Corporate Governance in Islamic Banks: A Critical Review

Abstract

The purpose of this paper is to test the level of corporate governance in the Islamic Banks (IBs) sector with a focus on the Shariah Supervisory Board (SSB) performance. The main objective is to construct an Islamic Corporate Governance Index (ICGI) based on the Corporate Governance (CG) standard issued by the Islamic Financial Standard Board (IFSB) and the Accounting and Auditing Organization for Islamic Finance Institutes (AAOIFI). The 2012 data on Board structure and procedures, Disclosure and Shareholders were analyzed using Principal Component Analysis (PCA). Three principal components were extracted as well as an overall index. These three components are representing managerial, financial and Shariah disclosures. The results support the lack of adequate disclosure on the three dimensions.

Keywords: Corporate Governance, Islamic Banking, Shariah Board

JEL Classification: B19, C12, G21