A Review Paper: Corporate Governance Characteristics, Risk-Taking and Financial Performance of Islamic Banks in Malaysia

  • Salina Rasli Ms
  • Abul Bashar Bhuiyan
  • Aza Azlina Kassim
Keywords: Islamic banks, financial performance, risk-taking, corporate governance, Malaysia


Purpose: The purpose of the study is to provide some important insight into the impact of Islamic banking corporate governance structures denoted by board of directors, audit committee, risk management committee and sharia board on risk-taking and financial performance in Malaysia. This study also aimed to explore the role of risk-taking in the relationship between the characteristics of corporate governance (CG) and the financial performance of Islamic banks and to examine the relationship between Islamic banks' risk-taking and financial performance.

Background: The issue of risk-taking and performance in Islamic banks needs to be focused as Islamic banks need to remain consistent with Shari'ah to improve their customer loyalty and gain a competitive edge. This study attempted to expand prior research towards the creation of a theoretical CG-index to assess the quality of Islamic banks governance with a particular focus on the effect of CG quality on risk-taking and financial performance. More considerations of governance frameworks to enhance their related standards and guidelines across countries with a different regulatory system, given the quality of bank governance. In addition to the academic contribution, this study would be of great help to Islamic banks clients, investors and policymakers. Four econometric models are being established in this study. The first model describes the bank governance and risk-taking relationship. The second model analyses the financial performance relationship within corporate governance. The third model discusses the mediating role of risk-taking in the corporate governance-performance relationship. The fourth model is the analysis of financial performance and risk-taking.                                                                                                         

Design/Methodology/Approach: A self-develop of corporate governance index based on number of directors, director independent, education background, membership with IFSB and attendance in meeting. Capital risk, credit risk and liquidity risk are the proxy used for risk-taking measurement. The indicators of bank profitability such as return on assets and return on equity used as measure of financial performance. This study applies the fixed-effect approach of balanced panels to analyze the impacts of corporate governance on risk-taking and performance using bank-level data from the balance sheets, income statements and notes of 14 Islamic banks over the period 2010 to 2016.

Results/Findings: The study of regression shows that the audit committee and the risk management committee have a significant impact on risk-taking and bank profitability. Board of directors and shariah have an insignificant effect on risk-taking and financial performance.  There is a negative and significantly influence of risk-taking on retun on assets except return on equity after controlling for bank size and leverage.

Conclusion and Implications:  This study examines the effectiveness of bank governance and its effects on risk-taking and financial performance that is not always predicted by the ' high risk-high return ' of conventional financial theory. The quality of bank governance will not be assured by a mixture of large board size, highly independent board, PhD qualified board and high frequency board meeting. The successful system of bank governance will suggest that it is capable of controlling and monitoring excessive risk-taking and generating both high investment and shareholder returns.

How to Cite
Rasli, S., Bhuiyan, A. B., & Kassim, A. A. (2020). A Review Paper: Corporate Governance Characteristics, Risk-Taking and Financial Performance of Islamic Banks in Malaysia. Postgraduate Research Symposium - January 2020, 1(1). Retrieved from http://ojs.journals.unisel.edu.my/index.php/prsj20/article/view/128