Corporate governance andShariahnon-compliant risk in Islamic banks: evidence from Southeast Asia

In: Corporate Governance: The International Journal of Business in Society, Band 20, Heft 2, S. 240-262

Abstract

PurposeThis study aims to investigate the relationship between corporate governance andShariahnon-compliant risk (SNCR) that is unique for Islamic banks. The study examines the roles ofShariahcommittee along with the board of directors in mitigating SNCR.Design/methodology/approachThe paper empirically investigates the implications of characteristics of board of directors andShariahcommittee on the SNCR by using a sample of 29 full-fledge Islamic banks from Malaysia and Indonesia over the period 2007-2017. All data is hand collected from the Islamic banks' annual reports with the exception of country-level data collected from the World Bank database.FindingsThe results show that banks with a smaller board size and higher proportion of independent board members are likely to have lower SNCR. The findings also indicate that the financial expertise and higher frequency ofShariahcommittee meetings reduces the SNCR. Collectively, the analysis shows that banks with strong corporate governance environments reduce SNCR.Practical implicationsThe findings of the study shed light on the relationship between corporate governance practice,Shariahcommittee characteristics and SNCR. The results can be used by different stakeholders such as policymakers, boards of directors and senior management of Islamic banks to mitigate SNCR.Originality/valueThis study extends the literature on corporate governance and risk-taking by including additional dimensions of governance and risk type. The corporate governance mechanism at the board level is complemented by including theShariahcommittee characteristics and SNCR which is relevant to Islamic financial institutions is examined.