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Islamic banks’ equity financing, Shariah supervisory board, and banking environments

Céline Meslier, Tastaftiyan Risfandy and Amine Tarazi

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: Although equity financing is a core value in Islamic finance, it is rarely used by Islamic banks which prefer other instruments such as markup or leasing contracts. The purpose of this paper is to investigate the potential determinants of equity financing. Shariah supervisory board (SSB) is regarded as crucial in promoting equity financing. We use hand-collected data on equity financing and governance structure of 88 Islamic banks in 16 countries between 2009 and 2014. Our findings reveal that Islamic banks’ equity financing is influenced by the characteristics of SSB. Specifically, the duality of SSB members positively affects equity financing whereas the existence of a Shariah department within banks has a negative impact. We also find that the role of SSB in Islamic banks is influenced by the characteristics of the board of directors (BOD) and the banking environments. The impact of SSB on equity financing is reduced in the better banking environment, possibly suggesting substitution role between SSB and institutional and Islamic environment.

Keywords: Profit and loss sharing; Equity financing; Governance; Shariah supervisory board; Environment; Islamic banks (search for similar items in EconPapers)
JEL-codes: G21 G34 Z12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.pacfin.2020.101354

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