Do the characteristics of the Sharia Supervisory Board affect the Islamic banks’ performance? Evidence from Arab countries

Abstract

Purpose

This study aims to examine the effect of Islamic governance through Sharia Supervisory Board (SSB) on performance of Islamic banks (IBs). Specifically, it investigates the impact of seven proxies for Islamic governance of SSB (size, number of meetings, independence, financial and accounting experiences, previous experience on SSBs, change in composition and presence of higher Sharia supervision) on the financial performance (return on assets [ROA]) of 28 listed IBs from 10 different Arab countries between 2019 and 2023.

Design/methodology/approach

Data were collected from the annual reports and other information available on banks’ websites, the websites of central banks and the financial markets.

Findings

OLS regression results indicate that greater member independence, SSB members’ prior expertise and less change in the SSB composition have a significant positive influence on the financial performance of IBs.

Research limitations/implications

The study findings are useful to IBs, and the governing bodies in Islamic countries in terms of emphasizing the importance of maintaining the financial independence of SSBs, appointing expert members and maintaining stability in the composition of SSBs.

Practical implications

The study’s findings offer significant implications for Islamic investment banks and regulatory authorities. These findings highlight the critical importance of maintaining the financial independence of Shariah Supervisory Boards, selecting expert members, and preserving board stability.

Social implications

Policymakers may consider the authors’ recommendations to establish a higher SSB, affiliating this monitoring body with the financial market authority or the monetary authority, to create a sound governance system at the macro level and better enforcement.

Originality/value

This study provides an original contribution to Islamic banking and Islamic governance literature as a cross-countries study, in its consideration of the presence of higher Sharia supervision in the country, alongside members’ financial independence as variables in the effectiveness of SSBs, and as a result on the performance of IBs.

Citation

Al Thnaibat, M., Al-Hajaya, K. and Alshhadat, M.Q. (2024), "Do the characteristics of the Sharia Supervisory Board affect the Islamic banks’ performance? Evidence from Arab countries", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-05-2024-0271