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Do board characteristics affect bank risk-taking and performance? Evidence from Indonesian and Malaysian Islamic banks

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Abstract

This paper aims to investigate the impact of board characteristics on the risk-taking and performance of Indonesian and Malaysian Islamic banks. It proposes an idea of ideal board governance in an Islamic bank institution. Based on hand-collected data of board characteristics in 27 Islamic banks in Indonesia and Malaysia from 2006 to 2016, this study utilises panel data analysis for its empirical approach. The authors used random effect Generalized Least Square (GLS) regression and Generalised Method of Moments (GMM) to ensure the robustness of the results. The regression results indicate that the Sharia Supervisory Boards (SSB) and Board of Commissioners (BoC) play a crucial role in Islamic banks’ risk-taking and financial performance. The paper highlights several significant findings: (1) the presence of female directors in SSB and BoC tend to improve performance, and the presence of female BoC tend to reduce risk-taking; (2) the presence of foreign BoC members induce performance and reduce bank’s risk-taking; (3) SSB members with not only Islamic but also finance/economics type of education background tend to reduce risk-taking, while BoC members with Islamic education is likely to decrease the four type of risks: insolvency risk, funding risk, credit risk, and Sharia non-compliance risk; (4) SSB and BoC members with financial or economics educational background are likely to increase Islamic bank’s performance; (5) SSB and BoC members that are older tend to improve performance, and SSB that are busy tend to reduce risk-taking of Islamic banks. These results are robust to different estimation techniques.

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  1. School of Business and Management, Institut Teknologi Bandung, Jalan Ganesha No. 10, Bandung, 40132, Indonesia

    Yunieta Anny Nainggolan, Dianita Indah Prahmila & Annisa Rizkia Syaputri

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  1. Yunieta Anny Nainggolan
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Appendices

Appendix A

See Table 8.

Table 8 List of Indonesian and Malaysian Islamic banks
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Appendix B

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Table 9 Construction of indexes: SBI and CBI
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Nainggolan, Y.A., Prahmila, D.I. & Syaputri, A.R. Do board characteristics affect bank risk-taking and performance? Evidence from Indonesian and Malaysian Islamic banks. J Manag Gov 27, 1115–1145 (2023). https://doi.org/10.1007/s10997-022-09625-w

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