Does corporate governance affect the performance and stability of Islamic banks?

In this paper, we investigate the impact of corporate governance practices on cost efficiency and financial stability for a sample of Islamic and conventional banks. In our analysis, we use a set of corporate governance variables which include, the board size, board independence, director gender, board meetings, board attendance, board committees, chair independence, and CEO characteristics. We employ corporate governance data of Islamic banks that is unique in this field. In our analysis, we employ stochastic frontier analysis and panel VAR (PVAR) models to quantify long-run and short-run statistical relationships between the operational efficiency of Islamic Banks and corporate governance practices. According to our results, Islamic and conventional banks exhibit important differences in the effects of corporate governance practices on cost efficiency and financial stability. Results show that with a blind general adoption of corporate governance practices, Islamic banks may suffer a loss in their value since the adoption of the third layer of binding practices, over and above the already existing ones, imposed by the Sharia Board and the Board of Directors, may lead to cumbersome business operations. This conclusion is of importance to Islamic Banks since they struggle to survive in a very competitive international environment. Unique sample of Islamic banks from 14 countries for the period 2005-2013, unique findings of the corporate governance on Islamic banks performance and stability. We believe that our results may be of a certain value to regulators, policymakers, and managers of Islamic banks. Based on our results we postulate that Islamic banks should select carefully international corporate governance practices. Islamic banks should not adopt additional third layer of binding practices as that would result lower performance and instability that would be damaging for the economy.