PreprintPDF Available
Preprints and early-stage research may not have been peer reviewed yet.

Figures

Content may be subject to copyright.
1
Board remuneration and risk-taking in Islamic banks
Galuh Aristika Filasti1 and Tastaftiyan Risfandy1,2,*
1 Faculty of Economics and Business, Universitas Sebelas Maret, Indonesia
2 Center for Fintech and Banking, Universitas Sebelas Maret, Indonesia
This version: November 21, 2020
Abstract
This paper investigates the impact of board compensation on risk-taking in Islamic banks. The
analysis of this issue is crucial because compared to their conventional peers, Islamic banks
possess unique characteristics such as different risk profiles and a Shariah board's existence as
another layer of governance. Using a sample of 13 Islamic banks in Indonesia from 2011 to
2018, our result suggests that Islamic banks' risk-taking is negatively associated with
compensation of three board types in Islamic banks: board of commissioners, board of
directors, and Shariah supervisory board. This empirical evidence suggests that high
compensation is positively associated with Islamic banks' stability. Islamic banks' positive role
could be because the existence of Shariah board as the second layer of governance in Islamic
banks and because the Indonesian Islamic banks are currently in the banking market with a
good regulatory regime.
Keywords: Remuneration, compensation, board of directors, board of commissioners, Shariah
supervisory board, risk taking, Islamic banks, Indonesia
JEL Classifications: G21, G34, Z12
*) Corresponding author at Universitas Sebelas Maret, Jl. Ir. Sutami 36A Surakarta 57126,
Indonesia.
Emails: galuh.aristika@gmail.com (G. A. Filasti), tastaftiyan.risfandy@staff.uns.ac.id (T.
Risfandy)
2
1. Introduction
Executive remuneration is considered to be one of the causes of the financial crisis in
the US and global financial institutions because high remuneration encourages executives to
take higher risks (Słomka-Gołębiowska and Urbanek, 2016). It has been argued that the design
of remuneration schemes in the banking sector was flawed in most cases and inconsistent with
shareholder interests and long-term sustainability. Prior to the crisis, banks could provide
bonuses in cash as awards for achievements at the end of the year. The high amount of cash
bonuses for achieving the targets set regardless of future risks. As a result, the policy of
providing remuneration throughout the banking sector has been increasingly criticized because
it creates too much risk (Shah et al., 2017). Excessive risk-taking has been reported as one of
the main factors that can exacerbate the country's financial stability (Słomka-Gołębiowska and
Urbanek, 2016).
This article is written to primarily answer a question: Do executive remuneration
increases Islamic banks' risk-taking? This issue is extremely important in the context of Islamic
banking because Islamic banks possess significant growth in the last decades. The Islamic
financial services industry's total worth reached USD 2.19 trillion in 2018 primarily because
of the improvement in Islamic banking sectors (Islamic Financial Service Board, 2019). Islamic
banking has also been categorized as systemic in a dozen countries that have adopted a dual
banking system because their market share has reached more than 15% (Islamic Financial
Service Board, 2018). Executive remuneration, therefore, becomes the main focus of either
academia or practitioners because their remuneration amount should be in line with the Islamic
banks' performance target. Moreover, the wrong design of remuneration could also harm
Islamic bank stability as suggested by prior studies in conventional banks context.
The contribution of this article is twofold. First, to the best of my knowledge, the issue
of executive remuneration in Islamic banks has not yet been empirically explored. Most of the
empirical studies explore remuneration in conventional banks' context (Bai and Elyasiani,
2013; Jiang et al., 2019; Tian and Yang, 2014). The investigation focusing on Islamic banks is
important because Islamic banks have a different risk profile than their conventional
counterparts. Profit and loss sharing applied in Islamic banks could trigger other risks (Hashem
and Abdeljawad, 2018). For instance, displaced commercial risk, or a risk that a depositor will
move to other banks because the Islamic banks could not provide a steady rate of return, could
happen in Islamic banks. Islamic banks have also faced other risks because of their complexity
3
and limitations in terms of funding, investment, and risk management activities (Abedifar et
al., 2013). Unlike the conventional banks that have flexibility in funding such as exploiting
money markets, Islamic banks are unable to do that because these practices are not allowed by
the Shariah.
Second, prior literature highlighting the nexus between remuneration and risk-taking is
mixed. Unda and Ranasinghe (2019) find a positive association between high-paid board and
stability in the credit union firms, suggesting that higher board remuneration could lower banks'
risk-taking. Vallascas and Hagendorff (2013) show in their paper that increases in CEO cash
bonuses lower bank default risk. However, this risk-reducing effect is missing when banks
operate under weak regulatory regimes or when banks are financially distressed. In contrast,
DeYoung et al. (2010) find strong evidence that banks’ CEO responded to contractual risk-
taking incentives by taking more risk. In a similar vein, Uhde (2016) provide empirical
evidence of a risk-increasing impact of excess variable pay for both executive cash- and equity-
based compensation. However, interestingly, Cheng et al. (2015) argue that the correlation
between pay and risk-taking is not because misaligned pay leads to risk-taking but rather
because principal-agent theory predicts that riskier firms have to pay total compensation than
less risky firms. Fahlenbrach and Stulz (2011) empirically show that banks with higher
compensation and bonuses for their CEOs did not perform worse during the crisis, implying
that higher CEO compensation is not related to stability. Therefore, this paper will contribute
to the debate by providing evidence in the context of Islamic banks.
Third, we use a sample setting in Indonesia because Islamic banks' development in
Indonesia is quite surprising. Indonesia is the largest Muslim country in the world and has great
potential for the growth of Islamic banking. The development of Islamic banking in Indonesia
began in 1991, marked by the establishment of Bank Muamalat Indonesia (BMI). According
to Meslier et al. (2017), Islamic banking's rapid development began since the 2007-2008 global
financial crisis. Islamic banking assets worldwide grew at an annual rate of 17.6% between
2009-2012 and is expected to grow by nearly 20% per year until 2018. As for comparisons,
Islamic banking assets in Indonesia assets grew at an annual rate of 18.81% between 2012
2018 (www.ojk.go.id). Therefore, this research contributes to the literature in Islamic banks,
especially in Indonesia, because prior empirical articles in the Indonesian setting usually
related to bank profitability (Octavio and Soesetio, 2019; Risfandy, 2018; Trinugroho et al.,
2017). Some others indeed have focused on bank stability or risk-taking (Narayan et al., 2019),
but none of them focus on executive remuneration as one of the main predictors for stability.
4
2. Literature review
2.1 Islamic banking in Indonesia
Islamic banking received attention after a series of economic crises, such as the global
economic crisis in 1998 and 2009. According to several reports, conventional banks
experienced a bigger negative effect than Islamic banks due to the global economic crisis.
(Hamad et al., 2014). In the 1998 crisis, Bank Muamalat Indonesia is the only Islamic bank in
Indonesia that have also shown that the bank is quite resilient during the crisis. After 1998,
many conventional banks have started to open Islamic windows because it could diversify their
revenue, especially during economic turmoil. Several Islamic windows have been successfully
converted into full-fledged Islamic banks, such as Bank Mandiri Syariah and Bank BNI
Syariah, while some others still enjoy their position as Islamic windows, such as Bank BTN
Syariah. Currently, there are 14 full-fledged Islamic banks in Indonesia.
2.2 Islamic banks’ governance in Indonesia
Governance issues have become an important topic in Islamic banking operations. In
facing the dynamics of the global economy, the Islamic banking industry needs to increase
resilience by improving governance. Effective governance is essential to board remuneration
and oversight of the risk management of public financial institutions (Unda and Ranasinghe,
2019). The implementation of governance for providing remuneration aims to encourage
prudent risk-taking so that the Islamic banking industry's sustainability can be maintained. For
the banking sector in Indonesia, the implementation of remuneration governance for
commercial banks is regulated in the Regulation of Indonesia Financial Services Authority
(Otoritas Jasa KeuanganOJK) No. 45/POJK.03/2015, while Islamic Commercial Banks and
Shariah Business Units are regulated in the Financial Services Authority Regulation No.
59/POJK.3/2017. In the context of agency theory, boards must play an important role in
monitoring so that corporate governance is effective and avoids opportunistic managerial
behavior (Unda and Ranasinghe, 2019).
Agency theory concerns the contractual relationship between company members. The
concept shows the relationship between the principal agency (shareholder) and agent
(managing manager); the agent works for the principal's wishes and then delegates decision-
5
making authority (Ntim et al., 2019). The problem caused by the agency relationship is the
occurrence of asymmetric information because executives have more financial information
than principals. The second problem is that there is a conflict of interest because the agent's
goal that is, seeking personal gain is not the same as the principal (Messier et al., 2014). If
executive remuneration and incentive contracts are well designed, they can serve as tools to
improve performance and minimize agency problems (Ntim et al., 2019).
Islamic banks' operation implies that the underlying Islamic principles produce a unique
agency relationship (Safieddine, 2009). In the Islamic banking governance, there is a Shariah
supervisory board that is tasked with providing input or advice to the Board of Directors and
supervising banking activities so that they run in accordance with Shariah principles (Indonesia
Financial Services Authority59/POJK.03/2017). The Shariah board serves as the second layer
of control in the independent governance mechanism to prevent the board of directors and other
top management from making high-risk investment decisions (Bukair and Abdul Rahman,
2015). Because of Shariah restrictions, Islamic banks' risk is predicted less than conventional
banks (Bukair and Abdul Rahman, 2015). Managers of Islamic banks trusted by shareholders
to maximize investment value and have a duty to achieve company performance without
ignoring Shariah (Safieddine, 2009).
2.3 Islamic banks risk
According to Hashem and Abdeljawad (2018), Islamic banks' risks are classified into
two major parts. The first is the same risks faced by conventional banks. This situation is due
to the Islamic financial ecosystem having a strong relationship with the conventional financial
industry. Islamic banks must face credit risk, market risk, benchmark risk, operational risk,
liquidity risk, and legal risk similar to their conventional counterparts.
However, because Islamic banks have to comply with Islamic rules, there are additional
risks faced by Islamic banks. This is the second risk uniquely for Islamic banks. Because
Islamic banks apply profit and loss sharing mechanism implying that profit or losses will be
shared between Islamic banks and clients, Islamic banks have to face three additional (unique)
risks: withdrawal risk, fiducia risk, dan displaced commercial risk. Withdrawal risk is a risk as
to the result of the competitive pressures that Islamic banks face from conventional banks.
Islamic banks can be exposed to withdrawal risk (risk of withdrawing funds) caused by
6
depositors if the profits they receive are lower than the rate of return provided by their
competitors. In fact, this risk disciplines Islamic banks to be more effective since the
investment account holders have incentives to monitor the performance of Islamic banks.
Fiducia risk is a risk because of the violation of investment contracts, whether it is incompatible
with Shariah provisions or mismanagement of investor funds. Displaced commercial risk is
the transfer of risk related to deposits to equity holders. This risk can arise when the bank is
under pressure to get a profit; however, the bank has to give part of its profit to the depositors
due to the low rate of return. In practice, to avoid withdrawal and displaced commercial risk,
Islamic banking tends to deviate from Islamic finance PLS. Islamic banking pays a relatively
competitive rate of return to the account of investment holders regardless of the bank's actual
performance (Farook et al., 2012; Meslier et al., 2017).
3. Methodology
3.1 Data and sample
We use a sample of 13 full-fledged Islamic banks in Indonesia from 2011 to 2018: (1)
PT. BPD Nusa Tenggara Barat Syariah, (2) PT. BCA Syariah, (3) PT. Bank Aceh Syariah, (4)
PT. Bank BNI Syariah, (5) PT. Bank BRI Syariah, (6) PT. Bank Jabar Banten Syariah, (7) PT.
Bank Mega Syariah, (8) PT. Bank Muamalat Indonesia, (9) PT. Bank Panin Dubai Syariah,
(10) PT. Bank Syariah Bukopin, (11) PT. Bank Syariah Mandiri, (12) PT. Bank Victoria
Syariah, (13) PT. Maybank Syariah Indonesia. The Islamic windows are not part of our sample
because there are no data of executive remuneration in Islamic windows. This is because the
executive (board of directors) in Islamic windows are similar to their parent (conventional
banks). To deal with the extreme values, we winsorize our data at 1% and 99% levels. Our
final sample consists of 92 observations.
3.2 Empirical approach
In order to see the impact of board remuneration on Islamic banks' risk-taking, we built
an econometric model as follows.
          
   (1)
7
where subscripts i and t refer to bank and time index, respectively. Consistent with the prior
literature (Ashraf et al., 2020; Risfandy, Tarazi, et al., 2020; Smaoui et al., 2020; Trinugroho
et al., 2017), the dependent variable we use here is the z-score calculated as follows.
     (2)
ROA is the return on assets, EQTA is equity to assets, SDROA is the standard deviation
of ROA. The z-score is a direct measure of bankruptcy, defined as a situation where losses
exceed equity. The probability of bankruptcy is expressed as the probability of ROA less than
EQTA. An increase in the ratio of capital to assets will increase the z-score. The higher the z-
score, the smaller the bank's bankruptcy risk and it indicates that that Islamic banks are more
stable. Islamic banks with a higher z-score have more benefits to cover their debts; therefore
the risk of default is lower (Unda and Ranasinghe, 2019). The Z-score indicates that a bank
may go bankrupt if the Z-score continues to decline (Tarraf and Majeske, 2013). Thus, the z-
score is negatively related to banks' risk-taking behavior (Smaoui et al., 2020). A higher z-
score implies higher stability and hence lower risk-taking.
The main independent variable in this study is the remuneration of the board of directors
(Dir_Rem), board of commissioners (Comm_Rem), and Shariah supervisory board (SSB_Rem).
It is defined as total cash remuneration received by the board members in a year. Following
prior studies such as Unda and Ranasinghe (2019), we use both logarithms of total board
remuneration and the average value of remuneration in a board. As explained in the previous
section, remuneration could positively, negatively, or even have no impact on risk-taking.
Therefore, in this paper, we do not make any predictions about the sign of β.
Following prior studies, we also employ several control variables. The first is size,
proxied by the logarithm of total assets (LogTA). According to Sufian (2007), larger firms may
be more efficient because they exploit the problem of economies of scale and have the ability
to diversify risk. We, therefore, predict that larger banks will have better stability (lower risk-
taking). The second is the capital adequacy ratio (CAR) calculated by dividing equity by total
assets. On the one hand, a higher equity ratio could be associated with better stability. On the
other hand, banks high-capitalized banks have more incentive to take higher risk. Third, we
use efficiency (EFF) proxied by the ratio of operating expense to operating income. Bank
Indonesia regulations stipulate that a good EFF ratio is below 90%. The value of EFF that is
still within regulatory standards indicates good bank management efficiency, thus avoiding
risks where costs are greater than revenues (Dendawijaya, 2009). Fourth, we use bank margin
8
(BM) used extensively by prior literature such as Trinugroho et al. (2018) to measure the ability
of bank management in managing productive assets. This ratio is the result of the transaction
uncertainty faced by banks. Low-interest margins will substantially increase bank risk-taking
(Delis and Kouretas, 2011).
4. Result
4.1 Descriptive statistics
Table 1 illustrates the descriptive statistics of our sample. All variables have 92
observations except SSB_Rem. The data of Shariah board remuneration is missing for several
banks. The statistics show that directors, on average, receive IDR 2 billion/year (± USD
141,184.40) or approximately IDR 166 million per month. This high amount is not surprising.
According to Roberts Walters recruitment firm, Indonesia's average salary is approximately
the second or third highest in the Asian region for skilled workers. For instance, in 2018, a
finance director in Indonesia received anything within the range of IDR 1.2 billion to IDR 1.6
billion. A marketing director could see an annual income of around IDR 1.3 billion to IDR 2.34
billion (The Jakarta Post, 2018).
[Table 1]
In the Indonesian two-tier system, the directors have an important role in managing the
company because their role is explicitly separated from commissioners who only has a
monitoring role. It is the directors responsible for the firms' daily operations and ensuring that
the targets determined by the commissioners could be achieved. Please see related papers
regarding the two-tier system's discussion (Risfandy, Radika, et al., 2020; Trinugroho et al.,
2020).
Regarding control variables, the statistics we obtain in this study are consistent with the
previous studies, especially in the Indonesian context (Risfandy et al., 2019; Trinugroho et al.,
2017). The EFF variable shows an average value of 90.02, suggesting that Indonesian banks
are quite efficient as 90% of their operating income is allocated for operating costs. The average
number of margins (BM) of Indonesian Islamic banks is 6%. This value is less than margins
possessed by Islamic rural banks (Trinugroho et al., 2018) but this is plausible because Islamic
banks, in general, have a lower risk than Islamic rural banks. Indonesian Islamic banks have a
22% capital ratio on average, confirming prior studies explaining that Islamic banks, in general,
are better capitalized (Beck et al., 2013).
9
4.2 Regression result
The regression result of equation (1) is shown in Table 3. We separate remuneration
received by directors, commissioners, and SSB in the estimations because it has a high
correlation coefficient and high variance inflation factors (VIF) as shown in Table 2. For
instance, Log Dir_Rem has a correlation coefficient of 0.8 with Log Comm_Rem. Both
variables have the VIF score of 13.04 and 12.27, respectively, and this is more than the rule of
thumb 10.
[Table 2]
[Table 3]
Our result shows that remuneration received by the boards, either directors,
commissioners, or Shariah board, is positively associated with the LogZ. Although SSB_Rem
is not significant in column (3), but it is significant in column (6). Overall, our result suggests
that higher remuneration packages obtained by the boards in a year are associated with lower
risk taking and better stability. This result suggests that, in Indonesian banking, the argument
that high remuneration received by the board could lead to excessive risk-taking is not true.
Our empirical evidence implies that when boards' remuneration is high, the risk-taking
is low. There could be three possible explanations. First, the Indonesian banking market is quite
stable, resilient, and has a strong regulatory regime. It is shown by the rapid growth of Islamic
banks and their role in Indonesian banking market (Narayan et al., 2019). The increase in the
year remuneration is possibly only happened in the weak regulatory regimes or when banks
are financially distressed, as empirically shown by (Vallascas and Hagendorff, 2013). Our
result is also consistent with Unda and Ranasinghe (2019) who find a positive impact of high-
paid board and credit union firms' stability.
Second, the negative impact of remuneration is not shown in our regression results,
possibly because of the indirect role of size. Islamic banks with high assets indeed will tend to
pay higher than those with lower assets. In general, larger banks will have better stability than
smaller banks. Therefore, arguably, high-paid board members enjoy being in the banks with
higher stability (lower risk-taking) while low-paid boards do not have a choice rather to stay
in the banks with higher risk-taking. This argument is also in line with Cheng et al. (2015),
contending a principal-agent theory: riskier firms have to pay more total compensation than
less risky firms.
10
Third, remuneration's positive impact could be because Islamic banks have a two-layer
governance system (Mollah and Zaman, 2015). While the business activities are monitored by
the first layer (Board of Directors), the Shariah-compliance standards are supervised by the
second layer (Shariah supervisory board). The combination of two governance layers is
empirically proven to increase Islamic banks' performance and stability (Mollah et al., 2016;
Mollah and Zaman, 2015).
4.3 Robustness checks
In this paper, we employ a series of robustness checks to see the consistency of our result.
First, it is arguably important to control for the dummy year because the year trend could
influence the boards' remuneration. We therefore introduce year fixed effects in the estimations
and present the result in Table 4. After adding a dummy year, our result is still consistent. All
six remuneration proxies have a positive and significant impact on the z-score.
[Table 4]
Second, following the argument of Cheng et al. (2015), the relationship between
remuneration and risk-taking could refer to principal-agent theory. It is not the payment of the
boards that leads to risk-taking but riskier firms have to pay higher board remuneration,
suggesting a reverse causality problem. To deal with this issue, we lag all of the remuneration
variables. The result shown in Table 5 suggests that the impact of board remuneration is not
altered after lagging one period.
[Table 5]
Third, one may argue that panel data regression is more suitable in our context because
our data contains both cross-section and time-series dimensions. We therefore estimate the
equation (1) using random effects method. The choice of random effects than fixed effects is
because the remuneration variables are rarely changed, and fixed effects would be
inappropriate (Arifin et al., 2020). The result in Table 6 suggests that the significance and sign
of our remuneration variables do not change. The Hausman test in each estimation also shows
that it does not reject the null hypothesis, suggesting the random effects technique is more
preferred than the fixed effects. Similar to what we find previously, although SSB_Rem is not
11
significant when we use the total amount of remuneration, it turns out to be significant when
we use the average value. All in all, using various robustness does not alter our main finding.
[Table 6]
5. Conclusion
This article investigates the nexus between Islamic banks' board remuneration and risk-
taking. Unlike most of the prior empirical papers focusing on executive remuneration, we are
interested in examining the impact of remuneration in all board types in Islamic banks: board
of commissioners, board of directors, and Shariah supervisory board. This research uses the
Indonesian setting and the data ranges between 2011-2018. We find in this paper that higher
board remuneration is associated with lower risk-taking. The result is similar across different
proxies of remuneration and different types of the board. The positive impact of high
remuneration in Indonesian Islamic banking markets could be different from prior studies that
find a detrimental impact of the board's high remuneration. However, this result is not without
reason and several empirical works also support our result. The positive impact could be driven
by a strong regulatory regime in the Indonesian Islamic banking market (Narayan et al., 2019;
Vallascas and Hagendorff, 2013), the role of the Shariah board as a second layer in Islamic
banking governance (Mollah et al., 2016; Mollah and Zaman, 2015), and the indirect role of
size (larger Islamic banks have higher remuneration payment and have better stability) (Cheng
et al., 2015). Moreover, after a series of robustness, our results do not change. For the
Indonesian government, our result suggests that the government could maintain the high
remuneration payment for the boards but at the same time, the stability of the Islamic banking
system should be also well monitored.
References
Abedifar, P., Molyneux, P. and Tarazi, A. (2013), “Risk in Islamic Banking”, Review of
Finance, Vol. 17 No. 6, pp. 20352096.
Anoopa Sharma, D., Bern, C., Varghese, B., Chowdhury, R., Haque, R., Ali, M., Amann, J.,
et al. (2006), “The economic impact of visceral leishmaniasis on households in
Bangladesh”, Tropical Medicine and International Health, available
12
at:https://doi.org/10.1111/j.1365-3156.2006.01604.x.
Arifin, T., Hasan, I. and Kabir, R. (2020), “Transactional and relational approaches to
political connections and the cost of debt”, Journal of Corporate Finance, Elsevier B.V,
p. 101768.
Ashraf, B.N., Zheng, C., Jiang, C. and Qian, N. (2020), “Capital regulation, deposit insurance
and bank risk: International evidence from normal and crisis periods”, Research in
International Business and Finance, Elsevier B.V., Vol. 52, p. 101188.
Bai, G. and Elyasiani, E. (2013), “Bank stability and managerial compensation”, Journal of
Banking and Finance, Elsevier B.V., Vol. 37 No. 3, pp. 799813.
Beck, T., Demirgüç-Kunt, A. and Merrouche, O. (2013), “Islamic vs. conventional banking:
Business model, efficiency and stability”, Journal of Banking & Finance, Vol. 37 No. 2,
pp. 433447.
Bukair, A.A. and Abdul Rahman, A. (2015), “Bank performance and board of directors
attributes by Islamic banks”, International Journal of Islamic and Middle Eastern
Finance and Management, Vol. 8 No. 3, pp. 291309.
Cheng, I.H., Hong, H. and Scheinkman, J.A. (2015), Yesterday’s Heroes: Compensation and
Risk at Financial Firms, Journal of Finance, Vol. 70, available
at:https://doi.org/10.1111/jofi.12225.
Dendawijaya. (2009), “Manajemen Perbankan”, Edisi Revisi Sembilan, available
at:https://doi.org/10.1007/s00262-007-0394-0.
DeYoung, R., Peng, E. and Yan, M. (2010), Executive Compensation and Business Policy
Choices at US Commercial Banks, available at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1544490.
Fahlenbrach, R. and Stulz, R.M. (2011), “Bank CEO incentives and the credit crisis”, Journal
of Financial Economics, Vol. 99 No. 1, pp. 1126.
Fakhrunnas, F. and Ramly, Z. (2017), “Board of directors and risk-taking behavior of Islamic
banks in South East Asia”, Tazkia Islamic Finance and Business Review, available
at:https://doi.org/10.30993/tifbr.v10i2.107.
13
Farook, S., Hassan, M.K. and Clinch, G. (2012), “Profit distribution management by Islamic
banks: An empirical investigation”, The Quarterly Review of Economics and Finance,
Vol. 52 No. 3, pp. 333347.
Hamad, Z., Bahari, Z. and Sari, M.D. (2014), “What’s up with Islamic Banking in
Indonesia ?”, Journal of Islamic Economics Banking and Finance, available
at:https://doi.org/10.12816/0025701.
Hashem, S.Q. and Abdeljawad, I. (2018), “Chapter 2 Islamic Banks’ Resilience to Systemic
Risks: Myth or Reality-Evidence from Bangladesh”, pp. 37–68.
Islamic Financial Service Board. (2018), Islamic Financial Services Industry Stability Report,
available at: https://www.ifsb.org/.
Islamic Financial Service Board. (2019), Islamic Financial Services Industry Stability Report
2019, available at: https://www.theedgemarkets.com/article/malaysias-islamic-banking-
industry-will-achieve-40-market-share-2020-says-aibim.
Jiang, W., Liu, Y., Lobo, G.J. and Xu, Y. (2019), “Deferred cash compensation and risk-
taking: Evidence from the Chinese banking industry”, Pacific Basin Finance Journal,
Elsevier, Vol. 53 No. December 2018, pp. 432448.
Mehran, H. and Rosenberg, J. V. (2011), “The Effect of Employee Stock Options on Bank
Investment Choice, Borrowing, and Capital”, SSRN Electronic Journal, available
at:https://doi.org/10.2139/ssrn.1022972.
Meslier, C., Risfandy, T. and Tarazi, A. (2017), “Dual market competition and deposit rate
setting in Islamic and conventional banks”, Economic Modelling, Elsevier, Vol. 63 No.
July, pp. 318333.
Messier, W.F., Glover, S.M. and Prawitt, D.F. (2014), “Jasa Audit dan Assurance Pedekatan
Sistematis”, Edisi 8, Buku 2.
Mollah, S., Hassan, M.K., Al Farooque, O. and Mobarek, A. (2016), “The governance, risk-
taking, and performance of Islamic banks”, Journal of Financial Services Research,
Journal of Financial Services Research, pp. 125.
Mollah, S. and Zaman, M. (2015), “Shari’ah supervision, corporate governance and
performance: Conventional vs. Islamic banks”, Journal of Banking and Finance,
14
available at:https://doi.org/10.1016/j.jbankfin.2015.04.030.
Narayan, P.K., Rizvi, S.A.R., Sakti, A. and Syarifuddin, F. (2019), “Role of Islamic banks in
Indonesian banking industry: an empirical exploration”, Pacific-Basin Finance Journal,
Elsevier, No. October 2018, pp. 110.
Ntim, C.G., Lindop, S., Thomas, D.A., Abdou, H. and Opong, K.K. (2019), “Executive pay
and performance: the moderating effect of CEO power and governance structure”,
International Journal of Human Resource Management, Routledge, Vol. 30 No. 6, pp.
921963.
Octavio, D.Q. and Soesetio, Y. (2019), “Intellectual capital and bank profitability: Evidence
from conventional and Islamic bank in Indonesia”, Jurnal Keuangan Dan Perbankan,
Vol. 23 No. 2, pp. 191205.
Risfandy, T. (2018), “Equity Financing and Islamic Banks ’ Profitability : Evidence from the
Biggest Muslim Country”, Jurnal Keuangan Dan Perbankan, Vol. 22 No. 3, pp. 496
505.
Risfandy, T., Radika, T. and Wardhana, L.I. (2020), Women in a Dual Board System and
Dividend Policy.
Risfandy, T., Tarazi, A. and Trinugroho, I. (2020), “Competition in dual markets:
Implications for banking system stability”, Global Finance Journal, Elsevier Inc, p.
100579.
Risfandy, T., Trinarningsih, W., Harmadi, H. and Trinugroho, I. (2019), “Islamic Banks’
market power, state-owned banks, and Ramadan: Evidence from Indonesia”, The
Singapore Economic Review, Vol. 64 No. 02, pp. 423440.
Safieddine, A. (2009), “Islamic financial institutions and corporate governance: New insights
for agency theory”, Corporate Governance: An International Review, Vol. 17 No. 2, pp.
142158.
Shah, S.Z.A., Akbar, S., Liu, J., Liu, Z. and Cao, S. (2017), “CEO compensation and banks’
risk-taking during pre and post financial crisis periods”, Research in International
Business and Finance, Vol. 42 No. July, pp. 14891503.
Słomka-Gołębiowska, A. and Urbanek, P. (2016), “Corporate boards, large blockholders and
15
executive compensation in banks: Evidence from Poland”, Emerging Markets Review,
Vol. 28, pp. 203220.
Smaoui, H., Mimouni, K., Miniaoui, H. and Temimi, A. (2020), “Funding liquidity risk and
banks’ risk-taking: Evidence from Islamic and conventional banks”, Pacific Basin
Finance Journal, Elsevier, Vol. 64 No. July, p. 101436.
Sufian, F. (2007), “The efficiency of Islamic banking industry in Malaysia: Foreign vs
domestic banks”, Humanomics, available
at:https://doi.org/10.1108/08288660710779399.
Tarraf, H. and Majeske, K. (2013), “Impact of Risk Taking on Bank Financial Performance
During 2008 Financial Crisis”, Journal of Finance & Accountancy.
The Jakarta Post. (2018), “The highest paying jobs in Indonesia revealed”, 7 January, pp. 1–
9.
Tian, G.Y. and Yang, F. (2014), “CEO incentive compensation in U.S. financial institutions”,
International Review of Financial Analysis, Elsevier Inc., Vol. 34, pp. 6475.
Trinugroho, I., Risfandy, T. and Ariefianto, M.D. (2018), “Competition, diversification, and
bank margins: Evidence from Indonesian Islamic rural banks”, Borsa Istanbul Review,
Elsevier Ltd, Vol. 18 No. 4, pp. 349358.
Trinugroho, I., Risfandy, T., Ariefianto, M.D., Prabowo, M.A., Purnomo, H. and
Purwaningsih, Y. (2017), “Does religiosity matter for Islamic banks’ performance?
Evidence from Indonesia”, International Journal of Economics and Management, Vol.
11 No. 2.
Trinugroho, I., Risfandy, T., Hanafi, M.M. and Sukmana, R. (2020), Busy Commissioners
and Firm Performance: Evidence from Indonesia.
Uhde, A. (2016), “Risk-taking incentives through excess variable compensation: Evidence
from European banks”, The Quarterly Review of Economics and Finance, Board of
Trustees of the University of Illinois, Vol. 60, pp. 1228.
Unda, L.A. and Ranasinghe, D. (2019), “To pay or not pay: Board remuneration and
insolvency risk in credit unions”, Pacific Basin Finance Journal, Elsevier, No. March
2018, p. 101128.
16
Vallascas, F. and Hagendorff, J. (2013), “CEO bonus compensation and bank default risk:
Evidence from the U.S. and Europe”, Financial Markets, Institutions and Instruments,
Vol. 22 No. 2, pp. 4789.
17
Table 1. Descriptive statistics and variables description
Variable
Explanation/measurements
Mean
Std. Dev.
Min
Max
LogZ
Logarithm of the z-score
1.86
0.59
(1.46)
3.89
Dir_Rem
Directors’ total remuneration
9,266.65
7,604.78
3.39
36,380.00
Comm_Rem
Commissioners’ total
remuneration
3,337.69
3,726.21
1.11
22,903.00
SSB_Rem
Shariah Supervisory Board’ total
remunerations
692.88
390.70
148.00
1,920.00
Av. Dir_Rem
Directors’ total remuneration
divided by total directors
2,017.81
1,326.72
0.85
6,063.33
Av.
Comm_Rem
Commissioners’ total
remuneration divided by total
commissioners
815.32
682.82
0.37
3,817.17
Av. SSB_Rem
Shariah Supervisory Board’s
remunerations divided by number
of Shariah board member
292.31
158.64
72.00
742.50
EFF
Efficiency (total operating cost
divided by total operating income)
90.02
15.55
53.77
134.63
NIM
Net interest margin
6.35
2.78
2.22
18.28
CAR
Capital-assets-ratio
22.39
12.90
12.01
63.89
LogTA
Logarithm of the total assets
16.10
1.21
13.40
18.40
Note: Remuneration variables are in million IDR
Table 2. Correlation matrix and variance inflation factors for the remuneration variables
(1)
(2)
(3)
(4)
(5)
(6)
VIF
(1)
Log Dir_Rem
1
13.04
(2)
Log Comm_Rem
0.8321
1
12.27
(3)
Log SSB_Rem
0.4724
0.3901
1
10.21
(4)
Log Av. Dir_Rem
0.8542
0.9534
0.3453
1
13.85
(5)
Log Av. Comm_Rem
0.9105
0.7342
0.418
0.7767
1
8.72
(6)
Log Av. SSB_Rem
0.3045
0.2139
0.9003
0.1952
0.3629
1
8.97
Note: Please see Table 1 for the description of variables.
18
Table 3. Main regressions
(1)
(2)
(3)
(4)
(5)
(6)
Log Dir_Rem
0.0207***
(3.00)
Log Comm_Rem
0.0231**
(2.51)
Log SSB_Rem
0.0958
(1.42)
Log Av. Dir_Rem
0.0196***
(2.95)
Log Av.
Comm_Rem
0.0218***
(2.70)
Log Av.
SSB_Rem
0.0986*
(1.71)
EFF
-0.0129***
-0.0129***
-0.0129***
-0.0129***
-0.0129***
-0.0130***
(-3.31)
(-3.34)
(-3.22)
(-3.29)
(-3.32)
(-3.24)
NIM
-0.00401
-0.00444
-0.000647
-0.00412
-0.00495
0.000568
(-0.50)
(-0.54)
(-0.06)
(-0.52)
(-0.62)
(0.05)
CAR
0.0246***
0.0248***
0.0240***
0.0247***
0.0249***
0.0239***
(9.26)
(9.84)
(9.47)
(9.12)
(9.73)
(9.41)
LogTA
-0.0694***
-0.0725***
-0.0885***
-0.0655***
-0.0682***
-0.0807***
(-3.38)
(-3.60)
(-3.77)
(-3.29)
(-3.46)
(-3.86)
Constant
3.445***
3.495***
3.320***
3.419***
3.463***
3.256***
(10.08)
(9.80)
(10.56)
(10.08)
(9.90)
(10.20)
Observation
92
92
78
92
92
78
R-Squared
0.8446
0.8457
0.8516
0.8444
0.8453
0.8524
Notes: The dependent variable is LogZ. Robust t-statistics are in parentheses. Please see Table 1 for the
descriptions of variables. ***, **, and * denotes significance in 1%, 5%, and 10% levels respectively
19
Tabel 4. Robustness: Adding dummy Year
(1)
(2)
(3)
(4)
(5)
(6)
Log Dir_Rem
0.0152*
(0.00784)
Log Comm_Rem
0.0151*
(0.00802)
Log SSB_Rem
0.118*
(0.0646)
Log Av. Dir_Rem
0.0148*
(0.00795)
Log Av.
Comm_Rem
0.0127*
(0.00715)
Log Av. SSB_Rem
0.124**
(0.0585)
EFF
-0.0141***
-0.0140***
-0.0145***
-0.0141***
-0.0140***
-0.0145***
(0.00375)
(0.00370)
(0.00389)
(0.00376)
(0.00372)
(0.00388)
NIM
0.00267
0.00200
0.00945
0.00267
0.00150
0.0110
(0.00761)
(0.00785)
(0.0110)
(0.00758)
(0.00776)
(0.0110)
CAR
0.0234***
0.0236***
0.0227***
0.0234***
0.0236***
0.0226***
(0.00240)
(0.00231)
(0.00224)
(0.00245)
(0.00235)
(0.00224)
LogTA
-0.0948***
-0.0957***
-0.123***
-0.0921***
-0.0920***
-0.114***
(0.0205)
(0.0200)
(0.0231)
(0.0196)
(0.0194)
(0.0200)
Constant
3.908***
3.936***
3.723***
3.889***
3.908***
3.629***
(0.337)
(0.353)
(0.299)
(0.332)
(0.344)
(0.304)
DummyYear
Yes
Yes
Yes
Yes
Yes
Yes
Observations
92
92
78
92
92
78
R-squared
0.871
0.871
0.883
0.871
0.871
0.884
Notes: The dependent variable is LogZ. Robust t-statistics are in parentheses. Please see Table 1 for the
descriptions of variables. ***, **, and * denotes significance in 1%, 5%, and 10% levels respectively
20
Table 5. Robustness: Lag value of independent variables
(1)
(2)
(3)
(4)
(5)
(6)
Lag Log Dir_Rem
0.0147
(1.64)
Lag Log Comm_Rem
0.0214**
(2.52)
Lag Log SSB_Rem
0.135*
(1.85)
Lag Log Av.
Dir_Rem
0.0175**
(2.01)
Lag Log Av.
Comm_Rem
0.0180**
(2.27)
Lag Log Av.
SSB_Rem
0.112*
(1.73)
EFF
-0.0138***
-0.0137***
-0.0138***
-0.0138***
-0.0137***
-0.0138***
(-3.35)
(-3.36)
(-3.19)
(-3.35)
(-3.33)
(-3.15)
NIM
-0.00751
-0.00557
-0.00651
-0.00670
-0.00686
-0.00666
(-0.72)
(-0.52)
(-0.49)
(-0.64)
(-0.65)
(-0.50)
CAR
0.0257***
0.0256***
0.0249***
0.0256***
0.0258***
0.0251***
(7.83)
(8.21)
(8.02)
(7.86)
(8.04)
(7.82)
LogTA
-0.0690***
-0.0751***
-0.108***
-0.0679***
-0.0693***
-0.0893***
(-2.79)
(-3.16)
(-4.09)
(-2.82)
(-2.96)
(-3.63)
Constant
3.583***
3.632***
3.497***
3.563***
3.590***
3.440***
(8.89)
(8.87)
(9.42)
(8.86)
(8.92)
(8.79)
Observation
79
79
65
79
79
65
R-Square
0.8423
0.8440
0.8482
0.8432
0.8430
0.8462
Notes: The dependent variable is LogZ. Robust t-statistics are in parentheses. Please see Table 1 for the
descriptions of variables. ***, **, and * denotes significance in 1%, 5%, and 10% levels respectively
21
Table 6. Robustness: random effects regressions
(1)
(2)
(3)
(4)
(5)
(6)
Log Dir_Rem
0.0207***
(3.00)
Log Comm_Rem
0.0231**
(2.51)
Log SSB_Rem
0.0958
(1.42)
Log Av. Dir_Rem
0.0196***
(2.95)
Log Av.
Comm_Rem
0.0218***
(2.70)
Log Av.
SSB_Rem
0.0986*
(1.71)
EFF
-0.0129***
-0.0129***
-0.0129***
-0.0129***
-0.0129***
-0.0130***
(-3.31)
(-3.34)
(-3.22)
(-3.29)
(-3.32)
(-3.24)
NIM
-0.00401
-0.00444
-0.000647
-0.00412
-0.00495
0.000568
(-0.50)
(-0.54)
(-0.06)
(-0.52)
(-0.62)
(0.05)
CAR
0.0246***
0.0248***
0.0240***
0.0247***
0.0249***
0.0239***
(9.26)
(9.84)
(9.47)
(9.12)
(9.73)
(9.41)
LogTA
-0.0694***
-0.0725***
-0.0885***
-0.0655***
-0.0682***
-0.0807***
(-3.38)
(-3.60)
(-3.77)
(-3.29)
(-3.46)
(-3.86)
Constant
3.445***
3.495***
3.320***
3.419***
3.463***
3.256***
(10.08)
(9.80)
(10.56)
(10.08)
(9.90)
(10.20)
Observation
92
92
78
92
92
78
Hausman Test (p-
value)
0.3843
0.4282
0.4213
0.3822
0.4338
0.4433
Number of Bank
ID
13
13
13
13
13
13
R-Squared
Overall
0.709
0.712
0.754
0.708
0.711
0.754
Notes: The dependent variable is LogZ. Robust t-statistics are in parentheses. Please see Table 1 for the
descriptions of variables. ***, **, and * denotes significance in 1%, 5%, and 10% levels respectively
ResearchGate has not been able to resolve any citations for this publication.
Article
Full-text available
This study investigates the effect of intellectual capital on bank profitability. In addition, we also analyze the effect of intellectual capital on bank profitability based on bank types, conventional and Islamic bank. Our data consist of conventional and Islamic banks operated in Indonesia from 2010 to 2016 annually. Since our data are a panel, we employ panel regression. Intellectual capital is measured by using Value Added Intellectual Capital (VAIC). Our result shows that intellectual capital has a positive significant impact on bank profitability. After data classified based on bank types, intellectual capital only has a positive significant effect on conventional bank profitability. We also attempt to estimate the impact of VAIC components, such as Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE) and Capital Employed Efficiency (CEE), on bank profitability. The results show that the impact of HCE is strongly significant in both banks. However, CEE and SCE do not have a significant effect on both types of bank profitability. Our results indicate that conventional banks synergize their intellectual and physical capital in creating profit better than Islamic banks. Thus, this research could be a critique of the Indonesian Islamic banking industry in determining and overcome their weaknesses.
Chapter
Full-text available
This chapter investigates the presence of a difference in the systemic risk level between Islamic and conventional banks in Bangladesh. The authors compare systemic resilience of three types of banks: fully fledged Islamic banks, purely conventional banks (CB), and CB with Islamic windows. The authors use the market-based systemic risk measures of marginal expected shortfall and systemic risk to identify which type is more vulnerable to a systemic event. The authors also use ΔCoVaR to identify which type contributes more to a systemic event. Using a sample of observations on 27 publicly traded banks operating over the 2005–2014 period, the authors find that CB is the least resilient sector to a systemic event, and is the one that has the highest contribution to systemic risk during crisis times. Keywords: Systemic Risk Measures; Marginal Expected Shortfall; Systemic Risk; Delta Conditional Value at Risk; Risk Vulnerability; Islamic Banks; Bangladesh; Conventional Banks
Article
Full-text available
It was highlighted in the literature that Islamic banks’ equity financing was very risky in practice. Theoretically, equity financing could boost Islamic banks’profitability because the riskier financial instrument was always associated with the greater return that could be created. Using a sample of nine Islamic banks in Indonesia from 2009m1 to 2014m12, interestingly we found that higher proportion of equity financing was significantly associated with lower Islamic banks’ profitability. However, this negative relationship diminished in the case of large Islamic banks, implying that the negative effect of equity financing on Islamic banks’ profitability was more prominent for small banks rather than for large banks. Our results were robust using various estimations. Although equity financing was a core of Islamic banks and could differ Islamic from conventional banks’ activities but Islamic banks altogether with policymakers should evaluate this instrument for the sake of Islamic banks’ profitability and its prospects in the future.
Article
Full-text available
Board of Directors (BODs) and Shariah Supervisory Board (SSB) have a pivotal role to manage Islamic banks in Southeast Asia. The decision made by the BODs and SSB will directly affect to the risk-taking behavior performed by Islamic bank. This study aims to investigate the relationship among BODs, SSB and risk-taking behavior of Islamic banks in Southeast Asia. Adopting random effect model, this research utilizes 24 Islamic banks in Southeast Asia which observe over six periods from 2009 to 2014. By using unbalanced panel data, the result of the study reveals that independent director influences the risk-taking behavior positively while Shariah Supervisory Board (SSB) affects it negatively. In addition, Board size has positive effect to the credit risk but negative to z-score.
Article
This paper examines the economic effects of a firm's approach to developing and maintaining political connections. Specifically, we investigate whether lenders favor transactional connection as opposed to relational connection. By tracing firms in a politically volatile emerging democracy in Indonesia, we find that firms following a transactional political connection strategy experience a relatively lower cost of debt than those with a relational strategy. The effect is more pronounced for firms facing high financial distress. The finding is robust to cost of bank loans and a variety of regression methods. Overall, the evidence suggests that in times of frequently changing political regimes, firms benefit from a transactional relationship with politicians as it enables to update connection with the government in power. Relational connection is valuable for a firm only when the political regime connected with it gains power.
Article
Islamic banks have been gaining traction in Indonesia, which is the world's largest Muslim population. Although the share of Islamic banking is small, the growth potential poses challenges and questions that need an inquiry. Our paper is a response to this. We investigate whether competition from Islamic banks adds to the financial stability and profitability. We then test the source of any such stability/instability. We find, consistent with the competition-stability theory, that the presence of Islamic banks has not impacted profitability but has made the banking industry more stable. We show that Islamic banks have improved both lending and deposit growth of the banking system, suggesting that Islamic banks have contributed to stability through both asset and liability channels.
Article
Starting in 2010, the China Banking Regulatory Commission (CBRC) mandated that between 40% and 50% of the annual variable compensation of senior commercial bank managers be paid over the subsequent 3 years or longer. We examine the implications of the CBRC deferred compensation regulation for bank risk-taking using a sample of 156 bank executives from 14 listed Chinese commercial banks. We find that before the 2010 regulation, high-risk banks deferred executive compensation less than low-risk banks. We also find that banks reduced their risk-taking after the 2010 regulation, and the reduction was greater for banks with higher pre-regulation risk. Unlike prior research which examines equity compensation, we provide evidence on the use of deferred executive cash compensation and its implications for bank risk-taking in an emerging market.
Article
We use a monthly dataset to analyze whether Islamic banks have greater market power compared with their conventional counterparts. Using a sample of Indonesian banks, we find that Islamic banks possess greater market power than conventional banks. This condition does not hold, however, when we compare state-owned Islamic and conventional banks. We also find some specific determinants of Islamic banks’ market power: the Ramadan holy month (positive impact), the proportion of profit-and-loss sharing in their financing (negative impact), and the presence of a Sharia board (positive impact). Interestingly, Ramadan benefits not only Islamic banks but also conventional banks. Our findings support prior literature emphasizing the role of religiosity in Islamic banks’ behavior.