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Shari'ah Supervision, Corporate Governance and Performance: Conventional vs. Islamic Banks Journal of Banking and Finance, Forthcoming
Abstract
The performance and accountability of boards of directors and effectiveness of governance mechanisms continue to be a matter of concern. Focusing on differences between conventional banks and Islamic banks, we examine the effect of (i) Shari'ah supervision boards, (ii) board structure and (iii) CEO-power on performance during the period 2005-2011. We find Shari'ah supervision boards positively impact on Islamic banks' performance when they perform a supervisory role, but the impact is negligible when they have only an advisory role. The effect of board structure (board size and board independence) and CEO power (CEO-chair duality and internally recruited CEO) on the performance of Islamic banks is overall negative. Our findings provide support for the positive contribution of Shari'ah supervision boards but also emphasize the need for enforcement and regulatory mechanism for them to be more effective.
... The reason is that the operation mechanisms of IBs are mainly based on the Islamization in all their activities and operations (Grassa, 2013a;Grassa, 2013b). For this, IBs operate based on a profit and loss and (risksharing) model instead of interest-based (Riba) as in the CBs (Mollah & Zaman, 2015). CG of IBs derives from two principles, namely, the faith-based principle which implies conducting the operations based on Shari'ah and profit-motive principle (Grassa, 2013a). ...
... These two unique features of the IBs provide another layer of governance besides the usual boards such as the BoD. This extra layer of governance in the IBs modifies their governance structure from "single-layer" as in the conventional ones into "multilayer" governance (Mollah & Zaman, 2015;Safiullah & Shamsuddin, 2018). ...
... To control this issue, few jurisdictions have restricted the numbers of membership of scholars in SSBs whereas others do not have any restriction regarding this issue (Grassa, 2013b;Grassa, 2015). The regulatory authorities in some jurisdictions restrict SSB scholars from serving on multiple boards in order to implement a good SG system (Mollah & Zaman, 2015). Table 3 provides a summary of the jurisdictions that impose restriction on the cross-membership of SSB scholars. ...
Due to the rapid global growth in Islamic banking and finance industry, supervisory authorities in many countries have developed different Shari'ah governance (SG) regulatory systems to regulate this industry. However, the current SG practices across jurisdictions still suffer from some drawbacks. This chapter highlights some issues related to the differences across jurisdictions in adopting various SG regulatory practices and supports the discussion using descriptive analysis. The findings indicate that Islamic banks (IBs) demonstrate higher levels of financial performance, on average, when located in regulated jurisdictions, in jurisdictions that restrict cross-membership of scholars in Shari'ah Supervisory Boards (SSBs), and in jurisdictions adopting Centralized supervision model (CSGM). The findings also show that IBs in jurisdictions adopting Reactive regulatory model report the worst performance in comparison with the other models (Passive, Pro-active, Interventionist and Minimalist).
... For example, Gazdar and Grassa (2015) identified the positive influence of macroeconomic factors, such as income per capita, economic openness and population, for Islamic finance in GCC countries while institutional factors were not considered relevant to the development of IBs. In another study, Mollah and Zaman (2015) investigated the positive influence of Shari'ah supervisory boards (SSB) on financial performance, and they found that corporate governance attributes, such as the board of directors' size, independence and its CEO, overall negatively impact IB financial performance. In focusing on ownership, Zouari and Taktak (2012) trace family and government ownership of IBs with higher financial performance while institutional and foreign shareholders do not have such influence on IBs. ...
... The fourth factor is corporate governance related organizational structures and the features of the board of directors in IBs. Mollah and Zaman (2015) summarised that, according to the existing available literature related to all types of companies, there is mixed empirical evidence of the influence of governance mechanisms on a company's performance. Nevertheless, their study showed that a board of directors' size and independence are negatively affected by the financial performance of IBs. ...
... The 'corporate governance' variables consists of 'board independence' ('INED' as a percentage of non-executive directors in the board of directors), 'board pro-stakeholders directors' ('BPSD' as a percentage of board members, for example politicians, academic scholars and others who have not held any other positions in the other organizations in the same industry), 'board size' ('BS', as the number of members in the board of directors), 'CEO duality' ('CEOD' is marked as '1' if the CEO and chairman are the same person and '0' if otherwise) and 'investment account holders ratio' ('IAH' as a percentage of IAHs account deposits to equity). It should be noted that these variables have all been utilized in previous studies, such as Farook et al. (2011) and Mollah and Zaman (2015). ...
This study utilises higher objectives postulated in Islamic moral economy or the maqasid al-Shari’ah theoretical framework’s novel approach in evaluating the ethical, social, environmental and financial performance of Islamic banks. Maqasid al-Shari’ah is interpreted as achieving social good as a consequence in addition to well-being and, hence, it goes beyond traditional (voluntary) social responsibility. This study also explores the major determinants that affect maqasid performance as expressed through disclosure analysis. By expanding the traditional maqasid al-Shari’ah,, we develop a comprehensive evaluation framework in the form of a maqasid index, which is subjected to a rigorous disclosure analysis. Furthermore, in identifying the main determinants of the maqasid disclosure performance, panel data analysis is used by including several key variables alongside political and socio-economic environment, ownership structures, and corporate and Shari’ah governance-related factors. The sample includes 33 full-fledged Islamic banks from 12 countries for the period of 2008–2016. The findings show that although during the nine-year period the disclosure of maqasid performance of the sampled Islamic banks has improved, this is still short of ‘best practices’. Through panel data analysis, this study finds that the Muslim population indicator, CEO duality, Shari’ah governance, and leverage variables positively impact the disclosure of maqasid performance. However, the effect of GDP, financial development and human development index of the country, its political and civil rights, institutional ownership, and a higher share of independent directors have an overall negative impact on the maqasid performance. The findings reported in this study identify complex and multi-faceted relations between external market realities, corporate and Shari’ah governance mechanisms, and maqasid performance.
... This result is consistent with the view that Islamic banks' behavior is shaped by the moral obligation to set a fair price to their customers, possibly limiting their willingness to set lower prices. This result is also in line with the findings of Mollah and Zaman (2015) and Mollah et al. (2016) who highlight that the governance structure of Islamic banks with the presence of a Shari'ah supervisory board might play a significant role in Islamic bank behavior. We also find a negative relationship between the deposit rate and liquidity risk for conventional banks, indicating that conventional banks set lower deposit rates when they are more liquid, although at the 10% significance level only. ...
... In this work, we conjecture that Islamic banks' governance characteristics, particularly the presence and characteristics of Shariah board or of Shariah Supervisory Board (SSB), play a vital role in determining the extent of equity-based financing. Indeed, Islamic banks has a different organizational structure than conventional banks with a 'multi-layer' governance system (Mollah and Zaman, 2015) which may lead to different agency conflicts between bank's stakeholder than in conventional banks (Farag et al., 2017). While the first layer, the board of director (BOD), is the same than in conventional banks, the specific feature of Islamic banks' governance is the existence of a second layer, the SSB. ...
... They could also provide some advice or recommendations to the BOD and the executive management (CEO) on all aspects related to the implementation of Shariah principles in the bank, including which contracts should be used or avoided (Ginena and Hamid, 2015;Quttainah et al., 2013;Song and Oosthuizen, 2014). In this sense, the SSB has a role in recalling BOD and management on the core of Islamic finance, ethics which translates into PLS arrangements (Mollah and Zaman, 2015). The SSB is hence expected to recommend less usage of markup financing because many Islamic scholars argue that markup financing could open a backdoor to interest (Aggarwal and Yousef, 2000). ...
This dissertation highlights three important issues in Islamic banks. In the first chapter, we investigate the impact of dual market competition on the differences in deposit rate setting in Islamic and conventional banks. We show that there are notable differences in the determinants of deposit rates in the two types of institution. Market competition has a significant impact on deposit rate of conventional banks but not Islamic banks. Our result, in general, suggests that although Islamic banks’ deposit seems to be similar than conventional banks, their determinants are different. In the second chapter, we continue our investigations by looking at the competition-stability issue. Does competition between Islamic and conventional banks increase banks’ stability or fragility? Our main finding suggests that competitive dual banking market is not beneficial for banks’ stability. In line with the result from the first chapter, in the next investigation, dual market competition only matters for conventional banks. In the third chapter of this dissertation, we analyze the role of Shariah Supervisory Board (SSB) on banks’ equity financing. Our result shows that Islamic banks’ equity financing is influenced by some characteristics of SSB. The presence of SSB member in the Board of Directors (BOD) or executive member has a positive impact on equity financing whereas the existence of a Shariah department in Islamic banks decreases the proportion of equity financing.
... Several studies indicate that GCG positively impacts firm value by enhancing operational efficiency and reducing agency conflicts (Yasser et al., 2020). However, some research suggests that while GCG contributes to firm value, its effect may not always be statistically significant (Mollah & Zaman, 2021). ...
... Profitability indicators, such as return on assets (ROA) and return on equity (ROE), reflect a firm's efficiency in generating earnings relative to its assets and shareholders' equity (Fauzi & Locke, 2020). Increased sales and profit margins positively impact firm value by reinforcing investor confidence and long-term growth prospects (Mollah & Zaman, 2021). However, some studies suggest that while profitability generally enhances firm value, its impact may vary across industries and market conditions (Klapper & Love, 2020). ...
This study aims to analyze the effect of Good Corporate Governance (GCG), capital structure, and profitability on the value of manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the period 2019-2023. In conditions of increasingly tight business competition, company value is an important indicator that reflects the company's performance and prospects, and attracts investor interest. This study uses a quantitative method with secondary data obtained from the annual reports of manufacturing companies on the IDX. The independent variables used are GCG, capital structure as measured by the Debt to Equity Ratio (DER), and profitability as measured by Return on Assets (ROA). The dependent variable is company value as measured using Price to Book Value (PBV). The results of the study show that GCG, capital structure, and profitability have a significant effect on company value, both partially and simultaneously. Good GCG implementation and optimal capital structure and profitability have been proven to be able to increase company value, which ultimately has a positive impact on investor confidence.
... Research by Mollah & Zaman (2015) explained that governance influences quality improvement of education through indicators of high accountability, political stability, effective regulations and policies made towards internationalization. Other research by Bingab et al. (2018) stated that higher education governance to improve the quality of universities, funded only by students alone, will reduce the primary goal, namely improving the quality of human resources [6]. ...
... The instrument used a questionnaire with interval scale data measurements measured using a rating scale approach, five scales. Apart from that, to support the research results, interviews were conducted parallel to when the questionnaire was distributed to strengthen the research findings [19]. ...
Aims: This study aims to illustrate empirically the impact of governance and environmental uncertainty on the quality of B-accredited private universities and their long-term competitive advantage. Study Design: The method used in this study used descriptive and causal-explanatory methods to test the research hypothesis. Place and Duration of Study: All private universities accredited by B in Indonesia. Methodology: This Research used descriptive and causal-explanatory methods. Data for this research were collected using a questionnaire and supplemented with interviews involving various university leaders. A random sampling technique was utilized to select a sample of 136 B-accredited private universities in Indonesia. The data was analyzed using the Structural Equation Modeling (SEM) approach. The study's findings show that higher education governance has a significant influence on both the quality of higher education and long-term competitive advantage, both directly and indirectly. Results: In contrast, environmental uncertainty has a major impact on higher education quality but has little effect on long-term competitive advantage. Higher education quality, on the other hand, has a strong beneficial influence on long-term competitive advantage. Furthermore, this research demonstrates that improved quality among B-accredited private institutions boosts their competitive advantage. Conclusion: This research shows that improving quality among B-accredited private institutions will increase their competitive advantage. Therefore, the results of this investigation provide a valuable contribution in addressing the problem of substandard quality in private universities in Indonesia and expand existing research on environmental governance and communication in university environments.
... On the other hand, both Jensen (1993) and Lipton and Lorsch (1992) stated a certain limit for board size and suggested that a board size beyond 7-8 members functions ineffectively and, thus, deteriorates profitability. Previously, some studies also found a negative relationship between profitability and boards with a large number of members (Ghosh 2006;Liang et al. 2013;Masulis et al. 2012;Mollah and Zaman 2015;Pathan et al. 2007;Tanna et al. 2011). In addition to the above positive and negative relationships, some studies found a nonlinear relationship (inverted U-shaped) between board size and profitability (Andres and Vallelado 2008;Grove et al. 2011;Yeung 2018;Yulia 2016). ...
... where the SBP treats investment and microfinance banks differently from the banking sector. invested by shareholders, and it is widely used in the study of corporate governance, e.g., and Mollah and Zaman (2015). NIM is a measure of income generated from interest-bearing activities after compensating for the interest cost. ...
This study investigates the impact of corporate governance characteristics and political connections of directors on the profitability of banks in Pakistan. The study uses the data of 26 domestic banks over the latest and large period of 2007–2016. Our findings firstly affirm that bank profitability is negatively affected by the presence of politically connected directors on the board, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin. Secondly, our findings also affirm the negative political influence on the sustainability of the banking industry, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin during the government transition of banks having politically connected directors sitting on their board. Our findings further report an inverted U-shaped relationship between board size and bank profitability, suggesting that a board size beyond 8–9 members decreases the profitability. The study further finds a positive impact of board composition, board independence, and director compensation on bank profitability, while also finding a negative impact of frequent board meetings, presence of foreign directors, and audit committee independence.
... To date, corpo- rate governance in the banking sector has been researched almost exclusively in terms of conventional, western banking systems. Despite the rapid growth of Islamic finance over the last two decades, research into corporate govern- ance in Islamic banks is still at an early stage (Archer & Karim, 2007;Mollah & Zaman, 2015). ...
... Zakat was defined as "the compulsory giving of a set proportion of one's wealth to charity" (Religions, 2009), this ap- plies to both individual and institutions. Despite the rapid growth of Islamic banks there is a gap in the literature on corporate governance in Islamic banking ( Abu-Tapanjeh, 2009;Abdullah Saif Alnasser & Muhammed, 2012;Muneeza & Hassan, 2014;Mollah & Zaman, 2015). ...
Islamic banks are growing rapidly with annual growth rates of 17.6% between 2009 to 2013 and 19.7% from 2014 to date. This level of growth is projected to continue into the future. Islamic banks now operate in more than 75 countries with a value of approximately $920 trillion of bank assets. Islamic banks are increasingly being seen as good long-term value propositions and are serving both Muslim and non-Muslim customers across international markets. Despite the rapid growth in Islamic finance, the underpinning corporate governance rules and regulations are at an embryonic stage of development with little attention having been paid to them. The purpose of this paper is to help fill that gap by exploring a conceptual model of corporate governance for Islamic banks based on both Islamic finance principles while fused with elements of corporate governance standards from Western theories and codes, primarily the UK, and thereby ensure that good governance is in place in Islamic banks. The paper links the predominant corporate governance theories of Principal/Agent, Stakeholder and Stewardship with practice based corporate governance codes and explores the potential of applying stewardship theory to Islamic banks. Islamic principles emphasis is on real assets rather than debt as is the case in Western Banks and as a consequence this paper offers the conclusion that the more prudent approach to banking used by Islamic banks could be used as a model for Western banks and thereby deliver a more sustainable future and maintain confidence in banks and substitute for the need for taxpayer support, such as the guaranteed deposit scheme, which acts as a backstop under the Western approach.
... The literature on Islamic finance covers different aspects related to the application of Sharia and its impacts, for example in the banking system (Adebifar et al., 2013 and Beck et al., 2013), in financial markets (Kenourgios et al., 2016), in corporate governance (Mollah and Zaman, 2015), or in mutual funds (Abdelsalam et al., 2014). In this section, we will present first the landscape of Islamic finance before reviewing previous studies about the comparison between Islamic and conventional stocks. ...
... Hence, since the activities of Islamic banks are not based on interest, many researchers study to what extent these banks are different from conventional ones in terms of efficiency, risk, asset quality, and financial stability (e.g., Cihak and Hesse, 2010; Beck et al., 2013, Abedifar et al., 2013). Other researchers focus on their performance (e.g., Mollah and Zaman, 2015), as well as their contribution to financial development and economic welfare in Muslim countries (e.g., Abedifar et al., 2016). In addition to banking activities, Islamic finance covers many other segments, such as investment funds, money markets, stock markets, microfinance, the insurance industry (takaful), as well as Islamic indexes and securities. ...
This article investigates the impact of gold in portfolios in distinguishing between Islamic and conventional stocks as well as between risk-averse and risk-seeking investors, while considering sectorial specificities. Using daily data from the Dow Jones indexes and the London gold market over the 2002-2014 period, the results obtained show that the stochastic dominance method is more robust than the mean-risk method to detect the difference between Islamic and conventional portfolios. For most sectors, risk-averters prefer conventional portfolios, while risk-seekers prefer Islamic portfolios. On the other hand, risk-averters prefer portfolios with gold, while risk-seekers prefer portfolios without gold. A robustness check on different sub-periods shows that these results are time-varying following the behavior of gold prices. These findings can provide useful information to investors respecting Sharia and looking for a diversification with commodities such as gold. JEL Classifications: G11, C58
... It is because, this ethical foundation can contribute to a more responsible and sustainable financial system. By avoiding exploitative practices, Islamic finance may promote a fairer distribution of wealth, fostering economic stability and reducing income inequality (Can, 2021;Mollah & Zaman, 2015). ...
This research aims to examine and analyze the relationship between Islamic financial development and Indonesia's standard of livability from an Islamic perspective. This is considered significant because, as a developing country, it is crucial for Indonesia to sustain high economic growth along with a good standard of livability. This is a quantitative study using a panel data regression method, utilizing panel data such as Islamic financing disbursement and real expenditure per capita across 33 provinces in Indonesia from 2017 to 2022. The results revealed that Islamic financial development plays a significant role in improving the standard of livability. Moreover, these findings will help understand the role of financial inclusion in sustainable development, contributing to discussions on financial and distribution policies for lower-income groups.
... According to Abdelsalam et al. (2016), the SSB provides an additional monitoring mechanism to mitigate agency problems. Thus, it is imperative for IBs to have a proficient SSB capable of fulfilling its responsibilities in controlling the BOD and managers (Zulfikar, Nursiam, Mujiyati, et al., 2021), ensuring their adherence to Shariah principles (Mollah & Zaman, 2015). ...
This study aimed to investigate how Board of Director (BOD) diversity affected sustainability reporting in Islamic banks in Indonesia. The effectiveness of three supervisory bodies, namely the Board of Commissioners (BOC), the Audit Committee (AC), and the Sharia Supervisory Board (SSB), was explored to determine their ability to enhance sustainability performance. The study was based on a sample of 13 Islamic banks listed with the Financial Services Authority between 2012 and 2021. Moderated Regression Analysis was applied to test the hypotheses. It was found that board diversity had a positive influence on sustainability reporting. The regression results for all three moderation variables showed positive and significant findings, indicating that the interactions between the BOC, the AC, the SSB, with the BOD played an effective role in enhancing sustainability disclosure. board ’diversity’s importance and supervisory boards’ effectiveness. This study fills a research gap on the relationship between corporate governance and sustainability disclosure, especially in developing countries that adhere to a dual board governance system, specifically Islamic banks that comply with Sharia governance. The research results underscore the need for a diverse board of directors and the effectiveness of the supervisory board as the party responsible for meeting stakeholder demands through its role in encouraging companies to be actively involved in sustainability performance.
... This led to a significant growth in Islamic banking assets where approximately US$3,306 billion is expected to be reached by 2025 (Islamic Finance Development Indicator, 2021). Furthermore, the presence of a double-layer governance structure in Islamic banks, comprising a board of directors and a Shariah supervisory board, considerably boosts customers' and investors' confidence as well as trust in these financial institutions (Mollah & Zaman, 2015). ...
The study investigates capital decisions of Islamic banks in developing countries. The study uses 96 Islamic banks in developing countries from period of 2007 to 2021. By applying the random effect model with cluster regression, the findings reveal that all variables are found to be negatively correlated with the capital buffer. The results recommend regulators in developing countries to ensure Islamic banks maintain consistent capital ratios at all times to address the moral hazard issue that is apparent in larger banks. In response to economic cycles, Islamic banks are also encouraged to manage their capital buffers in a counter-cyclical manner.
... Specifically, the unique characteristics of Islamic financial institutions and the different sets of measurements included in Islamic banks should be compatible with governance structures that distinguish between Islamic and conventional finance. In addition, corporate governance and Shariah supervisory boards play an essential role in regulating Islamic bank operations according to Shariah principles (Mollah & Zaman, 2015). This is in line with results based on several studies conducted by Errico and Sundararajan (2002), Wilson (2007), Askari et al. (2009), Hashim et al. (2015, Ahmed (2017), and Siswanti et al. (2017), who found that governance (GOV) has a significant positive impact on Islamic finance (IFDI). ...
Despite the inclusion of cultural elements in hundreds of business and management research studies, there have been relatively few studies in finance, and Islamic finance just recently seems to have discovered the impact of culture. Through this study, culture has been proposed as the next possible means to improve the Islamic finance industry. By utilizing data from 2012 to 2019, this paper aims to empirically examine the effects of culture, proxied by education, on Islamic finance in 45 Islamic finance-permitting countries by using generalized method of moments (GMM) estimators. We find significant effects of culture in Islamic finance in all regions except for developed countries and other Arab countries, which are still in their infancy in the field of Islamic finance. Developed countries need to change their educational system in Islamic finance to reflect the real, Shariah-based ethics of Islam rather than secular humanism, while other Arab countries should pay more attention to the Islamic finance industry. Thus, it is important to consider the culture and open the door to the new discipline of “Islamic cultural finance” in the development of the Islamic finance industry.
... These settings often end up in tumultuous transitions, conicts, fragile regimes and economic policies with limited scope (Li et al., 2008). In another research, Mollah and Zaman (2015) discovered that Islamic institutions in politically stable nations tend to perform better than those in turbulent nations. In countries with Muslim majorities and Shariah-based legal systems, Islamic banks usually demonstrate a lower degree of protability and stability (Mollah et al., 2017). ...
Purpose
This study aims to investigate the relationship between political instability and the performance of Islamic banks in emerging countries.
Design/methodology/approach
For a data sample of 93 Islamic banks in 20 emerging countries during the period from 2011 to 2016, the authors identify indicators that matter most for the activities of Islamic banks.
Findings
The study finds that a stable government and law and order are positively correlated with the health of Islamic financial institutions. On the other hand, corruption and military involvement in politics can create an unstable environment for businesses, leading to uncertainty and risk. The study also reveals that Islamic banks operating in regions or communities with lower risk of socio-economic conditions tend to exhibit higher levels of profitability.
Originality/value
Overall, the study provides valuable insights into the impact of political instability on Islamic banks in emerging countries.
... Ajili and Bouri (2018) confirmed the findings of Mollah and Zaman (2015). The authors built a CG index composed of the board of directors, audit committee, and sharia board indices. ...
This paper aims to investigate the impact of executives’ ethical commitment and corporate governance on the Islamic banks’ performance in the Saudi context. The sample of this study consists of Saudi Islamic banks over the period 2012–2020. The financial data were extracted from the Saudi stock exchange (Tadawul). While the behavioral data, particularly the executives’ ethical commitment, is measured through the ethical commitment index. In the econometric analysis, a generalized least square regression method (GLS) is applied to two different sub-models with different dependent variables (return on assets and return on equity). Empirical results suggest that board size and board independence have a significant impact on bank performance. The ethical commitment of executives contributes positively and significantly to the performance of Islamic banks in terms of return on assets. However, there is no statistical evidence of the effect of ethical commitment on Islamic banks’ returns on equity. Therefore, boards of directors of Islamic banks should include expert independent directors to promote best governance practices and enhance executives’ commitment. Larger boards can improve their credit ratings and access to resources.
AcknowledgmentThis study was funded by Deanship of Scientific Research at Princess Nourah bint Abdulrahman University (Grant No. 39/S/243).
... This leaves us with a nal sample of 1760 bank-year observations of the worlds' 160 banks from 2006 to 2016 across 45 countries, for which this paper attempted to collect RD measures. (Hutchinson & Gul, 2004;Mollah & Zaman, 2015;Pathan & Faff, 2013), we measure bank performance using two performance indicators: (i) Tobin's Q (TOBQ) and (ii) Return on Asset (ROA). These measures focus on two broad aspects of performance; bank operating and market performance and capture the future expectations of shareholders rather than highlighting historical performance only. ...
This study examines whether risk disclosure and risk committee are associated with major banks’ performance worldwide. We also test whether the composition of a risk committee moderates (i.e. strengthens or weakens) this relationship. Using 1760 bank-year observations of 160 banks across 45 countries for the years 2006–2016, we find that risk disclosure and risk committees are associated with a bank’s overall performance. In addition, the findings suggest that the composition of a risk committee moderates the relationship between risk disclosure and bank performance. The results support the contention that risk disclosure and risk committee can be used as a channel to optimise the performance of a bank. Conclusions reflect on how the agency, signalling, and resource-based theories inform this phenomenon. This paper advances our understanding of the role of risk committee characteristics on the relationship between risk disclosures and bank performance from both theoretical and empirical perspectives, suggesting risk committee is not a panacea for risk monitoring. However, the existence of a strong risk committee is vital for effective risk governance. Findings from this research may have valuable practical and policy implications, particularly in the banking sector.
... The main difference is caused by firm size and structure and the secondary difference is caused by the development of the country in which the dataset is taken from. Overview of the literature suggests that first of all, large and institutionalized corporations within developed economies rarely benefit from CEO duality in the short run and never benefit in the long run (Bhagat & Bolton, 2008;Gill et al., 2011;Mollah & Zaman, 2015). In developing country markets, however, the duality of CEO is found to be comparatively positively related in large corporations and definitely positively related with Small and medium-sized companies. ...
The purpose of the present study is to evaluate the current state of the linkage between corporate governance and performance. Corporate governance is by far the most important subject that should be studied due to its role and significance. Accordingly, there is intensive literature on corporate governance and its possible impact on performance. By conducting a systematic literature review, the authors provide the results of frequently used variables that supposed to reflect the character of corporate governance on firm performance. The study covers the findings of empirical papers that analyze the impact of “board size,” “percentage of independent directors,” “CEO duality,” “ownership concentration,” “audit committee and auditor reputation,” “board meetings,” and “firm size.” The examination of the reviewed studies indicates that there is a need to explain the competing findings observed among firms, markets, and countries by developing a theoretical explanation.
... To our knowledge, a study about governance in Islamic banks is very limited. Most of them examining the impact of corporate governance on profitability (for instance, the most recent paper written by Mollah and Zaman, (2015). Other study reviews issues and option for ensuring sharia compliance for Islamic banks. ...
p>Operating in the competitive dual banking market, Islamic banks’ behavior often mimics conventional banks. One of the ways to do this is by managing their earnings so that their deposit rate of return could be closely pegged to the conventional banks’ deposit interest rate. Farook et al. (2012) define this term as “profit distribution management” or PDM. This paper investigates whether PDM practice in Islamic banks is affected by their market power. Using a sample of Islamic banks from 2009 to 2013 from Indonesia, the most populous Muslim country adopting dual banking market, we find that bank with a high market power are less engage in PDM. This means that, when Islamic banks are able to set high price of their banking product in the competitive market, they are already reach specific market position. In this case, Islamic banks is observed manage their earnings but in the lower intensity. We also provide empirical evidence that other factors such as governance structure and market share of Islamic banks are also matter for the PDM. Some policy implications are discussed.</p
... According to the Structure-Conduct-Performance (hereafter SCP) paradigm, performance of an industry involves the profits and social welfare emanating from such industry (Baye 1958). To date, banks' profit performance and its links with bank-industry-macroeconomic fundamentals has been favored in available empirical literature (Mollah and Zaman, 2015;Sensarma, 2008;Iannotta et al., 2013). But is performance only about profits? ...
The study examines the relationship between the consequential social cost of market power (i.e., welfare performance of banks) and cost efficiency using data covering the period 2009 to 2017 from the Ghanaian banking industry. The results indicate a positive relationship between banks’ welfare performance and cost efficiency, which suggests that greater cost efficiency hedges welfare losses. In other words, welfare gains and cost-efficient banks are not mutually exclusive. Also, the results show evidence that the sensitivity of welfare gain to cost efficiency depends on the knowledge of local market dynamics. Further, the findings from the QR estimation suggest that, but for welfare loss at low (Q.25) to the median (Q.50) quantiles, cost efficiency is a necessary and sufficient condition to hedge the welfare losses. We argue that if welfare gain is synonymous with cost-efficient banks, then the assumption of welfare gain may imply that the presence of a quiet life is typical of financial consumer protection.
Corporate Social Responsibility (CSR) is gaining momentum in Nigeria as organizations are recognizing the vital role it plays on firm's financial performance. The aim of the study is to examine the mediating effect of Corporate Governance in the relationship between Corporate Social Responsibility and Financial Performance of Jaiz Bank Plc. The three variables of the study which are Corporate Social Responsibility (CSR) is proxied by charity funds, while financial performance (FP) is proxied by Return on Asset (ROA). And Corporate Governance (CG) on the other hand is proxied by Corporate Governance Index (CGI) for Islamic Financial Institutions developed by the General Council for Islamic Banks and Financial Institutions (CIBAFI) and World Bank in 2017. The study was analyzed using e-views version 4 and regression analyses was used to test the hypothesis based on the method proposed by Baron & Kenny (1986). The results reveal that CG does not mediate the relationship between CSR and FP. Although CSR seem to have significant effect on FP, the effect is a negative one due to the fact that CSR of Jaiz bank is seen to reduce its performance proxy by 0.13%. The study, thus recommends that Jaiz bank should intensify its efforts in increasing the banks profit through the accounting policy by the management due to the high costs that banks spend on CSR activity which results in decrease profit. The study also suggest that Jaiz bank should dwell more on its CSR activities because by doing so the bank will get a positive response from stakeholders which will in turn raise the image of the bank and will eventually increase the value of the bank.
This study examines the elements of Shariah governance in Islamic financial institutions in Nigeria. In this study, a quantitative research method is utilized to gather data via a survey approach using questionnaires. The data were acquired from members of ACE, SAs, academia, religious preachers, banks customers and banks auditor in Nigeria. The outcome of the study demonstrated that the Advisory Committee of Experts, and Board of Directors have a positive significant relationship with Shariah governance of the Islamic financial institutions. Furthermore, this study found Executive Management to have a negative significant relationship with Shariah governance. However, the outcome of the study demonstrated that the Shariah audit has a negative insignificant relationship with Shariah governance. This study shows that Shariah governance of Islamic financial institutions needs to work in coordination with the Board of Directors, Executive Management, and Advisory Council of Experts to achieve the obejective of Islamic finance and Shariah compliance in every product and service. Therefore, the result of the study may assist practitioners and users in recognising the elements that influence Shariah governance as the backbone of Islamic finance in Nigeria. Also, the study contributes to non-interest banks by confirming the elements of the Shariah governance that may impacts the development and growth of non-interest banks in the country.
The resistance to financial crisis and compliance with social norms and effectiveness of corporate governance mechanisms is considered recently as a good matter of concern. Focusing on differences between French and Saudi firms, we examine the effect of (1) board of directors, (2) audit committee, (3) compliance with Corporate Social Responsibility activities, (4) compliance with Shariah principles on financial volatility during subprime crisis of 2007. We find that larger boards, larger audit committees, independent members on boards and audit committees are related negatively to financial volatility. The result supports corporate governance theory which suggests that corporate governance variables outlined provide effective of monitoring of the management thereby enhancing firm’s resistance to financial crisis. In addition, we find that compliance with CSR alone does not explain the financial volatility. Its concert with corporate governance variables is necessary. This result supports stakeholder theory which argues that companies compliant with CSR activities in their business strategy and have larger boards and audit committees, and independent directors on boards and audit committees resist more financial downturns and any economic shock. Furthermore, we find that compliance with Shariah norms plays a significant role in protecting shareholder interests, improving functioning of corporate governance mechanisms and affect positively the resistance of Saudi firms to financial crisis.
This study examines the impact of corporate governance on earnings predictability in large banks from 35 countries over the period 2004–2010. We find that board structure and CEO power have a significant positive influence on earnings predictability of future cash flows although these findings vary for emerging markets and between common and civil law countries. Board structure and CEO power are more effective in predicting future cash flows in civil law countries whereas in common law countries risk governance is a more accurate predictor of earnings. Similarly, we find differences between developed and emerging countries. While in both domains there is no qualitative difference in CEO power to predict future cash flows, board structure and risk governance are less effective in emerging countries.
of Australia, and the Australian Prudential Regulatory Authority for valuable comments. Yian Liu provided
CEO duality—the practice of a single individual serving as both CEO and board chair—has been the subject of academic interest for more than 20 years. In that time, boards’ use of CEO duality has fluctuated and the scholarly conceptualizations of the phenomenon have become more complex. As such, the need to understand CEO duality has only increased with time. We review and integrate the disparate literature on this topic so that future attempts to study it will benefit from a more complete understanding of the knowledge already produced. We review the demonstrated antecedents and consequences of CEO duality, pointing out that while much work has been done in this area, much remains that we do not understand. Finally, we offer new theoretical, methodological, and contextual directions that researchers could explore to extend knowledge about CEO duality.
Examining 128 tender offer bids made from 1980 through 1987, we categorize outside directors as either independent of or having some affiliation with managers, and find that bidding firms on which independent outside directors hold at least 50% of the seats have significantly higher announcement-date abnormal returns than other bidders. However, the relationship between bidding firms' abnormal stock returns and the proportion of board seats held by independent outside directors is nonlinear, suggesting it is possible to have too many independent outside directors. All results are lost if the traditional inside-outside board classification method is used.
Purpose
The main objective of this paper is to highlight the unprecedented growth of Islamic banking and finance in the contemporary finance world. It captures the advancements of Islamic banking and finance industry across the tools, systems, sectors, markets and over 75 countries from Africa, Asia, Europe and North America.
Design/methodology/approach
The paper deals with the paradigm of Islamic banking and finance. It constitutes a general review that bears special features, facts and figures over the recent developments of Islamic banking and finance across the globe. It takes stock of the growing institutional and infrastructure support for the Islamic banking and finance system in Muslim countries and Western financial markets.
Findings
The findings of the paper hold that Islamic banking and finance industry has been making breakthrough improvements to become a truly viable and competitive alternative to conventional systems at the global level. Islamic banking and finance institutions have acquired booming grounds in the Middle East, South East and South East Asia. These growing Islamic hubs have been acting as a launching pad to promote Islamic banking in Western business and financial markets. There are some core factors contributing to the recent success of Islamic banking and finance, such as spiraling oil prices worldwide, prolonged boom in the Middle Eastern economies, product innovation and sophistication, increasingly receptive attitude of conventional regulators and information technology advancements that have been acting as a catalyst for the Islamic banking and finance industry to go global. Given all growth patterns, Islamic banking may be able to win over the majority of customers from the Muslim world that constitutes almost 24 per cent of the world's population (over 1.3 billion), and other ethical groups across the globe in times ahead.
Research limitations/implications
The paper takes stock of on‐going developments in Islamic banking and finance industry worldwide. It deals with latest information, facts and figures, which however do not amount to a substantive volume to allow statistical testing and analysis to figure out the main factors and their actual contributions in making Islamic banking and finance emerge as the fastest growing industry of the global finance. This paper mostly bears a subjective outlook.
Originality/value
The paper aims to attract the global attention towards the fastest growing industry of the contemporary world of finance. It presents the case of the Islamic banking and finance industry in the most powerful, comprehensive and logical fashions to remove all misgivings about it in some circles, and let it be seen as an industry adding more ethical, competitive, flexible and diversified tools and systems to global financial markets. The paper highlights the increasing moral and material support that Islamic banking has been enjoying from Muslim governments and the public, and Western market players and regulators. It draws attention towards the growing number of products, systems, infrastructures and supporting institutions of Islamic banking over the recent years. The current trends of Islamic banking industry worldwide captured in this paper can tell all about its strength and weakness, future prospects and ambitions to become a truly innovative, competitive and integrated part of contemporary global finance.
Purpose
This paper aims to investigate the determinants of good governance in the US firms.
Design/methodology/approach
The data are taken from a sample of 624 US listed and non‐financial firms for the period of 1994‐2003. Four indices were constructed that summarize the governance quality: one indice for the board of directors, another one for the board committees, a third one for the audit committee, and a fourth representing an overall or total index. Multiple regressions analyses are used in the study to find the determinants of strong governance.
Findings
The empirical results show statistically significant and positive associations between each governance index (exception to board index) and firm size, investment opportunities, intangible assets and directors and officers ownership. Furthermore, institutional ownership and external financing needs are positively related to each governance index considered. However, growth opportunities and performance have no significant effect on governance quality.
Research limitations/implications
Other corporate governance mechanisms could be considered (transparency and disclosure, anti‐takeover provisions and shareholder's rights).
Originality/value
This paper adds evidence to the important debate about corporate governance ratings. It gives a most comprehensive analysis to date in term of sample size and breath coverage. This paper also offers a new contribution to the debate on the determinants of good governance by isolating the effects of firm characteristics on the board of directors from the effect on compensation and nominating committees and from the effect on audit committee.
The severity of the current financial crisis has shaken the foundations of the capitalist financial system and has led to the search for ideas and solutions. This paper identifies the failure of risk mitigation at different levels as the main cause of the crisis. While following the principles of Islamic finance would have prevented the occurrence of the crisis, the practice of Islamic finance of mimicking its conventional counterpart can make the industry vulnerable to similar crises. Lessons for the Islamic financial sector are drawn by suggesting ways in which risks can be mitigated at the levels of institutions, organisations and products. In doing so, some key risks arising in Islamic finance are identified and various ways in which the Islamic finance sector can be made stable and resilient are proposed.
The Globe and Mail's Report on Business annually publishes governance rankings for more than 200 companies represented in the TSX/S&P index. There are four sub-categories that comprise the composite scores: board composition; board and CEO compensation; shareholder rights; and board governance disclosure. The purpose of this paper is to examine the association between the composite or sub-category corporate governance scores and various measures of firm value. We test for this association using data for 2002 through 2005 on the Report on Business rankings and various financial and market measures. Overall, our study does not find an association between the composite or sub-category corporate governance scores and the various measures of firm value.
This paper extends prior research on the relationship between governance quality and auditor remuneration. We examine the influence of audit committee effectiveness (ACE), a proxy for governance quality, on audit fees (AF) and non-audit services fees (NASF) using a new composite measure comprising audit committee independence, expertise, diligence and size. We find that after controlling for board of director characteristics, there is a significant positive association between ACE and AF only for larger clients. Our results indicate that effective audit committees undertake more monitoring which results in wider audit scope and higher audit fees. Contrary to our expectations, we find the association between ACE and NASF to be positive and significant, especially for larger clients. This suggests that larger clients are more likely to purchase non-audit services (NAS) even in the presence of effective audit committees probably due to the complexity of their activities. Overall, our findings support regulatory initiatives aimed at improving corporate governance quality.
This paper examines the performance of Islamic banks (IBs) and conventional banks (CBs) during the recent global crisis by examining the impact of the crisis on profitability, credit and asset growth, and external ratings in a group of countries where the two types of banks have significant market share. Our analysis suggests that IBs have been affected differently than CBs. Factors related to IBs' business model helped limit the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to a larger decline in profitability in 2009 compared to CBs. IBs' credit and asset growth performed better than did that of CBs in 2008–2009, contributing to financial and economic stability. External rating agencies' re-assessment of IBs' risk was generally more favorable.
Purpose
This paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees (ACs), with particular focus on the interaction between the AC, individuals from financial reporting and internal audit functions and the external auditors.
Design/methodology/approach
A case study approach is employed, based on direct engagement with participants in AC activities, including the AC chair, external auditors, internal auditors, and senior management.
Findings
The authors find that informal networks between AC participants condition the impact of the AC and that the most significant effects of the AC on governance outcomes occur outside the formal structures and processes. An AC has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. ACs are used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values.
Research limitations/implications
Further research on AC and governance processes is needed to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational and institutional context of AC operations, can examine how historical events in an organization and significant changes in the regulatory environment affect current structures and processes.
Originality/value
The case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of ACs or in the development of policy and regulations concerning ACs but which impinge on their governance contribution. They include the importance of informal processes around the AC; its influence on power relations between organizational participants; the relevance of the historical development of governance in an organization; and the possibility that the AC's impact on governance may be greatest in non‐routine situations.
The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and
commercial banks in 19 banking systems with a substantial presence of Islamic banking. We find that (a) small Islamic banks
tend to be financially stronger than small commercial banks; (b) large commercial banks tend to be financially stronger than
large Islamic banks; and (c) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect
challenges of credit risk management in large Islamic banks. We also find that the market share of Islamic banks does not
have a significant impact on the financial strength of other banks.
KeywordsIslamic banking-Financial stability
JEL ClassificationG21
This study determines whether it is possible to distinguish between conventional and Islamic banks in the Gulf Cooperation Council (GCC) region on the basis of financial characteristics alone. Islamic banks operate under different principles, such as risk sharing and the prohibition of interest, yet both types of banks face similar competitive conditions. The combination of effects makes it unclear whether financial ratios will differ significantly between the two categories of banks. We input 26 financial ratios into logit, neural network, and k-means nearest neighbor classification models to determine whether researchers or regulators could use these ratios to distinguish between the two types of banks. Although the means of several ratios are similar between the two categories of banks, non-linear classification techniques (k-means nearest neighbors and neural networks) are able to correctly distinguish Islamic from conventional banks in out-of-sample tests at about a 92% success rate.
This paper deals with the estimation of unequally spaced panel data regression models with AR(1) remainder disturbances. A feasible generalized least squares (GLS) procedure is proposed as a weighted least squares that can handle a wide range of unequally spaced panel data patterns. This procedure is simple to compute and provides natural estimates of the serial correlation and variance components parameters. The paper also provides a locally best invariant test for zero first-order serial correlation against positive or negative serial correlation in case of unequally spaced panel data.
If governance refers to the relationship between government and its constituents, then corporate governance concerns the corporation and its constituents. This definition then begs the question of who the constituents of a corporation are. While there are many who would argue for the corporation having a broad corporate responsibility mandate, in many conventional conceptions of corporate governance the relationships are confined either to the links between those supplying capital and finance to the firm and its management or, more narrowly still, to the relationship between shareholders and management. By contrast, Islamic corporate governance necessarily has a wide commission, with obligations extending to suppliers, customers, competitors and employees, embracing the spiritual as well as the temporal needs of the Islamic community. Nevertheless, while the mandate is clear, and the ethical underpinnings unequivocal, there are some important challenges in implementing this vision. I. The Nature of Governance This paper examines the basic elements of Islamic corporate governance, i.e. corporate governance according to Islamic principles. Despite considerable interest in the topic of corporate governance recently, by organizations such as the Islamic Development Bank (Chapra and Ahmed, 2002) and AAOIFI 1 , there is not as yet a unified expression in Arabic to represent the meaning of corporate governance, although in Egypt an official translation has been reached for governance pronounced hawkama and accredited by the Egyptian Linguistic Department (Sourial, 2004). By contrast, the English terminology has clear origins. The word 'governance' comes from the Greek word kybernan, meaning to 'steer', 'guide' or 'govern' 2 . At its broadest, governance – the act of governing – refers to the relationship between the governors and the DR MERVYN K. LEWIS is Professor of Banking and Finance in the School of International Business at the University of South Australia, Adelaide, South Australia.
The recent global financial crisis has induced a series of failure of many conventional banks and led to an increased interest in the Islamic banking business model. This paper attempts to answer empirically the following question: What was the effect of the 2007–2008 financial crisis on the soundness of Islamic banks and their conventional peers? Using the Z-score as an indicator of bank stability, our regression analysis (covering a matched sample of 34 Islamic Banks (IBs) and 34 conventional banks (CBs) from 16 countries) shows that there is no significant difference in terms of the effect of the financial crisis on the soundness of IBs and CBs. This finding reveals that IBs are diverging from their theoretical business model which would have allowed them to keep the same level of soundness even during the crisis.
Purpose – The purpose of this conceptual paper is to develop a discussion expounding the Islamic perspective of corporate governance as a special case of a broader decision-making theory that uses the premise of Islamic socio-scientific epistemology. Islamic epistemology is premised on the divine oneness of God. The worldly explanation of divine unity is done by means of specific laws and instruments that make the Islamic epistemology functionally viable in developing, implementing and inferring from the application of the epistemological rules to different issues. In the present case the issue is of corporate governance. Design/methodology/approach – The development and conclusions of this discursive paper as a conceptual one point out the possible application of a process-oriented epistemology of unity of knowledge to corporate governance. The underlying methodology of institutional discourse and integration with dynamic parameters is formalized.
This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. We also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. We find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time.
We study whether board structure (board size, independence and gender diversity) in banks relates to performance. Using a broad panel of large US bank holding companies over the period 1997–2011, we find that both board size and independent directors decrease bank performance. Although gender diversity improves bank performance in the pre-Sarbanes–Oxley Act (SOX) period (1997–2002), the positive effect of gender diminishes in both the post-SOX (2003–2006) and the crisis periods (2007–2011). Finally, we show that board structure is particularly relevant for banks with low market power, if they are immune to the threat of external takeover and/or they are small. Our two-step system generalised method of moments estimation accounts for endogeneity concerns (simultaneity, reverse causality and unobserved heterogeneity). The findings are robust to a wide range of other sensitivity checks including alternative proxies for bank performance.
We look at internal corporate governance mechanisms and the performance of publicly-traded U.S. banks before and during the financial crisis. Obviously, bank performance decreases dramatically during the crisis. This decrease occurs for all bank size groups. However, the largest banks see the largest losses. We find several measures of corporate governance, particularly CEO pay-for-performance sensitivity, executive ownership, and affiliated director ownership, decrease significantly just before and during the crisis. Large banks experience the largest changes in corporate governance. Finally, we find stronger relations between corporate governance variable changes and 2008 stock market returns for large banks than for small banks.
As a result of the financial crisis of 2008, the employment compensation policies and decisions of Wall Street corporate boards have come under close scrutiny. Specifically, the willingness to approve company-wide compensation plans that resulted in the paying out of billions of dollars in bonuses, even in the face of deteriorating financial and economic conditions, has been a highlight of the controversy. If only these firms had retained the bulk of these large annual bonuses over the last several years when the financial markets were noticeably in decline, perhaps the economic impact of the current financial crisis would have been less severe. It is now understood that board approval of compensation policies that are heavily weighted toward large bonuses can encourage the pursuit of fake alpha and that the decisions to pay out huge amounts of company capital in the form of bonuses may primarily be the result of fake alpha being successfully achieved. In terms of corporate governance, these decisions reveal how opportunistic rent seeking stakeholders can pressure the corporate board into excessively risky decisions that can jeopardize the financial health of the corporation. The question then becomes whether corporate law needs to be modified to deal with this weakness in corporate governance and if so, how should it be done. In this article, it is argued that courts should require a public company's board - a board composed of a majority of presumably independent and disinterested members - to fulfill an enhanced duty in the process of deciding to approve policies or making decisions that on their face implicate both opportunistic rent seeking behavior on the part of one or more company stakeholders and the financial health of the firm. Such board decisions would necessarily include, among others, those decisions that involve moving massive amounts of cash out of the company and into the pockets of one or more stakeholders (huge company-wide bonuses, large executive management team compensation, large dividend payouts, aggressive stock buybacks, etc.).
The empirical research examining the association between typical measures of corporate governance and various accounting and economic outcomes has not produced a consistent set of results. We believe that these mixed results are partially attributable to the difficulty in generating reliable and valid measures for the complex construct that is termed corporate governance. Using a sample of 2,106 firms and 39 structural measures of corporate governance (e.g., board characteristics, stock ownership, institutional ownership, activist stock ownership, existence of debt-holders, mix of executive compensation, and anti-takeover variables), our exploratory principal component analysis suggests that there are 14 dimensions to corporate governance. We find that these indices have a mixed association with abnormal accruals, little relation to accounting restatements, but some ability to explain future operating performance and future excess stock returns.
This paper discusses Islamic banking products and interprets them in the context of financial intermediation theory. Anecdotal evidence shows that many of the conventional products can be redrafted as Sharia-compliant products, so that the differences are smaller than expected. Comparing conventional and Islamic banks and controlling for other bank and country characteristics, the authors find few significant differences in business orientation, efficiency, asset quality, or stability. While Islamic banks seem more cost-effective than conventional banks in a broad cross-country sample, this finding reverses in a sample of countries with both Islamic and conventional banks. However, conventional banks that operate in countries with a higher market share of Islamic banks are more cost-effective but less stable. There is also consistent evidence of higher capitalization of Islamic banks and this capital cushion plus higher liquidity reserves explains the relatively better performance of Islamic banks during the recent crisis.
Manuscript Type: Empirical
Research Question/Issue: This paper takes a theory building approach to highlighting variations of agency theory in the unique and complex context of Islamic banks, mainly stemming from the need to comply with Sharia and the separation of cash flow and control rights for a category of investors.
Research Findings/Results: The paper provides insights that agency structures in the context of Islamic banking might give rise to trade-offs between Sharia compliance and mechanisms protecting investors' rights. Alternative models of idiosyncratic governance might be effective in balancing the two cornerstones of the agency dynamic. In practice, the paper finds that most of the surveyed Islamic banks appear to recognize the value of governance and institute some basic mechanisms. Nonetheless, some governance flaws relating to audit, control, and transparency are observed, a situation further exacerbated by the fact that investment account holders are not represented on the board, and are not granted control or monitoring rights. This leads to a discussion on the tradeoff between the costs and benefits of such a practice.
Theoretical Implications: This study contributes to the agency theory literature by providing theoretical propositions highlighting challenges to this theory whereby mechanisms with the purpose of mitigating agency problems might lead to a divergence from Islamic principles of Sharia.
Practical Implications: The paper motivates Islamic banks to improve governance practices currently in place. It alerts policy makers to the need to tailor the regulations to safeguard the interests of all investors without violating the principles of Sharia.
This paper investigates the influence of corporate governance on financial firms’ performance during the 2007-2008 financial crisis. Using a unique dataset of 296 financial firms from 30 countries that were at the center of the crisis, we find that firms with more independent boards and higher institutional ownership experienced worse stock returns during the crisis period. Further exploration suggests that this is because (1) firms with higher institutional ownership took more risk prior to the crisis, which resulted in larger shareholder losses during the crisis period, and (2) firms with more independent boards raised more equity capital during the crisis, which led to a wealth transfer from existing shareholders to debtholders. Overall, our findings add to the literature by examining the corporate governance determinants of financial firms’ performance during the 2007-2008 crisis.
There has been large-scale growth in Islamic finance and banking in Muslim countries and around the world during the last twenty years. This growth is influenced by factors including the introduction of broad macroeconomic and structural reforms in financial systems, the liberalization of capital movements, privatization, the global integration of financial markets, and the introduction of innovative and new Islamic products. Islamic finance is now reaching new levels of sophistication. However, a complete Islamic financial system with its identifiable instruments and markets is still very much at an early stage of evolution. Many problems and challenges relating to Islamic instruments, financial markets, and regulations must be addressed and resolved. In this paper, we provide a comprehensive comparative review of the literature on the Islamic financial system. Specifically, we discuss the basic features of the Islamic finance and banking. We also introduce Islamic financial instruments in order to compare them to existing Western financial instruments and discuss the legal problems that investors in these instruments may encounter. The paper also gives a preliminary empirical assessment of the performance of Islamic banking and finance, and highlights the regulations, challenges and problems in the Islamic banking market.
This report analyses the impact of failures and weaknesses in corporate governance on the financial crisis, including risk management systems and executive salaries. It concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies. Accounting standards and regulatory requirements have also proved insufficient in some areas. Last but not least, remuneration systems have in a number of cases not been closely related to the strategy and risk appetite of the company and its longer term interests. The article also suggests that the importance of qualified board oversight and robust risk management is not limited to financial institutions. The remuneration of boards and senior management also remains a highly controversial issue in many OECD countries. The current turmoil suggests a need for the OECD to re-examine the adequacy of its corporate governance principles in these key areas.
The difference and system generalized method-of-moments estimators, developed by Holtz-Eakin, Newey, and Rosen (1988, Econometrica 56: 1371-1395); Arellano and Bond (1991, Review of Economic Studies 58: 277-297); Arellano and Bover (1995, Journal of Econometrics 68: 29-51); and Blundell and Bond (1998, Journal of Econometrics 87: 115-143), are increasingly popular. Both are general estimators designed for situations with "small T , large N" panels, meaning few time periods and many individuals; independent variables that are not strictly exogenous, meaning they are correlated with past and possibly current realizations of the error; fixed effects; and heteroskedasticity and autocorrelation within individuals. This pedagogic article first introduces linear generalized method of moments. Then it describes how limited time span and potential for fixed effects and endogenous regressors drive the design of the estimators of interest, offering Stata-based examples along the way. Next it describes how to apply these estimators with xtabond2. It also explains how to perform the Arellano-Bond test for autocorrelation in a panel after other Stata commands, using abar. The article concludes with some tips for proper use. Copyright 2009 by StataCorp LP.
This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
Using a comprehensive sample of nearly 7,000 firms from 1990 to 2004, we examine the corporate board structure, trends, and determinants. Guided by recent theoretical work, we find that board structure across firms is consistent with the costs and benefits of the board's monitoring and advising roles. Our models explain as much as 45% of the observed variation in board structure. Further, small and large firms have dramatically different board structures. For example, board size fell in the 1990s for large firms, a trend that reversed at the time of mandated reforms, while board size was relatively flat for small and medium-sized firms.
This paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance, as measured by a low sensitivity of turnover to performance and a low Q ratio, when (i) the controlling shareholders are also top executives, (ii) the control is fully in the hands of one shareholder and is not shared by a set of core shareholders, and (iii) the controlling shareholders own less than 50% of the firm's cash-flow rights.
We investigate whether institutional investors “vote with their feet” when dissatisfied with a firm's management by examining changes in equity ownership around forced CEO turnover. We find that aggregate institutional ownership and the number of institutional investors decline in the year prior to forced CEO turnover. However, selling by institutions is far from universal. Overall, there is an increase in shareholdings of individual investors and a decrease in holdings of institutional investors who are more concerned with holding prudent securities, are better informed, or are engaged in momentum trading. Measures of institutional ownership changes are negatively related to the likelihoods of forced CEO turnover and that an executive from outside the firm is appointed CEO.
Management plays a dominant role in selecting outside directors, inviting skepticism about outsiders' ability to make independent judgments on firm performance. Our examination of wealth effects surrounding outside director appointments finds significantly positive share-price reactions. We find no clear evidence that outside directors of any particular occupation are more or less valuable than others. The results are consistent with the hypothesis that outside directors are chosen in the interest of shareholders.
This study examines the relevance of bank board structure on bank risk-taking. Using a sample of 212 large US bank holding companies over 1997–2004 (1534 observations), this study finds that strong bank boards (boards reflecting more of bank shareholders interest) particularly small and less restrictive boards positively affect bank risk-taking. In contrast, CEO power (CEO’s ability to control board decision) negatively affects bank risk-taking. These results are consistent with the bank contracting environment and robust to several proxies for bank risk-takings and different estimation techniques.
Employing a unique data set provided by Governance Metrics International, which rates firms using six different corporate governance dimensions, we analyze whether Japanese firms with many governance provisions have a better corporate performance than firms with few governance provisions. Employing an overall index, we find that well-governed firms significantly outperform poorly governed firms by up to 15% a year. Using indices for various governance categories, we find that not all categories affect corporate performance. Governance provisions that deal with financial disclosure, shareholder rights, and remuneration do affect stock price performance. The impact of provisions that deal with board accountability, market for control, and corporate behavior is limited.
Prior research on the relationship between corporate controls and firm performance is premised on the notion that, in theory, there is direct association between corporate governance and firm performance. However, extensive research has produced mixed and often weak results. In this paper, we posit, as a primary relationship, a negative association between growth and firm performance and then examine whether corporate governance variables moderate this negative relationship. Our results support this notion and show that the role of corporate governance variables in firm performance should be evaluated in the context of the firm's external environment measured in this study in terms of growth opportunities.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
I analyze the competitive conditions prevailing in Islamic and conventional global banking markets, and investigate the possible differences in profitability between these markets, using a sample of banks across 13 countries during 2000–2006. The results suggest that Islamic banks allocate a greater share of their assets to financing activities compared to conventional banks, and they are also better capitalized. Different computed measures of competition indicate that Islamic banking is less competitive compared to conventional banking. A second-stage analysis shows that profitability significantly increases with market power, but this does not warrant higher profitability levels for Islamic banks.
This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally.
This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.
This paper examines the trends and endogenous determinants of boards of directors (board size, composition, and CEO duality) for a sample of 212 US bank holding companies, from 1997 to 2004. Overall, the results show that the costs and benefits of boards' monitoring and advising roles could explain bank board structures with caveats. For example, due to the regulatory nature and comparatively intensive scrutiny of bank officers and directors, it is argued that bank managers have less control over the directors' selection processes. Thus, bank board independence should not be the outcome of negotiation with CEOs. Consistent with this view, bank CEOs are found not to affect bank board independence. The trend analysis also provides some important results. In contrast to non-bank evidence, for instance, board size was discovered to decrease over the sample period for large and medium-sized banks, while board size remained relatively stable for small banks. These results are robust with respect to different estimation specifications. Furthermore, the study's findings have important policy implications for bank regulators and investors.
The purpose of this paper is to identify the variables that influence the board structure adopted by firms and the subsequent relationship to the firm's performance. The results of this study of 229 Australian firms show that firms' investment opportunities are strongly associated with a higher proportion of executive directors (“EDs”) on the board. The results also show that the negative relationship between a firm's investment opportunity set (“IOS”) and firm performance is weakened at higher levels of non-executive director board domination. These results have implications for policy setters and managers of firms with investment opportunities. © City University of Hong Kong.
This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
This paper examines the relationship between governance variables and voluntary intellectual capital disclosure in a sample of European biotechnology firms. We extend previous research by simultaneously considering governance mechanisms such as the proportion of independent directors, board dimension, CEO duality and board structure in relationship to voluntary disclosure on intellectual capital. We understand voluntary disclosure as a multidimensional and complex concept and, hence, use the semantic properties of the information disclosed, and on the content of information, as proxies for the quality of disclosure. Our results suggest that governance-related variables strongly influence the quantity of information disclosed, thus confirming our hypotheses. In regard to the quality of disclosure, our results show that (1) the proportion of independent directors is positively related to the disclosure of internal structure, (2) CEO duality is negatively linked to the disclosure of forward-looking information, and (3) board structure helps to improve the annual report's overall readability. We contribute to agency theory by indicating that corporate governance mechanisms and voluntary disclosure can be used strategically to reduce agency conflicts. The results of this study might be of interest to regulators, investment analysts and market participants.
We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors' ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.