ISLAMIC BANKS IN AFRICA: THE RISK OF SHARIA NON-COMPLIANCE AND FINANCIAL PERFROMANCE

Authors

  • Aishatu Usman Muhammad Centre for Islamic Development Management Studies, Universiti Sains Malaysia, 11800 Pulau Penang, Malaysia
  • Murni Yusoff Centre for Islamic Development Management Studies, Universiti Sains Malaysia, 11800 Pulau Penang, Malaysia

DOI:

https://doi.org/10.33736/ijbs.6419.2023

Keywords:

Islamic Banks, Sharia Non-Compliance Risk, Financial Performance, Africa

Abstract

The establishment of Islamic banks is solely based on Sharia standards, which, if not followed, will have dire consequences of Sharia non-compliance, making IBs comparable to conventional banks. Sharia non-compliance can damage investor trust and income. Although Sharia is the primary distinction between IBs and CBs, Sharia non-compliance must be scrutinized to avoid non -compliance issues. The risk of Sharia non-compliance and the performance of Islamic banks in Africa are investigated in this research, covering the years 2015 through 2019. The research studied 27 Islamic banking institutions from 11 African countries. The Sharia non-compliance risk was evaluated using the size and competence of the Sharia committee. In addition, GDP, bank age and size were used as control variables. Data were analyzed using simple regression with EViews. The result shows that Sharia Committee Size positively correlates with African Islamic bank performance. The research also shows that the expertise of the Sharia Committee in Sharia positively affects Islamic bank performance. Banks with larger Sharia committees perform better, the studies revealed. All banks have a large number of Sharia specialists in their committees, indicating that having them is vital for establishing and smoothly running an Islamic bank.

References

Abdullah, M., Shahimi, S. and Ismail, S.G. (2011). Operational Risk in Islamic Banks: Examination of Issues. Qualitative Research in Financial Markets, Vol. 3(2), pp 131-151. Adznan, S., Muhamad Sori, Z. B., & Mohamad, S. (2023). Intellectual capital disclosure (ICD) in Islamic banks: does the diversity of Sharia committee matters?. International Journal of Islamic and Middle Eastern Finance and Management, 16(6), 1269-1286.

https://doi.org/10.1108/IMEFM-02-2023-0055

Aebi, V., Sabato, G. and Scmid, M. (2012). Risk Management, Corporate Governance, and Bank Performance in Financial Crisis. Journal of Banking and Finance, Vol.32, pp 3213-3226

https://doi.org/10.1016/j.jbankfin.2011.10.020

Ahmed, H., and Chapra, M. (2002). Corporate Governance in Islamic Financial Institutions (Occasional Paper) (No. 93). The Islamic Research and Teaching Institute (IRTI) 2002.

Alkhamees, A. (2021). Islamic Banking in the Middle East and North Africa (MENA) Region. Islamic Economic Studies, Vol. 20 (1), pp 1 - 4. Awosanya, Y. A. (2022). The impact of liquidity and credit risks on financial performance: a case study of Islamic banks in Africa (Doctoral dissertation, University of Bolton).

Bahari, N. F., & Baharudin, N. A. (2016). Sharia Governance Framework: The Role of Sharia Review and Sharia Auditing. In Proceeding of 3rd International Conference on Management & Muamalat (Vol. 2016).

Baltagi, B. H. (2008). Econometric Analysis of Panel Data. Chichester: John Wiley & Sons.

Basiruddin, R., & Ahmed, H. (2020). Corporate Governance and Sharia non-compliance Risk in Islamic Banks: Evidence from Southeast Asia. Corporate Governance: The International Journal of Business in Society, Vol 2 (2), pp 240-262.

https://doi.org/10.1108/CG-05-2019-0138

Chen, H. J., and Lin, K.T. (2016). How Do Banks Make the Trade-offs Among Risk? The Role of Corporate Governance. Journal of Banking and Finance, Vol. 72, pp 39-69.

https://doi.org/10.1016/j.jbankfin.2016.05.010

D'Amato, A. and Gallo, A. (2019). Bank Institutional Setting and Risk-Taking: The Missing Role of Directors' Education and Turnover. Corporate Governance: The International Journal of Business in Society, Vol. 1 (4), pp 285-303. Djalilov, K. and Piesse, J. (2016), "Determinants of bank profitability in transition countries: what matters most?", Research in International Business and Finance, Vol. 38, pp. 69-82.

https://doi.org/10.1016/j.ribaf.2016.03.015

Eisenberg, T., Sudgren, S. and Wells, M. (1998). Larger Board Size and Decreasing Firm Value in Small Firms. Journal of Financial Economics, Vol 48 (1), pp 35-54.

https://doi.org/10.1016/S0304-405X(98)00003-8

Fahlenbrach, R. and Stulz, R.M. (2011). Bank CEO Incentives and the Credit Crisis. Journal of Financial Economics. Vol 26 (2), pp 301-325.

https://doi.org/10.1016/j.jfineco.2010.08.010

Farag, H., Mallin, C., and Ow-Yong, K. (2018), "Corporate governance in Islamic banks: new insights for dual board structure and agency relationships," Journal of International Financial Markets, Institutions, and Money, Vol. 54, pp. 59-77.

https://doi.org/10.1016/j.intfin.2017.08.002

Ghayad, R. (2008). Corporate governance and the global performance of Islamic Banks. Humanomics, 24(3), 207-216.

https://doi.org/10.1108/08288660810899368

Gujarati, DN (2003). Basic Econometrics (4th ed.) New York McGraw Hill.

Hassan, R. (2016). Sharia Non- compliance Risk and its Effect on Islamic Financial Institutions. Al-Shajarah: Journal of International Institute of Islamic Thought and Civilization (ISTAC), 21(3), 21-25. Isa, M., & Lee, S. P. (2020). Does the Sharia committee influence risk-taking and performance of Islamic banks in Malaysia? Journal of Islamic Accounting and Business Research, 11(9) 1739-1755.

https://doi.org/10.1108/JIABR-12-2018-0207

Islamic Finance Development Report (2020). Islamic Corporation for the Development of Private Sector. Retrieved from https://icd-ps.org/uploads/files/ICD-Refinitiv%20IFDI%20Report%2020201607502893_2100.pdf

Islamic Financial Services Board (2005). Guiding Principles on Sharia Governance Systems for Institutions Offering Islamic Financial Services. Islamic Financial Services Board, Kuala Lumpur. Retrieved from Islamic Financial Services Board (IFSB)

Islamic Financial Services Board (2009). Guiding Principles on Sharia Governance Systems for Institutions Offering Islamic Financial Services. Islamic Financial Services Board, Kuala Lumpur. Retrieved from Islamic Financial Services Board (IFSB) Jimoh, A. T., Ijaiya, M. A., Attah, J. A., Abdulmumin, B. A., & Muhtar, O. F. E. (2022). Comparative Analysis of Technical Efficiency of Islamic Banks in Selected Low-Income Countries of Africa and Asia. Journal of Business Management and Accounting, 12(2), 81-102.

Malkawi, B. (2013). Sharia Board in Governance Structure of Islamic Financial Institutions. The American Journal of Comparative Law, Vol. 61 (3), pp 539-577.

https://doi.org/10.1093/ajcl/61.3.539

Mollah, S., & Zaman, M. (2015). Sharia Supervision, Corporate Governance, and Performance: Conventional vs. Islamic Banks. Journal of Banking & Finance, 58(August 2016), 418-435. Muhammad, A. U., & Yusoff, M. (2023). Effect of Sharia Governance on Performance of Fully Fledged Islamic Banks in Africa. KnE Social Sciences, 754-768.

https://doi.org/10.1016/j.jbankfin.2015.04.030

Nomran, N.M., Haron, R. and Hassan, R. (2017), "Bank performance and Sharia supervisory board attributes on Islamic banks: does bank size matter?", Journal of Islamic Finance, Vol. 6 No. Special Issue, pp. 174-187. Noordin, N. H., & Kassim, S. (2019). Does Sharia committee composition influence Sharia governance disclosure? Evidence from Malaysian Islamic banks. Journal of Islamic Accounting and Business Research, 10(2), 158-184. Olson, D., and Zoubi, T. (2017). Convergence in bank performance for commercial and Islamic banks during and after the global financial crisis. The Quarterly Review of Economics and Finance, Vol. 65, pp. 71-87.

https://doi.org/10.12816/0047348

Oz, E., Ali, M.M., Khoker, Z.R. and Rosman, R. (2016). Sharia Non-Compliance Risk in the Banking Sector: Impact on Capital Adequacy Framework of Islamic Banks. IFSB Working Paper Series, WP-05/03/2016, Islamic Financial Services Board, Kuala Lumpur.

Parker, M. (2021). How Can Africa Tap Its Huge Potential for Islamic Banking? African Business. Retrieved from https://african.business/2021/05/finance-services/how-can-africa-tap-its-huge-potential-for-islamic-banking/

Puri-Mirza, A. (2021). Value of Islamic Banking Assets Worldwide. Retrieved from Worldwide: value of Islamic banking assets 2021 | Statista Rabaa, B. and Younes, B. (2016). The impact of the Islamic banks performances on economic growth: using panel data. International Journal of Economics and Finance Studies, Vol. 8 No. 1, pp. 101-111. Ramdani, O., & Kamal, M. (2023). Corporate Governance and Sharia Non-compliance Risk: The Case of Islamic Banks in Indonesia. Jurnal Akuntansi dan Keuangan Islam, 11(1, April), 49-79. Rozzani, N. and Rahman, R.A. (2013). Camels and performance evaluation of banks in Malaysia: conventional versus Islamic. Journal of Islamic Finance and Business Research, Vol. 2 No. 1, pp. 36-45.

https://doi.org/10.35836/jakis.v11i1.370

Safieddine, A. (2009). Islamic Financial Institutions and Corporate Governance: New Insight for Agency Theory. Corporate Governance: An International Review, Vol 17 (2), pp 142-158.

https://doi.org/10.1111/j.1467-8683.2009.00729.x

Safiullah, M. and Shamsuddin, A. (2018), "Risk in Islamic banking and corporate governance," Pacific-Basin Finance Journal, Vol. 47, pp. 129-149. Tabash, M.I. (2019). Banking sector performance and economic growth: an empirical evidence of UAE Islamic banks. Creative Business and Social Innovations for a Sustainable Future, Springer, pp. 39-45. Tazilah, K. M. D. A., Rapani, N. A., Halim, N. A., & Majid, M. (2017). Preliminary study on the compliance of shariah governance framework and performance of Islamic financial institutions in Malaysia. In 19th Malaysian Finance Association Annual Conference, Malaysia.

https://doi.org/10.1016/j.pacfin.2017.12.008

Thijs, J. P. (2010). Risk Management in Islamic Banking. Bank Islam Malaysia Berhad.

Usmani, M.T. (2008). Sukuk and their Contemporary Applications. In Translated from Original Arabic by Sheikh Yusuf Talal DeLorenzo, AAOIFI Sharia Council Meeting, Saudi Arabia. Uyob, S., Zin, A. S. M., Ramli, J., Othman, J., Ghani, N. A. A., & Salleh, K. (2022). The Effect of Sharia Committee Composition on Malaysian Islamic Banks' Audit Report Lag. International Journal of Applied Economics, Finance and Accounting, 14(1), 67-76.

https://doi.org/10.33094/ijaefa.v14i1.652

Zain, S. N. M., & Shafii, Z. (2018). The Impact of Sharia Governance to Financial and Non-financial performance in Islamic Financial Institutions (IFIs): A Literature Survey. International Journal of Islamic Business, 3(2), 27-40

https://doi.org/10.32890/ijib2018.3.2.3

Downloads

Published

2023-12-26

How to Cite

Aishatu Usman Muhammad, & Murni Yusoff. (2023). ISLAMIC BANKS IN AFRICA: THE RISK OF SHARIA NON-COMPLIANCE AND FINANCIAL PERFROMANCE. International Journal of Business and Society, 24(3), 1213–1230. https://doi.org/10.33736/ijbs.6419.2023