The effect of Islamic banks’ specific corporate governance mechanisms on compliance with AAOIFI governance standards

Purpose - The purpose of this paper is to examine the effect of specific Islamic banks’ (IBs) corporate governance (CG) mechanisms on compliance with the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI) governance standards (GSs) disclosure requirements. Design/methodology/approach - Using an unweighted governance compliance index, the authors measure the extent of IBs’ compliance with 7 AAOIFI GSs’ disclosure requirements over the period 2009–2015 (372 bank-year observations). In addition, a multivariate regression analysis was used to test the four hypotheses. Findings - This study’s results report substantial non-compliance (the mean of compliance level with AAOIFI’s GSs over the covered years for the entire sampled IBs is 52.1%). The findings reveal that the Shariah Supervisory Board’s (SSB) remuneration, SSB’s members with only industry expertise, SSB’s members with the combined industry expertise and accounting and financial expertise, the existence of internal Shariah Auditing Department and the level of investment accounts holders’ funds are positively associated with the level of compliance with AAOIFI’s GSs. Originality/value - The existing studies focusing on the determinants of compliance with AAOIFI’s standards are in the early research stage, as to the best of the authors’ knowledge, there is a paucity of empirical research testing this issue. The authors extend these studies by examining all the AAOIFI’s GSs and focusing on the specific IBs’ CG mechanisms. Furthermore, a major contribution of this study is the examination of the relationship between some SSB’s characteristics and compliance level. To the best of the authors’ knowledge, this is the first research that has examined the effect of the SSB’s remuneration and expertise on compliance level.