Question

Point out and illustrate key aspects of the principal and agent problems that exist within the Islamic Financial Institution and that can result in loss of value for shareholders.

Answer 1

There are instances of principal and agent conflicts which are reflected into the Islamic world also because there would be conflicts of interest, generally between shareholders and the managers of the company which would be an implication of agency relations leading to agency conflicts.

Key aspect of principal and agents problem that would be resulting into Islamic financial institution would be as follows-

A. Manager would be trying to act on their own behalf rather than acting on to the behalf of the shareholders.

B. Mkanager would be trying to compensate themself higher than what is desirable according to the standard rates of the industry, and that would be leading to the loss of profit for the share holders and that would not be acceptable by the shareholders.

C. Manager may not be disclosing the proper information to the shareholders and they would be misguiding the shareholders many times so that could lead to conflicts of agency relationships

D. Managers can also take excessive risk in order to make money for the shareholders and those excessive risk can be very harmful in order to Survival and growth of the organisation and that can even harm the shareholders principals.

it can be said that agency conflict also exist into the Islamic world and these are the relationships of managers and shareholders which are to be properly monitored in order to avoid any kind of agency conflicts so as to maximize the value of the organisation and the protection of the interest of the shareholders.