How diverse are Shariah supervisory boards of Islamic banks? A global empirical survey

Islamic Banking has come to a critical phase where it has to balance between performance and sanctity of the offerings. Keeping the investors happy and at the same time maintaining the reason for existence of Islamic Banking has not been an easy task. Since all the contracts and products in Islamic Banking need to be approved by Shariah board, there is a heavy reliance on Shariah. Shariah Supervisory Board is the main decision making body in the Islamic financial institutions. Their powers supersede the powers of the Board. Hence they play a crucial role in the Corporate Governance. The paper examines the critical role of Shariah Supervisory Board in Islamic Banks in relation to corporate governance. Shariah Supervision can make significant contribution to the strategic direction of the organization while adhering to corporate governance principles. It can also help in maintaining the sanctity of the Islamic offerings thus fulfilling the prime role. It is evident that there is a strong link between the principles of Islamic Finance and corporate governance. The fundamental principle of avoiding Gharar lays down the foundation of corporate governance in Islamic Banking. Avoiding uncertainty and deceit are the basic rules of Islamic Banking. Following the corporate governance is thus not a matter of choice but a fundamental requirement and thus channelling it for providing the strategic direction to the organisation is the responsibility of the Shariah Board. There are several factors affecting Corporate Governance in Islamic Banking. A Governance Committee as proposed on the lines of IFSB is a viable option as a first step for corporate governance in the Islamic Banks. It should be noted that the disclosure requirements are more stringent in case of Islamic Banks as compared to conventional banks due to the fundamental principle of complete disclosure in Islamic Banking. Thus, Shariah Supervisory Board can provide critical direction to the organization while adhering to the principles of corporate governance in the Islamic banks.

PurposeThe purpose of this paper is to explore the perceived importance of management about various corporate governance dimensions being practiced in the Pakistani Islamic banking context.Design/methodology/approachAHP is applied to analyze the corporate governance indexes and its dimension of five Islamic banks and 12 conventional banks which are providing Islamic banking facilities (Islamic bank window) throughout Pakistan. These dimensions included board of directors (BOD), Shari'ah supervisory board (SSB), audit, investment account holders (IAH), and information disclosure & transparency.FindingsThe study reveals that the most significant dimensions which affect the corporate governance in Islamic banks are BOD and SSB, while the significant factors for Islamic banking windows are almost all dimensions of corporate governance. The correlation, regression, and ANOVA tests are applied to check the contributions of various factors of corporate governance mechanisms. These results indicate that there is a significant difference between Islamic banks and Islamic banking windows regarding the BOD and SSB. On the other hand, no significant difference is seen for the rest of the factors. The dissatisfaction level of customers reduces with the increase in the audit and BOD governance and all other factors have no impact in the case of Islamic banking windows; whereas in Islamic banks, in addition to audit and the SSB, information disclosure also significantly reduces the dissatisfaction level of customers. The concern of customers decreases significantly with the increasing level of IAH in the case of Islamic banking windows whereas in the case of Islamic banks a significant impact is seen for BOD, information disclosure, audit and IAH, but improvement in the governance of these rather increases the concern of customers toward compliance of Shari'ah and SSB has no contribution towards the concern of customers.Originality/valueThis study has practical significance for conventional and Islamic banking policy makers for understanding the requirements of their stakeholders and aligning them with the fundamentals of Shari'ah compliance according to the guidelines provided by the code of corporate governance so as to get better insight into the relationship between customers' motives behind using Islamic banking products.

Purpose The article investigates how governance mechanisms, specifically Shariah Supervisory Boards (SSBs) and Boards of Directors (BDs), interact with the adoption of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards to mitigate earnings management (EM) in Islamic banks (IBs). This study aims to explore the contextual effectiveness of these governance structures and regulatory frameworks in strengthening financial reporting quality. Design/methodology/approach Based on 450 bank-year observations from IBs across 10 Middle East and North Africa (MENA) economies over the period 2010–2018, the analysis deliberately excludes COVID-19 years to ensure data stability and comparability. Discretionary loan loss provisions (DLLPs) were used as proxies for EM. To address potential endogeneity, we employed an instrumental-variables two-stage least squares (IV-2SLS) regression, allowing for a robust evaluation of the moderating role of AAOIFI standards in the relationship between governance mechanisms and EM. Findings The results show that SSB cross-membership significantly reduces EM, reinforcing its role as an effective governance mechanism. In contrast, SSB size has no direct impact, but becomes positively associated with EM in weaker regulatory contexts. Board independence mitigates EM when moderated by AAOIFI standards, while the effect of board size remains context-dependent. Although AAOIFI adoption alone is linked to higher EM, indicating potential symbolic compliance, it strengthens the capacity of both the Shariah and corporate governance mechanisms to curb EM when effectively enforced. Practical implications Policymakers in jurisdictions with voluntary or partial adoption should consider mandating these standards to prevent symbolic compliance and to ensure substantive alignment with ethical and financial objectives. Furthermore, targeted capacity-building initiatives, such as training programs for members of SSBs and BDs, can strengthen governance effectiveness by enhancing their familiarity with AAOIFI principles, thereby contributing to EM reduction. Social implications AAOIFI standards enhance the transparency and accountability of IBs by fostering ethical compliance and curbing EM practices. This reinforces stakeholder trust and supports the broader societal role of IBs as credible and ethically guided financial intermediaries in the global financial system. Originality/value This study advances the literature by examining how AAOIFI standards moderate the relationship between governance mechanisms and EM in IBs. It fills key gaps by assessing contextual effectiveness across diverse regulatory settings. Aligned with signaling theory, the findings suggest that symbolic adoption may mask opportunistic behavior, emphasizing the need for strong enforcement to ensure meaningful compliance and prevent the misuse of governance frameworks.

Shari'ah Supervisory Board (SSB) is the salient feature of Shari'ah governance upon which the entire operation of Islamic Financial Institutions (IFIs) depends for validations. This chapter examines the status of SSB in the context of Shari'ah governance in Sri Lankan IFIs. The position of SSB has been examined in three dimensions, namely appointment, qualifications of SSB members, and the enforcement of their decisions. The qualitative method of research and the gap analysis have been applied to find the gap between the guidelines issued by Accounting and Auditing Organizations (AAOIFI) and Islamic Financial Services Board (IFSB) and the actual practices of SSB. Some gaps were found in the practice of SSB in the abovementioned three areas though each IFI has setup SSB institutionally at micro level. The recommendations are put forward to enhance the SSB practices in Sri Lankan IFI, which is the significant contribution of this chapter.

PurposeThe main objective of the study is to ascertain the level of independence and the effectiveness of the Shariah Supervisory Board (SSB) members of Islamic banks in Bangladesh. This is because only SSB members are empowered to oversee and certify the overall business functions of Islamic banks.Design/methodology/approachThis paper implements qualitative case research approach to explore the research objective in the context of Bangladesh. We applied purposeful and snowball sampling tactics for selecting respondents. By using a semi-structured questionnaire and face-to-face interviews, we collect data from SSB members, central bank executives and experts in Islamic banking and Shariah governance.FindingsThe study finds that majority Islamic banks' SSB's positions are similar to the Board of Directors (BOD) of the banks. Next, this study finds that in recruiting/selecting SSB members, some banks do not follow the guidelines of the central bank. This study finds mixed evidence regarding the independence of the members of the SSB. Most of the respondents opined that SSBs do not have power; in some cases, members of SSB are not independent and seeming powerless as BOD selects and recruits them. In contrast, they are dependent on management in respect of strategy implementation.Research limitations/implicationsThe study significantly contributed to the national and global regulatory bodies by identifying an important governance determinant of Islamic banks that is the independence of SSB members, which is highly important for both Shariah functions, and to enhance the trust level of the stakeholders. This study makes a theoretical contribution by documenting the violation of stakeholder theory and agency theory in recruiting SSB members by BOD's choice. The lack of SSB members' independence has an impact on Shariah legitimacy of the Islamic banks which is contradictory with the notion of legitimacy theory. This study recommends the central bank to ensure the independence of the SSB and central bank should take initiatives to develop an environment for the Islamic banking sector.Originality/valueThis study extends the literature of corporate governance relating to Islamic banking and financial institutions. More specifically, this paper explores the necessity of independence of members of the monitoring body (here SSB), an important constituent of governance, to ensure high-quality governance and transparency in reporting to increase diverse stakeholders' trust/confidence. The absence of independence of SSB in performing their functions contradicts with the agency, stakeholder and legitimacy theory, which is inconsistent with global evidence, that demands further investigations.

PurposeThis paper aims to examine the impact of Shari’ah supervisory boards (SSBs) on the performance of Islamic banks (IBs). It also tests whether SSBs’ attributes affect the performance of IBs. Based on a sample of 1,803 Islamic bank-year observations from 82 banks in 15 countries over the period 1993-2014 and controlling for factors known to affect bank performance, this study reveals a robust and significant positive relationship between SSBs and Islamic bank performance. This study also shows that the characteristics of SSBs affect the performance of IBs. This research reveals how SSBs influence the performance of IBs, as well as the processes and roles SSBs use to ensure Shari’ah compliance in business transactions.Design/methodology/approachThe purpose of this study design is to relate SSB presence, size and diversity to financial performance using three techniques. The first technique is a multivariate data analysis that analyzes data arising from more than one variable. The second technique is a clustered regression (clustering by bank), which corrects for serial correlation and produces unbiased t-statistics. Because this sample is drawn from panel data, it is expected serial autocorrelation of the independent variables and error term within banks. In cases where within-company correlation exists, t-statistics based on average regression coefficients from year-by-year regression are upwardly biased and potentially severe (Peterson, 2009). Therefore, this study uses a technique that agrees with Stock and Watson (2002), who show that the standard method of calculating heteroskedasticity-robust standard errors for the fixed-effects estimator generates inconsistent variance estimates. Thus, using the clustered regression is consistent with the fixed-effects estimator. The third technique is a two-stage least-squares regression that helps build an instrumental variable for robustness tests purposes.FindingsThe findings suggest that large corporate boards and large SSBs are more efficient in dealing with different monitoring and advisory roles than small SSBs. Consequently, this suggests that increasing the size of corporate boards and SSBs should improve monitoring and advisory functions, management behavior and organizational performance.Research limitations/implicationsIt is possible that there is an upper limit to this benefit, however; we do not explore this limit, which therefore provides opportunities for additional research. Because Shari’ah compliance relates only to a rational legal framework of negative screening relegated to interest prohibition and limiting uncertainty. The interest prohibition and limiting uncertainty have not been investigated between the two samples due to data unavailability. In addition, limited accounting-based measures of financial performance may not accurately portray IB performance; hence, an additional market measure is implemented, which is Tobin’s Q.Practical implicationsUltimately, these findings could help IBs improve their financial results by enhancing their internal and external governance mechanisms (Walsh and Seward, 1990). They provide a basis for developing larger, more diverse SSBs that are more focused on complying with Shari’ah and corporate governance. The results also have significant policy implications for improving firm-level corporate governance versus improving country-level institutional factors. Both views have their advocates. However, it is very difficult to reform the legal system in a short time. Still, this study shows that struggling IBs have a way to improve their corporate governance and simultaneously improve their financing environment.Originality/valueThis research contributes to the literature on the effects of SSBs on IBs’ organizational financial performance, processes and roles. It is the first to examine empirically the underpinnings of how SSBs affect organizational financial performance via agency theory and contingency theory.

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.

SSB (or in some Islamic financial institutions known as shariah committee), is one of the most important governance mechanism of an IFI to ensure compliance with shariah. Compliance with shariah is the distinctive characteristic of an IFI as compared to conventional financial institutions. Acknowledging this importance, the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) has provided standards on SSB, shariah review and internal shariah review under its governance standards (AAIOIFI, 1999). At present in line with shariah principles several Islamic financial institutions are engaged in product development activities globally to cater the needs of a wide range of parties. However, considering the essentiality for these institutions to innovate and operate within the ambits of shariah, need of the shariah supervision cannot be over stated. The safeguard to make Islamic financial institutions perform their dealings according to the Islamic laws comes when there is a legitimate control body in the institution. Hence, it is vital for such institutions to form a shariah supervisory board (SSB) comprising on fiqh al-muamalat experts to guide their transactions in accordance with the principles of shariah. Malaysia and several other countries have passed laws to govern the formation and functions of SSB. In fact, SSB undoubtedly forms the most important and influential entity in any Islamic financial institution.The paper in hand attempts to discuss these functions in detail and tries to shed a little light on established laws in Malaysia regarding regulations of SSB and operations of Islamic financial institutions.

PurposeGiven the relative importance of the Shari’ah supervisory boards (SSBs) in Islamic banks’ (IBs’) performance, this study aims to examine the impact of SSB diversity on IBs’ performance from the stakeholders’ perspective in the context of Pakistan.Design/methodology/approachRandom-effects model and generalized method of moment are used to investigate the impact of SSB diversity on IBs’ performance across a panel data of 22 Islamic banks in Pakistan from 2005 to 2020 inclusive.FindingsThe findings of this study show that SSB size, SSB relevant educational background diversity, bank’s size and bank’s stability have a positive impact on IBs’ performance. In contrast, SSB age, nationality and cross-membership diversities have a negative impact on IBs’ performance. Moreover, SSB gender, tenure and general educational diversities have no significant impact on IBs’ performance.Research limitations/implicationsSSB diversity and IBs practices are different across different jurisdictions. This study is conducted on IBs in Pakistan because of data constraints; thus, the results of this study may not be generalizable to other countries' IBs.Practical implicationsIn structuring the SSBs’ framework, the regulatory authorities and policymakers should consider mandating an ideal SSB size and hiring relevant qualified members with low cross-membership to improve IBs' performance. Thus, the structure potentially attracts Muslim stakeholders, enhances their satisfaction and improves IBs' performance.Social implicationsHaving diversified members in the SSB, IBs equally benefit both individual and group stakeholders in society. Diversity in SSB members enhances IBs' performance and the social welfare of various stakeholders in society.Originality/valueTo the best of the authors' knowledge, this is the first empirical research that examines comprehensively the impact of SSB structural and demographic diversities on IBs' performance in the context of Pakistan. This paper contributes to the unique Shari’ah governance structure in the context of Pakistan. Additionally, this study may serve to assist IBs’ stakeholders in better comprehending the SSB practices of IBs in Pakistan.

PurposeThe purpose of this paper is to examine the influence of gender diversity among the board of directors (BOD) and Shariah supervisory board (SSB) members on the financial performance of Islamic banks in Indonesia and Malaysia.Design/methodology/approachData for a sample of 19 Islamic banks for the period 2010–2018 were collected to test the research hypotheses using pooled ordinary least squares estimation method. Generalized least squares estimation method was used to confirm that the results are robust. This study lagged the explanatory variables by one period to control for potential endogeneity.FindingsThe findings suggest that Islamic banks with more gender-diverse BOD and SSB are expected to have better financial performance. In addition, this paper finds that an increase in Islamic banks’ size may undermine the positive impact of gender diversity among SSB members on Islamic banks’ financial performance.Research limitations/implicationsThis study was conducted only on Islamic banks in Indonesia and Malaysia owing to data constraints; thus, the results may not be generalizable to Islamic banks in other countries.Practical implicationsImproving financial performance is crucial for banks, especially for Islamic banks, to sustain their fast-growing share globally. Therefore, the findings of this study are expected to provide insight and understanding in the selection and appointment of BOD and SSB members at Islamic banks.Social implicationsBy having women represented in the BOD and SSB, Islamic banks will benefit equally from valuable abilities across demographic groups in the society. Furthermore, if the members of the BOD and SSB are properly selected, Islamic banks with more gender-diverse boards can effectively contribute to enhancing social welfare of various segments in the society.Originality/valueThis is the first study, as far as is known to the authors, that provides empirical evidence on the influence of gender diversity among BOD and SSB members on the financial performance of Islamic banks. This paper is expected to be used as a reference by the shareholders and customers of Islamic banks in ensuring that the BOD and SSB have the best optimal composition that maximizes their profits.

Purpose The purpose of this study is to investigate and compare the dynamic leverage policies of Islamic and conventional banks within selected Organization of Islamic Cooperation (OIC) countries. The study specifically focuses on the concepts of leverage procyclicality and prospect theory. Design/methodology/approach To achieve the research objectives, the study uses data from three distinct periods: Crisis I (2007–2009), Crisis II (2011–2012) and Crisis III (2020). The analysis uses dynamic panel-data regression, using the generalized method of moments (GMM) technique. Findings The research findings indicate that both Islamic and conventional banks demonstrate leverage procyclicality. Interestingly, Islamic banks exhibit weaker leverage procyclicality during normal conditions but display stronger procyclicality during crises compared to their conventional counterparts. The application of prospect theory reveals that both bank types exhibit risk-taking or risk-averse behavior through leverage under certain financial and market performance measures as the first-level domain of the gain-vs-loss condition. Furthermore, during crises (as the second-level domain of the normal-vs-crisis condition), both Islamic and conventional banks experience heightened leverage. Notably, Islamic banks, owing to their lower risk exposure and greater shock resilience, demonstrate lesser risk-taking behavior through leverage than conventional banks, both during periods of underperformance and worsening conditions amid crises. These findings validate the extension of prospect theory's applicability in a two-level domain perspective. The dynamic nature of leverage policy, being procyclical and adhering to prospect theory, also varies following different crises specifically. Research limitations/implications The study's limitations include the unequal crisis periods (Crises I, II and III), leading to an imbalanced examination of their effects, certain financial and market performance metrics that fail to corroborate the expected hypotheses and the limited generalizability of findings beyond the selected OIC countries. Practical implications Understanding the intricate dynamics and behavioral aspects of leverage policy for both Islamic and conventional banks, particularly during crisis scenarios, proves crucial for reviewing banking regulations, making informed financial decisions and managing risks effectively. Originality/value This study enriches the current knowledge by presenting two key points. First, it highlights the dynamic nature of leverage procyclicality in Islamic banks, showing a change from weaker procyclicality in normal conditions to stronger procyclicality during crises compared to conventional banks. Second, it expands the application of prospect theory by introducing a dual-level domain context. Examining the comparative leverage policies of Islamic and conventional banks during different crises within OIC countries provides novel insights into leverage procyclicality and behavioral responses.

Purpose – This study examines the influence of the Shariah supervisory board (SSB) and Islamic banks’ characteristics on tax avoidance practices in Indonesia.Methodology – This research uses secondary data using the panel data analysis method fixed effects model; the research sample is an Islamic bank in Indonesia from 2017 to 2021.Findings – The results indicate that SSB size, SSB reputation, and bank size have a positive effect on tax avoidance. The variables across SSB members, SSB education level, bank age, and bank profitability have a negative effect. Meanwhile, the SSB expertise variable, SSB remuneration, and turnover do not affect tax avoidance.Implications – Islamic banks play an essential role in social welfare to align with tax contributions in developing countries. Therefore, tax regulators and Islamic banks must collaborate to review the treatment of expenses according to tax regulations.Originality – This study fills a research gap by investigating the relationship between SSB characteristics and tax avoidance in Indonesian Islamic banks, which has yet to be discussed in previous papers.

Purpose This paper aims to examine the effect of dual board governance structure, i.e. Shari’ah supervisory board (SSB) and board of directors (BoD), on the performance of Islamic banks (IBs) in Southeast Asia region versus banks in the Gulf Cooperation Council (GCC) region. Design/methodology/approach This study uses a sample of 45 IBs over seven countries covering the period of 2007-2015 based on the GMM estimator – First Difference (2-step). Findings The findings reveal that SSB and BoD for IBs in both regions are segmented in terms of ROA (negative interaction) and integrated in terms of Zakat ratio (Zakat on equity [ZOE]) (positive interaction) only for Southeast Asia region. Furthermore, SSBs positively affect multi-bank performance in Southeast Asia while its effect is absent for GCC. This suggests that Shari’ah governance practices for IBs in Southeast Asia are stronger compared to GCC IBs. Finally, BoD has a significant association with low ZOE for IBs in both the regions. Research limitations/implications The implications of this research is that the unique agency theory depicted in this study can be inferred when analyzing how dual board structure affects IBs' performance. Practical implications For regulators in both regions, SSBs must be given real power to monitor BoD. They should also balance the number of SSB scholars with experience in Shari’ah, as well as in law, accounting and finance. It is also important that such a balance of scholars with PhD in these areas be required for Southeast Asia IBs. For the GCC’s regulators, CG practices need to be improved by giving due importance to SSB characteristics and BoD structure. Originality/value Though the effects of dual board structure on IBs' performance has been previously examined in the literature, only SSB size has been used as a single proxy of SSB governance. Furthermore, no empirical evidence is recorded to date on this issue in Southeast Asia and the GCC regions. One of the innovations of this paper is the use of multi-bank performance measures in the IBs performance and corporate governance.

Previous studies use mainly insolvency, credit, liquidity, market, and operational risk to measure risk-taking in Islamic banks. We are expanding the risk indicators: credit risk, market risk, liquidity risk, operational risk, legal risk, reputation risk, strategic risk, shariah compliance risk, rate of return risk, equity investment risk, and insolvency risk. We summarize these risks in a risk index. Additionally, we expanded the Shariah Supervisory Board (SSB) attribute indicator and developed the SSB busyness attribute unused by previous researchers. The study sample included 14 Islamic commercial banks in Indonesia, observed from 2010 to 2020. Fixed effect and random effect data analysis models were used. Model determination is based on Hausman test results. Based on the test results for each type of risk, we find that busyness, educational background (economics/finance and Islamic law), and SSB experience has a negative effect on the risk. However, SSB's level of education encourages directors to take risks. This result is also consistent when using a risk index where SSB education can increase the risk. Our findings strengthen the resources-dependent theory that experience, busyness, and educational background as access to resources have an impact on increasing the knowledge and skills of SSB in controlling risk. The findings are robust to the potential issues of endogeneity and sensitivity analyses.

Exploring the workings of Shari’ah supervisory board in Islamic finance: A perspective of Shari’ah scholars from GCC