Basali, Mona Ahmed Qari (2022) The Impact of Shariah Supervisory Boards on Islamic Banks’ Performance in Gulf Cooperation Council (GCC) Countries. PhD thesis, Victoria University.

Abstract

While most conventional banks were threatened with failure or collapse because of the Global Financial Crisis (GFC) which beset the world economy during 2008-9, Islamic banks (IBs) remained resilient, and even witnessed notable growth. It is generally accepted that the reason for this is that IBs are guided by Shariah regulations (Islamic law) about how banking/financial transactions should be carried out properly and ethically, in contrast to the ‘fraudulent and speculative managerial conduct’ (Franzoni & Allali 2018, p. 1) that has marked the practices of conventional banks. Early research investigated the structure of IBs with a focus on the differences between corporate governance in conventional banks compared with Shariah governance in IBs. The purpose of the Shariah Supervisory Boards (SSBs) is to ensure that IBs’ activities and financial transactions strictly adhere to Shariah regulations, which contributes to their success through improving performance. Consequently, to gain a better understanding of Islamic banking, researchers have focused on identifying the Shariah regulations that lead to their success. The focus on classifying types of regulations and the inherent implications of these fails to take account of the diversity between these boards. By extending the scope to include such inherent diversity, this study adds to the current understanding of the function of SSBs. While some research explores the relationship between SSBs and IB financial performance, there is limited empirical research that closely examines the composition of SSBs and the impact this has. The current research aims to fill this gap. This study focuses not only on profitability but on efficiency and Shariah measurement. It also investigates the moderating effect of the structure of the Board of Directors (BD) on the relationship between SSBs and IBs’ financial performance. Considering the purpose of this study, it was imperative to broaden the research design to include the whole region of the Gulf Cooperation Council (GCC). A longitudinal study was selected to reinforce such broadness, as were the measurement tools. The study sample included 19 fully fledged IBs listed on the GCC stock exchange over 2010–2019. Annual reports, along with Bank Focus databases, and each bank’s official website were used to collect the data. A multivariate pooled-ordinary least squares regression was used to investigate the impact of SSB composition (SSB size, SSB expertise, educational level, cross-membership and reputation) on return on assets (ROA), return on equity (ROE), Tobin’s Q and Zakat on equity (ZOE). Further, data envelopment analysis (DEA) was used to estimate benchmark indices. This study used the truncated Tobit regression, since the DEA estimated efficiency index is limited to 1 and 0. To address issues of endogeneity and to maintain confidence in these estimates, the study used the two-stage least squares (2SLS) method. The findings indicate that SSBs are indeed diverse, and that this is a reason for their diverse effects on financial performance. This study determined that SSB size and SSB expertise have a significant and positive relationship with bank performance. SSB size, SSB expertise, educational level and cross-membership have a significant positive association, whereas SSB reputation has a significant negative association with Tobin’s Q. Regarding the moderating role of the BD, the results show that the interaction between the SSB and the BD is significant and negative on ROA, ROE and Tobin’s Q. The findings of the efficiency DEA suggest that the efficiency of IBs in the GCC countries is also affected by SSB composition (size, expertise, cross-membership and reputation). This study adds to the literature on governance in general and Shariah governance of IBs particularly in emerging countries particularly. In practice, the results of the research allow stakeholders such as regulators (Central Banks) in GCC countries to improve the existing regulatory framework regarding SSBs mechanisms for better IBs’ performance. The results will help shareholders to identify the mechanisms that can improve IBs’ financial performance and to enhance the role of SSBs in: firstly, achieving business goals; and secondly, devising strategies to deal with future financial crises. Introducing the current COVID-19 pandemic as a variable may have different implications for IBs’ performance. Further research could compare the impact of SSBs on IB financial performance during the GFC and the COVID-19 pandemic of 2020.

Search Google Scholar

Repository staff login