Corruption and bank risk-taking: The deterring role of Shari’ah supervision

Abstract

This paper investigates whether the risk-taking of Islamic banks is differently affected by corruption compared to conventional banks. Indeed, the presence of Shari’ah supervisory boards (SSBs), as a cornerstone of Islamic banking, is expected to deter the influence of corruption on risk-taking for Islamic banks. We consider a matched sample of 70 Islamic and conventional banks operating in 10 OIC (Organization of Islamic Cooperation) countries over the 2012-2017 period. We find consistent evidence that higher levels of corruption are associated with higher bank risk for both conventional and Islamic banks. However, this association is stronger for conventional banks. Furthermore, for Islamic banks, the impact of corruption on risk-taking is significantly reduced with higher representation of females in Shari’ah supervisory boards and higher academic qualifications of board members. The role played by such board members in mitigating the impact of corruption on risk-taking is more effective for Islamic banks than for conventional banks.