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Journal of Financial Services Research

Erschienen in:

14.04.2016

The governance, risk-taking, and performance of Islamic banks

verfasst von: Sabur Mollah, M. Kabir Hassan, Omar Al Farooque, Asma Mobarek

Erschienen in: Journal of Financial Services Research | Ausgabe 2/2017

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Abstract

We examine whether the difference in governance structures influences the risk taking and performance of Islamic banks compared to conventional banks. Using a sample of 52 Islamic banks and 104 conventional banks in 14 countries for the period from 2005 to 2013, we conclude that the governance structure in Islamic banks plays a crucial role in risk taking as well as financial performance that is distinct from conventional banks. Particularly, we show that the governance structure in Islamic banks allows them to take higher risks and achieve better performance because of product complexities and transaction mechanisms. However, Islamic banks maintain a higher capitalization compared to conventional banks. These results support the research on Islamic investment and risk taking. Our results add a new dimension to the governance research that could be a valuable source of knowledge for policy makers and regulators in the financial services sector.

Vorheriger Artikel Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality

Nächster Artikel A Survival Analysis of Islamic and Conventional Banks

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In 2014, Muslim population was 2038.04 million, which was 28.26 % of the total world population of 7151.51 million. Muslim countries in Asia and Africa had 27.56 % Muslim population (i.e., 1971.08 million), while non-Muslim counties in North America, Europe, Oceania, and South America had 0.7 % (i.e. 66.96 million) (see http://muslimpopulation.com/World).

Islamic banking offers a two-tiered business model: mark-up financing (murabaha) and profit-sharing financing (mudaraba and musharaka). Overtime, the former became the dominant mode of financing in Islamic banks given that there are some inherent problems in applying the latter in practice, such as moral hazard.

Islamic banks are neither exposed to toxic securities nor offered products like CDOs or MBS due to the prohibition by the Shari’ah (Ahmed 2009). The derivative products like CDS are prohibited under Islamic law due to the existence of risky or hazardous sale. In fact, Islamic law prohibits any transactions involving unnecessary uncertainty (gharar) and gambling (maysir), which includes short selling, arbitrage, betting and speculation (Aziz et al. 2009).

Although the governance structure of conventional banks in some countries like Germany or Austria includes a supervisory board, the monitoring mechanism of the Shari’ah Supervisory Board (SSB) is much more effective (Mollah and Zaman 2015).

We take the definition of Islamicity from Rehman and Askari (2010).

Bankscope database offers six accounting consolidation codes: C1, C2, U1, U2, C*, and U*. Banks having accounting consolidation codes C1, C2 and C* indicate that the financial statements of the parent bank is consolidated with its subsidiaries, but the financial statements of the parent bank are not consolidated with its subsidiaries for the codes U1, U2, and U*. Thus, un-consolidated statements do not offer a complete financial picture of those banks.

This independence indicator consists of five categories. The categories A and B include companies where the main shareholder holds less than 50 % of the total ownership of a company. We made this choice because in non-independent banks the governance mechanisms are influenced by the parent bank.

We discuss model 6 (GMM) in subsection 4.3

See footnote 8 for model 6.

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Titel: The governance, risk-taking, and performance of Islamic banks
verfasst von: Sabur Mollah
M. Kabir Hassan
Omar Al Farooque
Asma Mobarek
Publikationsdatum: 14.04.2016
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 2/2017
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-016-0245-2

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