The relationship between corporate governance and financial performance in the Islamic and conventional banking industries: a Malaysian evidence

Purpose - This study aims to investigate the relationship between corporate governance characteristics and the financial performance of both Islamic and conventional banks in the context of an emerging market, i.e. Malaysia. Design/methodology/approach - This study includes 300 bank-year observations from Islamic and conventional banks over the period 2010–2021. The dynamic panel model (generalized method of moments [GMM]) was considered the primary estimation model that solves simultaneity, endogeneity and omitted variable problems as most governance variables are endogenous by nature. Hence, static models are considered biased after conducting the DWH test of endogeneity, and considering dynamic panel GMM is valid proven by Sargan and Hensen and first-order (ARI) and second-order (ARII) tests. Findings - Based on the regression results, the authors discovered that board size, female participation in the board and director remuneration have a significant positive impact on bank performance, whereas board meetings have a significant negative impact. Furthermore, the board governance structure of commercial banks is found to be more passive than that of Islamic banks. Practical implications - The study’s findings added a new dimension to governance research, which could be a valuable source of knowledge for policymakers, investors and regulators looking to improve existing governance mechanisms for better performance of conventional and Islamic banks. Originality/value - The goal of this study is to add to the existing literature by focusing on the impact of female board participation and other board governance mechanisms in both conventional and Islamic banks on bank performance.