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Corporate governance of Islamic banks: A comparative study between GCC

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Article  in  International Journal of Islamic and Middle Eastern Finance and Management · August 2014
DOI: 10.1108/IMEFM-01-2013-0001

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IMEFM
7,3
Corporate governance of
Islamic banks
A comparative study between GCC
346 and Southeast Asia countries
Rihab Grassa and Hamadi Matoussi
Received 2 January 2013 ISCAE, Manouba University, Manouba, Tunisia
Revised 31 January 2014
Accepted 21 May 2014

Abstract
Purpose – This paper aims to understand the current governance practices and governance structure
of Islamic banks (IBs) in Gulf Cooperation Council (GCC) and Southeast Asia countries with the purpose
of providing relevant information in guiding the future development of the governance system for IBs.
As well, the paper discusses and compares the state of the governance system in GCC countries (Kuwait,
Bahrain, United Arab Emirates, Qatar and Saudi Arabia) and Southeast Asia countries (Malaysia and
Indonesia).
Design/methodology/approach – The study utilizes descriptive analysis approach in extracting
and analyzing data collected for 83 IBs observed for the period 2002-2011. The authors test for
differences in means and medians of corporate governance attributes between a sample of IBs in GCC
countries and another one for Southeast Asia countries. They use selected variables of corporate
governance of different governance structures, namely, the ownership structure, the board of directors,
the Shariah board and the CEO attributes.
Findings – The paper findings argue that there are significant differences and divergence of corporate
governance structure of IBs in GCC countries and those in Southeast Asia countries. This position
acknowledges that there are shortcomings to the existing governance framework for IBs which needs
further improvement and standardization.
Practical implications – The paper is a very useful source of information that may provide relevant
guidelines in guiding the future development of corporate governance of IBs. As well, the paper
provides relevant guidelines for improving regulations and laws covering the governance of IBs.
Originality/value – This paper provides fresh data and recent information on the actual corporate
governance system in IBs in GCC and Southeast Asia countries. As well, the paper discusses a
significant shortage in corporate governance literature of Islamic finance.
Keywords Corporate governance, GCC countries, Islamic bank, Shariah board, Board of directors,
CEO, Southeast Asia countries
Paper type Research paper

International Journal of Islamic and
Middle Eastern Finance and
Management
Vol. 7 No. 3, 2014
pp. 346-362
© Emerald Group Publishing Limited
1753-8394
DOI 10.1108/IMEFM-01-2013-0001
1. Introduction
Islamic banks (IBs) are particular financial institutions generating distinct corporate
governance challenges. The present study examines corporate governance in IBs
operating in both Gulf Cooperation Council (GCC) and Southeast Asia countries. In
particular, we study corporate governance variables identified as relevant by academics
and practitioners and we investigate the differences and similarities of corporate
governance characteristics of IBs in GCC and Southeast Asia countries.
The governance of IBs should be different from that of conventional banks due to the
high number of parties involved in their governance scheme. In addition to investors
and stakeholders, regulators and the Islamic community have a direct interest in the Corporate
stability of the Islamic banking system, because the stability of the Islamic financial
sector depends on their financial stability. As a result, corporate governance attributes
governance of
are placed in a crucial role of corporate governance of IBs. Islamic banks
Most of the IBs are located in GCC and Southeast Asia countries. That is why, this
paper tries to examine corporate governance of IBs in both GCC and Southeast Asia
countries. In particular, we try to examine corporate governance variables of IBs as 347
identified as relevant by academics and practitioners (ownership structure, board of
directors, Shariah board and CEO characteristics) and investigate on their differences
and similarities between those of IBs in GCC countries and those in Southeast Asia
countries. Our goal is to provide useful information and data and a roadmap for thinking
about the governance of IBs in terms of reform and research.
Our investigation covered a sample of 83 largest IBs in GCC and Southeast Asia
countries observed over the period 2002-2011. We find, first, GCC IBs are more profitable
than those in Southeast Asia countries. Second, there are several divergences between
corporate governance characteristics of GCC IBs and in those in Southeast Asia
countries.
These divergences have economic, social and cultural explanations. As well, the
divergences of the regulatory frameworks of these countries influenced the governance
structure schemes of these IBs.
Our study has several contributions to the existing literature. First, to our knowledge,
this paper is the first to compare corporate governance characteristics between IBs in
Southeast Asia and those in GCC countries. Our findings suggest that culture, economic
and social contexts on which these banks operate affect the composition of board of
directors and the Shariah board. Second, our paper focuses on the unique corporate
governance structure of IBs, the Shariah board, and examines the different Shariah
board structure of IBs in GCC and Southeast Asia countries. Third, this study provides
empirical support for the neo-institutional perspective at the national level for
differences in perceived legitimacy of corporate governance practices throughout the
world. As such, it suggests new avenues of research for both the comparative corporate
governance literature, as well as for the neo-institutional perspective.
The remaining of this paper is organized as follows: Section 2 discusses the related
literature. Section 3 presents sample and methodology. Section 4 provides empirical
results. Section 5 summarizes our paper.

2. Literature review
2.1 Corporate governance of IBs
The governance of IBs must be different from their conventional counterpart. For
talking about corporate governance of IBs, we should take into consideration the
particularities of corporate governance of this financial sector. First, IBs must undertake
their activities only on the basis of Shariah law. Hence, the risk of Shariah-incompliance
can create financial turmoil. Second, IBs are characterized by the existence of
the investment accounts which complicate their governance system. Third, institutional
environment in which IBs operate is characterized by less transparency and weaker
market forces and sometimes weaker government oversight (Claessens, 2006). These
whole factors make corporate governance of IBs different from their conventional
counterpart.
IMEFM In addition, the purpose of corporate governance of Islamic financial institutions
(IFIs) is different from the purpose of corporate governance of other financial firms.
7,3 Ahmed and Chapra (2002) consider the corporate governance of IFIs as a mechanism
that allows ensuring fairness to all stakeholders through greater transparency and
accountability toward Islamic principles. According to Ibrahim (2007), the corporate
governance of Shariah-compliant business would first look at the transactional
348 structure to see whether the transaction involves elements that invalidate gains or
profits, as Shariah is concerned not only with the substance but also with the form of the
transaction.
Most of previous research works did not give a clear definition for corporate
governance of IBs. The IFSB Standard 3 defines corporate governance of IFIs[1] as:
[…] a set of relationships between a company’s management, its board of directors, its
shareholders and other stakeholders which provides the structure through which: the
objectives of the company are set; and the means of attaining those objectives and monitoring
performance are determined.
Also, the IFSB Standard 3 assumes that good corporate governance in of IFIs should
encompass:
[…] a set of organizational arrangements whereby the actions of the management of IFIs are
aligned, as far as possible, with the interests of its stakeholders; provision of proper incentives
for the organs of governance such as the board of directors, Shariah board and management to
pursue objectives that are in the interests of the stakeholders and facilitate effective
monitoring, thereby encouraging IFIs to use resources more efficiently; and compliance with
Islamic Shariah rules and principles.
Accordingly, IBs have a complicated governance system. Indeed, the number of
stakeholders having a direct interest on the activities of IBs complicates their
governance system. In addition to the board of directors and the Shariah board (Lewis,
2007), investors, depositors and regulators have a direct interest on the performance and
the continuity of the activities of the IBs (Figure 1).

2.2 Previous research on corporate governance of IBs

There is limited but growing literature on corporate governance of IBs. Hassan (2011)
studied the Shariah practices and Shariah governance system in different countries. The
paper findings confirmed that there are significant differences and diverse Shariah
governance practices in these countries, which acknowledges that there are
shortcomings and weaknesses to the existing governance framework for the IFIs and
which requires more improvement. Garas (2012) studied the conflicts of interest in the
Shariah board and the conflict of interest between the Shariah board and board of
directors and others third parties in IFIs. The research findings confirmed that the
conflict of interest in the Shariah board is significantly affected by the executive position
of the Shariah board members. Mollah and Karim (2011) tested whether a multi-layer
corporate governance model instituted by the Islamic banking system offers protection
against its fallibility to financial crises. The findings of the paper suggested that the
corporate governance model followed by IBs provides better protection against crisis.
Quttainah (2011) examined how the corporate governance system, especially Shariah
boards, impacts the earning management behaviors within IBs. The paper findings
suggested that various board attributes, such the size, Accounting and Auditing
 Supervisor/Regulator (Central Corporate
Bank, Monetary Authority…) governance of
Islamic banks

Shariah
Supervisory Board 349

External Shareholders External

financial Shariah
audit audit

Management Board of directors

Investment
accounts holders Figure 1.
Components of corporate
governance in IBs

Organization for Islamic Financial Institutions’ member and the independence of the
board of directors, are important determinants of the earning management for IBs.
Using a sample of 22 large Bahraini IBs observed over the period 1998-2008, Grassa et al.
(2010) investigated the effect of the Shariah board on financial and ethical performance
of IBs. Empirical investigations suggested that no significant relation has been
observed between financial performance and Shariah board characteristics. However,
governance attributes are efficient in terms of Shariah compliance transactions.
Due to the lack of literature, fresh data and empirical evidence, this paper carried out
a comprehensive analysis on corporate governance practices of IBs in GCC countries
and those in Southeast Asia countries. The analysis takes into consideration the main
basic structures of sound corporate governance in IBs, namely, the ownership structure,
the board of directors, the Shariah board and the CEO characteristics. As the nature of
this study is explorative and comparative in character, it will be based on two different
contexts: the GCC region and the Southeast Asia region. This research examines the
corporate governance system and practices in these two contexts which can help us to
provide two distinctive models of corporate governance of IBs.

3. Sample construction and methodology

3.1 Sample construction and characteristics
Our Islamic banking samples consist of 55 IBs located in GCC countries (Saudi Arabia,
UAE, Kuwait, Bahrain and Qatar) and 28 IBs located in Southeast Asia (Malaysia and
Indonesia) observed over the period 2002-2011 (panel data). We collect data for internal
governance characteristics from their annual reports and Zawya database. The
governance data are measured on the date of the proxy at the beginning of the
corresponding fiscal year. We collected balance-sheet data from annual financial
statement of IBs.
IMEFM Tables I–III present the distribution of means of selected financial variables for our
samples of IBs. Perhaps, the most important trend evident is the increasing firm size,
7,3 measured by the book value of assets, which reflects the heightened consolidation in the
industry. The average IB in our sample had 6.046 billion USD. We remark that IBs in
GCC countries are larger than those in Southeast Asia. The average size of IBs in GCC
countries is 6.460 billion USD (the size ranges between 3.602 billion USD and 146 billion
350 USD). However, the average size of IBs in Southeast Asia countries is 3.061 billion USD.
On the other hand, the average size of IBs in our sample has increased considerably
during the 10 years of observation from 2.176 billion USD in 2002 to 9.898 billion USD in
2011.
The age of IBs of our sample ranges between 3 and 35, with a median of 8. We find
that IBs in GCC countries are older than IBs in Southeast Asia.

Variables 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bank size (billions of dollars)

Mean 2.176 2.13 2.389 2.890 3.297 4.532 5.858 8.328 9.482 9.898
Median 1.120 1.099 0.542 1.240 1.353 1.894 2.257 3.141 3.457 3.361
ROA (%)
Mean 2.54 3.44 4.57 6.19 4.53 5.568 1.47 0.407 1.062 1.473
Median 1.64 2.07 2.82 3.599 3.35 3.733 2.148 1.094 0.796 0.74
ROE (%)
Mean 11.40 15.15 13.36 16.22 14.76 14.37 6.54 0.44 03.32 5.52
Median 9.38 11.40 13.89 13.85 13.28 15.43 0.94 0.406 03.37 6.28
Leverage
Mean 0.407 0.417 0.378 0.426 0.479 0.495 0.536 0.531 0.378 0.391
Median 0.345 0.381 0.343 0.342 0.455 0.541 0.605 0.589 0.272 0.300
Loss
Mean 0.052 0 0.0277 0.0697 0.055 0.016 0.093 0.258 0.2631 0.117
Successive loss
Mean 0 0 0 0 0 0.016 0.015 0.064 0.122 0.098
IAH (%)
Table I. Mean 49.57 46.89 34.16 25.11 27.67 29.49 33.86 36.52 36.60 33.76
Mean and median of Median 59.64 58.70 42.72 3.07 26.05 30.87 31.17 42.79 41.58 38.27
selected financial AGE (year)
variables: yearly Mean 13 12 11 12 13 13 13 14 14
comparison for all IBs Median 10 7 5 6 7.5 7 8 11 10

Variables Mean Median SD Minimum Maximum

AGE (year) 12 8 10.4 3 35

Bank assets (billions of dollars) 6.046 1.742 – 0.560 145.990
ROA (%) 4.57 2.04 0.0078 ⫺0.43 40.253
Table II. ROE (%) 10.19 10.11 0.153 0.087 65.44
Mean and median of Leverage (%) 46.30 43.88 0.299 3.11 99.96
selected financial Loss (frequency) 0.107 0 0.308 0 1
variables: 2002-2011 Successive loss 0.037 0 0.188 0 1
comparisons for all IBs IAH (%) 32.95 36.16 28.35 0 91.57
 Mean Median
Corporate
GCC Southeast Asia Significance GCC Southeast Asia Significance governance of
Variables countries countries (p-value) countries countries (p-value)
Islamic banks
AGE (year) 12.5 8.84 2.027 (0.046)** 8 4 2.859 (0.000)***
Bank assets
(billions of
dollars)
ROA (%)
6.46
5.57
3.061
1.5
2.784 (0.000)***
2.253 (0.01)***
1.741
2.04
1.77
0.9
0.638 (1.375)
2.089 (0.012)**
351
ROE (%) 10.19 10.2 0.783 (0.781) 10.10 9.3 0.472 (0.145)
Leverage (%) 46.31 59.78 0.259 (0.399) 43.88 58.33 0.483 (0.067)
Loss
(frequency) 0.106 0.0625 2.157 (0.01)*** – – Table III.
Successive Mean and median of
loss 0.037 0.0156 2.363 (0.010)*** – –
selected financial
IAH (%) 26.48 50.43 2.850 (0.006)*** 14.75 51.53 3.027 (0.000)***
variables: 2002-2011
Notes: p-value for the coefficient is within parentheses; *significant at 10 per cent; ** significant at 5 per cent; *** significant at comparisons for GCC IBs
1 per cent and Southeast Asia IBs

The return on assets (ROA) and the return on equities (ROE), as proxies for performance,
have also exhibited an upward trend during the period 2002-2007. The average ROA has
been increased from 2.54 per cent in 2002 to 5.57 per cent in 2007. In the same way, the
average rate of ROE has increased from 11.40 per cent in 2002 to 14.37 per cent in 2007.
Due to the global financial crises of 2008, the profitability of IBs has decreased
considerably during the period 2008-2010. Nevertheless, IBs in GCC countries are more
profitable in terms of ROA and ROE than those in Southeast Asia.
On average, 10.7 per cent of IBs of our sample have suffered a loss during the period
2002-2011 and 3.7 per cent have known successive losses for two years. IBs in GCC
countries have suffered more from losses than those in Southeast Asia.
The share of investment account holders to total assets ranges between 0 and 91.57
per cent, with a median of 36.16 per cent. The mean is 32.95 per cent. The share of
investment account holders is higher in IBs in Southeast Asia countries than those in IBs
in GCC countries.

3.2 Methodology
The sample of IBs is divided into two subsamples: the first subsample is for IBs in GCC
countries, and the second subsample for those in Southeast Asia countries.
We tested for differences in means and medians of corporate governance attributes
between the two samples. We used selected variables of corporate governance of
different governance structures, namely, the ownership structure, the board of directors,
the Shariah board and the CEO characteristics. We emphasize that our analysis and
comparison are not regression-based; rather, our purpose is to compile a series of
descriptive statistics in one place.
3.2.1 Variables measurement. We retain in our study, four types of variables:
ownership structure, board of directors’ attributes, Shariah board attributes and CEO
characteristics.
3.2.1.1 Ownership structure. Corporate governance is viewed from the perspective
that publicly traded companies have dispersed shareholders who demand governance
to protect their interests. Ownership structure and the influence that certain
IMEFM shareholders exert play a key role in corporate governance. Indeed, previous studies
argue that the ownership structure significantly influences voting outcomes on
7,3 shareholder-sponsored proposals to make change in corporate governance structures
(Jensen, 1993; Shleifer and Vishny, 1997; Gordon and Pound, 1993).
For this research, we have selected the most intensely studied ownership structure
attributes in the corporate finance literature (Table IV).
352 3.2.1.2 Board of directors’ attributes. Boards of directors of IBs are placed in a crucial
role in their governance structure. Even if the boards of IBs have the same legal
responsibilities as boards of conventional banks, indirectly Islamic finance principles
have placed additional expectations and tasks to the board. Hence, the board structure
may influence notably how IBs’ boards operate.
That is why, for this paper, we have selected the most intensely studied board of
directors’ characteristics in the corporate finance literature (Table V).
3.2.1.3 CEO characteristics. Previous studies on corporate finance discussed the
important role played by the CEO in banks’ governance. Imhoff (2003) found that board
governance is strictly cooperative when the current or former CEO of the firm has a dual
role of chairman of the board. In fact, the board chairman often sets the agenda of the
board meeting and, so, controls issues brought before the board. Besides, CEOs serving
as board chairman often have significant influence on the structure of the board, thereby
increasing the risk that new director appointees in the board will not be independent of
management, even though they are “outsiders”. Moreover, CEOs can have significant
influence over the board over the committees they serve on.
For this research, we have selected the most intensely studied CEO attributes in the
corporate finance literature (Table VI).

Ownership structure variables

BLOCK Number of blockholders, where blockholders is defined at the (5 per cent)

ownership level
Per cent INSTIT Percentage of share held by institutional investors
Per cent PUBLIC Percentage of share in the stock exchange
Table IV. Per cent FOREIGN Percentage of share held by foreign investors
Ownership structure Per cent INSIDER Percentage of share held by insiders

Board of directors’ attributes

Board meeting Number of meetings held by the board of directors during the year
Board size Number of directors in the board of directors
Outside director Percentage of independent directors sitting on the board of directors
Non-executive The percentage of non-executive directors in the board
Foreign directors Percentage of foreign directors sitting on the board of directors
Female directors Percentage of women sitting on the board of directors
Table V. Old directors Percentage of directors over 65 in the board of directors
Board of directors’ Director fee The annual payment made to directors in the board
attributes Board committee Number of board of director committees
3.2.1.4 Shariah board attributes. Shariah board is a unique characteristic of corporate Corporate
governance in IBs and which concerns the religious aspects of the activities of IBs.
Shariah board consists of Shariah advisers who are hired by the IBs. Shariah board is an
governance of
independent body entrusted with the duty of directing, reviewing and supervising the Islamic banks
activities of IBs. The purpose of the Shariah board is to ensure that the IB operates in
accordance with the Shariah principles and rules.
The Shariah board operates as an internal control body in the IB which enhances the 353
credibility of the bank in the eyes of its customers, shareholders […] and bolstering their
Islamic credentials (Rammal, 2006). The Shariah board is crucial for two reasons. First,
those who deal with IBs want to be assured that they are transacting with Islamic law.
Second, some Islamic scholars argue that strict adherence to Shariah will act as a
counter to the incentive problems outlined above. In fact, the Islamic moral code will
push Muslims to behave toward being ethical, thus minimizing the transaction costs
arising from incentive issues. Islamic religious ideology acts as an incentive mechanism
that reduces the inefficiency that arises from asymmetric information and moral hazard
(Suleiman, 2000).
For this research, we have selected the most intensely studied Shariah board
characteristics in the Islamic finance literature (Table VII).

4. Empirical results
Tables VIII, X, XIII and XVI provide summary statistics for selected variables
describing the governance structures for our samples of IBs in GCC countries and
Southeast Asia countries.
Tables XI, XII, XIV, XV and XVII compare the means and medians of selected
variables of corporate governance between IBs in GCC countries and those in Southeast
Asia countries. We emphasize that our analysis and comparison are not
regression-based; rather, our purpose is to compile a series of descriptive statistics in one
place.

CEO characteristics

CEO tenure The number of years the CEO has been in that position
CEO duality Dummy variable set equal to 1 if the CEO is also the chairman of the board
CEO founder Dummy variable set equal to 1 if the CEO is also the founder Table VI.
CEO age Age of the CEO CEO characteristics

Shariah board attributes

SB size Number of scholars sitting on the Shariah board

Meeting Number of meetings held by the Shariah board during the year
SB interlock Percentage of scholars sitting on the Shariah board of others IFIs
SB_ACF Percentage of members of the Shariah board having accounting/
finance knowledge
Female scholars Percentage of female scholars in the Shariah board
SB supervisory/Advisory Dummy variable set equal to 1 if the Shariah board has a supervisory role,
0 if it has an advisory role. Table VII.
SB fee Shariah board fee Shariah board attributes
IMEFM 4.1 Ownership structure
Tables VIII and IX provide, respectively, a summary statistics for selected variables
7,3 describing the ownership structure of our sample of IBs and a comparison between GCC
IBs and Southeast Asia IBs during the period 2002-2011.
The average number of blockholders that own 5 per cent or more is 2.46, the
minimum is 1 and the maximum is 11. IBs in GCC countries are dominated by
354 blockholders. The average number of blockholders of GCC IBs is 3. However, the
average number of blockholders is 1.32 in IBs in Southeast Asia countries.
The average percentage of shares held by institutional investors is 63 per cent. The
presence of institutional investors is higher in IBs in Southeast Asia, compare to IBs in
GCC, where the average is 48.57 per cent.
Moreover, the average percentage of shares held by public investors is 19.4 per cent
for all samples of IBs. IBs in Southeast Asia are characterized by the absence of public
investors. However, the average percentage of share trading in the stock exchange of
GCC IBs is 27.89 per cent.
During the period 2002-2011, the average percentage of share held by foreign
investors was 50.6 per cent. The presence of foreign investors is higher in Southeast
Asia IBs than in GCC IBs.

4.2 Board size and composition

Tables X–XII provide summary statistics for selected variables describing the board of
directors’ attributes of our sample of IBs. The average number of directors sitting on the

Variables Mean Median SD Minimum Maximum

BLOCK 2.46 2 1.96 1 11

Per cent INSTIT 63 70.1 37.8 0 100
Table VIII. Per cent PUBLIC 19.4 0 28.2 0 86
Ownership structure of Per cent FOREIGN 50.6 49 44.2 0 100
IBs: all IBs Per cent INSIDER 73.83 84 29.4 0 100

Mean Median
Southeast Southeast
GCC Asia Significance GCC Asia Significance
Variables countries countries (p-value) countries countries (p-value)

BLOCK 2.93 1.32 2.869 (0.006)*** 3 1 3.002 (0.000)***

Per cent
INSTIT 48.57 100 5.756 (0.000)*** 42.63 100 4.948 (0.000)***
Per cent
PUBLIC 27.89 0 3.03 (0.000)*** 29.37 0 2.983 (0.000)***
Table IX. Per cent
Ownership structure of FOREIGN 39.25 75.8 1.824 (0.042)** 39.45 100 2.837 (0.002)***
IBs: 2001-2011 Per cent
comparisons of ownership INSIDER 59.79 100 3.848 (0.001)*** 58.70 100 3.746 (0.000)***
attributes between GCC
IBs and Southeast Asia Notes: p-value for the coefficient is within parentheses; *significant at 10 per cent; ** significant at 5
IBs per cent and *** significant at 1 per cent
Variables 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Board Mean – 4 6.67 8 6.25 6.7 6.89 7.5 7.32 7.82

meeting Median – 4 4 6 5 6 6 6 6 6
Board size Mean 8.5 8.28 8.4 8.06 8.10 8.24 8.37 8.33 8.2 8.3
Median 9 9 9 8 8 8 9 8 8 8
Non-executive Mean 0.83 0.85 0.82 0.83 0.80 0.823 0.80 0.84 0.81 0.81
Median 0.89 0.0.87 0.89 0.88 0.89 0.875 0.875 0.88 0.875 0.885
Outside Mean 0.63 0.655 0.66 0.59 0.60 0.576 0.59 0.60 0.59 0.60
directors Median 0.74 0.64 0.64 0.5 0.58 0.54 0.6 0.56 0.55 0.57
Female Mean 0 0 0.004 0.004 0.010 0.011 0.013 0.0147 0.011 0.011
directors Median 0 0 0 0 0 0 0 0 0 0
Old directors Mean 0.005 0.025 0.031 0.048 0.056 0.05 0.053 0.047 0.057 0.057
Median 0 0 0 0 0 0 0 0 0 0
Foreign Mean 0.25 0.249 0.39 0.3165 0.329 0.36 0.33 0.30 0.32 0.35
directors Median 0 0 0.17 0 0.125 0.33 0.18 0.12 0.05 0.06
Director feesa Mean 290,957 378,243 395,563 392,758 556,133 708,823 891,228 980,999 1,069,146 1,179,345
Median 244,800 272,000 293,900 286,000 318,303 429,440 478,000 500,000 596,250 600,750
Mean 3 2 2 2 2 3 3 4 5 5
Median 46 48 49 50 50 50 53 53 53 54
Number of Mean 3 2.58 3 3 3 3.45 3.28 3 3 3
committee Median 3 3 3 3 3 4 4 4 4 4

a
Notes: expressed in USD

Table X.

yearly comparison
for all samples of IBs:
selected board of
Mean and median of

directors’ characteristics
355
Islamic banks
governance of
Corporate
IMEFM board is eight, although there is a wide distribution of board size in the sample (with a
minimum of 4 and maximum of 14). The average number of directors is stable over the
7,3 period 2002-2011. Table XII provides evidence that the boards of directors of GCC IBs
are slightly larger than those in Southeast Asia IBs. However, the number of directors
present in the board of directors of IBs is still smaller than those founded in conventional
banks in the USA. Adams and Mehran (2003) find an average of 18 directors make up
356 each bank board.
According to Table XI, on average, board of directors of IBs of our sample meet 7.04
times per year. Table XII reports that, on average, boards of GCC IBs meet 5.25 times per
year, lower than that observed in Southeast Asia IBs (average: 8.94). Generally, the
number of annual board meetings of banks is regulated at the state level. Malaysian
state requires a minimum of seven meetings per year. However, in GCC countries, banks
must have a minimum of between four and six meetings per year. State regulations on
the number of meetings may influence the choice of bank directors. Table X reports that
the number of meetings has increased considerably during the 10 years of observation
from four meetings in 2002 to eight meetings in 2011.
The mean percentage of non-executive directors in the board in our sample is 82 per
cent. However, the mean percentage of outside directors is 60 per cent. Table XII reports
that, on average, the percentage of outside directors in GCC IBs is higher (65 per cent)

Variables Mean Median SD Minimum Maximum

Board meeting 7.04 6 3.86 2 19

Board size 8.29 8 1.99 4 14
Non-executivea 82% 87.5% 0.223 0% 100%
Outside directorsa 60% 58% 0.26 0% 100%
Table XI. Female directorsa 0.94% 0% 0.032 0% 16.7%
Mean and median of Old directorsa 5.1% 0.125 0.098 0% 50%
selected board of Foreign directorsa 31.6% 0.125 0.362 100%
directors’ characteristics Director feesb 694,619 363,456 – 5,980 9,513,280
for all samples of IBs: Number of committee 3.14 3 1.129 1 8
2002-2011 comparisons
for all IBs Notes: a expressed in per cent; b
expressed in USD

Mean Median
GCC Significance Significance
Variables IBs Southeast Asia IBs (p-value) GCC IBs Southeast Asia IBs (p-value)

Board meeting 5.25 8.94 3.375 (0.000)*** 4 6 2.385 (0.003)***

Board size 8.53 7.71 1.966 (0.027)** 9 8 1.076 (0.32)
Table XII. Non-executiveb 82.3% 82.4% 0.962 (0.872) 90% 87.5% 0.765 (0.275)
Mean and median of Outside directorsb 65% 52% 1.423 (0.078)* 66% 50% 1.541 (0.138)
Female directorsb 0.36% 3% 4.018 (0.000)*** – –
selected board of
Old directorsb 3% 3.3% 1.037 (0.152) – –
directors’ characteristics Foreign directorsb 34.3% 18.97% 5.853 (0.000)*** – –
for all samples of IBs: Director feesa 813,988 353,090 2.822 (0.002)*** 411,000 196,974 2.372 (0.0012)***
comparisons of board of Number of
committee 2.9 3.63 1.604 (1.056) 3 4 1.834 (1.466)
directors between GCC
IBs and Southeast Asia a
Notes: expressed in USD; p-value for the coefficient is within parentheses; b
expressed in per cent; * significant at 10 per cent; ** significant
IBs at 5 per cent; and *** significant at 1 per cent
than those observed in Southeast Asia IBs (52 per cent). Adams and Mehran (2003) find Corporate
that the percentage of outside directors in bank-holding companies in the USA is 68.7
per cent.
governance of
The mean percentage of female directors in our sample is 0.94 per cent. The presence Islamic banks
of female directors has increased over the 10 years of observations from 0 per cent in
2002 to 1.1 per cent in 2011. Table XII shows that the presence of the women in the board
of directors of Southeast Asia IBs countries (mean: 3 per cent) is higher than those 357
observed in GCC IBs (0.36 per cent). This observed behavior can be explained by
tradition and culture governing the GCC region where women cannot hold a
decision-making or a leading position. However, women in Southeast Asia participate
more and more in the professional life since the past 80 years and can have leading
positions.
The mean percentage of old directors is 5.1 per cent. The presence of old directors in
the board has increased considerably from 0.5 per cent in 2002 to 5.7 per cent in 2011.
Furthermore, the average percentage of old directors sitting on the board of directors of
Southeast Asia IBs (8.33 per cent on average) is higher than those observed in GCC IBs
(3 per cent on average).
The average percentage of foreign directors is 31.6 per cent. The presence of foreign
directors in the board of directors has increased from 25 per cent in 2002 to 35 per cent
in 2009. Moreover, the presence of the foreign directors in the board of directors of IBs in
GCC countries (34.4 per cent on average) is significantly higher than those observed in
Southeast Asia (18.97 per cent on average).
The average of directors’ fees is 694 million USD, while the median is 364 million
USD. Over the ten-year period, the average director’s fees have significantly increased
from 291 million USD in 2002 to 1.069 million USD in 2011. Moreover, on average, IBs
directors’ fees in GCC countries (814 million USD) are significantly higher than those
observed in Southeast Asia IBs (353 million USD).
The average number of board committees of IBs is four. The number of board
committees of GCC IBs is lower (average is three) than those in Southeast Asia IBs
(average is four).

4.3 CEO attributes

Tables XIII–XV provide summary descriptive statistics on the characteristics of the
CEO for our sample. On average, the tenure of the CEO is four years, the minimum is one
year and the maximum is 24 years. The average tenure of the CEO in GCC IBs is slightly
longer (four years) than that observed in Southeast Asia IBs (three years).

Variables 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

CEO tenure Mean 4 3.588 3.29 3 3.24 3.53 4.11 5.04 5.4 5.7
Median 3 2 2 2 2 3 3 4 5 5
CEO duality Mean 0.133 0.14 0.16 0.1 0.078 0.072 0.067 0.066 0.077 0.076
Median 0 0 0 0 0 0 0 0 0 0 Table XIII.
CEO founder Mean 0.462 0.476 0.43 0.45 0.53 0.51 0.5 0.5 0.49 0.48 Mean and median of
Median 0 0 0 0 1 1 0.5 0.5 0 0 selected variables for CEO
CEO age Mean 44 47 47 48 49 49 50 49.96 50 51 attributes for all samples
Median 46 48 49 50 50 50 53 53 53 53 of IBs: yearly comparison
IMEFM On average, 8.99 per cent of the CEOs of IBs are also the chairman of the board of
directors. The duality of the position of the CEO with the chairman of the board does not
7,3 exist in Southeast Asia IBs, but it is widely observed in GCC countries.
Tables XIII–XV report that, on average, 48.6 per cent of the CEOs of the IBs are also
founders of the bank. As well, the percentages of CEOs who are also founders of the IBs
are significantly higher in GCC countries (an average of 54.5 per cent) than in Southeast
358 Asia countries, where the average is 48.9 per cent. Moreover, the average age of the CEO
of the IB is 49 years.

4.4 Shariah board size, composition and process

Tables XVI and XVII provide summary statistics for selected variables describing the
Shariah board attributes of our sample of IBs. The average number of scholars sitting on
the Shariah board is four (with a minimum of three and maximum of ten). Table XVII
provides evidence that the Shariah board of IBs in Southeast Asia countries is slightly
larger than those in GCC IBs. We can explain this difference by the divergence of
regulations governing the structure of Shariah boards across these countries. For

Table XIV. Variables Mean Median SD Minimum Maximum

Mean and median of
selected variables for CEO CEO tenure 3.98 3 3.37 1 24
attributes for all samples CEO duality 0.0899 0 0.286 0 1
of IBs: 2002-2011 CEO founder 0.487 0 0.50 0 1
comparisons for all IBs CEO age 48.6 50 7.26 32 67

Mean Median
Southeast Southeast
Table XV. Variables GCC IBs Asia IBs Significance GCC IBs Asia IBs Significance
Mean and median of
selected variables for CEO CEO tenure 4.25 2.53 4.752 (0.000)*** 3 2 3.958 (0.000)***
CEO duality 0.13 0 2.045 (0.02)** – – –
attributes for all samples
CEO founder 0.545 0.489 1.66 (0.050)** – – –
of IBs: comparisons of
CEO age 48.7 48.69 1.194 (0.863) 50 52 1,391 (0.563)
CEO attributes between
GCC IBs and Southeast Notes: p-value for the coefficient is within parentheses; *significant at 10 per cent; ** significant at 5 per cent
Asia IBs and *** significant at 1 per cent

Variables Mean Median SD Minimum Maximum

SSB size 4.28 4 1.12 3 10

Supervisory
role 81.26% 100% 0.39 0 100%
SSB interlock 82.72% 0 0.2819 0 100%
Table XVI. SSB_ACF 10.43% 0% 0.159 0% 66.67%
Meeting 12.12 7.5 11.13 3 54
Comparison of descriptive
Female
statistics on selected scholars 0.88% 0 4.88% 0% 40%
Shariah board variables SSB feea 130,427 69,000 150,383 2,016 732,000
for all IBs: 2002-2011
comparisons for all IBs Note: a expressed in USD
example, Bank Negara Malaysia requires that the Shariah committee should constitute Corporate
of not less than five Shariah scholars. However, the Bahraini law requires that the
Shariah board must consist of at least three Shariah scholars; nevertheless, there are no
governance of
specific requirements in UAE and Saudi Arabia. Islamic banks
Table XVI and XVII report also that, on average, 81.26 per cent of Shariah boards of
IBs in our sample have a supervisory role and 18.74 per cent have an advisory function.
Table XVII provides evidence that 100 per cent of Shariah boards of IBs in GCC 359
countries have supervisory boards; however, only 18.08 per cent of Shariah boards of
IBs in Southeast Asia countries have principally a supervisory role and 81.92 per cent
have an advisory role.
Tables XVI and XVII show also that, on average, 81.26 per cent of scholars are sitting
on more than two Shariah boards. The presence of the interlock in the Shariah board is
higher in GCC IBs (average: 93.21 per cent) than in those of Southeast Asia IBs (average:
54.65 per cent). In fact, the Indonesian law requires that every scholar can be a member
of maximum four IFIs. Also, Malaysian regulations require that a Shariah committee
member of one IFI is not allowed to become a Shariah committee member of another IFI
in the same industry. However, no specific regulation in the matter exists for IFIs of GCC
countries.
The average percentage of scholars sitting on the Shariah board and having
accounting and financial knowledge is 10.43 per cent (with a minimum of 0 per cent and
maximum of 66.67 per cent). Table XVII provides evidence that scholars with
accounting and finance knowledge sitting on the Shariah board of GCC IBs are much
more (average: 11.24 per cent) than those in Southeast Asia IBs (average: 8.74 per cent).
On average, the Shariah board of our sample has 12 meetings per year. Table VI
shows that, on average, Shariah boards of IBs in GCC countries meet more frequently
than those of Southeast Asia countries (15 meetings per years comparing to 11 times per
years for Southeast Asia banks).
The presence of female scholars in the Shariah boards of IBs in our sample is very
limited, on average 0.88 per cent. The presence of women in the Shariah boards is
remarkable in Southeast Asia IBs (on average: 4.89 per cent). However, no woman is
sitting on the Shariah board of GCC IBs.
The average fees of the Shariah boards are 130,427 USD. The average fees of Shariah
boards are higher in GCC IBs, 216,380 USD (minimum: 19,600 USD, maximum: 732,000

Mean Median
Significance Significance
Variables GCC IBs Southeast Asia IBs (p-value) GCC IBs Southeast Asia IBs (p-value)

SSB size 4.11 4.853 6.057 (0.000)*** 4 5 5.127 (0.001)*** Table XVII.
Supervisory role 100% 18.08% 16.166 (0.000)*** – – – Comparison of descriptive
SSB interlock 93.21% 54.65% 7.131 (0.000)*** 100% 60% 6.132 (0.004)*** statistics on selected
SSB_ACF 11.24% 8.74% 6.890 (0.000)*** – – –
Shariah board variables
Meeting 15.25 10.83 9.50 (0.010)*** 6 9.5 7.658 (0.015)**
for all IBs: comparisons of
Female scholars 0 4.89% 4.591 (0.000)*** – – –
SSB fee (USD) 216,380 42,018 4.017 (0.000)*** 136,000 36,878 4.017 (0.000)*** Shariah board
characteristics between
Notes: p-value for the coefficient is within parentheses; *significant at 10 per cent; ** significant at 5 per cent GCC IBs and Southeast
and *** significant at 1 per cent Asia IBs
IMEFM USD), than in Southeast Asia IBs, 42,018USD (minimum: 2,016 USD, maximum: 178,272
USD).
7,3
5. Conclusion
In this paper we examine the corporate governance of IBs in GCC countries and
Southeast Asia countries. In particular, this study examines corporate governance
360 variables of IBs identified as relevant by academics and practitioners and describes the
differences and resemblances between corporate governance characteristics of IBs in
GCC and those in Southeast Asia countries.
Our findings can be summarized as follows: GCC IBs are more profitable than those
in Southeast Asia countries. The investment deposits to total assets ratio is higher in
Southeast Asia IBs than those in GCC IBs.
Concerning the ownership structure, our findings reveal that IBs in GCC countries
are dominated by blockholders, and the number of blockholders observed in GCC IBs is
higher than those observed in Southeast Asia IBs. The presence of institutional
investors is higher in Southeast Asia IBs comparing to GCC IBs. IBs in Southeast Asia
are characterized by the absence of public investors. The presence of foreign investors is
higher in Southeast Asia IBs than in GCC IBs.
Tuning to board of directors’ characteristics, we find that the average number of
directors sitting on the board of directors of IBs is stable over the period 2002-2011, and
the boards of directors of GCC IBs is slightly larger than those observed in Southeast
Asia countries. On average, the number of meetings held by the board of directors of
GCC IBs during the year is lower than those held in Southeast Asia IBs. The percentage
of outside directors in GCC IBs is higher than those observed in Southeast Asia. The
presence of female directors has increased over the 10 years of observations from 0 per
cent in 2002 to 1.1 per cent in 2011, and the presence of the women in the board of
directors of Southeast Asia IBs is higher than those observed in GCC IBs. The presence
of old directors in the board has increased considerably from 0.5 per cent in 2002 to 5.7
per cent in 2011. Furthermore, the average percentage of old directors sitting on the
board directors of Southeast Asia IBs is higher than those observed in GCC IBs. The
presence of foreign directors in the board of directors of GCC IBs is significantly higher
than those in Southeast Asia IBs. On average, directors’ fees in GCC IBs are significantly
higher than those in Southeast Asia IBs.
Concerning the CEO characteristics, our paper reveals that the average tenure of the
CEO in GCC IBs is slightly longer than the CEO tenure of the Southeast Asia IBs. The
duality of the position of the CEO with the chairman of the board does not exist in
Southeast Asia IBs, but it is widely observed in GCC IBs. The percentages of CEOs who
are also founders of the IBs are significantly higher in GCC countries than in Southeast
Asia countries.
Turning to the Shariah board characteristics, our paper reveals that the Shariah
board of IBs in Southeast Asia countries is slightly larger than those in GCC IBs. The
presence of the interlock in the Shariah board is higher in GCC IBs than in Southeast
Asia IBs. The percentage of scholars with accounting and finance knowledge sitting on
the Shariah board of IBs in GCC countries is higher than those in Southeast Asia IBs.
Shariah boards of IBs in GCC countries meet more frequently than those of Southeast
Asia IBs. The presence of female scholars in the Shariah boards of IBs in our sample is
very limited, and the presence of women in the Shariah boards is remarkable in
Southeast Asia IBs. However, no woman was observed in the Shariah board of GCC IBs. Corporate
The average fees of Shariah boards are higher in GCC IBs than in those in Southeast
Asia IBs.
governance of
In general, the several differences between corporate governance characteristics of Islamic banks
GCC IBs and Southeast Asia IBs have economic, social and cultural explanations. As
well, different regulations, laws and regulatory frameworks in different countries
influence the structures of corporate governance of IBs. 361
To the best of our knowledge, our paper is the first to compare corporate governance
characteristics between IBs in Southeast Asia and those in GCC countries. Our findings
suggest that culture, economic, regulatory environment and social contexts on which
these banks operate affect the composition of board of directors and the Shariah boards.
Further research works should explore and compare the different effects of corporate
governance of IBs in different countries, which can help to build a strong governance
framework for IFIs.

Note
1. Excluding Takaful companies and Islamic mutual funds.

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Further reading
IDB (2009), “Islamic financial services industry development: ten year framework and strategies”,
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Corresponding author
Rihab Grassa can be contacted at: rihab_grassa@hotmail.fr

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