A canary in a Coalmine! religious agency and its impact on the performance of Islamic banks

Abstract

• Impact of ensconcing of religious agency on the performance of GCC Islamic banks (IBs) is analysed. • Analysis shows that high proportion of prominent religious scholars on Shariah supervisory boards (SSB) improves financial performance of GCC IBs. • Prominent Shariah scholars are detrimental for performance when they assume SSB chair role. • Shariah compliance mechanisms in the Islamic banking business model needs revisiting to mitigate embeddedness of Shariah scholars. We examine the impact of religious agency on the performance of GCC Islamic banks. Our results show that a high proportion of prominent religious scholars on Shariah supervisory boards (SSB) improves financial performance. However, when a prominent Shariah scholar chairs the SSB there are negative performance effects. With the high concentration of a few Shariah scholars, our findings have twofold implications: first, future research should develop approaches to test Shariah governance effectiveness in relation to the assigned mandate of SSBs; second, there is a need for revisiting Shariah compliance mechanisms to mitigate the embeddedness of Shariah scholars and their influence on Islamic bank performance.