Abstract:

This research investigates the effect of independent directors on risk-taking behaviour of Islamic banks and the moderating role of shariah governance in this relationship. The theoretical literature argues that a higher participation of independent directors on the board of directors enhances board monitoring, which minimises the tendency of bank managers to take excessive risk to the detriment of the shareholders and stakeholders. This study focuses on the roles and size of supervision boards. The proxies of bank risk-taking are insolvency risk and credit risk. Using 36 Islamic banks in GCC and Southeast Asian countries and panel data regression technique, this study observes that the direct effect of independent directors on risk-taking is not significant. However, this link becomes statistically significant when the interaction term of independent directors and shariah supervision role is added, indicating a positive moderation effect in the relationship between independent directors and bank risk-taking. This finding suggests that the combination of independent directors and the role of the shariah supervision board increases insolvency risk, which is not a desirable outcome. This finding is possibly driven by the fact that the supervisory boards of the Islamic banks in the sample mainly performed an advisory role insufficient to influence the risk-taking positively.