Unveiling the nexus: Corporate governance practices and corporate financial performance of an Islamic banking

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Abstract

The importance of corporate governance lies in its ability to ensure transparency, accountability, and ethical decision-making within an organization. It plays a crucial role in fostering investor confidence, enhancing financial performance, and promoting sustainable business practices, particularly in addressing the principal-agent problem. This study examines the impact of corporate governance on the financial performance of Islamic banks in a developing economy, with a focus on Indonesia. Utilizing balanced panel data and regression analysis, the research assesses Islamic financial institutions listed on the Indonesia Stock Exchange (IDX) from 2013 to 2020. To achieve the proposed objectives, a quantitative approach was adopted using a fixed effects panel data model, employed by Stata statistical software. Control variables were included to explore the correlation between theoretical frameworks such as the principal-agent theory and risk management theory. Bank performance metrics analyzed include operational return on assets (ROA) and financial return on equity (ROE) indicators. Corporate governance variables encompass the board of directors (BOD), board of committee (BOC), audit committee (AC), and Shariah supervisory board (SSB). The study reveals a positive relationship between corporate governance and the financial performance of Indonesian Islamic banks, filling a gap in the literature by addressing governance and its role in bank performance. The findings offer valuable insights for policymakers formulating governance mechanisms for Islamic banks and provide businesses and investors with a deeper understanding of governance in the Islamic banking sector.

Keywords: Corporate Governance, ROA, ROE, Islamic Banking, Fixed Effects Model

Authors’ individual contribution: Conceptualization — U.S.A.A.; Methodology — R.H.; Software — U.S.A.A.; Validation — U.S.A.A.; Formal Analysis — R.H.; Investigation — U.S.A.A. and R.H.; Data Curation — U.S.A.A.; Writing — Original Draft — U.S.A.A.; Writing — Review & Editing — U.S.A.A. and R.H.; Visualization — U.S.A.A.; Supervision — R.H.; Project Administration — U.S.A.A.; Funding Acquisition — R.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G21, G34, G39

Received: 20.08.2024
Revised: 04.11.2024, 03.01.2025; 05.05.2025
Accepted: 12.05.2025
Published online: 14.05.2025

How to cite this paper: Al Azizah, U. S., & Haron, R. (2025). Unveiling the nexus: Corporate governance practices and corporate financial performance of an Islamic banking. Business Performance Review, 3(1), 37–47. https://doi.org/10.22495/bprv3i1p4