Corporate governance, risk and efficiency: evidence from GCC Islamic banks

Abstract

Purpose

The purpose of this paper is to determine the simultaneous effect of corporate governance (CG) of Gulf Cooperation Council (GCC) Islamic banks (IBs) on efficiency and risk.

Design/methodology/approach

The authors include Shariah supervisory board (SSB) size, Chief Executive Officer (CEO)-duality and ownership structure as CG variables. Efficiency and risk are measured using the data envelopment analysis (DEA)/stochastic frontier analysis (SFA) and Z-score, respectively. This paper also examines the risk-efficiency relationship. To test the hypotheses, the authors used seemingly unrelated regressions on a sample of 56 GCC IBs during the period 2004-2013.

Findings

The results indicate that implementing rigorous CG structures correlate with higher efficiency levels. Particularly, the authors show that the governance structure of IBs allows them to take higher risks to achieve a high efficiency level. In addition, results show that bank efficiency and risk are positively related.

Practical implications

This paper gives some insights to policy makers. It points out detail attention toward the importance of CG in IB that influences the efficiency level and risk-taking behavior. Thus, IB should improve governance procedures that can lead to higher efficiency and survival in a competitive environment and sustain financial crisis. Moreover, the economic conditions of a country are the main determinant of an IB’s efficiency and risk relationships.

Originality/value

The simultaneous effect of the CG of the GCC IBs on efficiency and risk is examined, taking into consideration different CG proxies, i.e., SSB size, CEO-duality and ownership structure, and different efficiency estimation techniques, i.e., SFA and DEA.

Citation

Ben Zeineb, G. and Mensi, S. (2018), "Corporate governance, risk and efficiency: evidence from GCC Islamic banks", Managerial Finance, Vol. 44 No. 5, pp. 551-569. https://doi.org/10.1108/MF-05-2017-0186