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Diversity of Shari’ah supervisory
board and the performance of
Islamic banks: evidence from an
emerging economy of Pakistan
Ismail Khan
Department of Management, Sunway Business School, Sunway University,
Subang Jaya, Malaysia
Ikram Ullah Khan
Institute of Management Sciences, University of Science and Technology Bannu,
Bannu, Pakistan
Mohammad Jasim Uddin
Department of Management, School of Business, Monash University,
Subang Jaya, Malaysia
Safeer Ullah Khan
Institute of Business Administration, Gomal University,
Dera Ismail Khan, Pakistan, and
Jahanzeb Marwat
Department of Management Sciences, Faculty of Finance, SZABIST,
Larkana, Pakistan
Abstract
Purpose –Given the relative importance of the Shari’ah supervisory boards (SSBs) in Islamic banks’(IBs’)
performance, this study aims to examine the impact of SSB diversity on IBs’performance from the
stakeholders’perspective in the context of Pakistan.
Design/methodology/approach –Random-effects model and generalized method of moment are used
to investigate the impact of SSB diversity on IBs’performance across a panel data of 22 Islamic banks in
Pakistan from 2005 to 2020 inclusive.
Findings –The findings of this study show that SSB size, SSB relevant educational background diversity,
bank’s size and bank’s stability have a positive impact on IBs’performance. In contrast, SSB age, nationality
and cross-membership diversities have a negative impact on IBs’performance. Moreover, SSB gender, tenure
and general educational diversities have no significant impacton IBs’performance.
The authors would like to thank Professor Yuka Fujimoto, Sunway Business School, Sunway
University, Malaysia for here support, guidance, and valuable comments throughout the research
write-up. Her valuable comments and guidance and significance helps us to improve the research
paper quite considerable. Moreover, the authors would like to thank the editor-in-chief of JIABR and
anonymous reviewers for their comments and suggestions for the development of the manuscript.
Funding information: No fund was received from any institute or third party.
Conflict of interest: There are no conflicts of interest among the authors.
Diversity of
Shari’ah
supervisory
board
Received 2 September2021
Revised 23 January2022
7 May 2022
5 September 2022
23 September 2022
22 December 2022
Accepted 10 January2023
Journal of Islamic Accounting and
Business Research
© Emerald Publishing Limited
1759-0817
DOI 10.1108/JIABR-09-2021-0240
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1759-0817.htm
Research limitations/implications –SSB diversity and IBs practices are different across different
jurisdictions. This study is conducted on IBs in Pakistan because of data constraints; thus, the results of this
study may not be generalizable to other countries’IBs.
Practical implications –In structuring the SSBs’framework, the regulatory authorities and
policymakers should consider mandating an ideal SSB size and hiring relevant qualified members with low
cross-membership to improve IBs’performance. Thus, the structure potentially attracts Muslim stakeholders,
enhances their satisfaction and improves IBs’performance.
Social implications –Having diversified members in the SSB, IBs equally benefit both individual and
group stakeholders in society. Diversity in SSB members enhances IBs’performance and the social welfare of
various stakeholders in society.
Originality/value –To the best of the authors’knowledge, this is the first empirical research that
examines comprehensively the impact of SSB structural and demographic diversities on IBs’performance in
the context of Pakistan. This paper contributes to the unique Shari’ah governance structure in the context of
Pakistan. Additionally, this study may serve to assist IBs’stakeholders in better comprehending the SSB
practices of IBs in Pakistan.
Keywords Islamic banking, Islamic corporate governance, Shari’ah supervisory board,
SSB diversity, Pakistan
Paper type Research paper
1. Introduction
Islamic banking has gained considerable popularity in Muslim and non-Muslim economies.
Islamic banks (IBs) are designed to take care of the requirement of Shari’ah governance (SG)
compliance and the ethical, religious, social and cultural needs of stakeholders (Alam et al.,
2021a). IBs continuously grow because of the increasing interest of Muslim stakeholders
who make profitable investments as per their religious beliefs [1] and bank compliance with
Maqasid-a-Shari’ah [2](Mukhlisin, 2021). Globally, IBs contribute to the owners’wealth
(Mollah et al.,2017), economic prosperity (Nawaz and Haniffa, 2017;Ledhem and Mekidiche,
2021) and socio-economic benefits of various groups of stakeholders (Hassan and Lewis,
2007). Similarly, for economic stabilization, Pakistan is among those economies striving
rigorously to improve IBs’performance (Chaudhry et al.,2020). Despite its importance,
recent studies on IBs indicate that the performance of IBs in Pakistan is still low (Abbas
et al., 2016). Hence, it is important to identify the main reason preventing IBs in Pakistan
from competitive performance (Ahmed et al., 2017). One crucial area for this consideration is
how IBs are governed based on the Shari’ah governance framework (SGF) and how IBs
satisfy customers’expectations based on the aspects of Shari’ah compliance (Hasan, 2008;
Ashraf et al.,2015). Keeping in view the recent development in the Islamic banking industry,
the State Bank of Pakistan (SBP) reviewed the existing SGF (2018) and SGF (2015) and
introduced a revised SGF in 2018 to apply to all IBs in Pakistan (SBP, 2018). The main
purpose of SGF is to strengthen the roles and responsibilities of the Shari’ah compliance
department of IBs guided by Shari’ah supervisory board (SSB) (SGF, 2018).
SSB is the most important governance device, composed of Shari’ah scholars for
monitoring the Shari’ah compliance of IBs on behalf of stakeholders (Pranata and Laela,
2020). Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
defines SSB as an independent body of highly specialized jurists in Fiqh-al-Mu’amalat –
Islamic commercial jurisprudence (AAOIFI, 2010). SSBs assured the compliance of
transactions and operations with Islamic Financial Institutions and Islamic Financial Law to
satisfy the Shari’ah (SGF, 2018) and ethical expectations of IBs’stakeholders (Minhat and
Dzolkarnaini, 2016). Notably, the structure, quality and other strategic aspects of Shari’ah
SSBs determine the IBs’stakeholder-oriented successful operations which indicates that
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SSB diversity is one of the crucial governance mechanisms (Jabari and Muhamad, 2020),
including structural diversity and demographic diversity [3]. Diversity in terms of age,
expertise, education and skills leads to a greater knowledge base, creativity and innovation,
thereby improving IBs’competitive advantages and financial performance (Jabari and
Muhamad, 2020;Mai, 2021).
The scope of Islamic finance is growing continuously that increases the challenges for
Shari’ah supervision to gain stakeholders’satisfaction and loyalty (Grassa, 2013;Alam
et al.,2019;Alam et al., 2021a). Developing an attractive SGF in terms of SSB diversity seems
vital today to meet the challenges of growth, stakeholders satisfaction and competitive
performance. Despite the reasonably available literature on Islamic corporate governance
(ICG) and IBs’performance (Grassa, 2016;Hamsyi, 2021), the research on SSB
characteristics and IBs’performance is still relatively small (Nomran et al., 2018;Baklouti,
2020). Existing research studies examined separately the ICG, SSBs and IBs’performance or
the link between ICG, SSBs and IBs (Rammal, 2010;Khan et al.,2015;Mansoor et al.,2019;
Abbas et al., 2020); however, they overlooked the impact of SSB diversity on IBs’
performance. The ICG mechanism is not implicitly identical and could differ within different
countries (Nomran et al.,2018). In other words, SGF differ across different jurisdictions
(Nomran and Haron, 2020a). For instance, some jurisdictions are highly regulated, while
other jurisdictions are slightly regulated or not (Hasan, 2009), which ultimately affects the
IBs’performance (Nomran and Haron, 2020b). Moreover, there is a high lack of effective
SGF implementation and research on IBs in the context of Pakistan (Sohail and Wadood,
2022). To address the research gap, we attempt to investigate the influence of SG,
particularly SSB diversity, on IBs’performance from the stakeholders’perspective in the
context of Pakistan.
The contributions of this study to the Islamic banking and SG literature are
threefold. First, to the best of the authors’knowledge, this is the first research that
examines the impact of SSB diversity in terms of structural diversity and demographic
diversityonIBs’performance in the context of Pakistan. Second, this study
incorporates both 6 full-fledged IBs and 16 conventional banks (CBs) having Islamic
windows and, thus, contributes to the whole industry of IBs in Pakistan. Third, our
research contributes to the existing literature that the relationship between SSB
diversity and IBs is patterned differently in various geographical contexts. This is
because each jurisdiction has its distinctive institutions (Halkos and Skouloudis, 2016),
stakeholders and legal protection rules (Ntim and Soobaroyen, 2013), ownership
concentration (Machuga and Teitel, 2009) and governance mechanisms (Alkhamees,
2013). Some jurisdictions prefer high intervention of regulatory authorities, while other
jurisdictions prefer low intervention of regulatory authorities (Nomran et al., 2018). It is
still a challenge whether high intervention, low intervention or no intervention is better
(Hasan, 2009). The difference between jurisdictions based on the regulatory authorities’
interventions can be reflected in the reactive, passive and pro-active SG models [4]. The
pro-active model also called the regulation-based model (Hasan, 2011)isappliedinthe
Pakistani context and reflects the high intervention of regulatory authorities (Ahmed
et al., 2017;Abbas et al., 2020). Research conducted by Hussain and Azez (2021) argued
that Pakistan has a strong SGF compared to Bahrain, Qatar and Bangladesh. The SBP
initiated a strategic plan (2021–2025) to reinforce SGF guided by SSBs to take the IBs to
the next level of growth and development and increase IBs’performance (SBP, 2021).
Thus, it seems crucial for Pakistani IBs to understand and fulfill the needs and
expectations of different stakeholders following Shari’ah compliance rules and the
extreme degree of regulatory authorities’interventions. Therefore, this study
Diversity of
Shari’ah
supervisory
board
contributes to the literature by focusing on SSB diversity and IBs’performance in the
context of Pakistan.
2. Literature review and hypotheses development
Recently, researchers focused on looking into why some businesses are regularly profitable
than other businesses. One approach is the stakeholder school of thoughts that seeks
competitive advantages by fulfilling stakeholders’needs (Freeman et al.,2004). The term
stakeholder theory was fundamentally coined by Freeman (1984), who argued that the
organizations require to satisfy the needs/expectations of multiple stakeholders who have a
stake in the businesses to improve organizations’value. Any strategy that opposes
stakeholders’values puts their economic success at stake, as stakeholders are more likely to
negatively respond to the organizations and vice versa (Maurer et al.,2011). The CBs boards
(BODs) and SSBs are affected by similar stakeholders’requirements (Rahman and Bukair,
2013;Alam et al.,2022); therefore, the stakeholders’theory can be suitably applied to
investigate the influence of SSB diversity on IBs’performance. In this regard, SSB is a
crucial factor that ensures the development of a comprehensive Shari’ah compliance (SGF,
2018) and supervises all the Shari’ah-related matters of the IBs to fulfill the needs/
expectations of stakeholders and improve IBs performance (SBP, 2018).
Generally, providing efficient Shari’ah compliance and Shari’ah supervision improves
the IBs’competitive performance (Grassa, 2013), as most stakeholders deal with IBs based
on their religious and Shari’ah preferences (Ireland, 2018). For instance, if the IBs comply
with Shari’ah principles, then Muslim stakeholders may increase their investment which
would increase the IBs’profitability and decrease their risk (Nomran et al.,2018). SGF
ensures the Shari’ah compliance of IBs’operations needed for effective, profitable and
higher financial performance (Alam et al., 2021a). In other words, the Shari’ah compliance of
IBs increases the stakeholders’confidence and stakeholders’satisfaction which ensures
their competitive performance (Hamza, 2013;Grassa, 2015). Therefore, the success of the IBs
highly depends on effective ICG (Toufik, 2015) which is dependent mainly on the existence
of effective SGF guided by SSBs (SBP, 2018).
The stakeholders-oriented successful operation and competitive performance of IBs
depend on the structure, quality and other strategic aspects of SSBs (Zafar and Sulaiman,
2020;Alam et al.,2022). The growing literature on IBs sees SSBs as groups of different
individuals with varied backgrounds, preferences and Islamic knowledge (Grassa, 2016),
which suggests that diversity in the SSB is crucial in determining how SSB diversity is
important for IBs’performance. SSB diversity refers to the heterogeneity among board
members including age, gender, nation, education, task and expertise alike (Kachkar and
Yilmaz, 2022). The SSBs’diversity determines how effectively the diverse scholars related
to IBs’valuable performance by fulfilling the needs and expectations of various groups of
stakeholders. A considerable heterogeneous board palliates the unfavorable consequences
of the homogeneous board (Fidanoski et al., 2014), provides new insights and creative ideas
(Ostergaard et al., 2011) and improves corporate performance (Mahadeo et al.,2012). Despite
the growing literature on SSBs, ICG and IBs, there is limited empirical research on Shari’ah
supervision, especially on the impact of SG mechanisms on IBs’performance (Mollah et al.,
2017;Nomran and Haron, 2020a). Existing studies that examined SSBs and IBs’
performance (Table 1) used different proxies for SSB attributes. For instance, Nomran et al.
(2018) examined the influence of SSBs’qualification, reputation, cross-membership and SSB
size on IBs performance in GCC countries. Isa and Lee (2020) examined the SSBs’
qualifications, female members and SSBs’reputation in Malaysia. Jabari and Muhamad
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Key reference Findings Country context
Abbas and Ali (2019) Shari’ah officers and advisors improve
Shari’ah compliance and IB performance
Pakistan
Abbas et al. (2020) SSBs ensure the IBs’compliance with
Shari’ah governance principles; SSBs’
reputation, expertise, cross-membership,
Shari’ah qualification and ownership
moderate the relationship between SG and
IBs’financial performance
Pakistan
Ahmed et al. (2017) The SSBs play an important role in the
improvement of IBs Shari’ah compliance;
however, the SSBs’mechanism needs further
improvement
Pakistan
Alam et al. (2021a) SG enhances the accurate functions and
activities based on Shari’ah principles; SG
enhances effectiveness, profitability and higher
performance; Shari’ah governance assists in the
implementation, monitoring and compliance of
Shari’ah role in IBs to enhance accurate
functions based on Shari’ah principles
Bangladesh
Alam et al. (2021b) BODs and SSBs’composition, formations and
reputation positively influence IBs fatwas,
Shari’ah decisions and IBs performance
which further increase customer trust and
confidence
Bangladesh
Alam et al. (2022) BODs, SSBs and Shari’ah executives affect
positively the Shari’ah compliance quality,
image, goodwill and performance of IBs
Bangladesh
Grassa (2013) SG strengthens the credibility of IBs and failure
to provide SG may have serious consequences
on the development of the IBs system
Organization of Islamic
Cooperation (OIC)
Grassa (2015) Weak and poor Shari’ah supervisory system
in OIC states such as national Shari’ah
authority, institutional Shari’ah boards
duties and attributes
South Asia, MENA, GCC,
Malaysia and Indonesia
Isa and Lee (2020) SSBs’qualifications and reputations
positively affect the IBs’performance; SSB
female members are weakly negatively
related to IBs’performance; committee size,
SSBs’experience and committee meetings are
not related to IBs’performance
Malaysia
Hussain and Azez (2021) SSB is not strong enough as compared to
Bahrain, Pakistan and Qatar
Bahrain, Bangladesh,
Qatar and Pakistan
Jabari and Muhamad (2020) IB with gender-diverse SSB is expected to
have better financial performance; IBs sizes
undermine the positive effect of gender
diversity on IBs’financial performance
Indonesia and Malaysia
Jan (2020) SG is formulated and implemented
significantly by SBP in Pakistan; however,
the SDG frameworks require regulatory
enhancement and higher qualifications to
safeguard the credibility and marketability of
SG of IBs
Pakistan
(continued)
Table 1.
An overview of past
studies on Shari’ah
governance,Shari’ah
supervisory boards
and Islamic backs’
performance
Diversity of
Shari’ah
supervisory
board
(2020) investigated the influence of gender SSBs diversity and IBs size on IBs performance
in Malaysia and Indonesia.
Khalil and Taktak (2020) examined the influence of SSB educational background and
nationality on the financial soundness of IBs in 20 countries. Alam et al. (2022) investigated
the impact of SG mechanisms on the IBs’performance and Shari’ah compliance. More
specifically, Khan et al. (2015) critically examined the SSBs framework of IBs in the dual
banking system of Pakistan, Malaysia, Bahrain and the UK. Ahmed et al. (2017) examined
the SSBs’role in the improvement of the Shari’ah compliance environment of IBs in
Pakistan. Khan et al. (2018) examined the impact of SG on IBs’performance. Abbas and Ali
(2019) investigated the need for SG in the IBs of Pakistan. Abbas et al. (2020) examined the
role of SSBs’reputation, SSBs’cross-membership and SSB members’Shari’ah qualification
in affecting the financial performance of IBs with the moderation role of ownership
Key reference Findings Country context
Khalil and Taktak (2020) SSBs’size is negatively related to the
financial soundness of IBs; SSBs’finance
qualification, presence of Mufti and foreign
Shari’ah scholars are insignificantly related
to the financial soundness of IBs
Bahrain, UAE, Kuwait,
Jordan, Palestine,
Pakistan, Iran, Nigeria,
Sudan, Malaysia,
Indonesia, Brunei and
Bangladesh
Khan et al. (2015) Malaysia and Bahrain have indigenous SG
frameworks, while Pakistan and the UK are
still under developmental and conventional
setup, respectively
Pakistan, Bahrain, the UK
and Malaysia
Khan et al. (2018) Large Shari’ah board, board independence
and board meetings enhance the IBs’value
Bangladesh, Maldives,
Pakistan and Sri Lanka
Mansoor et al. (2020) SG and corporate governance are
significantly related to the short- and long-
term credit ratings of IBs
Pakistan
Nomran and Haron (2020b) Small-size SSBs improve IBs’performance
compared to large-size SSBs; the optimal size
seems to be five
Algeria, Bahrain,
Bangladesh, Brunei,
Indonesia, Jordan, Kuwait,
Malaysia, Maldives,
Oman, Pakistan,
Palestine, Qatar, Saudi
Arabia, Sri Lanka, Sudan,
Syria, Thailand, Tunisia,
UAE, the UK and Yemen
Nomran et al. (2018) SSBs’size, qualification, change in SSBs
composition, cross-membership, experience
and reputation improve have significant
effects on IBs performance
Malaysia
Kachkar and Yilmaz (2022) SSBs members have higher educational level
diversity and national diversity; however, a
lack of gender diversity and age diversity is
observed
Malaysia and Oman
Bukhari et al. (2022) IBs in Pakistan experienced decreasing
trends from 2011 to 2019 in financial
performance because of ineffective SGF
Pakistan
Note: Table 1 shows the literature focused on SG, SSBs and IBs’performance. The columns show the
reference, findings and country context
Table 1.
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structure. Mansoor et al. (2020) investigated the influence of SSBs on both the long- and
short-term credit ratings in IBs. Hussain and Azez (2021) investigated the SSBs role in
supervising the IBs in Bahrain, Bangladesh, Pakistan and Qatar. Khalil and Taktak (2020)
investigated the influence of SSB size, SSBs’qualification and the presence of Mufti and
foreign Shari’ah scholars on the financial soundness of IBs. Jan (2020) examined the SG
mechanisms and IBs performance in Pakistan. Bukhari et al. (2022) examined the trends
from 2011 to 2019 of IBs performance in Pakistan. All these studies investigated the
relationship between SG and IBs’performance (Table 1) using one or more characteristics as
a proxy for SSB attributes; however, no study is conducted yet in the context of Pakistan
that comprehensively examined the influence of SSB diversity on IBs’performance. Saba
(2019) argued that there is a need for continuous improvement in the SGF in the context of
Pakistan. To address the research gap, this study examines the impact of SSB diversity on
IBs’performance from the stakeholders’perspective in the context of Pakistan.
2.1 Shari’ah supervisory board age diversity
Age is an important human capital to the board’s effectiveness (Sonnenfeld, 2002) because it
reflects the board members’experience and risk-taking behavior (Darmadi, 2011). Based on
the stakeholder theory, SSB members with age diversity can attract a large group of
stakeholders, as they understand the need and expectations of various groups of
stakeholders of IBs. Existing studies found mixed results. For instance, Hafsi and Turgut
(2013) found that age diversity has a negative influence on an organization’s social
performance. The board members with the same age group may have biased leadership and
decision-making style toward another age segment which negatively affects their strategic
performance. On the other hand, Ali et al. (2014) found a significant positive relationship
between age diversity and organization profitability. Goergen et al. (2015) argued that high
age diversity among the board members improves board effectiveness and performance.
Younger SSB scholars are expected to be highly educated and highly familiar with new and
advanced corporate knowledge. Similarly, older SSB scholars tend to be highly experienced
and bring high corporate exposure to the board. Kachkar and Yilmaz (2022) found lesser age
diversity in IBs. Thus, the unique and diversified attributes of younger and older SSB
scholars complement one another where IBs may leverage these differences to fulfill
multiple stakeholders’needs and improve financial performance. Hence, we hypothesized
that:
H1. Shari’ah supervisory board age diversity is positively related to Islamic banks’
performance.
2.2 Shari’ah supervisory board gender diversity
Recently, gender diversity is one of the major issues of debate for researchers and
practitioners (Praveen and Zattoni, 2016;Jabari and Muhamad, 2020;Kachkar and Yilmaz,
2022). In line with stakeholders’theory, female representation in SSB contributes to the
fulfillment of multiple stakeholders needs and improvement of sustained competitive
advantages, thereby IBs’financial performance. Prior literature offers mixed results on the
impact of gender diversity on corporate performance. For example, Yang et al. (2019) found
that female members on the board are negatively associated with financial performance.
Unite et al. (2019) documented an insignificant relationship between gender diversity with
financial performance. Similarly, Fernandez-Temprano and Tejerina-Gaite (2020) also found
insignificant relationship between gender diversity and financial performance. In contrast,
Diversity of
Shari’ah
supervisory
board
some studies found positive impact of gender diversity on the performance and argue that
gender-diverse board is likely to bring more independent perspectives which improve the
quality of board decisions (Colaco et al.,2011) and fulfill the need and expectations of
various groups of stakeholders. Julizaerma and Sori (2012) and Lee-Kuen et al. (2017) found a
positive relationship between gender diversity and financial performance. Jabari and
Muhamad (2020) argued that SSB scholars’gender diversity improves the financial
performance of Islamic banks in Malaysia and Indonesia. Based on the above arguments, we
hypothesize that:
H2. Shari’ah supervisory board gender diversity is positively related to Islamic banks’
performance.
2.3 Shari’ah supervisory board national diversity
The growing internationalization of corporate organizations requires a higher demand for
board members to link the organizations to various contexts and countries in which they
operate (Kachkar and Yilmaz, 2022). Based on the stakeholder theory, SSB members with
different nationalities improve the financial flexibility and financial performance of IBs by
increasing the pool of stakeholders through cross-border flows of IBs’operations. Foreign
scholars’prior knowledge and experience in the international market are useful
determinants to improve IBs’performance. Prior studies provide mixed results on the
relationship between national diversity and corporate performance. For instance, Masulis
et al. (2012) found that national diversity results in poor performance. On the other hand,
foreign scholars on the board are considered as transparency signals and committed to
improving and fulfilling the governance (Kachkar and Yilmaz, 2022) and both internal and
external stakeholders’needs, thereby increasing corporate value (Grassa, 2016). Foreign
scholars in SSB not only improve financial performance but also improve managerial
expertise, ethical collaboration, creativity and innovation. Ararat et al. (2015) argued that
appointments of different nationals improve board representatives’performance. SSB
scholars with different nationalities enable them to introduce new ideas, points of view and
experiences, which help IBs in improving competitive advantages and, thus, financial
performance. Thus, thefollowinghypothesis is outlined:
H3. Shari’ah supervisory board national diversity is positively related to Islamic banks’
performance.
2.4 Shari’ah supervisory board general educational qualification diversity
Based on the stakeholder theory (Freeman, 1984), diversity in general education qualification of
the SSB scholars is highly important in improving the performance of SSBs to fulfill the
stakeholders’Shari’ah compliance expectations. For instance, Hillman and Dalziel (2003)
argued that a board member with diverse educational qualifications improves the effectiveness
of the board when evaluating strategic policies and implementations. Eventually, directors with
low educational levels, more work experience, a variety of views and diverse perspectives turn
around more efficaciously than directors with higher educational levels and vice versa (Chang
et al., 2017). A qualified board of directors with relevant education is expected to be able to
accept new practices and embrace corporate uncertainty (Hambrick and Mason, 1984). SSB
with qualified members could act as a major institutional asset that could influence financial
performance and practices (Gray et al., 1988). According to Berger et al. (2014), board members
with higher educational qualifications possess better reasoning abilities and help in
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increasing the usefulness of the decision-making process and strengthening the process of
monitoring risk-taking behavior. Moreover, Valls et al. (2016) also found that board general
educational qualification is significantly positively related to an organization’s team
performance. Hence, we outline the following hypothesis:
H4. Shari’ah supervisory board general educational qualification diversity is positively
related to Islamic banks’performance.
2.5 Shari’ah supervisory board relevant educational background diversity
Educational background is any type of education, for example, finance, Islamic finance,
business, management, sciences, arts, law and engineering. Parallel with SSB educational
level diversity, SSB members’educational background diversity is highly important, as it
stimulates divergent ideas, skills, ways of judgment and understanding of stakeholders’
interests and expectations. Shari’ah board scholars with different backgrounds, skills and
experiences are likely to resolve similar problems in different ways, improving SSBs’
creativity and overall IBs’performance. Prior studies found mixed results. For instance,
Khalil and Taktak (2020) found an insignificant relationship between SSB education
background and IBs’financial soundness. On the other hand, Isa and Lee (2020) found that
SSBs’educational qualification is positively associated with IBs’risk-taking attitude.
Bukair and Rahman (2015) argued that SSB members with relevant qualifications assess to
understand and solve modern issues and corporate problems related to stakeholders and
IBs’successful operations. SSB members in IBs with financial knowledge and experience
could perform better than members without such knowledge (Rahman and Bukair, 2013).
Khan et al. (2018) found that Shari’ah scholars having additional knowledge of accounting
and finance together with Shari’ah knowledge outperform to improve IBs’financial
performance. Grassa and Matoussi (2014) also found that Shari’ah board members with
accounting/financial knowledge have a positive impact on the IBs’performance. Therefore,
we hypothesize that:
H5. Shari’ah supervisory board relevant education background diversity is positively
related to Islamic banks’performance.
2.6 Shari’ah supervisory board tenure diversity
Board members’tenure refers to the length of time a board member hold in the organization
(Huang and Hilary, 2018). The entry and exit of SSB members in a year indicates the
diversity in SSB tenure. Board tenure is an important variable in evaluating the performance
of directors and their contribution to corporate financial performance. Kosnik (1990) asserts
that the director’s tenure influences the organization’s stakeholders related strategies and
performance. Prior studies presented mixed results. For example, Azar and Rad (2014)
identify a negative significant relationship between tenure diversity and organizations’
performance. On the other hand, Barroso et al. (2011) found that tenure diversity improves
knowledge about organizations and brings diverse perspectives to achieve competitive
advantages and improve financial performance. According to Huang (2013), organizations
with heterogeneous tenure of board members perform better than organizations with
homogeneous tenure of board members. Alman (2012) argued that yearly change in the
tenure of SSB members is vital because it increases the scholars’capability and creativity to
improve IBs’performance. SSB members with extended tenure directors better comprehend
IBs’operations and improve IBs’performance, as they are more familiar with IBs regulation
Diversity of
Shari’ah
supervisory
board
and have strong relations with groups of stakeholders. Thus, based on existing literature,
we hypothesize from the perspective of the stakeholder theory that:
H6. Shari’ah supervisory board tenure diversity is positively related to Islamic banks’
performance.
2.7 Shari’ah supervisory board size
The size of the SSB is a very important structural diversity variable for the success of IBs
because a reasonable size would help in making strategic decisions with the help of Shari’ah
knowledge and experience they possess (Mollah et al., 2017). Based on the stakeholder
theory, a large board size improves the degree of stakeholders’representation and
guarantees that no specific small group or individual dominates the board’s strategic
decision (Ghayad, 2008). Existing literature provides mixed results on the effect of SSB size
on IBs’performance. For instance, several prior studies found that SSB large size negatively
impacts on IBs’performance (Nomran et al., 2018;Nomran and Haron, 2020a;Hakimi et al.,
2018). These authors asserted that contrary to SSB large size, the small size of the SSB
increases the coordination and communication among its members, which improves the
quality of strategic decisions and, therefore, IBs’performance. On the other hand, Safiullah
and Shamsuddin (2018) found a positive relationship between SSB size and IBs’
performance. Moreover, Farag et al. (2018) argued that the large size of SSB can bring
efficiency to the operations of IBs because of the vast experience and skills possessed by its
members belonging to different schools of fiqh. Based on the above arguments, the following
hypothesis is formulated:
H7. Shari’ah supervisory board size is positively related to Islamic banks’performance.
2.8 Shari’ah supervisory board cross-membership
SSBs cross-membership is an important structural diversity variable in IBs, where the
Shari’ah members take the responsibility to sit on different Shari’ah boards without any
specific restrictions (Grassa, 2016). Board members with high cross-membership improve
organizations’performance through knowledge, experience and skills comparison that is
gained from other similar organizations (Dahya et al., 1996). The strategic decisions made
in SSBs may become a road map for similar decisions crucial in other organizations (Haat
et al., 2008). Some researchers highlighted that cross-membership of the SSB is negatively
significant to board members’effective operations (Alman, 2012). This is because the
SSB members with cross-membership lead to a conflictofinterest,andtheyhaveeasy
access to priority information (Garas, 2012), while other studies argued that cross-
membership of SSB has a positive impact on the performance and efficiency of the
Shari’ah scholars by gaining access to more operations and transactions which could, in
turn, enhance IBs’performance (Rahman and Bukair, 2013;Grassa, 2016). Thus, having
Shari’ah scholars on board with cross-membership can lead to better monitoring and
thereby positively impact IBs’performance (Nomran et al., 2018). Hence, we outline the
following hypothesis:
H8. Shari’ah supervisory board cross-membership is positively related to Islamic
banks’performance.
JIABR
3. Research methodology
3.1 Data and sample
The sample consists of 22 Islamic banks in Pakistan. Following Chaudhry et al. (2020),we
consider both full-fledged Islamic banks and banks having IBs windows. We manually
collect data from multiple secondary sources, including annual reports, Shari’ah
members’profiles, the SBP and respective banks’websites. We extract the maximum
amount of information from secondary mentioned sources regarding the SSB diversity
and IBs’performance variables. The sample selection is based on two conditions. First,
considering the reasonable size of IBs based on early practices, only those IBs were
included in the sample that published reports annually for at least three consecutive
years. Second, being a pilot study, IBs practices have been checked, and it is observed
that Islamic banking started its operations in the spirit in 2001 in Pakistan as a primary
step to establish and Islamize the banking sector according to Shari’ah rules. Thus, the
resultant sample consists of 22 IBs (Appendix) comprising 6 full-fledged IBs and 16 CBs
having Islamic windows with 16-year spans from 2005 to 2020.
3.2 Variables measurement
Priory studies investigated the relationship between SG mechanisms and IBs’performance
using one or more attributes as a proxy for only SSB attributes (Grassa, 2015;Grassa, 2016;
Mollah et al.,2017;Nomran and Haron, 2020a). To examine more comprehensively, we used
eight SSB diversity proxies (Table 2) and studied their impact on IBs’performance. The
essential domain of any research is selecting a suitable research method that provides a
solution to the research problem (Abdullah and Raman, 2001). The suitability of the research
method depends on the “efficiency and informational adequacy”of certain methods used in
gathering data. We, therefore, applied Blau’s Index (1977) [5] to measure simultaneously the
diversity variables.
Following previous literature, we used three performance indicators as the dependent
variable, namely, return on assets (ROA), return on equity (ROE) and operational efficiency
(OE) (Nomran and Haron, 2020b). ROA is the ratio of net income to total assets (Nomran and
Haron, 2020a). ROE is the ratio of net income to total equity (Mai, 2021). OE is the ratio of
profit to total assets or the ratio of operating profit to average equity (Nomran et al., 2018).
Following prior studies on board diversity (Hafsi and Turgut, 2013;Rao and Tilt, 2016;
Khan et al., 2019;Jabari and Muhamad, 2020), the independent variables (Table 2) are
measured using the study conducted by Blau (1977). For instance, SSBAGE is the diversity
index used for age diversity which includes three categories: less than 40 years, less than 50
years and more than 50 years. GENDER is measured using two categories: male and female.
SSBNATION is the diversity index with two categories: Pakistani nationality and foreign
nationality (Khan et al.,2019). SSBGEDU is the board members’general educational
qualification, characterized as any degree from a recognized institution (Hamsyi, 2021).
SSBREDU relevant educational background is measured using four categories: HRM,
accounting, commerce and banking and finance knowledge along with Shari’ah knowledge
(Nomran et al.,2018). SSBTENURE is the diversity index that included five categories: less
than 3 years tenure, 6, 9, 12 and 15 years or more (1, 2, 3, 4 and 5 or more). Normally, the
tenure period for directors is three years. SSBSIZE is the number of Shari’ah scholars other
than the general board members (Jabari and Muhamad, 2020). SSBCM represents the cross-
membership measured as the proportion of SSB members serving on multiple boards of
various IBs (Nomran et al., 2018).
Additionally, we found in existing literature a set of control variables significantly
affecting IBs’performance (Jabari and Muhamad, 2020;Nawaz and Haniffa, 2017). The IB
Diversity of
Shari’ah
supervisory
board
size, age, bank stability and leverage ratio are used as control variables. Large-sized IBs
reduce risks through higher investment in different profit-sharing instruments and, thus,
offer higher profit at a lower cost (Bukair and Rahman, 2015). Following Jabari and
Muhamad (2020), we proxy bank size (SIZE) with the natural logarithm of total assets.
Leverage is the second control variable. IBs with low debt ratios and a higher investment
base tend to finance themselves through their internal financing sources before using
external financing (Bukair and Rahman, 2015). Bank leverage (LEV) is measured as the total
debt-to-asset ratio (Nomran and Haron, 2020b). Bank age (AGE) is the natural log for the
number of years since the foundation of banks (Ajili and Bouri, 2018). Z-score [6]isusedasa
measure of bank stability, interpreted as the number of standard deviations below the mean
by which profits would have to fall to deplete equity (Uddin et al.,2017). Finally, we used
YEAR DUMMY to control for specific year-fixed effects (Khan et al., 2021).
3.3 Econometric model
The model developed below is applied to investigate the influence of SSB diversity on IBs’
performance. The fixed-effects model (FEM) and random effects models (REM) are the
Table 2.
Independent
variables,
measurement and
sources, expected
sign of hypotheses
Independent variables Measurement Source Hypothesis
SSBAGE SSBAGE is the diversity index used
for age included in three categories:
less than 40 years, less than 50 years
and more than 50 years old
Khan et al. (2021) H1 (þ)
GENDER GENDER is measured using two
categories: male and female
Khan et al. (2019) H2 (þ)
SSBNATION SSBNATION is the diversity index
with two categories including
Pakistani nationality and foreign
nationality
Kachkar and Yilmaz
(2022)
H3 (þ)
SSBGEDU SSBGEDU is the general educational
qualification of a board member
characterized as any degree from a
recognized institution
Nomran et al. (2018) H4 (þ)
SSBREDU SSBREDU relevant educational
background is measured using four
categories; HRM, accounting,
commerce and banking and finance
along with Shari’ah knowledge
Nomran et al. (2018) H5 (þ)
SSBTENURE SSBTENURE is the diversity index
that included five categories; less
than 3 years tenure, 6, 9, 12 and 15
years or more (1, 2, 3, 4 and 5 or
more); normally, the tenure period
for directors is 3 years
Khan et al. (2021) H6 (þ)
SSBSIZE SSBSIZE is the number of Shari’ah
scholars other than the general
board members
Jabari and Muhamad
(2020)
H7 (þ)
SSBCM SSBCM represents the cross-
membership measure as the
proportion of SSB members serving
on multiple boards
Abbas et al. (2020) H8 (þ)
Note: Table 2 depicts the independent variable, measurement and sources
JIABR
highly used statistical techniques to test the panel data. Researchers use theHausman test to
guide the selection of either FEM or REM (Baltagi, 2005). The results of the Hausman test
suggested the application of REM. This method is suitable for ICG studies, as the OLS
ignores the panel structure of data (Nomran et al.,2018). Most of the independent variables
(diversity variables) are time-consistent variables in the current research. Moreover, there
are differences in the sample that may affect the dependent variables. As the REM is more
appropriate in the context of this study, prior studies on panel data of board diversity also
applied the REM (Rao and Tilt, 2016;Baklouti, 2020;Khan et al.,2021):
Perfit ¼
b
0þ
b
1Perfit 1
ðÞ
þ
b
2SSBAGE þ
b
3SSBGENDER þ
b
4SSBNATION þ
b
5SSBGEDUit
þ
b
6SSBREDUit þ
b
7SSBTENUREit þ
b
8SSBSIZEit þ
b
9SSBCMit þ
b
10SIZEit
þ
b
11AGEit þ
b
12LEVit þ
b
13Zscoreit þ
b
14YEARDUMMYit þ
«
it
where:
Perf = IBs’performance (ROA, ROE and OE), used as a dependent variable;
i = cross-sectional units (indicates the number of IBs);
t= time series (indicates the annual period from 2005 to 2020);
b
0 = intercept (has constant value);
b
1–
b
14 = the coefficient scope;
SSBAGE = SSB age diversity;
SSBGENDER = SSB gender diversity;
SSBNATION = SSB nationality diversity;
SSBGEDU = SSB general educational qualification diversity;
SSBREDU = SSB relevant educational background diversity;
SSBTENURE = SSB tenure diversity;
SSBSIZE = SSB size;
SSBCM = SSB cross-membership;
SIZE = bank size;
AGE = bank age;
LEV = leverage ratio;
Z-score = bank financial stability;
YEARDUMMY = year fixed effects; and
«
= error term.
4. Results and discussion
4.1 Descriptive statistics
Table 3 presents the descriptive statistics of the dependent, independent and control
variables. In addition to this, it also depicts the paired sample t-test for full-fledged IBs and
CBs having Islamic windows. The average value of performance indicators of IBs is 0.010,
0.030 and 0.105 for ROA, ROE and OE, respectively. The minimum value of performance
variables is negative which may reflect the global crisis period effect. Concerning
independent variables for demographic diversity, the mean value of SSBAGE diversity is
0.313, indicating SSB members’inclination toward old age. The mean value of
SSBGENDER diversity is 0.012 with ranges between 0.000 and 0.2000 which indicate that
females are now increasing in the SSB. SSBNATION diversity with a mean value of 0.024
indicates that SSB has very low foreign scholars on the Shari’ah board. The average value
of the SSBGEDU is 0.979 which implies that almost all existing members of the Shari’ah
board hold a university degree. SSBREDU mean value is just 0.262, implying that only
Diversity of
Shari’ah
supervisory
board
Variables Mean SD Minimum Maximum
Paired sampled t-statistics
Full-fledged IBs Islamic windows CBs Mean difference t-statistic
ROA 0.010 0.051 0.091 0.637 0.004 0.012 0.007 0.919
ROE 0.030 0.043 0.236 0.767 0.045 0.016 0.014 0.943
OE 0.105 0.348 2.791 0.801 0.096 0.108 0.012 0.216
SSBAGE 0.313 0.220 0.000 0.500 0.413 0.163 0.250 6.929***
SSBGENDER 0.012 0.212 0.000 0.020 0.311 0.102 0.156 0.353
SSBNATION 0.024 0.078 0.000 0.444 0.071 0.000 0.071 5.304***
SSBGEDU 0.979 0.089 0.430 1.000 0.992 0.976 0.016 1.011
SSBREDU 0.262 0.273 0.000 0.660 0.514 0.199 0.314 7.039***
SSBTENURE 0.116 0.195 0.000 0.500 0.057 0.131 0.074 2.076**
SSBSIZE 2.260 1.436 1.000 6.000 3.378 1.979 1.398 5.736***
SSBCOMP 0.168 0.375 0.000 1.000 0.135 0.175 0.041 0.603
SIZE (InS) 5.377 1.541 0.160 8.360 6.771 4.918 1.853 8.608***
AGE (InA) 1.519 0.727 0.000 3.000 1.600 1.493 0.106 0.898
LEV 0.556 0.886 0.001 4.200 0.788 0.244 0.543 4.536***
Z-score 2.523 3.235 1.851 15.495 2.439 2.551 0.112 0.212
Notes: Table 3 depicts the details concerning the descriptive statistics such as mean, range and standard deviation. The CBs represent conventional banks.
Moreover, this table shows the paired sample t-test to compare the IBs and CBs for any significance difference between the variables of interest. ***, ** and *
mean 1%, 5%, and 10% significance level, respectively
Table 3.
Descriptive statistics
JIABR
26.2% of the members have education exactly helpful in understanding the operations of IBs
in Pakistan.
As for structural diversity, 2.260 is the average value of SSBSIZE with a minimum value
of 1.000 and a maximum value of 6.000. Before the implementation of SGF (2015) by the
SBP, there was no minimum restriction on the Shari’ah board size (SBP, 2008); however,
after the implementation, a restriction of at least three members is imposed (SBP, 2018). This
has been observed from the data that all the IBs since 2016 have a minimum of three
members in the SSB. The SSBCM shows the mean value of 0.202 which indicates that only
20.2% of members of the Shari’ah board hold the position in other Pakistani IBs. No limits
to the cross-membership of Shari’ah board members have been mentioned in the SGF (2015);
however, the residence SSBs are restricted to not holding more than two memberships in
other IBs boards (SGF, 2018). Concerning control variables, the average value of IBs SIZE is
5.377. The average value of IBs AGE is 1.519. The average value of IBs leverage (LEV) is
0.556. This indicates that 55.6% of IBs in Pakistan are leveraged. As for bank stability, the
mean value measured by Z-score is 2.523.
After splitting sample data into sub-samples of full-fledged IBs and banks of Islamic
windows, we used a paired sample t-test to examine –if any –the difference between the
two sub-samples in the proposed relationship. The results in Table 3 show no difference in
respect of performance indicators between the IBs and CBs having Islamic windows. One
possible justification for this may be the fact that IBs’performance as measured by the
conventional measures (ROA, ROE and OE) is subjected to the board of directors (BOD)
domination. As for independent variables, however, almost all the variables show higher
presence in full-fledged IBs than in CBs with Islamic windows. This may be because of the
role of SSB members as advisory rather than supervisory, indicating that the SSB is not
independent of the BOD. This is consistent with Jabari and Muhamad (2020), who argued
that SSB and BOD arethe best optimal compositionthat maximizes IBs’performance.
4.2 Correlation analysis
Table 4 presents the pairwise correlation. Following Gujarati (2003), a coefficient value of
more than 0.80–0.90 appears to be the existence of multicollinearity in the model. Our data,
however, is free from multicollinearity problems, as the coefficient values of all the variables
fall below 0.80, where the highest coefficient value is 0.719 between SSB size and SSB
relevant educational background diversity.
4.3 Panel random effects analyses
Table 5, Models 1, 2, 3, 4, 5 and 6, shows the result of SSB diversity and IBs’performance as
measured by ROA, ROE and OE. In the first three models, we tested the impact of SSB
demographic diversity (i.e. age, gender, nation, general educational qualification and
relevant educational background) on IBs’performance, while in Models 4, 5 and 6, we
examined the impact of SSB structural diversity (such as tenure, SSB size and SSB cross-
membership) on IBs’performance. Table 5, Models 1, 2 and 3, shows that the coefficient of
SSBAGE is negative and significant which represents that the SSBAGE has a negative
impact on performance variables. The result shows that the high age diversity of SSB
members reduces IBs’overall performance. Diversity in age brings contradiction in
providing information to the various groups of stakeholders where the elder may not accept
the opinion of the new and least age members. This situation creates barriers to making a
strategic decision on the board related to stakeholders and lowers IBs’performance. Hence,
H1 is not supported by the hypothesized relationship following stakeholder theory, as
SSBAGE has no impact on stakeholders’interest that leads to improved IBs’performance.
Diversity of
Shari’ah
supervisory
board
Variables ROA ROE OE SSBAGE SSBGENDER SSBNATION SSBGEDU SSBREDU SSBTENURE SSBSIZE SSBCM
ROA 1.000 ––– – – –– – ––
ROE 0.021** 1.000 –– – – –– – ––
OE 0.463*** 0.052 1.000 –– ––––––
SSBAGE 0.051 0.291 0.235 1.000 –––––––
SSBGENDER 0.119 0.147** 0.279*** 0.119 1.000 ––– –––
SSBNATION 0.043 0.073 0.169 0.122** 0.241*** 1.000 –– – ––
SSBGEDU 0.027 0.034 0.034 0.635** 0.039 0.131 1.000 ––––
SSBREDU 0.047 0.243*** 0.061 0.044*** 0.211 0.217 0.272*** 1.000 –––
SSBTENURE 0.215*** 0.061** 0.180** 0.262 0.592*** 0.244*** 0.134** 0.181** 1.000 ––
SSBSIZE 0.041 0.220 0.074 0.376*** 0.046 0.268 0.524*** 0.719*** 0.292* 1.000 –
SSBCM 0.473** 0.216** 0.427 0.681*** 0.077 0.127 0.011** 0.469** 0.675** 0.552*** 1.000
Notes: The pairwise correlation has been applied and found no multicollinearity. Values documented in Table 4 are the coefficient of correlation, while *, ** and
*** represent significance at 10, 5 and 1% levels
Table 4.
Pairwise correlation
JIABR
Variables Exp. sign
Model Demog. ROA
b
(standard error)
Model 2 Demog. ROE
b
(standard. error)
Model 3 Demog. OE
b
(standard error)
Model 4 Struct. ROA
b
(standard error)
Model 5 Struct. ROE
b
(standard error)
Model 6 Struct. OE
b
(standard error)
SSBAGE þ0.0291** (0.0155) 0.0911*(0.0495) 0.4623*(0.2655) 0.0658** (0.0199) 0.6931*(0.2768) 0.4695** (0.1864)
SSBGENDER þ0.2291 (0.1984) 0.1155 (0.1053) 0.1710 (0.1442) 0.2197 (0.2871) 0.1099 (0.1827) 0.2011 (1.9210)
SSBNATION þ0.0697*** (0.0226) 0.0855** (0.0424) 0.4517** (0.2011) 0.5131 (0.3451) 0.0696*** (0.0311) 0.4101*** (0.1255)
SSBGEDU þ0.0241 (0.0233) 0.1455 (0.0871) 0.4611 (0.5402) 0.0433 (0.0319) 0.0261 (0.0422) 0.7521 (0.5600)
SSBREDU þ0.0324** (0.0222) 0.0513 (0.0432) 0.2917*** (0.0435) 0.0739*** (0.0349) 0.0232** (0.0029) 0.0679*** (0.0395)
SSBTENURE þ 0.0112 (0.0167) 0.0214 (0.1375) 0.0684 (0.3910)
SSBSIZE þ0.0344** (0.0141) 0.0512*** (0.0178) 0.0877*** (0.0327)
SSBCM þ 0.0163*** (0.0045) 0.4330** (0.1481) 0.2555** (0.1109)
SIZE (InS) þ0.0105** (0.0050) 0.0257 (0.0121) 0.2134*** (0.0208) 0.0039*** (0.0011) 0.0221*** (0.0042) 0.1386*** (0.0337)
AGE (InA) þ0.0351 (0.0082) 0.0245 (0.0646) 0.0065 (0.0350) 0.0291 (0.0536) 0.0283 (0.0255) 0.0333 (0.0395)
LEV þ0.0531** (0.0310) 0.0220*(0.0111) 0.0281 (0.0455) 0.3200** (0.0171) 0.2290** (0.0999) 0.0097 (0.0084)
Z-score þ0.0215*** (0.0060) 0.0569*** (0.0092) 0.0615*** (0.0059) 0.0423*** (0.0039) 0.0255*** (0.0051) 0.0976*** (0.0072)
Year dummy Yes Yes Yes Yes Yes Yes
_CONS 0.0571** (0.0252) 0.3456 (0.2397) 0.6440*** (0.1331) 0.3022*** (0.0518) 0.0371 (0.1611) 1.4288*** (0.3820)
F/Wald Chi
2
32.7610*** 35.0636*** 37.0544*** 89.4392*** 26.2000*** 43.4893***
R
2
0.5921 0.4583 0.4155 0.6101 0.5291 0.3902
Notes: The non-parentheses figure shows the coefficient value, while the parentheses figure shows the standard error of various variables. The italic values
represent the significant variables at 10, 5 and 1% levels of significance. *, ** and *** represent statistically significant at less than 0.10, 0.05 and 0.01 levels,
respectively
Table 5.
Random effects
regression analyses
Diversity of
Shari’ah
supervisory
board
This result is consistent with Hafsi and Turgut (2013), who found that age diversity
negatively impacts corporate social performance in Standard and Poor’s-500 (S&P500)
organizations.
Our result for SSBGENDER is insignificantly related to IBs’performance in Pakistan.
Hence, the result is not supported by the hypothesized relationship in H2. Thus, H2 is not
supported by the stakeholder theory, as higher SSB gender diversity may not affect the IBs’
performance to fulfill the needs and expectations of various groups of stakeholders. There
could be several possible reasons for such findings. For instance, the insignificant effect of
SSB gender diversity may be because of the lower number of female scholars in SSB.
Because of a lack of educational qualifications and expertise, female scholars in Pakistan
might not be able to realize their importance in the SSB room. Moreover, female scholars are
appointed based on family ties and nepotism which also leads to poor performance. This
finding is consistent with Baklouti (2020), who found that female scholars in SSB have no
impact on the financial performance of IBs in MENA countries. However, this finding
contradicts Jabari and Muhamad (2020), who found that SSBs’gender diversity positively
impacts the IBs’performance in Indonesia and Malaysia. Looking into the fact and
deviation from existing literature, the result indicates that the SG structure in Pakistan is
patterned differently from various other Islamic jurisdictions.
The coefficient of SSBNATION is negative and significant which indicates that
nationally diverse SSBs reduce the IBs’performance. This may be because of the high cost
of hiring foreign scholars and ineffective monitoring oversight because they are unfamiliar
with laws, regulations and the documentation process of the new jurisdiction. Our result for
H3 is not supported by the hypothesized relationship. Moreover, our result is different from
previous literature such as Almutairi and Quttainah (2020) who found that foreign scholars
in SSB improve Shari’ah scholars’performance effectiveness. Thus, our finding indicates
that the impact of SSB national diversity on IBs’performance may differ in other countries
with different regulatory settings. According to Saba (2019), the SG mechanisms vary from
one economy to another economy. Concerning hypothesis H4, SSBGEDU has no significant
impact on IBs’performance. This is consistent with Bakar (2016), who argued that the
higher degree/qualification of SSBs insignificantly related to the IBs’performance. This is
because there are SSB members without any academic qualification or degree. They have
only Islamic education. Thus, H4 is not supported by the stakeholder theory, as SSBGEDU
has no impact on stakeholders’interests that leads to improved IBs’performance. As for the
H5, SSBREDU is positively significant to all indicators (i.e. ROA, ROE and OE) of IBs’
performance which indicates that SSB members with diverse and relevant educational
backgrounds improve IBs’performance. Diversity in the educational background depicts
diverseness in the director’s mentality and attitude (Westphal and Milton, 2000),
intellectuality and cognitive ability (Hambrick and Mason, 1984) which enables them to
make strategic policies and decisions (Khan et al.,2019) and improve IBs performance
(Nomran et al., 2018). Thus, our result supports H5, indicating that relevant educational
background contributes to the stakeholders’interest and attracts more stakeholders to IBs
products/services, thereby improving IBs’performance. Existing studies also indicated that
SSB members with knowledge from divergent disciplines along with Shari’ah knowledge
improve the competitive performance of IBs (Nomran and Haron, 2020b;Nomran et al.,
2018).
The results for control variables are illustrated in Table 5, showing that IBs’size (SIZE)
is positively significant with IBs’performance indicating that IBs with more market
capitalization are more likely to have good performance, as they have more resources to
fulfill the needs and expectation of large groups of stakeholders. The AGE of IBs has no
JIABR
significant effect on IBs’performance, which may be because of the young age of IBs in
Pakistan, as Islamic banking first started in 2001. This is consistent with Alsharari and
Alhmoud (2019), who found an insignificant link between IBs’age and IBs’profitability in
Jordon. Leverage (LEV) is found negatively significant with ROA, ROE and OE. Large-size
IBs with the least debts are more likely to perform better than smaller and indebted ones
(Uddin et al., 2017). Finally, Z-score is significantly positively associated with IBs’
performance indicators for ROA, ROE and OE. According to De Nicolo (2000), an increase in
the Z-score leads to a decrease in the insolvency risk. Therefore, the greater the Z-score, the
more financially stable the bank is and likely to perform better.
We then added three variables of SSBs structural diversity (i.e. Tenure diversity, SSB
size and cross-membership) to Models 1, 2 and 3, rerun the regression and documented the
results in Models 4, 5 and 6. The results in Table 5, Models 4, 5 and 6, almost present
consistent results with Models 1, 2 and 3. Regarding SSB structural diversity, SSBTENURE
has no significant impact on IBs’performance. Thus, our result does not support the
hypothesized relationship in H6. The finding shows that SSB with Shari’ah scholars of
diverse tenure underperforms the SSB more than Shari’ah scholars of homogeneous tenure.
The result for H7 shows that SSBSIZE is significantly positively associated with IBs
performance. This indicates that large-size SSB fulfills the Shari’ah compliance
requirements and attracts a large group of stakeholders which, in turn, increases the sale of
IBs products/services and, hence, improves the financial performance of IBs. Our result
supports the basic concept of the stakeholder theory, indicating that large-size SSB
understands and fulfills the preferences and needs of various stakeholders’group which, in
turn, improve IBs’performance. The size of the SSB board is very important for the success
of the bank from an Islamic perspective because a reasonable size would help in overcoming
the issues of communication and strategic decisions relating to stakeholders with the help of
Shari’ah knowledge and experience they possess and so improve the performance of the IBs
(Mollah et al.,2017). Our result for SSB size is inconsistent with Hakimi et al. (2018) and
Nomran and Haron (2020a), who found a negative relationship between SSB size and IBs’
performance. Looking into the fact, our results show that the SSBs diversity in terms of size
of SSB in Pakistani IBs is patterned differently from other Muslim jurisdictions.
Finally, with regard to cross-membership, SSBCM for ROA, ROE and OE in Models 4, 5
and 6 is negatively associated with IBs’performance. Our result for H8 is not supported by
the hypothesized relationship from the stakeholder perspective as shown in Table 6. The
findings show that SSB cross-membership leads to a conflict of interest among SSB
members, as they have easy access to proprietary information (Nomran et al.,2018).
Moreover, SSB scholars with cross-membership (in other words sitting on various IBs
boards) are not independent of their opinions for different IBs when a new product is
launched by two competitors (Alman, 2012). Our result for SSBs cross-membership is
consistent with that of Nomran et al. (2018) in the Malaysian context and that of Pranata and
Laela (2020) in the Indonesian context. They found a negative relationship between SSBCM
and IBs’performance. Concerning the control variables, almost all the variables present
consistent results with Models 1, 2 and 3. Table 6 summarized the research hypotheses,
findings and the actual status of each hypothesis after the findings.
4.4 Generalized method of moment analyses
Existing studies on attributes of SSB members show the problem of endogeneity (Nomran
et al., 2018). Endogeneity occurs when the dependent and independent variables
simultaneously cause each other, and the casual effects run reciprocally (Wooldridge, 2002).
This reverse causality/endogeneity may result in inconsistent and biased coefficients of the
Diversity of
Shari’ah
supervisory
board
estimated model. For this purpose, Arellano and Bond (1991) developed a dynamic panel
estimator based on generalized method of moment (GMM), which is generally used to tackle
endogeneity issues. GMM estimation is enormously used because it outperforms all the
other estimators in terms of biasness and efficiency (Soto, 2009). Blundell and Bond (1998)
also exhibited the superiority of GMM over other estimators. Previous studies on SSBs and
IBs’performance in another context also applied GMM (Jabari and Muhamad, 2020;Nomran
et al.,2018). Therefore, we applied system GMM to overcome the issue of endogeneity and
measure the robustness of REM results. Moreover, we applied several diagnostic teststo test
model specification validity, instrumental variables validity and multicollinearity in the
model. For each model (as discussed above), we indicated the coefficient, the first-order
correlation test (AR1), the second-order correlation tests (AR2) [7], the Hansen tests of
instrumental validity [8] and, finally, F-test [9]. Moreover, this study lagged the dependent
variables by one year to control for the potential endogeneity. This approach helps to
address the potential issue of reverse causality/endogeneity (Safiullah and Shamsuddin,
2018).
As documented in Table 7, the SSBAGE and SSBNATION for Models 1, 2 and 3 are
negatively related to IBs’performance, respectively, while SSBREDU, IBs size (SIZE) and
IBs stability (Z-score) are positively related to IBs’performance. These findings are
consistent with early baseline model findings in Table 5, Models 1, 2 and 3, thus validating
our REM regression estimations. Moreover, we run the same GMM regression on Models 4,
5 and 6 of Table 5 and show the findings in Table 7, Models 4, 5 and 6. We found that
SSBSIZE is significantly positively related to IBs’performance, while SSB cross-
membership is negatively related to IBs’performance. Similarly, the results for other
variables in Models 4, 5 and 6 of Table 7 along with control variables are almost consistent
Table 6.
Independent
variables, findings,
hypotheses and
actual status of
hypothesis
Variables Hypothesis Finding
Actual status of
hypothesis after finding
SSBAGE H1 (þ)The SSBs’age diversity is significantly
negatively related to IBs’performance
Rejected
GENDER H2 (þ)The SSB relevant educational background
diversity is insignificantly related to IBs’
performance
Rejected
SSBNATION H3 (þ)The SSBs’national diversity is significantly
negatively related to IBs’performance
Rejected
SSBGEDU H4 (þ)The SSBs’tenure diversity is insignificantly
related to IBs’performance
Rejected
SSBREDU H5 (þ)The SSB relevant educational background
diversity is significantly positively related to
IBs’performance
Accepted
SSBTENURE H6 (þ)The SSBs’general educational qualification
diversity is insignificantly related to IBs’
performance
Rejected
SSBSIZE H7 (þ)The SSB size diversity is significantly positively
related to IBs’performance
Accepted
SSBCM H8 (þ)The SSBs’cross-membership diversity is
significantly negatively related to IBs’
performance
Rejected
Note: Table 6 depicts the independent variables, findings, hypotheses and actual status of hypothesis
JIABR
Variables
Model 1 Demog. ROA
b
(standard error)
Model 2 Demog. ROE
b
(standard error)
Model 3 Demog. OE
b
(standard error)
Model 4 Struct. ROA
b
(standard error)
Model 5 Struct. ROE
b
(standard error)
Model 6 Struct. OE
b
(standard error)
ROA (1) 0.0461** (0.0227) 0.0223 (0.0721)
ROE (1) 0.4513** (0.0829) 0.2714** (0.0455)
OE (1) 0.0229 (0.0391) 0.2311 (0.1834)
SSBAGE 0.0225*** (0.0041) 0.4431** (0.2338) 0.6329*** (0.0662) 0.0327** (0.0121) 0.3522 (0.4845) 0.7553*** (0.2419)
SSBGENDER 0.0258 (0.0493) 0.0640 (0.2422) 0.0525 (0.0778) 0.0432 (0.0439) 0.0768 (0.0573) 0.0632 (0.0859)
SSBNATION 0.0832** (0.0381) 0.2310*(0.1769) 0.1357 (0.1324) 0.0382*** (0.0232) 0.1575 (0.7831) 21.2091** (0.5933)
SSBGEDU 0.0392 (0.0728) 0.3674 (0.6822 0.2580 (0.8101) 0.0425 (0.3490) 0.3921 (0.5930) 0.5361 (0.4550)
SSBREDU 0.4221*** (0.007) 0.8730*** (0.2843) 0.5846*** (0.0220) 0.0592** (0.0466) 0.2845*** (0.0429) 0.4838** (0.0363)
SSBTENURE 0.0210 (0.0483) 0.6383 (0.6389) 0.4939 (0.6483)
SSBSIZE 0.0043** (0.0019) 0.3200*** (0.0833) 0.0382 (0.0399)
SSBCM 0.0355*** (0.021) 0.0500*** (0.0159) 0.0462 (0.3535)
SIZE (InS) 0.0041** (0.0020) 0.3769** (0.1322) 0.1233*** (0.02731) 0.0052** (0.0014) 0.3693*(0.2014) 0.2945*** (0.0268)
AGE (InA) 0.0054 (0.0032) 0.0284 (0.0560) 0.0392 (0.0177) 0.0067 (0.0044) 0.0472 (0.0756) 0.0036 (0.0537)
LEV 0.0341*** (0.0376) 0.0138 (0.1220) 0.1261** (0.0589) 0.3673 (0.3209) 0.0210 (0.0229) 0.7350** (0.3522)
Z-score 0.0080*** (0.0039) 0.7034*** (0.2309) 0.1830*** (0.0311) 0.0057** (0.0013) 0.1591*** (0.0435) 0.0722*(0.0409)
Year dummy Yes Yes Yes Yes Yes Yes
_CONS 0.0322*** (0.0048) 0.3995** (0.0230) 0.7032*** (0.2741) 0.0693** (0.0111) 0.2028** (0.0392) 1.4823*** (0.3593)
F-test 176.8390*** 322.4499*** 278.9304*** 24.5443*** 19.4302*** 42.4030***
Hansen test 0.9044 0.9609 0.9005 0.9729 0.5472 0.7292
AR (1) 3.5432*** 2.6949*** 2.9300*** 4.8490*** 3.7390*** 3.3004**
AR (2) 1.4032 0.7840 0.7940 0.5400 0.9303 0.7019
Notes: The figure in the parentheses is the standard error, while the non-parentheses figure is the coefficient of variables. The italic values represent the
significant variables at 10, 5 and 1% levels of significance, respectively; *, ** and *** represent statistically significant at less than 0.10, 0.05 and 0.01 levels,
respectively
Table 7.
System generalized
method of moment
analyses
Diversity of
Shari’ah
supervisory
board
with the results documented in Table 5, Models 4, 5 and 6. Thus, our findings are robust
across alternative issues because our GMM provides results similar to our baseline
regression results.
5. Conclusion
SSB is the most inspired source of ICG in Islamic banking (Alam et al.,2022) which
formulates bank strategies and management oversight based on Shari’ah compliance
principles (Alam et al., 2021b). SSBs develop a comprehensive Shari’ah compliance
framework (SGF, 2018) and supervise all the Shari’ah-related matters of the IBs to improve
IBs’performance (SBP, 2018) to improve stakeholder confidence and, hence, IBs’
performance (Nomran and Haron, 2020b). Despite the rapid growth in IBs, Shari’ah’s
supervision of IBs faces considerable challenges related to stakeholders’needs and
satisfaction (Alam et al.,2019;Alam et al., 2022). This prepared us to develop an attractive
SGF in terms of SSB diversity that contributes to IBs’performance. Specifically, we
examined the influence of SSB diversity on IBs’performance from the stakeholder
perspective in the context of Pakistan from 2005 to 2020. The results from multiple
regressions analysis indicate that SSB size and relevant educational background diversity
significantly positive impact on IBs’performance. However, SSB age diversity, national
diversity and cross-membership have a significantly negative impact on IBs’performance.
Additionally, SSBs’tenure diversity, gender diversity and general educational qualification
diversity have no significant impact on IBs’performance. Our results highlight the
importance of a large SSB size with a diversified educational background in enhancing the
IBs’performance. Therefore, we conclude that large-size SSB with highly qualified
members from different educational backgrounds improves IBs’performance. Moreover, we
also conclude that SSB members with diversified ages, nationality and higher cross-
membership reduce IBs’performance.
This study added an important contribution to the literature on IBs and SG in the context
of Pakistan. For instance, few studies examined the SGF in the context of Pakistan; however,
to the best of the authors’knowledge, this is the first study that comprehensively examined
the impact of SSB diversity in terms of structural and demographic diversities on IBs’
performance. We responded to the recommendations made by Chaudhry et al. (2020) that
there is a high need for new policies to facilitate the growth-effectiveness in the IB industry
of Pakistan. We reacted to the recommendation made by Mollah and Zaman (2015) that
empirical studies on the influence of SSB and IBs’performance are limited. We responded to
the recommendation made by Nomran et al. (2018) that existing studies have not sufficiently
addressed the SSBs and their impact on IBs’performance. Finally, we reacted to the
recommendation made by Saba (2019),Alam et al. (2021a) and Nomran and Haron (2020b)
that a study on the SG mechanisms may provide different results in different jurisdictions.
Therefore, in response to existing studies that has not examined the importance of SSB
diversity, this study contributed to the literature on SSB diversity and IBs’performance in
the context of Pakistan.
Given that the economy of Pakistan faces difficulties in IBs growth factors (Chaudhry
et al., 2020) because of higher competition with CBs (Mollah and Zaman, 2015;Abbas et al.,
2016), the IBs’need to adopt a better SSB framework to attract and retain a large group of
stakeholders. The IBs’regulators in Muslim economies, specifically in Pakistan, assure the
Muslim stakeholders that the IBs’operations are fully compliant with Shari’ah rules (Awan
et al.,2011). Looking into the facts, the implications concerning the Pakistani IBs are that the
regulations and policymakers should give high importance to the SG mechanisms,
specifically SSB diversity to attract majority Muslim stakeholders. The performance of IBs
JIABR
is attributed to the Shari’ah compliance role of SSBs (Alman, 2012;Alam et al., 2021b).
Therefore, the regulatory authorities and policymakers may plan to consider mandating an
ideal SSBs’size and hiring qualified members from a relevant educational background with
low cross-membership to improve IBs’performance. In line with stakeholder theory, the
suggested structure would enhance the stakeholder’s satisfaction leading to improves IBs’
performance. Moreover, concerning the social implication, SSB diversity in IBs attracts
various groups of stakeholders which equally benefits the various groups of stakeholders in
society. Thus, the SSB diversity contributes to enhance IBs’performance and the social
welfare of various groups of stakeholders in society.
The results are presented with high care in the presence of some unavoidable
limitations. First, although our selected sample of 22 banks per year may be
considered small relative to other Islamic countries’data sets, this sample is the
largest sample of research on SSB diversity and IBs’performance in the context of
Pakistan. Second, other diversity variables like experience and expertise are
considered crucial, but these variables are difficult to measure and analyze.
Considering the above limitations, we contend that our study is pertinent and timely
and contributes to the relevant literature on SG, particularly SSB diversity and IBs’
performance. Future studies may examine the SSB diversity variables such as
experience and expertise. Moreover, future studies may investigate this relationship
and replicate in other jurisdictions for more insights on SSB diversity and IBs
performance. Accordingly, SG practices and the SSB diversity are different across
different jurisdictions because of different regulatory settings (Jabari and Muhamad,
2020). We contend that the impact of SSB on IBs’performance may differ in other
Islamic countries. Therefore, a future research study in a similar context may offer
different results in different nations comparable to the results offered by the current
study.
Notes
1. Religious attitude has a strong influence on customers’choices in evaluating the quality of
banks. These customers focus on bank reputation, religiosity, economic stability and the
existence of a variety of financing options when choosing a bank (Ireland, 2018).
2. Maqasid-al-Shari’ah refers to the Islamic rules on transactions that require that IBs, apart from
profit maximizations, consider social justice and welfare (Maharani and Rehmawati, 2021).
3. Structural diversity is the dissimilarities in board attributes that are related to structural
aspects such as board size, board committee, board composition and board independence,
while the term demographic diversity refers to the dissimilarities in directors’attributes
such as age, nation, ethnicity, educational background, experience and so on (Hafsi and
Turgut, 2013).
4. The pro-active model is also called the regulation-based model which reflects the most extreme
intervention of regulatory authorities (Nomran et al., 2018).
5. BI ¼1X
n
i¼1
P2
iwhere BI is Blau’s index, “i”represents many categories, “n”represents several
members in each category and “t”represents the proportion of board members in each category.
This index always takes values between 0 and 1, where “0”shows no diversity and “1”shows
100% diversity.
6. Z¼
m
þK
s
where Z represents bank stability,
m
is the bank average ROA, K is equity capital in the
percentage of total assets and
s
is the standard deviation of the ROA, used as a proxy to measure
risk.
Diversity of
Shari’ah
supervisory
board
7. The AR(1) significant value and AR(2) insignificant value present that in the first order (i.e. AR1),
correlation is mattered, and at the second stage (i.e. AR2), the correlation is absent (Nomran et al.,
2018).
8. Hansen-test insignificant value ensures the validity of instrumental variables for overcoming
endogeneity problems (Baum et al., 2003).
9. F-test indicates that the selected instrumental variables are strong and valid at p<0.0000.
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Appendix
Corresponding author
Ikram Ullah Khan can be contacted at: ikram.bnu@gmail.com
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Table A1.
List of Islamic banks
in Pakistan
Type Serial no. Name of banks
Full-fledged Islamic banks 1 Al-Baraka Bank (Pakistan) Ltd.
2 Bank Islamic Pakistan Ltd.
3 Burj Bank Ltd.
4 Dubai Islamic Bank Pakistan Ltd.
5 Meezan Bank Ltd.
6 Muslim Commercial Bank Ltd.
Islamic windows conventional banks 7 Allied Bank Ltd.
8 Askari Bank Ltd.
9 Bank Al-Habib Ltd.
10 Bank Alfalah Ltd.
11 Fayal Bank Ltd.
12 Habib Bank Ltd.
13 Habib Metropolitan Bank Ltd.
14 National Bank of Pakistan
15 Silk Bank Ltd.
16 Sindh Bank Ltd.
17 Soneri Bank Ltd.
18 Standard Chartered Bank (Pakistan) Ltd.
19 Summit Bank Ltd.
20 The Bank of Khyber
21 The Bank of Punjab
22 United Bank Ltd.
Note: Appendix shows the list of IBs in Pakistan retrieved from the Banking Policy and Regulation
Department, State Bank of Pakistan
Diversity of
Shari’ah
supervisory
board
