The trade-off between knowledge accumulation and independence: The case of the Shariah supervisory board within the Shariah governance and firm performance nexus  

Stuart Farquhar, Seng Kok*, Giorgioni Gianluigi

*Corresponding author for this work

Research output: Contribution to JournalArticlepeer-review

Abstract

Research Question/Issue: This study seeks to better understand the concept of Shariah governance and the role of the Shariah supervisory board (SSB) within Islamic financial institutions (IFIs). In light of the direction of the extant academic literature, we utilize a resource dependence conceptualization of the SSB and examine its impact on IFI performance.
Research Findings/Insights: Utilizing a hand-collected dataset from the published financial statements of 140 of the largest IFIs over the period of 2011-2015 and across 16 different nations, we discover that the tenure of SSBs is a positive, linear predictor of IFI performance. Additionally, this positive impact diminishes for Islamic banks against other IFIs but there is no consistent difference for Shariah-based or Shariah-compliant IFIs. Our results also confirm the existing academic knowledge that SSB interlocks have a negative relationship to IFI performance. To isolate the impact of SSBs on IFI performance we controlled for, a priori, firm-specific and sovereign characteristics and our results are robust to alternative regressands, reduced regressions and GMM estimators.
Theoretical/Academic Implications: The results from this study provide empirical support for a resource dependence conceptualization of the SSB and its impact on IFI performance. It provides a more detailed decomposition of the characteristics of the SSB and the channels of transmission of these characterizations on IFI performance and in doing so highlights further avenues of study incorporating additional theoretical frameworks of corporate governance that may further improve explanatory power.
Practitioner/Policy Implications: Our findings also highlight to leaders of IFIs that SSBs should be afforded time to build and develop firm-specific knowledge. Moreover, our results also illustrate that the economic and finance environment of Islamic banks is more changeable than that of other IFIs.
Original languageEnglish
JournalResearch in International Business and Finance
Early online date20 Sep 2021
DOIs
Publication statusE-pub ahead of print - 20 Sep 2021

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