Corporate governance and risk-taking of Islamic banks: evidence from OIC countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ejaz Aslam ◽  
Razali Haron
Keyword(s):  
Corporate Governance ◽  
Risk Taking ◽  
Audit Committee ◽  
Liquidity Risk ◽  
Bank Risk ◽  
Board Independence ◽  
Islamic Banks ◽  
Ceo Power ◽  
Content Type ◽  
Level Of Risk

Purpose This paper aims to investigate the impact of corporate governance and other related factors on the risk-taking of Islamic banks. Risk-taking is defined according to credit risk, liquidity risk and operational risk. Design/methodology/approach The study uses the two step system generalized method of moment (2SYS-GMM) estimation technique by using a panel data set of 129 Islamic banks (IBs) from 29 countries in the Middle East, South Asia and the Southeast Asia regions covering from 2008 to 2017. Governance variables incorporated include board size, board independence, chief executive officer (CEO) power, Shariah board and audit committee, as well as other control variables. Findings This study provides evidence that board size and Shariah board are positively and significantly related to credit and liquidity risk. Board independence and CEO power are negative and significantly associated with credit and liquidity risk, but the audit committee has a mixed relationship with bank risk. Male CEOs take more risk compared to the female and more board meeting has an inverse relationship with Islamic banks risk. Bank size, however, does not influence the level of risk in Islamic banks, but leverage has an inverse relationship with bank risk. Research limitations/implications The present study sheds light on the risk-taking behaviour of the board of IBs, particularly the board independence and CEO power reducing the level of risk in IBs thereby contributing to the agency theory. Therefore, regulators and policymakers can use the findings of this study to strengthen the internal corporate governance mechanism to protect IBs at a time of financial distress. Moreover, it increases the trust of the shareholders and stakeholders in the effectiveness of governance reforms that have been pursued to reap long-term benefits. Originality/value To the best of the knowledge, this research is preliminary in examining the board behaviour on risk-taking of IBs from four different regions. The results are robust and suggest that the board of directors mitigate the level of risk in IBs.

scholarly journals CEO power and bank risk in the UAE

2020 ◽  
Vol 15 (3) ◽  
pp. 117-128
Author(s):  
Haileslasie Tadele ◽  
Baliira Kalyebara
Keyword(s):  
Corporate Governance ◽  
Risk Taking ◽  
Global Financial Crisis ◽  
Bank Risk ◽  
Islamic Banks ◽  
Ceo Power ◽  
Governance Mechanisms ◽  
Corporate Governance Mechanisms ◽  
Conventional Banks ◽  
The Relationship

The lessons from the 2008 global financial crisis show that excessive risk taking and governance failures contribute to the failure of several banks. As a result, the relationship between corporate governance mechanisms and risk taking has been the subject of many studies. However, extant studies report inconclusive results. Therefore, this study aims to investigate the relationship between CEO power and bank risk in the UAE using data over the period of 2015–2018 and a sample of 19 UAE banks. The study uses a Pearson pairwise correlation to analyze the relationship between CEO power and bank risk. In addition, a two-tailed t-test is used to examine the differences between conventional and Islamic banks in terms of CEO power and risk-taking. The results of the study show that CEO power measured using CEO duality and CEO tenure reduces risk. Furthermore, the paper indicates that larger boards and higher CEO ownership tend to increase risk. The study also reports that conventional banks have higher return variability, larger boards and powerful CEOs than Islamic banks. However, Islamic banks tend to have higher non-performing finances than conventional banks. The study provides important insights on the relationship between CEO power and bank risk and concurs with earlier studies. The findings can be of interest to policy makers and can be used as input data for the development of corporate governance mechanisms. Shareholders can also use the survey results as input when appointing a CEO for their banks.

Does corporate governance affect the performance of Islamic banks? New insight into Islamic countries

2020 ◽  
Vol 20 (6) ◽  
pp. 1073-1090 ◽  
Author(s):  
Ejaz Aslam ◽  
Razali Haron
Keyword(s):  
Corporate Governance ◽  
Audit Committee ◽  
Positive Impact ◽  
Islamic Banks ◽  
Governance Mechanism ◽  
Method Of Moment ◽  
Content Type ◽  
Return On Equity ◽  
Islamic Countries ◽  
And Performance

Purpose Corporate governance plays a significant role to overcome agency issues and develop the culture of transparency and openness. In this context, this paper aims to examine how corporate governance mechanisms affect the performance of Islamic banks (IBs). Design/methodology/approach Stepwise, two-step system generalize method of moment estimation technique is used in the analysis in which control variables are added into the model sequentially. This study used data on 129 IBs from 29 Islamic countries (Middle East, South Asia and Southeast Asia) during the period of 2008 to 2017. Findings The findings suggest that the audit committee (AUDC) and Shariah board (SB) have positive impact on the performance of IBs (return on assets and return on equity). However, board size and risk management committee have negative and significant effect on the performance of IBs. CEO duality and non-executive directors have mixed relationship with the performance of IBs. These results support the argument that IBs need to improve their financial performance through appropriate governance mechanism. Research limitations/implications The findings of the study added a new dimension to the governance research that could be a valuable source of knowledge for policymakers and regulators to improve the existing governance mechanism for better performance of IBs. Originality/value The study fills the gap in the literature by addressing the issue of corporate governance on performance of IBs across countries. Agency theory is discussed to explain the relationship between corporate governance mechanism and performance.

Does bank governance affect risk and efficiency? Evidence from Islamic banks in GCC countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Samir Srairi ◽  
Khawla Bourkhis ◽  
Asma Houcine
Keyword(s):  
Risk Management ◽  
Financial Crisis ◽  
Risk Taking ◽  
Audit Committee ◽  
Governance Structure ◽  
Board Structure ◽  
Islamic Banks ◽  
Bank Efficiency ◽  
Content Type ◽  
Gcc Countries

Purpose The motivation of the study is to shed further light on the question of whether the governance structure of Islamic banks (IBs) has an impact on the efficiency and risk of Islamic banks operating in the Gulf Cooperation Council (GCC) after the global financial crisis and during the period 2010–2018. This study aims to examine the extent of governance structure on the efficiency and risk of IBs as the effect of the financial crisis has been less on IBs. In addition, the authors are interested in the GCC region as it represents the hub of Islamic finance. Design/methodology/approach In this study, the authors examine how the banking governance structure affects the risk-taking and performance of IBs in the GCC countries between 2010 and 2018. The authors construct a banking governance index (CGI) composed of sub-indices for the board structure, risk management, transparency and disclosure, audit committee, Sharia supervisory board and investment account holders. Unlike the majority of previous studies, bank performance is measured with technical efficiency scores using a data envelopment analysis and the authors use a comprehensive CGI. Findings The results show that IBs in GCC countries adhere to 54% of the attributes covered in the CGI. The authors also note a lack of disclosure regarding the investment account holders and the audit committee. As well, the results indicate that bank governance is positively associated with risk-taking and bank efficiency. Banking risk is influenced by the Sharia board and risk management while bank efficiency is affected by the characteristics of the board structure and investment account holders. Originality/value To the best of the authors’ knowledge, this is the first study that has developed a comprehensive governance index for IBs in GCC countries that includes a wide range of governance dimensions. The study contributes to the literature on governance in the banking sector by simultaneously examining its impact on the risk-taking and efficiency of IBs and recognizes the dynamic relation between these three variables for IB.

Corporate governance and compliance with AAOIFI governance standards by Islamic banks

2020 ◽  
Vol 13 (5) ◽  
pp. 891-918
Author(s):  
Yosra Mnif ◽  
Marwa Tahari
Keyword(s):  
Corporate Governance ◽  
Financial Institutions ◽  
Audit Committee ◽  
Annual Reports ◽  
Islamic Banks ◽  
Content Type ◽  
Disclosure Requirements ◽  
Financial Expertise ◽  
Islamic Financial Institutions ◽  
Research Stage

Purpose This study aims to examine the effect of the main corporate governance characteristics on compliance with accounting and auditing organisation for Islamic financial institutions’ (AAOIFI) governance standards’ (GSs) disclosure requirements by Islamic banks (IB) that adopt AAOIFIs’ standards in Bahrain, Qatar, Jordan, Oman, Syria, Sudan, Palestine and Yemen. Design/methodology/approach The sample consists of 486 bank-year observations from 2009 to 2017. Findings The findings reveal that compliance with AAOIFIs’ GSs’ disclosure requirements is positively influenced by the audit committee (AC) independence, AC’s accounting and financial expertise and industry expertise, auditor industry specialisation, IB’s size and IB’s listing status. On the other hand, it is negatively influenced by the ownership concentration. Research limitations/implications This study has only examined compliance with AAOIFI’s GSs’ disclosure requirements and has focussed on one major sector of the Islamic financial institutions (which is IB). Practical implications The findings are useful for various groups of preparers and users of IBs’ annual reports such as academics and researchers, accountants, management of IBs and some organisations. Originality/value While the study of the AAOIFIs’ standards has grown contemporary with considerable contributions from scholars, however, the majority of these studies are descriptive in nature. Indeed, the existing literature that has explored the determinants of compliance with AAOIFI’s standards is in the early research stage. To the best of the knowledge, there is a paucity of empirical research testing this issue.

The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region

2016 ◽  
Vol 7 (4) ◽  
pp. 318-348 ◽  
Author(s):  
Hounaida Mersni ◽  
Hakim Ben Othman
Keyword(s):  
Corporate Governance ◽  
Middle East ◽  
Earnings Management ◽  
Audit Committee ◽  
Islamic Banks ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The purpose of this paper is to examine whether corporate governance mechanisms affect the reporting of loan loss provisions by managers in Islamic banks in the Middle East region. Design/methodology/approach This empirical study uses balanced panel data from 20 Islamic banks, from seven Middle East countries for the period 2007 to 2011. The regression model is estimated using random effects specifications. Findings The empirical results show that discretionary loan loss provisions (DLLP) are negatively related to board size and the existence of an audit committee. Results also report a positive relationship between sharia board size and DLLP. This indicates that small sharia supervisory boards are more effective than larger ones, which could be due to the higher costs and negative effects of large groups on decision-making. Results also highlight that the existence of scholars with accounting knowledge sitting on the sharia board reduces discretionary behavior. Additional results provide evidence that an external sharia audit committee is also found to reduce discretion in Islamic banks. The conclusions are found to be robust to endogeneity issues and potentially omitted variables. Practical implications The findings are potentially useful for regulators and shareholders. Regulators could use the findings to focus on corporate governance mechanisms that restrain earnings management practices in Islamic banks and implement regulations to strengthen them. Additionally, this study gives shareholders further insight which enables them to better monitor the actions of managers and thus increase their control over their investments. Originality/value This study provides two contributions to the literature on Islamic banking. First, to the authors’ knowledge, this study is only the second piece of research focused on the impact of corporate governance on earnings management in Islamic banks. Second, the authors have examined the effect of some new corporate governance mechanisms that have not been studied previously in the research literature.

Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter!

2017 ◽  
Vol 10 (1) ◽  
pp. 42-59 ◽  
Author(s):  
Mehdi Mili ◽  
Sami Abid
Keyword(s):  
Moral Hazard ◽  
Risk Taking ◽  
Bank Risk ◽  
Islamic Banks ◽  
Total Risk ◽  
Empirical Examination ◽  
Content Type ◽  
Islamic Bank ◽  
Franchise Value ◽  
The Impact

Purpose This paper aims to examine risk-taking in Islamic banks by exploring moral hazard and owner/manager agency problems simultaneously. Design/methodology/approach The authors propose to estimate a model of bank risk-taking that includes both franchise value and ownership structure as explanatory factors of bank risk. Findings The results show that franchise value is an important determinant of Islamic bank risk-taking. Banks with high franchise values are less likely to take risks than banks with low franchise value. In contrast, outside block holders have, at best, limited influences on bank risk-taking. Originality/value This paper conducts the first empirical examination of the relationship between managerial risk preferences and Islamic banks ownership. The authors examine simultaneously the effect of franchise value and owner/manager problem on Islamic bank risk taking behavior. They consider separately the impact on total risk, systematic risk and bank specific risk.

Corporate governance and risk taking: the role of board gender diversity

2019 ◽  
Vol 31 (1) ◽  
pp. 19-42 ◽  
Author(s):  
Heba Abou-El-Sood
Keyword(s):  
Corporate Governance ◽  
Risk Taking ◽  
Emerging Market ◽  
Gender Diversity ◽  
Capital Adequacy ◽  
Bank Risk ◽  
Regulatory Capital ◽  
Government Ownership ◽  
Content Type ◽  
Board Gender Diversity

Purpose This paper aims to investigate the association between board gender diversity and bank risk taking in an emerging market context. Design/methodology/approach The association between female board directorship and bank risk taking is examined, while controlling for board characteristics, managerial, concentrated, family and government ownership. Two-stage regression with instrumental variables is used for a sample of banks listed in Gulf Cooperation Council (GCC) countries during 2002-2014. Findings Results show that banks with more female board directors invest in less risky positions; the association is attenuated when the regulatory capital is larger, providing protection against risky investments, and female directors tend to invest less in risky asset positions in Islamic banks relative to conventional banks. Practical implications The relevance of the findings stems from the recent initiatives undertaken by the Basel Committee to address deficient corporate governance structures that lead to bank breakdowns and the diversified economy of the fast-growing GCC market, relying on banking services in the aftermath of the oil price drop. Originality/value This paper provides novel evidence on the influence of board gender diversity on bank risk taking in an emerging market context. This paper fills a gap in prior research by examining bank-specific regulatory capital adequacy and Islamic banking aspects.

Preliminary evidence on the relationship between corporate governance attributes and audit committee functionality in Egypt: beyond checking the box

2014 ◽  
Vol 14 (2) ◽  
pp. 197-210 ◽  
Author(s):  
Ahmed Abdel-Meguid ◽  
Khaled Samaha ◽  
Khaled Dahawy
Keyword(s):  
Corporate Governance ◽  
Audit Committee ◽  
Stock Exchange ◽  
Preliminary Evidence ◽  
Audit Committees ◽  
Board Independence ◽  
Regulatory Requirements ◽  
Content Type ◽  
The Relationship ◽  
Egyptian Stock Exchange

Purpose – This exploratory study aims to provide preliminary evidence regarding the non-audit committee corporate governance determinants of audit committee functionality. Design/methodology/approach – The study is based on archival accounting, corporate governance data, and interviews of subjects of the top 100 companies listed on the Egyptian Stock Exchange (EGX100). A logistic regression is used to identify the non-audit committee governance attributes that affect the likelihood of of having a functional audit committee. Findings – Board size and board independence, (CEO-chairman duality) are positively (negatively) related to audit committee functionality, suggesting complementary governance relations. On the other hand, the authors document a negative relation between auditor type (Big4) and audit committee functionality indicating a substitutive governance effect. Originality/value – To the best of the authors' knowledge, this is the first study that explores the actual functioning of audit committees in Egypt beyond mere regulatory requirements. The study highlights the importance of assuring that the “spirit” of corporate governance laws and regulations is adhered to rather than the mere compliance with their “letter”.

The effect of characteristics of audit committee and board on corporate profitability in Iran

2018 ◽  
Vol 34 (1) ◽  
pp. 71-88 ◽  
Author(s):  
Mahdi Salehi ◽  
Mohammad Tahervafaei ◽  
Hossein Tarighi
Keyword(s):  
Corporate Governance ◽  
Audit Committee ◽  
Stock Exchange ◽  
Emerging Market ◽  
Board Independence ◽  
Outside Directors ◽  
Governance Mechanisms ◽  
Content Type ◽  
Corporate Governance Mechanisms

Purpose The purpose of this paper is to evaluate the relationship between the characteristics of the audit committee and the board and profitability among the companies listed on the Tehran Stock Exchange (TSE) in Iran. Design/methodology/approach In this study, the companies listed on the TSE during the period from 2010 to 2015 are investigated. The Linear panel regression method is employed for this purpose. The independent variables of the study are composed of some corporate governance mechanisms including audit committee size, audit committee expertise, board size, board independence, chief executive officer (CEO) duality, and institutional ownership. Findings In spite of the fact that there does not exist any significant association between audit committee size and corporate financial performance, the results indicate that there is a positive and significant relationship between audit committee financial expertise and profitability. The authors found that the number of board members cannot affect corporate performance; moreover, duality of CEO role in Iranian companies does not affect company performance. However, the outcomes showed a positive and significant association between the proportion of outside directors on the board (board independence) and profitability at 99 percent confidence level. This implies that the role of non-executive directors in Iran is inconsistent with the stewardship theory. This is due to the fact that independent directors understand the status of business and market better than the board’s executive members. Finally, the results indicated that there is no significant association between institutional owners and Iranian companies’ performance. Practical implications The findings of this study will reveal more than ever the role of corporate governance mechanisms for society and users of financial statements because as tools on the CEO actions, they always have to pay attention to the implementation of corporate principles in the economic entity’ operation. Originality/value This is one of the most important studies that simultaneously examine the impacts of characteristics of the audit committee and the board on profitability in an emerging market, and the results of the study may give strength to Iranian as well other developing countries.

Funding liquidity risk and bank risk-taking in BRICS countries

2018 ◽  
Vol 13 (1) ◽  
pp. 231-248 ◽  
Author(s):  
Ahmed Mohamed Dahir ◽  
Fauziah Binti Mahat ◽  
Noor Azman Bin Ali
Keyword(s):  
Risk Factor ◽  
Risk Taking ◽  
Generalized Method Of Moments ◽  
Liquidity Risk ◽  
Bank Risk ◽  
Policy Makers ◽  
Substantial Impact ◽  
Content Type ◽  
Funding Liquidity ◽  
Brics Countries

Purpose The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking. Design/methodology/approach This study employs a system generalized method of moments (GMM) estimation technique and a sample of 57 banks operating in BRICS countries over the period from 2006 to 2015. Findings The results reveal that liquidity risk has a significant and negative effect on the bank risk-taking, indicating that a decrease in liquidity risk contributes to higher bank risk-taking. The study also reveals that funding liquidity risk has the substantial impact on bank risk-taking, suggesting lower funding liquidity risk results in higher bank risk-taking. These results are consistent with prior assumptions. Research limitations/implications The implications of this study highlight the fact that liquidity risk is a risk factor which drives the potential bank default, of which banks tend to take more risks when higher funding liquidity exists. Practical implications This study offers a number of valuable implications for the policy makers as well as practitioners. The policy makers should take into account better liquidity risk management framework aimed at preventing banks from taking excessive risks. Bank executives must pay more attention on how banks could hold more liquid securities and cash. Less risk-taking reduces higher borrowing costs undermining earnings through imposing taxes on corporate. Originality/value This work uncovered that liquidity risk per se is an important and previously unidentified risk factor, specifically its effects on bank risk-taking and contributes to the view in support of holding more liquid securities than the past.

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