IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v47y2018icp129-149.html
   My bibliography  Save this article

Risk in Islamic banking and corporate governance

Author

Listed:
  • Safiullah, Md
  • Shamsuddin, Abul

Abstract

We examine the differences in risk between Islamic and conventional banks with specific attention to the role of Shariah supervisory board (SSB) composition on risk in Islamic banks. Using a sample of banks from 28 countries, we find that Islamic banks have a higher liquidity risk, lower credit risk, lower insolvency risk, but encounter similar operational risk in comparison with conventional banks. Operational and insolvency risks in Islamic banks decline with an increase in SSB size and SSB members' academic qualifications, but increase with an increase in the number of reputed Shariah scholars on the SSB. The SSB attributes do not have significant influence on liquidity and credit risks. The findings are robust to alternative risk measures, and the use of a system GMM estimator.

Suggested Citation

  • Safiullah, Md & Shamsuddin, Abul, 2018. "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 129-149.
    • Handle: RePEc:eee:pacfin:v:47:y:2018:i:c:p:129-149
    DOI: 10.1016/j.pacfin.2017.12.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X17304079
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2017.12.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2014. "Of religion and redemption: Evidence from default on Islamic loans," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 141-159.
    2. Mr. Luca Errico & Ms. Mitra Farahbaksh, 1998. "Islamic Banking: Issues in Prudential Regulations and Supervision," IMF Working Papers 1998/030, International Monetary Fund.
    3. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
    4. Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2010. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 3131-3169, March.
    5. Anginer, D. & Demirguc-Kunt, Asli & Huizinga, H.P. & Ma, K., 2014. "Corporate Governance and Bank Insolvency Risk : International Evidence," Other publications TiSEM 3da1df9f-1cbe-4a14-91be-f, Tilburg University, School of Economics and Management.
    6. Brian K. Boyd & Katalin Takacs Haynes & Fabio Zona, 2011. "Dimensions of CEO–Board Relations," Journal of Management Studies, Wiley Blackwell, vol. 48(8), pages 1892-1923, December.
    7. Ahmet Sensoy, 2016. "Systematic Risk in Conventional and Islamic Equity Markets," International Review of Finance, International Review of Finance Ltd., vol. 16(3), pages 457-466, September.
    8. Berger, Allen N. & Kick, Thomas & Schaeck, Klaus, 2014. "Executive board composition and bank risk taking," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 48-65.
    9. Kose John & Lubomir Litov & Bernard Yeung, 2008. "Corporate Governance and Risk‐Taking," Journal of Finance, American Finance Association, vol. 63(4), pages 1679-1728, August.
    10. Asli Demirguk-Kunt & Thorsten Beck & Ouarda Merrouche, 2013. "Islamic Banking versus Conventional Banking: Business model, Efficiency, and Stability," Post-Print hal-01638080, HAL.
    11. Adhikari, Binay Kumar & Agrawal, Anup, 2016. "Does local religiosity matter for bank risk-taking?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 272-293.
    12. International Monetary Fund, 2002. "Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead," IMF Working Papers 2002/192, International Monetary Fund.
    13. Pathan, Shams & Faff, Robert, 2013. "Does board structure in banks really affect their performance?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1573-1589.
    14. Kabir, Md. Nurul & Worthington, Andrew & Gupta, Rakesh, 2015. "Comparative credit risk in Islamic and conventional bank," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 327-353.
    15. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, vol. 99(2), pages 606-610, May.
    16. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    17. Aebi, Vincent & Sabato, Gabriele & Schmid, Markus, 2012. "Risk management, corporate governance, and bank performance in the financial crisis," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3213-3226.
    18. Dimitriou, Dimitrios & Kenourgios, Dimitris & Simos, Theodore, 2013. "Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH–DCC approach," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 46-56.
    19. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    20. René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 8-15, January.
    21. Beltratti, Andrea & Stulz, René M., 2012. "The credit crisis around the globe: Why did some banks perform better?," Journal of Financial Economics, Elsevier, vol. 105(1), pages 1-17.
    22. Mollah, Sabur & Zaman, Mahbub, 2015. "Shari’ah supervision, corporate governance and performance: Conventional vs. Islamic banks," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 418-435.
    23. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 693-728.
    24. Shehzad, Choudhry Tanveer & de Haan, Jakob & Scholtens, Bert, 2010. "The impact of bank ownership concentration on impaired loans and capital adequacy," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 399-408, February.
    25. John M. Griffin & Patrick J. Kelly & Federico Nardari, 2010. "Do Market Efficiency Measures Yield Correct Inferences? A Comparison of Developed and Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3225-3277, August.
    26. Balachandran, Balasingham & Faff, Robert, 2015. "Corporate governance, firm value and risk: Past, present, and future," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 1-12.
    27. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    28. Ho, Daniel E. & Imai, Kosuke & King, Gary & Stuart, Elizabeth A., 2007. "Matching as Nonparametric Preprocessing for Reducing Model Dependence in Parametric Causal Inference," Political Analysis, Cambridge University Press, vol. 15(3), pages 199-236, July.
    29. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, vol. 17(6), pages 2035-2096.
    30. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    31. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    32. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
    33. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    34. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    35. Martin Čihák & Heiko Hesse, 2010. "Islamic Banks and Financial Stability: An Empirical Analysis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(2), pages 95-113, December.
    36. Abdelsalam, Omneya & Dimitropoulos, Panagiotis & Elnahass, Marwa & Leventis, Stergios, 2016. "Earnings management behaviors under different monitoring mechanisms: The case of Islamic and conventional banks," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 155-173.
    37. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    38. Luc Laeven, 2013. "Corporate Governance: What’s Special About Banks?," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 63-92, November.
    39. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    40. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    41. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    42. Khan, Tariqullah & Ahmed, Habib, 2001. "Risk Management: An Analysis of Issues in Islamic Financial Industry (Occasional Paper)," Occasional Papers 2001, The Islamic Research and Teaching Institute (IRTI).
    43. Wei Jiang & Hualin Wan & Shan Zhao, 2016. "Reputation Concerns of Independent Directors: Evidence from Individual Director Voting," The Review of Financial Studies, Society for Financial Studies, vol. 29(3), pages 655-696.
    44. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    45. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    46. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    47. Karen A. Bantel & Susan E. Jackson, 1989. "Top management and innovations in banking: Does the composition of the top team make a difference?," Strategic Management Journal, Wiley Blackwell, vol. 10(S1), pages 107-124, June.
    48. Minton, Bernadette A. & Taillard, Jérôme P. & Williamson, Rohan, 2014. "Financial Expertise of the Board, Risk Taking, and Performance: Evidence from Bank Holding Companies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(2), pages 351-380, April.
    49. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
    50. Yuval Deutsch & Thomas W. Ross, 2003. "You are Known by the Directors You Keep: Reputable Directors as a Signaling Mechanism for Young Firms," Management Science, INFORMS, vol. 49(8), pages 1003-1017, August.
    51. Sabur Mollah & M. Kabir Hassan & Omar Farooque & Asma Mobarek, 2017. "The governance, risk-taking, and performance of Islamic banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 195-219, April.
    52. DeYoung, Robert & Jang, Karen Y., 2016. "Do banks actively manage their liquidity?," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 143-161.
    53. Viral V. Acharya & Nada Mora, 2015. "A Crisis of Banks as Liquidity Providers," Journal of Finance, American Finance Association, vol. 70(1), pages 1-43, February.
    54. El-Hawary, Dahlia & Grais, Wafik & Iqbal, Zamir, 2007. "Diversity in the regulation of Islamic Financial Institutions," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(5), pages 778-800, February.
    55. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    56. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    57. Sun, Lei & Chang, Tzu-Pu, 2011. "A comprehensive analysis of the effects of risk measures on bank efficiency: Evidence from emerging Asian countries," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1727-1735, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Safiullah, Md & Hassan, M. Kabir & Kabir, Md Nurul, 2022. "Corporate governance and liquidity creation nexus in Islamic banks—Is managerial ability a channel?," Global Finance Journal, Elsevier, vol. 51(C).
    2. Mollah, Sabur & Skully, Michael & Liljeblom, Eva, 2021. "Strong Boards and Risk-taking in Islamic Banks," Review of Corporate Finance, now publishers, vol. 1(1-2), pages 135-180, April.
    3. Safiullah, Md, 2020. "Bank governance and crisis-period efficiency: A multinational study on Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    4. Sabur Mollah & M. Kabir Hassan & Omar Farooque & Asma Mobarek, 2017. "The governance, risk-taking, and performance of Islamic banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 195-219, April.
    5. Zhou, Yifan & Kara, Alper & Molyneux, Philip, 2019. "Chair-CEO generation gap and bank risk-taking," The British Accounting Review, Elsevier, vol. 51(4), pages 352-372.
    6. Abid, Ammar & Gull, Ammar Ali & Hussain, Nazim & Nguyen, Duc Khuong, 2021. "Risk governance and bank risk-taking behavior: Evidence from Asian banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    7. Trinh, Vu Quang & Aljughaiman, Abdullah A. & Cao, Ngan Duong, 2020. "Fetching better deals from creditors: Board busyness, agency relationships and the bank cost of debt," International Review of Financial Analysis, Elsevier, vol. 69(C).
    8. Elnahass, Marwa & Salama, Aly & Trinh, Vu Quang, 2022. "Firm valuations and board compensation: Evidence from alternative banking models," Global Finance Journal, Elsevier, vol. 51(C).
    9. Galletta, Simona & Mazzù, Sebastiano & Scannella, Enzo, 2021. "Risk committee complexity and liquidity risk in the European banking industry," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 691-703.
    10. Thierno Amadou Barry & Laetitia Lepetit & Frank Strobel & Thu Ha Tran, 2022. "Implications for Bank Risk when Directors are Related to Minority Shareholders," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(3), pages 233-265, December.
    11. Raouf, Hajar & Ahmed, Habib, 2022. "Risk governance and financial stability: A comparative study of conventional and Islamic banks in the GCC," Global Finance Journal, Elsevier, vol. 52(C).
    12. Tasawar Nawaz, 2019. "Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks," Journal of Business Ethics, Springer, vol. 157(2), pages 567-587, June.
    13. Louhichi, Awatef & Boujelbene, Younes, 2017. "Bank capital, lending and financing behaviour of dual banking systems," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 61-79.
    14. Catarina Fernandes & Jorge Farinha & Francisco Vitorino Martins & Cesario Mateus, 2018. "Bank governance and performance: a survey of the literature," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(3), pages 236-256, July.
    15. Mavrakana, Christina & Psillaki, Maria, 2019. "Do board structure and compensation matter for bank stability and bank performance? Evidence from European banks," MPRA Paper 95776, University Library of Munich, Germany.
    16. Sabur Mollah & Omar Farooque & Asma Mobarek & Philip Molyneux, 2019. "Bank Corporate Governance and Future Earnings Predictability," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 369-394, December.
    17. Marwa Elnahass & Kamil Omoteso & Aly Salama & Vu Quang Trinh, 2020. "Differential market valuations of board busyness across alternative banking models," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 201-238, July.
    18. Vallascas, Francesco & Mollah, Sabur & Keasey, Kevin, 2017. "Does the impact of board independence on large bank risks change after the global financial crisis?," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 149-166.
    19. Elnahass, Marwa & Alharbi, Rana & Mohamed, Toka S. & McLaren, Josie, 2023. "The Nexus among board diversity and bank stability: Implications from gender, nationality and education," Emerging Markets Review, Elsevier, vol. 57(C).
    20. Aljughaiman, Abdullah A. & Cao, Ngan Duong & Trinh, Vu Quang & Albarrak, Mohammed & Vo, Xuan Vinh, 2023. "Does gender diversity affect financial strength differently in conventional and Islamic banks? Evidence from MENA countries," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).

    More about this item

    Keywords

    Islamic banking; Shariah supervisory board; Ownership concentration; Risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:47:y:2018:i:c:p:129-149. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.