The authors also highlighted the societal, economic and legal environment of Islamic banks in relation to the propositions of institutional theory. In addition, Delener (1994) suggested that religiosity would influence the individual’s behavior and decision-making process. credit-by-exam regardless of age or education level. The LAD framework has a long history that may be interesting to the readers of this issue. 1-12. 20 No. and Huisman, J. Unlike the Western approach, Islamic teachings on business integrate both spiritual and temporal issues (Archer and Karim, 2007; Karim, 1995; Karim, 2001; Tinker, 2004), and relatively little is known about them especially in terms of their epistemological positioning [2]. Is the environmental order in accordance with the Paris Agreement possible by 2020? 8 No. What are some strategies for harnessing and developing institutional knowledge? 151-169. Mallin, C., Farag, H. and Ow-Yong, K. (2014), “Corporate social responsibility and financial performance in Islamic banks”, Journal of Economic Behavior and Organization, Vol. 4, pp. (2004), “Stakeholders model of governance in Islamic economic system”, Islamic Economic Studies, Vol. 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. The study of institutions has a long pedigree. Consequently, Greenwood and Hinings (1996) stated that the institutional theory tactic describes the similarities and the modification in organizational structure rather than focusing on discovering its changes. Seeing the global popularity of Islamic finance in Muslim jurisdictions over the past few decades, it is plausible to suggest that Islamic organization’s governance processes and structures are more complex than the conventional corporate governance systems. 49-64. 21, No. However, little is known about the efforts of higher education researchers in tracing the development of organisational institutionalism and applying the theory in their research for a better understanding of the nature of … 16 chapters | Second, the institutional theory provides a more suitable basis when considering a Shariah governance framework for Islamic banks because of its capacity to deal with operational guidelines and procedures for organizations. The overall outlook of Shariah governance indicates that wider institutional structures surround the governance system. The authors also critically reviewed prior empirical and review papers for accomplishing the research objectives. Did you know… We have over 220 college It inquires into how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse. It considers the processes by which structures, including schemas, rules, norms, and routines, become established as authoritative guidelines for social behavior. Roberts, B. and Greenwood, R. (1997), “Integrating transaction cost and institutional theories: toward a constrained-efficiency framework for understanding organizational design adoption”, Academy of Management Review, Vol. Thus, future researchers can apply institutional theory in Shariah governance practices and implementations of setting up rules by the regulators and respective institutions. The image of Islamic banks can comprise being Islamic, modest, fair, constant and clear (institutional image), along with being friendly, truthful, pleasing, leading, trustworthy and protected (performative images). However, when examining these competing theories, Obid and Naysary (2014) highlighted some limited ideas had been highlighted connected with Shariah governance which includes issues on accountability, independence, transparency, disclosure, competence and confidentiality. Enrolling in a course lets you earn progress by passing quizzes and exams. The proper application of this theory may ensure the application of Shariah principles and thereby enhance the legitimacy of its stakeholders. Restaurant Managers’ Adoption of Sustainable Practices: An Application of Institutional Theory and Theory of Planned Behavior. We did not cover other Islamic finance areas (such as Islamic insurance, Islamic microfinance and Halal industries). Grassa, R. (2013), “Shariah supervisory system in Islamic financial institutions new issues and challenges: a comparative analysis between Southeast Asia models and GCC models”, Humanomics, Vol. (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. Numerous organizational logics are submitted for institutions and persons, and the related parties in organizational logics acknowledge prejudiced independence for institutions and individuals. 28 No. In addition, Meyer and Rowan (1977) and Zucker (1977) drew a novel tactic of an institutional predictor that emphasizes the social character and perception in the institutional inquiry. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. 17 No. 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). Support for Institutional Theory: Rowan, Tolbert, and Zucker. Earn Transferable Credit & Get your Degree, Resource Dependency Theory: How External Resources Affect Organizational Behavior, Agency Theory: Relationships of Principals & Agents, Rational Choice Theory: Definition & Principles, Resource-Based Theory: Path to Competitive Advantage, What is Stakeholder Theory? 769-784. Published by Emerald Publishing Limited. Published in PSU Research Review. Greuning, H.V. Oliver, C. (1991), “Strategic responses to institutional processes”, Academy of Management Review, Vol. Scott (2004) showed that to persist; institutions must follow guidelines and the belief structures dominant in the setting (Meyer and Rowan, 1977; DiMaggio and Powell, 1983) because organizational isomorphism both the structural and procedural will achieve organizational legitimacy (Dacin et al., 2002; Suchman, 1995; Deephouse, 1996). and Hoque, M.Z. and Naysary, B. 75-83. Karim, R.A.A. Choose one of the three main class theories discussed in class, Marx, Weber and Durkheim, and compare it to Institutionalist class th. (1976), “Theory of the firm: managerial behaviour, agency costs, and ownership structure”, Journal of Financial Economics, Vol. and Muneeza, A. 333-348. (1999), “The role of marketing actions with a social dimension: appeals to the institutional environment”, Journal of Marketing, Vol. 16 No. and Jamali, D. (2016), “Fatwa repositioning: the hidden struggle for Shari’a compliance within Islamic financial institutions”, Journal of Business Ethics, available at: https://doi.org/10.1007/s1055_1-016-3090-1. Journal of Foodservice Business Research: Vol. This means that most of institution theory does not involve sophisticated or advanced levels of cat… This posits that the Shariah governance structure should be more comprehensive and socially developed than the general association of the agent principle outlook to protect the interest of all parties. The role of the Shariah supervisory board is to independently monitor the overall Islamic banking activities concerning the Shariah rules and regulations. Parasuraman, A., Zeithaml, W. and Berry, L. (1985), “A conceptual model of service quality and its implications for future research”, Journal of Marketing, Vol. Bhatti, M. and Bhatti, M.I. (1991), Business and Accounting Ethics in Islam, Mansell Publishing Limited, London. Another word for this system is institutional environment. Realizing this, key AU leaders quickly scanned the peer environment and wholly adopted other universities' practices (or mimetic process) and researched and implemented new discoveries in teaching (normative pressures) so that AU could achieve consistency with the larger institutional environment. 1, pp. 4, pp. Explain the main elements of the institutionalist theory of class. He, Y., Tian, Z. and Chen, Y. 15 No. 180-199. 4, pp. 21 No. Finally, legitimacy where an organization’s persistence needs it to follow with social rules of adequate behavior, ascending from the grade deliberated by outdoor concerned parties, generally the government, the general people or the professions (Meyer and Rowan, 1977; Deephouse, 1996; Covaleski and Dirsmith, 1988). Mizanur Rahman. Tinker, T. (2004), “The enlightenment and its discontents: antinomies of christianity, islam and the calculative science”, Accounting, Auditing and Accountability Journal, Vol. In this case, the authors also found that institutional image is the central concern in Islamic banks and conduct their banking affairs based on Shariah principles and how the Shariah is the main motive for Muslims to select Islamic banks. Copyright © 2020, Yusuf Karbhari, Md. The meaning of institutional theory is a statement on the more in-depth and more flexible characteristic of societal structure (Scott, 1987). 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 … 1, pp. 144-166. and Bhatti, M.I. | 10 45-56. Institutional theory in political science has made great advances in recent years, but also has a number of significant theoretical and methodological problems. justice, Shariah compliance, zakah management (Mittal, Sinha, and Singh, 2008). To answer this question, it makes sense to start by asking another question: What is an institution? Platonova, E., Asutay, M., Dixon, R. and Mohammad, S. (2016), “The impact of corporate social responsibility disclosure on financial performance: evidence from the GCC Islamic banking sector”, Journal of Business Ethics, available at: https://doi.org/10.1007/s1055_1-016-3229-0. Together with the board of directors and management, the Shariah supervisory board is an internal autonomous authority. According to Institutionalists the two ways of knowing are ceremonial and instrumental. 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. and Hosen, S. (2020e), “The reasons behind the absence of a comprehensive Shariah governance framework for the Islamic banks in Bangladesh”, International Journal of Economics and Business Administration, Vol. Interestingly, Tolbert and Zucker (1983) rejected rationality and highlighted legitimacy instead of competency. 154-171. 20 No. and Gibbs, B.W. Uniquely to Islam, Muslims and Islamic organizations are accountable to God and are required to comply with a strict ethical code. Graziella is an ethics and leadership educator and maintains a workforce and career development background. Let's review what we've learned. When organizations try make their actions consistent with the expectations of the institutional environment, they work toward something called institutional isomorphism. Individuals and organizations are affected by societal institutions, and national-states by a world society. Karbhari, Y., Muye, I., Hassan, A.F.S. 3, pp. - Definition & Theory, Structural-Functional Theory in Sociology: Definition & Examples, Systems Approach to Management: Theory & Concepts, Positivism in Sociology: Definition, Theory & Examples, Freud's Theory of the Id, Ego & Superego: Definitions & Examples, Human Resource Management Syllabus Resource & Lesson Plans, Introduction to Business: Homework Help Resource, Introduction to Organizational Behavior: Certificate Program, UExcel Organizational Behavior: Study Guide & Test Prep, Professional in Human Resources - International (PHRi): Exam Prep & Study Guide, SPHR Certification Exam Study Guide - Senior Professional in Human Resources, English 103: Analyzing and Interpreting Literature, Environmental Science 101: Environment and Humanity. 265-276. (2007), “Corporate governance reform as institutional innovation: the case of Japan”, Organization Science, Vol. Greenwich, CT, pp. Researchers can apply institutional theory in the areas mentioned above by using a quantitative and qualitative methodology through regulatory policies, guidelines and regulations. 39 No. 22 No. 1, pp. 2, pp. Grassa, R. (2016), “Corporate governance and credit rating in Islamic banks: does Shariah governance matters?”, Journal of Management and Governance, Vol. In this context, prior studies on institutional theory have emphasized corporate governance (Yoshikawa et al., 2007; Chakrabarty and Bass, 2014; Morrison, 2014), and on the corporate community development practices of Islamic banks in Bangladesh. Moreover, the Shariah governance structure describes the boards association, formation of various committees along with their members, management and exchange of information amongst them (Zahra and Pearce, 1989). For example, conventional corporate governance emphasizes profit-making and institutional performance, whereas Shariah governance focuses purely on the implementation of Islamic principles in applying a Shariah governance framework. flashcard set{{course.flashcardSetCoun > 1 ? research could leverage socio-organizational theory, e.g. 117-127. If anything, institutional theory today is challenged to maintain its critical gaze over the taken-for-granted. Second, by highlighting that the structures, procedures and rules of Shariah governance is better represented by institutional theory and is, therefore, more relevant in ensuring accountability, independence, competence, confidentiality and transparency and disclosure resulting in improved quality Shariah governance. 3, pp. 491-506. 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. 1, pp. In short, the Shariah supervisory board is associated with the inner governance structure of the organization and performs as an in-house monitoring authority within the institution. Overall, from an institutional theory lens, Shariah governance is a holistic overview of relationships to various parties related to Islamic banks. All other trademarks and copyrights are the property of their respective owners. 4, pp. (2001), “International accounting harmonization, banking regulation, and Islamic banks”, The International Journal of Accounting, Vol. Fundamentally, the Shariah supervisory board assures that Islamic banks are conducting their operational functions in accordance with Shariah (Alam et al., 2020e). Deegan, C. (2002), “The legitimizing effect of social and environmental disclosures – a theoretical foundation”, Accounting, Auditing and Accountability Journal, Vol. 2, pp. In this tactic, organizations have a tendency to seek legitimacy over obeying rules and regulations that are developed by the cultures and the organization’s internal structures. institutional theory (DiMaggio and Powell 1983, Meyer and Rowan 1977), to frame inquiries. Institutional theory highlights the structure and arrangement of an institution’s setting, proposing that the suitable structure of organization’s is not simply a combination of resource dependencies and mechanical demands, but is inclined by structural arrangements, containing rational mythologies, perceived knowledge legitimized over the enlightened structure and by the occupations, community belief and regulation (Meyer and Rowan, 1977; Zucker, 1977; DiMaggio and Powell, 1983; Scott, 1987). 169-193. 5 No. DiMaggio, P. (1998), “The relevance of organizational theory to the study of religion”, Sacred Companies, Oxford University Press. 8 No. Study.com has thousands of articles about every Log in here for access. Explain Institutional Theory and the various processes of isomorphism. Tsai, M.C., Lai, K.H. 8, pp. (1984), Strategic Management: A Stakeholder Approach, Pitman, Boston, MA. Yet, we find substantial biases and omissions in the application of institutional theory. 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. 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. They emphasize that a well-designed Shariah governance framework driven by institutional theory could assist in providing guidelines, strategies and procedures for Islamic banks to better conduct, monitor and control their social, religious and accountability obligations. Abu-Tapanjeh, A.M. (2009), “Corporate governance from the Islamic perspective: a comparative analysis with OECD principles”, Critical Perspectives on Accounting, Vol. 6 No. The authors did not cover other Islamic finance areas (such as Islamic insurance, Islamic microfinance and Halal industries). New institutionalism is a clarification for the achievement and existence of institutions (DiMaggio and Powell, 1983). 263-280. Definition The institutional theory of organizations puts institutions at the core of the analysis of organiza- tions ’design and conduct. (2007), “Corporate governance reforms in Malaysia: insights from institutional theory’, world review of entrepreneurship”, Management and Sustainable Development, Vol. 2, pp. Grais, W.M. A Shariah Supervisory Board is defined as “an independent body entrusted with the duty of directing, reviewing, and supervising the activities of Islamic Banks for the purpose of Shariah compliance and issuing legal rulings relating to Islamic banking and finance” (AAOIFI, 2005). Some of AU's norms, policies, and ways of doing business were contrary to the norms of the institutional environment. 543-561. What is the best political advice to the political leaders arguing for Brexit? 16 No. and Arnold, S.J. 309-331. (2013), “Interest free banking in Turkey: a study of customer satisfaction and bank selection”, European Scientific Journal, Vol. just create an account. 4, pp. 9, doi: 10.1108/JIABR-08-2019-0155. 33-48. First, the strategic approach (Pfeffer, 1981; Ashforth and Gibbs, 1990) and second, the institutional approach (DiMaggio and Powell, 1983; Zucker, 1987; Meyer and Rowan, 1991). 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. To the best of the authors’ knowledge, this is the first study that attempts to show the importance of the application of institutional theory in Shariah governance of Islamic Banks. Crucially, without effective governance mechanisms in place, Islamic Banks cannot deliver the religious and ethical legitimacy that usually the stakeholders require. (1990), “The double-edge of organizational legitimation”, Organization Science, Vol. 305-350. 7, pp. 129-150. in this case, Shariah governance) is both interpreted and implemented in Islamic banks [5]. {{courseNav.course.mDynamicIntFields.lessonCount}} lessons 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. 243-269. As researchers, in recent years, have paid attention to institutional theory to illuminate variations in institutional multiplicity (Morphew, 2009; Morphew and Huisman, 2002), the theory does, nevertheless, have several limitations. 5, pp. 1-52. Institutional theory is a concept that emerged in the 1970s that serves as a way of exploring how organizations navigate the larger institutional environment or system of rules around their organizations. Alternatively, institutions might “avoid” the obligation to ensure to organizational pressures by covering their Shariah non-performance or over altering their functions. 20 No. Zucker, L.G. 39 No. 2, pp. Kausar Alam and Md. Parsons, T. (1960), Structure and Process in Modem Societies, Free Press, Glencoe, IL. lessons in math, English, science, history, and more. It is the need that drives a person to work and even struggle for the objective that he wants to achieve. and Rahman, M.M. (2017), “Exploring the ‘social failures’ of Islamic banks: a historical dialectics analysis”, Journal of Islamic Accounting and Business Research, Vol. For this reason, the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) and International Financial Services Board (IFSB) explicitly outlined a framework for Shariah governance framework requiring Islamic banks to implement appropriate structures and processes to ensure that their operations are in absolute conformity with religious beliefs (Iqbal and Mirakhor, 2004; Grais and Pellegrini, 2006a; Kamla and Alsoufi, 2015; Ullah et al., 2016; Karbhari et al., 2018; Alam et al., 2020a). By outlining the roles and powers of the various stakeholders along with the regulators, institutions, centralized Shariah supervisory board, the board of directors, Shariah supervisory board, management and Shariah officers, the institutional theory acts as an important role in the enhancement of organizational structure and performance by balancing the stakeholders’ roles. 3 No. 25 No. 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). 22 No. The role of marketing actions with a social dimension: appeals to the institutional environment, Factor influences selection of Islamic banking: a study on Malaysian preferences, An empirical investigation into the role, independence and effectiveness of Shari’ah boards in the Malaysian Islamic banking industry, Performance implications of nonmarket strategy in China, Guiding Principles on Shari'ah Governance System for Institutions offering Islamic Financial Services, Stakeholders model of governance in Islamic economic system, Theory of the firm: managerial behaviour, agency costs, and ownership structure, Organizational and economic explanations of audit committee oversight, Critical insights into contemporary Islamic accounting, Critical Muslim intellectuals’ discourse and the issue of ‘interest’ (rib¯a): implications for Islamic accounting and banking, Islam, nature and accounting: Islamic principles and the nation of accounting for the environment, Governance mechanisms and efficiency: evidence from an alternative insurance (Takaful) market, Journal of International Financial Markets, Institutions and Money, The nature and rational of a conceptual framework for financial reporting by Islamic banks, International accounting harmonization, banking regulation, and Islamic banks, Corporate governance reforms in Malaysia: insights from institutional theory’, world review of entrepreneurship, Islamic banking and finance: on its way to globalization, The effect of corporate governance elements on corporate social responsibility (CSR) disclosure: an empirical evidence from listed companies at KSE Pakistan, International Journal of Financial Studies, Corporate social responsibility and financial performance in Islamic banks, Journal of Economic Behavior and Organization, Banking behaviour of Islamic bank customers perspectives and implications, Institutionalized organizations: formal structure as myth and ceremony, The New Institutionalism in Organizational Analysis, An analysis of linkage between economic value added and corporate social responsibility, Conceptualizing change in the institutional diversity of US colleges and universities, Using institutional theory to reframe research on academic drift, Shariah boards and the corporate governance of Islamic banks in the United Kingdom, Journal of Islamic Economics Banking and Finance, From knowledge to wisdom: the case of corporate governance in Islamic banking, Toward a comprehensive theoretical framework for Shariah governance in Islamic financial institutions, The collective strategy framework: an application to competing predictions of isomorphism, Strategic responses to institutional processes, Sustainable competitive advantage: combining institutional and resource based views, A conceptual model of service quality and its implications for future research, Suggestions for a sociological approach to the theory of organizations, Management as symbolic action: the creation and maintenance of organizational paradigms, Research in Organizational Behavior, Vol. In which external stakeholders determine in part the expectations of the application of institutional theory emphasizes the normative of! 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