Corporate Governance Disclosure Practices and Performance of Islamic Banks in GCC Countries
DOI:
https://doi.org/10.31436/jif.v4i2.88Abstract
This paper investigates the impact of the level of corporate governance disclosure on bank performance by constructing a corporate governance disclosure index (CGDI) for 27 Islamic banks operating in five Arab Gulf countries. Using content analysis on the banks’ annual reports for 3 years (2011-2013), the composite index construction uses information on six important corporate governance mechanisms, namely board structure, risk management, transparency and disclosure, audit committee, Sharia supervisory board and investment account holders. The results demonstrate that Islamic banks adhere to 54% of the attributes addressed in the CGDI. The most frequently reported and disclosed elements are Sharia supervisory board followed by board structure and risk management. The findings related to countries revealed that only two countries, the United Arab Emirates and Bahrain, possess a higher level of CGDI. Our regression results provide evidence that Islamic banks with higher levels of corporate governance disclosure report high operating performance measured by return on assets and return on equity. Finally, as of the effect of internal and external factors, we identified four variables that were associated with bank performance, namely size, equity, risk and concentration.Downloads
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References
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AAOIFI (2010), Standards, Accounting and Auditing Organization for Islamic financial institutions, Manama, Bahrain.
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Baltagi, B. H., (2005), Econometric analysis of panel data, John Wiley and Sons, Chichester,
Al-Sadah, A. K., (2007), Corporate governance of Islamic banks, its characteristics and effects and stakeholders and the role of Islamic banks supervisors, Thesis, School of management, University of Surrey.
Anderson, C., Mansi, A., Reeb, M., (2004), Board characteristics, accounting report integrity, and the cost of debt, Journal of Accounting and Economics, 37, pp.315-342.
Baltagi, B. H., (2005), Econometric analysis of panel data, John Wiley and Sons, Chichester,
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Beltratti, A., Stulz, R. M., (2012), The credit crisis around the globe: why did some banks perform better, Journal of Financial Economics, 1105, pp.1-17.
Ben Naceur, S., Omran, M., (2011), The effects of bank regulations, competition, and financial reforms on banks’ performance, Emerging Markets Review, 12, pp.1-20.
Beiner, S., Drobetz, W., Schmid, M. M., & Zimmermann, H. (2006), An integrated framework ofcorporate governance and firm valuation, European Financial Management, 2, pp.249–283.
Bhagat, S., Bolton, B., (2008), Corporate governance and firm performance, Journal of Corporate Finance, 14, pp.257-273.
Bhagat, S., Bolton, B., Romano, R., (2008), The promise and peril of corporate governance indices, Columbia Law Review, 108, pp.1803-1882.
Black, B., Jang, H., Kim, W., (2006), Predicting firms’ corporate governance choices: Evidence from Korea, Journal of Corporate Finance, 12, pp.660-691.
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Brown, L., Caylor, M., (2006), Corporate governance and firm performance, Journal of Accounting and Public Policy, 25, pp.409–434.
Byun, HY., Kwak, SK., Hwang, LS., (2008). The implied cost of equity capital and corporate governance practices, Asian-Pacific Journal of Finance Studies, 37, pp.139–184.
Chahine, S., Safieddine, A., (2011), Is corporate governance different for the Lebanese Banking system, Journal of Management Governance, 15, pp.207-226.
Chang, C-S., Yu, S-W., Hung, C-H., (2014). Firm risk and performance: The role of corporate governance, Review of Management Science, DOI 10.1007/s11846-014-0132-x.
Chapra, M. U., Ahmed, H., (2002), Corporate governance in Islamic financial institutions, Working Paper, Islamic Development Bank, Islamic Research and Training Ibstitute, Jeddah.
Cheung, YL., Thomas Connelly, J., Limpaphayom, P., & Zhou, L., (2007), Do investors really value corporate governance? Evidence from the Hong Kong Market, Journal of International Finance Management Accounting, 18, pp.86–122.
Cooper, W. E., (2008),Monitoring and governance of private banks. The Quarterly Review of Economics and Finance, 49, pp.253-264.
Core, J., Guay, W. and Rusticus, T. (2005), Does weak governance cause weak stock returns? An examination of firm performance and analysts’ expectation, Working Paper,University of Pennsylvania.
Darmadi, S., (2011), Corporate governance disclosure in the annual report: An exploratory study on Indonesian Islamic banks, Working paper, Indonesian College of State Accountancy.
De Andres, P., Vallelado, E., (2008), Corporate governance in banking: The role of the board of directors, Journal of banking and Finance, 32, pp.2570-2580.
Dedu, V., Chitan, G., (2013), The influence of internal corporate governance on bank performance: An empirical analysis for Romania, Procedia-Social and Behavioral sciences, 99, pp.1114-1123.
Diamond, W., Rajan, G., (2009), The credit crisis: conjectures about causes and remedies, American Economic Review, 99, pp.606-610.
Farook, S., Hassan, M. K., Lanis, R., (2011),Determinants of corporate social responsibility disclosure: the case of Islamic banks, Journal of Islamic Accounting and Business Research, 2, pp.114-141.
Ferrero-Ferrero, I., Fernandez-Izquierdo, M. A., Munoz-Torres, M, J., (2012), The impact of the board of directors characteristics on corporate governance and risk-taking before and during the global financial crisis, Review of Management Science, 3, pp.207-226.
Frankel, R., Johnson, M., Johnson, K., (2002), The relation between auditors’ fees for non-audit services and earnings, Management Accounting Review, 77, pp.71-105.
Gompers, P. A., Ishii, J. L., Metrick, A., (2003), Corporate governance and equity prices, Quarterly Journal of Economics, 118, pp.107-155.
Grais, W. Pellegrini, M., (2006), Corporate governance in institutions offering Islamic financial services: Issues and options, Working Paper 4051, Washington, World Bank Policy Research.
Greuning, V., Iqbal, Z., (2007), Banking and the risk environment, in Simon Archer and R.A.A. Karim (eds.), Islamic Finance: The Regulatory Challenge. Chichester: John Wiley & Sons (Asia) Pte Ltd.
Hassan, M. K., (2012), A disclosure index to measure the extent of CG reporting by UAE listed corporations, Journal of Financial Reporting Accounting, 10, pp.3-44.
Hassan, M. K., Mollah, S., (2012), Corporate governance, risk-taking and firm performance of Islamic banks during global financial crisis, Working Paper.
Hossain, M., (2008), The extent of disclosure in annual reports of banking companies: The case of India, European Journal of Scientific Research, 23, pp.659-680.
Hutchinson, M., (2002), An analysis of the association between firms’ investment opportunities, board composition, and firm performance, Asia Pacific Journal of Accounting and Economics, 9, pp.17-39.
Hutchinson, M., Gul, A., (2004), Investment opportunity set, corporate governance practices and firm performance, Journal of Corporate Finance, 10, pp.595-614.
Iqbal, Z., Mirakhor, A., (2004), Stakeholders model of governance in Islamic economic system, Islamic Economic Studies, 2, pp.43-64.
Jensen, MC., (1993), The modern industrial revolution, exit and failure of internal control system, Journal of Finance, 48, pp.831-880.
Johnson, L., Daily, C., Ellstrand, A., (1996), Board of directors: A review and research agenda, Journal of Management, 22, pp.409-438.
John, K., Senbet, L., (1998), Corporate governance and board effectiveness, Journal of Banking and Finance, 22, pp.371-403.
Kirkpatrick, G., (2009), The corporate governance lessons from the financial crisis, Working Paper 1, OECD.
Klapper, F., Love, I., (2004), Corporate governance, investor protection and performance in emerging markets, Journal of Corporate Finance, 10, pp.703-728.
Klein, A., (2002), Audit committee, board of director characteristics, and earning management, Journal of Accounting and Economics, 3, pp.375-400.
Klein, A., (1998), Firm performance and board committee structure, Journal of Law and Economics, 41, pp.275-303.
Klein, P., Shapiro, D., Young, J., (2005), Corporate governance, family ownership and firm value, Corporate governance: An International Review, 6, pp.769-784.
Lee, C., Rosenstein, S., Rangan, N.,& Davidson III, W., (1992), Board composition and shareholder wealth: the case of management buyouts, Financial Management, 21, pp.58-72.
Levine, R., (2004), The corporate governance of banks: A concise discussion of concepts and evidence, Working Paper 3404, World Bank Policy Research, September.
Mohamed, S. A., (2007), A mini guides to Shari’ah audit for Islamic financial institutions, CERT Publications, Kuala Lumpur.
Nienhaus, V., (2007), Human Resource Management of Islamic Banks: Responses to Conceptual and Technical Challenges, in Simon Archer and R.A.A. Karim (eds.), Islamic Finance: The Regulatory Challenge.
Chichester: John Wiley & Sons (Asia) Pte Ltd.
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Patel, S., Balic, A., and Bwakira, L., ( 2002). Measuring transparency and disclosure at firm level in emerging markets, Emerging Markets Review, 3, p325-337.
Pathan, S., Skully, M., and Wickramanayake, J., ( 2007). Board Size, Independence and Performance: An Analysis of Thai Banks, Asia-Pacific Financial Markets, 14, p211-227.
Pearce, A., Zahra, A., (1992), Board composition from a strategic contingency perspective, Journal of Management Studies, 4, pp.411-438.
Rechner, P. L., Dalton, D. R., (1991), CEO duality and organizational performance: A longitudinal, Strategic Management Journal, 12, pp.155-160.
Rehman, U. R., Mangla, U. I., (2010), Corporate governance and performance of financial institutions in Pakistan: A comparison between conventional and Islamic banks in Pakistan, The Pakistan Development Review, 49, pp.461-475.
Safieddine, A., (2009), Islamic financial institutions and corporate governance: New insights for agency theory, Corporate Governance: An International Review, 17, pp.142-158.
Sarkar, J., Sarkar, S., Sen, K., (2012), A corporate governance index for large listed companies in India, Working Paper, 9, Indira Gandhi Institute of Development Research, Mumbai.
Smirlock, M.,(1985), Evidence on the (non) Relationship between Concentration and Profitability in Banking, Journal of Money, 17, pp. 69-83.
Srairi, S., (2009), A comparison of the profitability of Islamic and conventional banks: The case of GCC countries, Bankers, Markets, Investors, 34, pp.45-62.
Srairi, S., Ben Douissa, I., (2014), Factors influencing bank transparency: Case of emerging markets, British Journal of Economics, Management and Trade, 4, pp.523-540.
Sufian, F., Habibullah, M. S., (2010), Does economic freedom fosters banks performance? Panel evidence, Journal of Contemporary Accounting and Economics, 6, pp.77-91.
Sulaiman, M., Abd Majid, N., Ariffin, N. M., (2011), Corporate governance of Islamic financial institutions in Malaysia, Paper presented at the Proceedings of the 8th International Conference on Islamic Economics and Finance, Doha, Qatar.
Vinnicombe, T., (2010), AAOIFI reporting standards: Measuring compliance, Advances in Accounting, Incorporating Advances in International Accounting, 26, pp.55-65.
Yermack, D., (1996), Higher market valuation of companies with a small board of directors, Journal of Financial Economics, 40, pp.185-211.
AAOIFI (2010), Standards, Accounting and Auditing Organization for Islamic financial institutions, Manama, Bahrain.
Abu-Tapanjeh, M., (2006), Good corporate governance mechanism and firms’ operating and financial performance: Insight from the perspective of Jordanian industrial companies, Journal of King Saud University, 19, pp.101-121.
Abdel Karim, A., Archer, S., (2006), On capital structure, risk sharing, and capital adequacy in Islamic banks, International Journal of Theoretical and Applied Finance, 9, pp.269-280.
Aebi, V., Sabato, G., Schimd, M., (2012), Risk management, corporate governance, and bank performance in the financial crisis, Journal of Banking and Finance, 36, pp.3213-3226.
Adams, R., Mehran, H., (2012), Bank board structure and performance: evidence for large bank holding companies, Journal of Financial Intermediation, 21, pp.243-267.
Al-Malkawi, HA. N., Pillai, R., Bhatti, M., (2014), Corporate governance practices in emerging markets: The case of GCC countries, Economic Modeling, 38, pp.133-141.
Bashir, H., Hassan, M., (2003), Determinants of Islamic Banking Profitability, Paper presented at the Proceedings of theEconomic Research Forum 10th Annual Conference. Marrakech, Morocco, December 16-18.
Baltagi, B. H., (2005), Econometric analysis of panel data, John Wiley and Sons, Chichester,
Al-Sadah, A. K., (2007), Corporate governance of Islamic banks, its characteristics and effects and stakeholders and the role of Islamic banks supervisors, Thesis, School of management, University of Surrey.
Anderson, C., Mansi, A., Reeb, M., (2004), Board characteristics, accounting report integrity, and the cost of debt, Journal of Accounting and Economics, 37, pp.315-342.
Baltagi, B. H., (2005), Econometric analysis of panel data, John Wiley and Sons, Chichester,
Bebchuk, L., Spamann, H., (2010), Regulating banker’s pay, Gergetown Law Review, 98, pp.247-287.
Beltratti, A., Stulz, R. M., (2012), The credit crisis around the globe: why did some banks perform better, Journal of Financial Economics, 1105, pp.1-17.
Ben Naceur, S., Omran, M., (2011), The effects of bank regulations, competition, and financial reforms on banks’ performance, Emerging Markets Review, 12, pp.1-20.
Beiner, S., Drobetz, W., Schmid, M. M., & Zimmermann, H. (2006), An integrated framework ofcorporate governance and firm valuation, European Financial Management, 2, pp.249–283.
Bhagat, S., Bolton, B., (2008), Corporate governance and firm performance, Journal of Corporate Finance, 14, pp.257-273.
Bhagat, S., Bolton, B., Romano, R., (2008), The promise and peril of corporate governance indices, Columbia Law Review, 108, pp.1803-1882.
Black, B., Jang, H., Kim, W., (2006), Predicting firms’ corporate governance choices: Evidence from Korea, Journal of Corporate Finance, 12, pp.660-691.
Blair, M., (1995), Ownership and control: Rethinking corporate governance for the twenty-first century, Working Paper, Brookings Institution Press, Washington.
Brown, L., Caylor, M., (2006), Corporate governance and firm performance, Journal of Accounting and Public Policy, 25, pp.409–434.
Byun, HY., Kwak, SK., Hwang, LS., (2008). The implied cost of equity capital and corporate governance practices, Asian-Pacific Journal of Finance Studies, 37, pp.139–184.
Chahine, S., Safieddine, A., (2011), Is corporate governance different for the Lebanese Banking system, Journal of Management Governance, 15, pp.207-226.
Chang, C-S., Yu, S-W., Hung, C-H., (2014). Firm risk and performance: The role of corporate governance, Review of Management Science, DOI 10.1007/s11846-014-0132-x.
Chapra, M. U., Ahmed, H., (2002), Corporate governance in Islamic financial institutions, Working Paper, Islamic Development Bank, Islamic Research and Training Ibstitute, Jeddah.
Cheung, YL., Thomas Connelly, J., Limpaphayom, P., & Zhou, L., (2007), Do investors really value corporate governance? Evidence from the Hong Kong Market, Journal of International Finance Management Accounting, 18, pp.86–122.
Cooper, W. E., (2008),Monitoring and governance of private banks. The Quarterly Review of Economics and Finance, 49, pp.253-264.
Core, J., Guay, W. and Rusticus, T. (2005), Does weak governance cause weak stock returns? An examination of firm performance and analysts’ expectation, Working Paper,University of Pennsylvania.
Darmadi, S., (2011), Corporate governance disclosure in the annual report: An exploratory study on Indonesian Islamic banks, Working paper, Indonesian College of State Accountancy.
De Andres, P., Vallelado, E., (2008), Corporate governance in banking: The role of the board of directors, Journal of banking and Finance, 32, pp.2570-2580.
Dedu, V., Chitan, G., (2013), The influence of internal corporate governance on bank performance: An empirical analysis for Romania, Procedia-Social and Behavioral sciences, 99, pp.1114-1123.
Diamond, W., Rajan, G., (2009), The credit crisis: conjectures about causes and remedies, American Economic Review, 99, pp.606-610.
Farook, S., Hassan, M. K., Lanis, R., (2011),Determinants of corporate social responsibility disclosure: the case of Islamic banks, Journal of Islamic Accounting and Business Research, 2, pp.114-141.
Ferrero-Ferrero, I., Fernandez-Izquierdo, M. A., Munoz-Torres, M, J., (2012), The impact of the board of directors characteristics on corporate governance and risk-taking before and during the global financial crisis, Review of Management Science, 3, pp.207-226.
Frankel, R., Johnson, M., Johnson, K., (2002), The relation between auditors’ fees for non-audit services and earnings, Management Accounting Review, 77, pp.71-105.
Gompers, P. A., Ishii, J. L., Metrick, A., (2003), Corporate governance and equity prices, Quarterly Journal of Economics, 118, pp.107-155.
Grais, W. Pellegrini, M., (2006), Corporate governance in institutions offering Islamic financial services: Issues and options, Working Paper 4051, Washington, World Bank Policy Research.
Greuning, V., Iqbal, Z., (2007), Banking and the risk environment, in Simon Archer and R.A.A. Karim (eds.), Islamic Finance: The Regulatory Challenge. Chichester: John Wiley & Sons (Asia) Pte Ltd.
Hassan, M. K., (2012), A disclosure index to measure the extent of CG reporting by UAE listed corporations, Journal of Financial Reporting Accounting, 10, pp.3-44.
Hassan, M. K., Mollah, S., (2012), Corporate governance, risk-taking and firm performance of Islamic banks during global financial crisis, Working Paper.
Hossain, M., (2008), The extent of disclosure in annual reports of banking companies: The case of India, European Journal of Scientific Research, 23, pp.659-680.
Hutchinson, M., (2002), An analysis of the association between firms’ investment opportunities, board composition, and firm performance, Asia Pacific Journal of Accounting and Economics, 9, pp.17-39.
Hutchinson, M., Gul, A., (2004), Investment opportunity set, corporate governance practices and firm performance, Journal of Corporate Finance, 10, pp.595-614.
Iqbal, Z., Mirakhor, A., (2004), Stakeholders model of governance in Islamic economic system, Islamic Economic Studies, 2, pp.43-64.
Jensen, MC., (1993), The modern industrial revolution, exit and failure of internal control system, Journal of Finance, 48, pp.831-880.
Johnson, L., Daily, C., Ellstrand, A., (1996), Board of directors: A review and research agenda, Journal of Management, 22, pp.409-438.
John, K., Senbet, L., (1998), Corporate governance and board effectiveness, Journal of Banking and Finance, 22, pp.371-403.
Kirkpatrick, G., (2009), The corporate governance lessons from the financial crisis, Working Paper 1, OECD.
Klapper, F., Love, I., (2004), Corporate governance, investor protection and performance in emerging markets, Journal of Corporate Finance, 10, pp.703-728.
Klein, A., (2002), Audit committee, board of director characteristics, and earning management, Journal of Accounting and Economics, 3, pp.375-400.
Klein, A., (1998), Firm performance and board committee structure, Journal of Law and Economics, 41, pp.275-303.
Klein, P., Shapiro, D., Young, J., (2005), Corporate governance, family ownership and firm value, Corporate governance: An International Review, 6, pp.769-784.
Lee, C., Rosenstein, S., Rangan, N.,& Davidson III, W., (1992), Board composition and shareholder wealth: the case of management buyouts, Financial Management, 21, pp.58-72.
Levine, R., (2004), The corporate governance of banks: A concise discussion of concepts and evidence, Working Paper 3404, World Bank Policy Research, September.
Mohamed, S. A., (2007), A mini guides to Shari’ah audit for Islamic financial institutions, CERT Publications, Kuala Lumpur.
Nienhaus, V., (2007), Human Resource Management of Islamic Banks: Responses to Conceptual and Technical Challenges, in Simon Archer and R.A.A. Karim (eds.), Islamic Finance: The Regulatory Challenge.
Chichester: John Wiley & Sons (Asia) Pte Ltd.
OECD (2014), Principles of corporate governance, www.oecd.org/daf/governance/principles/html.
Pasiouras, F., Kosmidou, K., (2007), Factors influencing the profitability of domestic and foreign commercial banks in the European Union, Research in International Business and Finance, 21, pp.223-237.
Patel, S., Balic, A., and Bwakira, L., ( 2002). Measuring transparency and disclosure at firm level in emerging markets, Emerging Markets Review, 3, p325-337.
Pathan, S., Skully, M., and Wickramanayake, J., ( 2007). Board Size, Independence and Performance: An Analysis of Thai Banks, Asia-Pacific Financial Markets, 14, p211-227.
Pearce, A., Zahra, A., (1992), Board composition from a strategic contingency perspective, Journal of Management Studies, 4, pp.411-438.
Rechner, P. L., Dalton, D. R., (1991), CEO duality and organizational performance: A longitudinal, Strategic Management Journal, 12, pp.155-160.
Rehman, U. R., Mangla, U. I., (2010), Corporate governance and performance of financial institutions in Pakistan: A comparison between conventional and Islamic banks in Pakistan, The Pakistan Development Review, 49, pp.461-475.
Safieddine, A., (2009), Islamic financial institutions and corporate governance: New insights for agency theory, Corporate Governance: An International Review, 17, pp.142-158.
Sarkar, J., Sarkar, S., Sen, K., (2012), A corporate governance index for large listed companies in India, Working Paper, 9, Indira Gandhi Institute of Development Research, Mumbai.
Smirlock, M.,(1985), Evidence on the (non) Relationship between Concentration and Profitability in Banking, Journal of Money, 17, pp. 69-83.
Srairi, S., (2009), A comparison of the profitability of Islamic and conventional banks: The case of GCC countries, Bankers, Markets, Investors, 34, pp.45-62.
Srairi, S., Ben Douissa, I., (2014), Factors influencing bank transparency: Case of emerging markets, British Journal of Economics, Management and Trade, 4, pp.523-540.
Sufian, F., Habibullah, M. S., (2010), Does economic freedom fosters banks performance? Panel evidence, Journal of Contemporary Accounting and Economics, 6, pp.77-91.
Sulaiman, M., Abd Majid, N., Ariffin, N. M., (2011), Corporate governance of Islamic financial institutions in Malaysia, Paper presented at the Proceedings of the 8th International Conference on Islamic Economics and Finance, Doha, Qatar.
Vinnicombe, T., (2010), AAOIFI reporting standards: Measuring compliance, Advances in Accounting, Incorporating Advances in International Accounting, 26, pp.55-65.
Yermack, D., (1996), Higher market valuation of companies with a small board of directors, Journal of Financial Economics, 40, pp.185-211.
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Published
2015-11-17
How to Cite
Srairi, S. (2015). Corporate Governance Disclosure Practices and Performance of Islamic Banks in GCC Countries. Journal of Islamic Finance, 4(2). https://doi.org/10.31436/jif.v4i2.88
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