Shariah supervision and corporate governance effects on Islamic banks’ performance: evidence from the GCC countries

Abstract

PurposeThis study aims to analyze the impact of Shariah supervision and corporate governance (CG) variables on the performance of Islamic banks (IBs) in Gulf Cooperation Council (GCC) countries.Design/methodology/approachA dynamic panel regression model is used to analyze bank performance’s persistence and the results are estimated using the generalized method of moments estimator. The sample includes 27 full-fledged IBs in 6 GCC countries from 2005 to 2020.FindingsThe results reveal that Shariah supervision and CG-related variables are significant in determining IBs' performance. Furthermore, the results show that bank size, capital adequacy ratio, economic growth and inflation are significant and positive determinants of IBs’ financial performance.Practical implicationsThis study is conducted to fill a gap in the literature regarding the effect of Shariah supervision on IBs’ performance, recommending the implementation of CG guidelines in IBs to improve their current practices.Originality/valueDespite existing studies on the relationship between Shariah governance and performance, this study contributes to the Shariah governance and Islamic banking literature in GCC, which is the most important region of the Islamic financial industry. In addition, it provides additional insight into the fundamental role of Shariah supervision in IBs.