Sharia Supervisory Boards, Governance Structures and Operational Risk Disclosures: Evidence from Islamic Banks in MENA Countries

Abstract

This paper examines the impact of Sharia supervisory board (SSB) and governance structures on the extent of operational risk disclosures (ORDs), using a sample of 63 Islamic banks from 10 (i.e., Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, and the UAE) countries in the Middle East and North Africa (MENA) region for the fiscal years 2006 to 2013. Drawing on Sharia compliance, Islamic banking and corporate governance literature, our findings are as follows. We find that SSB, block ownership, board independence, and country-level governance quality are statistically significant and positively associated with ORDs. Our results are robust when controlling for several bank- and country-level variables. Our study has implications for policy-makers and regulators in the MENA region with respect to the development and implementation of SSB and governance mechanisms that can improve operational risk disclosures. Finally, the findings highlight the need to enhance current understanding of SSB structures and governance mechanisms that can best help Islamic banks towards engaging in effective compliance