Shari’ah Board Traits and Islamic Banks Financial Soundness: A New Paradigm of Islamic Corporate Governance Framework

Abstract

The stability of banks' finances is being impacted by the growing apprehension of Islamic banking. Consequently, the aim of this study is to investigate how Shari’ah board (SB) traits impact financial soundness of Islamic banks using the theoretical framework of resource dependence theory. Regression analysis is employed in this study to investigate the impact of Shari’ah board (SB) traits on Islamic banks’ financial soundness. The data set of 51 Islamic Banks was taken from seven Asian nations with Muslim population spanning from the period 2016-2021 using a panel data technique. On the other side, to assess the financial stability of Islamic Banks, a z-score metric was employed. This research demonstrates that the existence of a competent Shari’ah member and a mufti has no impact on the stability of the Islamic bank's finances although the size of the board has a significant consequence on the financial stability of Islamic Banks across all the Asian countries. This research expands the extant literature on Islamic Banking in the context of Asian countries. Regardless of the level of agency engagement, it appears that there has never been a verifiable study that looked at the impact of Shari’ah Board (SB) qualities on Islamic Banks’ (IB) achievements. Therefore, the objective of this study, which sets it apart from previous work, is to provide practical evidence to Islamic governance framework bodies and experts regarding the relationships between SB traits and how IBs are presented in the countries with high levels of regulatory agency intervention. The aforementioned study aids the management of Islamic banks in framing the board structure in light of Asian Islamic nations. Furthermore, by issuing the rules on reorganizing the composition of boards, regulators may receive insightful information, particularly those aiming to strengthen the soundness of their Islamic institutions.