Consequences of Agency Cost In Light of Maqasid Al Shariah

Noman Arshed, Shakeel Riaz, Muhammad Shahid Hassan, Osama Aziz

Abstract


Shariah provides rules to each aspect of human life from the religious part of Aqiddah and Ibadah to normal social dealings which called Muamalat. The religious guidance provided in the code of Maqasid al Shariah and Maslahah. Maqasid al Shariah and Maslahah suggests that people must act toward the expansion of public benefit. With reference to Maqasid al Shariah, this study will put forward the role of the firm in the society and will highlight the conflict which exists between the managers and the shareholders named as “agency cost.” The term, agency cost emerges in light of the fact that the working of the firm is not complying with the teaching of Maqasid al Shariah. In theory, if the managers and shareholders are following Islamic standards of governance then any resource firm owns, will be contributing a higher performance of the firm both financial and social area. By using SEM approach for 86 KSE listed firms, this study reveals that the free cash flow leads improper usage of available resources at the disposal of manager, which brings out either no or negative impact on firm’s performance. This depicts disconnection of financial governance practices with Shariah guidelines. Teaching the role of firms as per Maqasid al Shariah, managers and shareholders will be able to use this free cash for the mutual benefit of the firm’s performance, which will lead to social benefit via output maximization and employment creation.

Aus. J. Isla. Finan. & Busi. Vol 4(1), April 2018, P 19-27

Keywords


Maqasid al Shariah; Maslahah; Agency Cost; KSE; Panel SEM

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