Shari’Ah Supervision, Corporate Governance and Performance: Conventional vs. Islamic Banks

The performance and accountability of boards of directors and effectiveness of governance mechanisms continue to be a matter of concern. Focusing on differences between conventional banks and Islamic banks, we examine the effect of (i) Shari’ah supervision boards, (ii) board structure and (iii) CEO-power on performance during the period 2005–2011. We find Shari’ah supervision boards positively impact on Islamic banks’ performance when they perform a supervisory role, but the impact is negligible when they have only an advisory role. The effect of board structure (board size and board independence) and CEO power (CEO-chair duality and internally recruited CEO) on the performance of Islamic banks is overall negative. Our findings provide support for the positive contribution of Shari’ah supervision boards but also emphasize the need for enforcement and regulatory mechanism for them to be more effective.

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