Corporate governance in Islamic banks: new insights for dual board structure and agency relationships

Hisham Farag, Christine Mallin, Kean Ow-Yong

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    35 Citations (Scopus)
    302 Downloads (Pure)

    Abstract

    We investigate the influence of the dual board structure on the financial performance of Islamic banks. The paper also investigates the unique agency relationships using a sample of 90 Islamic banks across 13 countries over the period 2006–2014. We find that the larger the Shari’ah Supervisory Board (SSB) the better the financial performance and this result reinforces the fundamental role of the SSB to certify permissible financial instruments and products. We also find evidence of the scope of operation hypothesis with respect to both the board of directors and the SSB as Islamic banks are characterised by a higher degree of complex operations. Interestingly, we find that a larger SSB size may result in lower agency costs and that the greater the size of the unrestricted contracts, the higher the agency costs. This implies that unrestricted profit-sharing contracts are one of the main sources of the unique agency relationships in Islamic banks. The paper has a number of policy implications for regulators including the design of governance mechanisms in Islamic banks and the dynamics of unrestricted contracts.
    Original languageEnglish
    JournalJournal of International Financial Markets, Institutions and Money
    Early online date12 Aug 2017
    DOIs
    Publication statusE-pub ahead of print - 12 Aug 2017

    Keywords

    • islamic banks
    • shari'ah supervisory board
    • financial performance
    • corporate governance

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