IDEAS home Printed from https://ideas.repec.org/a/pal/ijodag/v22y2025i1d10.1057_s41310-024-00260-5.html
   My bibliography  Save this article

Corporate governance quality index and Islamic bank risk-taking

Author

Listed:
  • Umar Habibu Umar

    (Universiti Brunei Darussalam
    Yusuf Maitama Sule)

  • Muhamad Abduh

    (Universiti Brunei Darussalam)

  • Mohd Hairul Azrin Besar

    (Universiti Brunei Darussalam)

Abstract

This study used the board of directors, risk management committee (RMC), audit committee (AC) and Shari’a supervisory board (SSB) attributes and constructed a comprehensive corporate governance (CG) quality index and sub-indices to explore their influence on Islamic bank risk-taking. It used unbalanced panel data manually collected over 12 years (2010–2021) generated from the annual reports of a sample of 43 fully Shari'a-compliant Islamic banks operating in 15 different countries. Using the two-step system GMM estimator as a major regression, the findings indicate a significant positive relationship between the CG quality index and credit risk. Concerning sub-indices, board and AC quality sub-indices have a significant negative and positive association with credit risk. However, RMC and SSB quality sub-indices have an insignificant association with risk. The findings were substantially similar when we used portfolio risk as an alternative measure of risk-taking and FGLS and OLS robust regression as alternative regression models. Consequently, the study recommends the need for relevant regulators to review the CG codes related to the board and these committees, as well as credit and risk management policies, to rejuvenate the effectiveness of RMC, AC, SSB and the overall CG practices in enhancing Islamic bank stability.

Suggested Citation

  • Umar Habibu Umar & Muhamad Abduh & Mohd Hairul Azrin Besar, 2025. "Corporate governance quality index and Islamic bank risk-taking," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 22(1), pages 284-303, March.
    • Handle: RePEc:pal:ijodag:v:22:y:2025:i:1:d:10.1057_s41310-024-00260-5
    DOI: 10.1057/s41310-024-00260-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41310-024-00260-5
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41310-024-00260-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tasya Aspiranti & Qaisar Ali & Oktofa Yudha Sudrajad & Sulistya Rusgianto, 2023. "Shariah governance reporting of Islamic banks: An insight from Malaysia," Cogent Business & Management, Taylor & Francis Journals, vol. 10(2), pages 2247220-224, December.
    2. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, vol. 17(6), pages 2035-2096.
    3. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LLC, vol. 9(1), pages 86-136, March.
    4. Alin Marius Andries & Daniela Balutel & Iulian Ihnatov & Silviu Gabriel Ursu, 2020. "The nexus between corporate governance, risk taking, and growth," PLOS ONE, Public Library of Science, vol. 15(2), pages 1-24, February.
    5. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    6. Ivo Županović, 2014. "Sustainable Risk Management in the Banking Sector," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(1), pages 81-100.
    7. Diana Zigraiova, 2015. "Management Board Composition of Banking Institutions and Bank Risk-Taking: The Case of the Czech Republic," Working Papers 2015/14, Czech National Bank.
    8. Safiullah, Md & Shamsuddin, Abul, 2018. "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 129-149.
    9. Jing Jia & Michael E Bradbury, 2021. "Risk management committees and firm performance," Australian Journal of Management, Australian School of Business, vol. 46(3), pages 369-388, August.
    10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    11. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
    12. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    13. Shahchera , Mahshid & Arbabian , Shirin & Shadrokh , Mahdieh, 2013. "Identification of Moral Hazard in the Banking System of Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 8(3), pages 63-87, July.
    14. Berger, Allen N. & Kick, Thomas & Schaeck, Klaus, 2014. "Executive board composition and bank risk taking," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 48-65.
    15. Hana Ajili & Abdelfettah Bouri, 2018. "Corporate governance quality of Islamic banks: measurement and effect on financial performance," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 11(3), pages 470-487, April.
    16. Konishi, Masaru & Yasuda, Yukihiro, 2004. "Factors affecting bank risk taking: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 215-232, January.
    17. Tai, Vivian W. & Lai, Yi-Hsun & Yang, Tung-Hsiao, 2020. "The role of the board and the audit committee in corporate risk management," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    18. Nguyen, Quang Khai, 2021. "Oversight of bank risk-taking by audit committees and Sharia committees: conventional vs Islamic banks," MPRA Paper 120998, University Library of Munich, Germany.
    19. Amal AlAbbad & M. Kabir Hassan & Irum Saba, 2019. "CanShariahboard characteristics influence risk-taking behavior of Islamic banks?," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 12(4), pages 469-488, September.
    20. Mollah, Sabur & Skully, Michael & Liljeblom, Eva, 2021. "Strong Boards and Risk-taking in Islamic Banks," Review of Corporate Finance, now publishers, vol. 1(1-2), pages 135-180, April.
    21. Armaya'u Alhaji Sani & Rohaida Abdul Latif & Redhwan Ahmed Al-Dhamari, 2020. "CEO discretion, political connection and real earnings management in Nigeria," Management Research Review, Emerald Group Publishing Limited, vol. 43(8), pages 909-929, January.
    22. Amal AlAbbad & M. Kabir Hassan & Irum Saba, 2019. "CanShariahboard characteristics influence risk-taking behavior of Islamic banks?," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 12(4), pages 469-488, September.
    23. Abid, Ammar & Gull, Ammar Ali & Hussain, Nazim & Nguyen, Duc Khuong, 2021. "Risk governance and bank risk-taking behavior: Evidence from Asian banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    24. Sun, Jerry & Liu, Guoping, 2014. "Audit committees’ oversight of bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 376-387.
    25. Md. Borhan Uddin Bhuiyan & Mabel D’Costa, 2020. "Audit committee ownership and audit report lag: evidence from Australia," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 28(1), pages 96-125, January.
    26. Tuan-Hock Ng & Lee-Lee Chong & Hishamuddin Ismail, 2012. "Is the risk management committee only a procedural compliance?: An insight into managing risk taking among insurance companies in Malaysia," Journal of Risk Finance, Emerald Group Publishing, vol. 14(1), pages 71-86, December.
    27. Mansor Isa & Siew-Peng Lee, 2020. "Does the Shariah committee influence risk-taking and performance of Islamic banks in Malaysia?," Journal of Islamic Accounting and Business Research, Emerald Group Publishing Limited, vol. 11(9), pages 1739-1755, July.
    28. Sabur Mollah & M. Kabir Hassan & Omar Farooque & Asma Mobarek, 2017. "The governance, risk-taking, and performance of Islamic banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 195-219, April.
    29. Searat Ali & Benjamin Liu & Jen Je Su, 2022. "Does corporate governance have a differential effect on downside and upside risk?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1642-1695, October.
    30. Naama Trad & Houssem Rachdi & Abdelaziz Hakimi & Khaled Guesmi, 2017. "Banking stability in the MENA region during the global financial crisis and the European sovereign debt debacle," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 18(4), pages 381-397, August.
    31. Koetter, Michael & Poghosyan, Tigran, 2010. "Real estate prices and bank stability," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1129-1138, June.
    32. Yan†Leung Cheung & Ping Jiang & Piman Limpaphayom & Tong Lu, 2010. "Corporate Governance in China: a Step Forward," European Financial Management, European Financial Management Association, vol. 16(1), pages 94-123, January.
    33. Bley, Jorg & Saad, Mohsen & Samet, Anis, 2019. "Auditor choice and bank risk taking," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 37-52.
    34. Nkoko Blessy Sekome & Tesfaye Taddesse Lemma, 2014. "Determinants of voluntary formation of risk management committees: Evidence from an emerging economy," Managerial Auditing Journal, Emerald Group Publishing, vol. 29(7), pages 649-671, July.
    35. Armaya'u Alhaji Sani & Rohaida Abdul Latif & Redhwan Ahmed Al-Dhamari, 2020. "CEO discretion, political connection and real earnings management in Nigeria," Management Research Review, Emerald Group Publishing Limited, vol. 43(8), pages 909-929, January.
    36. Duran, Miguel A. & Lozano-Vivas, Ana, 2015. "Moral hazard and the financial structure of banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 28-40.
    37. Egi Arvian Firmansyah & Umar Habibu Umar & Rabiu Saminu Jibril, 2023. "Investigating the effect of ESG disclosure on firm performance: The case of Saudi Arabian listed firms," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2287923-228, October.
    38. Ameni Ghenimi & Hasna Chaibi & Mohamed Ali Brahim Omri, 2017. "The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(4), pages 238-248, December.
    39. Renata Karkowska & Jan Acedański, 2020. "The effect of corporate board attributes on bank stability," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 19(2), pages 99-137, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Umar Habibu Umar & Muhamad Abduh & Mohd Hairul Azrin Besar, 2023. "Standalone risk management committee, risk governance diversity and Islamic bank risk-taking," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-23, September.
    2. Safiullah, Md & Shamsuddin, Abul, 2018. "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 47(C), pages 129-149.
    3. Abid, Ammar & Gull, Ammar Ali & Hussain, Nazim & Nguyen, Duc Khuong, 2021. "Risk governance and bank risk-taking behavior: Evidence from Asian banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    4. Douglas A. Adu, 2024. "How do board and ownership characteristics affect bank risk-taking? New evidence from sub-Saharan Africa," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(3), pages 209-233, September.
    5. Al-Shboul, Mohammad & Maghyereh, Aktham & Hassan, Abul & Molyneux, Phillip, 2020. "Political risk and bank stability in the Middle East and North Africa region," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    6. Elnahass, Marwa & Salama, Aly & Trinh, Vu Quang, 2022. "Firm valuations and board compensation: Evidence from alternative banking models," Global Finance Journal, Elsevier, vol. 51(C).
    7. Elnahass, Marwa & Alharbi, Rana & Mohamed, Toka S. & McLaren, Josie, 2024. "Women directors’ attributes and demographics: New insights into bank risk," Research in International Business and Finance, Elsevier, vol. 71(C).
    8. Raouf, Hajar & Ahmed, Habib, 2022. "Risk governance and financial stability: A comparative study of conventional and Islamic banks in the GCC," Global Finance Journal, Elsevier, vol. 52(C).
    9. Zhou, Yifan & Kara, Alper & Molyneux, Philip, 2019. "Chair-CEO generation gap and bank risk-taking," The British Accounting Review, Elsevier, vol. 51(4), pages 352-372.
    10. Safiullah, Md & Hassan, M. Kabir & Kabir, Md Nurul, 2022. "Corporate governance and liquidity creation nexus in Islamic banks—Is managerial ability a channel?," Global Finance Journal, Elsevier, vol. 51(C).
    11. Mushtaq Hussain Khan & Mohammad Bitar & Amine Tarazi & Arshad Hassan & Ahmad Fraz, 2021. "Corruption and bank risk-taking: The deterring role of Shari'ah supervision," Working Papers hal-03366460, HAL.
    12. Rabiu Saminu Jibril & Muhammad Aminu Isa, 2025. "Corporate board diversity, environmental compliance, and occupational health and safety disclosure for achieving sustainable development goals in an emerging economy," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(1), pages 652-667, February.
    13. Olszak, Małgorzata & Pipień, Mateusz & Kowalska, Iwona & Roszkowska, Sylwia, 2014. "What drives heterogeneity of loan loss provisions’ procyclicality in the EU?," MPRA Paper 56834, University Library of Munich, Germany.
    14. Safiullah, Md, 2023. "Funding liquidity in Islamic banks: Does the Shariah supervisory board's higher educational attainment matter?," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    15. Unda, Luisa A. & Ranasinghe, Dinithi, 2021. "To pay or not pay: Board remuneration and insolvency risk in credit unions," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    16. Zulkufly Ramly & Nurusysyifa Nordin, 2018. "Sharia Supervision Board, Board Independence, Risk Committee and Risk-taking of Islamic Banks in Malaysia," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 290-300.
    17. Khan, Mushtaq Hussain & Fraz, Ahmad & Hassan, Arshad & Abedifar, Pejman, 2020. "Female board representation, risk-taking and performance: Evidence from dual banking systems," Finance Research Letters, Elsevier, vol. 37(C).
    18. Albaity, Mohamed & Mallek, Ray Saadaoui & Noman, Abu Hanifa Md., 2019. "Competition and bank stability in the MENA region: The moderating effect of Islamic versus conventional banks," Emerging Markets Review, Elsevier, vol. 38(C), pages 310-325.
    19. Brogi, Marina & Lagasio, Valentina, 2022. "Better safe than sorry. Bank corporate governance, risk-taking, and performance," Finance Research Letters, Elsevier, vol. 44(C).
    20. Sabur Mollah & M. Kabir Hassan & Omar Farooque & Asma Mobarek, 2017. "The governance, risk-taking, and performance of Islamic banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(2), pages 195-219, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:ijodag:v:22:y:2025:i:1:d:10.1057_s41310-024-00260-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.