Journal of Islamic Monetary Economics and Finance, Vol. 9, No. 3 (2023), pp. 419 - 442
p-ISSN: 2460-6146, e-ISSN: 2460-6618

SHARI’A SUPERVISORY BOARD AND ISLAMIC BANKS’
INSOLVENCY RISK
Umar Habibu Umar1, Muhamad Abduh2 and Mohd Hairul Azrin Besar3
Department of Accounting and Finance, School of Business and Economics, Universiti Brunei
Darussalam, Brunei Darussalam, uhumar21@gmail.com
2
Department of Accounting and Finance, School of Business and Economics, Universiti Brunei
Darussalam, Brunei Darussalam, muhamad.abduh@ubd.edu.bn
3
Department of Accounting and Finance, School of Business and Economics, Universiti Brunei
Darussalam, Brunei Darussalam, azrin.besar@ubd.edu.bn
1

ABSTRACT
This study examines how the characteristics and quality of Shari’a supervisory board
(SSB) influence the insolvency risk of Islamic banks. It employs unbalanced panel data
of 43 Islamic banks in 15 countries between 2010 and 2020, which are hand-collected
from the banks’ annual reports. The results indicate that the SSB quality index, SSB
Islamic finance professional expertise and SSB competency increase insolvency risk
while the SSB members with PhDs reduce it. Meanwhile, SSB size, SSB meetings, SSB
gender diversity (SSBG) and SSB members from foreign countries have no significant
influence on the insolvency risk. These findings have implications for policymakers
and regulators in carving policies and regulations in restraining the SSB from
taking excessive risk. They can also guide the Islamic banks’ board of directors and
shareholders in appointing the SSB members.
Keywords: Risk-taking, Shari’a supervisory board (SSB), SSB quality index, SSB characteristics,
Islamic banks.
JEL classification: G21; G32; G33.
Article history:
Received
: November 7, 2022
Revised		
: February 25, 2023
Accepted
: August 31, 2023
Available online : September 29, 2023
https://doi.org/10.21098/jimf.v9i3.1635

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

I. INTRODUCTION
Poor governance in banks and the resulting financial scandals are the major features
of the 2008 financial crisis (Darmadi, 2013). Indeed, many view the crisis as the
manifestation of the ineffectiveness of the government regulatory frameworks to
restrain banks from excessive risk-taking (AlAbbad et al., 2019; Alam et al., 2022b;
Purbayanto et al., 2022). While risk-taking is part of the normal decisions of banks,
excessive risk-taking can lead to financial instability (Jabari & Muhamad, 2022).
The operations of Islamic banks, like conventional banks, are not free from various
forms of risk, such as insolvency risk, operation risk, portfolio risk, credit risk, etc.
This is because Islamic banks discharge similar functions to their conventional
counterparts, though they are different in their business principles where all their
transactions are completely decoupled from riba (interest), gharar (uncertainty)
and qimar (speculations/gambling). Islamic banks are also not immune to all the
risks encountered by conventional banks (Hassan et al., 2019).
Islamic banks normally have two independent boards: the board of directors
and the Shariá supervisory board (SSB henceforth) (Alman, 2012). However, in
few countries, the functions of SSB are contracted to the Shariá consultancy firms.
The SSB governance is a vital structure unique to Islamic financial institutions
(Abbas, 2021; Alman, 2012; Hakimi et al., 2018). This governance structure has
now become more advanced and diverse in line with the development of the
Islamic finance industry around the globe (Musibah & Alfattani, 2014). It is an
extra layer to undertake monitoring and oversight duties on Islamic banks (Mollah
& Zaman, 2015; AlAbbad et al., 2019; Abbas et al., 2020). A study by Mollah et al.
(2021) finds that integrating the SSB with a strong board reduces the risk-taking of
Islamic banks because religiosity prohibits risk-taking. This indicates that the SSB
can be key to restraining Islamic banks from excessive risk-taking. Consequently,
the SSB has become more attractive than other forms of Shariá governance in
Islamic financial institutions (Mansoor et al., 2020). It also remains a subject of
discussion, particularly for Islamic banks in countries with dissimilar regulatory
environments (Nomran et al., 2018).
While establishing the relationship between SSB attributes and the risk-taking
of Islamic banks has emerged to be a subject of increasing interest , there are at least
three limitations in existing studies. First, a few empirical studies generally examine
the relationship between SSB attributes and risk-taking (Jabari & Muhamad,
2022; Khalil & Boulila Taktak, 2020; Nomran & Haron, 2020; Nguyen, 2021). The
findings of these studies are inconsistent (Jabari & Muhamad, 2022; Nguyen, 2021;
Serly & Oktamirza, 2022). Hence, there is a need for further investigation. Second,
previous studies mostly employ a limited number of SSB attributes, like SSB size,
SSB meetings and SSB gender diversity. The effects of other essential attributes of
the SSB, like SSB competency, SSB members with Doctor of Philosophy (PhD), SSB
Islamic finance professional expertise and SSB members from foreign countries
on the risk-taking of Islamic banks have been given either little or no empirical
attention. Third, previous studies show the impact of individual attributes on the
risk-taking of Islamic banks instead of developing the SSB quality index, which
makes it difficult, if not impossible, to know the overall effect of the SSB on their
risk-taking. This is because the attributes will hardly yield similar results. For
example, the results of SSB size and SSB gender diversity may indicate that they

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significantly reduce risk-taking. However, the frequency of SSB meetings may
show a significant positive relationship with risk-taking. Other SSB attributes
like SSB members with PhDs, SSB competency and SSB members from foreign
countries may insignificantly influence risk-taking. Going by these results, it is
impossible to establish the overall effect of the SSB on risk-taking unless an index
that captures the SSB attributes is constructed. To the authors’ best knowledge,
no study has examined how the SSB quality index influences the risk-taking of
Islamic banks.
Against the above background, this study investigates the effects of the SSB
attributes and quality index on the risk-taking of Islamic banks using a panel
sample of 43 full-fledged Islamic banks from 15 countries. As earlier pointed out,
some attributes have not been empirically investigated or given special attention
by previous studies. A key novelty of this study is the construction of the SSB
quality index for assessing the overall or aggregate impact of the SSB attributes
on the risk-taking of Islamic banks. Examining the effects of the individual
characteristics of SSB alone cannot be used to make a general conclusion as to
whether SSB influences risk-taking. This study pioneers the development of the
SSB quality index to establish the overall impact of SSB attributes on the risktaking of Islamic banks.
The study’s findings have implications for policymakers and regulators in
developing or reviewing policies and regulations for revitalizing the role of the
SSB for the sustainable operations of Islamic banks. Specifically, Central Banks
will find this helpful in understanding the overall contribution of the SSB towards
managing the risk-taking of Islamic banks to know whether some measures need
to be taken to revitalize its role by issuing new or revised regulations. Islamic
banks’ boards of directors and shareholders will use the findings to ensure
that competent and qualified scholars are appointed to the SSB. Scholars and
researchers will make use of the results for further research.
The rest of the paper is structured as follows. Section 2 presents the literature
review and develops hypotheses to be tested. Section 3 outlines the methodology
of the study. Section 4 presents the results and analysis. Lastly, section 5 presents
a conclusion and recommendations.
II. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
2.1. Background Theory
Though various theories have been proposed to explain the association between
corporate governance and the risk-taking of Islamic banks, the agency theory and
resource dependency theory are the most dominant (Khalil & Boulila Taktak, 2020).
The agency theory relates to a contractual relationship between principals and
agents in carrying out a certain task on their behalf under a delegation of decision
authority (Jensen & Meckling, 1976). Agency conflict in the banking industry needs
unique analysis, which necessitates the board of directors to protect investors’
funds, including those of depositors (Farag et al., 2018). There are two sources of
agency problems in Islamic banks; the traditional source, which emerges when
managers deviate from the objective of the maximization of shareholders’ wealth
and the unique one in Islamic banks, which occurs when they provide products

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

and services that contravene the teachings of Islam (AlAbbad et al., 2019). Besides,
the investment depositors of Islamic banks constitute a key segment in agency
conflicts because they engage in profit and loss contracts like shareholders, which
highly demand good governance practices to protect the interests and improve the
confidence of shareholders and depositors (Darmadi, 2013).
The conflict of interest may occur because of information asymmetry, which
often happens when managers use the greater valuable economic and financial
information that could not be accessed by shareholders and depositors (in the case
of banks) to gain at their expense. The information asymmetry will be reduced and
the credibility and confidence of investors in Islamic banks will improve when the
SSB provides correct and transparent information (Khalil & Boulila Taktak, 2020).
In addition, the SSB discharges a unique form of supervision that can minimize
the conflict of interest between the investors and the management of Islamic banks
(Rahman & Bukair, 2013).
The resource dependency theory explains how the external resources of
corporate bodies influence their rulings (Alam et al., 2022b). The theory indicates
that companies depend significantly on resources obtainable from other entities
(Pfeffer & Salancik, 1978). It also argues that coalitions should be formed between
trading partners mainly to manage the uncertainty of companies (Singh et
al., 2011). Besides, the resource dependency theory posits that companies are
not independent but depend on the bigger networks of organizations in their
environment- through which they struggle to manipulate resources for survival
(Pfeffer & Salancik, 1978). Specifically, the SSB connects Islamic banks with their
environment, which enables them to obtain essential resources (Elamer et al.,
2019). This implies that the SSB, as an independent and external body, can provide
an avenue for Islamic banks to connect with valuable external resources for their
perpetual existence. The proper connection of Islamic banks with the external
environment through the SSB could enable them to manage their risks properly.
Hence, the SSB consisting of Shariá scholars are regarded as valuable resources in
shaping Islamic banks’ risk-taking (Ramly & Nordin, 2018).
2.2. Shari’a Governance Structure of Islamic Banks
The Shari’a governance of Islamic banks is commonly known as the Shari’a
supervisory board (SSB). The presence of the SSB is expected to influence Islamic
banks’ financial soundness (Serly & Oktamirza, 2022). It is an independent
committee in Islamic banks comprising Islamic scholars with sound knowledge of
Fiqh Muamalat (Islamic jurisprudence guiding commercial transactions) (Aslam &
Haron, 2021; Ramly & Nordin, 2018). The Accounting and Auditing Organizations
of Islamic Financial Institutions (AAOIFI) governance standards describe the
SSB as an independent body vested with the responsibility of leading, reviewing
and overseeing the activities of Islamic financial institutions to ensure their strict
compliance with the Shariá and advising them on legal issues related to Islamic
banking and finance (Ramly & Nordin, 2018). It performs a similar role to the
audit committee and the external auditor by mainly reviewing and monitoring the
shariah-compliance of Islamic banks’ products and services (Rahman and Bukair,
2013; AlAbbad et al., 2019; Ramly & Nordin, 2018; Jabari & Muhamad, 2022).

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Moreover, while SSB members are appointed based on board of directors’
recommendations, they discharge their duties independently (Aslam & Haron,
2021; Ramly & Nordin, 2018). Still, in many cases, they are expected to collaborate
with the board of directors in discharging their duties. Preventing Islamic banks
from excessive risk-taking is one of the important duties of the SSB. Nguyen (2021)
believes that the SSB has an oversight function to play in managing the risk-taking
of Islamic banks and is responsible for ensuring minimal moral hazard problem,
as justified by previous studies.
2.3. Hypotheses Development
2.3.1. Shariá Supervisory Board Size
There are differing views on how SSB size influences the risk-taking of Islamic
banks. Apparently, Islamic banks in various countries have different SSB sizes, as
specified by their respective regulations (Nomran et al., 2018). For example, the SSB
of local Islamic banks in Malaysia should comprise a minimum of five members,
while Islamic windows or a foreign branch operating in the country should have
at least three members (BNM, 2019). In Saudi Arabia, full-fledged Islamic banks
are required to have a minimum of three SSB members and a maximum of five
(SAMA, 2020). According to the Islamic Financial Service Board, the SSB should
consist of at least three members who are independent non-executives (Farag et
al., 2018). Besides, a study by Nomran & Haron (2020) establishes that the SSB
size should be between 3 and 6, as the optimal SSB size appeared to be 5. The
supervisory effectiveness and the disciplinary power of the SSB of individual
banks can reduce portfolio risk when the number of members is increased (Alman,
2012).
Many empirical studies examine how SSB size affects the risk-taking of Islamic
banks. For instance, Safiullah & Shamsuddin (2018) evaluate the effects of SSB
attributes on the risk-taking behavior of Islamic banks operating in 28 countries.
The authors find SSB size significantly and negatively influences Islamic banks’
operational and insolvency risks. Alman (2012) examines the relationship between
SSB attributes and loan portfolio risks of Islamic banks operating in the Middle
East, North Africa and Southeast Asia between 2000 and 2010 and finds that
SSB size has a significant positive association with loan portfolio risk. Khalil &
Boulila Taktak (2020) conduct a similar study using data from 67 Islamic banks in
20 countries between 2005 and 2014. The study establishes a significant negative
relationship between SSB size and the financial soundness of Islamic banks. In other
words, SSB is directly related to insolvency risk. Aslam & Haron (2021) evaluate
the association between corporate governance mechanisms and the risk-taking of
Islamic banks. The study applies a two-step system generalized method of moment
(2SYS-GMM) estimation technique to a panel data set of 129 Islamic banks from 29
countries between 2008 and 2017. It notes that SSB size has a significant positive
relationship with liquidity risks. AlAbbad et al. (2019) investigate the association
between SSB characteristics and the risk-taking using data from 70 Islamic banks
from 18 countries between 2000 and 2011. The result suggests a significant positive
association between the SSB size and insolvency risk. Nguyen (2021) employs the
fixed effect and GMM estimators to evaluate the impact of the audit committee

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and Shariá supervisory board on the risk-taking behavior of 57 Islamic banks and
102 conventional banks drawn from 10 countries from 2002 to 2018. The study
shows that the SSB has a significant positive relationship with the insolvency risk
of Islamic banks. Besides, Isa & Lee (2020) investigate the impact of the Shari’a
supervisory attributes on the risk-taking behavior of Islamic banks in Malaysia
between 2007 and 2016. The study finds that SSB size is not related to insolvency
risk. Similarly, Serly & Oktamirza (2022) examine the effects of the SSB attributes
on the financial soundness of Islamic banks in Indonesia between 2015 and 2019.
The study indicates that SSB size does not influence Islamic banks’ financial
soundness. Thus, in line with these studies, we propose the following hypothesis:
H1 Ceteris paribus, SSB size increases the insolvency risk of Islamic banks.
2.3.2. The Frequency of Shari’a Supervisory Board Meetings
The SSB meeting provides an avenue for members to come together and exchange
ideas with the aim of enhancing the performance of Islamic banks (Alotaibi,
2022). The SSB is expected to speak on behalf of Islamic financial institutions
during annual meetings to clarify Shari’a aspects concerning any transaction to
stakeholders (Hassan & Chachi, 2010). In most countries, the SSB is statutorily
required to hold a certain minimum number of meetings during a particular year.
For example, the SSB of Islamic banks in Indonesia is compulsorily required to
hold meetings at least once a month and submit a report to the Bank Indonesia
periodically (Darmadi, 2013). The Saudi Arabian Shariá governance for Islamic
banks requires SSB members to hold a minimum of one meeting every three
months (SAMA, 2020). In the case of Malaysia, SSB members are mandated to
hold at least one meeting every two months (BNM, 2019).
Despite the importance of the SSB meetings, we find only two relevant studies.
Serly & Oktamirza (2022) examine the relationship between SSB meetings and
the financial soundness of Islamic banks in Indonesia. The finding indicates that
the frequency of SSB meetings does not affect the banks’ financial soundness.
Similarly, Isa & Lee (2020) establishe that the number of SSB meetings does not
affect the risk-taking behavior of Islamic banks. The lack of adequate theoretical
explanation and empirical evidence on how SSB meetings influence the risktaking of Islamic banks makes it difficult to predict whether the relationship will
be positive or negative. Hence, due to the lack of adequate empirical evidence, we
develop the following hypothesis:
H2 Ceteris paribus, the frequency of SSB meetings influence the insolvency risk of
Islamic banks.
2.3.3. Shariá Supervisory Board Gender Diversity
Promoting board diversity has become a priority of regulatory bodies (Kachkar
& Yilmaz, 2022). The effects of diversity on bank risk-taking remain a topical
issue of research with little empirical evidence (Jabari & Muhamad, 2022). Gender
diversity is a key indicator of board diversity. The existence of female scholars on
the SSB is likely to enhance the SSB’s monitoring role and compliance with the
Shariá (Mansoor et al., 2020). Female scholars on the SSB are expected to effectively

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perform check-and-balance in making decisions that can assist in mitigating
excessive risk-taking (Isa & Lee, 2020).
Some empirical studies have been carried out to identify the effects of female
scholars appointed to the SSB on the risk-taking of Islamic banks. Nguyen (2021)
find that the proportion of female members on the SSB has significantly and
negatively influenced the insolvency risk of Islamic banks. In addition, Mansoor
et al. (2020) examine the impact of corporate governance attributes and Sharia
governance attributes on the credit rating of Islamic banks. The study utilizes a
sample of 22 Islamic banks between 2006 and 2018 and finds that the existence
of female scholars improved the credit rating of Islamic banks. Nainggolan et
al. (2022) examine how board attributes affect the risk-taking of Islamic banks
in Indonesia and Malaysia. The data are collected from the annual reports of
27 Islamic banks between 2006 and 2016. Using random-effect and GMM panel
estimators, they show that female scholars on the SSB lower risk-taking. Isa & Lee
(2020) discover that the presence of female scholars on the SSB has an insignificant
association with the risk-taking of Islamic banks. Hence, in line with the above
discussion, the following hypothesis will be tested:
H3 Ceteris paribus, SSB gender diversity reduces the insolvency risk of Islamic
banks.
2.3.4. Shari’a Supervisory Board Members with Philosophy of Doctorates (PhDs)
The educational qualification of SSB members is beneficial for decision-making
(Almutairi & Quttainah, 2017). Considering banks’ high level of opaqueness and
complexity, better academic qualification of board members can improve their
ability to appreciate and elucidate sophisticated risk measurement approaches
and the effects of bank policies on risk-taking (Srivastav & Hagendorff, 2016).
PhD is the highest educational qualification to acquire from universities and other
degree-awarding institutions. According to Wang et al. (2017), scholars who hold
PhDs in economics and business tend to be in a better position to understand
economic and financial issues and their implications for financial institutions.
Besides, people with PhDs in Shariá Law or Islamic finance-related disciplines
are most qualified to be appointed to the SSB (Abbas et al., 2020). Evidently, SSB
members with PhDs are better versed in the applications of Islamic principles in
banks (Rahman & Bukair, 2013). Also, SSB members who have high academic
qualification could apply Islamic moral principles to restrain the managers of
Islamic banks from excessive risk-taking (Safiullah & Shamsuddin, 2018).
Using a sample of listed companies on the Taiwan Stock Exchange between
2006 and 2012, Wang et al. (2017) find that highly educated board members
are likely to discharge monitoring and advisory functions that complement
corporate governance’s effectiveness. Safiullah & Shamsuddin (2018) establish
that SSB members with advanced academic qualification significantly reduce
the operational and insolvency risks of Islamic banks. Thus, based on the above
theoretical views and empirical evidence, it can be pointed out that appointing
scholars with PhDs can prevent Islamic banks from investing in risky businesses
and transactions. Hence, we propose the following hypothesis:
H4 Ceteris paribus, the proportion of SSB members with PhDs reduces the
insolvency risk of Islamic banks.

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2.3.5. Sharia Supervisory Board Members’ Islamic Finance Professional Expertise
SSB members’ Islamic finance professional expertise indicates the ability to
discharge their duties effectively. The Accounting and Auditing Organizations
for Islamic Financial Institutions (AAOIFI) is an independent international and
reputable professional body that develops accounting, auditing, governance,
ethics and Shari’a standards to apply by Islamic financial institutions around
the globe. AAOIFI runs the following professional programs; Certified Islamic
Professional Accountant (CIPA), the Shari’a Advisor and Auditor “CSAA” and the
corporate compliance program to improve Islamic financial institutions’ human
resources and governance structures (AAOIFI, 2020). AAOIFI offers the required
Shari’a expertise that enables one to accumulate both tacit and explicit knowledge
(Almutairi & Quttainah, 2017). They add that SSB members with the knowledge
or practice of accounting, economics and/or finance are likely to influence the
performance of Islamic banks. As the SSB decisions entail appreciating Islamic
Law, the practice of modern banking and finance and legal issues, the presence of
more members with different professional backgrounds could allow juristic Shariá
decision-making and a higher level of compliance with Shariá requirements, which
in turn affect the level of risk-taking of Islamic banks (Safiullah & Shamsuddin,
2018). Hence, SSB members who are qualified members of the AAOIFI are expected
to have adequate knowledge of the Shari’a and financial expertise to the extent that
they could contribute to the proper risk management of Islamic banks. Despite the
lack of clear empirical evidence, we propose the following hypothesis:
H5 Ceteris paribus, the proportion of SSB members with Islamic finance professional
expertise reduces the insolvency risk of Islamic banks.
2.3.6. Shari’a Supervisory Board Competency
SSB members are scholars and experts in Islamic Jurisprudence and Finance
(Farag et al., 2018). Appointing well-deserved people into the SSB can enable it
to comfortably assimilate, assess and introduce products and services that strictly
comply with the Shariá (Abbas et al., 2020). The Malaysian Shariá Governance
requires that a member of SSB should either be a Shari’a-qualified person or an
expert with the abilities and background necessary to support the functions and
duties of the Shariá supervisory board (BNM, 2019). Similarly, the guidelines for
appointing SSB members in Malaysia indicate that a majority should have Shariá
degrees from recognized universities (Isa & Lee, 2020). This demonstrates that SSB
members with degrees in Shariá and businesses who are appointed to the SSB tend
to understand the current implications of Islamic banking practice (Masulis et al.,
2012). Appointing more qualified or competent scholars to the SSB can reduce
agency conflicts (Farag et al., 2018). Therefore, the Shari’a qualification obtained
by SSB members indicate their competency to discharge their duties effectively.
Empirically, Isa & Lee (2020) find that SSB members with Sharia qualifications
reduce the risk-taking of Islamic banks. However, Khalil & Boulila Taktak (2020)
establish an insignificant association between the presence of Mufti and Islamic
banks’ financial soundness. The Mufti is an official expounder of Islamic legal
opinion (Amanullah, 2015). Though empirical studies are few, we provide the
following hypothesis:

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H6 Ceteris paribus, SSB competency influences the insolvency risk of Islamic banks.
2.3.7. Shariá Supervisory Board with Foreign Members
Theoretically and empirically, little attention has been paid to the role of foreign
scholars on the SSB in managing the risk-taking of Islamic banks. Foreign scholars
are expected to contribute to proper risk management of Islamic banks. Getting
external resources adds credence to a firm’s strategic and tactical management
(Alam et al., 2022a). Besides, Masulis et al. (2012) believe that foreign directors
on the board could demonstrate essential international expertise and advice
to companies. Nainggolan et al. (2022) provide empirical evidence showing a
significant negative relationship between the presence of foreign directors on the
board and the risk-taking of Islamic banks. However, Khalil & Boulila Taktak (2020)
document an insignificant relationship between the presence of foreign scholars
on the SSB and the financial soundness of Islamic banks. Thus, we propose the
following hypothesis:
H7 Ceteris paribus, the proportion of foreign scholars on the SSB influences the
insolvency risk of Islamic banks.
2.3.8. Shariá Supervisory Board Quality Index
The purpose of creating Shariá governance is to enhance confidence of investors
and the general public on the authenticity and conformity of Islamic banking
practices to Islamic Law and reduce the fiduciary and reputation risks of Islamic
banks (Abbas et al., 2020). Ramly & Nordin (2018) believe that the risk-taking
of Islamic banks could be controlled when the oversight role is integrated with
the valuable resources that SSB members contribute to Islamic banks. The SSB is
expected to advise the board of directors on Shariá compliance and risk-taking
behavior (Isa & Lee, 2020). The result obtained by Nguyen (2021) indicates the
ability of the SSB to restrain Islamic banks from excessive risk-taking.
As pointed out earlier, a novel contribution of our study is the construction of
the SSB quality index. Depending on the results of the individual attributes of SSB
will make it difficult to establish the overall effectiveness of SSB in constraining
Islamic banks from taking excessive risks. Therefore, the SSB quality index provides
the overall effectiveness of SSB on the risk-taking of Islamic banks to establish
whether it restrains the managers and board of directors of Islamic banks from
taking excessive risks. We construct an index comprising seven SSB attributes:
size, meetings, gender diversity, members with PhDs, competency, Islamic finance
professional expertise and foreign members. In developing the index, we refer to
the literature and the various codes of corporate governance in order to adopt the
best practices. Thus, we propose the following hypothesis:
H8 Ceteris paribus, the SSB quality index reduces the insolvency risk of Islamic
banks.

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III. METHODOLOGY
3.1. Data
The data are hand collected from the annual reports of Islamic banks from 2010 to
2020. The criteria that we use for the inclusion of Islamic banks are: (1) full-fledged
Islamic banks, (2) annual reports are available for at least a minimum of four years,
(3) the annual reports are in English, and (4) all relevant data, particularly SSB
attributes, are available. Based on these criteria, we have in our sample only one
bank for each of the following countries, Qatar, the United Arab Emirates (UAE),
Oman, Jordan and Egypt, although there many Islamic banks in these countries.
We also have one bank from the Maldives, Nigeria and Sri Lanka, that have annual
reports for at least four years. For remaining countries in our sample, we are able
to extract their Islamic banking data from more than one bank. Our panel data
are unbalanced comprising of 43 Islamic banks operating in 15 countries: Bahrain,
Kuwait, Qatar, Saudi Arabia, the United Arab Emirates (UAE), Oman, Jordan,
Egypt, Indonesia, Malaysia, Maldives, Nigeria, Pakistan, Bangladesh and Sri
Lanka. Table 1 presents the sample distribution of the study based on a countrywide basis.
Table 1.
Sample Distribution of the Study
Country
Bahrain
Kuwait
Qatar
Saudi Arabia
United Arab Emirates (UAE)
Oman
Jordan
Egypt
Indonesia
Malaysia
Maldives
Nigeria
Pakistan
Bangladesh
Sri Lanka
Total

No. of Banks

Observations

(%)

7
5
1
4
1
1
1
1
2
5
1
1
4
8
1
43

62
43
11
35
7
8
11
8
17
47
10
8
32
80
10
388

15.9
11.03
2.82
8.97
1.79
2.05
2.82
2.05
4.36
12.05
2.56
2.05
8.21
20.77
2.57
100

3.2. Variables and Measurements
This study investigates how Shari’a supervisory board attributes and quality
influence the risk-taking of Islamic banks. Insolvency risk is the dependent
variable, which represents risk-taking. The independent variables comprise eight
attributes: SSB size, SSB meetings, SSB gender diversity, SSB members with PhDs,
SSB competency, SSB Islamic finance professional expertise, SSB members from
foreign countries and the SSB quality index. Besides, five control variables are
used: the existence of a standalone risk management committee, board size, risk

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429

management committee meetings, leverage and tangibility. Table 2 shows the
description of the variables used in the study.
Table 2.
Description of the Variables
Variables
Dependent variable:
Insolvency risk

Independent variables:
SSB Size
SSB meetings
SSB gender diversity
SSB members with PhDs
SSB Islamic finance
professional expertise
SSB competency
SSB members from foreign
countries
SSB quality index

Control variables:
Standalone risk committee
Board size
Risk management
committee meetings
Leverage
Tangibility

Abbreviation

Definition

ZSCORE

(ROA plus capital asset ratio)/σ(ROA). The SD of
ROA is a 3-year moving window for each bank-year
observation. A higher value of ZSCORE indicates a
reduction in insolvency risk and vice-versa. Therefore,
Z-score represents an inverse proxy of insolvency risk.

SSBS
SSBM
SSBG
SSBD
SSBI

Total number of SSB members
Total number of annual meetings held by SSB
The proportion of female scholars on the SSB
The proportion of SSB members with PhDs
The proportion of AAOIFI members on the SSB

SSBC
SSBF

The proportion of SSB members with degrees in Shariá
The proportion of foreign scholars on the SSB

SSBQ

The SSB quality index is developed based on seven
essential attributes of the SSB: (1) SSB size: is the
SSB size at least 3? If yes, then one; otherwise, zero.
(2) SSB meetings: one, if the SSB held at least four
meetings during a financial year; otherwise, zero.
(3) SSB gender diversity: one if the SSB has a female
scholar; otherwise, zero. (4) SSB members with PhDs:
one, if the SSB has at least two members with PhDs;
otherwise zero. (5) SSB competency: Do the majority
(more than 50%) of SSB have the Shari’a qualifications?
If yes, then one; otherwise, zero. (6) SSB Islamic finance
professional expertise: one if the SSB has a member of
AAOIFI; otherwise zero. (7) SSB members from foreign
countries: one if a foreign scholar exists on the SSB;
otherwise, zero. Finally, the SSB quality is computed as
the proportion of the aggregate individual scores of the
attributes to the total number of attributes.

SARC
BS
RMCM

Dummy variable, one is allocated if a bank has a
standalone risk management committee, otherwise
zero
The total number of directors on the board.
Number of annual meetings held by the RMC

LEV
TANG

Total liabilities/Total assets
Total fixed assets/ total assets

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

3.3. Empirical Model
This study utilizes panel data gathered from the annual reports of 43 Islamic banks
from 2010 to 2020. Based on the results of various tests, the heteroskedastic panels
corrected standard errors (HPCSE) regression is used in the analysis. Models 1
and 2 below are used to investigate the effects of SSB attributes and SSB quality
index respectively on the risk-taking of Islamic banks:

(1)

(2)
The study also employs the generalized method of moments (GMM) for
robustness. The GMM estimator can address endogeneity, heteroskedasticity and
autocorrelation problems (Roodman, 2009). The GMM econometric models used
to assess how the SSB attributes influence the risk-taking of Islamic banks are as
follows:

(3)
(4)
In these models, ZSCORE is the insolvency risk; SSB, Shariá supervisory
board; SSBS, SSB size; SSBM, SSB meetings; SSBG, SSB gender diversity; SSBD,
SSB members with PhDs; SSBI, SSB Islamic finance professional expertise; SSBC,
SSB competency; SSBF, SSB members from foreign countries; SSBQ, SSB quality
index; SARC, standalone risk management committee; BS, board size; RMCM,
risk management committee meetings; LEV, leverage; and TANG, tangibility; β0,
constant term; β1- β13, coefficients of the explanatory variables (independent and
control); Subscript i and t stand for bank and year, respectively; and ε is the error
term.
IV. RESULTS AND ANALYSIS
4.1. Descriptive Statistics
Table 3 presents the descriptive statistics of the variables used in the study.

344
386
386
386
386
386
386
386
388
388
388
388
388

0
73

ZSCORE
SSBS
SSBM
SSBG
SSBD
SSBI
SSBC
SSBF
SSBQ
BS
RMCM
LEV
TANG
Observation

SARC

71.64
5.00
6.20
0.01
0.57
0.11
0.98
0.08
0.81
10.47
4.45
0.74
0.010
Frequency
1
315

Mean

388

5.38
2.00
2.00
0.00
0.00
0.00
0.80
0.00
0.00
3.00
0.00
0.13
0.000

Minimum

0
18.81

307.61
12.00
21.00
0.17
1.00
1.00
1.00
0.80
1.00
26.00
13.00
0.96
0.040

Maximum

SD
82.86
2.30
4.80
0.04
0.35
0.21
0.05
0.05
0.00
4.03
3.26
0.01
0.010
Percentage (%)
1
81.19
-1.60

12.87
1.43
3.15
3.89
-0.30
2.27
-3.39
2.40
-0.73
1.14
3.06
13.82
17.030

Skewness

3.55

168.65
4.47
13.53
17.92
1.78
8.35
13.91
7.97
6.71
4.47
17.68
191.99
305.430

Kurtosis

Source: Author’s computation using Stata version 16

Notes: ZSCORE is the insolvency risk; SSB, Shariá supervisory board; SSBS, SSB size; SSBM, SSB meetings; SSBG, SSB gender diversity; SSBD, SSB members with PhDs; SSBI, SSB Islamic
finance professional expertise; SSBC, SSB competency; SSBF, SSB members from foreign countries; SSBQ, SSB quality index; SARC, standalone risk management committee; BS, board
size; RMCM, risk management committee meetings; LEV, leverage; TANG, tangibility.

Obs

Variable

Table 3.
Descriptive Statistics

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

Table 3 shows that the average value of ZSCORE is 71.64, with the lowest and
highest values of 5.38 and 307.61, respectively. The SSB has an average number of
5 scholars with a minimum of 2 directors and some Islamic banks appoint up to
12 scholars to the board. The average number of meetings held is six and at least
two meetings are held by the SSB. Besides, some SSBs are found to have convened
up to 21 meetings. In the case of gender diversity (SSBG), the result indicates that
on average female scholars accounted for 1% of the total scholars. The minimum
value of 0.00 implies that some Islamic banks have no female scholars on their
SSBs. But in the case of other Islamic banks, female scholars constitute 17% of
their members. Concerning SSB members with PhDs (SSBD), on average, they
account for 57% of the members. However, while some Islamic banks have no
single scholar with a PhD, in other Islamic banks, all the members have PhD. On
average, SSB members of the AAOIFI account for 11% of board members. Besides,
some Islamic banks have appointed no AAOIFI members to their boards, but in
other Islamic banks, the entire SSB members are professional members of the
AAOIFI. Regarding SSB competency (SSBC), the results indicate that the average
proportion of the competent members on the SSB is 98%, with minimum and
maximum values of 80% and 100%, respectively. On average, foreign scholars
(SSBF) appointed to the SSB account for 8% of the members. In addition, though
some SSBs have no foreign scholars (0.00%), others have up to 80% of their SSB
members from other countries. The average number of directors on the board
is 10, with a minimum and maximum of 3 and 26 members, respectively. The
average number of risk management committee meetings (RMCM) is four, with
a minimum of 0 and a maximum of 13. In the case of leverage (LEV), the average
value is 74%, with 13% and 96% as minimum and maximum values, respectively.
Tangibility (TANG) has an average value of 0.01 and minimum and maximum
values of 0% and 4%, respectively.
Table 3 also presents the descriptive statistics of a standalone risk management
committee (SARC), a dichotomous variable. There are 388 observations, out
of which 73 (18.81%) show the non-existence of a standalone risk management
committee. The remaining 315 (81.19%) indicate the presence of a standalone
risk management committee in Islamic banks. Moreover, Table 3 also shows the
skewness and kurtosis test results for the variables used in the econometric models.
Following a study by Nomran & Haron (2021), all the variables with skewness and
kurtosis values greater than 3 and 10, respectively, are regarded as not normally
distributed. On this basis, ZSCORE, SSBM, SSBG, SSBC, RMCM, LEV and TANG
have outliers. Thus, in line with earlier studies, these variables were winsorized at
the 5% or 95% significance levels to control the effects of the outliers (Bala et al.,
2020; Barth et al., 2012; Farber et al., 2018; Ittonen et al., 2014; Umar, 2022; Umar et
al., 2022).
4.2. Univariate Analysis
Table 4 shows the correlation matrix for all the variables used in the analysis.
The correlation coefficients are mostly low except between SSB and BS, which is
0.66. However, this correlation coefficient is not a serious issue because it does
not exceed the threshold of 0.80 suggested by Kennedy (2008). The remaining

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Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 3, 2023

correlation coefficients are found between -0.02/0.01 and -0.38/0.40. These suggest
that that multicollinearity is not a major concern. This is further supported by the
variance inflation factor results (VIFs) presented in Table 4, which are below 5. The
VIF results for the model (VIF1) showing the relationship between SSB attributes
and risk-taking range from 1.18 to 2.90. The minimum and maximum values of
VIF results (VIF2) for the model that indicates the impact of the SSB quality index
on the risk-taking of Islamic banks are 1.05 and 1.20, respectively.
Table 4.
Pearson Correlation Matrix
Variable

ZSCORE

ZSCORE
SSBS
SSBM
SSBG
SSBD
SSBR
SSBC
SSBF
SSBQ
SARC
BS
RMCM
LEV
TANG

1.00
-0.02
0.14***
0.09*
0.18***
-0.22***
-0.03
-0.04
-0.05
0.13**
-0.12**
0.15***
0.06
0.01
SARC
1.00
-0.05
0.35***
0.15***
0.08

SARC
BS
RMCM
LEV
TANG

SSBS

SSBM

SSBG

SSBD

1.00
0.21***
0.20***
-0.33***
-0.23***
-0.30***
-0.11**
0.37***
-0.02
0.66***
0.09*
0.40***
-0.03
BS

1.00
0.22***
0.03
-0.23***
0.07
0.13***
0.23***
0.17***
-0.13**
0.38***
0.18***
-0.05
RMCM

1.00
0.08*
-0.16***
0.02
-0.08
0.38***
0.13***
-0.07
0.39***
0.20***
-0.19***
LEV

1.00
-0.17***
0.11**
-0.14***
-0.03
-0.07
-0.38***
0.01
-0.33***
0.22***
TANG

1.00
-0.10**
0.23***
0.15***

1.00
0.10**
-0.04

1.00
-0.05

1.00

SSBR

SSBC

SSBF

1.00
-0.09*
1.00
0.16*** 0.12**
1.00
0.14*** -0.06 0.40***
0.01
0.02 -0.15***
-0.02 -0.25*** -0.02
-0.12** 0.05
-0.03
-0.02
-0.06 0.13***
0.27*** -0.07
-0.05

SSBQ VIF1 VIF2

1.00
0.13***
0.15***
0.23***
0.31***
0.03

2.90
1.50
1.36
1.42
1.33
1.18
1.26
1.23
2.35
1.41
1.41
1.24

1.20
1.14
1.12
1.16
1.20
1.05

Notes: ZSCORE is the insolvency risk; SSB, Shariá supervisory board; SSBS, SSB size; SSBM, SSB meetings; SSBG,
SSB gender diversity; SSBD, SSB members with PhDs; SSBI, SSB Islamic finance professional expertise; SSBC, SSB
competency; SSBF, SSB members from foreign countries; SSBQ, SSB quality index; SARC, standalone risk management
committee; BS, board size; RMCM, risk management committee meetings; LEV, leverage; TANG, tangibility.
*p <0.10; **p <0.05; ***p <0.01
Source: Author’s computation using Stata version 16

4.3. Multiple Regression Results Using the Heteroscedastic Panels Corrected
Standard Errors (HPCSE)
This section presents the results using the heteroscedastic panel corrected standard
errors (HPCSE) regression. Model 1 and Model 2 show the effects of SSB attributes
and SSB quality index on the risk-taking of Islamic banks, respectively. We apply
the HPCSE method after performing some essential tests. For both models, the
Hausmans test is statistically significant ( Model 1: 21.09, p=0.0491; Model 2: 20.30,
p=0.0024). Thus, the FE panel estimator is preferred for both models. Furthermore,
the heteroscedasticity statistics for model 1 and model 2 are 1.1e+07 (p=0.0000) and

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

1.2e+07 (p=0.0000), respectively. These indicate the presence of heteroscedasticity
problems. Hence, we used heteroscedastic panels corrected standard errors
(HPCSE) regression.
Table 5.
Multiple Regression Results Using HPCSE
Model 1

Model 2

EV
SSBS
SSBM
SSBG
SSBD
SSBI
SSBC
SSBF
SSBQ
SARC
BS
RMCM
LEV
TANG
Constant
Prob>chi2
Wald chi2
R2
Hausman’s test
Hetero. test

coef.
-0.8645
0.3341
9.4069
41.2365
-86.1585
-148.4469
19.5444
22.1036
-2.2178
1.8504
32.5567
938.4345
162.4679

p-value
0.330
0.759
0.934
0.005***
0.000***
0.097*
0.443
0.052**
0.133
0.276
0.079**
0.033**
0.075
0.0000***
70.88
0.1288
21.09 (p=0.0491) ***
1.1e+07 (p=0.000) ***

coef.
-69.7693
20.9386
-2.5892
3.3293
26.0406
239.4909
88.468

p-value
0.043**
0.076*
0.027**
0.024**
0.110
0.585
0.000

0.0027***
20.09
0.0572
20.30 (p=0.0024) ***
1.2e+07 (p=0.000) ***

Notes: DV, means dependent variable; EV, means explanatory variables (independent and control); Notes: ZSCORE is
the insolvency risk; SSB, Shariá supervisory board; SSBS, SSB size; SSBM, SSB meetings; SSBG, SSB gender diversity;
SSBD, SSB members with PhDs; SSBI, SSB Islamic finance professional expertise; SSBC, SSB competency; SSBF, SSB
members from foreign countries; SSBQ, SSB quality index; SARC, standalone risk management committee; BS, board
size; RMCM, risk management committee meetings; LEV, leverage; TANG, tangibility.
*p <0.10; **p <0.05; ***p <0.01
Source: Author’s computation using Stata version 16

The regression result of model 1 in Table 5 indicates that SSB size has an
insignificant association with insolvency risk (β= -0.8645, p=0.330). This finding
supports the ones obtained by Isa & Lee (2020) and Serly & Oktamirza (2022),
which indicate that SSBS does not influence the stability of Islamic banks. Hence,
the hypothesis (H1) stating that SSBS increases the insolvency risk of Islamic banks
is rejected. Similarly, the frequency of the SSB meetings (SSBM) has an insignificant
association with insolvency risk (β= 0.3341, p=0.759). This finding corresponds to
the result of Serly & Oktamirza (2022), which reveals that the frequency of SSB
meetings does not influence the financial soundness of Islamic banks in Indonesia.
Thus, the hypothesis (H2), which states that the number of SSB meetings influences
the insolvency risk of Islamic banks, is also rejected. Regarding the SSB gender

Journal of Islamic Monetary Economics and Finance, Vol. 9, Number 3, 2023

435

diversity (SSBG), the result shows an insignificant association with insolvency
risk (β=9.4069, p=0.934). This result corresponds to the finding of Safiullah and
Shamsuddin (2018), who find that the presence of female scholars on the board
has insignificantly affected the risk-taking of Islamic banks in Malaysia. This
indicates the rejection of the hypothesis (H3), which states that SSBG reduces
the insolvency risk of Islamic banks. In the case of SSB members with PhDs
(SSBD), the result shows a significant positive association with insolvency risk
(β=41.2365, p=0.005). This result indicates that SSB members with PhDs improve
the stability of Islamic banks, which signifies that they constrain the managers
from taking excessive risks. Therefore, SSB members with PhDs are risk-averse.
This justifies the argument of Safiullah & Shamsuddin (2018) that SSB members
who have high academic qualifications possibly apply Islamic moral principles
to constrain the managers of Islamic banks from excessive risk-taking. Hence, the
finding implies the acceptance of the hypothesis (H4), that that the proportion of
SSB members with PhDs reduces the insolvency risk of Islamic banks.
However, the association between SSB Islamic finance professional expertise
(SSBI) and insolvency risk is significantly negative (β= -86.1585 p=0.000). This
result implies a reduction in the stability of Islamic banks and excessive risktaking, which contradicts the view that Shariá scholars on the SSB with expertise
in accounting and finance tend to contribute to conformity with the Sharia, which
in turn lead to a high credit rating of Islamic banks in Asia (Mansoor et al., 2020).
Hence, the result supports the rejection of hypothesis (H5). Similarly, evidence
from the regression result shows that SSB competency (SSBC) has a significant
negative association with risk-taking (β=-148.4469, p=0.097). This signifies that
SSBC reduces Islamic bank stability and increases the level of risk-taking. Therefore,
it contradicts the finding of Isa and Lee (2020), which indicates SSB members with
Sharia qualifications reduce the insolvency risk of Islamic banks. Hence, this
result indicates that the hypothesis (H6), which states that SSBC influences Islamic
bank insolvency risk, is accepted. Concerning the foreign scholars appointed to
SSB (SSBF), the result indicates that it has an insignificant association with risktaking (β= 19.5444, p=0.443). This finding implies the inability of foreign scholars
appointed to the SSB to influence the risk-taking of Islamic banks. This result is
similar to the one obtained by Khalil & Boulila Taktak (2020), which shows the
inability of foreign scholars on the SSB to influence the financial soundness of
Islamic banks. Thus, The finding indicates the rejection of the hypothesis (H7),
which states that SSBF influences the insolvency risk of Islamic banks. Regarding
the control variables in model 1, the existence of a standalone risk management
committee (SARC), leverage (LEV) and tangibility (TANG) have a significant
positive association with insolvency risk. However, board size (BS) and risk
management committee meetings (RMCM) do not influence risk-taking.
Moreover, the regression results presented in model 2 show that the SSB
quality index (SSBQ) has a significant negative association with insolvency risk
(β= -69.7693, p=0.043). This finding implies that SSB plays a significant role in
supporting Islamic banks to take excessive risks, which indicates a reduction in
Islamic bank stability. Therefore, the SSB is a risk-taker, as it encourages Islamic
banks to take more risks. Thus, the hypothesis (H8), which indicates that the SSB
quality index reduces the insolvency risk of Islamic banks is rejected. Regarding

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

the control variables, SARC and RMCM have significant positive associations
with risk-taking. On the other hand, Board size (BS) has a significant negative
association with risk-taking. Also, LEV and TANG have insignificant association
with risk-taking.
4.4. Robustness Results Analysis Using the Two-Step System GMM
Table 5 shows the results from the dynamic panel data models estimated using
a two-step system generalized method of moments (GMM). Model 3 shows the
results of the association between SSB attributes and the risk-taking of Islamic
banks. Model 4 represents the association between the SSB quality index and the
risk-taking of Islamic banks. The GMM results for each model are valid because
the number of groups (43) exceeds the number of instruments (31). The tests for
autocorrelation (AR1 and AR2) also validate the consistency of the stimates, as
the p-value for AR1 indicates significance while AR2 insignificance. Moreover, the
Hansen test results suggest that the instruments used in the model are valid for
both models.
Table 6.
Multiple regression results using the two-step system GMM
EV
l.
SSBS
SSBM
SSBG
SSBD
SSBR
SSBC
SSBF
SSBQ
SARC
BS
RMCM
LEV
TANG
Constant
Prob>chi2
Wald chi2
AR1
AR2
Hansen test
No. of groups
No. of instruments

Model 3

Model 4

coef.
p-value
0.3763
0.053*
-4.1559
0.557
-1.8473
0.372
-16.1058
0.976
93.1373
0.044**
-223.511
0.016**
-182.5006
0.238
-17.2921
0.854
-1.7978
0.954
0.5204
0.892
-0.1079
0.892
-108.8591
0.067
3565.44
0.086
254.8942
0.069
0.000***
6.60E+06
-1.96(p=0.050) *
-0.92 (p=0.355)
0.840
43
31

coef.
p-value
0.4409
0.000***
-276.4016
0.002***
49.8504
0.021**
-6.9862
0.000***
6.291
0.000***
10.903
0.721
688.832
0.186
199.503
0.001
0.0000***
388.15
-2.69 (p=0.007) ***
0.18 (p=0.856)
0.420
43
31

Notes: DV means dependent variable; EV, explanatory variables (independent and control); l.is the lagged value of DV;
ZSCORE is the insolvency risk; SSB, Shariá supervisory board; SSBS, SSB size; SSBM, SSB meetings; SSBG, SSB gender
diversity; SSBD, SSB members with PhDs; SSBI, SSB Islamic finance professional expertise; SSBC, SSB competency;
SSBF, SSB members from foreign countries; SSBQ, SSB quality index; SARC, standalone risk management committee;
BS, board size; RMCM, risk management committee meetings; LEV, leverage; TANG, tangibility.
*p <0.10; **p <0.05; ***p <0.01
Source: Author’s computation using Stata version 16

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437

Interestingly, the regression results of HPCSE presented in Table 6 and Table
5 are similar except for SSBC. Specifically, the regression results of model 1
(Table 5) and model 3 (Table 6) indicate that SSBS, SSBM, SSBG and SSBF do not
influence the insolvency of Islamic banks. They also indicate that SSBD and SSBI
significantly increase and reduce insolvency risk, respectively. The only difference
is that while model 1 shows a significant negative association between SSBC and
risk-taking, the result is statistically insignificant in the case of model 3. Besides,
the association between SSBQ and risk-taking is significantly negative in both
model 2 and model 4.
4.5. Analysis
The study reveals that the SSB quality index (SSBQ) increases the insolvency risk of
Islamic banks, which signifies a reduction in their stability. This result contradicts
the view of Mollah & Zaman (2015) that SSB could prevent the board of directors
and management from aggrieving lending behavior and participating in major
risk-taking activities. Theoretically, it does not support the view of the agency
theory that SSB plays a vital role in minimizing the conflicts of interest between
management and shareholders and depositors as it supports Islamic banks to take
more risks which in turn decreases their stability. Besides, the finding contradicts
the argument of the resource dependency theory, which regards SSB as an
essential resource that can help Islamic banks to maintain a good relationship
with stakeholders, particularly shareholders and depositors. Similarly, SSB
members with Islamic finance professional expertise (SSBI) encourage Islamic
banks to take more risks, which suggests a reduction in their stability. This is
contrary to the expectation that SSB who are professionally qualified as members
of AAOIFI, can constrain Islamic banks from excessive risk-taking with a view
to minimizing agency conflicts and protecting the interest of stakeholders. Also,
the effect of SSB competency in increasing the insolvency risk might be due the
fact that they are primarily appointed based on their Shariá knowledge without
necessarily considering their knowledge of finance and banking. Therefore, apart
from Shari’a knowledge of Shari’a, SSB members are expected to have basic skills
and knowledge in banking and finance. In this regards, the Saudi Arabian Shariá
governance for Islamic banks provides that SSB competency entails that the
members must demonstrate a high level of education, training, knowledge and
willingness to learn, as well as have diverse experience of a minimum of five years
across a range of industries, including the Shariá auditing of financial transactions,
Islamic banking and compliance (SAMA, 2020).
However, the ability of SSB members with PhDs to constrain Islamic banks from
investing in excessively risky products indicates that they utilize their educational
qualification to make useful decisions (Almutairi & Quttainah, 2017). Therefore,
though most SSB members have their PhDs in Sharia, they are able to understand
the implications of taking excessive risks. This attitude toward the risk-taking of
Islamic banks tends to reduce agency conflicts in Islamic banks. Also, following
the view of the resource dependency theory, we argue that the PhD holders on
SSB are essential resources that are capable of investigating and understanding the
implications of excessive risk-taking, with a view to discouraging Islamic banks

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Shari’a Supervisory Board and Islamic Banks’ Insolvency Risk

from excessive risk-taking toward attaining more stability and reducing their
exposure to insolvency risk.
Moreover, the inability of SSB size to influence the insolvency risk of Islamic
banks aligns with the view that a larger SSB size comprising many Scholars with
different opinions would not effectively monitor the managers’ behavior toward
the risk-taking of Islamic banks (AlAbbad et al., 2019). This contradicts the view of
the agency theory that a large SSB is capable of minimizing the conflict of interest
in Islamic banks (Farag et al., 2018). Hence, in line with Nomran & Haron (2020),
the SSB should be between three and six members. Similarly, SSB meetings do
not prevent Islamic banks from investing in risky products. This signifies that
SSB pays little attention to the ways of restricting Islamic banks from investing
in risky financial products during its meetings. Women scholars appointed to the
SSB also do not constrain Islamic banks from excessive risk-taking. This study find
that most Islamic banks, particularly in the GCC countries, have not appointed a
single female Shariá scholar to the SSB. The lack of an adequate number of female
scholars on the board could make them unable to influence the risk-taking of
Islamic banks. Therefore, a few female Shariá scholars on the SSB cannot carry out
check-and-balance before deciding to restrain Islamic banks from excessive risktaking (Mansoor et al., 2020). Finally, lack of regular and easy access to operational
activities and non-familiarity with the environment due to the distance barrier
could be among the key reasons why SSB members from foreign countries could
not significantly reduce the insolvency risks of Islamic banks.
V. CONCLUSION AND RECOMMENDATIONS
5.1. Conclusion
This study examines the effects of Shari’a supervisory board (SSB) attributes
and quality index on the insolvency risk of Islamic banks using heteroskedastic
panel corrected standard errors (HPCSE) regression. The results show that the
SSB quality index, SSB Islamic finance professional expertise and SSB competency
increase the insolvency risk of Islamic banks. However, SSB members with PhDs
reduce the risk-taking of Islamic banks. Besides, SSB size, SSB meetings, SSB
gender diversity and SSB foreign scholars have insignificantly affected the risktaking of Islamic banks. These findings are further substantiated using the twostep system GMM estimation.
5.2. Recommendation
The contributions of this study to both policy and academic discussions are
three-fold. First, the findings have implications for regulators and policymakers.
Specifically, the Central Banks in various countries could utilize the findings in
developing or revising their Shari’a governance for Islamic banks to ensure that
SSBs contribute significantly to restraining Islamic banks from taking excessive
risks. The new or revised Shariá governance regulations and policies should
emphasize appointing more PhD holders to SSB to improve Islamic bank stability
and overturn the attitude of SSB Islamic finance professional expertise and SSB
competency to become risk-averse. They should also be capable of revitalizing the

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effectiveness of SSB size, SSB meetings, SSB gender diversity and SSB members
from foreign countries toward improving the stability of Islamic banks. Second,
the results will be useful to the boards of directors and shareholders of Islamic
banks in appointing scholars to SSBs who can contribute to minimizing excessive
risk-taking. Third, the study contributes to the literature by constructing a
comprehensive SSB quality index for assessing the overall impact of the SSB on
the risk-taking of Islamic banks. The study also provides empirical evidence of the
essential SSB attributes that can influence risk-taking, which have either not been
empirically investigated or not used in a few prior studies, particularly in the case
of Islamic banks.
Despite the study’s contributions, three limitations could be attributed to it.
First, the study use only seven SSB attributes and thus may have ignored some
others. It is therefore recommended that future studies should consider other
SSB attributes not considered in this study. Second, this study considers only the
insolvency risk. Hence, future research should investigate how the SSB quality
index and attributes influence other forms of risk, such as credit risk, portfolio risk,
liquidity risk, operational risk, etc. Third, the study utilizes only a sample of 43
Islamic banks. Many full-fledged Islamic banks are excluded because their annual
reports are published in languages other than English. The study also do not also
consider some Islamic banks because their annual reports were not up to 4 years
during this research. By now, some Islamic banks are expected to have annual
reports for a minimum of four years. Hence, it is highly recommended that future
studies make all necessary efforts to overcome these challenges to increase sample
size and make their findings more generalizable.
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