Islamic Governance, National Governance, and Bank Risk Management and Disclosure in MENA Countries

What is it about?

We examine the relationships among religious governance, especially Islamic governance quality (IGQ), national governance quality (NGQ), and risk management and disclosure practices (RDPs), and consequently ascertain whether NGQ has a moderating influence on the IGQ–RDPs nexus. Using one of the largest data sets relating to Islamic banks from 10 Middle East and North Africa (MENA) countries from 2006 to 2013, our findings are threefold. First, we find that RDPs are higher in banks with higher IGQ. Second, we find that RDPs are higher in banks from countries with higher NGQ. Finally, we find that NGQ has a moderating effect on the IGQ–RDPs nexus. Our findings are robust to alternative RDP measures and estimation techniques. These results imply that the quality of disclosure depends on the nature of the macro-social-level factors, such as religion that have remained largely unexplored in business and society research, and, therefore, have important implications for policy makers.

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Why is it important?

Hence, this study seeks to make a number of new contributions to the extant literature by examining the relationship among IGQ, NGQ, and RDPs within such a distinct environment. First, and drawing insights from a neo-institutional perspective, we offer first-time evidence on the impact of IGQ on Islamic banks’ RDPs. Recent studies suggest that Shariah boards play an important role in monitoring Islamic bank’s financial reporting quality (Al-Bassam & Ntim, 2017; Farook et al., 2011; Safieddine, 2009). We extend this nascent research by providing evidence that Islamic governance can serve as an additional governance layer with capacity to closely monitor and scrutinize managerial decisions, including those relating to disclosures. We argue that by highlighting the monitoring, performance, and value maximizing roles of Islamic governance within Islamic banks, our finding may help inform the decisions of the various stakeholders of Islamic banks, such as employees, depositors, investors, government, and regulators. Second, and to the best of our knowledge, our study offers first-time evidence on the effect of NGQ on RDPs. This result may potentially help investors and regulators to better understand and/or evaluate the channels (e.g., the institutional and regulatory setting) through which macro-social-level factors, such as religion and national governance affect disclosure quality, transparency, and accountability within Islamic banks. Finally, previous research indicates that the relation between governance quality and disclosure varies according to the type of business, disclosure, and contexts (Abedifar et al., 2013; Barakat & Hussainey, 2013; Essen et al., 2013; Ntim et al., 2013). We extend this literature by providing first-time evidence that shows that NGQ has a moderating effect on the relationship between IGQ and RDPs.