Corporate Governance, SSB Strength and the Use of Internal Audit Function by Islamic Banks: Evidence from Sudan

Abstract

Purpose: The paper aims to identify the effects of some Corporate Governance (CG) mechanisms and Shariah Supervisory Board (SSB) strength on the voluntary use of Internal Audit Function (IAF) by Islamic banks in Sudan.

Design/Methodology/Approach: Based on Agency and Stakeholder theories, the paper hypothesizes that IAF is likely used by Islamic banks with strong CG and Shariah Governance systems. In order to test these hypotheses, we examine the annual reports of fourteen Sudanese banks for a period of five years following the global financial crisis in 2008, using Logistic Regression Analysis.

Findings: The paper found that IAF is likely used by Islamic banks with higher CG Disclosure (CGD) and strong SSB. While the findings showed that the audit committee and IAF are likely used as substitutes, the paper also indicated that there is a negative association between levels of Unrestricted Investment Account Holders’ (UIAH) ownership and the use of IAF. However, the evidence of this study did not find any impact for the board of directors’ strength on the use of IAF.

Research Limitations/Implications: There may be better measures for some variables in the study model. Additionally, the restriction of the study sample to Sudanese banks may limit the generalization of the results. Therefore, future studies may refine the model and expand the sample to Islamic banks in other countries.

Practical Implications: The paper highlights the importance of IAF for Shariah governance in Islamic banks. Moreover, the insignificant association between the use of IAF and the strength of board of directors has important implications for board’s effectiveness in Islamic banks.

Originality/value: This is the first study to investigate the factors that associate with the use of IAF by Islamic banks.

Keywords: Corporate Governance, Shariah, SSB, Internal Audit Function, Islamic Banks

JEL Classification: G20, G28, G30, G38