Internal Governance Mechanisms: Evidence from Islamic Banks

Abstract

The impact of institutional corporate governance on the financial performance of Islamic banks, with a specific focus on Shariah Supervisory Boards and corporate boards. The findings of this study indicate that Islamic banks with Shariah Supervisory Boards outperform Islamic banks without such boards, as measured by return on assets (ROA), return on equity (ROE), asset growth (AG), and interest margins (IM). Further findings of this study indicate that the financial performances of Islamic banks with Shariah Supervisory Boards and corporate boards are influenced by several board characteristics, including the size of the board and the education of the board members. Moreover, Shariah Supervisory Boards provide tighter monitoring and control, as well as more advising and counseling, as compared with Islamic banks without Shariah Supervisory Boards. Later findings indicate that Shariah Supervisory Boards affiliations with international Islamic financial institutions motivate the positive relationship between the Shariah Supervisory Boards and Islamic bank performance. Overall, this study provides strong evidence that Shariah Supervisory Boards benefit shareholders by complementing corporate boards and thus mitigating agency problems and agency costs.