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The
The moderating role of Shariah moderating
supervisory board on the role of Shariah
supervisory
relationship between board board
effectiveness, operational risk
transparency and Received 24 September 2019

bank performance Revised 17 February 2020

Accepted 25 March 2020

Souhir Neifar
Faculty of Economics and Management, University of Sfax, Sfax, Tunisia
Bassem Salhi
Department of Accounting, Majmaah University,
Al Majma’ah, Saudi Arabia, and
Anis Jarboui
University of Sfax, ISAAS. Tunisia

Abstract
Purpose – The purpose of this study is to determine the effect of board effectiveness (BE) on financial
performance and operational risk (OR) disclosure and the interaction effect of a bank’s Sharia Supervisory
Board quality (SSB) with religious and ethical principles.
Design/methodology/approach – The data were collected from the annual financial reports of 25
Islamic banks (IBs) in the Gulf Cooperation Council countries over 2008-2017. The OR disclosure, the SSB
quality and BE were measured using self-developed indices. The Tawhidi string relation methodology
was used to establish the circular causal model. The moderating effect of the SSB quality on the
performance, OR disclosure and board structure relationship was examined using the hierarchical
regression analysis.
Findings – The main finding of this study is related to the positive moderating effect of SSB quality on the
relationship between performance, OR disclosure and BE. This result seems to indicate that at a high level of
SSB quality, even when the performance increase the IBs engage in complying with OR disclosure to inform
the stakeholders on the real situation of the bank.
Practical implications – The finding of this research would be of great support to stakeholders and
policymakers to make more pressure on IBs to improve the quality of their SSB structure and show more
compliance with the governance recommendations. As an extension to this research, further study can
examine other Islamic governance mechanisms such as Sharīʿah-compliant banks.
Originality/value – The present study provides a new addition to the prior literature by investigating
the relationship between performance, BE, OR disclosure and the interaction effect of SSB quality. From
an Islamic ethical, this research can also contribute to the growing discussion on SSB quality and
performance.

Keywords Financial performance, Board effectiveness, OR disclosure, SSB quality, International Journal of Ethics and
Systems
Ethical obligation, Tawhidi methodology © Emerald Publishing Limited
2514-9369
Paper type Research paper DOI 10.1108/IJOES-09-2019-0155
IJOES 1. Introduction
Scanning throughout literature in the managerial field reveals that much interest has been
paid to the impact of the mechanisms of good governance on the quality of the financial
information (Pomeroy and Thornton, 2008) and risk disclosure (Linsley and Shrives, 2006;
Domínguez and Gámez, 2014). Specifically, empirical study has focused on the risk
disclosure practices of financial Oliveira et al. (2011), Maffei et al. (2014), Hassan (2014) and
non-financial Madrigal et al. (2012), Elshandidy et al. (2013) firms in the context of single-
country studies. Also, much of the empirical work has concentrated on the standards of the
risk reporting practices of publicly-traded firms in developed countries ranging from the UK
(Solomon et al., 2000; Linsley and Shrives, 2006; Linsley and Lawrence, 2007; Abraham and
Cox, 2007; Elshandidy et al., 2013) to Italy (Beretta and Bozzolan, 2004; Maffei et al., 2014),
the USA (Linsmeier et al., 2002; Jorion, 2002), Finland (Miihkinen, 2012), Spain (Madrigal
et al., 2012), Canada (Lajili and Zeghal, 2005), Australia (Poskitt and Yang, 2005) and
Portugal (Oliveira et al., 2011). In spite of the study of Amran et al. (2009), Mokhtar and
Mellett (2013), Hassan (2014), Elkelish and Hassan (2014) and Abdallah et al. (2015) very
little attention has been given to the risk reporting practices of publicly traded firms in
emerging economies. The Basel Committee on Banking Supervision ambitions to encourage
market discipline by developing a set of disclosure recommendations, which will allow
market participants to assess key pieces of information on the scope of application, capital,
risk exposures, risk assessment and management processes (Ariffin et al., 2009). It has Pillar
3 in the New Basel Agreement (Basel II), published in June 2004 on the outcome of market
discipline, which goes in good agreement with Islamic banks (IBs). In view of their benefit
sharing arrangements, IBs are likely to be more transparent than conventional banks as the
investment account holders may need more information from the banks to monitor their
investments. As argued previously, information disclosure is more important in an Islamic
banking environment than in any conventional banking. In specific, with an Islamic
environment, information disclosure should be meant to reduce information asymmetries
owing to the specific contracts between an IB and its depositors (Neifar and Jarboui, 2018).
Furthermore, operational risk (OR [1]) is the main source of financial distress in banks.
Hence, OR are particularly sensitive in IBs in view of the complexity of the economic and
legal status of certain operations (Izhar and Asutay, 2010; Archer and Haron, 2013). IBs have
to undertake the regulations set by both the supervisors and the Islamic principles of
Sharīʿah. Sharīʿah banns riba (interest), gharar (speculation) and money trading and it
appeal for alternative modes of trading where the underlying products are real assets or
services. A large percentage of capital providers – shareholders and investors – to Islamic
financial institutions are extremely concerned that their funds are invested in a Sharīʿah-
compliant manner (Chapra and Ahmed, 2002). Rare studies confirm that there has been an
increasing interest in the impact of the CG structures on both the performance (Liang et al.,
2013; Luo and Salterio, 2014) and the disclosure quality (Verriest et al., 2013; Samaha et al.,
2015). The Sharīʿah supervisory board (SSB) is one of the key corporate governance
mechanisms in the Islamic banking system. It is an independent body of specialized jurists
in Islamic commercial jurisprudence and experts in Islamic finance (IFSB, 2009; AAOIFI,
2010). This board ensures the compliance of services and products offered to consumers and
investors with Islamic rules and principles (Broquet, 2012). Financial well-being is a vital
factor in determining one’s quality of life. The recession, for example, threatened financial
well-being and caused economic problems, including health, income, debt and career
development. According to Van Praag et al. (2003), these concerns affect the psychological
and physical health of employees, reduce their confidence and productivity in the workplace
and increase absenteeism, work delays and lack of concentration in their work job. It is also
a smart way to improve performance. Workers with prosperous financial well-being are
more likely to be. The well-being and prosperity of society must be measured to track its
progress over time and to tell how well the Muslims are doing in managing scarce
resources. Everything of this worldly affairs aspect is quantifiable in monetary terms and
thus, an index should be established. Among the most recognized governance
mechanisms, the board committee occupies a major role as it intervenes in the
remuneration and replacement of senior management, as well as in the ratification of the
company’s budget. Its impact on the firm’s performance, though complex, is clearly
highlighted by literature (Caby and Hirigoyen, 2001). It plays a leading role as an internal
mechanism of corporate governance. Indeed, its effectiveness depends on the presence of
several factors, the most important of which relate to its characteristics, which mainly
relate to the independence of its members, the size of the board, the combination of
functions and the presence of its alternative committees. According to extant literature
board independence, board leadership and board structure (the monitoring role of the
audit committee) are good proxies for board monitoring (Bronson et al., 2009; Jaggi et al.,
2009). Monitoring is a very vital board role (Fama, 1980; Zahra and Pearce, 1989) as
boards of directors are “the apex of the internal control system” (Jensen, 1993, p. 862). Our
study will try to fill the gap in the Sharīʿah literature by empirically investigating the
effect of board effectiveness (BE) on performance and OR disclosure. Moreover, this
study will focus on the moderating effect of SSB quality between BE and performance.
To achieve our objectives, we will try to answer the following one important question: Is
there any relationship between BE, OR disclosure, SSB quality and performance in IBs?
By answering this question, we can provide a new addition to the prior literature by
investigating the relationship between BE and performance and the interaction effect of
SSB quality.
Section 2 presents relevant literature related to voluntary risks disclosure and describes
the evolution of the practice of risks in general and operational risks particularly in the
annual reports of IBs of the Gulf Cooperation Council (GCC) countries. Section 3 explores the
theory used in this study and hypothesis development. Section 4 introduces the
methodology adopted in this research. Section 5 discusses the findings of this study. Finally,
Section 6 concludes this paper.

2. The theoretical framework

This study focuses on the GCC region where the growth rate has been significant compared
to other parts of the world (Hassoune and Volland, 2006; Grais and Pellegrini, 2006). The
reason for selecting GCC banks refers basically to the socio-economic structure among GCC
countries that is quite similar, which enables us to control the effect of their macro and
cultural factors, leading to a more meaningful interpretation. The Islamic finance industry in
this region is expected to attract 4.50 times the funds to be invested in conventional assets in
the near term. In 2007, the United Arab Emirates (UAE) alone issued 52.70% of the global
Sukuk (Islamic bond) (Global Investment House, 2008). Islamic finance has grown
significantly over the years to become an intrinsic part of the international financial system.
The value of Islamic financial assets worldwide increased from US$150bn in the mid-1990s
to an estimated US$1.6tn by end-2012. Islamic banking still dominates the global Islamic
finance industry, covering approximately 80% of total Islamic financial assets. Five
outstanding Gulf states (Iran, Saudi Arabia, UAE, Kuwait and Qatar), as well as countries in
South-East Asia (most notably Malaysia) account for most of the Islamic banking market
BCE (2013).
IJOES 2.1 The practice of operational risk disclosure in the annual reports of Islamic banks in the
gulf cooperation council countries
Examination of the annual reports of the banks in our sample shows that differences in OR
disclosure practices appear both over the years and between banks. While some banks are
aware of the importance of OR disclosure, others are not and are reluctant to disclose needed
data. The figures below provide an overview of the trend of OR information disclosure
expressed in a number of sentences. According to IFSB (2007), IBs are committed to timely,
accurate and balanced disclosure of all OR information, as well as fair and equal access to
this information. The bank will comply with the legal and regulatory requirements for the
timely disclosure of the information. The recent development of IBs around the world has
accelerated the demand for transparency, reliability and comparability of their financial
statements. As a result, there is a growing need for accounting regulation, particularly on
disclosure practices. According to our sample, the majority of banks disclose OR
information. We note from the graphs presented above that the number of sentences dealing
with OR disclosure follows an upward trend from 2008 to 2017 (Figure 1).
Grounded on our sample, the majority of banks disclose OR information. We notice from
the graphs presented above that the number of risk-related sentences is evolving upwards
from 2008 to 2017 (Figure 1). The content analysis based on disclosures made by IBs in the
GCC countries seems to confirm the existence of such relationships and reveals that an
increasing number of disclosures about OR are associated with certain characteristics of the
board of directors. However, the question of the quality and usefulness of such qualitative
risk disclosures remains open and requires future research. Besides, the relationship
between governance mechanisms and risk management needs to be further explored. In
addition, measurement issues associated with corporate governance and risk management
constructs need more clarification. This could help banks, investors and regulators, etc.,
better assess the degree of risk exposure and how these risks are managed, controlled and
communicated.

3. Literature review and hypotheses development

3.1 Bank performance and board effectiveness
Various studies addressed the association between the board of directors’ effectiveness and
firm performance as will be shown in this part. The following mechanisms will be discussed:
leadership structure, a board of directors’ independence, board size and board of directors’
meetings. Previous research grounded in agency theory demonstrates consistently over
countries and across time that board composition board leadership (chief executive officer
(CEO) duality), the proportion of independent directors and board structure (the role and
composition of the audit committee) are good proxies for board monitoring (Di Pietra et al.,
2008; Bronson et al., 2009; Jaggi et al., 2009; Michelon et al., 2015). Board monitoring depends
also on the structure and composition of subcommittees (Xie et al., 2003), as the most
important board decisions are made at that level (Kesner, 1988). Various studies have
argued a negative dimension of duality. Chapra and Ahmed (2002) recommended that
Islamic Financial Institutions separate both roles of President and the chief executive officer
so as to maintain the necessary checks and balances of power and authority over
management behavior. The ultimate objective is to protect the interest all stakeholders. The
President and CEO need to exhibit excellent personal attributes such as honesty, frugality
and promptness, which are mentioned in the Qur’an and Sunnah to effectively fulfill their
role. However, recent studies have found no significant relationship between role duality
and performance (Al-Saidi and Al-Shammari, 2013). The debate upon the impact of duality’s
role on performance is unclear. Various studies consider that duality leads to better
 Figure 1.
The practice of
operational risk
disclosure in the
annual reports of
Islamic banks in GCC
countries

performance (Tian and Lau, 2001; Al-Manaseer et al., 2012), while others consider that firms
adopting the separation of the two functions perform better than the ones combining these
two functions (Pi and Timme, 1993; Boyd and Runkle, 1993). One of the vital roles of
independent directors is to monitor the firm’s performance and operation. Several studies
IJOES showed that the presence of independent directors positively influences a company’s
financial performance (FP). Board composition is very important to monitor managers
effectively and reduce agency cost (Choe and Lee, 2003). Berghe and Baelden (2005)
examined the issue of independence as an important factor in ensuring BE through the
monitoring and strategic roles of the directors. Al-Manaseer et al. (2012) supported this
reflection and stated that the proportion of independent directors acts positively on bank
performance. In Hong Kong firms, a study on board committee independence and firm
performance in a family firm showed no association. However, there is a positive
relationship between board independence and firm performance in non-family firms (Leung
et al., 2014). The findings of previous studies are mixed. Yermack (1996) found a higher
firm’s value for small board sizes because the large boards cannot monitor or control the
agency problem and smaller boards. So, the relationship between firm board size and
performance be negative (Olusola and Abiodun, 2013). The small size is better because the
large boards size needs high cost of coordination and expense such as rewards and
incentives. So, Sanda et al. (2011) found that firm performance is positively correlated with
small boards as opposed to large boards. The stewardship theory proposed that the boards
of directors’ meetings are irrelevant to the implementation of a board’s governance
obligations because monitoring is an entirely endogenous process (Hahn and Lasfer, 2007).
So, the association between firm board meeting and performance be negative. In the
contrary, Ntim and Osei (2011) establish a positive association with the firm’s performance
because meeting frequency is a monitoring means and leads to increased firm value.
The above discussion suggests that the board increases bank performance. Thus, the
following hypothesis is proposed:

H1. BE has a positive and significant impact on a bank’s performance.

3.2 Board effectiveness and operational risk disclosure

Disclosure and transparency of information appear to be key factors in the good governance
of any organization and attract potential investors to fund investment opportunities.
Disclosure is very important to investors as it reveals an understanding of the organization’s
structure, operations and processes (Shleifer and Vishny, 1997; John and Senbet, 1998;
Hermalin and Weisbach, 2003). A better proportion of independent directors in the
committee ensure an effective follow-up and a higher level of transparency of firms (Frankel
et al., 2011). The association between the risk disclosure and independence of directors has
stimulated the interest of many academics. While some authors have emphasized the
existence of a negative relationship (Al-Maghzom et al., 2016). Others have reported a
positive relationship (Abraham and Cox, 2007; Elshandidy et al., 2013). Previous studies on
the relationship between the risk disclosure and duality of roles have proposed mixed
results. While some authors have highlighted the existence of a negative relationship
(Elzahar and Hussainey, 2012). Others have found a positive relationship (Beasley et al.,
2005). Chakroun and Matoussi (2012) on the Tunisian context and the study of Haniffa and
Cooke (2002) on the Malaysian context proves the existence of a negative relationship
between the extent of voluntary disclosure and the concentration of ownership and while
some authors confirmed the existence of a negative relationship (Oliveira et al., 2011). The
above discussion suggests that BE increases bank performance. Thus, the following
hypothesis is proposed:

H2. OR disclosure has a positive and significant impact on a bank’s performance.

3.3 The moderating role of Sharīʿah supervisory board quality
The governance structure of the IBs is distinct from the conventional banks because of the
existence of the SSBs in addition to the usual boards such as the board of directors. The SSB
is a mechanism of internal governance, which aims at transparency in the disclosure of
information (Broquet, 2012). The SSB members with financial knowledge would be more
likely knowledgeable in the importance of transparent information to stakeholders’ decision
making (Broquet, 2012).
The issues of SSB are associated to the functions that the Sharīʿah board implements.
Independence, confidentiality, competence, consistency and disclosures are of the important
issues related to the functions (Grais and Pellegrini, 2006). The quality of the Sharīʿah board
was determined in the literature by various variables such as independence, size, reputation,
education, experience, directorship and the information disclosed (Abudul Rahman and
Bukair, 2013). In the SSB context, it is easier for the board of directors and for the
management to control smaller SSBs compared to larger SSBs. Larger SSBs involve
scholars with various skills from different schools of fiqh and with wealthy experiences,
which leads to a better interpretation of the products and operations and as a matter of fact
of better performance (Hamza, 2016). Rare studies have examined the effect of SSB size on
the IBs performance such as the studies of Matoossi and Grassa (2014), Mollah and Zaman
(2015) and Nomran et al. (2018), who found that SSB size has a significant impact on the IBs
performance. Farook et al. (2011) affirmed that scholars with a doctorate degree in
economics and business were better informed of the current implications of Islam for Islamic
financial institutions, principally with regards to disclosure. In fact, although there are few
studies investigating on the impact of Sharīʿah boards on the Islamic bank performance
(Mollah et al., 2017; Mollah and Zaman, 2015), rating (Grassa, 2016) and Islamic bonds or
Sukuk, there is a dearth of literature dealing with the impact of Sharīʿah tables on the risk
and performance of Islamic indices.

H3. SSB quality moderates the relationship between BE and FP.

H4. SSB quality moderates the relationship between BE and OR disclosure.

3.4 Epistemological model: (Choudhury, 2009)

3.4.1 Circular causation. The “Tawhidi” phenomenological model was first established by
Choudhury (2009), (2014), (2018). Sunnat al Rasoul together developed the essential episteme
of the unity of knowledge in the Tawhidi worldview. Contrarily, the Islamic worldview of
the unity of knowledge is permanently premised on Tawhid. Its methodology is one of
continuous self-referencing to the Tawhidi premise of the unity of knowledge of the
mapping, “Tawhid (in the primal instance) to Tawhid (in Akhira),” through the process of
unifying world-systems (Choudhury, 2001). Within this functional relationship of God, man
and the universe is the central role of justice and balance, purpose, certainty, well-being and
creative re-origination (Choudhury, 1999). According to Van Praag et al. (2003), well-being is
ensured by individuals’ satisfaction in six areas, namely, business, finance, home, leisure,
health and environment. According to Joo (1998), the concept of well-being or, in other
words, people’s perception of well-being varies with changes in people’s standard of living.
Fergusson et al. (1981) define financial well-being as the level of financial income and the
asset. Williams (1983) recognizes financial well-being according to the material and spiritual
aspects of his financial situation and Hayhoe et al. (1990) describe financial well-being as a
person’s feeling of satisfaction with their status. According to Porter (1990), financial well-
IJOES being is an attitude toward the financial situation based on objective aspects and judge them
by standards.
The immutable core is formed by the Sharīʿah (Azam et al., 2019). By taking Tawhidi’s
concept of string relation (TSR), this study uses some variables, namely, FP, BE and OR
disclosure to denote an integrated relationship as is desired by the ethic context and
shareholders. The present study explains the contribution of Sharīʿah to community well-
being. Moreover, this study investigates how SSB quality contributes to financing well-
being through their performance. The model is given below (Figure 2).

4. Research design
4.1 Data and sample selection
Our Islamic banking samples consist of 25 IBs located in GCC countries (Saudi Arabia,
UAE, Kuwait, Bahrain, Oman and Qatar) observed over the period 2008-2017 (panel data).
The initial sample includes 55 banks. Following a selective process, we kept only 25 banks.
First, we needed to remove the banks whose annual reports were not available, then the
banks which have some missing reports or data. We have collected data for internal
governance characteristics from their annual reports and the DataStream database. The
governance data is measured on the date of the proxy at the beginning of the corresponding
fiscal year. We collected balance-sheet data from the annual financial statement of IBs.

4.2 Variables measures

The variables of this study can be classified into three types, namely, dependent variable,
independent variable and moderator variable. These variables were measured as shown in
Table 1.
In this study, we have one independent variable, two dependent variables and two
moderators.
4.2.1 Dependent variable. The accounting measure for FP, return on assets (ROA), was
used as the first dependent variable (Stanwick and Stanwick, 2000; Srairi, 2015; Mollah and
Zaman, 2015; Alsartawi, 2019). OR disclosure was used as the second dependent variable.
The later uses the number of “sentences” for the text encoding unit. Past studies such as
Abraham and Cox (2007), Linsley and Shrives (2006) and Amran et al. (2009) also used the
number of “sentences” as a coding unit in their studies. It is believed that using the number

Figure 2.
The moderating
effect of SSB quality
on the relationship
between board
effectiveness
governance, OR
disclosure and
performance
Variable Definition Measure Authors

ROA Return on assets Net income/average total Mollah and Zaman (2015), Srairi (2015),
assets Alsartawi (2019)
DISQT Index of the quantity Index measuring the Baraket and Hussainey (2013), Neifar
of OR disclosure quantity of OR disclosure and Jarboui (2018)
for bank [number of
sentences (OR)]
BE Index of the board Total number of board Darmadi (2011), Al-Malkawi et al.
effectiveness committee (2014) and Ulussever (2018)
recommendations
respected by the bank/11
SSBQ Sharīʿah Supervisory Total number of SSB Darmadi (2011), Al-Malkawi et al. Table 1.
Board recommendations (2014) and Ajili and Bouri (2018) Summary of variable
Index of the SSB respected by the bank/4 names, description
quality and sources

of “sentences” to measure a unit is more reliable than other units of analysis (Milne and
Adler, 1999). Similar to Linsley and Shrives (2006), we used a content analysis method to
collect data of this study. Data was collected from three sections of the narrative parts of the
annual report, namely, chairman’s statement, operations review and management
discussion and analysis.
We opted for these three sections as a recent study as reported that IBs usually disclose
voluntary or non-financial risk management information in these three sections.
Findings from studies in other countries also prove this situation (Beretta and Bozzolan,
2004; Linsley and Shrives, 2006; Abraham and Cox, 2007).
4.2.2 Independent variables. Only one independent variable is introduced into our
models, namely, BE. This ratio was used by Darmadi (2011) and Al-Malkawi et al. (2014) to
measure the BE of IBs. This sub-index address attributes pertaining to the prerequisites for
an efficient board. It relates to the BE and focuses on 11 attributes, which influence BE.
These include factors such as board duality, presence of various monitoring committees,
directors’ independence, the board size, intercompany directorships and board
shareholdings are evaluated in this sub-index.
4.2.3 Moderator variable. The IFSB (2009) recommended the establishment of an SBB
quality (structure, competence, independence and confidentiality). For this reason, an SSB-
index was used as a proxy for the SSB quality. This index contained four keyboard
attributes, namely, the existence of an SSB, the number of SSB, the expertise of SSB and the
doctoral qualification of SSB member. The SSB index contained four keyboard attributes as
follows:
(1) Existence of an SB: 1 if the SSB existed and 0 otherwise;
(2) Number of SSB members: 1 for banks with 3 or more SB members and 0 otherwise;
(3) Financial expertise of the SSB member: 1 if an SSB member has experience in the
field Islamic banking institutions and 0 otherwise; and
(4) Doctoral qualification of the SSB member: 1 if an SSB member holds a doctorate
and 0 otherwise.

Bouri (2018), this study calculated a score for the SSB-index by summing the values
assigned to the related attributes and then converting it into a percentage. IB with higher SB
IJOES score was considered to signal a stronger SSB quality while a low score was considered to
have weaker SSB quality.
The table below summarizes the various selected variables (Table 1).

4.3 Model specification

The data used in this study were collected from the annual financial reports of 25 IBs over
2008-2017. The TSR method focuses on the learning process of integration and interaction
among studied variables. The process of learning is explained on the basis of the
relationship between dependent and independent variables. This model is given below as
follows:

u ¼ a þ b t1 Xt1 þ b t2 Xt2 þ b t3 u t3 þ « t

where
u : sustainability index, which measures the financial well-being function as indicated by
performance
X1: DIS_QT = index based on OR quantity
X2: BE = index based on board structure
X3: SSBQ = index based on SSB quality
The circular causation for X1 to X3 is estimated using a regression equation. The models
are obtained as follows:

X1 ¼ /1 þ b t2 Xt2 þ b t3 Xt3 þ b t4 u t4 þ « t (2)

X2 ¼ /2 þ b t1 Xt1 þ b t3 Xt3 þ b t4 u t4 þ « t (3)

X3 ¼ /3 þ b t1 Xt1 þ b t2 Xt2 þ b t4 u t4 þ « t (4)

The expected relationship of each variable (u , X1 to X3) in the well-being function is

estimated in Figure 2. In addition, u is explained by the regression equation across all
variables described in the model. u is the indexed value of each variable (Choudhury, 2014).
Using the averages of u i, u is calculated. In this study, linear regression is used to check the
all-circular causality.

5. Results
5.1 Descriptive statistics
Table 2 provides descriptive statistics for the regression variables. It presents descriptive
statistics for the entire sample, including the mean, minimum, maximum and standard
deviation.
The mean of ratio (ROA) measurement corresponds approximately to 2.929% and varies
between 2.21% and 23.21%. Additionally, the mean of an index measuring the quantity of
OR disclosure is approximately 17.38 and varies between 2 and 250 for scores assigned to
the information disclosed on OR. Also, the mean of an index measuring the BE is
approximately 0.853 and varies between 0.63 and 1. Additionally, the mean of an index
measuring the SSB quality is approximately 0.751 and varies between 0.5 and 1.
5.2 Regression results
In this section, the results of the regression model are presented by the moderating impact of
SSB quality on OR disclosure and performance. Before performing the regression analysis,
independent variables are standardized to eliminate the multi-collinearity effect in the
model, especially in using the interaction effect (Bauer and Curran, 2005). Several tests need
to be conducted so as to qualify our data panel. Basically, the presence/absence of a problem
of heteroscedasticity and a problem of multi-collinearity are tested. The multi-collinearity is
a computational difficulty that appears when two or more independent variables are highly
correlated.
The results of multi-variate circular causation are presented in Table 3. The results
indicate that all three variables (BE, OR disclosure and SSBQ) have a significant relationship
with FP. However, FP has been shown to be associated with BE. This suggests that the
Sharīʿah status plays an important role in ensuring the ethical behavior of managers.

5.3 Robustness tests

In this section, the results of the regression model are presented by the moderating impact of
SSBQ on FP. The pooled model does not make a difference between a period and cross-
section and it is mostly not appropriate for analysis. However, it is often useful to apply a
redundant fixed effect test and based on the results decide whether you have we use a fixed-
effect or pooled model.
Hausman’s test compares fixed and random effects models. If the fixed and random
effects are revealed significantly, the Hausman test will give a good idea when choosing one
of the two. The loser the assumption is that the effect (fixed or random) is not correlated with
other independent variables (Table 3).
Because we have one independent variable, two dependent variables and two moderators
understudy, the four different models are estimated. An estimation has been done on the

Variables Mean SD Minimum Maximum

ROA 2.929 3.2874 2.21 23.021

SSBQ 0.751 0.154 0.5 1
BE 0.853 0.155 0.63 1 Table 2.
DIS_QT 17.38 7.462 2 250 Descriptive statistics

Variables u X1 (DIS_QT) X2 (BE) X3 (SSBQ)

Ct 0.219(0.000***) 0.107(0.001***) 0.362(0.001***) 0.263(0.000***)

H – 0.014(0.000***) 0.019(0.000***) 0.071(0.000***)
X1(DIS_QT) 0.071(0.002***) – 0.121(***) 0.046(0.000***)
X2(BE) 0.086(0.000***) 0.218(0.000***) – 0.184(0.002***)
X3(SSBQ) 0.124(0.000***) 0.034(0.000***) 0.108(0.001***) –
F-state 32.33***(0.000) 35.26***(0.000) 34.25***(0.000) 32.56***(0.000)

Notes: N = 250; the variables are defined in the table as follows: u : sustainability index, which measures
the financial well-being function as indicated by performance. X1: DIS_QT = index based on OR quantity,
X2: BE = index based on board structure and X3: SSBQ = index based on SSB quality; ***p < 0.01; **p < Table 3.
0.05; *p < 0.10. Correlation analysis
IJOES basis on the fixed-effect model being preferred over the random effect one (Hausman, p-
value < 0.05). The main effects of the variables are entered in Models 1 and 2, whereas
Models 3 and 4 explain the moderating affects. H1 predicts that the BE variable proved to be
a significant and positive effect on the FP. Model 1 indicates that the BE variable proved to
be significant in all instances, with positive coefficients except in random effect (ß = 0.271,
p > 0.05). Thus, H1 is supported in the case of the pooled and random effect models. The
simultaneous presence of dual functions and a level of OR disclosure has a positive effect on
the level of the bank’s performance. Our results go in good agreement with the work of
Cannella and Lubtakin (1993). Sridharan and Marsinko (1997), who judged that the
combination of functions increases to a great extent the performance of the firm because the
CEO has all the information to be disclosed to the company members of the board of
directors. Jensen and Meckling (1976), the proponents of agency theory, considered that the
separation of decision-making and control functions reduces agency costs and improves
business performance. However, to avoid miscommunication and reduce the risk that the
actions and expectations of the leader and the board are in contrast, the role duality
considers it crucial that the firm is headed by the same person leading as a matter of fact to
better performance.
H2 predicts that BE has a significant and positive effect on the OR disclosure. However,
Model 2 is unable to explain the hypothesis significantly except in all instances (p > 0.05).
Finally, H3 and H4 suggest the moderating effect of SSB quality on FP and OR
disclosure. The simultaneous presence of an active SSB size and a level of OR disclosure has
a positive and significant effect on the level of the bank’s performance. This positive
relationship indicates that IBs with large SSB sizes tend to perform better. This finding is
consistent with Mollah and Zaman (2015) and Nomran et al. (2018), who found a positive and
significant impact for SSB size on the IBs performance. In IBs, the aim of Sharīʿah
governance is specifically to ensure equity for all stakeholders (Choudhury and Nurul, 2013).
This is achieved through good transparency and accountability (Grassa, 2013). H4 explains
the moderating effect of SSBQ on OR disclosure. Model 4 significantly predicts H4 in the
polled and random effect model (ß = 0, p < 0.05).
The results show that the SSB quality has a significant effect on OR disclosure in IBs.
The findings indicate that SSB quality moderates the relationship between BE and FP.
In fact, the BE and a high level of OR disclosure increase the bank’s performance level.
This result further confirms the essential role played by these committees (board committee
and SSB) in making strategic and tactical decisions. As a result, the establishment of such a
committee on the board of directors seems to be highly important for IBs. It addresses the
institution’s risk issue and defines performance measurement objectives and key risk
indicators.
To sum up, none of the previous studies of GCC countries has examined the effect of the
characteristics of the committee board of IBs, except those of Matoossi and Grassa (2014).
These authors examined the effect of corporate governance mechanisms on the performance
of the 77 largest IBs and 85 conventional banks in the GCC and Southeast Asian countries
from 2000 to 2009. They reported several important differences between both types of
banks. In addition, they noted that the duality of functions and the age of CEOs have a
significant positive influence on the performance of IBs. They also emphasized the
important role played by SSB in terms of creating value and performance of IBs. IBs provide
Sharīʿah-compliant finance and have Sharīʿah supervision boards as a key feature of their
governance. The empirical evidence recognized in this study strongly highlights the
importance of large SSB size in enhancing the performance of the IBs. Large SSB provides
more scholars with various experiences and schools of fiqh, which leads to better
performance. The board structure appears to be an important mechanism that could affect
performance firmly and is regarded as a significant factor in corporate governance (Bhagat
and Bolton, 2008). The results of our research suggest that a committee board structure
contributes to in the level of performance of the bank. In a nutshell, the board committee, as
a management body, stands for the major mechanism for controlling the activities of IBs
and the essential element of corporate governance. Specialized committees are created to
assist the board of directors in their work. Proponents of best governance practices
recommend the establishment of specialized committees to facilitate and ensure the
effectiveness of the work of the board of directors. Neifar and Jarboui (2018) suggested that
IBs shall disclose their OR management framework to inform stakeholders to know about
the process of managing OR including the way that the bank identifies, evaluate, monitor
and control the OR and how efficiently it manages this type of risk. In addition, they
encourage ensuring an effective risk culture because it is an important task for learning how
to manage unexpected situations (Table 4).

6. Conclusion
Motivated by recent recommendations of regulators (BCBS, 2006; IFSB, 2007) regarding
disclosure, this study adds to the debate about the importance of the voluntary disclosure of
OR information. Transparency and disclosure are pivotal issues for corporate governance.
Recent governance initiatives in IBs have underlined the need for higher transparency and
better disclosure. As the IBs are recognized on Islamic values, it can be claimed that IBs
managers are likely to reveal more as the level of risk increases, without having particular
disclosure rules laid out, in conformance to the Islamic standard of full disclosure. There are
strong signals that profitable banks are likely to be related with a higher level of disclosure.
In addition to having a board of directors, external and internal audits and a compliance unit
key elements of the corporate governance system, IBs must have an SSB. In this system, the
SSB plays an important role in the process of supervising, auditing, monitoring and
providing opinions on Sharīʿah compliance to Islamic financial institutions (Grassa, 2013;
Yadiat and Amrania, 2017; Muliadi and Feriyanto, 2018). This study, on the other hand,
focuses on SSB quality. This adds a new contribution to the literature in the area of Islamic
banking in the GCC.
The main objective of this research is to investigate the relationship between BE and FP
and the interaction effect of bank’s SSB quality with religious and ethical principles. The
data used in this research were collected from the annual reports of 25 IBs. The
epistemological model was applied to determine the contribution SSB quality banks to
community financial well-being. Furthermore, the TSR methodology was used to establish
the circular causal model.
The results of this study have several benefits at a practical level. The results of this
study have several benefits at a practical level. First, they motivate bank executives to
voluntarily disclose OR information so as to ensure transparency to investors. Second, they
make it possible to foresee the establishment of a management risk committee to control the
risks that could result from failures or deficiencies in procedures and human or technical
errors. Third, these results make it possible to extend the research performed on the
relevance of value-relevance studies, by showing that the information disclosed on OR is
relevant or “value-related” for investors. Finally, we can conclude that the system of
corporate governance of the IBs of the Gulf countries including the largest banks (Al Rajhi
Bank, Dubai Bank, Abu Dubai Bank, etc.) have integrated the main professional
recommendations and the new legal constraints. When we compare the main
recommendations contained in the various regulatory documents (Basel committee, IFSB,
 IJOES

Table 4.

effects models
Fixed and random-
Model 1 Model 2 Model 3 Model 4
Variables Pooled FE RE Pooled FE RE Pooled FE RE Pooled FE RE

Ct 0.325*** 0.256*** 0.278*** 0.318*** 0.221*** 0.408*** 0.415*** 0.523*** 0.403*** 0.034*** 0.073*** 0.041***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Main effect BE 0.016*** 0.023*** 0.071*** 0.473*** 0.283*** 0.248*** 0.086*** 0.096*** 0.084*** 0.167*** 0.019*** 0.118***
(0.000) (0.000) (0.642) (0.581) (0.431) (0.321) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Interaction _ _ _ _ _ _ 0.124*** 0.080*** 0.199*** 0.072*** 0.033*** 0.363***
BE* SSBQ (0.000) (0.046) (0.000) (0.000) (0.000) (0.000)
Adj R2 0.3322 0.3315 0.2985 0.3219 0.3424 0.3523 0.3369 0.3652 0.3425 0.3562 0.3401 0.3362
F-statistic 22.24 23.36 24.33 33.40 29.26 30.49 28.34 29.54 29.55 30.30 31.25 32.15

Notes: N = 250; BE: board effectiveness, SSBQ: sharia supervisory board quality, FE: fixed effect, RE: random effect, first numbers are coefficients (ß) and second
numbers are p-values in the parentheses; ***p < 0.01; **p < 0.05; *p < 0.1.
specific reports, AIBI, Vienot, Bouston, etc.), concerning the characteristics of the board of
directors and alternative committees, we notice that certain banks have been above the
minimum required, particularly, in terms of the alternative committees, role duality,
meetings and attendance. These banks are making the necessary efforts to restore the
confidence of shareholders and investors, though apparently significant developments are
recorded. However, we need to remain cautious regarding certain corporate governance
practices. In fact, there is still a kind of dispersion between the ban on the various aspects of
corporate governance investigated in this research; the fraction of independent members is,
for example, very low in certain boards of directors.
This study is not without limits. First, the results depend on the fundamental construction
of the board committee index. An index cannot capture all aspects of good governance or
incorporate bank-specific influences. Second, this index may not stop the elements of
effective advice that the market considers vital. Third, a bank’s actual sub-index score is not
available and our conversion mechanism is therefore only an approximate measure of the
score. The validity of our results is subject to this constraint. Under the GCC principles-based
regime, it would appear that some aspects of the effectiveness of the board, particularly
independence, are not linked to the performance of the banks. For the proponents of good
governance, this may seem paradoxical. The result can be clarified by the fact that many of
these banks are family-owned. Therefore, regulators may need to know how IBs in the GCC
countries are supervised when developing a corporate governance policy.

Note
1. Basel Committee on Banking Supervision [Basel Committee on Banking Supervision (2006) (p.
144)] defines operational risk as “[. . .] the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. This definition includes legal risk, but
excludes strategic and reputational risk.” cited by Baraket and Hussainey (2013).

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About the authors
Souhir Neifar is a Doctor in Management Sciences from Faculty of Economic Sciences and
Mangement of Sfax-Tunisia. Her main research interests are related to corporate governance,
information transparency, financial communication, corporate social responsibility and Islamic
Finance.
Dr Bassem Salhi is currently an associate Professor of accounting and finance at the Majmaah
university in Saudi Arabia. Salhi Bassem main research interests are corporate governance and
accounting.
Dr Anis Jarboui is currently Professor of Finance at Sfax University. He is the of significant
articles and books on corporate governance, some of which allowed him to receive awards and
research grants. Pr. Anis Jarboui has also worked on many governance consultancy projects for
different international organizations. Anis Jarboui is the corresponding author and can be contacted
at: anisjarboui@[Link]

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