Islamic taking interest (restrict in Islam) making it non

Islamic finance is the term used for such
financial transactions that are duly allowed by the shariah (Islamic law).  Islamic law is derived from the guidelines by
Quran, Sunnah, Ijma and Qiyas (Maghrebi, Mirakhor, and Iqbal 2016).the primary
source of shariah (Islamic law) prohibits dealing in excessive risk taking
primarily called Gharar, shifting risk but not sharing risk, interest (riba),
soud, ambiguity, gambling, unethical investments (i.e. investing in pornogharpy
or speculative businesses and such investments which are not asset backed.
These guidelines, together, are the main principles of shariah.

With practical Point, (Hayat and Kabir 2016) Muslims are not allowed to
invest in some sectors (e.g. Insurance), transfer or rotate risk through
derivatives (financial risk swaps) or take or give loans on conventional
grounds (e.g. conventional bonds and loans). Islam allows to take
entrepreneurial risk and to earn profit from it i.e. investment in listed
stocks but almost every firm is paying of taking interest (restrict in Islam)
making it non permissible for investing. To overcome this hectic problem
(Derigs & Marzban, 2008), shariah experts have allowed to invest in stocks
if they meet following terms:

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

·        
Earning
from ethical business of a firm must be less than 5%.

·        
Debt to
market value of equity (24 month average) must be less than 33%.

·        
Accounts
receivables to market value of equity (24 month average) must be less than 49%.

·        
Cash to
market value of equity (24 month average) must be less than 33%.

Dow jones follow this criteria currently to screen stocks being halal. External shariah holders provide
this halal certification to firms and
charge some fee, same as for credit rating. (Hayat et al., 2013)

Data from which source to be taken for
Pakistan??? Pls guide

The word governance is derived from a Greek word “kybernan
meaning to guide or to control. Corporate governance in broader sense meaning
the relationship of firm with its stakeholders and society as well (Yasser,
2011). The definition of corporate governance in Islamic context does not
differ much more than its conventional definition as it refers to the system by
which companies are directed and controlled with the objective of meeting its
goals and also protecting the rights of its stakeholders, but the Islamic
paradigm encourages honesty, integrity, transparency, accountability and
responsibility to all stakeholders with in the organizations (sayd et al.,
2011).

Corporate
governance is basically to solve the agency problems of organizations but
agency issues in Islamic institutions are examined and solved in a bit
different way from its conventional peers because the operations and contracts
differ from conventional peers, so, this change the concept of issues of
control and separation lying in agency theory. Managers of Islamic banks work,
under shariah guidelines, to maximize stakeholder’s benefits (Archer et al.,
1998).

In this research we will be more conscious
about finding that being Islamic says anything about good CG especially with
respect to Pakistan. The attention given to this perspective is because Islamic
industry is growing very rapidly and has a size of US $2.2 trillion (Reuters
2013). Most of the study on Islamic finance is seems to be positive, for
example, (i) during crisis, Islamic index return is positive as compared to
conventional return (Ho et al., 2014; Bhatt and Sultan, 2012, and
Jouaber-Snoussi et al., 2012); (ii) Islamic banks are less credit risky than
conventional counterparts, Abedifar et al. (2013), ;(iii) Amran et al. (2011)
evidence that Islamic banks are more likely to disclose corporate
sustainability disclosure than conventional banks.(iv) Islamic banks, disclose
more information which in return reduce dissatisfaction level of their
customers. Khuram Shahzad Bukhari, Hayat M. Awan, Faareha Ahmed, (2013); (v)
Islamic banks perform very efficiently in use of capital for short term
finances than their conventional peers(Ghafoor 2009). Moreover in a competitive
market the Islamic financial institutions are better managed and performed well
than conventional peers. (Ghafoor, 2009)

More precisely this research will focus on linkage
between leverage, governance and Islamic finance in Pakistan, but it is
unfortunate that we are unable to find much search on this link. In early days
(Jensen, 1986) debt was consider to be the main tool to control the managers
from wasting the company cash (for example, unnecessary mergers and
acquisitions) but recently regulations are also considered important to
discipline the managers. (Jiraporn & Gleason, 2007) find that if the
governance of a firm is weaker then it has high leverage in order to control
managers, but higher leverage will result in better governance and show a positive
relationship is also argued by Berger et al., (1997), Jiraporn & Liu, (2008)
& Kabir & Hayat, (2016), also this relationship is not much stronger
(Kabir & Hayat, 2016).  This is the
indication that the role of disciplining the managers have been taken by
governance rather than higher debt.

Governance
has positive relationship with Islamic financial institutions(Hashim, Mahadi
& Arman) but (Hayat & kabir, 2016) argues that governance in Islamic
firm & non-Islamic peers are quite similar and the do not carry significant
differences. Islamic firms have low leverage than non-Islamic firms. Apring
& Sautner (2010) analyze Dutch companies by using difference in difference
approach and concludes that debt can be reduced by increasing governance
quality and is also helpful in solving principal-agent conflicts. Recently
Jiraporn et al., (2012) use the Corporate Governance Quotient Score (CGQ) to
find the increase in governance quality tends to lower the debt and conclude
that debt is being the close substitute to the Good governance. They also
argued that the flow of causality is from governance to leverage meaning change
in governance quality does not reflect change in leverage but is causes change
in the leverage

x

Hi!
I'm Mack!

Would you like to get a custom essay? How about receiving a customized one?

Check it out