Shariah governance effects on cash holdings under sustainability commitments: Indonesian Islamic banks

This study aims to examine the Maqashid Shariah Performance of Islamic banks in Indonesia by considering the influence of Intellectual Capital (IC) and aspects of the Shariah Supervisory Board (SSB), namely SSB reputation and SSB tenure. This study uses a sample of Islamic banks registered with the Financial Services Authority with a sample of 14 Islamic banks during the period 2008-2020. This research uses panel data regression model analysis. The analytical techniques used in this study are statistical tests, preliminary tests (Breusch-Pagan, likelihood test, Hausman test), diagnostic tests (heteroscedasticity test and autocorrelation test), and hypothesis testing. Based on the results of the three preliminary tests in determining the panel data regression model, this study will use a fixed effect model to examine the relationship between variables in regression models one and two. The results of this study reveal that intellectual capital has a positive impact on the Maqashid Shariah Performance of Islamic banks in Indonesia, this indicates that greater utilization of intellectual capital leads to an increase in the Maqashid Shariah Performance. The SSB Reputation variable negatively affects Maqashid Shariah Performance, this happens because there are many SSB who have positions on the National Standards Board (DSN) which can reduce focus so that the performance of SSB members cannot be implemented optimally, therefore it can reduce Maqashid Shariah Performance. In addition, the tenor of SSB does not affect the performance of Islamic maqashid Islamic banks in Indonesia, because the results of this study indicate that the average tenor of SSB is 5-6 years in Islamic banks. Where this proves that there is no influence of the length of time or not the term of office of the SSB on the performance of Islamic banks because the experience gained is not only in Islamic banks themselves. In addition, the longer the term of office spent as a member of the SSB, the higher the company's performance because the SSB feels more experienced and has prospects within the company. This study could not prove the moderating role of the reputation and tenure of the Shariah Supervisory Board in strengthening the relationship between intellectual capital variables and Maqashid Shariah Performance.

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.

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.

The aim of this research is to assess the effect of financial performance to Maqasid Shariah performance with shariah governance as a moderating variable. Financial performance can be measured based on three criteria: firm size (FS), return on asset (ROA) and asset structure, while Maqasid Shariah performance is measured by zakat, infaq, shadaqoh and awqaf (ZISWAF) and qordhul hasan (QH). Shariah governance (SG) is measured by the proportion of independent board of commissioners’ members, board size, audit committee, and shariah supervisory board. The data in this study are the secondary data from Islamic Banking Financial Report (IBFR) of 2012-2016. This research employed a quantitative approach with panel data regression using E-views 9.0 software. The method for the data analysis used factor analysis. The results show that the effects of FS and ROA on Maqasid Shariah performance are significant, and the implementation of shariah governance is generally proven to play a significant role in moderating the effect of FS and ROA on Maqasid Shariah performance. The better the implementation of SG, the stronger the predictability of Maqasid Shariah, and shariah governance has a positive effect on Maqasid Shariah.

IT investment and financial performance are crucial issues for the Islamic banking industry. An Islamic banking (IB) that is established in a technologically advanced setting, employs mostly young and tech-savvy employees, and adheres to Islamic principles in all aspects of its activities, needs to invest in IT. This investment in information technology is essential if they are to remain competitive and achieve solid financial performance. This study aims to investigate the effect of IT investment on Islamic banking performance in Indonesia. The study used data of 14 Islamic banks in Indonesia, from 2012 to 2021. By employing panel regression analysis, the study revealed that IT investment has a significant impact on Islamic banking performance, indicated by ATM and Expenses for Human Resources (BG), which has the coefficient 1.75e-07 (Alpha 0.060) and 4.73e-14 (Alpha 1%), respectively. The study also documented a significant relationship between IT investment and IB performance, caused by Sukuk issuance and the Shariah supervisory board. Sukuk issuance has a negative impact on banking performance in relation to IT investment, while shariah governance (board of directors and shariah supervisory board) has a positive impact. Hence, it is also important for an Islamic banking to minimize the use of Sukuk, which until now was still categorized as debt, and to maximize the role of good governance to back up IT spending.

This research is conducted to prove empirically the influence of Islamic business ethics disclosure, corporate governance, debt ratio, syirkah fund ratio and the profile of the Shariah Supervisory Board (SSB) towards earnings management. The samples are collected from Islamic commercial banks in Indonesia. Multiple regression analyses are employed in analyzing the data. From this research, it is found that (i) corporate governance, (ii) temporary syirkah funds, (iii) the size and educational level of the SSB, (iv) the syirkah fund ratio, and (v) the Islamic Ethics Disclosure Index or IEDI have negative impacts towards earnings management. The debt ratio, educational background of the members of SSB, and double membership of SSB do not have an impact on earnings management. Thus, the SSB should oversee the implementation of Islamic business ethics and avoid earnings management. Earnings management creates a false view of the performance of the Islamic bank, with respect to its profit and loss sharing system.

Shari'ah Supervisory Board (SSB) plays a crucial role in the Shari'ah governance (SG) and legal framework of Islamic banks. One of the main functions of SSB is to ensure that the products and services of Islamic banks conform to Shari'ah as set by the regulators. However, despite the essential role of SSB in the context of Shari'ah governance, bibliometric analysis in this topic is very limited. Therefore, the main objective of this study is to review the SSB and SG of Islamic banks to capture what has been done in this area of research and to suggest prospects for future research. Specifically, this study is to answer the following three research questions. First, how has SSB and SG research evolved and been disseminated; second, what key topics have been discussed in SSB and SG; and third, what are the characteristics of scientific collaborations in SSB and SG research between authors from various countries? This paper employed a systematic literature review (SLR) as its research methodology to identify the relevant studies, followed by a bibliometric analysis to gain insight into the role of SSB in the SG of IBs research and trends in its dissemination. This study finalised 148 publications between 2006 and 2022 upon screening the title and abstract using relevant keywords to address the research questions.

1. IntroductionThe reason of holding corporate cash is explained by four motives in economics and finance literature: the transaction motive, the precautionary motive, the tax motive and the agency motive (Bates, Khale, and Stulz, 2009). Keynes (1936) determines two main benefits for holding cash. First, the firm reduces transaction costs to raise funds and also it does not have to liquidate assets in order to make payments. This is called transaction cost motive (Opler, Pinkowitz, Stulz and Williamson, 1999). According to precautionary motive, in case of cash flow shortfalls a firm might not invest in profitable projects if it does not have liquid assets. As a result, a firm holds cash in order to diminish the costs of financial distress (Opler et al., 1999). Third, Foley, Hartzell, Titman and Twite (2007) report that the firms which incur tax consequences related with repatriating foreign earnings hold more cash. This is explained by tax motive (Bates et al., 2009).It is assumed that when agency problems between managers and shareholders are greater, cash is worth less (Pinkowitz, Stulz and Williamson, 2006). In his free cash flow theory, Jensen (1986) states that managers have an incentive to hold large amount of cash for their own objectives rather than shareholders'. By doing so, they increase the assets under their control and gain optional power over the firm's investment decisions (Ferreira and Vilela, 2004). However, it is known that when managers have ownership, they aim to maximise firm value rather than using the firm's resources for their own benefits. Thus, managerial ownership aligns the interests of managers and shareholders and this is called as managerial alignment effect. In addition, when managerial ownership continues to increase managers can not be monitored by shareholders and it is resulted in entrenchment of managers. In this case, managers use the firm's resources for their own private benefits rather than the shareholders'. This is called as managerial entrenchment effect. Following the alignment and entrenchment effects, this study examines whether managerial ownership is effective on cash holding decisions of Turkish firms. To examine the impact of managerial alignment and managerial entrenchment on the cash holdings, the ownership level by managers (MO) and quadratic form of this variable (MO2) are used, respectively. Quadratic form of managerial ownership is a proxy for high level of ownership and thus managerial entrenchment in line with the existing literature (Marchica, 2005). When cash holding ratio is used as a dependent variable, a negative coefficient for MO and a positive coefficient for MO2 are expected. Since high cash holdings cause agency problems of free cash flow (Dittmar et al., 2003), managers should choose less level of cash holdings to behave in line with shareholders' interests. Thus, a negative coefficient for MO variable is expected. In addition, at higher levels of managerial ownership, managers might hold higher level of cash for their own private benefits at the expense of shareholders'. Therefore, a positive coefficient for MO2 variable is expected.So far several studies have already analysed the firm specific characteristics that determine the cash holding preferences of firms. Ozkan and Ozkan (2004) examine the impact of managerial ownership besides firm specific characteristics on cash holding preferences of UK firms for the period between 1984 and 1999. Furthermore, although Uyar and Kuzey (2014) have examined the firm specific characteristics that affect cash holding choices of Turkish firms, they have not investigated whether managerial ownership is effective on this choice. As an emerging market Turkish market has different characteristics. Emerging markets have weaker regulatory environment, weak corporate governance and thus low information disclosure level which results in information asymmetry problem between managers and shareholders. As a result, the firms operate in emerging markets come across with costly external financing (Uyar and Kuzey, 2014). …

PurposeThis study aims to shed light on Shari’ah supervisory boards (SSBs) and the possibilities of Islamic banks to reduce the tax avoidance. Performance and Shari’ah compliance have been extensively studied; however, tax avoidance remains a challenge.Design/methodology/approachSSB characteristics, based on resource dependence theory, influence tax avoidance, including SSB size, educational level, expertise, reputation, remuneration and turnover. The samples were obtained from Islamic banks in Indonesia and Malaysia (2010–2020) using the data panel method.FindingsIslamic banks avoid taxes through the effective tax rate and book tax difference. SSBs who have more expertise play a role in investigating the complexity of tax avoidance, and SSB reputation, who is a member of the Islamic bank regulator, understands immorality, resulting in reduced tax avoidance. Moreover, the recruitment system has been effective, as SSBs with more expertise have become more prevalent. Meanwhile, SSB from a Shari’ah background works only in regulated areas, simplifying Shari’ah compliance, in particular, attestation of financial reporting. A heavy workload is created by cross-membership, resulting in the neglect of the immoral value of tax avoidance. The calculation of tax avoidance also includes remuneration and bank assets.Practical implicationsGiven the uniqueness of Islamic banks contributing to social welfare, tax regulators need to review the appropriateness of fees that can be treated as taxes. Tax regulators can join hands with Islamic bank regulators on this review.Originality/valueTo the best of the authors’ knowledge, this study is one of the first to examine the characteristics of SSBs and Islamic banks on tax avoidance. Separating Islamic banks by country enriches the analysis.

PurposeThe purpose of this paper is to focus on conceptualizing the origin of legitimacy, the legitimation process and its trustworthiness toward the people, regulators, society and stakeholders. In achieving the purpose of the study, an inclusive research gap concerning the roles of the Shariah Supervisory Board (SSB) as a Shariah regulatory authority or an internal mechanism of Shariah Governance Framework (SGF) in the development and formation of Islamic financial institutions (IFIs) would also be addressed.Design/methodology/approachThe paper implements an analytical approach to investigate the legitimation process of SSB, and its presence, significance, as well as credibility to the stakeholders.FindingsThis study proposes an additional authority of legitimacy, namely, SSB/Shariah regulatory authority, along with regulators, professionals and people. These could be derived from the internal mechanism of Shariah Governance (SG) practices of IFIs. The study also proposes another type of legitimacy (ethical/Shariah legitimacy) that derives from the organizational SG practices through its internal mechanisms. The formation of SSB is mandatory and more significant for the isomorphic identification of IFIs, SG system, legitimacy and broader acceptance to stakeholders.Research limitations/implicationsThe rational argument shows that SSB legitimates the overall functions of IFIs, SG practices, processes and structures. It is more apposite because it has substantial validity, dominance, recognition and acceptability along with three external bodies. Besides, IFIs and their SG do not have the proper value to the general people, society, regulators and other stakeholders without the legitimization of SSB. Thus, theorists and academicians may consider SSB as the fourth party of legitimacy along with three legitimacy providing authorities (regulators, professionals and people).Originality/valueThe paper focuses on illustrating and extending the border knowledge concerning the legitimacy from SG and how do SSBs legitimize IFIs and enhance their credibility to the general people, government, society and other stakeholders. The paper first clarified the internal legitimacy concerning SGF and contributed to the area of Islamic finance, legitimacy, institutional theory, legitimacy theory and internal legitimacy.

PurposeIslamic banks (IBs) must stay Shari’ah compliant to enhance their customer loyalty and obtain a competitive edge. Given the performance of Shari’ah supervisory board (SSB) continues to be a matter of concern especially for IBs across countries that have a different regulatory environment, the purpose of this paper is to examine the effects of SSB characteristics on IBs’ performance in Malaysia being a country that applies the most extreme intervention of regulatory agencies (pro-active model).Design/methodology/approachA sample of 15 Malaysian IBs is used to test the study hypotheses for the period from 2008 to 2015 using the Generalized Method of Moments estimator.FindingsThe results reveal strong support for a significant association between SSB size, doctoral qualification, change in the SSB composition and performance. In addition, the study supports the view that SSB with cross-membership and reputation is very important in improving the performance of IBs.Research limitations/implicationsFirst, the paper focused only on Malaysia which adopts a pro-active model, and therefore, extending the investigation to include countries that adopt the different models may provide a better view of the best Shari’ah governance (SG) practices for IBs. Second, there is a need for more empirical analysis regarding the optimal SSB size of IBs.Practical implicationsThis paper provides empirical evidence for regulators and policy makers in Malaysia, to understand how to enhance the performance of IBs using SG. Furthermore, marketers of Malaysian IBs should focus on SG practices as an important element for attracting Muslim customers, especially as there is a lack in this aspect.Originality/valueTo date, it seems there is no empirical study that has examined to what extent the impact of SSB characteristics on IBs performance can be affected by the degree of agencies intervention, whether extreme or slight. Malaysia has been chosen as the only country that adopts the most extreme model.

Purpose – The paper aims to contribute to the discussion on Shari'ah governance systems by examining the extent of disclosure on the Shari'ah Supervisory Board (SSB) as well as the content of the Board's report in the annual reports of 23 Islamic banks in Malaysia and Indonesia. The paper also investigates the disclosures about zakat (Islamic levy). Design/methodology/approach – The study is a cross-sectional analysis of annual report disclosures in the year 2009. The paper uses both disclosure indices and content analysis to measure the extent of disclosures about SSB and zakat. The paper also tests hypotheses examining the relationship between SSB characteristics and the extent of the SSB-related and zakat disclosures. Findings – The results indicate that SSB-related and zakat disclosures are still limited, with only four banks disclosing more than half of the SSB Index. What is noticeable is the low level of disclosure on sensitive matters. Among the factors associated with SSB-related disclosures are cross-membership with other SSBs and the expertise of SSB members in accounting, banking, economics or finance . Originality/value Originality/value – The study is the first to provide an in-depth analysis of Shari'ah disclosures in Malaysian and Indonesian Islamic banks. As such, this study makes an important contribution to the debate on Shari'ah governance systems and has implications for regulators and standard setters. The Malaysian and Indonesian standard setters could play an important role in ascertaining appropriate disclosure requirements relating to the SSB as the study suggests that the level of disclosure is less than expected. The evidence also suggests the need for mandatory enforcement of standards on these types of disclosures.

Shariah’s compliance in bank operations guarantees that Islamic bank (IB) directors must maintain. The importance of shariah compliance has not been widely explained by previous researchers, especially the attribute factor of the Shariah Supervisory Board (SSB). Only Basiruddin and Ahmed (2020) have researched shariah compliance using the indicator or shariah non-compliant income (SNCI). This study uses zakat expenditure as an indicator to measure shariah compliance. The study aims to prove the role of the SSB attributes (the number of members, SSB expertise in finance/banking, experience, and educational background in shariah) on the risk of shariah compliance. This study uses a sample of 9 Islamic banks in Indonesia observed from 2010 to 2019. Using unbalanced data, the number of units of analysis is 102 bank years. Data were analyzed using panel data regression. We find that the number of SSB members and the educational background of SSB are proven to increase Shariah compliance. However, SSB’s experience and expertise in finance/banking are not proven to affect Shariah’s compliance. In general, SSB’s involvement in strategic bank policy-making to improve Shariah compliance is evident.

Purpose The main aim of this research is to ascertain the expected duties and performed roles and functions of the Shariah supervisory boards (SSBs) of Islamic banks in Bangladesh. Design/methodology/approach A semistructured face-to-face interview was applied to accomplish the research objectives. In total, data was collected from 17 respondents with a combination of regulators, SSBs, Shariah department executives and experts from the central bank and Islamic banks in Bangladesh. Findings This study finds that the expectations of Islamic banks toward SSB members are to provide opinions on Shariah issues, guidelines and decisions regarding the modern banking, practices and delivering of fatwas on the contemporary issues offered by the management to fulfill the demand of the numerous stakeholders. In addition, they can develop Shariah governance (SG) policies and implement those guidelines, approve and develop new products, observe and monitor banking functions, identify problems and outline solutions as well as they should ensure Shariah principles and compliance. The SSBs members perform roles and functions in monitoring and reviewing overall banking activities and functions; reviewing products, services and contracts; preparing SG guidelines; ensuring Shariah principles and compliance; providing opinions on existing SG practices and finally, delivering Shariah resolutions on the overall functions. Research limitations/implications This study significantly contributed to the national regulatory bodies by providing suggestions that the existing SG system should be improved to enhance the overall monitoring of SSB and ensure more Shariah compliance in the overall operations of the Islamic banks in Bangladesh. Originality/value This is the first research to the best of authors’ knowledge that explores the expected duties and performed roles and functions of the Islamic banks concerning Bangladesh. This study also contributes to the agency, legitimacy and stakeholder theories by outlining the expected and performed roles of SSBs to the Islamic banks and stakeholders.

Purpose This paper tests the causal relationship between bid ask spread and cash holding in the short and long run. It uses different proxy of corporate cash holding and test three proxies of a bid-ask spread. It also provides comprehensive and robust evidence for the causal relationship between cash holding and stock liquidity in an emergent market. Design/methodology/approach This study is based on a sample covering all financial and industrial firms in Tunisia’s stock market from 2008 to 2020. It uses a panel ARDL data approach to test the bi-directional relationship between cash holding and stock liquidity. This paper conducts rigorous statistical analysis of the collected data to test the hypothesized relationship between cash holding and bid-ask spread. This can involve running regression models, performing statistical tests, and analyzing the significance of the estimated coefficients. Findings Overall, paper’s findings provide empirical evidence supporting the bidirectional causal relationship between cash holding and bid-ask spread. The results highlight the importance of cash holding in determining stock liquidity and suggest that firms with higher cash holdings may face liquidity challenges. These findings have implications for corporate governance and can guide firms and regulators in improving stock liquidity and designing appropriate policies and recommendations. Practical implications Overall, the practical implications of this paper suggest that firms can enhance their stock liquidity by improving governance mechanisms and optimizing cash management strategies. Regulators can play a crucial role in creating a conducive market environment, and investors can take into account the relationship between cash holding and stock liquidity when making investment decisions. Originality/value We present empirical evidence of the relation causality between stock liquidity and cash holding. Our research is the first to test the bidirectional relationship between bid ask spread and cash holding in the short and long run. Overall, the originality of this paper lies in its exploration of the causal relationship between cash holding and bid-ask spread, the use of multiple proxies for stock liquidity, the examination of an emerging market context, the comparative analysis across sectors, and the practical implications for firms and regulators. These contributions add to the existing body of knowledge and provide new insights into the dynamics of cash holding and stock liquidity.