Does risk governance mediate the impact of governance and risk management on banks’ performance? Evidence from a selected sample of Islamic banks

Abstract

Purpose Relying on the agency theory and the financial intermediation theory, the purpose of this paper is to examine to what extent risk governance would improve corporate governance and risk management effectiveness. The paper especially investigates the mediating role that would have the risk governance mechanisms in explaining both of the following relationships: the corporate governance–the banks’ performance, and the risk management–the banks’ performance. Design/methodology/approach This research uses the Baron and Kenny’s (1986) approach to investigate the mediating effect of risk governance; besides, the study refers to structural equation modeling in carrying out the appropriate panel regressions. The data collection was based largely on Bank scope Database, but some missing qualitative data were gathered manually from the banks’ annual reports available on the banks’ websites. Findings The study findings illustrate the significant role of risk governance mechanisms in improving both corporate governance and risk management’s effectiveness. Especially, this paper finds that risk governance is fully explaining the corporate governance–bank performance relationship, but risk governance would explain partially the risk management–bank performance relationship. Further, findings suggest that the internal corporate governance mechanisms seem to be more relevant than the external ones in improving the sample bank performance, and that risk management mechanisms seem to impede rather the sample bank performance. Practical implications The findings would make an important contribution to the current debate on the need to reinvent the optimal organization of the bank’s board and directorates and would allow readers to develop more cost-effective governance and risk-management thinking. Besides, the findings may help bank deciders and boards to rationalize costs and to focus only on the relevant corporate governance and risk management mechanisms. Finally, findings might illustrate to regulatory instance the importance of recommending risk governance in their coming corporate governance guidance. Social implications The global credit crisis of 2008 caused significant difficulties to financial institutions, so it would be worth enlightening practitioners and policymakers, even regulators, on the importance of considering the level of potential risk and risk monitoring as a key component in the decision-making process, to strengthen the stability and resilience of banks in an increasingly uncertain environment. Originality/value The issues raised in the paper are important in that Islamic banking is an integral part of the global banking and finance industry. This paper extends the knowledge of the potential importance of the new concept of risk governance with specific reference to Islamic banking industry peculiarities. It also provides a telling illustration of the need for the enhancements of the Basel Committee’s prudential requirements as well as the accounting and auditing organization for Islamic financial institutions and Islamic Financial Services Board set out especially regarding the consideration of risk in the strategic decision process.

The Effect of Corporate Governance in Islamic Banking on the Agility of Iraqi Banks

“…El-Chaarani et al (2022) found that corporate-governance criteria have a positive and significant effect on the financial performance of banks. In addition, Jallali and Zoghlami's (2022) findings illustrated that risk governance expresses the relationship between corporate governance and bank performance, and they also found that internal corporate-governance mechanisms can improve company performance better than external ones. Marina and Lagasio (2022) found that board and committee independence can increase bank solvency, but board and committee size can decrease it.…”

Risk of Islamic Finance: A Bibliometric Analysis for Front Mapping Research

“…[45,46], and bank profitability [47,48], this topic has been researched for a long time and is still developing today. A topic that has been around for a long time but has just started to be used frequently is risk corporate governance in Islamic Finance [49,50], performance measurement [9,51] and risk assessment [5,42] of Islamic Finance compared to conventional banks. In 2019-2020, research began to develop by comparing the Islamic financial system with other financial institutions [52].…”

Compliance and governance: evidence from financial institutions in Taiwan

“…Those self-disciplined standards can be summarized as corporate governance mechanisms, whose eventual goal is to mitigate agency problems (Dey, 2008) and to protect shareholders. In addition, because complex organizations suffer compliance difficulties because of developed priorities and information silos (Martinez, 2020), the internal mechanisms may work better than the external ones (Jallali and Zoghlami, 2022).…”