Paper Title: The Influence of National and Individual Islamic Governance on Islamic Banks‘ Social Performance

Author: Admir Meskovic, Emira Kozarevic and Alija Avdukic

Publisher: Journal of Islamic Accounting and Business Research, 15(6), 911 – 944.

The paper examines whether the social performance of Islamic banks has an association with Islamic governance or not. The paper takes data from multiple countries and the results are interesting. As against the common perception, there is a positive association between Islamic governance and social performance of Islamic banks.

The paper also cites several studies which discuss the social failure of Islamic banks. The results suggest that while Islamic banks may need to still improve their social performance, strong Shari‘ah governance only compliments that objective rather than appearing as a hurdle or substitute.

Therefore, the results imply that rather than making a choice between strengthening Shari‘ah governance and improving social performance, the Islamic banks shall focus on both.

However, the social performance of Islamic banks has to be evaluated on standalone basis as well rather than just looking at its association with Shari‘ah governance.

The authors mostly used indicators which are capturing existence and non-existence of an attribute rather than looking at the economic significance and salience of the activity.

Therefore, it is important to document not just the existence of performance on social indicators, but also the level of performance. Then, it is also useful to compare it with conventional banks to see whether that performance is as per the industry average, better than the industry average or worse than the industry average.

Furthermore, the use of multiple indicators can overshadow the performance on some more critical indicators. As part of economy as banking companies, Islamic banks are obliged to follow the labour related regulations, governance related regulations, environmental related regulations, ethical codes of conduct and so on.

It is important to capture what are the distinct initiatives Islamic banks had taken on their own with the explicit and conscious mind-set to further the social performance in compliance with Maqasid-e-Shari‘ah.

As authors note themselves, capturing social performance on self-reporting basis is a limitation. It can bring self-stated bias where the institution is over projecting its efforts and initiatives and under reporting weaknesses or omissions in social performance.

In the model itself, it will have been better to include measures of profitability and liquidity. Plausibly, more profitable and liquid banks would be in a better position to have strong social performance. It could also be that profitability and liquidity drive social performance since Islamic governance variables is expected to have less variability as all Islamic banks invariably have strong Shari‘ah governance mechanisms in place anyways.

Furthermore, it will have been useful to also capture the country-specific variations in the separate regressions for banks in different jurisdictions. Among the other explanatory factors, the funding source of Islamic banks also needs to be taken into account as shareholders determine the path for the bank. If shareholders have strong social and impact motives, then this can allow the management to be focusing on social performance more intently.

It is also important to study the data more carefully. For instance, an asset light Sukuk priced at interbank rates may not be in anyway economically distinct than a bond. Just because it involves an asset, it does not make the transaction meaningful to the real economy in the sense it is emphasized in Islamic economies literature.

Likewise, use of Musharakah and Mudarabah in interbank transactions may involve huge volumes, but it is not going to have meaningful and distinctive results unless it is used to finance SMEs, MSMEs and private sector businesses. Furthermore, avoiding interest may make the transaction interest-free, but not necessarily less costly. Higher cost of financing can be more exclusionary and lead to extractive profits for banks higher than the industry average.

Lastly, the results of negative association between national Shari‘ah board and social performance are not plausible and even somewhat contradictory to the other result that Islamic governance is positively influencing social performance.
The future studies shall revisit the model variables and attempt to document the social performance of Islamic banks in a more objective and deeper way.

Islamic banks need to revisit their performance and focus on both strong Shari‘ah governance as well as distinctive and meaningful social performance.