Volume 5 • Issue 3 | November 2021

Disclosure, Shariah governance and financial performance in Islamic banks

Mariem Ben Abdallah, and Slah Bahloul


This study aims at investigating the impact of the disclosure and the Shariah governance on the financial performance in MENASA (Middle East, North Africa and Southeast Asia) Islamic banks.

We use the Generalized Least Squares (GLS) regression models to check the interdependence relationship between the disclosure, the Shariah governance and the financial performance of 47 Islamic banks (IBs) from ten countries operating in MENASA region. The sample period is from 2012 to 2019. In these regressions models, Return on Assets (ROA) and Return on Equity (ROE) are the dependent variables. The disclosure and the Shariah governance indicators are the independent factors. To measure the Shariah governance, we use the three sub-indices, which are the Board of Directors (BOD), the Audit Committee (AC) and the Shariah Supervisory Board (SSB). Size, Leverage and Age of the bank are used as control variables. We also used The Generalized Method of Moments (GMM) and the three-stage least squares (3SLS) estimations for robustness check.

Result shows a negative relationship between the disclosure and the two performance measures in IBs. Furthermore, as far as the governance indicators are concerned, we found that the BOD and AC, as well as the BOD and SSB, have a positive and significant impact on the ROA and ROE, respectively. This reveals that good governance had a significant association with higher performance in MENASA IBs.

The paper considers both IBs that adopt mandatory as well as voluntary AAOIFI standards and the GLS method to investigate the impact of the AAOIFI disclosure and the Shariah governance on ROA and ROE. Also, it uses the GMM and the 3SLS estimations for robustness check. It is relevant for researchers, policymakers and stakeholders concerned with IBs' performance.


  1. Abdallah, A.A. and Ismail, A. (2017), “Corporate governance practices, ownership structure, and corporate performance in the GCC countries”, Journal of International Financial Markets, Institutions and Money, No. 46, pp. 98-115, doi: 10.1016/j.intfin.2016.08.004.
  2. Abdallah, A., Hassan, M. and McClelland, P. (2015), “Islamic financial institutions, corporate governance, and corporate risk disclosure in Gulf cooperation council countries”, Journal of Multinational Financial Management, Vol. 31 No. 2015, pp. 63-82, doi: 10.1016/j.mulfin.2015.02.003.
  3. Abdul Rahman, A. and Bukair, A.A. (2015), “Bank performance and board of directors attributes by Islamic banks”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 8 No. 3, pp. 291-309, doi: 10.1108/IMEFM-10-2013-0111.
  4. Ajili, H. and Bouri, A. (2018), “Corporate governance quality of Islamic banks: measurement and effect on financial performance”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 11 No. 3, pp. 470-487, doi: 10.1108/IMEFM-05-2017-0131.
  5. Albarrak, H. and El-Halaby, S. (2019), “AAOIFI governance standards: Sharia disclosure and financial performance for Islamic banks”, Journal of Governance and Regulation, Vol. 8 No. 1, pp. 19-37, doi: 10.22495/jgr_v8_i1_p2.
  6. Al-Malkawi, H.A.N. and Pillai, R. (2018), “Analyzing financial performance by integrating conventional governance mechanisms into the GCC Islamic banking framework”, Managerial Finance, Vol. 44 No. 5, pp. 604-623, doi: 10.1108/MF-05-2017-0200.
  7. Al-Malkawi, H.A.N., Pillai, R. and Bhatti, M.I. (2014), “Corporate governance practices in emerging markets: the case of GCC countries”, Economic Modelling, Vol. 38, pp. 133-141, doi: 10.1016/j.econmod.2013.12.019.
  8. Alsartawi, A.M. (2019), “Performance of Islamic banks do the frequency of Sharīʿah supervisory board meetings and independence matter?”, ISRA International Journal of Islamic Finance, Vol. 11 No. 2, pp. 303-321, doi: 10.1108/IJIF-05-2018-0054.
  9. Arellano, M. and Bond, S. (1991), “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations”, The Review of Economic Studies, Vol. 58 No. 2, pp. 277-297, doi: 10.2307/2297968.
  10. Arellano, M. and Bover, O. (1995), “Another look at the instrumental variable estimation of error-components models”, Journal of Econometrics, Vol. 68 No. 1, pp. 29-51, doi: 10.1016/0304-4076(94)01642-D.
  11. Aslam, S., Ahmad, M., Amin, S., Usman, M. and Arif, S. (2018), “The impact of corporate governance and intellectual capital on firm’s performance and corporate social responsibility disclosure”, Pakistan Journal of Commerce and Social Sciences, Vol. 12 No. 1, pp. 283-308, available at: http://hdl.handle.net/10419/188346.
  12. Aslam, E. and Haron, R. (2020a), “The influence of corporate governance on intellectual capital efficiency: evidence from Islamic banks of OIC countries”, Asian Journal of Accounting Research, Vol. 5 No. 2, pp. 195-208, doi: 10.1108/AJAR-05-2020-0030.
  13. Aslam, E. and Haron, R. (2020b), “Does corporate governance affect the performance of Islamic banks? New insight into Islamic countries”, Corporate Governance, Vol. 20 No. 6, pp. 1073-1090, doi: 10.1108/CG-11-2019-0350.
  14. Blundell, R. and Bond, S. (1998), “Initial conditions and moment restrictions in dynamic panel data models”, Journal of Econometrics, Vol. 87 No. 1, pp. 115-143.
  15. Buallay, A., Al Hawaj, A.A. and Hamdan, A. (2020), “Integrated reporting and performance: a cross-country comparison of GCC Islamic and conventional banks”, Journal of Islamic Marketing, Vol. 11 No. 6, pp. 1-18, doi: 10.1108/JIMA-08-2017-0084.
  16. Chazi, A., Khallaf, A. and Zantout, Z. (2018), “Corporate governance and bank performance: Islamic versus Non-Islamic banks in GCC countries”, The Journal of Developing Areas, Vol. 52 No. 2, pp. 109-126, doi: 10.1353/jda.2018.0025.
  17. Darwanto and Chariri, A. (2019),“Corporate governance and financial performance in Islamic banks: the role of the Sharia supervisory board in multiple- layer management”, Banks and Bank Systems, Vol. 14 No. 4, pp. 183-191, doi: 10.21511/bbs.14(4).2019.17.
  18. Elgattani, T. and Hussainey, K. (2020), “The level of AAOIFI governance disclosure in the annual reports of Islamic banks”, Journal of Islamic Accounting and Business Research, Vol. 18 No. 1, pp. 1-18, doi: 10.1108/jfra-03-2019-0040.
  19. Ellili, N.O.D. and Nobanee, H. (2017), “Corporate risk disclosure of Islamic and conventional banks”, Banks and Bank Systems, Vol. 12 No. 3, pp. 247-256, doi: 10.21511/bbs.12(3-1).2017.09.
  20. Embi, S. and Shafii, Z. (2018), “The impact of Shariah governance and corporate governance on the risk management practices: evidence from local and foreign Islamic banks in Malaysia”, The Journal of Muamalat and Islamic Finance Research, Vol. 15 No. 2, pp. 1-20, doi: 10.33102/jmifr.v15i2.174.
  21. Fama, E.F. and Jensen, M.C. (1983), “Agency problems and residual claims”, The Journal of Law and Economics, Vol. 26 No. 2, pp. 327-349.
  22. Grassa, R. and Matoussi, H. (2014), “Corporate governance of Islamic banks: a comparative study between GCC”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 No. 3, pp. 346-362, doi: 10.1108/IMEFM-01-2013-0001.
  23. Grassa, R. (2013), “Shariah supervisory system in Islamic financial institutions new issues and challenges: a comparative analysis between Southeast Asia models and GCC models”, Humanomics, Vol. 29 No. 4, pp. 333-348, doi: 10.1108/H-01-2013-0001.
  24. Gujarati, D.N. (2003), Basic Econometrics, 4th ed., McGraw-Hill, New York.
  25. Haddad, A., El-Ammari, A.and Bouri, A. (2020), “Effect of board quality on the financial performance of conventional and Islamic banks in a stable financial context: comparative study on the international evidence”, Research Square. doi: 10.21203/rs.3.rs-26274/v2.
  26. Haddad, A., El-Ammari, A.and Bouri, A. (2021), “Impact of audit committee quality on the financial performance of conventional and Islamic banks”, Journal of Risk and Financial Management, Vol. 14 No. 4, p. 176, doi: 10.3390/jrfm14040176.
  27. Harisa, E., Mohamad, A. and Meutia, I. (2019), “Effect of quality of good corporate governance disclosure, leverage and firm size on profitability of Islamic commercial banks”, International Journal of Economics and Financial Issues, Vol. 9 No. 4, pp. 189-196, doi: 10.32479/ijefi.8157.
  28. Hassan, M., Rizwan, M. and Sohail, H.M. (2017), “Corporate governance, Shariah advisory boards and Islamic banks' performance”, Pakistan Journal of Islamic Research, Vol. 18 No. 1, pp. 359-366.
  29. Hassan, O.A.G., Romilly, P., Giorgioni, G. and Power, D. (2009), “The value relevance of disclosure: evidence from the emerging capital market of Egypt”, The International Journal of Accounting, Vol. 44 No. 1, pp. 79-102, doi: 10.1016/j.intacc.2008.12.005.
  30. Islam, A., Oweidat, G.A. and Mohd, S.N. (2020), “Audit committee versus other governance mechanisms and the effect of investment opportunities: evidence from Palestine”, Corporate Governance: The International Journal of Business in Society, Vol. 20 No. 3, pp. 527-544, doi: 10.1108/CG-06-2019-0185.
  32. Kallamu, B.S. and Saat, N.A.M. (2015), “Audit committee attributes and firm performance: evidence from Malaysian finance companies”, Asian Review of Accounting, Vol. 23 No. 3, pp. 206-231, doi: 10.1108/ARA-11-2013-0076.
  33. Khan, I. and Zahid, S.N. (2019), “The impact of Shari'ah and corporate governance on Islamic banks performance: evidence from Asia”, International Journal of Islamic and Middle Eastern Finance and Management, Vol. 13 No. 3, pp. 483-501, doi: 10.1108/IMEFM-01-2019-0003.
  34. Klapper, L.F. and Love, I. (2004), “Corporate governance, investor protection, and performance in emerging markets”, Journal of Corporate Finance, Vol. 10 No. 5, pp. 703-728, doi: 10.1016/S0929-1199(03)00046-4.
  35. Mnif Sellami, Y. and Tahari, M. (2017), “Factors influencing compliance level with AAOIFI financial accounting standards by Islamic bank”, Journal of Applied Accounting Research, Vol. 18 No. 1, pp. 137-159, doi: 10.1108/JAAR-01-2015-0005.
  36. Mohd Zain, F.A. and Wan Abdullah, W.A. (2017), “Corporate social responsibility disclosure in the Southeast Asia (SEA) and Gulf cooperation council (GCC) regions: the case of Takaful companies”, Proceeding of International Conference of Empowering Islamic Civilization, ISBN 978-967-0899-70-1.
  37. Mollah, S. and Zaman, M. (2015), “Shari'ah supervision, corporate governance and performance: conventional vs. Islamic banks”, Journal of Banking and Finance, Vol. 58, pp. 418-435, doi: 10.1016/j.jbankfin.2015.04.030.
  38. Mollah, S., Hassan, M.K., Al Farooque, O. and Mobarek, A. (2017), “The governance, risk-taking, and performance of Islamic banks”, Journal of Financial Services Research, Vol. 51 No. 2, pp. 195-219, doi: 10.1007/s10693-016-0245-2.
  39. Mushafiq, M. and Sehar, T. (2021), “Reality of short-term causality of Islamic and conventional banking term deposit rates in Pakistan”, Asian Journal of Economics and Banking, Vol. 5 No. 1, pp. 66-78, doi: 10.1108/AJEB-10-2020-0072.
  40. Naushad, M. and Malik, S. (2015), “Corporate governance and bank performance: a study of selected banks in GCC Region”, Asian Social Science, Vol. 11 No. 9, pp. 226-234, doi: 10.5539/ass.v11n9p226.
  41. Nawaz, T. (2019), “Exploring the nexus between human capital, corporate governance and performance: evidence from Islamic banks”, Journal of Business Ethics, Vol. 157 No. 2, pp. 567-587, doi: 10.1007/s10551-017-3694-0.
  42. Neifar, S., Salhi, B. and Jarboui, A. (2020), “The moderating role of Shariah supervisory board on the relationship between board effectiveness, operational risk transparency and bank performance”, International Journal of Ethics and Systems, Vol. 36, p. 3, doi: 10.1108/IJOES-09-2019-0155.
  43. Nomran, M.N. and Haron, R. (2019), “Dual board governance structure and multi bank performance: a comparison analysis between Islamic banks in Southeast Asia and GCC countries”, Corporate Governance: the International Journal of Business in Society, Vol. 19 No. 6, pp. 1377-1402, doi: 10.1108/CG-10-2018-0329.
  44. Nomran, M.N., Haron, R. and Hassan, R. (2018), “Shari'ah supervisory board characteristics effects on Islamic banks' performance: evidence from Malaysia”, International Journal of Bank Marketing, Vol. 36 No. 2, pp. 290-304, doi: 10.1108/IJBM-12-2016-0197.
  45. Noordin, N.H. and Kassim, S. (2019), “Does Shariah committee composition influence Shariah governance disclosure? Evidence from Malaysian Islamic banks”, Journal of Islamic Accounting and Business Research, Vol. 10 No. 2, pp. 158-184, doi: 10.1108/JIABR-04-2016-0047.
  46. Paino, H., Bahari, A.B. and Bakar, R.A. (2011), “Shariah, social responsibilities and corporate governance of the Islamic banks in Malaysia”, Accounting Research Institute Universiti Teknologi MARA Pahang, Malaysia, European Journal of Social Sciences, Vol. 23 No. 3, pp. 382-391.
  47. Roodman, D. (2009), “How to do xtabond2: an introduction to difference and system GMM in Stata”, The Stata Journal: Promoting Communications on Statistics and Stata, Vol. 9 No. 1, pp. 86-136, doi: 10.1177/1536867X0900900106.
  48. Sarea, A.M. and Hanefah, M.M. (2013), “Adoption of AAOIFI accounting standards by Islamic banks of Bahrain”, Journal of Financial Reporting and Accounting, Vol. 11 No. 2, pp. 131-142, doi: 10.1108/JFRA-07-2012-0031.
  49. Sarea, A.M. (2020), “The impact of Islamic finance on sustainability reporting”, in Global Approaches to Sustainability through Learning and Education, IGI Global, pp. 262-269, doi: 10.4018/978-1-7998-0062-0.ch017.
  50. Sayari, N. and Marcum, B. (2017), “Corporate governance and financial performance in the emerging markets: do ADRs perform any better than non-cross-listed firms?”, Financial Management from an Emerging Market Perspective, pp. 149-175, doi: 10.5772/intechopen.72297.
  51. Sheikh, N.A. and Kareem, S. (2015), “The impact of board structure, ownership concentration, and CEO remuneration on performance of Islamic commercial banks in Pakistan”, Pakistan Journal of Islamic Research, Vol. 15 No. 2015, pp. 49-59.
  52. Sheikh, M.F., Shah, S.Z.A. and Akbar, S. (2018), “Firm performance, corporate governance and executive compensation in Pakistan”, Applied Economics, Vol. 50 No. 18, pp. 2012-2027, doi: 10.1080/00036846.2017.1386277.
  53. Srairi, S. (2015), “Corporate governance disclosure practices and performance of Islamic banks in GCC countries”, Journal of Islamic Finance, Vol. 4 No. 2, pp. 1-17, doi: 10.12816/0024085.
  54. Tabash, M. (2019), “An empirical investigation on the relation between disclosure and financial performance of Islamic banks in the United Arab Emirates”, Journal of Asian Finance Economics and Business, Vol. 6 No. 4, pp. 27-35, doi: 10.13106/jafeb.2019.vol6.no4.27.
  55. Velte, P. (2017), “The link between audit committees, corporate governance quality and firm performance: a literature review”, Corporate Ownership and Control, Vol. 14 No. 4, pp. 15-31, doi: 10.22495/cocv14i4art2.
  56. Vu, M.C., Phan, T.T. and Le, N.T. (2018), “Relationship between board ownership structure and firm financial performance in transitional economy: the case of Vietnam”, Research in International Business and Finance, Vol. 45, October 2018, pp. 512-528, doi: 10.1016/j.ribaf.2017.09.002.
  57. Wild, J.J. (1996), “The audit committee and earnings quality”, Journal of Accounting, Auditing and Finance, Vol. 11 No. 2, pp. 247-276, doi: 10.1177/0148558X9601100206.
  58. Zhang, L. (2012), “Board demographic diversity, independence, and corporate social performance”, Corporate Governance: The International Journal of Business in Society, Vol. 2 No. 5, pp. 686-700, doi: 10.1108/14720701211275604.

Further reading

  1. Haniffa, R. and Hudaib, M. (2007), “Exploring the ethical identity of Islamic banks via communication in annual reports”, Journal of Business Ethics, Vol. 76 No. 1, pp. 97-116, doi: 10.1007/s10551-006-9272-5.

JEL classification: G21,G34