Abstract
This study aimed to investigate the association between corporate governance characteristics, shariah governance characteristics, and the credit rating of Asian Islamic banks. To do so, we collected data from 22 banks during the 2006–2018 period. In total, we observed 286 data points. Credit rating was measured through an adaption of the credit rating scale that measured the long term credit of Islamic banks on an ordinal scale. From these data, 19 scores (Aaa) were considered high credit ratings and 1 score (C) was considered a low credit rating. Descriptive statistics, correlations, and the ordered logit regression model were applied in a panel setting. We found that the board interlock, board independence, CEO duality, and board foreign directorship negatively affected credit ratings. We also found that the board size, board accounting, finance knowledge, presence of women on the board, shariah board size, presence of supervisory shariah board, the shariah board interlock, and presence of female shariah scholars all were positively associated with credit ratings. This study suggests that Islamic banks can access more funds with higher shariah compliance. As such, we concluded that evaluating organizations’ credit ratings must consider shariah governance attributes as determinants of the credit rating of Islamic banks.
Highlights
The Islamic banks have distinctive characteristics of shariah compliance and profit & loss sharingModel [1,2]
As we expected from the resource dependence theory and open innovation concepts, directors who work in other Islamic banks can enhance innovation but corporate board interlock is contrary to the expectations
The present study focused on shariah governance attributes, corporate governance attributes, and credit ratings
Summary
The Islamic banks have distinctive characteristics of shariah compliance and profit & loss sharingModel [1,2]. The Islamic banks have distinctive characteristics of shariah compliance and profit & loss sharing. The model of Islamic financial institutions is more favorable during economic and financial crises because the aspect of risk-sharing distributes the total risk among all parties instead of only one party; Islamic bank losses are usually less compared to conventional banks during an economic crisis. The Islamic banking system differentiates from the conventional banking system based on shariah compliance. Islamic banks face several operation risks due to their funding structure based on profit and loss sharing [5]. In a conventional banking system, the governance role is limited to stockholders and management but in the Islamic banking system, shariah governance deals with all stakeholders.
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