Shariah Supervisory Board Research Articles

Risk Governance Unlocks Islamic Banks’ Dual Performance Goals

This study investigates the moderating effect of risk governance structures on the relationship between risk management—covering insolvency, financing, and operational risks—and the financial and social performance of Islamic banks in Indonesia. Using dynamic panel data regression, the analysis draws on annual report data from 11 Islamic commercial banks over the period from 2012 to 2021. The findings show that certain risk governance structures, such as the size and independence of the audit committee, the expertise of its members, the frequency of meetings, and the quality of external audits, significantly enhance the effectiveness of risk management in improving both financial and social outcomes. Moreover, unique Islamic banking structures, such as the size of the Shariah Supervisory Board and the frequency of its meetings, further strengthen these effects. These results highlight the importance of robust governance in optimizing risk management and improving the overall performance of Islamic banks, with implications for regulatory bodies and Islamic financial institutions aiming to improve governance frameworks.

Desirability of Sukuk as a New Investment Avenue: An Exploratory Study in Bangladesh

Sukuk can be a worthwhile device for meeting demand of those willing to invest in Shariah-compliant avenues of investment, which has been largely catered by Islamic banking products in Bangladesh. Using survey data collected from existing market investors, this study aims to explore the factors contributing to their choice of investment in sukuk. The risk-return preference of the investors is crucial for structuring the sukuk for issuance. Major factors contributing to the investment decision of the sukuk of surveyed participants also include confirmation of the use of proceed of the project in a Shariah-compliant way, risk-adjusted return, timely payment of the expected cash flows, tradability in the secondary market, awareness regarding the expertise, and independence of the Shariah advisors in the Shariah supervisory board (SSB). To facilitate the new instrument and utilize it for the development of the country, especially for the infrastructural development and green projects, government and other policymakers can contemplate offering government guarantee as well as tax exemptions demanded by the respondents of this study. The respondents expressed aversion to longer-term investment opportunities; rather sukuk maturity of up to five years was found desirable. Apprehension for upholding a distinct special purpose vehicle (SPV) and trustee for sukuk was revealed in the study. Although sufficient care was taken in selecting the sample, the limitation of the study is that it may not be deemed conclusive due to the lower sample size. A larger scale study may be conducted to reckon the insight of more potential investors in the market.

Corporate governance impact on risk disclosure in Shariah-compliant financial firms of Kuwait

Purpose This study aims to investigate the relationship between corporate governance characteristics and risk disclosure in Shariah-compliant financial firms operating in Kuwait. It aims to provide insights into the factors influencing risk disclosure practices within these institutions. Design/methodology/approach The research used manual content analysis to quantify risk disclosure levels in the annual reports of 47 Shariah-compliant financial companies listed in Kuwait in 2020. Subsequently, multiple regression analysis was conducted to assess the impact of various corporate governance factors on the extent of risk disclosure. Findings The study reveals that while Kuwaiti Shariah-compliant firms exhibit limited risk disclosure in their annual reports, larger boards and committees, along with a higher number of independent directors, positively influence the level of risk disclosure. Interestingly, the size of the Shariah supervisory boards did not show a significant impact on risk disclosure practices. Practical implications These findings hold regulatory implications for Kuwait, highlighting the need to ensure information adequacy and promote market efficiency. Additionally, they offer practical insights for managers and investors seeking to optimize fund sourcing and diversify investment portfolios within the context of Shariah-compliant financial institutions. Originality/value This study contributes to the existing literature by providing empirical evidence on the relationship between corporate governance characteristics and risk disclosure in the specific context of Shariah-compliant financial firms operating in Kuwait. Furthermore, it identifies avenues for future research to delve into the influence of additional governance factors on risk disclosure practices within this unique financial landscape.

The Role of Shariah Supervisory Board in Islamic Social Reporting Disclosure

Islamic Social Reporting (ISR) is a concept of social responsibility based on Islamic principles, assisting Islamic banks in enhancing transparency, accountability, and stakeholder relations. ISR encourages Islamic banks to increase their sustainable social responsibility to promote Islamic ethics in business practices. This study aims to analyze the impact of Sharia Supervisory Board (SSB) characteristics on ISR disclosure in Islamic banks in Indonesia. The analysis utilizes the unbalanced panel fixed effect model method and involves 15 Islamic banks from 2017 to 2021. The findings confirm that cross-member, expertise, and turnover of SSB have a significant positive effect. In contrast, the size, the education level, and remuneration of SSB do not affect ISR disclosure.

Does Shariah Supervisory Board Moderate the Effect of Islamicity Performance Index and Intellectual Capital on Financial Performance?

Does Shariah Supervisory Board Moderate the Effect of Islamicity Performance Index and Intellectual Capital on Financial Performance?

Cognitive board diversity and profitability – evidence from Islamic banks in Southeast Asia

PurposeLiterature on the board diversity of Islamic banks (IB) found limited knowledge of the “deep-level” attribute. This study aims to explain the impact of the board diversity attributes (education levels, educational backgrounds and the interactions between these two attributes of diversity) on profitability.Design/methodology/approachThe research sample is 37 fully flagged IBs from five Southeast Asian countries, covering nine years (2010–2019). Data were analyzed using the two-step system generalized moment (2SYS-GMM) method.FindingsWe found that the cognitive conflict between the board of directors (BOD) and the Shariah Supervisory Board (SSB), which has heterogeneity in its education level and educational background, positively affects profitability. These results reinforce the resources dependence theory (RDT) approach that having boards with heterogeneous characteristics is beneficial for IB.Practical implicationsThe findings of this study would offer useful information for Islamic banking authorities to revise or formulate rules and guidelines and make a greater effort to implement corporate governance (CG) reform measures by determining educational level and background as a requirement to become a member of a BOD or an SSB.Originality/valueThis paper contributes in three ways: (1) we use the “deep-level” diversity attributes of the BOD and the SSB, (2) it focuses on cognitive conflict in boards by presenting the expertise diversity of the BOD and SSB and (3) we interact with the level of education to evaluate the effect of a cognitive conflict.

LINKAGES SHARIAH GOVERNANCE AND ISLAMIC BANKS PERFORMANCE: EVIDENCE FROM GULF COOPERATION COUNCIL (GCC) COUNTRIES

The shariah governance system is crucial for Islamic banks (IB) because of the unique structure that is different from conventional banks. Good governance has an impact on stable performance. The shariah supervisory board (SSB) presence will convince stakeholders that IBs are running their business according to shariah principles. The focus of this research is the results of empirical studies in GCC countries. The research data was obtained from the bankscope database and manual collective from 2010-2018. This study uses a panel data model with a random effect method. Empirical results show that SSB size has a negative correlation with performance. SSB expertise and board size have a positive correlation with performance. Furthermore, SSB with doctoral qualifications and independent boards are not correlated with performance

Applicability of the Islamic Corporate Governance for Shariah Companies in Malaysia

The Islamic Capital Markets (ICM) have become part and parcel of the modern financial system which not only assists in the growth and expansion of the heavily monetized economy but often becomes a very major indicator of the business cycle movements as well as the confidence and the sentiments of the business community and investors. Of late, ICM has also been a very important vehicle to raise the necessary amounts of funds to affect the national savings needed for rapid economic growth. Most of Shariah companies in Malaysia do not implement an Islamic corporate governance system because of the lack of regulations and exposure from regulators as well as low demand from investors. In line with this development, this paper compares the corporate governance concepts in the conventional and the Islamic perspective. The discussion then proposes an Islamic corporate governance system and requirement of Shariah supervisory board for Shariah companies that could ensure that firms are operating according to Islamic principle thus improve the quality of monitoring role in firms listed on FTSE Bursa Malaysia EMAS Shariah Index.

Corporate governance and risk management: An evaluation of board responsibilities in western and Islamic banks

This research aims to explore the role of the board in cor-porate governance (CG) and risk management within the context of Islamic banking. Given the global reach of fi-nancial institutions, it is important to compare and evalu-ate the unique position of Shari’ah committees or Shari’ah Supervisory Board (SSB) in addressing the unique risks of Islamic banks. Using a comparative analysis, this study evaluated risk management guidelines in the CG codes of the United Kingdom, Germany, Saudi Arabia, and Malaysia. It found that board were ultimately responsible for risk management, regardless of the governance structure, and Shari’ah-related risks fell under the board’s purview. An innovative blend of Western CG frameworks and Islamic principles enhanced governance robustness through the strategic collaboration between board and SSBs.

Corruption and Bank Risk‐Taking in Dual Banking Systems

ABSTRACTResearch Question/IssueWe investigate whether the risk‐taking of Islamic banks is affected differently by corruption compared to conventional banks. We also examine whether the characteristics of the Shari'ah Supervisory Board (SSB) of Islamic banks and the characteristics of the board of directors of conventional banks play an effective role in moderating such an effect.Research Findings/InsightsWe find consistent evidence that banks in countries with higher corruption have higher bank risk for both conventional and Islamic banks. However, this association is attenuated by the size of the SSB, the presence of female board members, and higher academic qualifications of SSB members. For conventional banks, the moderating effect of the presence of female directors and academically qualified members on the board of directors is also prevalent but to a lesser extent.Theoretical/Academic ImplicationsThis study contributes to the corporate finance literature more generally by highlighting the role played by corporate governance, particularly the presence of female members and academically qualified members on the SSBs of Islamic banks and on the board of directors of conventional banks, in mitigating the effect of corruption on bank risk‐taking for the two bank types.Practitioner/Policy ImplicationsOur findings are based on a matched sample of banks operating in 10 OIC (Organization of Islamic Cooperation) countries and have important implications for bank stability and bank governance reforms. On the detrimental side, urgency of the anti‐corruption campaigns in these countries is justified due to the significant effect of corruption on risk‐taking for both conventional and Islamic banks. Overall, to better fight corruption in countries with dual banking systems, there is a need to enforce stricter rules for all types of banks.

Does digitalization affect shariah supervisory board efficiency? Evidence from Islamic banks

Purpose This study aims to examine how digitalization affects the work efficiency of the Shariah Supervisory Board (SSB) in Islamic banks. Design/methodology/approach This study uses panel data analysis of annual report disclosures over the past 10 years. The authors have selected 79 Islamic banks for the period ranging from 2012 to 2021. The criteria for SSB efficiency used in this research are disclosure of Zakat and disclosure in the SSB report. Findings The econometric results show that digitalization has a positive effect on improving the work efficiency of the SSB in Islamic banks. Accordingly, the authors provide evidence that the higher the bank's digital engagement, the higher the quality of the SSB. Originality/value The findings highlight the need to improve the current understanding of SSB structures and governance mechanisms that can better assist Islamic banks in engaging in effective compliance with recent governance and accounting reforms. Moreover, Islamic banks are the most capable and appropriate to implement and activate digitalization because they are based on a vital root calling for development if there are executives believing in it, as well as legislation supporting and serving them.

Islamic green finance: mapping the climate funding landscape in Indonesia

Purpose This study aims to explore the potential of Islamic climate finance in Indonesia and to map Islamic climate finance based on Islamic finance instruments, both commercial and social. Design/methodology/approach The analysis was conducted in Jakarta, Indonesia, between October 2022 and June 2023. This study adopted a qualitative interpretive approach in two phases. The first phase was desk-based research which focused on document analysis such as official documents, scientific publications, non-governmental organization publications and company reports in Indonesia. This analysis was conducted to identify significant milestones in developing green and eco-friendly finance that used Islamic financial instruments in Indonesia. The second phase consisted of interviews with essential Islamic climate finance project actors, such as green sukuk publishers, zakat and waqf collection agencies, stakeholders, capital market regulators, Shariah supervisory boards and Islamic finance experts. Findings The main finding of this study is that the development of Islamic green finance in Indonesia can occur through various channels, including greening Islamic capital markets, greening Islamic social finance, Islamic green finance and developing green banking services for the unbanked to support financial inclusion. Green sukuk, or Islamic bonds, are key financial instruments in Islamic green finance. They are used to fund projects in areas such as clean energy, mass transit, water conservation, forestry and low-carbon technology. These green financing initiatives also include socially responsible investments that are designed to improve the lives of people and communities. Research limitations/implications First, the availability of data on Islamic green finance practices in Indonesia may be limited, making it difficult to obtain a comprehensive understanding of the current landscape. Second, cultural and religious factors may play a role in the adoption and implementation of Islamic green finance, and these factors may vary across different regions in Indonesia. Practical implications The exploration and clustering of Islamic climate finance based on Islamic financial instruments in Indonesia can lead to the development of more sustainable and environmentally friendly practices in the financial industry. Originality/value This study serves as a pioneering effort to explore the potential and clustering of Islamic climate finance based on Islamic financial instruments in Indonesia.

Corporate governance and Islamic bank risk – do the directors’ and the Shariah board’s diversity attributes matter?

PurposeThis study aims to investigate the effect of the diversity of the board of directors (BOD) and the shariah supervisory board (SSB) on credit risk, insolvency, operations, reputation, rate of deposit return risk (RDRR) and equity-based financing risk (EBFR) of Islamic banks (IB).Design/methodology/approachThe study uses 68 IBs from 19 countries covering 2009 to 2019. BOD and SSB diversity attributes data were hand-collected from the annual reports. Financial data were collected from the bankscope database. The robustness test and two-step system generalized method of moment estimation technique were used to address potential endogeneity issues.FindingsThis study provides evidence that diversity in the experience and cross-membership of board members decreases the risk. Gender diversity increases the risk, but the BOD’s education level diversity has no relationship with risk. More interestingly, influences in the experience and cross-membership of the SSB’s members positively influence risk. However, members’ education levels and gender diversity have not been proven to affect risk.Practical implicationsThe paper recommends that Islamic banking authorities play a stronger role and make a greater effort in driving corporate governance reform. Also, determining individual characteristics of the board is a requirement to become a member of a BOD or an SSB.Originality/valueThis paper expands the commitment literature through the diversity of the BOD’s and the SSB’s members in terms of their education levels, experience, cross-membership and gender. This study expands the list of potential risks for IBs, by including the RDRR and EBFR.

Contemporary Legal Problems of Sharia Insurance Regulation in Indonesia

Objective: This study aims to examine the evolving structure of the insurance industry in Indonesia, particularly its transition from traditional insurance to dual insurance systems, highlighting the presence of the Sharia insurance sector within the national legislative framework.
 
 Theoretical framework: In the realm of Islamic economic studies, fundamental principles such as justice, mutual assistance, the avoidance of oppression, prohibition of riba (interest), and the elimination of gharar elements are central. Sharia-compliant insurance institutions are expected to adhere to these principles while also developing an independent, integrated, and professionally managed insurance framework that aligns with Islamic Shariah. To ensure compliance, each insurance company must establish a Shariah Supervisory Board (Dewan Pengurus Syariah).
 
 Method: This research adopts a normative legal research approach, analyzing primary, secondary, and tertiary legal resources sourced from academic papers and libraries to address the legal challenges of establishing Sharia insurance under existing positive legislation.
 
 Results and conclusion: The findings of this study include First, there is no specific law that governs Sharia insurance, there are no implementation rules for Law No. 40/2014, which governs Sharia insurance, and there is no regulation regarding the typical Sharia policy. These current legal issues make it difficult to set up Sharia insurance under positive law. Second, the specialized arrangement in a Law (lex specialis) of Law No. 40 of 2014 is the optimum Sharia insurance arrangement model following the favorable legal prospects.
 
 Originality/value: This research contributes to the understanding of the legal challenges and intricacies of Sharia insurance regulation in the context of Indonesia's insurance industry transformation. It provides valuable insights into the intersection of Islamic economic principles and contemporary insurance practices, offering a basis for further exploration and policy development in this critical area.

Influence of the Shariah supervisory board on tax avoidance at an Indonesian Islamic bank

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.

Review on Shariah Supervisory Board Studies using Bibliometrix

The rapid development of the Indonesian economy is influenced by the emergence of both sharia and non-sharia financial institutions. In Islamic banking, so that all parties' interests can be met properly, the management and supervision structure will involve four parties, namely: shareholders (board of commissioners), bank management, Sharia Supervisory Board (DPS) and/or National Sharia Council (DSN), and depositors. In an effort to purify the services of Islamic financial institutions to be truly in line with the provisions of Islamic sharia, the existence of a Sharia Supervisory Board (DPS) is absolutely necessary. DPS is a key institution that ensures that the operational activities of Islamic financial institutions are in accordance with sharia principles. This study aims to determine the development map and trend of Shariah Supervisory Board published by reputable journals in the field of Economics and Islamic finance. The data analyzed were more than 114 publications of research publications indexed by Scopus. The export data was then processed and analyzed using the R Biblioshiny application program to determine the bibliometric map of the development of the Shariah Supervisory Board.

Shariah governance framework for Islamic banking in Pakistan: a critical review and comparison with AAOIFI

Purpose The study aims to critically review the Shariah governance framework for Islamic banking prevailing in Pakistan and provide a comparison with Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Design/methodology/approach It analyzes 16 circulars issued by the State Bank of Pakistan (SBP) since 2002, including three Shariah governance frameworks in 2014, 2015 and 2018. Additionally, the study compares the SBP and AAOIFI Shariah governance standards to evaluate the soundness of the SBP framework against international benchmarks. Findings Pakistan’s Shariah governance model is centralized, with the SBP’s Shariah board having ultimate authority. The SBP has provided a comprehensive Shariah framework, which includes among others, the criteria for the qualifications and conflict of interests of Shariah members. Both AAOIFI and SBP Shariah governance frameworks have similarities and differences in terms of the tenure of Shariah Supervisory Board (SSB) members, reporting line of SSB, number of SSB meetings, minimum experience of SSB members, primary duties of Shariah board, code of ethics and conduct for SSB and management and requirement of publication of SSB report in the annual report of Islamic banks. The frameworks differ in terms of the delegation of SSB powers, assessment and appraisal of SSB effectiveness and outsourcing of Shariah Compliance Department and Internal Shariah Audit Unit. Practical implications The study recommends expanding the qualification criteria for Shariah advisors to include additional degrees and qualifications, upholding stringent criteria for conflict of interests and promoting stakeholder consultation through exposure drafts. Originality/value To the best of the authors’ knowledge, this is the first of its kind which critically review and compare the Shariah governance framework prevailing in Pakistan.

THE EFFECT OF ISLAMIC GOVERNANCE SCORE AND INVESTMENT ACCOUNT HOLDER ON THE DISCLOSURE OF ISLAMIC SOCIAL REPORTING AT ISLAMIC BANKS IN INDONESIA

This study aims to determine the effect of Islamic Governance Score (IG-Score) and Investment Account Holder (IAH) on Islamic Social Reporting (ISR) Disclosure. This research was conducted on Islamic banks registered with the Financial Services Authority for the 2016-2020 period and obtained 11 samples of Islamic banks. The method used is the panel data regression analysis method. The results showed that the IG-Score and IAH had an effect on the ISR design. IG-Score has an effect on ISR Disclosure, this shows that the presence of Shariah Supervisory Board (DPS) affects and encourages Islamic banks to carry out or improve ISR performance. IAH has an effect on ISR, in this case IAH determines compliance with Islamic banking principles and the consequences for ISR.

Strengthening governance mechanisms and corporate social responsibility disclosure: Drivers of performance in Islamic banks

This research examines the factors influencing the performance of Islamic banks in Southeast Asia (SEA) and the Gulf Cooperation Council (GCC) regions. It focuses on three key areas: corporate governance (CG), Shari’ah supervisory board (SSB) mechanisms, and corporate social responsibility (CSR) disclosure. This research employed rigorous panel data regression analysis, covering data from 79 Islamic banks spanning the years 2012 to 2021. This analytical approach revealed intricate connections between CG practices, SSB mechanisms, CSR disclosure, and bank performance. Strong CG and SSB mechanisms, in conjunction with robust CSR disclosure, positively impacted Islamic bank performance. These factors facilitated value creation, accountability, and stability, even during the COVID-19 pandemic. This underscores the significance of enhancing CG, SSB mechanisms, and CSR disclosure to bolster transparency and trust within the Islamic banking sector. Collaborative efforts among regulators, investors, and creditors are imperative for enforcing regulations, formulating CSR guidelines, and strengthening governance. This research contributes to a deeper understanding of CG practices, their impact, and the role of CSR disclosure in Islamic banks. It offers valuable insights for stakeholders and enhances comprehension of these mechanisms within the context of the SEA and GCC regions.

Islamic crowdfunding and Shariah compliance regulation: problems and oversight

PurposeThis study aims to identify the problems in shariah compliance and the weak oversight of implementing Islamic crowdfunding (ICF). Shariah compliance regulation is an essential subsystem in Islamic social finance ecosystems.Design/methodology/approachThis type of research is legal research. The research approaches are the statute, comparative and conceptual approaches. The study in this research examines Indonesia, the UK and Malaysia.FindingsICF is one of the fastest-growing sectors of Islamic financial technology (fintech). The Islamic fintech sector is showing maturity signals with a market size of $79bn in 2021, projected at $179bn in 2026. Malaysia, Saudi Arabia and Indonesia lead the Index by Global Islamic Fintech (GIFT) Index scores. However, low shariah compliance is still an issue in implementing ICF. This problem is caused by regulatory support that is still lacking and oversight of shariah compliance is not optimal. On the one hand, shariah compliance is the ICF core principle for Shariah Governance.Research limitations/implicationsThis study examines the regulation and oversight of ICF in Indonesia, Malaysia and the UK. Indonesia and Malaysia, a country with the highest GIFT index score in the world, and the UK, a country with an Islamic finance sector experiencing rapid growth.Practical implicationsThe research results on shariah compliance regulation in ICF are helpful as a comprehensive approach for developing sustainable Islamic social finance ecosystems.Social implicationsShariah compliance is the core principle of ICF governance. Its implementation can increase public trust.Originality/valueCrowdfunding platform and issuers in ICF must implement shariah compliance. Therefore, it is essential to consider the presence of shariah compliance requirements and a Shariah Supervisory Board (DPS).