Islamic Bank’s Governance on Intellectual Capital Aspects Towards Sustainable Development Goals
Abstract
This paper aims to propose a framework on Islamic bank’s governance on intellectual capital aspects towards sustainable development goals. This serves as an integrative guide for future research. As all the countries are putting efforts to achieve sustainable development goals, this paper thus advances the concept of sustainable development goals and objective of Shariah through new perspectives of the governance of Islamic value creation (Islamic value-based practices). The concept of sustainable development goals and objective of Shariah are taken as the domain theories, and Islamic value-based practices as the method theory. These theories are used to develop a conceptual framework that guides the implementation of Islamic banking practices, using literature review analysis as the methodology. The conceptual framework depicts that the performances of banking practices with regards to intellectual capital aspects and critical success factor aspects of corporate governance, are linked to the sustainable development goals, within the scope of Shariah.
Keywords: Banking Practices, Intellectual Capital, Objective of Shariah, Practice Theory, Sustainable Development Goals
Introduction
Sustainable development goals (SDGs), which is also known as the Global Goals comprises 17 integrated or interconnected Sustainable Development Goals. In agreement with the SDGs, by looking at the SDGs from Islamic point of view, these goals actually fit within the concept of objectives of Shariah. However, among the thousands of publications on the SDGs in two largest academic databases (Scopus and Web of Science), only 15 articles are discussing this subject area in relation to Islamic aspect by 17th April 2023.
In this article, we aim to develop propositions that bridge SDGs with Islamic perspective that provides an integrative guide for future research. In doing so, this paper thus aims to advance the concept of SDGs and objective of Shariah (domain theories) through new perspectives of the governance of Islamic value creation (Islamic value-based practices) as the method theory. The scope of practices emphasised is the intellectual capital aspect of an organisation, within the scope of Islamic banking industry, and their relation with SDGs, especially the 16th and 17th SDGs which are directly related to this industry.
This paper narrows the discussion on SDGs from Islamic perspective on banking industry whereby this industry is chosen due to the important role of banks as financial intermediaries of financing that contributes towards the performance of real economy and sustainability (Global Alliance for Banking on Values, 2019; Kamarudin et al., 2022). This requires the banks to implement good banking practices in boosting economic growth (MacDonald, 1998), especially in achieving the 16th and 17th SDGs.
With regards to the 16th SDG, the recent collapsed of Silvergate Bank, Silicon Valley Bank and Signature Bank in the United States can be taken as the best example for a need of strong institution. United States, the largest economy in the world with 41.89% share of the global gross domestic products in 2021 (Statistics Times, 2021), is facing immediate crisis and raising concern on economic growth of the country due to the collapsed of three of its digital-assets or crypto-friendly banks (Azhar & Barbuscia, 2023). Silvergate Bank collapsed after its high-profile client went bankrupt, and the bank was questioned for its failure to detect suspicious transactions done by its high-profile client, causing the bank’s customers to withdraw their deposits (Mason, 2023). The second bank, Silicon Valley Bank went bankrupt after customers were aware that the bank was short of capital after the bank announced a $1.75 billion capital raising after a loss-making sale of its bond portfolio (Barrett, 2023). Following the collapsed of Silicon Valley Bank is the collapsed of Signature Bank as customers moved their deposits to different bank (Bushard, 2023). These incidences called for examination on bank’s governance in terms of regulation, capital adequacy and risk management (Bushard, 2023; Khatsenkova, 2023).
On the other hand, the second largest economy, China with 34.75% share of the world’s gross domestic products (Statistics Times, 2021) is playing a role as a source, transit and demand country for transnational crimes, with its government itself is engaging in criminal activities such as forced labor and intellectual property rights violations (Mavrellis & Cassara, 2022). Besides the happenings in the two largest economies, global economy also is having concerns on the inadequate oversight of the mushrooming number of free trade zones globally, thus encouraging international criminal activities and illicit financial flows (Rowden, 2022). These financial crimes contribute to societal ills and create threats to financial stability (The Institute of International Finance & Deloitte LLP White Paper, 2019) and sustainability (Ruggiero, 2022). According to Ruggiero (2022), According to Ruggiero (2022), a sociology professor of Middlesex University, London, decriminalization of financial crimes will boost sustainable finance. However, “…sustainable finance will grow increasingly unsustainable due to its hypertrophic growth beyond the boundaries of the law” (Ruggiero, 2022, p. 150).
With the apparent issues and urgency to address the above-mentioned issues in relation to SDGs, this paper aims to integrate Islamic perspective on the issue of bank’s governance. According to Bank for International Settlements (2015), the primary objective of corporate governance is “safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis”. This definition is in line with the objective of Shariah which aims at preserving human life, religion, reason, progeny and wealth, whereby these objectives are deemed definitive, indisputably universal and thus become the pillars to Islamic jurisprudence (Al-Raysuni, 2005). These objectives also are parallel with the SDGs, although Islamic rules in finance go beyond the SDGs requirement such as in terms of the prohibition of interest or involvement in prohibited business sectors such as intoxicants and gambling, the requirement for underlying assets in sales and asset-backed financing to protect the parties involved in the transactions, making the observation of objectives of Shariah as more stringent than fulfilment of the SDGs alone. Due to its broader concept and compatibility with the SDGs, this paper insists on tackling the issue of financial crimes towards the fulfilment of the SDGs from Islamic perspective.
The research question that guides this aim is “how can Islamic banking practices be implemented by an organisation in managing its intellectual capital towards the fulfilment of the SDGs?”. In the next section, research approach being used in this article is presented, whereby firstly, in the first phase analysis, literature review on Islamic banking practices (key phenomena in this paper) and the gap identification are conducted. In the second phase, the result analysis of available literature in relation to critical success factor of governance is also done to support the generation of pre-theoretical ideas. Lastly, in the third phase, the conceptual framework is developed through identification of concepts and their connections.
Corporate Governance
“Corporate governance involves a set of relationships between a company’s management, board, shareholders and stakeholders. Corporate governance also provides the structure and systems through which the company is directed and its objectives are set, and the means of attaining those objectives and monitoring performance are determined” (Organisation for Economic Co-operation and Development, 2023, p. 6). As such, corporate governance plays a role in building the environment of trust, transparency and accountability that is necessary in fostering long-term investment, business integrity and financial stability, towards stronger growth and inclusive societies (Organisation for Economic Co-operation and Development, 2015).
In Australia, the systemic misconduct and governance failures of banks and other financial services that occurred despite the establishment of good remuneration system (Staples & Linden, 2019). The systemic misconduct and governance failures are deemed to be rooted from the key issue of corporate culture (Wishart & Wardrop, 2018), indicating the link between corporate culture and governance (Graham et al., 2021). A study done on public firms in the US found that corporate governance reduces organisations’ financial leverage (Hasan, 2022).
Corporate governance also affects credit ratings (Grassa, 2016). A study done on 80 Islamic banks in GCC and Southeast Asia found that overall board independence, proportion of women and old directors, share listing ownership, and CEO founder are positively correlated to credit ratings of Islamic banks as these factors lead to higher monitoring and independence (Grassa, 2016). On the other hand, CEO power and tenure, and the number of blockholders who own 5% or more, with foreign ownership are negatively related to credit ratings, whereby their influence may compromise corporate governance and management decision (Grassa, 2016).
Similarly, the aspect of bank governance is pivotal for Malaysian banking institutions which are highly-regulated (Kamarudin et al., 2022). Moreover, with all the financial crimes that are attacking the country (corruption, money-laundering, fraud or scam, and cybercrime) that caused losses to Malaysian citizen and the country as a whole, such as the 1MDB case, it calls for an upgrade in the banking governance. Individuals and customers thus questioned the inefficiency of Malaysian banks, as recorded by Nair (2022), and raised the issue of accountability of the banks in handling the financial crimes incidents (Bong, 2022; Dass, 2022; Ismail & Asrol, 2022; Thomas, 2022) and the thoroughness of banks’ due diligence and internal control (Jones, 2020). Aside from risk from external parties, Malaysia is not free from risk of crimes internally as there have been few reported cases of crimes done by bank employees (Che Noh, 2021; Mohamad, 2021; Yahaya, 2021). In fact, Bank Negara Malaysia (2020) reminded on the risks associated with customer information, human capital, operational aspect, and information technology. The presence of the risks from human capital (competency or expertise) and technological infrastructure is proven by previous studies (Latif & Abdul-Rahman, 2018; Said et al., 2013).
Specifically for banking sector, in 2016, Bank Negara Malaysia (2016) issued a policy titled ‘Corporate Governance’ which detailed out the standard and practices for sound corporate governance by financial institutions. The policy listed the key responsibilities of the board, senior management, and the group towards establishing governance, supporting culture and remuneration system, besides providing corporate governance disclosures of the corporation (Bank Negara Malaysia, 2016). The emphasis on the role of leader in the aspect of governance is in line with Islamic perspective which considers the responsibility of a governor comes along with the position as a leader (Abdallah et al., 2019).
Research Approach
Besides, this research in done due to a gap found in a pre-research phase whereby only 15 articles from Scopus and Web of Science databases are discussing about SDGs and Islam or from Islamic perspective in the same article by 17th April 2023. Key terms used for the ‘article title’ search are limited to (1) “SDGs AND Islam*”, and (2) “sustainable development goals AND Islam*”.
Based on the 15 available literature which linked Islam with SDGs, none has focused on the intellectual capital aspects of banking practices within the umbrella of Islamic perspective which is represented by the objective of Shariah, and the SDGs. This research will narrow the subject of interest on Islamic banking practices. In developing an integrated view on Islamic banking practices, (1) literature review within banking sector is done whereby gap identified from the literature review conducted is highlighted. After that, (2) literature review on critical success factor of corporate governance that support banking practices is conducted. Then, (3) conceptual framework is built on compatible theories to depict an integrated view that fills and links the gap on the Islamic value-based practices of Islamic bank.
Phase 1: Literature review and identification of research gap
Literature review is done on relevant articles within banking context, in relation to banking practices in intellectual capital aspects. This paper focuses on intellectual capital which is deemed as strategic asset, in which value-creation depended on to enhance organisation performance through added value (Gupta & Raman, 2020). Only 17 most relevant journal articles from 2012 until 2022 on banks’ intellectual capital which are covered within the context of this paper are found and analysed.
Based on the analysis conducted on the 17 journal articles, only two journal articles linked the aspect of banking practices with the SDGs. Moreover, most studies on the practices of the banking organisations measured the results of the practices on the organisation, without integrating or stretching the end result towards SDGs. Thus, the integrated theories conceptualised in this paper will produce a more meaningful results for the organisation and simultaneously, lead towards the accomplishment of SDGs.
Phase 2: Supporting analysis on critical success factors
In emphasizing the result of analysis from Phase 1, literature review also is conducted on critical success factor of the key phenomena. The critical success factor that is covered in this paper is governance, as mentioned in the introduction section. Governance aspect is chosen as within the context of value-based banking practices. This is because corporate governance aspect (including Shariah governance), which is covered within the themes of corporate responsibility (Egri & Ralston, 2008), has the highest relevance to value-based banking practices context. Corporate responsibility is an integral part of corporate activity, whereby it emphasises a company’s responsibilities to every stakeholder, in which these responsibilities are constant (always exist) (Waddock, 2009). Corporate responsibility differs from corporate social responsibility which is a voluntary activity (Waddock, 2009).
Only 10 journal articles are selected due to their high relevance to the context of this paper. Based on the summary and analysis done on the 10 most relevant journal articles on bank’s governance from year 2012 until 2022, it further highlighted that the available literature does not integrate the aspects of banking practices and bank’s critical success factor with SDGs and objective of Shariah.
Phase 3: Development of integrated conceptual framework
Based on the above analysis, conceptual framework is developed. Theory of objective of Shariah which is inclusive and goes beyond the SDGs to guide the banking practices as a whole, is chosen as the umbrella theory. Banking practices in relation to intellectual capital aspects of organisation for value creation (Gupta & Raman, 2020), with the support of critical success factor of governance then should be linked with the SDGs in terms of financial and non-financial aspects. The banks’ mission towards value-creation must be tailored to all levels within an organization to allow better decision making at all levels of the organization (Association of Chartered Certified Accountants, 2023; Koller, 1994). The value-created towards the SDGs should benefit all stakeholders (internal and external).
Besides, practice theory can be used as a method theory to achieve the objectives of Shariah. Practice theory which highlights the significance of daily activities, as they congeal into repetitive practices that are rooted within their contexts, leads toward conformity, through discipline, socialization or professionalism (Whittington, 2018). The practices later on initiate changes at micro level activism (generative micro practices) which then transform organisations (Kahtomaki et al., 2020). The term ‘practice’ includes not only practices-in-use, but everything such as formal or strategic discourse, strategic sensemaking through storytelling or narratives (Rouleau, 2005), and also pre-linguistic and inarticulable expression (Rouse, 2007).
Therefore, banking practices in managing the organisation’s intellectual capital, along with the organisation’s critical success factor should be done in manners that will initiate positive changes that promotes the achievements of the SDGs. From Islamic perspective, the practices also should be in line with the objective of Shariah.
Conclusion
This paper aims to develop a conceptual framework to guide the implementation of Islamic banking practices in managing its intellectual capital towards the fulfilment of the SDGs. The conceptual framework is governed by the theory of objective of Shariah as the umbrella theory and theory of practice as the method theory. Therefore, bank performances from the practices of intellectual capital management and critical success factor aspects of governance that drive value-creation are linked to the SDGs, as bound by the Shariah. As the conceptual framework is developed based on literature review analysis, future research may be done to provide empirical evidence.
Acknowledgments
The authors acknowledge the financial support of Universiti Teknologi MARA through the Institute of Graduate Studies (IPSiS).
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Talib, S. A., Zin, N. M., & Kasim, E. S. (2023). Islamic Bank’s Governance on Intellectual Capital Aspects Towards Sustainable Development Goals. In J. Said, D. Daud, N. Erum, N. B. Zakaria, S. Zolkaflil, & N. Yahya (Eds.), Building a Sustainable Future: Fostering Synergy Between Technology, Business and Humanity, vol 131. European Proceedings of Social and Behavioural Sciences (pp. 515-523). European Publisher. https://doi.org/10.15405/epsbs.2023.11.44