Corporate governance and financial stability in Islamic banking

Abstract Purpose The purpose of this paper is to examine the relationship between corporate governance and financial stability of the Islamic banking institutions in Malaysia. Indeed, we do not know much about the relationship between the corporate governance variables and the financial stability of the Islamic banks (IBs) in Malaysia. Design/methodology/approach In this case, the level of bank stability is individually measured using the Z-score indicator. The corporate governance dimension in this study includes the Shari'ah board size (SBS) in addition to the size of board members and the proportion of independent directors in the board. Using a yearly bank-level data of 16 IBs in Malaysia from 2005 to 2015, this paper utilizes the fixed effect, the GLS random-effect models and the OLS methods to provide empirical evidences. Moreover, this work aims to focus on the country-level data of Malaysia's banking sector and introduced the corporate governance variables in this model. Findings To the authors' knowledge, this is the first empirical analysis of country-level data in the Malaysia's banking industry with this research approach. The study found that the percentage of independent members in the board of directors has a significant positive impact on the financial stability of the IBs. However, the SBS and the size of board are found to have no influence toward financial stability. Originality/value With this paper, the authors hope to clarify the relationship between corporate governance and financial stability of the Islamic banking, and provide additional insights to the emerging literature of Islamic banking.