Board Size, Chief Risk Officer and Risk-taking in Islamic Banks: Role of Shariah Supervisory Board

Nur Athirah Najwa, Zulkufly Ramly, Razali Haron

Abstract


ABSTRACT

This paper aims to examine the moderating effect of Shariah Supervisory Boards (SSBs) on the relationship between board size, Chief Risk Officer (CRO), and risk-taking of 24 Islamic banks (IBs) in Malaysia, Indonesia and Brunei from 2010 to 2015. This approach integrates the arguments of agency theory and resource dependence theory. The results of panel regression indicate that the appointment of a CRO as an executive board member reduces credit risk, implying that the appointment of a CRO as a risk expert in IBs enhances the management of risk and monitoring of risk-taking activities. Further, larger board is likely to reduce insolvency risk when an SSB has higher percentage of members with supervisory Shariah experience. Next, this study observes that larger SSB size and a higher percentage of members with Shariah supervision experience moderate the relationship between the CRO and insolvency risk. Overall, this study highlights the important role of board size, CRO and SSB in the risk-taking of Islamic banks, which have received little attention in the extant literature.

Keywords: Islamic banks; risk taking; board size; Chief Risk Officer; Shariah Supervisory Board.

ABSTRAK

Tujuan kajian ini adalah untuk mengkaji kesan saiz lembaga pengarah (LP) dan Ketua Pegawai Risiko (KPR) ke atas pengambilan risiko di 24 bank-bank Islam di Malaysia, Indonesia dan Brunei dari tahun 2010 hingga 2015 dan sama ada kesan tersebut disederhanakan oleh Lembaga Penyeliaan Syariah (LPS). Kaedah ini mengintegrasikan hujah-hujah teori agensi dengan teori pergantungan sumber. Hasil analisa regresi data berpanel menunjukkan pelantikan KPR sebagai ahli eksetutif mengurangkan risiko kredit. Hasil ini menyiratkan yang pelantikan KPR sebagai pakar risiko di bank-bank Islam telah meningkatkan pengurusan dan pemantauan risiko di dalam aktivit-aktivitii pengambilan risiko. Selanjutnya, saiz LP yang lebih besar boleh mengurangkan risiko insolvensi dengan syarat peratus keanggotaan LPS dari kalangan ahli-ahli yang berpengalaman di dalam penyeliaan Syariah adalah tinggi. Seterusnya, kajian ini mendapati saiz LPS yang besar dan peratusan yang tinggi ahli-ahli LPS mempunyai pengalaman di dalam penyeliaan Syariah menyederhanakan hubungan di antara KPR dan risiko insolvensi. Keseluruhannya, kajian ini menyorotkan peranan penting saiz LP, KPR dan LPS di dalam aktiviti-aktiviti pengambilan risiko di bank-bank Islam. Selama ini kajian-kajian sedia ada hanya memberikan sedikit perhatian terhadap perkara ini.

Kata kunci: Bank-bank Islam; pengambilan risiko; saiz lembaga pengarah; Ketua Pegawai Risiko; Lembaga Penyeliaan Syariah


Keywords


Islamic banks, risk taking, board size, Chief Risk Officer, Shariah Supervisory Board.

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