Moderating role of Shariah committee quality on relationship between board of directors effectiveness and the performance of Malaysian Takaful

Abstract

PurposeThe purpose of this study is to examine the effect of Board of Directors Effectiveness (BODE) on the performance of Malaysian Takaful companies licensed by the Central Bank of Malaysia. In addition, the study investigates the moderating effect of Shariah Committee Quality (SCQ) on the relationship between BODE and companies’ performance.Design/methodology/approachThis study uses a sample of 11 Malaysian Takaful companies during the period of 2010-2017. While BDE and SCQ are measured using indices, performance is proxied using ROA and ROE. A panel fixed effect regression analysis is used to test the impact of the BDE on the financial performance of Malaysian Takaful companies and the moderator role of SCQ.FindingsThe main finding of this study shows a positive association between BDE and performance. More specifically, boards with a high presence of independent, Muslim and female directors positively contribute to the performance of Malaysian Takaful companies. Another interesting finding is related to the positive moderating effect of SCQ on the relationship between BDE and performance. This result indicates that a high level of SCQ combined with a high level of board effectiveness improve performance.Practical implicationsThe finding is of great importance to stakeholders and policymakers to improve their board effectiveness and the quality of the Shariah committee to reduce agency costs and to improve the performance of Malaysian Takaful companies.Originality/valueThis study adds to the prior literature by investigating for the first time the relationship between BDE and performance and the interaction effect of SCQ on the performance of Malaysian Takaful companies.