Shariah Supervisory Board Research Articles

Social Reporting of Islamic Banks in Malaysia: 3 Stages Approach.

This study examines the social disclosure by Islamic banks in Malaysia. The study explores the commitment of Islamic banks towards wider stakeholders in 7 dimensions (Shariah/Social Internal/Social External/ Environmental/Shariah Governance/Governance/Ethic) SEGE. The approach taken uses an in-depth 3-Stages content analysis (3-level Score disclosure) of 18 Malaysian Islamic banks’ annual reports for a period of 5 years (2010-2014). This ‘triple method’ was made possible using a special design manual sheet (Quality Score & Volume). The top 5 performing Islamic banks in disclosure quality were dominated by Malaysian Islamic banks. Furthermore, the top 10 performing Islamic banks ranking in disclosure movement from ordinary (index) to quality (3-level score) were much steadier in Malaysia. In addition, religiosity and regulatory quality seem to have influenced SEGE disclosure. In short, the Islamic banks that operate in environments with supportive governing bodies, collaborative institutions, sustainable talent management systems and moderate values tend to perform comparatively better in their SEGE disclosure. This research may draw attention to regulators and non-governmental organisations to produce a set of SEGE disclosure standards for Islamic financial institutions. Furthermore, this research might help managers, Board of Directors, and Shariah Supervisory Boards to have a greater view on the role of Islamic banks in social reporting initiatives. The study fills gaps in Islamic accounting literature by having an in-depth examination of the Malaysian model of Islamic banking.

Improving Islamic bank performance through agency cost and dual board governance

Purpose This study aims to examine the impact of agency cost, Islamic board characteristics and corporate governance on the performance of Islamic institutions. Design/methodology/approach Based on the selected criteria, 92 Islamic banks (IBs) from 20 countries were selected for further research. The authors used generalized method moments (GMM) estimation method. The agency cost and Shariah board characteristics are the explanatory variables. The author uses the age of the bank and the size of the bank for variable control. Findings Empirical results indicate that first, agency costs represented by cast/total assets negatively affect IBs’ return on equity and net income. As agency costs rise, IBs’ financial performance declines. Second, Shariah supervisory board (SSB) size and board independence affect IB performance. The study found that SSB size positively affects IB performance. Research limitations/implications This research contributes to the literature on IBs in different countries, which policymakers and practitioners can use to improve agency cost functions and Shariah board characteristics. Second, this analysis shows that IBs require specific attention for agency charges, given their operations and business structures. This study contributes to agency theory, which requires Islamic banking information and practices. Finally, the author has aided regulators and IBs by identifying the sources of agency cost practices that can be resolved. The other bank governance contribution is twofold. First, the author studied dual board governance in IBs (SSB and ordinary boards of directors). Second, the author examines how SSB and traditional board governance affect IB performance. This research focuses on banks listed on stock exchanges in the 20 countries analysed. Practical implications The research has policy and practical implications for central banks and IBs. By outlining appropriate regulatory guidelines and reporting systems, regulatory authorities can ensure Sharia compliance and protect the independence of IB Shariah department officers. Regulators and relevant stakeholders must ensure Sharia compliance, audits, inspections, reporting and accurate disclosure for IBs. Originality/value This paper offers original contributions to professionals in the field of IBs and stakeholders investigating the relationship between agency costs, governance of IBs, characteristics of Islamic supervisory boards and the performance of IBs.

Exploring the nexus between Islamic financial institutions Shariah compliance disclosure and corporate governance: New insights from a cross‐country analysis

AbstractWe address the scarcity of empirical research on Shariah Compliance Disclosure (hereafter referred to as SCD) by presenting new evidence on the levels and range of SCD, of 807 bank‐year observation of Islamic Financial Institutions (hereafter referred to as IFIs) in 19 countries for the period from 2010 to 2020 and its determinants. Using an unweighted disclosure index measured by manual content analysis categorized into Shariah Supervisory Board (hereafter referred to as SSB) information, audit process, Shariah compliance review and Zakat, several outcomes are documented. In general, the SCD level is above average (57.38%) and hence evidence an overall growth during the sample period. Further, the study examines the relationship between corporate governance (CG) and SCD and the results indicate that foreign investors, institutional investors, board size, board independence, SSB reputation and SSB size are vital and influence the extent of SCD level. The study also conducted several tests to examine the main findings' robustness. The findings deliver valuable in‐depth empirical insights to regulatory bodies on the current SCD practises of IFIs to assist policymakers in modifying reporting frameworks or guidelines accordingly. In addition, this research can support academics, policymakers or standard setters and managers interested in seeking information about SCD and CG.

Shariah Supervisory Board and Islamic Banks’ Financial Performance: An Evidence from Southeast Asia

This study aims to find out the effect of SSB Characteristics on financial performance of Islamic Banks in Southeast Asia, particularly in Malaysia and Indonesia. To establish the relationship between SSB characteristics and financial performance, secondary data from banks’ annual report was collected and then analysed using Panel data regression model and T test with the help of Eviews 10.Result shows that there is no significant effect of the observed characteristics (size, doctoral degree, number of meetings) on financial performance of Islamic banks Originality/value – the strength of this study is that it focuses on the two most prominent countries regarding Islamic finance in Southeast Asia.

Shariah governance and takaful financial performance: the case of listed takaful insurances

Purpose The purpose of this paper is to examine the Shariah governance mechanisms of takaful insurance and their impact on its financial performance. Design/methodology/approach The effect of Shariah governance mechanisms on financial performance is analyzed over 2012–2018 on a sample of 11 takaful listed insurances in the Middle East region. Using multiple regression models, four hypotheses addressing Shariah governance mechanisms are tested. Findings The findings generally reveal that Shariah governance has an impact on the financial performance of takaful insurance. The Shariah Supervisory Board (SSB) size, the members’ reputation and their qualifications are the main determinants of financial performance for listed takaful insurance. Research limitations/implications This paper includes two main limitations that may affect the accuracy of the finding. First, the results are restricted to the Middle East region and may not be generalized to other regions. Second, the sample is dominated by UAE, i.e. 4 takaful insurances out of 11. Practical implications Both Shariah governance and regular governance have an impact on the financial performance of takaful insurance. Yet, the effect of Shariah governance is more robust. To improve its financial performance, takaful insurance should expand the size of the SSB, hiring reputable scholars and recruit doctors in Islamic economics. Originality/value This research studies takaful insurance, unlike the majority of other works that have focused on Islamic banks.

Corporate governance, Shari'ah governance and financial flexibility: Evidence from the MENA region

AbstractThis article investigates the relationship between corporate governance structures and financial flexibility for conventional and Islamic banks in the Middle East and North Africa (MENA) region. We construct a novel financial flexibility index (FFI) for the banking sector and examine the impact of the Shari'ah supervisory board (SSB), board size, and risk governance on financial flexibility. We find that board size and risk governance significantly affect banks' financial flexibility for Islamic and conventional banks. However, Shari'ah governance rules determine how that relationship is manifested in Islamic banks. We show that SSB size and busy SSBs enhance Islamic banks' financial flexibility. Our results show that Western corporate governance structures may lead to suboptimal financial flexibility. Banking policies should re‐evaluate the impact of one‐size‐fits‐all approaches to corporate governance while promoting ‘soft policies’ to banking regulation that are value‐enhancing for the banking sector.

An Analytical Commentary on Shariah Governance in Islamic Financial Institutions Across Multiple Countries.

This commentary provides a comprehensive overview of Shariah governance in Islamic financial institutions (IFIs). This piece draws on a literature review of various relevant studies and their key findings and observations. It emphasises the importance of implementing a robust Shariah governance framework in IFIs and argues that the current Shariah governance frameworks are complicated, resulting in each country adopting a different approach. The commentary highlights that the existence of different Shariah governance approaches can lead to inconsistencies in Shariah rulings, potentially undermining the credibility of IFIs and eroding consumer confidence.Additionally, the study reveals that certain IFIs have failed due to a deficient Shariah governance system. However, the commentary argues that the collapse of an institution does not necessarily indicate a weak Shariah governance framework. The framework itself remains robust, but the problem lies in how the Shariah supervisory board (SSB) interprets and makes decisions. As a result, a standardised Shariah governance framework could help address some of the inconsistencies contributing to these issues. This commentary is valuable for both academics and non-academics who are interested in understanding Shariah governance.

Dampak Kepatuhan Syariah terhadap Kinerja Keuangan Bank Syariah: Studi Kasus pada Struktur Pengawasan dan Manajemen Risiko

Shariah compliance is important for Islamic banks because it is one of the factors that determines their financial performance. This study aims to analyze the impact of shariah compliance on the financial performance of Islamic banks, with a case study on the supervisory structure and risk management. This study uses a case study method with three Islamic banks in Indonesia as the object of study. The data used in this study is secondary data obtained from the annual reports of these Islamic banks. The results of the study show that shariah compliance has a positive impact on the financial performance of Islamic banks. This impact can be seen from several aspects, including: Profitability: Islamic banks with high shariah compliance have better profitability than those with low shariah compliance, Liquidity: Islamic banks with high shariah compliance have better liquidity than those with low shariah compliance, Risk: Islamic banks with high shariah compliance have lower risk than those with low shariah compliance. Shariah compliance also has a positive impact on the supervisory structure and risk management of Islamic banks. This impact can be seen from several things, including: Supervisory structure: Shariah compliance can enhance the role of the Shari'ah Supervisory Board (SSB) in overseeing the business activities of Islamic banks, Risk management: Shariah compliance can enhance the role of the risk unit in managing risks related to shariah compliance. Based on the results of this study, it can be concluded that shariah compliance is an important factor that determines the financial performance of Islamic banks. Strong supervisory and risk management structures can help Islamic banks to improve shariah compliance and, ultimately, improve their financial performance.

The Effects of Internal Governance Factors on Lending Portfolio Composition in Islamic Banks

Recent studies indicate that lending portfoliocomposition in Islamic banks is concentrated towardsdebt-based lending portfolio; however, the ideal lending portfoliocomposition in Islamic banks should be an equity-based lending portfolio. This article explores the effects of the internal governance factors on lending portfolio compositionofIslamic banks in the GCC Region. The internal governance factors investigated are board of directors’ characteristics (size and independence), Shariah supervisory board attributes (size and cross-membership), and ownership structure (family and government). The generalized least squares (GLS) method is used to examine the relationship between the study variables. The results indicate that two characteristics of the board of directors, size and independence, and two attributes of the Shariah supervisory board, Shariah board size and Shariah board cross-membership, have significant effects on lending portfolio composition of Islamic banks in the GCC Region. However, the rest of the internal governance factors have no effects on lending portfolio composition of Islamic banks in the GCC Region. These significant results add new contributions to the literature in the area of internal corporate governance of Islamic banks. The article concludes with suggestions for regulators and policy makers in the GCC Region with regard to the ideal characteristics of the board of directors and the optimal attributes of the Shariah supervisory board in Islamic banks as well as directions for future studies in this area of research.

IMPLEMENTATION OF SHARIA COMPLIANCE AND GOOD CORPORATE GOVERNANCE AT BANK SYARIAH INDONESIA TEBING TINGGI SUDIRMAN 2 BRANCH OFFICE

Shariah compliance is an integral aspect of the banking sector's sustainability and is closely linked to good corporate governance. This study aims to analyze the implementation of Shariah compliance and good corporate governance, along with the challenges faced in implementing Shariah compliance and GCG principles at Bank Syariah Indonesia KCP Tebing Tinggi Sudirman 2. The research utilizes a qualitative methodology, with data obtained from primary and secondary sources. Primary data includes the Shariah Supervisory Board, Shariah Audit Committee, and Shariah Investment Committee. Secondary data consists of policy and procedural documents from the Islamic bank, as well as previous research and studies on Shariah compliance and GCG implementation in the Islamic banking sector. Data collection techniques employed in this study encompass interviews and documentation. The findings reveal that the principles of Good Corporate Governance (GCG) at Bank Syariah Indonesia KCP Tebing Tinggi Sudirman 2 encompass transparency, accountability, responsibility, independence, and fairness. Bank Syariah Indonesia KCP Tebing Tinggi Sudirman 2 has implemented Shariah compliance in accordance with the rules and principles of Shariah in every transaction, utilizing appropriate contracts such as murabahah, musyarakah, mudarabah, ijarah, rahn, and in fund mobilization, mudarabah and wadi'ah contracts are utilized. The bank's products have received approval from the National Shariah Board-Indonesian Ulama Council (DSN-MUI), the authorized institution for issuing Shariah fatwas. The implementation of Shariah compliance at Bank Syariah Indonesia KCP Tebing Tinggi Sudirman 2 involves transaction procedures based on Shariah principles, internal supervision, collaboration with DSN-MUI, employee training and awareness enhancement, as well as external audits aimed at ensuring the bank's compliance with Shariah principles

The mediating role of intellectual capital in corporate governance and financial efficiency of Islamic banks

PurposeThe purpose of this study is to investigate the mediating role of intellectual capital (IC) on the association between corporate governance mechanism (CGM) and the financial efficiency of Islamic banks (Z-score, net investment income and loan to deposit) and verify it through standard mediation in the panel based on interaction.Design/methodology/approachThe data of this study draws from 125 full-fledged Islamic banks and windows from 26 Organization of Islamic Cooperation (OIC) over the period of 2009 to 2019. A two-step system generalize method of moment estimation is used to test the hypotheses.FindingsThe results underwrite that the inclusion of IC as a mediating variable has influenced positively the corporate governance and financial efficiency of IBs. Besides, only CEO power and Shariah supervisory board positively affect the financial efficiency of IBs. While structural capital and relational capital positively affect the financial efficiency of IBs. Apart from that, results show that the CGM has a significant relationship with the IC value of IBs.Research limitations/implicationsThese findings are valuable for policymakers and regulators to set policies to improve CG structure and effective use of IC resources to improve banking efficiency. Additionally, findings might be helpful for the bankers to proficiently use the IC as a premise to plan new strategies to get an upper hand in financial performance.Originality/valueThis study extends and contributes to the current literature by analysing the role of IC along with CG to boost the financial efficiency of banks in OIC countries.

The influence of national and individual Islamic governance on Islamic banks’ social performance

PurposeThis study aims to investigate the relationship between Islamic governance and the social performance of Islamic banks, pioneering a new aspect in terms of the impact of the National Shariah Board (NSB) on the social performance of Islamic banks. The essential body in the Islamic banks in charge of Islamic governance is the Shariah Supervisory Board (SSB). Therefore, in this study, the authors explore how the characteristics of the Shariah board and Islamic governance mechanisms influence the social performance of Islamic banks.Design/methodology/approachPanel data methods are applied to the annual data of 43 banks from 14 countries over the period 2012–2018 to explore the impact of Islamic governance on Islamic banks’ social performance. The authors have used all available bank annual reports in the given period. Social performance is measured by Maqasid al-Shariah (in terms of the goals of the Islamic moral economy) index using a comprehensive evaluation framework. Islamic governance is represented by the improved Islamic Governance Score (IG-Score) index, which measures the quality of Islamic governance in Islamic banks. In the research, the authors also introduce the frequency of SSB meetings in IG-Score.FindingsThe findings suggest a strong link between Islamic governance and the social performance of Islamic banks, illustrating the importance of the Shariah board in achieving maqasid. On the other hand, the research discovered that NSBs are inefficient and the existence of NSB can jeopardize the social performance of Islamic banks. The results of this research imply valuable recommendations for Islamic banks that are keen to improve their social performance.Originality/valueBesides investigating the impact of SSB governance on the social performance of Islamic banks by using an improved IG score index, to the best of the authors’ knowledge, this is the first study that investigates the impact of NSBs on the social performance of Islamic banks.

Does Shariah Supervisory Board Matter in Explaining Islamic Social Reporting by Indonesian Islamic Commercial Banks?

Does Shariah Supervisory Board Matter in Explaining Islamic Social Reporting by Indonesian Islamic Commercial Banks?

IT investment and Islamic banking performance in Indonesia: Do Sukuk issuance and Sariah governance matter?

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.

Internal governance mechanisms and information value of banks’ earnings

PurposeThis study examines the association between internal corporate governance mechanisms (i.e. board of directors and audit committee) and the information value of bank earnings. The authors comparatively assess this association across different bank types, Islamic versus conventional banks. The authors also investigate the mediating effect of Shariah governance.Design/methodology/approachThe authors utilize a unique and an international sample of 723 bank-year observations representing 100 listed banks from 16 countries during the period 2007–2015. The authors investigate the characteristics of the board of directors and audit committee (i.e. size and independence) and employ three core analyses for earnings informativeness (i.e. earnings persistence, cash flow predictability and reliability of loan loss provisions). Additional analyses address Shariah supervisory boards’ (SSBs’) size, financial expertise and multiple outside directorships. The authors use the random-effect Generalised Least Squares (GLS) estimation technique and provide several robustness checks and sensitivities.FindingsThe authors find that, on average, having large and independent boards (and audit committees) increases the informativeness of reported earnings for banks. Conditional on bank type, our results report strong evidence for differential effects across the two alternative banking systems. In Islamic banks, large and independent board of directors (and audit committees) is positively associated with all measures of information value. There is insignificant evidence for conventional banks. However, SSBs show no significant effect on the reported earnings’ informativeness.Originality/valueThis is the first study, to the best of our knowledge, that empirically and comparatively assesses the information value of reported earnings in association with effective internal governance while recognizing the institutional characteristics of different bank types. The authors offer new insights to policymakers, investors and other stakeholders located within countries operating on a dual banking system. The results could help regulators to improve their rules/guidance related to double-layer governance and financial reporting quality.

Funding liquidity in Islamic banks: Does the Shariah supervisory board's higher educational attainment matter?

This study investigates whether higher educational attainment (i.e., doctorate degrees) of Shariah supervisory board (SSB) members is relevant to funding liquidity in Islamic banks. Using a firm fixed effects regression framework with data from 63 Islamic banks in 10 countries, we find that higher educational attainment of SSB members increases funding liquidity. We also show that the result holds when we employ subsample analysis for countries with a national-level Shariah regulatory authority, a systematically important Islamic banking sector, and young and small Islamic banks. Our results remain consistent after employing the alternative estimation techniques of change analysis, propensity score-matching analysis, and instrumental variable approach.

Diversity of Shari’ah supervisory board and the performance of Islamic banks: evidence from an emerging economy of Pakistan

PurposeGiven the relative importance of the Shari’ah supervisory boards (SSBs) in Islamic banks’ (IBs’) performance, this study aims to examine the impact of SSB diversity on IBs’ performance from the stakeholders’ perspective in the context of Pakistan.Design/methodology/approachRandom-effects model and generalized method of moment are used to investigate the impact of SSB diversity on IBs’ performance across a panel data of 22 Islamic banks in Pakistan from 2005 to 2020 inclusive.FindingsThe findings of this study show that SSB size, SSB relevant educational background diversity, bank’s size and bank’s stability have a positive impact on IBs’ performance. In contrast, SSB age, nationality and cross-membership diversities have a negative impact on IBs’ performance. Moreover, SSB gender, tenure and general educational diversities have no significant impact on IBs’ performance.Research limitations/implicationsSSB diversity and IBs practices are different across different jurisdictions. This study is conducted on IBs in Pakistan because of data constraints; thus, the results of this study may not be generalizable to other countries' IBs.Practical implicationsIn structuring the SSBs’ framework, the regulatory authorities and policymakers should consider mandating an ideal SSB size and hiring relevant qualified members with low cross-membership to improve IBs' performance. Thus, the structure potentially attracts Muslim stakeholders, enhances their satisfaction and improves IBs' performance.Social implicationsHaving diversified members in the SSB, IBs equally benefit both individual and group stakeholders in society. Diversity in SSB members enhances IBs' performance and the social welfare of various stakeholders in society.Originality/valueTo the best of the authors' knowledge, this is the first empirical research that examines comprehensively the impact of SSB structural and demographic diversities on IBs' performance in the context of Pakistan. This paper contributes to the unique Shari’ah governance structure in the context of Pakistan. Additionally, this study may serve to assist IBs’ stakeholders in better comprehending the SSB practices of IBs in Pakistan.

Transparency of Shariah Supervisory Board Information in Islamic Banks of Indonesia and Malaysia: The Effect of Islamic Corporate Governance

Purpose: This study aims to determine the level of transparency of Islamic banks in Indonesia and Malaysia by looking at the level of transparency of information related to the Sharia Supervisory Board (SSB) in Islamic banks in both countries and the influence of various characteristics of SSB on the disclosure.Method: The study covers the period 2012-2019 and the research data was obtained by conducting content analysis on the annual reports of Islamic banks.Findings: The results of the regression test show that the size and expertise of SSB have no effect on the disclosure of SSB by Islamic banks in Indonesia and Malaysia. SSB cross-membership has a positive effect on SSB-related disclosures in both countries. This study shows that the experience and knowledge gained by SSB members from their positions as SSB at various other Islamic financial institutions has a positive influence on the ability of SSB to increase the transparency of information about SSBs in Islamic banks.Novelty: This study contributes to providing empirical evidence and literature on the importance of the role of SSB in determining the level of transparency carried out by Islamic banks in the majority and most populous Islamic country in the world.

Open innovation in shariah compliance in Islamic banks – Does shariah supervisory board attributes matter?

This study extends the literature on shariah compliance in Islamic banks (IBs) based on interest free returns for Investment Account Holders (IAH) and to examine the role of the attributes of the shariah supervisory board (SSB) on shariah compliance. The study sample included 102 fully-fledged IBs from 27 countries over the period from 2010 to 2019. We use panel data estimation techniques and the system generalized method of moments (GMM) estimation to address potential endogeneity concerns. The results show that banks with more members on their SSBs are likely to have less shariah compliance. The findings also indicate that cross-membership and economic/finance/accounting expertise of SSB has positive impact on shariah compliance. This impact of SSB to increase shariah compliance is more pronounced in unlisted IBs than listed IBs. The results can be used by different stakeholders such as policy makers, bank supervisory agencies, other boards, and managers of IBs to mitigate shariah compliance.

The impact of proximity within elite corporate networks on the Shariah governance-firm performance nexus: Evidence from the global Shariah elite

Research shows the importance of social networks in the generation of valuable firm resources through informational flows. We extend this conceptualization to Shariah governance and the global Shariah elite as embodied by the Shariah supervisory board. Utilizing a unique dataset of 140 Islamic financial institutions over 2011–2015, across 16 nations, we find that interlocking behavior amongst Shariah supervisory boards is time-invariant and network proximity has an inverted U-shaped curvilinear impact on the performance of Islamic financial institutions. Our findings extend the academic literature on SSB interlocking behavior by disentangling the impact of network proximity on the Shariah governance-firm performance nexus.