The impact of the Shariah Board’s characteristics on the financial soundness of Islamic banks

Abstract

Purpose The purpose of this study is to examine the relationship between corporate governance and financial soundness of Islamic banks. Precisely, this study examines the Shariah Board’s characteristics and empirically diagnoses its impact on the financial soundness of Islamic banks. Design/methodology/approach In this case, the level of bank soundness is individually measured using the z-score indicator. Regression analyses are applied to test the impact of the Shariah Board’s characteristics on the financial soundness of Islamic banks, using a panel data set of 67 Islamic banks – covering 20 countries during the period 2005–2014. Findings The model shows that the size of the Shariah Board has a negative and significant impact on the financial soundness of Islamic banks. However, the Shariah scholar with knowledge in finance/accounting, the presence of Mufti, the interlocked Shariah scholar and the foreign Shariah scholar do not have any significant impact on the financial soundness of Islamic banks. Practical implications This study contributes to fill the gaps in the literature that discussed the Shariah Boards’ role in the governance of Islamic banks. In addition, it provides practical implications to the Shariah Boards’ members in the Islamic banks and calls for setting a sufficient number of scholars for each Shariah Board. Originality/value With this paper, the authors aim to clarify the relationship between Shariah Board and financial soundness of the Islamic banking, and provide additional insights to the emerging literature of Islamic banking. Contrary to previous research studies, the authors use an additional hypothesis, i.e. the presence of Mufti that has a positive and significant effect on the financial soundness of Islamic Banks. Methodologically, the authors incorporate a new measure to evaluate empirically the impact of Shariah Board members with knowledge of finance and accounting on the financial soundness of Islamic banks.