An integrated corporate governance framework for sharia law countries

Abstract

The purpose of this study was to develop an integrated corporate governance framework for Sharia law countries, with a view to enhancing their economic growth. The OECD model of corporate governance is heavily influenced by western systems and is considered the template for all countries globally, including those in the Sharia law context. However, the Sharia law context is inherently different from the western environment and thus renders implementing the OECD model of corporate governance there inappropriate. Using a positivist philosophy, the study compared data sets of 14 OECD countries against 13 Sharia law countries for a 17-year period from 2002 – 2018 with econometric model techniques to investigate the nature of the relationships between corporate governance determinants of firm-level governance, financial development, institutional environment, macroeconomic fundamentals and economic growth. The test results confirmed that the OECD corporate governance model is not a good fit for the Sharia law countries. At the disaggregated level, only protection of minority shareholders showed positive and significant effects to economic growth for the OECD under pooled and random effects estimations. Only foreign direct investment posted positive and significant effects with economic growth for OECD under fixed effects transformation. Aggregated panel Granger causality estimations showed that a combination of corporate governance, institutional environment, financial development and macroeconomic fundamentals are determinants of economic growth for the OECD while for Sharia law only corporate governance determines economic growth. The study developed an integrated corporate governance framework that suits the Sharia law context after the emendation of the weak and or insignificant relationships between the corporate governance determinants and economic growth. The framework pinpoints the inclusion of collateralised investment, interest rate charging, permission of speculation activities and increased frequency of firm disclosure practices. These would then reinforce the determinants of corporate governance in the framework in a bid to have an incremental effect on the economic growth for Sharia law countries.