Corporate governance is a new concept that has practices as old as the creation of business. Corporate governance varies depending on culture, institution and a local country, despite its universal recognition as playing an instrumental role in determining the success of businesses. Corporate governance has been defined in a variety of ways and experts have been unable to agree on a single unified definition. However, according to Gokhale, Bilolokar & Co (2009), corporate governance is a set of procedures, regulations, policies, and rules that help to maintain the effective and efficient administration and control of corporations. Corporate governance also deals with relationships among internal and external stakeholders of a given company, assisting in the fulfillment of e organizational goals. The internal stakeholders of a bank typically include the board of directors, executives and the employees of the company; while the external stakeholders are the shareholders, debt holders, creditors, suppliers, customers, and communities.
The concept of corporate governance ensures that there is total transparency, integrity and accountability of the management. It manages the relationship between all stakeholders who are related to the company. Good corporate governance certifies production, monitors the prudent use of investments by the organization to raise the company’s financial and business activities, and makes investor value. It includes the protection of, and cooperation with stakeholders who have a relationship with the organization (Dr. Amani Bouresli 2010).
In Kuwait, Islamic financial institutions have grown in the last three decades by having a non-conventional process. As institutions rarely succeed without adapting to modern developments and embracing new techniques, Islamic financial institutions in Kuwait have done well to grow in the market. Islamic financial institutions have not achieved the same grade of success in making regulatory environments conducive to greater innovation and development of Islamic capital markets. Standardized regulation is critical to the future growth of the Islamic finance (Modi and Vikram 2007).
According to the IMF's 2004 FSAP report, “minority shareholder protection, mergers and acquisitions, and tender offers are issues that need to be governed and organized by clear rules and regulations, as well as detailed procedures.” The Kuwait securities market is regulated by more than one agency, which forces them to operate within a non-comprehensive legal framework. Corporate governance systems in many countries give fair and equal treatment for all the shareholders of the company, but in Kuwait, this policy is not that clear. This is the main drawback of corporate governance because customers consequently become unwilling to invest in the Kuwaiti Islamic financial institutions.
More than one regulatory agency exists in Kuwait, which creates a gap between regulation and supervision. The agencies stop their activities after forming the principles and take less care of checking whether the principles are followed by Islamic financial institutions, which results in the fact these restrictions do not properly protect minority shareholders. The principles of corporate governance are set by the agencies in Kuwait, but they are not followed by all Islamic financial institutions, perhaps due to the fact that the power of regulation lies with more than one body. This means that the risk of future losses is not adequately addressed.
Aims and Objectives
The core objective of this research is to evaluate the corporate governance performance in Islamic financial institutions in Kuwait, against the recognized standards of corporate governance commonly used are thought to be most effective overseas. Additionally, this research will seek to ascertain the extent to which Islamic financial institutions agree with these standards and to what degree they are appropriate within the Kuwaiti context. Equally, this research e seeks to investigate whether the systems that Islamic financial institutions in Kuwait are operating under are sustainable in the modern global financial environment.
Given the effect of globalization and the impact that foreign banking systems have had on Arabic markets, customers have increasingly high expectations. However, Islamic financial institutions in Kuwait still seem to adhere to the established methods of satisfying their clients. While the current approach has enabled these financial bodies to grow rapidly, it is less clear whether they are suitable for future growth and development. This research aims at examining the likely future repercussions of the decision by Islamic financial institutions in Kuwait to continue their established methodology, when other financial institutions have implemented technological procedures to assist in the process.
The theme of this research is ascertaining the effectiveness of corporate governance in Islamic financial institutions in Kuwait through investigation of how these institutions have used the theories of corporate governance.