ABSTRACT
The literature has shown that corporate governance can have a positive impact on firm performance and economic development through access to external
finance, lower cost of capital, a sense of reduced risk, better operational performance, and reduction of contagion risk from financial distress (Claessens 2003). While Institutions Offering Islamic Financial Services (IIFS) may be less prone to suffer from ethical breaches given their strong religious compliant basis and culture, Grais and Pellegrini (2006) point out that the history of Islamic finance shows that cases of corporate governance failures have features in common with conventional financial scandals such as collusion of the board with management, external and internal audit failure, neglect of minority shareholders’ interests, imprudent lending, and excessive risk-taking by management. Mashayekh, Yazdanian and Jalai (2014) report that in 2011, there was a massive financial embezzlement in the Iranian banking system and existence of enormous deferred bank accounts which clearly indicate a weakness in corporate governance mechanisms. Therefore, it is critical that organizations pay ongoing attention to improve corporate governance mechanisms since IIFS are not immune from ethical transgressions.
