Corporate Governance Mechanisms and Financial Performance: A Comparative Study Between Local Islamic Banks and Local Conventional Banks in Malaysia

Abstract

The study examines the relationship between the corporate governance mechanisms and the financial performance of banks, by comparing the financial performance of local conventional banks with local Islamic banks in Malaysia. This study focuses on seven local and full-fledged Islamic banks and eight fully local-owned conventional banks in Malaysia over the period of 7 years which span between 2009 and 2015. This constitutes a total of 105 number of observation. Henceforward, the corporate governance variables being used as independent variables are board size (BS), independent director proportion (IDP) and CEO’s gender (CG), and firm age and firm size act as control variables. On the other hand, the financial performance of both types of banks as dependent variables are calculated based on the accounting ratio to measure liquidity ratio (current ratio—CR), profitability ratio (return on assets—ROA), risk and solvency (loan-to-deposit ratio—LDR) and efficiency ratio (asset utilization ratio—AU). Pearson correlation matrix, panel data analysis (fixed effect model) and independent samples t-test had been used in this study. Based on the findings, only CEO’s gender showed a significant influence on liquidity, profitability, risk and solvency and efficiency of conventional banks. On the other hand, the independent director variable is examined to be only significant with the asset utilization ratio or efficiency for Islamic banks. Interestingly, there is a statistically significant difference in mean on the current ratio (CR) and asset utilization (AU) for performance between both banks. Meanwhile, there is no significant difference between Islamic banks and conventional banks on the financial performance of loan-to-deposit ratio (LDR) and return on asset ratio (ROA).