Corporate governance in Islamic financial institutions: the issues surrounding unrestricted investment account holders Rodrigo Magalha ˜ es and Shereen Al-Saad Abstract Purpose – It has been observed that the practices of corporate governance in Islamic financial institutions (IFIs) do not sufficiently address the rights of unrestricted investment account holders (UIAHs). Given that such account holders are generally the ones who bear the risk of the performance of the investment pool, the purpose of this paper is to investigate the relationship between corporate governance practice and the safeguarding of the interests of UIAHs as major stakeholders. Design/methodology/approach – A qualitative research methodology is applied to a sample of 16 managers from 12 Islamic financial institutions from Kuwait, Bahrain, UAE and Malaysia. A theoretical model built around the GC principles featured in the King report underpins the research design. Findings – The findings reveal that the current practices implemented by IFIs in protecting the rights of UIAHs are not effective enough, in the light of standard corporate governance principles. It was also found that lack of responsibility, accountability and independence in decision making, as corporate governance principles, is contributing to the ineffectiveness of current practices in the investigated IFIs. Research limitations/implications – The major limitation of the research is the small size of the sample used. Hence, the work reported here must be considered as exploratory and a further study employing a larger sample is recommended as future research. Practical implications – A number of recommendations for corporate governance practice in IFIs aimed at the unique relationship between IFIs and UIAHs are put forward. Originality/value – The originality and the value of this paper rest on its topic which, to the best of the researchers’ knowledge, has not been investigated empirically before. Hence, the authors believe it will be of value not only to academics but mostly to practitioners in IFIs. Keywords Kuwait, Bahrain, United Arab Emirates, Malaysia, Financial institutions, Islam, Corporate governance, Investments, Islamic financial institutions, Effectiveness, Protecting, Maximizing Paper type Research paper 1. Introduction The initial wave of oil revenues in the early 1970s and the growth of petrodollars gave momentum to the growth of Islamic finance and many reputable Islamic banks were established, including Nasser Social Bank Cairo in 1972, the Dubai Islamic Bank in 1975, Kuwait Finance House in 1977, Faisal Islamic Bank of Sudan in 1977 and Dar Al-Maal Al-Islami in 1980 (Van Greuning and Iqbal, 2008). In the beginning of 1980s, three Muslim countries – Iran, Pakistan and Sudan – transformed their entire financial sector to be completely Islamized. The step was considered as of great importance to the global developments of Islamic banking (Bhatti and Khan, 2008). Currently, Islamic Finance is one of the fastest growing industries with double-digit annual growth rates for the past 30 years. There are more than 250 financial institutions in over 45 countries, in an industry which has been growing at a rate of more than 15 per cent per annum for the past five years, with estimated annual earnings of $350 billion, compared with a mere $5 billion in 1985 (Van Greuning and Iqbal, 2008). There are more than 284 Islamic DOI 10.1108/14720701311302404 VOL. 13 NO. 1 2013, pp. 39-57, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 39 Rodrigo Magalha ˜es and Shereen Al-Saad are based at Kuwait-Maastricht Business School, Salmiya, Kuwait. Received August 2010 Accepted February 2011