Religion in the boardroom and its impact on Islamic banks' performance

Abstract The impact of board diversity, in terms of gender, race, ethnicity etc., on performance and stability of firms has been researched extensively. However, the impact of religious diversity and its impact on performance and stability has been completely ignored. This issue is quite relevant, especially for the Islamic banks because of their primary objective i.e. to be in compliant with Islamic principles in all their dealings. Taking a cue from this argument, we believe if the majority board members are Muslim it can have a positive impact on the performance as they would better understand the importance of the substance of the shari'ah compliant dealings and that can translate into good performance and make it more stable. Based on our arguments, we examined the impact of religious diversity on the performance and stability on Malaysian banks Islamic and Conventional both for the period of 9 years, through 2005 to 2013. Our results from GMM estimation reveal that the religious orientation has no impact on the performance and this result is robust to various proxies. Our results imply that a non‐Muslim member of the board of directors is able to run the Islamic banking business as good as a Muslim board member.