The Mediating Effect of Financial Performance on the Relationship between Shariah Supervisory Board Effectiveness, Intellectual Capital and Corporate Social Responsibility, of Islamic Banks in Gulf Cooperation Council Countries

By Musibah, Anwar Salem; Alfattani, Wan Sulaiman Bin Wan Yusoff | Asian Social Science, September 2014 | Go to article overview

The Mediating Effect of Financial Performance on the Relationship between Shariah Supervisory Board Effectiveness, Intellectual Capital and Corporate Social Responsibility, of Islamic Banks in Gulf Cooperation Council Countries


Musibah, Anwar Salem, Alfattani, Wan Sulaiman Bin Wan Yusoff, Asian Social Science


Abstract

The objective of this study was to determine the influence of Shariah Supervisory Board Effectiveness (SSBE) and Intellectual Capital (IC) on Corporate Social Responsibility (CSR) among 36 Islamic banks in Gulf Cooperation Council Countries (GCC) over the period of 2007-2011. Additionally, this study was aimed to identify the significance of financial performance (ROA, ROE) as mediator in the relationship between Shariah Supervisory Board Effectiveness (SSBE), Intellectual Capital (IC) and Corporate Social Responsibility (CSR). For the purpose of data analysis and hypotheses testing, several statistical methods such as multiple regression analysis were utilized to understand the variables. The results of this study reported that SSBE, Capital Employee Efficiency (CEE) and Structure Capital Efficiency (SCE) of Islamic banks positively influenced CSR. However, Human Capital Efficiency (HCE) did not influence CSR. The results of hierarchical multiple regression indicate that financial performance (ROA, ROE) was found to be a significant mediating factor for the relationship between SSBE, CEE, and SCE, and CSR in Islamic banks. The relationship between SSBE, IC, financial performance (ROA, ROE) and CSR suggested that it may be beneficial to the management of Islamic banks to increase CSR as discussed. Limitations and recommendations for future research were also highlighted.

Keywords: Shariah supervisory board, intellectual capital, financial performance, corporate social responsibility, and gulf cooperation countries

1. Introduction

In recent years, corporate governance has received considerable attention in Islamic finance. The extensive development of corporate governance in conventional finance has raised the issue of how Islamic corporate governance should be designed. The question arises as to whether or not it needs its own theoretical model or is it sufficient to modify conventional corporate governance structures. This question has prompted scholarly research to identify and define the foundational dimensions and characteristics of Islamic corporate governance.

A particular aspect necessary for the formulation of a theoretical foundation of Islamic corporate governance is to search for its epistemological orientation and to identify the theories associated with the existing corporate governance model. The main theories that have affected the development of corporate governance are agency theory, which is primarily concerned with the relationship between managers and shareholders, and stakeholder theory that takes account of a wider group of constituents (Mallin, 2007). These theories generate the two most dominant corporate governance models known as the shareholder value system and stakeholder value orientation. Another dimension of corporate governance in Islam which is different from the western concept refers to its epistemological orientation. The fundamental principles of Tawhid, shura, property rights and commitment to contractual obligation that govern the economic and social behavior require IFIs to comply with the Shariah rules and principles (Choudury & Hoque, 2004 & 2006; Iqbal & Mirakhor, 2004).

As part of the corporate governance framework in Islamic banks, Shariah governance is the most essential practice of Islamic finance in building and maintaining the confidence of the shareholders with the assurance that all transactions, practices and activities are in compliance with the Shariah principles. Shariah governance is now becoming more diverse and advance in parallel with the development of Islamic finance industry worldwide. In view of the impressive growth and increasing sophistication of the Islamic finance sector, Shariah governance of this rapidly evolving industry has proved challenging.

Today in most of the companies, intellectual capital makes a huge part of their market value. This employ to manufacturing related companies, high tech, and business providing services (proctor, 2006). …

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