Corporate Governance in Islamic Banks: New Insights for Dual Board Structure and Agency Relationships

Journal of International Financial Markets Institutions and Money, Forthcoming

53 Pages Posted: 20 Sep 2017

See all articles by Hisham Farag

Hisham Farag

University of Birmingham - Birmingham Business School

Chris Mallin

Norwich Business School, University of East Anglia; University of Birmingham - Birmingham Business School

Kean Ow-Yong

University of Birmingham - Birmingham Business School

Date Written: August 15, 2017

Abstract

We investigate the influence of the dual board structure on the financial performance of Islamic banks. The paper also investigates the unique agency relationships using a sample of 90 Islamic banks across 13 countries over the period 2006-2014. We find that the larger the Shari’ah Supervisory Board (SSB) the better the financial performance and this result reinforces the fundamental role of the SSB to certify permissible financial instruments and products. We also find evidence of the scope of operation hypothesis with respect to both the board of directors and the SSB as Islamic banks are characterised by a higher degree of complex operations. Interestingly, we find that a larger SSB size may result in lower agency costs and that the greater the size of the unrestricted contracts, the higher the agency costs. This implies that unrestricted profit-sharing contracts are one of the main sources of the unique agency relationships in Islamic banks. The paper has a number of policy implications for regulators including the design of governance mechanisms in Islamic banks and the dynamics of unrestricted contracts.

Keywords: Islamic Banks, Shari’ah Supervisory Board, financial performance, corporate governance

Suggested Citation

Farag, Hisham and Mallin, Christine and Ow-Yong, Kean, Corporate Governance in Islamic Banks: New Insights for Dual Board Structure and Agency Relationships (August 15, 2017). Journal of International Financial Markets Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3037471

Hisham Farag (Contact Author)

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Christine Mallin

Norwich Business School, University of East Anglia ( email )

Norwich Research Park
Norwich, NR4 7TJ
United Kingdom

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Kean Ow-Yong

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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