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