Strong Boards and Risk-taking in Islamic Banks

Abstract

This paper examines whether variations in strong boards explain the differences between risk-taking in Islamic and conventional banks. From an analysis of a pooled sample of Islamic and conventional banks, we find that strong boards in general serve their shareholders through engaging in higher risk-taking activities across both types of banks. In Islamic banks, however, a strong board is found to mitigate risk-taking when integrated with a Shari’ah supervisory board (SSB) as religiosity restrains risk-taking. We recommend that Islamic bank regulators improve the SSB’s monitoring abilities, and thus facilitate its interaction with the board of directors.