Protecting the interest of profit-sharing investment account holders in Islamic banks: the Nigerian experience

Abstract

Islamic banks (IBs) have three major sources of funds namely: shareholders' funds, transaction deposits and Mudaraba deposits (by profit-sharing investment account holders-PSIAHs). Shareholders have their interest protected by the IBs’ directors, transactional accounts deposits are guaranteed by the banks. PSIAHs on the other hand have no representation on the banks’ board and their funds are not guaranteed. They rely on the goodwill of the banks’ board of directors and management to protect their interest and share profit (if any) from the investment of their funds and could lose some or all their capital if the banks incur losses. This could give rise to moral hazard and agency problem which put the PSIAHs at a disadvantage that calls for the establishment of corporate governance policies to protect their interest. The objective of this paper is to review corporate governance issues in the management of PSIAHs by IBs and to share Nigeria’s experience in the protection of the interest of PSIAHs. It is expected that the Nigerian experience could be a learning point for regulatory and supervisory authorities in other jurisdictions to replicate. The paper contributes to literature on the deposit practices by IBs which has been reported to be scarce

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