Can Shariah Board Characteristics Influence Risk-Taking Behavior of Islamic Banks?
Alabbad, A., Hassan, M.K., and Saba, I., “Can Shariah board characteristics influence risk-taking behavior of Islamic banks?”, The International Journal of Islamic and Middle Eastern Finance and Management, forthcoming
Posted: 19 Apr 2018 Last revised: 22 May 2019
Date Written: January 14, 2019
This paper studies whether the characteristics of Shariah supervisory board (SSB) can influence risk-taking behaviors of Islamic banks.
The data on governance was collected from Islamic banks’ annual reports across 18 countries for the period from 2000 to 2011. The generalized least square (GLS) based on random effect and three- stage least square (3SLS) estimations were used to investigate the relationship between Shariah supervisory board’s (SSB) characteristics including size, busyness, and foreign board and the Islamic banks’ risk activities.
Empirical results show that size of SSB and the proportion of busy board in SSB are positively and significantly influence Islamic banks’ asset return and insolvency risks. These findings seem to be consistent with the notion that more directors in bank’s board are less effective in monitoring bank activities because large board size is subject to the free-riding and coordination problems, and that members with multiple seats would be unable to provide meaningful managerial monitoring because they are too busy to mind the business. Moreover, the results indicate that foreign members are more effective in monitoring banks’ Shariah compliance as they provide expertise and independent monitoring over management, which in turn enhance firm value. Further analysis provides some evidence that most of the findings on the associations between SSB structure and bank risk are derived from countries in the Gulf Cooperation Council (GCC) where Shariah governance is ruled internally at bank level.
The structure of Islamic banks’ governance has grown in importance in light of recent financial crisis. However, findings of this paper point out to the need for better Shariah boards characteristics in place that complement with other governance mechanisms to well comprehend the main purpose of Islamic banks.
This study complements prior studies on corporate governance of Islamic financial institutions. In addition to SSB size, the study examines other SSB factors including busyness and foreign diversity of SSB and how these features influence the risk-taking behaviors of Islamic banks.
Keywords: Shariah Supervisory Board, Risk-Taking, Board Size, Busy Board, Foreign Board, GCC
JEL Classification: G21, G32, G18
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