Determinants and consequences of maqashid sharia performance: evidence from Islamic banks in Indonesia and Malaysia

Purpose - This study aims to examine how sharia supervisory board (SSB) characteristics are determinants of themaqashidsharia performance (MSP) of Islamic banks (IBs) and how MSP has implications for profitability and for profit-sharing investment account holders (PSIAHs). Design/methodology/approach - MSP is ascertained by semi-structured interviews. The SSB characteristics measured are size, cross-membership, education level, expertise, reputation, rotation and remuneration. Annual reports of Indonesian and Malaysian IBs from 2010 to 2018 are analysed using panel data regression. Findings - In Indonesia, SSB education level attenuates MSP, while other characteristics have only minor influence. However, in Malaysia, SSB size, education and reputation reinforce MSP, while others are ineffective. MSP in both countries is pseudo-Islamic; so their customers ignore religiosity. However, MSP in Malaysia can improve profitability because sharia assurance is more transparent; meanwhile, MSP in Indonesia cannot improve profitability because sharia assurance is less transparent. Practical implications - In order for MSP to improve in Indonesia, the regulators need to increase SSB size, reduce cross-membership and arrange the format for sharia assurance in SSB reports, while IBs need to increase SSB education and expertise. Originality/value - MSP is constructed in accordance with legal and social requirements to achieve IBs’ Islamic, economic, social and ethical objectives. Resource dependence theory is used to evaluate SSB, while PSIAH and profitability are investigated to demonstrate the impact of MSP. Finally, comparing SSB capabilities in Indonesia and Malaysia could be beneficial to regulatory and IB policies.