Corporate governance and banking performance: the mediating role of intellectual capital among OIC countries

Author:Ejaz Aslam, Razali Haron
DOI:https://doi.org/10.1108/CG-08-2020-0312
Pages:111-136
Publication Date:11 Nov 2020
Corporate governance and banking
performance: the mediating role of
intellectual capital among OIC countries
Ejaz Aslam and Razali Haron
Abstract
Purpose The existing literatureasserted that the Islamic banking industry progress significantly,but it
has increasinglyfound asset deficient whichassaulted the performance of Islamicbanks (IBs). The aim of
this study to examine the mediatingrole of intellectual capital (IC) on the relationship betweencorporate
governance(CG) mechanisms and IBs performance is examined(ATO, NPM).
Design/methodology/approach A panel sample of 129 IBs is drawn from the 29 organisation of
Islamic cooperation (OIC) countries from 2008 to 2017. Two-step system generalized method of
moments (2SYS-GMM) was used to account for the unobserved endogeneity and heteroscedasticity
problem.
Findings The empiricalfindings demonstrate that there isa significant impact of the CG mechanismon
IC. Moreover,the empirical findings indicatethat CG has a direct influence on bankingperformance but it
affects indirectlythrough IC. IC also appears to have amediation role in the relationship betweenthe CG
mechanismand the performance of IBs.
Research limitations/implications As the empirical research on IC fromCG point of view in Islamic
banking is generallynew in the banking literature, the output of thisresearch will contribute to the building
up of empirical framework and practices regarding IC in the Islamic banking industry by using the
resource-based theoryas a leading theory and agency theory as a sub theory.It is anticipated that this
study provided a superior comprehensive discussion of the IC in IBs across OIC countries which
discoversthe CG mechanism to influence the IC to improve bankingperformance.
Practical implications This study offers usefulinsights to the regulators and practitionersto draw the
rules and regulations in improving the CG mechanism and the effectiveness of internal controls by
acknowledgingthe importance of IC in Islamic banking institutions. Particularly,the findings of this study
may be of benefitto bankers to efficiently use the ICas a premise to design new and creative strategiesto
achievea competitive advantage in the bankingindustry.
Originality/value The study is unique in its nature because it presents a successful model forIBs to
concentratemore on the role of IC in enhancing banking performance,which might be used by the banks
to rearrange the roles within CG, to place their prioritiesregarding the internal governance system and
financialplans for competency enhancement.
Keywords Corporate governance, Intellectual capital, OIC countries, 2SYS-GMM,
Islamic bank performance
Paper type Research paper
1. Introduction
Islamic banking is the fastest-growing segment of the global financial industry.According to
the World Islamic Banking Competitiveness Report (20182019), the growth of Islamic
banking and finance is at a rate of 1520% and the total assets held by the Islamic banks
(IBs) have accumulated to US$2.19 trillion at the end of 2018. Based on the contemporary
literally, sources the Islamic finance industryremained stable (Hussien et al.,2019), efficient
Ejaz Aslam is based at the
School of Islamic
Economics Banking and
Finance (SIEBF), Minhaj
University, Lahore,
Pakistan. Razali Haron is
based at the IIUM Institute
of Islamic Banking and
Finance (IIiBF), IIUM, Kuala
Lumpur, Malaysia.
Received 3 August 2020
Revised 13 September 2020
12 October 2020
Accepted 13 October 2020
This research is self-funded.
We are grateful to Dr Anwar for
assistance within the model
section and Dr Naveed, who
moderated this paper and, in
that line, improved the
manuscript significantly.
DOI 10.1108/CG-08-2020-0312 VOL. 21 NO. 1 2021, pp. 111-136, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 111
(Al-Khazali et al.,2014;Bourkhis and Nabi, 2013;Rosman et al.,2014), maintained better
asset quality (Mwamba et al.,2017) and has lower loan default rates (Mollah et al., 2017).
In the past few decades, the world is experiencing substantial growth in Islamic financial
institutions, especially in Muslim countries. The financial stability of Islamic financial
institutions (IFIs) and the recent global financial crises 2007/2008 have attracted the
attention of the world towards the IFIs. These institutions are less susceptible to insolvency
due to their unique structure of investment and contracts. Rosman et al. (2014) argue that
Islamic financial institutions outperform the conventional banks during the financial crisis
due to their unique activity and funding structures such as risk-sharing principles and real
economic transactions backedby tangible assets (Ajili and Bouri, 2018).
The subprime crisis 2007/2008 has instigated many issues with lack of governance and
intellectual capital (IC) deficiency being one of the major issues (Chazi et al.,2018;Mollah
et al.,2017
;Nawaz, 2017). However, IBs are prospering by showing strong resilience
during the financial crises. Even though IBs appear to be more resilient than their
conventional counterpart, they need to be more cautious and must focus on a good
governance mechanism to avoid these types of uncertain shocks. Therefore, a good
corporate governance (CG) structure has a significant role in banking operations as it helps
these IBs to withstand external shocks, including exterior financial distress (Berger et al.,
2016). Quality board members structures a good CG, discipline, accountability, fairness,
independence, responsibility, transparency, social responsibility and shareholder rights
(AlSagr et al.,2018;Farag et al.,2018;Zagorchev and Gao, 2015).
Moreover, continuous growth in IFIs allows them to be competitive in the industry. They too
need to be more focused on their IC sources because the organizations which have high
intellectual resources contribute greatly to the dynamic efficiency of the economic system
(Nawaz, 2019). Al-Musalli and Ismail (2012) stated that knowledge-based IC is a primary
factor as compared to the financial and physical capital for value creation and to achieve
competitive advantage for the organizations. Today, the world financial economy is
knowledge-based (Rochmadhona et al.,2018), so the organizations have to create value
through intangible sources rather than only depend on physical sources (Duho and
Onumah, 2019;Khairiyansyahand Vebtasvili, 2018;Tahir et al., 2018).
Currently, organizations are trying to surge their IC sources to obtain a competitive advantage
through the extension of trained humans as unique assets for performance enhancement (Basyith,
2016;Duho and Onumah, 2019;Nawaz, 2017;Rochmadhona et al., 2018). In the financial sector,
banks generally require a massive number of relational capital and human capital for durabilit y
(Khairiyansyah and Vebtasvili, 2018;Nawaz, 2019) as this is a highly skill-based, knowledge-
intensive and relationship-rich industry (Alhassan and Asare, 2016). Thus, a typical operation of
the banking sector will involve direct customer interactions for better information on new products
and services (Arifin, 2016;Rochmadhona et al., 2018). Furthermore, the financial industry, may it
be locally or globally, demands the board to be more efficient in using their tangible and intangible
resources to enhance wealth. Thus, IC is viewed as one of the significant assets for banks to
increase their yield (Grove et al., 2011;Jetmiko, 2018;Nawaz, 2019).
CG and IC are associated with eachother due to their significant role to attain the objective
of the organization, and it assures survival and growth (Saeed et al., 2015). The board of
directors in banks is liable to constitute strategies to use human and structural resources
efficiently to improve banking performance (Nawaz, 2017). Thus, the combination of IC and
CG has become a keystone for IBs togenerate good profit and sustainable growth (Basyith,
2016;Nawaz, 2019). Henceforth, the current study uses IC as a mediator between CG and
the performance of the Islamic bankingIndustry.
The remaining of this paper has proceeded as follows. Section 2 addresses the literature review
and develops the hypotheses. Section 3 provides a detailed description of data collection and
the methodological approach. Section 4 provides detail of empirical analyses and related
PAGE 112 jCORPORATE GOVERNANCE jVOL. 21 NO. 1 2021

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