Corporate Governance, Islamic Governance and Financial Flexibility

Abstract

In this paper, we investigate the relationship between corporate governance structures and financial flexibility for conventional and Islamic banks in the Middle East and North Africa region. We construct a novel financial flexibility index for the banking sector. We show that corporate governance has a significant effect on banks’ financial flexibility. However, Shari’ah governance rules determine how that relationship is manifested in Islamic banks. Our results show that Western corporate governance structures and one-size-fits-all approaches to corporate governance may lead to suboptimal financial flexibility positions. Importantly, we show that “soft policies” to banking regulation are value-enhancing for the banking sector.

Keywords: Corporate Governance, Islamic banking, Financial Flexibility, MENA region

JEL Classification: G21, G32, G34