Executives’ commitment, corporate governance, and performance of Islamic banks: Evidence from the Saudi context
-
DOIhttp://dx.doi.org/10.21511/bbs.17(2).2022.08
-
Article InfoVolume 17 2022, Issue #2, pp. 86-97
- Cited by
- 629 Views
-
224 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper aims to investigate the impact of executives’ ethical commitment and corporate governance on the Islamic banks’ performance in the Saudi context. The sample of this study consists of Saudi Islamic banks over the period 2012–2020. The financial data were extracted from the Saudi stock exchange (Tadawul). While the behavioral data, particularly the executives’ ethical commitment, is measured through the ethical commitment index. In the econometric analysis, a generalized least square regression method (GLS) is applied to two different sub-models with different dependent variables (return on assets and return on equity). Empirical results suggest that board size and board independence have a significant impact on bank performance. The ethical commitment of executives contributes positively and significantly to the performance of Islamic banks in terms of return on assets. However, there is no statistical evidence of the effect of ethical commitment on Islamic banks’ returns on equity. Therefore, boards of directors of Islamic banks should include expert independent directors to promote best governance practices and enhance executives’ commitment. Larger boards can improve their credit ratings and access to resources.
Acknowledgment
This study was funded by Deanship of Scientific Research at Princess Nourah bint Abdulrahman University (Grant No. 39/S/243).
- Keywords
-
JEL Classification (Paper profile tab)C23, G21, G30, G41
-
References58
-
Tables9
-
Figures0
-
- Table 1. Data summation
- Table 2. Frequency analysis of EC items
- Table 3. Descriptive statistics
- Table 4. Pearson correlation matrix
- Table 5. Multicollinearity test
- Table 6. Breusch-Pagan test
- Table 7. Test of individual effects
- Table 8. Hausman test
- Table 9. Multiple regression (GLS)
-
- Abdallah, A. A. (1994). The Role of Shariah Supervisory Board in Setting Accounting Policies in Islamic Banks. Development of an accounting system for Islamic banks. Selected readings, Chapter 10 (pp. 129-142). London: Institute of Islamic Bank and Insurance.
- Abidin, A. F. Z., Hashim, H. A., & Ariff, A. M. (2017). Ethical commitments and financial performance: Evidence from publicly listed companies in Malaysia. Asian Academy of Management Journal, 22(2), 53-95.
- Ajili, H., & Bouri, A. (2018). Assessing the moderating effect of Shariah Board on the relationship between financial performance and accounting disclosure. Managerial Finance, 44(5), 570-589.
- Al-Musalli, M. A., & Ku Ismail, K. N. I. (2012). Corporate governance, bank-specific characteristics, banking industry characteristics, and intellectual capital performance of banks in Arab gulf cooperation council countries. Asian Academy Management Journal of Accounting & Finance, 8(1), 115-135.
- Almutairi, A., & Quttainah, M. (2017). Corporate governance: evidence from Islamic banks. Social Responsibility Journal, 13(3), 601-624.
- Alnasser, S., & Muhammed, J. (2012). Introduction to corporate governance from an Islamic perspective. Humanomics, 28(3), 220-231.
- AlQanea, M. K., & Hamdan, A. M. M. (2017). Islamic banks board independence and its relation to performance in GCC countries. International Journal of Islamic Marketing and Branding, 2(2), 100-121.
- Al-Saidi, M., & Al-Sammari, B. (2013). Board composition and bank performance in Kuwait: an empirical study. Managerial Auditing Journal, 28(6), 472-494.
- Ashraf, N., Aycinena, D., Martínez, C., & Yang, D. (2015). Savings in Transnational Households: A Field Experiment Among Migrants in El Salvador. Review of Review of Economics and Statistics, 97(2), 332-351.
- Belkhir, M. (2009). Board of Directors’ Size and Performance in the Banking Industry, International Journal of Managerial Finance, 5(2), 201-221.
- Bouarif, N. (2015). Predicting organizational commitment: The role of religiosity and ethical ideology. European Scientific Journal, 11(17), 283-307.
- Briston, R., & El-Ashker, A. (1986). Religious audit: Could it happen here? Accountancy, 98(1118), 120-127.
- Bukair, A., & Abdulrahman, A. (2015). Bank performance and board of directors attributes by Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management, 8(3), 291-309.
- Choudhury, M. A., & Hoque, M. Z. (2006). Corporate governance in Islamic perspective. Corporate Governance, 6(2), 116-128.
- Choudury, M. A., & Hoque, M. Z. (2004). An advanced exposition of Islamic economics and finance. Edward Mellen Press.
- Delorenzo, Y. T. (2007). Shariah compliance risk. Chicago Journal of International Law, 7(2), 397-408.
- Drobetz, W., Schillhofer, A., & Zimmermann, H. (2003). Corporate Governance and Expected Stock Returns: Evidence from Germany. SSRN Electronic Journal.
- Evan, W. M., & Freeman, R. E. (1990). Corporate governance: A stakeholder interpretation. Journal of Behavioral Economics, 19(4), 337-359.
- Fallatah, Y., & Dickins, D. (2012). Corporate governance and firm performance and value in Saudi Arabia. African Journal of Business Management, 6(36), 10025-10034.
- Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2011). Business Ethics: Ethical Decision Making & Cases. New York: South-Western College Publishing.
- Finkelstein, S., Hambrick, D. C., & Cannella, A. A. (2009). Strategic leadership: Theory and research on executives, top management teams, and boards. Strategic management series. New York, NY: Oxford University Press.
- Fischer, T. M., & Sawczyn, A. A. (2013). The relationship between corporate social performance and corporate financial performance and the role of innovation: Evidence from German listed firms. Journal of Management Control, 24(1), 27-52.
- Fu, G., & Jia, M. (2012). On the reasons for the vexing CSP-CFP relationship: Methodology, control variables, stakeholder groups and measures – the review of 63 studies from 1990s. International Journal of Business and Management, 7(12), 130-136.
- Gemmill, G., & Thomas, D. C. (2004). Does Governance Affect the Performance of Closed-End Funds? SSRN Electronic Journal.
- Ghaffar, A. (2014). Corporate Governance and Profitability of Islamic Banks Operating in Pakistan. International Journal on Contemporary Research in Business, 6(2), 1-17.
- Grais, W. (2004). Corporate Governance Challenges of Businesses Offering Islamic Financial Services. Washington: World Bank.
- Grassa, R., & Mattousi, H. (2014). Corporate governance of Islamic banks, A comparative study between GCC and Southeast Asia Countries. International Journal of Islamic and Middle Eastern Finance and Management, 7(3), 346-362.
- Hakimi, A, Rachdi, H., Mokni, R., & Hssini, H. (2018). Do board characteristics affect bank performance? Evidence from the Bahrain Islamic banks. Journal of Islamic Accounting and Business Research, 9(2), 251-272.
- Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9(2), 193-206.
- Hamza, F., Azouzi, M. A., & Jarboui, A. (2014). CEO’s commitment bias, ownership concentration, and innovation decision: Behavioral management of CEO’s discretion. Cogent Economics & Finance, 2(1), 948123.
- Hamza, H. (2013). Sharia governance in Islamic banks: effectiveness and supervision model. International Journal of Islamic and Middle Eastern Finance and Management, 6(3), 226-237.
- Haniffa, R., & Hudaib, M. (2007) Exploring the Ethical Identity of Islamic Banks via Communication in Annual Reports. Journal of Business Ethics, 76, 97-116.
- Hossain, M., Cahan, S. F., & Adams, M. B. (2000). The investment opportunity set and the voluntary use of outside directors: New Zealand evidence. Accounting and Business Research, 30(4), 263-273.
- Ibrahim, A., Habbash, M., & Hussainey, K. (2019). Corporate governance and risk disclosure: evidence from Saudi Arabia. International Journal of Accounting, Auditing and Performance Evaluation, 15(1), 89-111.
- Iqbal, Z., & Mirakhor, A. (2004). Stakeholders model of governance in Islamic economic system. Islamic Economic Studies, 11(2), 43-64.
- Jensen, M. (1993). The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48(3), 831-880.
- Kim, K., Mauldin, E., & Patro, S. (2014). Outside Directors and Board Advising and Monitoring Performance. Journal of Accounting and Economics, 57(2-3), 110-131.
- Mahenthiran, S., Terpstra-Tong, J., Terpstra, R., & Rachagan, S. (2015). Impact of executive citizenship and organizational commitment on corporate social responsibility. Social Responsibility Journal, 11(2), 387-402.
- Mathkur, N. M. M. (2019). Business Ethics in Islamic Finance. Archives of Business Research, 7(2), 143-152.
- Matoussi, H., & Grassa, R. (2012). Is corporate governance different for Islamic banks? A comparative analysis between the Gulf Cooperation Council context and the Southeast Asia context (Working Papers No. 734). The Economic Research Forum.
- Mokhlis, S. (2009). Relevancy and measurement of religiosity in consumer behavior research. International Business Research, 2(3), 75-84.
- Mollah, S., & Zaman, M. (2015). Sharia supervision, corporate governance, and performance: conventional vs. Islamic banks. Journal of Banking & Finance, 58, 418-435.
- Musibah, A. S., & Alfattani, W. (2014). The mediating effect of financial performance on the relationship between Shariah supervisory board effectiveness, intellectual capital, and corporate social responsibility, of Islamic banks in Gulf Cooperation Council countries. Asian Social Science, 10(17), 139-164.
- Nasution, M., & Rafiki, A. (2019). Islamic work ethics, organizational commitment and job satisfaction of Islamic banks in Indonesia. RAUSP Management Journal, 55(2), 195-205.
- Nathie, M. (2009). Islam Bank Failure: A case study. Brisbane: Griffith Islamic Research Unit.
- Pae, J., & Choi, T.H. (2011). Corporate governance, commitment to business ethics, and firm valuation: Evidence from the Korean stock market. Journal of Business Ethics, 100(2), 323-348.
- Rachdi, H., & Ben Ameur, I. G. (2011). Board Characteristics, Performance and Risk Taking Behaviour in Tunisian Banks. International Journal of Business and Management, 6(6), 88-98.
- Sheikh, N. A., & Kareem, S. (2015). The Impact of Board Structure, Ownership Concentration, and CEO Remuneration on Performance of Islamic Commercial Banks in Pakistan. Pakistan Journal of Islamic Research, 15(1), 49-59.
- Tracey, P. (2012) Religion and Organization: A Critical Review of Current Trends and Future Directions. The Academy of Management Annals, 6(1), 87-134.
- Ullah, S., & Lee, K.-H. (2012). Do customers patronize Islamic banks for Shari’a compliance? Journal of Financial Services Marketing, 17(3), 206-214.
- Van der Merwe, R., Pitt, L., & Berthon, P. (2003). Are excellent companies ethical? Evidence from an industrial setting. Corporate Reputation Review, 5(4), 343-358.
- Verschoor, C. C. (1998). A study of the link between a corporation’s financial performance and its commitment to ethics. Journal of Business Ethics, 17(13), 1509-1516.
- Vogel, D. (1991). Business ethics past and present. Public Interest, 102, 49-64.
- Wang, Y., & Berens, G. (2015). The impact of four types of corporate social performance on reputation and financial performance. Journal of Business Ethics, 131(2), 337-359.
- Williams, S. M. (2000). Relationship between Board Structure and a Firm’s Intellectual Capital Performance in an Emerging Economy (Working Paper). University of Calgary, Canada.
- Zain, E. N. B. M., & Ghazali, P. L. B. (2018). Non-performing loans and its implications toward Bank Performance: Comparison on Islamic and Conventional Banks. International Journal of Academic Research in Business and Social Sciences, 8(12), 528-537.
- Zain, S. N., & Shafii, Z. (2018). The impact of shariah governance to financial and non-financial performance in Islamic financial institutions (IFIs): a literature survey. International Journal of Islamic Business, 3(2), 27-40.
- Zhu, N., Wang, B., Yu, Z., & Wu, Y. (2016). Technical efficiency measurement incorporating risk preferences: An empirical analysis of Chinese commercial banks. Emerging Markets Finance and Trade, 52(3), 610-624.