Purpose The purpose of this paper is to study whether the characteristics of the Shariah Supervisory Board (SSB) can influence the risk-taking behaviors of Islamic banks. Design/methodology/approach The data on governance were collected from 70 Islamic banks’ annual reports across 18 countries for the period from 2000 to 2011 to investigate the relationship between SSB’s characteristics including size, busyness and foreign board and the Islamic banks’ risk activities. Findings The size of SSB and the proportion of busy board in SSB positively and significantly influence Islamic banks’ asset return and insolvency risks. Foreign members are more effective in monitoring banks’ Shariah compliance. Further analysis provides some evidence that most of the findings on the associations between the SSB structure and bank risk are derived from countries in the Gulf Cooperation Council where Shariah governance is ruled internally at the bank level. Practical implications There is a need for better Shariah board characteristics in place that complement with other governance mechanisms to well comprehend the main purpose of Islamic banks. Originality/value SSB board busyness and foreign characteristics appear to influence the risk-taking behaviors of Islamic banks.
We investigate the reasons for the growing demand for Islamic banking internationally, and examine the relative economic performance of Islamic banks compared with conventional banks in managing their capital buffers and liquidity. Using data for the period 2000–2012 for 104 Islamic and 619 conventional listed and non-listed banks spread across 22 countries with both these types of banks, and using standard statistical methodology for archival data analysis, we find that religious, political, and socio-legal factors, rather than economics alone, play key roles for Islamic banks in attracting depositors. Governed by Islamic ( Shariah) laws, these banks cannot lend money and charge interest. Depositors are not debt holders as in conventional banks, but investment partners that share in the risk, or profit-loss sharing (PLS), with the bank. As Islamic banks have no debt holders, and depositors self-select to bank with Islamic banks, economic theory suggests a reduced need for excessive (less productive) liquidity buffers. However, we find that Islamic banks maintain significantly higher liquidity buffers than their conventional counterparts. A main contribution of our study is to highlight the fact that standard economic measures alone may be inadequate to assess the performance of Islamic banks.
We explore how banks’ income and stock prices respond to the COVID-19 policy measures in countries with the dual-banking system, and whether Islamic banks over- or underperform compared to conventional banks. Applying two-way fixed-effect regressions, we document that the changes in Islamic banks’ finance income as well as net income decline as much during the COVID-19 pandemic as the changes in interest and net income of conventional banks. Event-study tests show that the stock prices of Islamic banks respond as negatively as the ones of conventional banks to workplace closures. We do, however, document that the two types of banks respond differently to income support schemes. The change in Islamic banks’ finance income and net income increase significantly more compared to that of their conventional peers when governments install income support initiatives. Also, Islamic banks’ stock prices respond more positively to the income support programs than the ones of conventional banks. Because we control for investment banking activities and services to large clients, our findings on the stronger response of Islamic banks to income support programs seem to result from Islamic banks’ focus on private customers who are supported during the pandemic. Overall, we conclude that the Shariah compliance does not limit the adverse impact of the COVID-19 crisis on Islamic banking, but that Islamic banks’ performance responds more positively to income support initiatives than the one of conventional banks.
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