Corporate governance quality of Islamic banks: measurement and effect on financial performance

Abstract

Purpose

This paper aims to assess the measurement of the Corporate Governance (CG) quality of Islamic Banks (IBs) and its effect on financial performance.

Design/methodology/approach

In the applied part of this study, a sample of 44 IBs operating in Bahrain, Kuwait, Qatar, Oman, the United Arab Emirates and the Kingdom of Saudi Arabia were investigated according to information provided by the national central bank websites of the Gulf Cooperation Council (GCC) countries. To measure the governance quality, CG-index was constructed based on three sub-indices which are the Board of Directors (BOD), the Audit Committees (AC) and the Shariah Supervisory Board (SSB) indices.

Findings

Findings revealed that CG quality of IBs in GCC countries adhere to 74 per cent of the attributes addressed in the CG-index. The results also showed that IBs in GCC countries valued the effectiveness of SSB much more than the conventional CG mechanisms. Using multiple regression models, findings suggested no statistically significant relation between CG quality and financial performance which would imply that good CG had an insignificant association with high performance in GCC IBs.

Originality/value

The current paper may serve to assist IBs stakeholders to better understand the CG practices of IBs. In addition, the observed insignificant relation between the quality of CG practices and performance should sensitize the IBs regulators in the GCC countries to the necessity of improving the existing CG requirements.

Citation

Ajili, H. and Bouri, A. (2018), "Corporate governance quality of Islamic banks: measurement and effect on financial performance", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 11 No. 3, pp. 470-487. https://doi.org/10.1108/IMEFM-05-2017-0131