Shari’ah governance and performance of southeast Asia and GCC Islamic banks : the moderating effect of institutional shareholding

Abstract

Islamic banks (IBs) are required to comply with Shari’ah rules and principles, which require the establishment of a Shari’ah supervisory board (SSB) to safeguard Shari’ah governance (SG). The SG system in IBs refers to institutional and organisational arrangements to ensure effective and independent Shari’ah `ah-compliance oversight. This study aims to fill some of the gaps in the literature. To this end, this study investigates the impact of SSB attributes on the performance of 60 IBs located in the GCC and Southeast Asia countries over the 2006-2021 period using the Generalized Least Squares (GLS) estimator to analyse the data. In particular, the effect of SSB independence, busyness, remuneration, and overall SSB effectiveness on the performance of IBs is assessed. Moreover, the study explores the moderating effects of SG models (i.e., Centralised and Decentralised Shari’ah Governance Models) on SSB effectiveness and the impact of SSBs on performance in crisis periods (i.e., during the 2008 global financial crisis and the COVID-19 pandemic crisis). Finally, the present study scrutinises the moderating effect of institutional shareholding on the relationship between SSB effectiveness and the performance of IBs. This study employs different performance metrics including accounting-based financial performance measurements (i.e., ROA and ROE) and an Islamic social performance measurement (i.e., Zakat payments). The empirical results show that SSB independence adversely affects performance while SSB busyness and remuneration enhance performance. In addition, the overall SSB effectiveness (captured by a SSB score) has a significant positive influence on the performance of IBs. The results also suggest that SG models do not significantly affect the relationship between SSB effectiveness and performance. Regarding periods of crisis, effective SSBs enhanced the Islamic social performance of IBs during the 2008 global financial crisis, while during the COVID-19 pandemic period, they enhanced financial performance. Furthermore, the moderation tests indicate that controlling institutional shareholders positively moderate the relationship between effective SSBs and the performance of IBs in terms of ROA and ROE and negatively in terms of Zakat payments. The findings of this study contribute to the body of knowledge by demonstrating how the Shari’ah governance mechanism, as represented by SSBs, influences the performance of IBs. The findings of this study have important practical implications for various stakeholders, including the policymakers, regulators, and IBs. First, IBs and regulators should enhance the autonomy of SSBs as findings demonstrate that currently, SSBs lack real independence. Additionally, the study offers evidence for IBs and regulators to help understand the role of effective SSBs in crisis non-crisis periods and how IBs can adopt an appropriate SSB structure to improve performance. Concerning SG models, the current study concludes that improvements in the SG framework are needed to be put in place by policymakers and regulatory bodies. Lastly, the current study reveals the role of large institutional shareholders in the SSB-performance association and presents recommendations to IBs and regulators.