Does Islamic corporate governance prevent bankruptcy in Islamic banks? Implications for economic sustainability
Abstract
Purpose
Sustainability is essential to the ongoing operations of banks, though it is much less clear how Islamic corporate governance (ICG) promotes economic sustainability (ES) and thereby prevents bankruptcy. To explore the unexplored, this study aims to examine the efficacy of ICG in preventing bankruptcy and enhancing the ES of Islamic banks operating in Pakistan.
Design/methodology/approach
The current study measures ES through Altman's Z-score to analyze the level of the industry's stability and consequently examines the effect of ICG on the ES of Islamic banks in Pakistan for the post-financial-crises period. Using the country-level data, this study utilized a fixed-effect model and two-stage least squares (2SLS) techniques on balanced panel data spanning from 2009 to 2020 to provide empirical evidence.
Findings
The empirical results unveiled that board size and meetings have a significant positive influence on the ES while managerial ownership demonstrated an unfavorable effect on ES. Interestingly, the insignificant effect of women directors became significant with the inclusion of controlled variables. Overall, the findings indicate that ICG is an efficient tool for promoting ES in Islamic banks and preventing them from the negative effects of emerging crises.
Practical implications
The findings provide concrete insights for policymakers, regulators and other concerned stakeholders to execute a sturdy corporate governance system that not only oversees the economic, social and ethical aspects but also provides measures to alleviate the impacts of potential risks like the COVID-19 pandemic.
Social implications
Examining the role of ICG in alleviating bankruptcy risk is an informative and useful endeavor for all social actors.
Originality/value
To the best of the authors’ knowledge, this study is one of the first efforts to provide evidence-based insights on the role of ICG in preventing bankruptcy and offers a potential research direction for ES.
Keywords
Acknowledgements
The authors would like to thank the Centre of Social Innovation (CoSI) and Management & Humanities Department of Universiti Teknologi PETRONAS (UTP) for facilitating this study. The authors also want to thank the anonymous reviewers and editor Prof. Noha El-Bassiouny for their helpful guidance throughtout the review process.
Since acceptance of this article, the following author(s) have updated their affiliations: Rohail Hassan is at the University of Economics and Human Sciences in Warsaw, Poland.
Citation
Jan, A.A., Lai, F.-W., Shah, S.Q.A., Tahir, M., Hassan, R. and Shad, M.K. (2023), "Does Islamic corporate governance prevent bankruptcy in Islamic banks? Implications for economic sustainability", Management & Sustainability: An Arab Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MSAR-02-2023-0009
Publisher
:Emerald Publishing Limited
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