On intellectual capital efficiency and shariah governance in Islamic banking business model

Tasawar Nawaz,Mohammad Hudaib,Roszaini Haniffa

doi:10.1002/ijfe.1986

Abstract

AbstractThis paper empirically investigates whether intellectual capital (IC) and shariah governance jointly affect the economic performance of Islamic banks (IBs). In contrast to prior research, this paper disaggregate IC and corporate governance features and examine whether the two are jointly related to economic performance. These relationships are further explored before, during and after the financial crisis based on a sample of 64 Islamic banks operating in different regions during the period 2007–2014. The required data to calculate different constituents of IC efficiency and governance mechanism is hand collected from 512 annual reports. After controlling for other corporate governance and bank‐specific characteristics (operational type, bank size, listing status, risk, type of auditor, accounting standard and region), we find both intellectual capital efficiency and shariah governance proxies (size and dominance of prominent scholars of shariah supervisory board) to have a significant positive relationship with accounting measure of performance. However, based on market performance measure, only one proxy for shariah governance mechanism, that is, prominent scholars on SSB, is found to be significant but in the negative direction. These results provide important insights into the relationship between IC efficiency, corporate governance and performance in Islamic banking business model and have policy and practical implications.

Highlights

Driven by religious business ethics, Islamic banks entered the main stream financial services sector about half a century ago to provide banking solutions that comply with Islamic jurisprudence which eschew interest, speculative trading or investments, excessive risk taking – in their investment and financing dealings and involve Islamic banks in the risk sharing of the proceeds and revenues of the borrower (Beck et al, 2013)
The main objective of our paper is to identify whether investments in intellectual capital and shariah governance have significant impact on performance of Islamic banks, while controlling for other corporate governance and bank-specific characteristics
Our regression results based on value added intellectual coefficient (VAIC) suggest that Islamic banks have utilised their resources efficiently leading to increase in profitability but this was not reflected in the case of market value

Summary

Introduction

Driven by religious business ethics, Islamic banks entered the main stream financial services sector about half a century ago to provide banking solutions that comply with Islamic jurisprudence (shariah) which eschew interest (riba), speculative trading or investments (gharar), excessive risk taking – in their investment and financing dealings and involve Islamic banks in the risk sharing of the proceeds and revenues of the borrower (Beck et al, 2013). Value creation in Islamic banks is dependent on efficient and effective investments in human and structural capital, which will lead to tangible (e.g. new products or processes) and intangible (e.g. more experienced employees likely to engage in future product and service innovations) outputs, and subsequently better banks’ performance. The downside of operating as windows or subsidiaries is that Islamic windows by design have to spend more internally on staff recruitment, training and development and externally on branding and marketing to position themselves as shariahcompliant business in the market to satisfy existing customers and attract potential clients looking for shariah-compliant financial services Such additional costs may affect their bottom line.

Dependent and explanatory variables

Conclusion

Findings

12. ACPower