The purpose of this paper is to examine the extent to which the Shariah governance through Shariah Supervisory Board (SSB) functions of Malaysian Islamic banks is affected by their financial performance. Content analysis is used to identify such governance of SSB. A checklist instrument outlining the criteria for determining SSB governance is developed to codify the SSB information contained in the annual reports. The governance consists of five measures; these are: Shariah committee attributes, Shariah risk, Shariah audit, Shariah review and disclosure & transparency. Meanwhile, financial performance is measured for profitability and gearing using return on assets (ROA) and Debt-equity (D/E) ratio of the Islamic banks. The findings suggested that Shariah governance, namely Shariah committee attributes and disclosure & transparency is affected by the bank profitability, indicating that higher trust of Islamic banks with the Shariah committee members encourage them to be more transparent. However, control function system under Shariah governance needs to be enhanced. The awareness on the importance of Shariah review, Shariah audit and Shariah risk should be reinforced. Moreover, officers in Shariah and audit department respectively should be fully equipped with necessary knowledge on cross disciplines of Shariah, auditing and risk management. While the challenge of integrating such knowledge is undeniable, the underlying forces of those cross disciplines are essential. This empirical findings complement the expectations of previous studies, which highlight the importance of Shariah governance functions. As such, this study might be of interest to top management in Islamic banking, industry players, SSB members and regulators.
Masruki et al. (Sat,) studied this question.