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Journal of Financial Services Research

, Volume 51, Issue 2, pp 195–219 | Cite as

The governance, risk-taking, and performance of Islamic banks

  • Sabur Mollah
  • M. Kabir Hassan
  • Omar Al Farooque
  • Asma Mobarek
Article

Abstract

We examine whether the difference in governance structures influences the risk taking and performance of Islamic banks compared to conventional banks. Using a sample of 52 Islamic banks and 104 conventional banks in 14 countries for the period from 2005 to 2013, we conclude that the governance structure in Islamic banks plays a crucial role in risk taking as well as financial performance that is distinct from conventional banks. Particularly, we show that the governance structure in Islamic banks allows them to take higher risks and achieve better performance because of product complexities and transaction mechanisms. However, Islamic banks maintain a higher capitalization compared to conventional banks. These results support the research on Islamic investment and risk taking. Our results add a new dimension to the governance research that could be a valuable source of knowledge for policy makers and regulators in the financial services sector.

Keywords

Corporate governance Risk-taking Firm performance Islamic banks 

JEL Classification

G34 Y90 G01 

Notes

Acknowledgments

We are grateful to the Editor, Prof. Haluk Ünal, the Managing Guest Editors of the special issue, Prof. M. Shahid Ebrahim, Prof. Phil Molyneux, Prof. Steven Ongena, and two anonymous referees for valuable comments. We acknowledge financial support from Jan Wallenders och Tom Hedelius Stiftelse, Handelsbanken, Sweden, for this research (Project ID P2010-0144: 1). An earlier version of this paper was presented at the 47th Euro Working Group on Financial Modeling, October, 2010, Prague, Czech Republic; at the seminar on Islamic Finance, 14 January, 2011, University of Dhaka, Bangladesh; the 61st Midwest Finance Association 2012 Meeting, 22–25 February, 2012, New Orleans, USA; and the Bangor-JFSR Conference, 15 September, 2014, Bangor, UK. We are thankful to Meryem Duygun for her valuable comments as a discussant at the Bangor-IRTI-JFSR conference. We have hugely benefitted from the comments by the discussants and participants in the conferences. We are also grateful to M. Shahid Ebrahim, Philip Molyneux, Omneya Abdelsalam, and Wares Karim for their comments on the earlier draft of this paper. We are also thankful to Omar Sikder, Sharifur Rahman, Al-Amin, Ziauddin, Zahiduzzaman, Humyra Jabeen, and IK Nahid for research assistance with the hand collected data. The authors are responsible for any remaining errors.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Stockholm Business SchoolStockholm UniversityStockholmSweden
  2. 2.Department of Economics and FinanceNew Orleans UniversityNew OrleansUSA
  3. 3.UNE School of BusinessUniversity of New EnglandArmidaleAustralia

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