In the present societies, legitimacy is given to the political organizations that provide based on society’s cultural rules and beliefs (Covaleski and Dirsmith, 1988). and Zucker, L.G. Conversely, Islamic banks customers have increased satisfaction levels from the view of Islamic banks products, services and facilities in numerous countries. Kalbers and Fogarty (1998) claim that “organizational structures have become symbolic displays of conformity and social accountability”. Institutionalism, in the social sciences, an approach that emphasizes the role of institutions.. (2012), “An empirical investigation into the role, independence and effectiveness of Shari’ah boards in the Malaysian Islamic banking industry”, PhD Thesis, University of Cardiff. Copyright © 2020, Yusuf Karbhari, Md. Parasuraman, A., Zeithaml, W. and Berry, L. (1985), “A conceptual model of service quality and its implications for future research”, Journal of Marketing, Vol. Meyer and Rowan (1977) highlighted that organizational guidelines work as mythologies through institutions that incorporate acquisition legitimacy, constancy and improved survival prospects. 340-363. Institutional theory emphasizes the normative impact of the environment on organizational activity. (2020b), “Problems of Shariah governance framework and its mechanisms: an empirical investigation of Islamic banks in Bangladesh”, The Journal of Asian Finance, Economics and Business, Vol. 11 No. Still, another can make an effort to “manipulate” rules and norms by trying to impact and regulate them. 11 No. 34 No. Abu-Tapanjeh (2009) claimed that any process that avoids a suitable ethical and moral structure would most probably default to generate a complete Islamic governance system. (2008), “Islamic banking and finance: on its way to globalization”, Managerial Finance, Vol. This study applied library research to investigate the application of institutional theory in the Shariah governance framework of Islamic banks. 443-464. 43-63. 6 No. 265-276. 50 No. Kausar Alam and Md. 250-271. Another word for this system is institutional environment. Plus, get practice tests, quizzes, and personalized coaching to help you | {{course.flashcardSetCount}} In Islamic financial institutions, managers must be accountable to God in parallel to shareholders and the company with the final objective of well-being and accomplishment for humanity (Abu-Tapanjeh, 2009) which is a default idea from the self-interest concept prescribed in agency theory. • Institutional theory brings in the social context • The boundary of rational choice (about IT) is socially constructed, and if legitimated and taken for granted as a social fact, operates and persists even beneath the level of consciousness – We (and our organizations) act out of … (2020a), “The influences of board of directors and management in Shariah governance guidelines of the Islamic banks in Bangladesh”, Journal of Islamic Accounting and Business Research, Vol. Institutional theories as applied to politics posit two distinct forms of institutions' influence over policy and political action. Institutional theory is an increasingly utilized theoretical lens for entrepreneurship research. (1988), “An institutional perspective on the rise, fall and social transformation of a university budget category”, Administrative Science Quarterly, Vol. (Department of Accounting and Finance, Cardiff Business School. To our knowledge, this is the first study that attempts to show the importance of the application of institutional theory in Shariah governance of Islamic Banks. 56, pp. 103, pp. 4, pp. 9 No. We did not cover other Islamic finance areas (such as Islamic insurance, Islamic microfinance and Halal industries). Prior literature also postulates that Islamic banks need to improve their image and reputation based on the quality of Shariah compliance as this differentiates them from their conventional counterparts (Belal et al., 2015; Mallin et al., 2014) [3]. Researchers such as Oliver (1988) rightly note that institutional theory adequately elucidated isomorphism within organizational arenas and that organizations may have a better opportunity in shaping their internal structures and actions whereas other features of institutions may show more or less resilience to these pressures. 16 No. Published in PSU Research Review. 2, pp. The bank has three substitutes of becoming purely Islamic or remaining as conventional or partially operating Islamic banking through Islamic windows. Therefore, research, based on the Islamic banks’ service quality in Malaysia, stated that the compliance measurement was the most important measurement among the customers of Islamic banks (Parasuraman et al., 1985). Rammal, H.G. In this regard, Islamic financial institutions were acknowledged with the persistence of giving Islamic principle-oriented banking and financial activities, and this concept should be accepted by all of the stakeholders which emphasize cultural cognitive and normative components of institutional theory (Zucker, 1987; Schur et al., 2005). There are some criticisms to Lustick's application of natural selection theory to institutional change. Learn more in: Social Forces that Influence Health IT Use Behavior of the Elderly 5. Explain the differences between these ways of knowing and explain how they inform the analytical method known a, Given what you have read about institutional theory, comment on the quote from William Inge, former dean of St. Paul's, London: "Every institution not only carries with it the seeds of its own dissolu. 8, pp. Religion: a confounding cultural element in the international harmonization of accounting? The overall surge of articles with institutional perspective in entrepreneurship research is promising. First, we contribute to prior literature on Shariah governance as it provides valuable insight on why institutional theory is more pronounced (as compared to the other theoretical frameworks) in the formation and discharge of the roles, powers, and functions by the different governance organs (such as regulators, the board of directors, management and Shariah supervisory boards) operating in this unique corporate governance landscape. Zucker, L.G. Study.com has thousands of articles about every 6 No. (1977), “Institutionalized organizations: formal structure as myth and ceremony”, American Journal of Sociology, Vol. Together with the board of directors and management, the Shariah supervisory board is an internal autonomous authority. 10 No. 299-313. 921-932. 1, pp. Though some folks still disagree about the exact definition of 'institution' when it comes to talking about institutional theory, for the purpose of this lesson, 'institutions' refer to the rules and norms of specific systems in our society, nation, world, etc. 4, pp. Institutional theory endeavors to outline more essential features of how institutions are shaped, continued, altered and postponed, and contracts with the pressures of Islamic financial institutions on human behavior comprising their practices, i.e. Few institutions at their individual risk might “defy” guidelines and adequate standards and practices by discharging, stimulating or arguing them. in this case, Shariah governance) is both interpreted and implemented in Islamic banks [5]. Greenwood, R. and Hinings, C.R. (2010), “Toward understanding Islamic corporate governance issues in Islamic finance”, Asian Politics and Policy, Vol. Nathan, S. and Ribieri, V. (2007), “From knowledge to wisdom: the case of corporate governance in Islamic banking”, VINE, Vol. 1-21. (2009), “Factor influences selection of Islamic banking: a study on Malaysian preferences”, American Journal of Applied Sciences, Vol. 708-725. (1976), “Theory of the firm: managerial behaviour, agency costs, and ownership structure”, Journal of Financial Economics, Vol. 3, pp. - Definition & Explanation, What Is Boolean Logic? Institutional theory was introduced in the late 1970s by John Meyer and Brian Rowan as a means to explore further how organizations fit with, are related to, and were shaped by … Rashid, M., Hassan, M.K. However, the failure to confirm the Shariah principles might expose the Islamic financial institutions to reputational risk toward the institution individually and the overall industry (Grais and Pellegrini, 2006b). Oliver, C. (1991), “Strategic responses to institutional processes”, Academy of Management Review, Vol. 49 No. This is called one kind of institutional culture which emphasizes cultural-cognitive and normative components of institutional theory (Zucker, 1987; Schur et al., 2005). The role of the Shariah supervisory board is to independently monitor the overall Islamic banking activities concerning the Shariah rules and regulations. (1996), “Does isomorphism legitimate?”, Academy of Management Journal, Vol. 285-300. Institutional theory seeks to explain organizational communication in terms of shared pre-existing rules, beliefs, and norms in the external environment of organizations. 3, pp. 1 No. The authors would like to thanks the Editor-in-Chief and anonymous reviewers for their valuable comments and suggestion for the improvement of this manuscript. Feldman, M. and Rafaeli, A. This study highlights institutional theory to serve best the development of operational strategies and structures of Islamic banks including the roles, functions and powers of the various stakeholders including regulators and those involved in the Shariah governance process of Islamic banks. (2020c), “External Sharī‘ah audit and review committee vis-a-Vis Sharī‘ah compliance quality and accountability: a case of Islamic banks in Bangladesh”, Journal of Public Affairs, doi: 10.1002/pa.2364. Many argue that this template is general enough to accomodate anything that may be called ‘logic’, or at least any logical system based on satisfaction between sentences and models of any kind. Finally, the application of institutional theory would enhance in Islamic finance areas. People who possess high achievement needs are people who always work to excel by particularly avoiding l… It is the need that drives a person to work and even struggle for the objective that he wants to achieve. Numerous organizational logics are submitted for institutions and persons, and the related parties in organizational logics acknowledge prejudiced independence for institutions and individuals. 3 No. 1, pp. 2, pp. © copyright 2003-2020 Study.com. courses that prepare you to earn Sociology 110: Cultural Studies & Diversity in the U.S. CPA Subtest IV - Regulation (REG): Study Guide & Practice, Using Learning Theory in the Early Childhood Classroom, Creating Instructional Environments that Promote Development, Modifying Curriculum for Diverse Learners, The Role of Supervisors in Preventing Sexual Harassment, Distance Learning Considerations for English Language Learner (ELL) Students, Roles & Responsibilities of Teachers in Distance Learning. Bhatti, M. and Bhatti, M.I. (2013), “Interest free banking in Turkey: a study of customer satisfaction and bank selection”, European Scientific Journal, Vol. The general aim of an Islamic bank is to provide banking services based on the rules prescribed by the Islamic faith. In this context, Islamic banks “corporate image” might be described from twice perspectives such as performative image and institutional image based on institutional theory (Handelman and Arnold, 1999). An institutionis a mathematical structure that can be regarded as a template for capturing mathematically logical systems. 129-150. 3, pp. Nevertheless, though the corporations are compelling with nature such as practices or environment or diversification of organizational behaviors or organizational strategies, they can reply toward the institutional pressures in a diversified way (Oliver, 1991, 1997; Greenwood and Hinings, 1996; Roberts and Greenwood, 1997). It also suggests that the components of proper structures, strategies and processes were generally generated from the mythologies relating to suitable social and economic customs (DiMaggio and Powell, 1983). and Muhammed, J. and Pellegrini, M. (2006b), “Corporate governance and Shari’ah compliance in institutions offering Islamic financial services”, World Bank Policy Research Working Paper 4054, World Bank. Schur, L., Kruse, D. and Blanck, P. (2005), “Corporate culture and the employment of persons with disabilities”, Behavioral Sciences and the Law, Vol. 10 No. It was DiMaggio (1998) who expanded institutional theory discourse to religious institutions by concentrating on the concepts of the “procedural,” “figurative understanding” and “cultural legitimacy.” Besides, he claimed that institutional theory is relevant and equivalent to the goals of Islamic institutions while conventional business institutions tend to focus more on coherent factors and an image centering on the maximization of profit [6]. and Ahmed, H. (2002), Corporate Governance in Islamic Financial Institutions, Islamic Development Bank: Islamic Research and Training Institute. Now that institutional theory’s dominance in organization studies is recognized and its breadth of topics and perspectives is evident, we institutionalists are called upon to sustain the theory’s critical perspective. 4, pp. Among other things, AU learned the following: a) parts of its curriculum were outdated, b) it was behind in its use of learning technologies, c) some of its hiring and training policies were antiquated, and d) compared to peers, some of its programs lacked legitimacy in the community. Get access risk-free for 30 days, Al-Nasser Mohammed, S.A.S. Institutional theory was introduced in the late 1970s by John Meyer and Brian Rowan as a means to explore further how organizations fit with, are related to, and were shaped by their societal, state, national, and global environments. 304-318. 3, pp. 2, pp. 6, pp. 4, pp. and Rahman, M.M. Carruthers, B.G. Chapra, M.U. 25 No. You can test out of the 11 No. Parsons, T. (1960), Structure and Process in Modem Societies, Free Press, Glencoe, IL. According to institutional theory researchers Paul DiMaggio and Walter Powell, organizations can achieve institutional isomorphism via three main avenues: A word of warning about institutional isomorphism from Meyer and Rowan: Organizations that conform to rules of the institutional environment in order to appear more legitimate may actually run the risk of reducing productivity in the work that they do. Suchman, M.C. It deliberates on the process by structures containing application, regulative, normative and cultural cognitive, which is recognized as commanding strategies for societal behavior. An error occurred trying to load this video. 309-331. AAOIFI, Accounting andAuditing Organization for Islamic Financial Institution, Exploring the ‘social failures’ of Islamic banks: a historical dialectics analysis, Journal of Islamic Accounting and Business Research, Corporate governance from the Islamic perspective: a comparative analysis with OECD principles, Perceptions of Malaysian corporate customers towards Islamic banking products and services, International Journal of Islamic Financial Services, The relationship between agency theory, stakeholder theory and Shariah supervisory board in Islamic banking: an attempt towards discussion, External Sharī‘ah audit and review committee vis-a-Vis Sharī‘ah compliance quality and accountability: a case of Islamic banks in Bangladesh, The influences of board of directors and management in Shariah governance guidelines of the Islamic banks in Bangladesh, Sharī‘ah governance framework of Islamic banks in Bangladesh: practices, problems and recommendations, An overview of corporate governance models in financial institutions, International Journal of Management and Sustainability, The reasons behind the absence of a comprehensive Shariah governance framework for the Islamic banks in Bangladesh, International Journal of Economics and Business Administration, Problems of Shariah governance framework and its mechanisms: an empirical investigation of Islamic banks in Bangladesh, The Journal of Asian Finance, Economics and Business, A Central Shariah regulatory authority for the Islamic banks in Bangladesh: Legalization or formation, Islamic Finance: The Regulatory Challenge, The double-edge of organizational legitimation, Ethical reporting in Islamic bank Bangladesh limited (1983–2010), Toward understanding Islamic corporate governance issues in Islamic finance, An institutional perspective on performance measurement and management in the ‘new public sector, Political Science and Comparative Constitutional Law, Accounting and religion: a historical perspective, Institutional theory and accounting rule choice: analysis of four US state governments' decisions to adopt generally accepted accounting principles, Accounting, ambiguity, and the new institutionalism, Corporate governance in microfinance institutions: board composition and the ability to face institutional voids, Corporate Governance: An International Review, Corporate Governance in Islamic Financial Institutions, Islamic Development Bank: Islamic Research and Training Institute, Corporate governance in Islamic perspective, International Journal of Islamic and Middle Eastern Finance and Management, An institutional perspective on the rise, fall and social transformation of a university budget category, Institutional theory and institutional change: introduction to the special research forum, The legitimizing effect of social and environmental disclosures – a theoretical foundation, Accounting, Auditing and Accountability Journal, Religious contrasts in consumer decision behavior patterns: their dimensions and marketing implications, The relevance of organizational theory to the study of religion, The iron cage revisited: collective rationality and institutional isomorphism in organizational fields, Stewardship theory or agency theory: CEO governance and shareholder returns, Rural accessibility, social inclusion and social justice: towards conceptualization, Organizational routines as sources of connections and understandings, Strategic Management: A Stakeholder Approach, Corporate governance in institutions offering Islamic financial services: Issues and options, World Bank Policy Research Working Paper 4052, Corporate governance and Shari’ah compliance in institutions offering Islamic financial services, World Bank Policy Research Working Paper 4054, Shariah supervisory system in Islamic financial institutions new issues and challenges: a comparative analysis between Southeast Asia models and GCC models. 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