DEPARTAMENT DE COMPTABILITAT DOCTORADO EN CONTABILIDAD Y FINANZAS CORPORATIVAS (R.D. 99/2011) TESIS DOCTORAL CORPORATE GOVERNANCE MECHANISMS AND PERFORMANCE IN THE ISLAMIC BANKING INDUSTRY ESTUDIANTE DE DOCTORADO: OSAMA SHIBANI DIRECTORA: Dra. CRISTINA DE FUENTES BARBERÁ Valencia, Octubre 2018 DEDICATION To my parents, to teach me and show me and guide me in this life. To my family for their support morally all the time and to my country for their support financially to complete my studies. ACKNOWLEDGEMENTS First and foremost, thanks to God the almighty who gives me strength and will to complete this thesis. I would also wish to express my gratitude to the people who have been part of the development of this work, and that in one way or another have made possible the completion of it. First of all, to Dr. Cristina de Fuentes Barberá, director of the thesis and mentor during this period in which she has been a fundamental reference for the course of my first stage in the academic world. In addition to its importance in the workplace, I would especially like to highlight your friendship, support, dedication and the trust you have placed in me. Thank you very much to my family, especially to my parents, my mother Sharifa Mohamed, for teaching me that the effort and dedication have their reward in the end, and My wife, Hana for her morally support and my brothers, Sami, Naseraddin and Huda who support me. Likewise, I also want to thank the Department of Accounting for the encouragement received during all this time. In particular. Dr. Rubén Porcuna and Dr. Luis Porcuna. My thanks, also, to the friends with whom I have shared this pleasant experience and with whom I have had the pleasure of working in the accounting area, to Amine Taleb and Nasim Berhmat and all colleague who support me to complete my studying. My thanks to my country for their support to complete my studying. To all, thank you very much, it has been a pleasure to enjoy this journey with you. Index INDEX INTRODUCTION ....................................................................................................................... 1 CHAPTER 1 ISLAMIC FINANCE ........................................................................................... 7 1.1. Introduction ................................................................................................................... 7 1.2. The concept of Islamic finance ..................................................................................... 7 1.3. The emergence of Islamic banks .................................................................................. 9 1.3.1. The emergence of Islamic banks in Middle Eastern countries ............................ 10 1.3.2. The emergence of Islamic banks in South Asian countries ................................. 13 1.3.3. The emergence of Islamic Banks in Europe ........................................................ 15 1.4. Islamic financial activities .......................................................................................... 16 1.4.1. Islamic Bank activities......................................................................................... 18 1.4.2. Islamic bank contracts ......................................................................................... 19 1.5. Differences and similarities between Islamic and conventional bank operations ...... 21 1.5.1. Deposits ............................................................................................................... 22 1.5.2. Housing finance ................................................................................................... 24 1.5.3. Consumer finance ................................................................................................ 24 1.5.4. Small business finance ........................................................................................ 25 1.5.5. Financing of long-term loans ............................................................................... 25 1.5.6. Savings accounts ................................................................................................. 26 1.5.7. Islamic bonds ....................................................................................................... 26 1.6. The current state of the Islamic banking industry ....................................................... 29 CHAPTER 2 COPORATE GOVERNANCE IN ISLAMIC FINANCIAL INSTITUTIONS . 35 2.1. Introduction ................................................................................................................. 35 2.2. Corporate governance definitions ............................................................................... 35 2.3. The role of Islamic religion in the governance of Islamic Financial Institutions ....... 37 2.4. Shariah Governance System ....................................................................................... 39 2.5. Shariah Governance regulation ................................................................................... 43 2.5.1. Shariah governance regulation at the national level ............................................ 44 2.5.2. Shariah board regulation at the Islamic financial institution level ...................... 53 I Index 2.5.2.1. Countries with a centralized model .............................................................. 53 2.5.2.2. Countries with a non-centralized model ...................................................... 57 2.5.2.3. ...... Main functions of the Shariah board at the Islamic financial institution level ....................................................................................................................................... 69 2.6. Shariah governance models ........................................................................................ 76 2.6.1. Minimalist approach ............................................................................................ 76 2.6.2. Proactive approach .............................................................................................. 76 2.6.3. Reactive approach ............................................................................................... 77 2.6.4. Interventionist approach ...................................................................................... 78 2.6.5. Passive approach ................................................................................................. 78 CHAPTER 3 LITERATURE REVIEW AND RESEARCH HYPOTHESES ........................ 81 3.1. Introduction ................................................................................................................ 81 3.2. Research paradigms and CG theories ......................................................................... 82 3.2.1. Agency theory ..................................................................................................... 83 3.2.2. Stakeholder theory ............................................................................................... 86 3.2.3. Stewardship theory .............................................................................................. 90 3.2.4. Institutional theory .............................................................................................. 92 3.2.5. Resource dependence theory ............................................................................... 94 3.3. Corporate Governance mechanisms ........................................................................... 98 3.4. Literature on bank governance and performance ..................................................... 100 3.5. Prior studies on CG in Islamic banks ....................................................................... 104 3.6. Literature review and research hypotheses related to Shariah board characteristics 109 3.6.1. Board size and bank performance ..................................................................... 111 3.6.2. Board activity and bank performance ............................................................... 116 3.6.3. Shariah board education and bank performance ............................................... 118 3.7. Literature review and research hypotheses related to Islamic banks’ ownership structure ............................................................................................................................... 120 CHAPTER 4 RESEARCH DESIGN, SAMPLE SELECTION AND DESCRIPTION OF THE DATA ...................................................................................................................................... 127 4.1. Introduction .............................................................................................................. 127 II Index 4.2. Research design ........................................................................................................ 128 4.2.1. Specification of the dependent variable............................................................. 128 4.2.2. Specification of the Shariah Board characteristics ............................................ 130 4.2.3. Specification of the ownership structure ........................................................... 131 4.2.4. Control variables ............................................................................................... 132 4.2.4.1. Corporate Governance variables ................................................................ 132 4.2.4.2. Non-corporate governance variables of control ......................................... 136 4.3. Statistical methods ...................................................................................................