What is it about?
This paper examines the relationships between the effectiveness of Shariah supervisory board (SSB), their remuneration and mode of financing Islamic bank. The SSB effectiveness is evaluated by an index based on 9 attributes score. This study comprises 18 Islamic banks in which operating in Malaysia from the year 2012 to 2013 as a sample. Our regression analysis shows that the effectiveness of SSB does not concern with the mode of Islamic bank financing. However, we found that SSB remuneration and bank’s financial growth shown a positive and significant relationship with mode of financing. The implications of these findings are discussed.
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Why is it important?
There is a strong debut on the Islamic mode of financing which do not underlie with the banner of Islamic banking in which constitutes the elimination of injustices of the interest-based system as ordained by Holy Qur'an . The current mode of financing still cannot be expected to completely free from the injustices of the interest-based system or to contribute to the achievement of socioeconomic objectives which Islam seeks to achieve. Although there are many views can be discussed towards the mode of financing adopted by the Islamic banks, this study aims to explain whether Shariah supervisory boards (SSB) and their remuneration have any significant influence towards the choices of Islamic banks mode of financing. Based on the work of [4] who suggested that, SSB plays an important role, particularly in harmonizing the Islamic rules and guidelines in Islamic banks (i.e. Shariah-compliance gatekeeper), this study argues that the choices of style of financing by Islamic banks should be tempted by this board as to avoid any injustices as what has been proposed in Shariah Law. In other words, the SSB should put highly concern with regard to any mode of financing by the Islamic bank in which are not aligned with the profit- sharing principles.
Perspectives
The objective of this study is to examine the influence of SSB effectiveness and their remuneration to the choices of Islamic mode of financing by Malaysian Islamic bank. The analysis shows that an effective SSB does not have significant bearing towards the choice of Islamic mode of financing in Malaysia but their remuneration have. Intrinsically, this finding might give some insight towards the notion of ‘cosmetic reason’ for regulator, policy maker and another researcher on the effectiveness and the existence of SSB in Malaysia especially when incorporating SSBs as part of the corporate governance mechanism.
Dr. Azrul Abdullah, Ph.D, C.A.(M), NCE
Universiti Teknologi MARA
Read the Original
This page is a summary of: Mode of Islamic Bank Financing: Does Effectiveness of Shariah Supervisory Board Matter?, SSRN Electronic Journal, January 2015, Elsevier,
DOI: 10.2139/ssrn.2769667.
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