Corporate governance and risk-taking of Islamic banks: evidence from OIC countries

• DOI: https://doi.org/10.1108/CG-08-2020-0311
• Published date: 15 July 2021
• Date: 15 July 2021
• Pages: 1460-1474
• Subject Matter: Strategy,Corporate governance
• Author: Ejaz Aslam,Razali Haron

Corporate governance and risk-taking of

Islamic banks: evidence from

OIC countries

Ejaz Aslam and Razali Haron

Abstract

Purpose –This paper aims to investigatethe impact of corporate governance and other relatedfactors

on the risk-taking of Islamic banks. Risk-taking is defined according to credit risk, liquidity risk and

operationalrisk.

Design/methodology/approach –The study uses the two step system generalizedmethod of moment

(2SYS-GMM)estimation technique by using a panel dataset of 129 Islamic banks (IBs) from 29 countries

in the Middle East, South Asia and the SoutheastAsia regions covering from 2008 to 2017. Governance

variables incorporated include board size, board independence, chief executive officer (CEO) power,

Shariahboard and audit committee, as well as other control variables.

Findings –This study provides evidence that board size and Shariah board are positively and

significantly related to credit and liquidity risk. Board independence and CEO power are negative and

significantlyassociated with credit and liquidity risk,but the audit committee has a mixed relationship with

bank risk. Male CEOs take more risk compared to the female and more board meeting has an inverse

relationship with Islamic banks risk. Bank size, however, does not influence the level of risk in Islamic

banks,but leverage has an inverse relationship with bank risk.

Research limitations/implications –The present study shedslight on the risk-taking behaviour of the

board of IBs, particularly the board independence and CEO power reducing the level of risk in IBs

thereby contributingto the agency theory. Therefore, regulatorsand policymakers can use the findings of

this study to strengthenthe internal corporate governancemechanism to protect IBs at a time of financial

distress. Moreover, it increases the trust of the shareholders and stakeholders in the effectiveness of

governancereforms that have been pursued to reaplong-term benefits.

Originality/value –To the best of the knowledge, this research is preliminary in examining the board

behaviour on risk-taking of IBs from four different regions. The results are robust and suggest that the

board ofdirectors mitigate the level of risk in IBs.

Keywords Liquidity risk, Corporate governance, Credit risk, Bank risk-taking, Operational risk,

2SYS-GMM

Paper type Research paper

1. Introduction

There is a conviction that excessive risk-taking exercises of banks led to the failure of

regulatory frameworks to forestall such risk-taking were majorly responsible for the recent

global financial crises (AlAbbad et al., 2019;Mollah et al., 2017;Siddika and Haron, 2019).

Accordingly, a growing strand of literature on the excessive risk-taking of financial

institutions has been documented to explain the phenomena (Moudud-Ul-Huq et al., 2018;

Najwa et al., 2019). Despite this, Islamic banks (IBs) demonstrate strong resilience during

the financial crises and grew substantially (Chazi et al., 2018). The financial assets of the

Islamic financial sector totalled US$2.1tn in 2017 [1] and have been recorded to have

increased by 50% faster than the overall banking sector, with an average annual growth of

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), International Islamic

University Malaysia, Kuala

Lumpur, Malaysia.

Received 3 August 2020

Revised 23 November 2020

26 January 2021

7 April 2021

Accepted 24 May 2021

The authors are grateful to the

anonymous referees and editor

of the journal for their extremely

useful suggestions to improve

the quality of the article.

PAGE 1460 jCORPORATE GOVERNANCE jVOL. 21 NO. 7 2021, pp. 1460-1474, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-08-2020-0311