The Influence of Islamic Governance on Minimizing Non-Compliance with Sharia

Abstract

Objective – One of the operational objectives of sharia banks is to comply with sharia principles. Therefore, the noncompliance of sharia banks to sharia law may be prevented by implementing Islamic Good Corporate Governance (GCG), which is controlled by the Sharia Supervisory Board (SSB), the board of directors, and the board of management.

Methodology/Technique – In this study, sharia non-compliance is defined as all cases of disobedience found in the report of sharia banks, covering things such as non-halal income, criminal law violations, civil law violations, and fraud. The unit of analysis of this research is sharia banks in Indonesia. Seven sharia banks were used as the study sample for the period between 2012 and 2015. The source of data for this study comprised of GCG annual reports. The data analysis method and hypothesis testing was conducted using a factor analysis and multiple regression analysis.

Findings – The findings show that higher levels of supervision from the SSB tend to minimize the instanc of sharia non-compliance as a whole, criminal and civil law violations, and fraud, although not to a level that is statistically significant.

Novelty – The influence of the board of management on non-halal income was negative, although statistically insignificant. The influence of the supervision from both the board of directors and the board of management on overall sharia non-compliance is also not statistically significant.

Type of Paper: Empirical.

Keywords: Sharia Non-compliance; Islamic Bank; Islamic GCG; Sharia Supervisory Board; Board of Directors; Board of Management

JEL Classification: M10, M14, M19