How diverse are Shariah supervisory boards of Islamic banks? A global empirical survey

• DOI: https://doi.org/10.1108/IJOES-10-2021-0195
• Published date: 31 May 2022
• Date: 31 May 2022
• Pages: 312-341
• Subject Matter: Economics,Social economics
• Author: Omar Kachkar,Mustafa K. Yilmaz

How diverse are Shariah

supervisory boards of Islamic

banks? A global empirical survey

Omar Kachkar and Mustafa K. Yilmaz

Business School, Ibn Haldun University, Istanbul, Turkey

Abstract

Purpose –This study aimsto examine diversity in the composition of Shariahsupervisory boards (SSBs) of

Islamic banks (IBs). It investigates diversity from two perspectives: existing composition of SSBs and the

regulatory frameworks and standards of selected Organisation of Islamic Cooperation countries. Diversity

characteristicsinclude education, nationality,gender and age.

Design/methodology/approach –A list of all full-fledged Islamic commercial banks (FFICBs)

globally has been carefully prepared and confirmed. Conventional banks with Islamic windows, non-

commercial banks, takaful companies and other Islamic financial institutions are excluded. The

available profiles of 428 SSB members have been scrutinised and analysed. These board members

occupy 522 SSB positions in 238 FFICBs operating in 52 countries around the globe. From the

regulatory perspective, 12 national and international Shariah governance frameworks and standards

have been examined.

Findings –Findings of thispaper indicate various levels of diversity in SSBs ofthe reviewed IBs. The level

of diversity in educational background and in the nationality of SSBs can be described as generally

acceptable. However,a lack of diversity in gender and age among SSB members is evidently observed in IBs.

While the lack of age diversity in SSBs maybe relatively justified as a common trend in the composition of

corporate boards, SSBs ofIBs are seriously lagging behind in gender diversity. Onthe regulatory level, this

study concludedthat provisions on diversity as a requirementin SSBs are almost non-existent in the existing

regulatoryframeworks and standards.

Research limitations/implications –The major limitation of this study is the lack of available

informationon the SSB members.

Practical implications –This paper provides insights for IBs and policymakers concerned with the

corporategovernance of IBs and all Islamic financial institutions.First, it offers an excellent bird’s-eyeview of

the status of diversity in SSBs of IBs. Second, it motivates policymakers and standard-setting bodies to

ensure, through the relevantregulatory frameworks, adequate levels of diversity in the composition of SSBs.

Diversity in SSBs of IBs and Islamic financial institutions should be given special emphasis, not only in

boards and top management positions but also in the workplace. This is of profound significance to the

reputation of Islamic finance industry which has been recently under mounting pressure to translate the

rhetoric about the Islamic finance industry being ethical, fair, just, equitable and inclusive into genuine

implementations.

Originality/value –To the best of the authors’knowledge,this study is the first of its kind to examine the

diversityof SSB members from the regulatory as well as from the implementation perspective.

Keywords Corporate governance, Islamic banks, Shariah board diversity, Shariah governance

Paper type Research paper

1. Introduction

Since the Global Financial Crisis (GFC) in 2008–2009, corporate governance has been the

focus of many studies conducted on business failures, particularly in financial institutions

(Kirkpatrick, 2009; Macey and O’Hara, 2016; Sallehuddin et al., 2019;Samra, 2016). The

IJOES

39,2

312

Received20 October 2021

Revised3 January 2022

14February 2022

28March 2022

Accepted5 May 2022

InternationalJournal of Ethics and

Systems

Vol.39 No. 2, 2023

pp. 312-341

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-10-2021-0195

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2514-9369.htm

report prepared by the High-Level Group on FinancialSupervision for the European Union

in 2009 also confirms that failures in corporate governance played a significant role in the

GFC (De Larosiere, 2009). Thus,numerous studies have examined corporate governance and

board diversity to explore the driving forces behind those detrimental events (Mateos de

Cabo et al.,2009;Selmaet al., 2020).

Corporate board is the key component in implementing corporate governance. Among

other roles, boards areresponsible for making strategic decisions (Ferreira,2011). They play

an intermediating role among shareholders, stakeholders and managers to solve agency

problems (Fama and Jensen, 1983). The performance of corporate board, however, depends

on several factors, including independence, size and diversity (Martín and Herrero, 2018).

Among these, board diversity has been recently promoted as one of the effective ways of

enhancing corporate performance(ACCA, 2020;Landaw, 2020). Regulatory authorities have

also taken measures to promote boarddiversity. In some countries, they have implemented

policies for gender diversity, while in others, the best practices for diversity include race,

ethnicity, age and professionalskills, beside gender diversity (Farient Adivors, 2018).

The global Islamic finance industry has rapidly developed over the past decades,

reaching a total asset size of US$3tn by 2018. It comprises 1,389 full-fledged Islamic

financial institutions (IFIs)and Islamic windows. Islamic banking accounted for 71% of the

industry’s total assets with a cumulative average growth rate of 5% (Thomson Reuters,

2018). An increasing number of Islamic banks (IBs) have been established in Muslim and

non-Muslim countries, while several conventional banks have started to provide Shariah-

compliant products and services to their customers. Thus, IFIs have gained international

acceptance and become strong competitors of commercial banks. This rapid growth in

Islamic finance and the emergenceof standards to guide IBs have also increased interest in

the identificationof factors that can improve corporate governance in these institutions.

Although IFIs are required to meet international corporate governance rules, they also

have to adhere to additional requirements imposed by their nature, i.e. being Shariah-

compliant institutions (Muneeza and Hassan, 2014). In other words, IFIs implement a dual

governance structure (Farag et al.,2018). This two-board system plays a vital role in the

corporate governance of IFIs. Shariah supervisory board (SSB) plays a significant role in

ensuring Shariah compliance in the products, services and operations of an IFI (Hasan,

2010). The Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI) defines an SSB as “an independent body specialised in Islamic commercial

jurisprudence”(AAOIFI, 2010). In practice, many IFIs establish their own Shariah board

and even set up an internal Shariah review department to support Shariah board in

performing its functions.

In recent years, many studies have been held on corporate governance of IFIs (Abd Razak,

2018;Agung et al., 2020; among others). They have investigated board attributes of IFIs

including board size (Najwa et al., 2019;Shittu et al.,2016), board composition (Bukair and

Abdul Rahman, 2015), gender diversity (Ahmed, 2020), board duality (Hakimi, 2018)andboard

independence (Muhamad et al., 2019). Likewise, studies on SSBs have focused on the

relationship between SSBs and various dimensions of IFIs, including but not limited to:

financial performance (Alsartawi, 2019;Baklouti, 2020;Nomran et al., 2018);

risk-taking (AlAbbad, et al., 2019;Alman, 2012);

equity financing (Meslier et al., 2020);

Shariah governance disclosure (Noordin and Kassim, 2019);

Shariah compliance (Dahlifah and Sunarsih, 2019);

Shariah

supervisory

boards of

Islamic banks

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