Corporate Governance in Islamic Banking:The Role of the Board of Directors

Abstract

The unprecedented amount of losses born by the banking industry during the crisis has brought into spotlight the issues concerning regulatory oversight, risk management and disclosure. However, Islamic banking industry remain immunized against the negative effects of crisis and have shown resilience.This study examines the relationship between multi-layer corporate governance model of Islamic banking and their performance. The sample size consists of 17 Islamic banks, 5 from Pakistan and 12 from Malaysia for the period 2009-2015. The results of the study show that Shari'ah supervisory board (SSB) size exerts significant and negative effect on value of firm. University education of Shari'ah board found positive and significant. While, factors related to board structure were found statistically insignificant, which could indicate that in case of Islamic banks' performance Shari'ah supervision related corporate governance factors are the significant determinants. To check the impact of supervisory/advisory role of SSB, sample is divided in two parts; the results of advisory were almost similar as of overall sample. However, the results of supervisory role of SSB worsen the results. Few important policy implications have been derived from results (i) Smaller sized SSB having knowledge of finance and accounting increase the value of firm (ii) strict supervisory role of SSB reduce the performance since there is a trade-off between profit and strict ethical compliance.