Can Shariah board characteristics influence risk-taking behavior of Islamic banks?

Amal AlAbbad (Department of Accounting, Iona College, New Rochelle, New York, USA)
M. Kabir Hassan (Department of Economics and Finance, University of New Orleans, New Orleans, Louisiana, USA)
Irum Saba (Institute of Business Administration, Karachi, Pakistan)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Publication date: 9 September 2019

Abstract

Purpose

The purpose of this paper is to study whether the characteristics of the Shariah Supervisory Board (SSB) can influence the risk-taking behaviors of Islamic banks.

Design/methodology/approach

The data on governance were collected from 70 Islamic banks’ annual reports across 18 countries for the period from 2000 to 2011 to investigate the relationship between SSB’s characteristics including size, busyness and foreign board and the Islamic banks’ risk activities.

Findings

The size of SSB and the proportion of busy board in SSB positively and significantly influence Islamic banks’ asset return and insolvency risks. Foreign members are more effective in monitoring banks’ Shariah compliance. Further analysis provides some evidence that most of the findings on the associations between the SSB structure and bank risk are derived from countries in the Gulf Cooperation Council where Shariah governance is ruled internally at the bank level.

Practical implications

There is a need for better Shariah board characteristics in place that complement with other governance mechanisms to well comprehend the main purpose of Islamic banks.

Originality/value

SSB board busyness and foreign characteristics appear to influence the risk-taking behaviors of Islamic banks.

Keywords

Citation

AlAbbad, A., Hassan, M.K. and Saba, I. (2019), "Can Shariah board characteristics influence risk-taking behavior of Islamic banks?", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 12 No. 4, pp. 469-488. https://doi.org/10.1108/IMEFM-11-2018-0403

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Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited


1. Introduction

There is a belief that excessive risk-taking activities of banks coupled with the failure of regulatory frameworks to prevent such risk-taking were responsible for the recent global financial crisis. Although there were various reasons underpinning banks’ risk-taking, banking industry, public sectors and academia agree to the fact that failures of bank corporate governance, such as ineffective board oversight, played an important role (Erkens et al., 2012; Sharfman, 2009). More recently, the literature on Islamic banking and finance has emerged that reveals that Islamic banks have been more resilient and did not reveal significant write-offs during the global financial crisis of 2008; despite that other banks have been negatively influenced by the crisis (Hasan and Dridi, 2010; Perry, 2011). Perry (2011) argued that the two-tiered type governance of Islamic banks, which is similar to the governance structure of German companies, would be an effective tool in protecting Islamic banks from the failure faced by conventional banks. Since then, a considerable amount of studies have been conducted on the governance of Islamic banks and on its differences from conventional counterparts.

The institution of Shariah Supervisory Board (SSB) is the key feature that distinguishes the governance of Islamic banks from their conventional peers. At the top of their governance, Islamic banks establish SSB that works with the board of directors and acts as an independent control mechanism to certify that all bank’s activities are compliant with Islamic or Shariah law. Hence, SSB works as an extra monitoring and oversight mechanisms that create some constraints on bank’s operation. According to Mollah and Zaman (2015), SSB might also create some pressures on board of directors and management by restricting the aggressive and risky projects.

The profit- and loss-sharing or the PLS scheme where each party needs to incur some risks to gain some compensations is the cornerstone of Islamic banking and finance. Under the PLS scheme, depositors’ funds will be pooled into a common fund to be used by the bank without any control rights for depositors, and the bank would decide how to invest the funds. To avoid the interest rate, the PLS parties would set an unguaranteed ex-post rate of return. Moreover, these deposits are not guaranteed in principle value and do not generate any fixed rate of return. If the banks record losses, depositors or investment account holders (IAHs) may scarify part or all of their investment deposits, unless there is negligence or misconduct by the bank.

Owing to the religious convictions of IAHs, nature of PLS contracts and lack of deposit insurance and any governance rights for IAHs, Islamic banks face a lower risk of withdrawal. This, however, would create some incentives for Islamic banks to engage more in risky investments to maximize bank’s profit and the loss, if any, would be passed to the IAHs (Mollah et al., 2017; Abdel Karim, 2001; Abdel Karim and Archer, 2002). To decrease such incentives and to protect the interests of IAHs, SSB must be established at the top of Islamic banks’ governance. SSB needs to ensure that Islamic banks should not involve in more risky projects, to be in compliant with Shariah law, which in turn would help to protect the interests of IAHs (El-Hawary et al., 2007; Grais and Pellegrini, 2006; Deloitte, 2010).

Drawing on a random sample of Islamic banks across 18 countries for the period from 2000 to 2011, this study examines whether the governance style of Islamic banks, specifically the characteristics of SSB, would influence banks risk-taking behaviors. Using generalized least-squares (GLS) and three-stage least-squares (3SLS) estimations, the results show that the larger size of SSB and busy SSB are associated with higher bank asset return and insolvency risks, whereas a higher proportion of foreign scholars in SSB is associated with lower risk behaviors of Islamic banks. Findings for the larger size of SSB or busier SSB indicate that the Shariah board would be less effective in monitoring bank’s managers, which may lead managers to take more risk as they have a preference to select more risk (Abdel Karim, 2001; Abdel Karim and Archer, 2002; Nomran et al., 2017; Nomran et al., 2018). Moreover, the negative association between foreign scholars and risk would indicate that foreign scholars who serve on SSB would be more concerned about their reputations and their job security, making them more effective in monitoring banks’ managers, which consequently would make Islamic banks to exhibit less risky investments.

In further analysis, the study investigates whether SSB rulings (internal vs external) have an influence on the relation between SSB characteristics and risk in Islamic banks. Shariah governance is ruled internally at the institutional level in countries that are members of the Gulf Cooperation Council or (GCC), whereas it is ruled externally, at a state level, in other countries. The result indicates that most of the findings are derived from banks operated in GCC where Shariah governance ruled at the bank level. Overall findings point out to the existing practices of SSB and highlight the need for a better-functioning Shariah board that works with other bank’s governance mechanisms to better achieve the goals of Islamic banks.

The current study contributes to the growing body of literature on Islamic banking and finance. Although there is abundant literature on risk-taking and corporate governance in the conventional banking industry, little is known on the governance of Islamic banking. Prior studies on Islamic banking describe the theoretical foundations of Shariah governance and its uniqueness (Choudhury and Hoque, 2006; Lewis, 2005; Safieddin, 2009). However, empirical studies on the governance of Islamic banking are still minimum. Up until recently, researches by Matoussi and Grassa (2014) and Mollah et al. (2017) questioned whether bank’s governance influences its performance on a sample of two types of banks: Islamic and conventional banks. These studies report that the governance structure significantly and positively influences the bank’s performance, and such influence is more pronounced in the case of Islamic banks. In terms of risk-taking studies, Mollah et al. (2017) provided empirical evidence stating that the nature of governance in Islamic banks allows them to take greater risks, measured by Z-score, and to achieve higher returns on assets (ROAs) because of the higher complexity of Shariah products and transactions.

Focusing on the religious nature of Islamic banks, Ali and Azmi (2016) tested whether the religious diversity of bank’s board affects bank performance in a sample of Islamic banks and conventional counterparts operated in Malaysia. They show, however, that no relations exist between the religious orientation of the bank’s board and its performance with no differences between a Muslim and a non‐Muslim director in the board as both can effectively run the business for Islamic banks. In the same line of research, Mollah et al. (2016) also investigated the influence of the Shariah board on banks’ performance and found that SSB has no association with banks’ performance, and such board is pronounced as a weak parameter in the Islamic banks’ governance system as its monitoring ability is minimum. However, Mollah and Zaman (2015) and Nomran et al. (2018) found that SSB positively impacts Islamic banks’ performance, which provides support to the positive contribution of Shariah governance in Islamic banks. Another study by Alman (2012) examined how SSB characteristics influence the risk-taking activities of Islamic banks. In his study, Alman (2012) focused on the size and busyness of SSB and how these factors influence Islamic banks’ loan risks and found that the loan portfolio risk taking of Islamic banks is positively influenced by the increasing size of the SSB, as well as when top-ranked Shariah scholars with multiple memberships, or busy board, have board mandates. A recent study by Haridan et al. (2018) examined whether the Shariah board effectively serves in meeting the religious expectations of Islamic banks following the adaption of the 2011 Malaysian Shariah Governance Framework. Using a qualitative approach undertaking in-depth interviews, they found that SSB members have a lower level of competency and lack of banking and finance expertise, and they generally meet the minimum responsibility of further making effective and attentive monitoring. The current study differs from that of Alman (2012) in two different ways. First, in addition to SSB size and busyness, this study considers the percentage of foreign members in SSB and how such members influence the behaviors of Islamic banks. Foreign directors are valuable additions to the banks’ board because of their global perspective and expertise, but their influence on Islamic banks behaviors is still an open question. Second, this paper considers the overall risk activities of the banks, measured by the volatility of asset return as well as Z-score, whereas Alman (2012) focuses only on banks’ loan portfolio. Third, the current study utilizes different analysis tools, GLS random effect (RE) and 3SLS estimations to test the proposed model, and it controls for numbers of bank and country-level variables that have not been controlled for, whereas the literature indicates their significant impact on bank behaviors.

In Section 2, the paper reviews the related academic literature on bank governance and risk-taking behaviors leading to the main hypotheses. Sample, variable measurement and descriptive statistics are specified in Section 3, whereas the empirical results are presented in Section 4. Sections 5 and 6 show the robustness of the results with additional findings, respectively. Section 7 concludes.

2. Related literature and hypotheses development

2.1 Bank governance and risk-taking behaviors

Bank shareholders have a preference to engage in higher risk behaviors because of moral hazard problems, limited liability and convex pay-off (Jensen and Meckling, 1976; John et al., 1991). Because of a higher information asymmetry level in the banking industry, debt contract ex-ante is not effective in curbing shareholders from taking more risks (Dewatripont and Tirole, 1994). Furthermore, deposit insurance and risk-adjusted capital increase the problem of moral hazard, by encouraging shareholders to take more risky investments, and fail to control banks’ incentives (Jensen and Meckling, 1976; Merton, 1977; John et al., 1991).

Shareholders in Islamic banking, however, would not only concern about maximizing their wealth but they would also concern about banks’ trustworthiness in investing their funds in a manner that is consistent with Shariah law (Chapra and Ahmed, 2002). Therefore, there are two sources of agency problems in Islamic banks: the traditional source that is created whenever managers diverge from maximizing shareholders’ wealth and the unique source that is created whenever managers deviate from placing supplied funds in Islamic ways. This unique type of agency issue may affect the trustworthiness of the bank, as well as its ability to attract new investors. For instance, Chapra and Ahmed (2002) showed that the majority of depositors in Bahraini Islamic banks and Sudanese Islamic banks are prepared to withdraw their funds whenever banks misplaced their money from Shariah-compliant manners.

To alleviate the unique agency problem faced by Islamic banks, the regulatory bodies of Islamic financial institutions, mainly the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), require Islamic banks to initiate SSB as an additional tier within the governance of banks to reassure all stakeholders that the institution’s activities are completely in compliance with Shariah law (Abdel Karim and Archer, 2002; IFSB, 2005). SSB works as an independent control mechanism that mainly sets Shariah-related rules and principles, certifies that all bank’s activities and projects are in conformity with Shariah and provides advice to the managers and board of directors about any Shariah-related issues (Safieddin, 2009).

Shariah governance standards set by AAOIFI and IFSB focus on SSB’s independence, competence, confidentiality, consistency and disclosure. In terms of SSB size, AAOIFI requires that SSB must have at least three members recommended by the board of directors and appointed by the shareholders of an Islamic bank (El-Hawary et al., 2007). SSB members play a monitoring role to ensure Shariah compliance. Thus, they communicate information to the shareholders when managers deviate from Shariah compliance and take more risks. The SSB members are morally and ethically driven rather than greed so that the belief is that they report truthfully to the shareholders. Moreover, the appointment and election process of SSB members makes them more dependent on shareholders, especially when SSB members have the plan to continue serving on the board (Rammal, 2006; Farook and Farooq, 2011).

2.2 Hypotheses development

Board size is one major characteristic that plays role in board’s effectiveness in monitoring managers and limiting their opportunistic behaviors. Findings from a prior literature argue that small board size positively influences firm risk-taking as a small board would be expected to effectively oversee bank’s manager for the interest of shareholders who have an incentive for more risk (Cheng, 2008; Pathan, 2009). In Islamic banking, the regular board would be responsible to ensure that managers work for the interest of shareholders, whereas SSB would be responsible to ensure that all banks’ transactions and products follow Islamic law. The decision on whether a single bank transaction or product is in compliant with Shariah depends on SSB interpretations and justifications of Islamic-related issues. This would indicate that such SSB’s opinion might vary across SSB members, so what it could be permissible to one SSB member might not be permissible to another. Therefore, more scholars in SSB makes it harder for the board to reach an agreement on a single legal issue. In addition, this would indicate the amount of time and effort to achieve an agreement among SSB members. For such reasons, SSB would be less effective at monitoring the bank’s managers in their risk-taking behaviors. Therefore, the first hypothesis would be as follows:

H1.

(SSB size) Size of SSB would be positively associated with Islamic banks’ risk-taking behavior.

A prior literature provides inconclusive evidence on whether the benefit outweighs the cost of a busy board, measured by the numerous and simultaneous board memberships. Some studies argue, on the one hand, that having multiple memberships across firms may have costs likely resulted from decreasing the effectiveness of monitoring managers. On the other hand, it might be advantageous to have members with multiple seats as they have more experience and good expertise gained by serving on multiple boards across various firms (Ferris et al., 2003; Fich and Shivadasani, 2006). The busy board might not only be less effective, but as other studies on the auditing literature indicate that busy auditors might also be ineffective. For example, DeAngelo (1981) reported that auditors with more clients have “more to lose” by failing to report an issue, which in turn negatively influences auditor’s reputation and lower audit quality.

Shariah scholars who serve in SSB and guide the Shariah-compliant decisions of Islamic banks are very few, with 20 well-known scholars holding 621 different SSB positions at multiple Islamic financial institutions (ÜNal, 2011; Farook and Farooq, 2011). ÜNal (2011) reviewed the boards of several Islamic institutions throughout the world and found evidence that the distribution of the boards is heavily skewed toward a few scholars. Alman (2012) reported evidence associating multiple memberships among the top-20 Shariah scholars, ranked by the number of SSB positions that a single scholar holds, with higher levels of risk in the loan portfolios of Islamic banks. Although gaining more knowledge and expertise, Shariah scholars with multiple seats in the board across many institutions are usually busy and are more likely to devote less time and effort for each board, which negatively influence their monitoring effectiveness. Empirically, Nomran et al. (2017) reported that cross-membership or busy SSB influences the performance of large Islamic banks with no such effects on small banks. However, Alman (2012) found that multiple membership of SSB would positively increase bank loan portfolio risk taking. Therefore, the cost of having a busy board would be associated with decreasing effectiveness of monitoring bank risk-taking outweighs the benefits of gaining more experience or solidifying members’ reputations. The above discussion would lead to the following hypothesis:

H2.

(SSB busy) Busy SSB would be negatively associated with risk-taking behaviors of Islamic banks.

A related issue with board characteristics is board independence. Earlier work suggests that having outside directors on the board would mitigate any conflict resolution of agency costs and moral hazard problems. In their studies, Fama (1980) and Fama and Jensen (1983) found that outside independent directors are the effective controller of managers in consideration of their incitement to exercise control. The argument is that such outside directors would be more concerned about their reputation on the market, which derives their incitement to work in the interest of the company.

Each member of SSB in the Islamic bank is required to be independent who works on a part-time basis and his directorship should be the only business relationship with the bank. Thus, independence would not be an issue for SSB members. An examination of the Shariah board sample for the current study shows that foreign-independent scholars are present in 30 per cent of the firm-year sample. This might also influence the monitoring effectiveness of such a board. Many foreign directors would be unfamiliar with a country’s culture where the bank operates with no strong social connections with the bank itself. This would make SSB members more concerned about their job security, compensation and reputation. Such concerns might incentivize foreign Shariah scholars to be more effective in monitoring managers’ behaviors. The third hypothesis would be the following:

H3.

(SSB foreign) Foreign members in SSB would be negatively associated with risk-taking behaviors of Islamic banks.

3. Sample, variable measurement and descriptive statistics

3.1 Sample

The primary sample is constructed from the Bankscope database that provides comprehensive financial information on public and private banks, including Islamic banks, across the globe. The study initially considers all 147 Islamic banks in Bankscope after confirming the identification of Islamic banks with information from the bank’s site and country-specific sources. The universal standardized data have been utilized to allow for the comparability of accounting numbers across countries. Data with codes C1, C2 and C* have been kept allowing working on only consolidated financial information. After filtering financial data for Islamic banks and owing to data availability limitation, the sample ends with 70 Islamic banks from 2000 to 2011[1]. Then, governance data, including SSB variables, were hand collected from bank’s annual reports available on the bank’s website. The study also uses data from the World Bank’s survey to account for macroeconomic factors across countries. The final sample comprises 359 observations for 70 Islamic banks across 18 countries and over the period of 2000-2011 (Appendix 1).

3.2 Measures of bank risk

The study focuses on accounting-based measures of risk that capture asset return risk, in addition to Z-score to measure insolvency risk. Accounting-based measures can better portray firms’ performance and risk, especially for banks as they face significant exposure to changes in the values of their financial instruments. Volatility in the time series of profit or income would be a good indicator of banks’ underlying risks as it better represents the outcomes of banks’ risk-management activities (Hodder et al., 2006). Focusing on the net interest income represents the core banking activities, whereas the net income includes many (but not all) effects of these activities, including interest revenue and expense, credit loss, realized gains and losses on investments, operating expenses, fees and taxes. The risk measures considered in the study include the volatility of the net profit (Netprofitvol) that is captured by the standard deviation of the annual net profit to the average of total assets, and measured over each five-year period, and the volatility of the net income (Netincomevol) that is calculated as the standard deviation of the annual net income to the average of total assets, and measured over each five-year period (Hodder et al., 2006)[2] In addition, Z-score was utilized as a metric for insolvency risk and was calculated for each fiscal year as the total of annual returns on the average asset ratio and the capital-to-asset ratio for each firm then divided by the standard deviation of firm annual returns divided by average asset over each five-year period (Boyd et al., 1993). Specifically, Z-score = (ROA + CAR)/SD(ROA) where ROA is the returns on average assets and CAR is equity to assets. Higher Netprofitvol and Netincomevol indicate more risk, whereas a higher Z-score means less risk. Thus, 1/Z-score was used to enhance the comparability of the coefficients’ interpretation.

3.3 Measures of explanatory variables

Three variables were used to account for the style of SSB: SSBSize, SSBforeign and SSBBusy. SSBSize is defined as the number of Shariah scholars in SSB, SSBforeign is measured as the proportion of foreign scholars to total scholars in SSB and SSBBusy is measured as the percentage of Shariah scholars with top 20 ranking to the total scholars in SSB. The data of SSBBusy were derived from ÜNal (2011) who top-ranked Shariah scholars to top 20 according to the number of SBB positions that a single scholar holds in overall positions within Islamic financial institutions that include standard-setting bodies, governmental entities (such as central banks) and consulting firms. The current study uses this ranking as a matric to proxy for the busyness of the Shariah scholar.

Following a prior literature, the study controls for numbers of variables at the bank and country levels that influence firms’ risk-taking activities. At the bank level, the size of the board of directors (BODNo) that is defined as the natural logarithm of the total number of directors in the board is included in the model. Cheng (2008) and Pathan (2009) found that the board size is negatively related to bank risk-taking because of higher coordination cost and more free riding problem in a larger board. A dummy variable (CEOduality) is also used to control for CEO influence over the board decisions. CEOduality equals 1 if the CEO also chairs the board and 0 otherwise. Pathan (2009) finds that CEO power, measured by CEOduality, has a negative influence on bank risk-taking. The reason is that most of the CEOs’ wealth is concentrated in their nondiversifiable human capital. Thus, risk-averse CEOs would be expected to protect their wealth and job internally be selecting safe investment (Smith and Stulz, 1985). Moreover, Fama and Jensen (1983) argued that the CEO who chairs the board may restrict the information flow to other board directors, thereby reducing the board’s independent oversight of management.

Other bank-level variables include bank size (Size), charter value (Charter), financial leverage (Capital), asset portfolio (Loan) and liquidity (Liquidity). Bank size affects risk as larger banks tend to engage in different types of activities and be better diversified than smaller banks. A prior literature on portfolio theory finds that asset size is negatively associated with firm-specific risk as well as with the volatility of asset returns (Demsetz and Strahan, 1997; Boyd and Runkle, 1993). Size is measured as the natural logarithm of total assets at the end of the fiscal year. The study controls for banks’ franchise or charter value (Charter) as prior studies find that banks with more franchise value (greater profit-making potential) take less risk. Franchise value works to reduce the moral hazard problem by increasing the cost of financial distress and thereby lowering shareholders’ desired level of risk (Demsetz et al., 1997). The charter value of a bank is the present value of a bank’s future economic profits when considered as a going concern, and it is calculated as the sum of the market value of equity plus the book value of liabilities divided by the book value of total assets.

A prior literature also shows that the capital-to-asset ratio is negatively related to bank risk-taking. Banks with a higher capital-to-asset ratio reduce the risk-taking incentives as the banks’ shareholders place more of their personal wealth at risk (Kim and Santomero, 1994; Laeven and Levine, 2009). Capital is measured as the total equity divided by total assets. The loan ratio is included to account for a bank’s loan portfolio. It is calculated as the total loan to total assets, and it is expected to be positively related to bank risk. Higher liquidity may also help in mitigating risk-taking incentives. Acharya and Naqvi (2012) indicated that when banks have a huge amount of liquidity, bank managers may take more risk by aggressively lowering the lending rate to increase loan volume to enhance their own compensation. More liquid banks may lower lending standards because bank managers’ compensation could be partially based on the volume of loans that is used as a benchmark for managerial performance or alternatively long-term risks may not be considered for managers’ compensation.

Risk-taking incentives also depend on institutional and legal factors of a country’s environment. The literature suggests that the deposit insurance scheme may increase the bank’s incentives to take more risks. Therefore, DepIns is included in the model and is measured as a dummy variable that takes a value of 1 if there is explicit deposit insurance in a country and 0 otherwise. Data were obtained from Demirgüç-Kunt et al. (2008). To account for different rules across countries, Rlaw is included using data from La Porta et al. (1998). In countries with strong traditions of rule of law, managers might have reduced incentives to engage in risky investments. In addition, the model includes a measure of shareholders’ rights (Srights) from La Porta et al. (1998) to control for the extent of monitoring by shareholders. Managers in countries with strong shareholders’ rights may choose to riskier but value-enhancing investment policy. Keeley (1990) suggested that bank risk-taking is related to the degree of competition among banks; anticompetitive restrictions endow banks with market power and increase the value of the bank’s charter. Therefore, such restriction reduces banks’ incentives to take a risk. Entry is accounted for as a measure of legal and administrative restrictions on bank entry that is obtained from a database provided by Barth et al. (2001).

Demographic factors for sample countries were also accounted for. Religion is added to the model as a dummy variable that equals 1 if 90 per cent or more of the population is Muslims and 0 otherwise. Religion would be negatively related to bank risk-taking as Shariah prevents excessive risk taking and managers in Islamic banks are expected to maintain society confidence. GDPgrowth is also included to account for countries’ development. Appendix 2 defines all variables in detail along with their expected sign to the risk measures.

3.4 Empirical models and estimation methods

3.4.1 Empirical models.

To empirically test the three main hypotheses that relate SSB characteristics to bank risk taking, the following model was estimated:

(1) ln(Risk)i,t = α+β1ln(SSBSize)i,t+β2(SSBforeign)i,t+β3(SSBBusy)i,t+δ1ln(BODNO.)i,t+δ2(CEOduality)i,t+ζ1(Size)i,t+ζ2(Chapter)i,t+ζ3(Capital)i,t+ζ4(Loan)i,t+ζ5(Liquidity)i,t+γ1(DepIns)j,t+γ2(Rlaw)j,t+γ3(Srights)j,t+γ4(Religion)j,t+γ5(Gdpgrowth)j,t+εi,t
where i represents the bank, j represents the country and t represents the time period.

Equation (1) was estimated using the randon effect (RE) of GLS. In the presence of unobserved bank fixed effects (FEs), panel FE is commonly suggested (Wooldridge, 2002). However, such FE estimation is not suitable for this study for several reasons. First, the time-invariant parameter like Religion cannot be estimated with FE as it would be absorbed or wiped put in “within transformation” or “time-demeaning” process in FE. Second, the structure variables of the Shariah board and board of directors do not change much over time, where the FE estimation would be imprecise as such estimation requires significant variations of the variable value to produce consistent and efficient estimates (Wooldridge, 2002). Therefore, using FE estimations would lead to a massive loss of the degrees of freedom (Baltagi, 2005). Thus, GLS RE or ordinary least-squares (OLS) is proposed for this study as an alternative to FE estimation.

3.5 Descriptive statistics

Table I presents the descriptive statistics for variables relating to the SSB structure, board structure, bank level and country level. The mean (median) of SSBSize is 3.58 (4.00) with a minimum of 1 and a maximum of 8. The mean (median) percentage of foreign members in the Shariah board is 0.25 (0.00). A total 36 per cent of the sample banks have Shariah members with top 20 ranking. The mean (median) of BODNo is 8.68 (9.00) with a minimum of 2 and a maximum of 20. A total 6 per cent of the banks’ sample CEOs were board chairs.

Referring to the descriptive statistics of bank risk measures of Table I, the mean (median) of Netprofitvol is 1.2 per cent (0.7 per cent), whereas the mean (median) of Netincomevol is 2 per cent (0.7 per cent). The mean (median) Z-score for the sample Islamic banks is 2.89 (2.88). Refer to Table I for details on descriptive statistics for all variables used in the model.

4. Empirical results

Table II provides the results of GLS RE estimates of regression equation (1) when either Netprofitvol, Netincomevol or 1/Z-score is used as a dependent variable. Model (1) is well built-in with an overall R2 of 23.13, 37.2 and 23.22 per cent for Netprofitvol, Netincomevol and 1/Z-score, respectively.

With regard to SSB measures, the coefficients on SSBSize are positive, although only statistically significant with the Netprofitvol measure of bank risk. The results are quite consistent with prior findings (Mollah et al., 2017; Alman, 2012). The larger the SSB size, the more Islamic bank’s risk-taking happens. As indicated above, many members in SSB make it difficult to achieve a timely and agreed decision on a single Shariah-related issue. This would also reflect a similar outcome often found in the corporate literature where larger boards are deemed to be less effective as a controlling mechanism.

In addition, the coefficients of SSBforeign, as anticipated, are negative and statistically significant for all three proxies used for bank risk. This explains that after controlling for other governance, bank and country characteristics, a higher proportion of foreign scholars within SSB would be more effective and more efficient in reducing manager’s incentives in taking more risk. Foreign scholars are expected to be more concerned about their reputation and hence more sensitive to the Shariah compliance and its application. The result is quite consistent with Fama (1980) and Fama and Jensen (1983) who claimed that outside directors would be the effective controller of managers in consideration of their incitement to exercise control. The economic significance of this result is also important. For instance, one (sample) standard deviation increase in SSBforeign (using Table II, an increase in SSBforeign of 0.37 points) would lower bank Netincomevol (in logarithmic) by approximately 18.43 per cent percentage points [ln(0.37) * – 0.129/ln(2.0) = 0.1843].

The coefficients of SSBBusy are positive and statistically significant across all three measures of risk. This would suggest that banks with more top-ranked Shariah scholars who have multiple numbers of positions across Islamic financial institutions would take more risk. The results are consistent with that of Alman (2012) who also showed that Shariah scholars with multiple positions are busy to monitor management behavior. For the economic significance, an increase in the SSBBusy by 1 (sample) standard deviation (using Table II, an increase in SSBBusy of 0.40 points) would increase bank Netincomevol (in logarithmic) by approximately 30.80 per cent percentage points [ln(0.40) * 0.233/ln(2.0) = 0.3080].

Turning to other governance variables, Table II shows that the coefficients of BODNo are negatively related to bank risk with all three risk measures; however, all estimates are not statistically significant. When considering CEO power, there is some evidence that CEOduality would increase bank risk, although the result is only significant with the Netincomevol measure of bank risk.

Looking at bank- and country-related variables, results indicate the existence of a statistically significant negative coefficient of Size across three measures of bank risk, which is interpreted as bank size increases, the bank’s preferences in taking risk decreases. Consistent with Demirgüç-Kunt and Detragiache (2002), a country that offers explicit deposit insurance for banks would increase banks’, Islamic banks in this case, incentives in taking more risk. The coefficient estimates on DepIns are positively and significantly associated with bank risk taking. Contrary to the expectation, Islamic banks in a country with strong shareholders’ rights take the lower risk. This illustrates that shareholders in the sample country may also have a concern about Shariah compliance and have a preference in taking less risk. Moreover, Islamic banks in a country that is dominated by Muslims prefer taking less risk. The coefficients on Religion are negative and significant across all three measures of risk. This indicates that Islamic banks adjust their risk preference according to society preference.

5. Robustness tests

Following Pathan (2009), the paper runs the 3SLS to reduce the endogeneity problem from the simultaneity bias (if any) that raised because SSB is endogenously structured. The following two regression models were estimated:

(2) ln(SSBSize)i,t=α+β1ln(SSBforeign)i,t+β2ln(Risk)i,t+β3(SSBBusy)i,t+δ1ln(BODNo)i,t+δ2(CEOduality)i,t+ζ1(Size)i,t+ζ2(Charter)i,t+ζ3(Capital)i,t+ζ4(Loan)i,t+ζ5(Liquidity)i,t+γ1(DepIns)j,t+γ2(Rlaw)j,t+γ3(Srights)j,t+γ4(Religion)j,t+γ5(Gdpgrowth)j,t+εi,t,
(3) (SSBforeign)i,t=α+β1ln(SSBSize)i,t+β2(SSBBusy)i,t+β3ln(Risk)i,t+δ1ln(BODNo)i,t+δ2(CEOduality)i,t+ζ1(Size)i,t+ζ2(Charter)i,t+ζ3(Capital)i,t+ζ4(Loan)i,t+ζ5(Liquidity)i,t+γ1(DepIns)j,t+γ2(Rlaw)j,t+γ3(Srights)j,t+γ4(Religion)j,t+γ5(Gdpgrowth)j,t+εi,t,

Table III presents the results when risk is measured by net income volatility. Column 1 of Table III shows the effect of the SSB structure on bank risk as specified by equation (1). The findings are the same as with those reported in Table II. Consistent with Pathan (2009), Column 2 of Table III indicates that the coefficient of Size is significantly positive which indicates that SSB size increases with bank size. Overall, this study shows, after direct control for endogeneity, that large SSB size increases bank risk, while more foreign scholars in the SSB decreases bank risk.

6. Further analysis

The structure of the Shariah governance of Islamic banks operating in the GCC is set differently than that of other countries. Grassa (2013) pointed out many gaps in issues related to Shariah regulatory, duties of higher Shariah authorities and supervisory frameworks in Islamic financial institutions located in Southeast Asian countries and GCC. Southeast Asian countries have established a dual Shariah control bodies including a higher Shariah authority setting at the national level and internal Shariah committee setting at the institutional level.

To ensure the consistency of Shariah interpretations across all Islamic financial institutions, central banks and securities commissions in Southeast Asian countries have established a national Shariah authority that acts as the higher Shariah authority body in the country to guide the central bank or the securities commissions on Shariah-related issues concerning Islamic banking and finance and to analyze Shariah compliance of new products/schemes submitted by Islamic financial institutions[3]. On the institutional level, every Islamic institution has to establish its independent internal Shariah committee that is responsible to advise the institutions on Shariah compliance of the Islamic financial operations.

The case is different in GCC where the national Shariah authority does not have any supervision on Shariah roles at the institutional level. GCC countries have delegated the power of higher Shariah authority to other governmental bodies such as the ministry of justice and Islamic affairs. However, such power is restricted to provide advice in the case of conflict of opinions among SSB members or to guide the central bank on Shariah-related matters. Therefore, the Shariah supervisory system in GCC is generally constructed at the institutional level[4]. To summarize, GCC countries have a decentralized or internal approach in structuring the Shariah supervisory system, whereas Southeast Asia countries are more governance oriented and have a more centralized or external approach in setting the Shariah supervisory system.

To see how different SSB structure approach influences Islamic banks risk-taking, the study splits the sample into two subsamples: one where a country belongs to GCC and the other where a country does not then re-run Model 1 using OLS. Columns 1, 2 and 3 of Table IV show the results for the association between SSB and bank risk-taking in GCC using the volatility of the net profit income, volatility of net income and Z-score, respectively. Overall, findings indicate that the more foreign scholars in SSB, the fewer banks engage in risk behaviors, whereas the more top-ranked scholars in SSB, the more risk behaviors. Thus, results are consistent with the major findings mentioned above. Turning to the results for banks located in the non-GCC region, Column 4 of Table IV indicates that only SSBSize and SSBBusy positively influence bank risk-taking. Using Netincomevol and 1/Z-score as a proxy for bank risk-taking, however, provides inconsistent results (Columns 5 and 6).

7. Conclusion

This study sets out to determine whether SSB is associated with bank risk-taking. Specifically, how SSB characteristics would influence managerial risk-taking incentives for the case of Islamic banks. Using a sample of 70 Islamic banks for the period 2000-2011 and consistent with the expectations, the results support that large SSB size and busy scholars in SSB positively encourage banks for more risk-taking. One of the more significant findings to emerge from this study is that having a higher percentage of foreign scholars in the SSB would decrease banks in taking risky projects owing to the belief that foreign members are more concerned about their job and reputations. Findings would imply that the style of SSB in Islamic banks is an essential factor in determining bank risk-taking activities. The current paper also reveals that the ruling of Shariah governance plays an important role. The association between SSB characteristics and bank risk is more pronounced in countries where the Shariah boards are ruled by the bank, whereas such an association is weak when the SSB is ruled at the state level. Discussion and analysis of the paper, however, should be interpreted with caution as the data are constrained for the period of 2000-2011, and the paper does not consider, because of data limitation, other attributes of SSB that could possibly influence the level of risk banks would take. Further research would be necessary to expand the time horizon and to include other characteristics of Shariah boards, such as gender, expertise, experience and educational background, and their influence on the banks’ value.

Findings of the study have some implications for Islamic banks as well as for bank regulators and policymakers. As for Islamic banks, there is a need to ensure that the Shariah board needs to work closely and cooperatively with the board of directors to achieve the main target of the bank. Islamic banks should also consider the detrimental effect of having large SSB, busy SSB or foreign SSB on banks’ overall value. Islamic banks should note the importance of SSB and its impact on risk and modify their own practices accordingly.

The study would be a valuable source of knowledge for regulators and central banks for setting roles and guideline to construct SSB that significantly impacts the performance of Islamic financial institutions. Regulators of Islamic bank should pay more attention to the development of the well-functioning Shariah board and to their interaction with the regular board, which in turn would help enhance the religious goals of Islamic banking in practice. Further, current regulation mandates at least three members to set in the Shariah board, with no clarity about the optimal number of Shariah board memberships, their remuneration and necessary training in economics and finance. Thus, regulators may need to establish clear roles on the structure of the Shariah board to help restore the credibility of the overall banking system and perhaps question whether the current requirements would be good for sound prudential regulation.

Descriptive statistics

Variable No. Mean SD Min P5 P50 P95 Max
Netprofitvol 359 0.020 0.045 0.000 0.001 0.007 0.109 0.319
Netincomevol 359 0.012 0.023 0.000 0.001 0.007 0.035 0.249
Z-score 359 0.062 0.292 −4.521 0.012 0.055 0.245 1.043
SSBSize 359 3.632 1.509 1.000 1.000 4.000 6.000 8.000
SSBforeign 359 0.266 0.377 0.000 0.000 0.000 1.000 3.000
SSBBusy 359 0.361 0.398 0.000 0.000 0.250 1.000 2.000
BODNo 359 8.671 2.789 2.000 4.000 9.000 13.000 20.000
CEOduality 359 0.056 0.230 0.000 0.000 0.000 1.000 1.000
Size 359 7.007 1.683 2.573 4.314 7.081 9.991 10.983
Charter 359 0.851 0.276 0.002 0.134 0.895 1.157 2.219
Capital 359 0.207 0.224 0.020 0.048 0.132 0.866 0.998
Loan 359 0.459 0.239 0.000 0.030 0.498 0.798 0.989
Liquidity 359 0.278 0.182 0.000 0.023 0.251 0.628 0.868
DepIns 359 0.092 0.289 0.000 0.000 0.000 1.000 1.000
Rlaw 359 6.182 2.019 3.330 3.330 6.780 8.330 8.570
Entry 359 7.602 0.906 4.000 6.000 8.000 8.000 8.000
Srights 359 0.393 0.881 0.000 0.000 0.000 3.000 4.000
Religion 359 0.579 0.494 0.000 0.000 1.000 1.000 1.000
GDPgrowth 359 0.055 0.043 −0.151 −0.015 0.056 0.115 0.262
Notes:

This table provides descriptive statistics for the dependent variable, independent variable and control variables for the Islamic sample over the period 2000-2011. Variables are defined in Appendix 2

GLS RE regression results of Islamic bank risk

Independent variable ln (Netprofitvol) ln (Netincomevol) ln (1/Z-score)
ln(SSBSize) 0.059** [1.97] 0.056 [0.92] 0.255 [1.25]
SSBforeign −0.076** [−2.07] −0.129** [−2.18] −0.318** [−2.14]
SSBBusy 0.076* [1.93] 0.233* [1.73] 0.408a [1.50]
ln(BODNo) −0.061 [−1.32] −0.008 [−0.19] −0.181 [−1.03]
CEOduality 0.039 [0.70] 0.165* [1.71] 0.218 [0.39]
Size −0.068** [−2.19] −0.165** [−2.28] −0.372*** [−3.29]
Charter 0.013 [0.32] 0.130 [1.32] 0.522a [1.59]
Capital 0.167 [0.50] −0.418 [−0.63] −1.628* [−1.89]
Loan −0.076 [−0.49] −0.336 [−1.05] −0.178 [−0.32]
Liquidity 0.096 [0.53] −0.223 [−0.94] −1.016* [−1.89]
DepIns 0.431** [2.31] 0.898** [2.15] 2.032*** [2.79]
Rlaw −0.005 [−0.22] −0.003 [−0.08] −0.030 [−0.35]
Srights −0.139* [−1.67] −0.377* [−1.88] −0.986*** [−2.80]
Entry 0.003 [0.21] 0.007 [0.14] 0.090 [0.73]
Religion −0.174* [−1.73] −0.471** [−2.20] −1.227*** [−2.79]
GDPgrowth 0.112 [1.05] 0.347a [1.62] 0.020 [0.02]
Firm FEs Yes Yes Yes
Country FEs Yes Yes Yes
Constant 0.553** [2.08] 1.211** [2.25] 2.987** [2.37]
Observations 359 359 359
Overall R2 0.2313 0.372 0.2322
Notes:

This table presents the results of the GLS RE estimates of different proxy for bank risk on SSB characteristics and control variables for the sample of Islamic banks over the period 2000-2011. Variables are defined in Appendix 2. Robust t-statistics adjusted for firm-level clustering are reported in brackets. ***, **, * denote significance at the 1, 5 and 10% level, respectively

3SLS regression results of bank risk

Independent variable Risk ln(SSBSize) SSBforeign
SSBforeign −0.159* [−1.88] 0.146** [2.50]
ln(SSBSize) 0.141** [2.12] 0.134*** [3.05]
SSBBusy 0.226** [2.30] −0.455*** [−6.06] 0.284* [1.86]
Risk 0.109** [2.33] −0.113a [−1.64]
ln(BODNo) −0.040 [−0.64] 0.069 [1.16] −0.219*** [−2.65]
CEOduality 0.189 [1.40] −0.005 [−0.12] −0.178*** [−2.63]
Size −0.083*** [−3.07] 0.030* [1.72] −0.018 [−0.91]
Charter 0.028 [0.29] −0.137a [−1.54] −0.158** [−1.99]
Capital 0.828*** [2.70] −0.389*** [−2.91] 0.452** [2.28]
Loan −0.295* [−1.76] 0.113 [0.92] 0.072 [0.68]
Liquidity −0.268 [−1.21] 0.028 [0.17] 0.342** [2.00]
DepIns 0.093 [0.74] −0.422*** [−3.85] −0.535*** [−3.75]
Rlaw −0.047a [−1.61] −0.033a [−1.51] −0.099** [−2.30]
Srights −0.050* [−1.78] −0.032 [−1.21] 0.069* [1.80]
Entry −0.014 [−0.54] 0.027 [1.07] −0.019 [−0.44]
Religion −0.278*** [−2.76] 0.118* [1.70] −0.346*** [−2.96]
GDPgrowth 0.056 [0.22] −0.584a [−1.55] −0.054 [−0.12]
Firm FEs Yes Yes Yes
Country FEs Yes Yes Yes
Constant 1.009** [2.27] 1.652*** [4.38] 1.491** [2.37]
Observations 359 359 359
Adjusted R2 0.511 0.581 0.595
Notes:

This table presents 3SLS estimates of the system of three regression models for Risk, SSBSize and SSBforeign, respectively. Variables are defined in Appendix 2. Robust t-statistics adjusted for firm-level clustering are reported in brackets. ***, **, * and a denote significance at the 1%, 5%, 10% and 15% levels, respectively

Shariah boards and bank risk taking in GCC vs others

GCC GCC GCC Other Other Other
Independent variable ln(Netprofitvol) ln(Netincomevol) ln(1/Z-score) ln(Netprofitvol) ln (Netincomevol) ln(1/Z-score)
ln(SSBSize) −0.021* [−1.81] 0.004 [0.17] 0.046 [0.99] 0.006*** [3.08] −0.002a [−1.57] 0.004 [0.41]
SSBforeign −0.041*** [−3.43] −0.050*** [−2.67] −0.108*** [−3.00] −0.002 [−0.68] 0.000 [0.24] 0.008 [0.67]
SSBBusy 0.018** [2.42] 0.035** [2.11] 0.054 [1.38] 0.004* [1.85] −0.003** [−2.38] −0.012 [−0.69]
ln(BODNo) −0.020a [−1.50] −0.016 [−0.96] −0.051 [−1.22] −0.005* [−1.74] −0.002*** [−2.72] −0.025*** [−3.11]
CEOduality −0.004 [−0.31] −0.006 [−0.24] −0.036 [−0.62] −0.000 [−0.08] 0.001 [0.48] −0.007 [−0.49]
Size −0.003 [−1.23] −0.016*** [−2.94] −0.044*** [−2.77] −0.001 [−0.57] −0.000 [−1.05] −0.002 [−0.25]
Charter −0.001 [−0.08] 0.000 [0.03] 0.065 [1.21] 0.005 [0.74] 0.021** [2.20] 0.109 [1.02]
Capital 0.031 [1.41] 0.065 [1.39] −0.076 [−0.87] 0.004 [0.60] 0.038*** [3.02] −0.265* [−1.97]
Loan −0.066** [−2.61] −0.093** [−2.29] −0.191** [−2.06] 0.000 [0.13] −0.002 [−1.03] −0.008 [−0.40]
Liquidity −0.029 [−1.25] −0.058 [−1.36] −0.216*** [−2.67] 0.006 [1.38] −0.004 [−1.13] −0.034 [−1.11]
DepIns 0.000 [0.] 0.000 [0.] 0.000 [0.] 0.007*** [2.79] −0.008*** [−4.44] −0.102*** [−3.73]
Rlaw −0.010* [−1.89] −0.005 [−0.69] −0.029 [−1.19] 0.001a [1.53] −0.003*** [−6.46] −0.014*** [−2.84]
Srights 0.000 [0.] 0.000 [0.] 0.000 [0.] 0.000 [0.21] −0.000 [−0.36] 0.026* [1.72]
Entry −0.004** [−2.10] 0.000 [0.01] −0.000 [−0.00] −0.004* [−1.94] 0.009*** [6.35] 0.121*** [5.80]
Religion 0.012a [1.55] 0.000 [0.] 0.000 [0.] 0.004 [0.90] −0.015*** [−8.82] −0.078*** [−4.28]
GDPgrowth −0.029 [−0.79] −0.010 [−0.14] −0.181 [−0.62] 0.015 [0.75] 0.009 [1.02] 0.012 [0.10]
Firm FEs Yes Yes Yes Yes Yes Yes
Country FEs Yes Yes Yes Yes Yes Yes
Constant 0.266** [2.40] 0.252** [2.27] 0.821** [2.42] 0.029* [1.80] −0.047*** [−4.36] −0.696*** [−5.57]
Observations 152 152 161 207 207 198
Adjusted R2 0.358 0.516 0.167 0.233 0.721 0.532
Notes:

This table presents the results of the OLS estimates of different proxy for bank risk on SSB characteristics and control variables across Islamic banks with different geographic location. Variables are defined in Appendix 2. Robust t-statistics adjusted for firm-level clustering are reported in brackets. ***, **, * and a denote significance at the 1, 5, 10 and 15% levels, respectively

Islamic banking in sample countries

Country Islamic banks
Bahrain 16
Bangladesh 4
Egypt 2
Indonesia 2
Jordan 2
Kuwait 3
Lebanon 1
Malaysia 4
Pakistan 2
Qatar 2
Saudi Arabia 4
Sudan 10
Syria 2
Tunisia 1
Turkey 3
United Arab Emirates 5
UK 3
Yemen 4
Total 70

Variable definitions

Variable Definition Expected sign
Panel A: dependent variables (risk)
Netprofitvol The standard deviation of annual net profit expressed as a percentage of average total
assets and measured over each five-year period. Data from BankScope
Netincomevol The standard deviation of annual income expressed as a percentage of average total assets and measured over each five-year period. Data from BankScope
Z-score The sum of annual returns on average assets ratio plus capital asset ratio for each firm divided by the standard deviation of firm annual returns divided by the average asset over each five-year period. Data from BankScope
Panel B: SSB, BOD and CEO variables
SSBSize The number of Shariah scholars in SSBs. Data are hand collected +
SSBforeign The percentage of SSB members who are foreigners. Data are hand collected
SSBBusy The percentage of SSB members with top 20 rankings. Data from ÜNal (2011) +
BODNo The number of directors in the Islamic bank’s board. Data are hand collected
CEOduality A dummy variable that equals 1 if CEO chairs the board and 0 otherwise. Data are hand
collected
Panel C: control variables
Size Natural logarithm of total assets at the end of each fiscal year. Data from BankScope
Charter Sum of the market value of equity plus the book value of liabilities divided by the book value of total assets. Data from BankScope
Capital Total equity divided by total assets. Data from BankScope
Loan Total loans divided by total assets. Data from BankScope +
Liquidity Cash and due from banks scaled by the total asset. Data from BankScope +
DepIns An indicator variable that equals 1 if the country has explicit deposit insurance and 0 otherwise Data from Demirgüç-Kunt et al. (2008) +
Rlaw A scale of 1-10 for the assessment of the law-and-order tradition in the country produced by the country risk-rating agency International Country Risk. Lower scores indicate less tradition for law and order. Data from La Porta et al. (1998)
Srights Index aggregating the following shareholders’ rights: one share-one vote, proxy by mail, shares blocked before meeting, cumulative voting and oppressed minorities mechanism. The index ranges from 0 to 5. Data from La Porta et al. (1998) +
Entry The sum of eight subindices related to administrative entry requirements imposed by supervisors, as further described in Barth et al. (2001)
Religion An indicator variable that equals 1 if 90 per cent or more of a country population is Muslim
and 0 otherwise. Data from the World Bank survey
GDPgrowth The annual percentage growth rate of GDP at the market process based on constant local currency. Aggregate on constant US dollars. Data from the World Bank survey ±

Notes

1.

The data of the study are randomly selected from the entire population of Islamic banks, and they are constrained for the period from 2000 to 2011 because of no access available to the data beyond 2011.

2.

Literature on conventional banks uses the volatility of net interest income as a measure of risk. The current study uses net profit volatility instead as Shariah prohibits the use of interest and Islamic banks should not therefore show any interest revenue or interest cost in their financial statements.

3.

For instance, the Bank Negara Malaysia which is the central bank of Malaysia has established the Shariah Advisory Council on Islamic banking and Takaful in May 1997 that acts as the highest Shariah authority for all Islamic financial institutions supervised by Bank Negara Malaysia (Hassan, 2010).

4.

The Shariah supervisory system varies in the GCC region from country to country. For instance, Bahrain has a comprehensive regulatory framework governing Shariah supervisory practices at both national and institutional levels, whereas Qatar, UAE and Kuwait have adopted a regulatory framework for Shariah supervision only at the institutional level. The Shariah supervisory system in Saudi Arabia, however, has a self-regulated approach, influenced by the market and the voluntary initiatives taken by several Islamic institutions to develop their internal Shariah supervisory system (Hassan, 2010).

Appendix 1

Table AI

Appendix 2

Table AII

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Acknowledgements

The authors are grateful for comments from participants at the Rutgers Business School Seminars, the American Accounting Association Annual Meeting Conference, 2016 and Portsmouth-Fordham Conference on Banking and Finance, UK, 2016 for their helpful comments. The paper’s findings, interpretations and conclusions are entirely those of the authors.

Corresponding author

Amal AlAbbad can be contacted at: aalabbad@iona.edu