division of corporate gover-nance from an Islamic perspective when board members and top executives take into account suggestions from corporate beneficiaries before formulating any decision.93 Evidence that supports consultation in Islam is found in the Qurʾānic verse:

And by the mercy of Allah, you dealt with them gently. And had you been severe and harsh-hearted, they would have broken away from about you; so pass over [their faults], and ask [Allah’s] forgiveness for them; and con-sult them in the affairs. Then when you have taken a decision, put your trust in Allah, certainly, Allah loves those who put their trust [in Him].94

90 Supra note 34, at 279.91 Saleh al-Fawzaan, Doctrinal Summary, Arabic edn. (Madina: Islamic University, 2002),

p. 95.92 Qurʾān 38:24.93 Supra note 3, at 61.94 Qurʾān 3:159. Allah also articulates ‘And those who answer the call of their lord and

perform the salat, and who conduct their affairs by mutual consultation, and who spend of what we have bestowed on them’ (Qurʾān 42:38).

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4.4 IntegrityThe Islamic integrity requires that man strives to remain honest and upright (amānah) since human nature possesses a number of destructive behaviours: explicitly cheating, deception, stealing and bribery.95 Thus, every individual involved in a corporation is liable to act in accordance with the moral and ethi-cal standards valued in Islam. Allah says: ‘O you who believe, betray not Allah and his messenger, nor betray knowingly your amānah [things entrusted to you and all the duties which Allah has ordained for you].’96

4.5 TruthfulnessTruthfulness (ṣiddiq) is a major value in Islam. Truthful people are, in particu-lar, those who do not lie in their words, deeds and faith, as well as those who are rated second and equal after all Prophets (peace be upon them) at the day of resurrection.97 Allah says:

And who so obeys Allah and the messenger [Muhammad], and then they will be in the company of those on whom Allah has bestowed his grace, of the prophets, the ṣiddiqūn [those followers of the prophets who were first and foremost to believe in them, the martyrs, and the righteous]. And how excellent these companions are!98

95 Supra note 34, at 280.96 Qurʾān 8:27. Allah also says ‘And eat up not one another’s property unjustly [in any illegal

way e.g. stealing, robbing, deceiving, etc.], nor give bribery to the rulers [judges before presenting your cases] that you may knowingly eat up a part of the property of others sinfully’ (Qurʾān 2:188). Allah states ‘Verily, Allah commands that you should render back the trusts to those to whom they are due; and that when you judge between men, you judge with justice. Verily, how excellent is the teaching which he [Allah] gives you! Truly, Allah is ever all-hearer, all-seers’ (Qurʾān 4:58). In addition, the Prophetic tradition approves that ‘The Quraish [Prophet Muhammad’s tribe] had been anxious about the Quraish woman who had committed theft, and said: Who will speak to Allah’s Messenger about her? They said: Who dare it, but Usama, the loved one of Allah’s Messenger? So Usama spoke to him. Thereupon Allah’s Messenger said: Do you intercede regarding one of the punishments prescribed by Allah? He then stood up and addressed [the people] saying: O people, those who have gone before you were destroyed, because if any one of high rank committed theft amongst them, they spared him; and if anyone of low rank committed theft, they inflicted the prescribed punishment upon him. By Allah, if Fatima, daughter of Muhammad, were to steal, I would have her hand cut off ’; see Muslim ibn al-Hajjaj Nisaboori, Ṣaḥīḥ Muslim, Ḥadīth No. 4187, (Saudi Arabia: Darussalam for Publication and Distribution, 1999), p. 953.

97 Supra note 19, at 291.98 Qurʾān 4:69.



In regard to the Islamic framework for corporate governance, corporate board members and top executives should attend to the value of truthfulness in all their corporate activities, especially when providing information company policies, transactions and most importantly the board’s annual financial state-ments, thereby enabling all corporate stakeholders and beneficiaries to make reasonable decisions.99

4.6 Sincerity and IntentionSincerity (ikhlāṣ) and intention (niyyah) are principal values since whether individual acts are considered intentional or non-intentional is of crucial importance in Islam.100 The necessity for sincerity has been laid down in the traditions of Prophet Muhammad:

The [reward of] deeds, depends upon the intentions and every person will get the reward according to what he has intended. So, whoever emi-grated for the sake of Allah and his apostle, then his emigration will be considered to be for Allah and his apostle, and whoever emigrated for the sake of worldly gain or for a woman to marry, then his emigration will be considered to be for what he emigrated for.101

In reference to corporate governance from an Islamic perspective, a corpo-rate governance framework should help ascertain whether the intentions and actions of corporate board members and top executives are scrupulously hon-ourable and guarantee that they fulfil their obligation to sustain a successful, profitable corporate strategy, specifically for shareholders and other stake-holder beneficiaries.102

4.7 Islamic BrotherhoodIslamic brotherhood (ukhuwah) is an alternative but critical value that illus-trates that all humans are equal, regardless of colour, language or gender. Humans should avoid discrimination, but rather admire each other as Allah’s creation.103 Allah says:

99 Supra note 19, at 295.100 Ibid., at 298.101 Muhammad al-Bukhārī, Ṣaḥīḥ Bukhārī, Ḥadīth No. 680 (Saudi Arabia: Darussalam for

Publication and Distribution, 1999), p. 1493.102 Supra note 34, at 280.103 Ibid., at 280.

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O mankind! We have created you from a male and a female, and made you into nations and tribes, that you may know one another. Verily, the most honourable of you with Allah is that [believer] who has taqwā [piety]. Verily, Allah is All-Knowing, All-Aware.104

The concept of Islamic brotherhood underlines a variety of opportunities for co-operation, e.g., participants in a corporation can be empowered to work together in an effortless and congenial manner. Moreover, under Islamic leg-islation, managers are provided with ways to look after their workers and act on their behalf. Therefore, such managers would be more likely to treat their employees as they would brothers and sisters. In this way, Islamic brotherhood can be implemented.105

5 Do the Principles of Corporate Governance Supplemented by Islamic Law Attain their Purpose?

Recent developments have led to renewed interest in the field of corporate governance from an Islamic perspective and have stimulated enquiry into whether religious theory could augment corporate governance practice effec-tively. In other words, because of the relationship between corporate gov-ernance and various Islamic values, namely the objective of wealth (māl), researchers abroad have begun investigating whether a corporate governance model supplemented by an emphasis on Islamic ethics might compete effec-tively with other eminent corporate governance models, such as the Anglo-American shareholder and the Continental European stakeholder models.

A number of ideologies highlight the differences between an Islamic corpo-rate governance model and common theories of governance. Firstly, the ethi-cal basis for Western business stems chiefly from socially derived secular, not religious, morals and values. Secondly, the fundamental theories of Western corporate governance models persist in emphasising self-interest, although there is a trend to amend certain principles to suit the interests of society. Finally, the major theoretical framework for corporate governance is based on the agency theory.106

It might be worth noting that the Anglo-American corporate governance shareholder model has integrated a significant variety of robust measures,

104 Qurʾān 49:13.105 Supra note 2, at 130.106 Supra note 7, at 14.



including legal protection of shareholders, persistent requirements for disclosure and transparency, and bankruptcy and insolvency legislation.107 Nevertheless, critical approaches most frequently focus on why corporations functioning in the Islamic world appear so appealing compared to the Anglo-American shareholder model regarding the implementation of corporate practices and undertakings. This phenomenon has been observed by various academics studying corporate governance issues. Hasan comments that many Islamic corporations have approved and put into practice the Anglo-American corporate governance shareholder model,108 while Al-Gamal observes that worldwide one can find multiple corporate governance models. Nevertheless, the Anglo-American shareholder model can be employed alongside the corpo-rate governance model formulated from an Islamic perspective.109

Hence, there is sufficient evidence with which to evaluate this trend. One can assume that various countries, including some in the Islamic Community, have adopted the Anglo-American shareholder model to enhance affordability and attract investments.110 According to Miles and Goulding, a major moti-vational force behind adaption of the Anglo-American shareholder model by Islamic capital markets and corporations is an attempt to provide occupations and contribute as a global competitor in the business world. At present, com-pared with the principles of international corporate governance, the attempts of nearly every Islamic country to install Islamic principles of corporate gover-nance remain under par.111 This observation rests on a variety of factors related to the huge number of political, legal, social and economic issues with which the Muslim world is struggling, e.g., reports on high levels of illiteracy, failures to provide women’s rights as well as repression of human rights, religious radical-isation, and the existence of fraudulent repressive regimes without a mandate. Such issues undoubtedly diminish the charisma of Islamic countries in terms of their ability to function as open markets, to conduct business in general, and to implement the best corporate governance practices in particular.112 It can also be argued that, although Islamic corporate governance would provide an ethical framework based on Muslim values, one cannot overlook the fact that Muslim countries have a poor record with regard to corruption. Many of the

107 Alvaro Cuervo, ‘Corporate governance mechanisms: A plea for less code of good governance and more market control’, Corporate Governance 10 (2002): 86.

108 Supra note 4, at 8.109 Supra note 1, at 9.110 Supra note 2, at 126.111 Ibid., at 130.112 Ibid., at 130.

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commentators who support corporate governance from an Islamic perspec-tive suggest that emphasis of Muslim values would challenge the principles of international corporate governance significantly since previous financial col-lapses and failures have resulted due to greed and the absence of morality in auditing and accounting firms.113

Thus, from an Islamic point of view, one can contend that it is the property of stakeholders, as well as their emotionality, which is at risk when consider-ing corporate capitulations. In particular, certain implications can affect the Continental European stakeholder and Islamic corporate governance models.114 While it was thought that the objectives of the Continental European model were intended to enhance the profits of all the beneficial stakeholder groups, as well enabling them to make decisions concerning corporate activities, it has become apparent that corporate governance from an Islamic perspective has the same aforementioned targets115 although the latter has taken further steps to increase income, to abide in line with Islamic values and legislation.116 Another reason why Islamic corporate governance is thought to diverge from the Continental European model is because Islamic corporations empower stakeholder privileges more fully based on the strong belief in one’s account-ability to Allah.117 In particular, Slahudin compared the principles of corporate governance from an Islamic perspective with those of the OECD. He sum-marised that, while the OECD covers six different aspects and rights, corporate governance from an Islamic perspective has a broader prospect and incorpo-rates commitments beyond those to shareholders, financiers, suppliers, cus-tomers and employees.118

In contrast, the development of corporate governance principles from an Islamic perspective has been criticised by observers. Miles and Goulding assert that Islamic corporate governance does not provide a topical model, since its theory is a combination of recommendations and prescriptions that are pre-arranged in an ambiguous fashion. In addition, scholars note that Islamic corporate governance is not legally enforceable because it goes beyond the corporate governance principles globally acknowledged.119 Another criticism is that Islamic law does not include any definitions or interpretations for the

113 Rodney Wilson, ‘Islam and business ethics’, New Horizon, 132 (2003): 15-16. 114 Supra note 33, at 18.115 Supra note 5, at 31.116 Supra note 4, at 8.117 Supra note 2, at 130.118 C. Slahudin, ‘OECD principles and the Islamic perspective on corporate governance’,

Review of Islamic Economics 12(1) (2010): 29-39.119 Ibid.



term ‘corporate governance’. As a result, we must ask: how can one identify a possible link between current principles of corporate governance in a global versus Islamic context?120

Although we agree with the opinions stated above, it can also be said that even if corporate governance from an Islamic perspective were valid for Muslim corporations, it would prove ineffective for global corporations whose principles are secular. One can therefore argued that such studies fail to clar-ify how Islamic legislation can empower corporate governance, either within Islamic institutions or global corporations. In particular, it is not yet apparent how Islamic sources, objectives and values might be satisfied in light of corpo-rate and capital market submission.

6 Evidence from Saudi Arabia

Having examined the main principles of corporate governance from an Islamic perspective, Section 6 will examine the extent to which the Saudi regulator (Capital Market Authority Board) has commended these ideals within its cor-porate governance framework. In other words, does the Saudi corporate gov-ernance framework sensibly sustain these main principles from an Islamic perspective? Hence, we must now investigate significant points in the Saudi Corporate Governance Code (hereafter CGC) to ascertain whether they sup-port these ideals from an Islamic perspective.

It is said that the CGC necessitates a number of excellent practices: i.e., requiring the board of directors to meets the needs of its sub-committees (e.g., the audit, nomination and remuneration committees), adhering to adequate disclosure and transparency requirements, respecting shareholder rights. In particular, most CGC fundamentals are promulgated by UK recommendations and OECD principles on corporate governance.121 Accordingly, this demon-strates how the Saudi regulator (Capital Market Authority Board) would deter-mine a viewpoint from an Islamic perspective in response to its corporate governance framework.

It is significant to note that, from the outset of the CGC, nowhere has infor-mation been offered on the principles of corporate governance from an Islamic perspective. The Capital Market Authority Board says:

120 Muhammad Sourial, Corporate Governance in the Middle East and North Africa: An Overview, Arabic edn. (Cairo: Egyptian Ministry of Foreign Trade, 2004), p. 20.

121 Riyadh Chamber of Commerce and Industry, Corporate Governance: The Definition, the Principles, and the Saudi Experience, Arabic edn. (2007), p. 10.

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These regulations include the rules and standards that regulate the man-agement of joint stock companies listed in the stock exchange to ensure their compliance with the best governance practices that would ensure the protection of shareholders’ rights as well as the rights of stakeholders.122

Accordingly, when introducing the CGC, the Capital Market Authority Board did not consider the Basic Law of Governance in terms of passing new laws to operate alongside Sharīʿah legislation. The Basic Law of Governance is the primary constitutional law of Saudi Arabia, and all economic, finance and administrative regulations must operate in accordance with its mandate. It is, however, frequently debated whether the Capital Market Law and imple-menting regulations, including those of the CGC, are separated by powerful regulations enacted by the Capital Market Authority Board in order to resolve capital market and corporate transactions and dealings without consideration of other Saudi laws, including the Basic Law of Governance. This is, in fact, clear since the majority of ideals and regulations implemented for the capital market have been promulgated worldwide to satisfy the needs of the Capital Market Authority. Therefore, the Capital Market Authority Board cannot aban-don a supportive capital market that is implementing regulations, even when such regulations have no Islamic centre. It is therefore of utmost importance that such regulations do not contradict basic Islamic legislation. In approving this, the Basic Law of Governance insists that: ‘The religion in Saudi Arabia is Islam and the constitution is the Book of Allah and the Sunnah [Ḥadīth] of His Messenger.’123

It is obvious that the CGC has inherited some features from the Anglo-American corporate governance shareholder model. For example, according to the CGC, a member of the board of directors can represent all shareholders,124 i.e., a declaration confines accountability to shareholders only. As a result, board of director accountability, as mentioned under the CGC, remains in line with the meaning of accountability from an Islamic perspective, which inspires members of the board to be accountable to Allah in all their worldly actions, albeit personal or corporate.

Another significant example of the efficacy of the Anglo-American corpo-rate governance shareholder model is the influence it has had on Article 11-C of the CGC, which insists that the board of directors must carry out its duties in

122 CGC 2006, Art. 1(A).123 Basic Law of Governance 1992, Art. 1.124 CGC 2006, Art. 11(D).



a responsible manner, in good faith and with due diligence.125 This statement resembles the UK Companies Act but does not involve the attendant consider-able discussion regarding the significance of this point.

The Capital Market Authority Board, advisably, should improve the CGC in line with the following idea where possible. In a Muslim society such as Saudi Arabia, a corporate governance framework should function in accordance with Islamic legislation as well as alongside other significant regulations that do not conflict with Islamic law. Consequently, two possible steps in this direc-tion have been mentioned by corporate governance scholars as follows:126

(1) to create a corporate governance framework based on the core of Islamic legislation and thereafter to scrutinize said framework with reference to modern corporate governance models; or

(2) to initiate corporate governance by consulting modern corporate gov-ernance models, scrutinize them against Islamic legislation, and then accept only those principles of modern corporate governance which are consistent with Islamic law.

It is recommended that the Capital Market Authority Board take seriously the development of a Saudi corporate governance framework based on Islamic principles, because Saudi society is founded upon Islamic values that have led to considerable clarification about the meaning of justice, trustworthiness and brotherhood in Islam. Thus, as relatively recent phenomenon in literature, corporate governance from an Islamic perspective has not yet been empow-ered as an indispensable instrument for supporting a Saudi corporate gover-nance framework. Certainly, capital market law, company law and regulations for their implementation are the aspects of law directly referenced for the implementation of Saudi corporate governance provisions and have a secular approach since their provisions are promulgated pursuant to on-going inter-national corporate governance principles. This simply indicates that the Saudi regulator is not too familiar with corporate governance from an Islamic stand-point, although Islamic legislation and values form the backbone of Saudi law. It appears, however, that while the Saudi regulator is not adverse in terms of corporate governance from an Islamic perspective, it operates without imple-menting actual practices and theory due to the uncertainty surrounding it.

125 Ibid., Art. 11(C).126 Supra note 70, at 80. See, also, supra note 6, at 285.

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7 Conclusion

This article analyses the theory of corporate governance from an Islamic per-spective. It aims to discover how a Saudi corporate governance framework can benefit in the global business arena by incorporating Islamic principles, by conveying the usefulness of Islamic legislation and religious values during implementation of corporate practices, and by examining whether supple-menting corporate governance with the principles of Islamic law will prove satisfactory.

The article discusses Islam and the sources of Sharīʿah law: i.e, the Holy Qurʾān and Sunnah (Prophetic traditions) as primary and ijmāʿ (consensus) and qiyās (analogical deduction) as secondary sources. The correlation between these original sources and the theory of corporate governance from an Islamic perspective is explained. The Sunnah is presented as the most crucial source of Islamic law for the purpose of clarifying Islamic values since it contains impor-tant illustrative examples from Prophetic traditions and customs.

Islamic objectives (maqāṣid al-sharīʿah) are discussed by focusing on the principles of wealth (māl) and Oneness of Allah (tawḥīd). Each objective pre-sented constitutes a key element in corporate governance. Therefore, justifi-cations for the acceptance of contracts, the prohibition of usury or interest (ribā), gambling (qimār), and uncertainty (gharār), as well as encouragement to pay alms (zakāt) are detailed.

Section 4 investigates Islamic values by highlighting accountability (ḥisāb), justice (ʿadālah), consultation (shūrā), integrity (amānah), truthfulness (ṣiddiq), sincerity (ikhlāṣ), intention (niyyah), and brotherhood (ukhuwah). Most importantly, the question to what extent the principles of corporate gov-ernance supplemented by Islamic law can achieve its aim is posed. Evidence from Saudi Arabia is also discussed. Overall, it appears that Islamic corporate governance is a satisfactory theory for encouraging legislation and upholding values in day-to-day business activities compared with the recent corporate governance model which is, however, an admirable attempt as studied in lit-erature on corporate governance. In particular, corporate governance from an Islamic perspective should be taken into consideration by the Saudi regulator since Sharīʿah law is the primary law in Saudi Arabia.

Corporate Governance from the Islamic Perspective

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