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Financial Contracts In Conventional And Islamic Financial Institutions: An Agency Theory Perspective

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  • Khaled Aljifri
  • Sunil Kumar Khandelwal

Abstract

This study examines the differences in the relationships between different stakeholders in conventional and Islamic financial institutions. The accounting and finance literature identifies the major contractual relationships as being those between managers and shareholders (employment contracts) and between shareholders and debt-holders (lending contracts). Both these types of contracts are usually considered to be financial-based contracts, because they rely, among other things, on the firm’s reported earnings. This paper applies agency theory to examine these contractual relationships in the two different financial system. The agency problem can have various forms in Islamic institutions. The agency problem has an additional dimension when managers deviate from the Islamic principles of Shariah. This study is intended to fill a gap which exists in the current literature, relating to the implications of Shariah rules for agency relationships. It also provides an analysis of how agency relationships are different as compared to conventional counterparts and the implications that this has for optimizing the agency relationships by reducing inherent frictions. In this way, this study extends and develops the literature on agency relationships in Islamic finance, thus paving the way for future studies in the direction of corporate governance, contractual relationships, and better disclosure in Islamic financial institutions. The study concludes that Islamic financial institutions have fewer agency problems than their conventional counterparts.

Suggested Citation

  • Khaled Aljifri & Sunil Kumar Khandelwal, 2013. "Financial Contracts In Conventional And Islamic Financial Institutions: An Agency Theory Perspective," Review of Business and Finance Studies, The Institute for Business and Finance Research, vol. 4(2), pages 79-88.
    • Handle: RePEc:ibf:rbfstu:v:4:y:2013:i:2:p:79-88
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    References listed on IDEAS

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    1. Ahmed, Habib & Chapra, Mohammad Umar, 2002. "Corporate Governance in Islamic Financial Institution (Occasional Paper)," Occasional Papers 93, The Islamic Research and Teaching Institute (IRTI).
    2. Simon Archer & Rifaat Abdel Karim & Talla Al-Deehani, 1998. "Financial Contracting, Governance Structures and the Accounting Regulation of Islamic Banks: An Analysis in Terms of Agency Theory and Transaction Cost Economics," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 2(2), pages 149-170, June.
    3. Iqbal, Zamir & Mirakhor, Abbas, 2004. "Stakeholders Model of Governance in Islamic Economic System," MPRA Paper 56027, University Library of Munich, Germany.
    4. Iqbal, Zamir & Mirakhor, Abbas, 2004. "Stakeholders Model Of Governance In Islamic Economic System," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 44-63.
    5. Jens Hagendorff & Michael Collins & Kevin Keasey, 2007. "Bank Governance and Acquisition Performance," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(5), pages 957-968, September.
    6. Marvin Berhold, 1971. "A Theory of Linear Profit-Sharing Incentives," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(3), pages 460-482.
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    Citations

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    Cited by:

    1. Achraf Haddad & Anis El Ammari & Abdelfattah Bouri, 2020. "Comparative and Demonstrative Study Between the Liquidity of Islamic and Conventional Banks in a Financial Stability Period: Which Type of Banks Is the Most Liquid?," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(1), pages 252-273, January.
    2. GholamReza Karami & Tahere Karimiyan & Mohammad Sadegh Ghaznavi, 2016. "Board Size, Non-Executive Board Members and Financial Performance in Non-Usury Banks in Iran," International Journal of Business and Social Research, LAR Center Press, vol. 6(6), pages 49-58, June.
    3. GholamReza Karami & Tahere Karimiyan & Mohammad Sadegh Ghaznavi, 2016. "Board Size, Non-Executive Board Members and Financial Performance in Non-Usury Banks in Iran," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 6(6), pages 49-58, June.
    4. Ibrahim Elsiddig Ahmed, 2020. "The Qualitative Characteristics of Accounting Information, Earnings Quality, and Islamic Banking Performance: Evidence from the Gulf Banking Sector," IJFS, MDPI, vol. 8(2), pages 1-16, May.
    5. Al Mannai, Muna & Ahmed, Habib, 2019. "Exploring the workings of Shari’ah supervisory board in Islamic finance: A perspective of Shari’ah scholars from GCC," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 97-108.
    6. Talla M Aldeehani, 2018. "Effects of the Global Financial Crisis on the Agency Cost of Islamic Banks and Conventional Banks," Applied Finance and Accounting, Redfame publishing, vol. 4(1), pages 41-53, February.

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    More about this item

    Keywords

    Accounting Contracts; Islamic Finance; Agency Problems; Compensation Schemes; Conventional Finance; Corporate Governance;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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