How does Corporate and Shariah governance influence the default risk: A Mediating role of Risk Committee

Abstract

The recent financial crises, corporate scandals, complexity of financial services offered by the banking industry, and growth rate of Islamic banking are steeply increasing in developed and developing economies like Pakistan. The present study proposed that ownership structure, board structure, and Shariah governance use the agency theory and Maqsidal-Shariah as underpinning theories. Moreover, the present study proposed the role risk committee as mediating between the association of ownership, board structure, Shariah governance, and default risk. The empirical findings of present study reveal that ownership structure and board structure are significantly linked with default risk. The findings also reveal that Shariah governance is significantly associated with the default risk of Islamic banks operating in Pakistan. Moreover, the risk committee is significantly linked with the default risk of Islamic bank of Pakistan. Furthermore, findings reveal that risk committee significance mediates the association between Shariah governance and default risk. However, the risk committee fails to mediate the association between ownership, board structure, and default risk of Islamic banks operating in Pakistan. The present study's findings will facilitate the managers, shareholders, investors, policymakers, and regulatory authorities in understanding the role of ownership, board structure, Shariah governance, risk committee, and default risk of Islamic banks operating in Pakistan. Future studies need to consider the role of leverage, bank size, CEO financial background, and audit committee to explain the model better.