Shariah Governance, Accounting Quality, and Performance of Islamic Banks

Abstract

Shariah governance has become a critical tool in making sure that financial institutions, especially the Islamic banks abide by Islamic principles. Quality of the financial reporting and accounting practices has a close connection with the effectiveness of the Shariah governance structures, and subsequently they determine the firm performance and confidence of the stakeholders. The paper investigates the connection between Shariah governance, quality of accounting and the financial performance of Islamic banks. Basing the study on the agency theory, stakeholder theory, and institutional theory, the research question that the study will explore is to determine the impact of the Shariah supervisory board, internal Shariah committees, and external auditing practices on the quality of earnings and operational efficiency. Empirical studies conducted in the past suggest that strong Shariah governance triggers transparency, less earnings management, and better financial performance. The differences are however varied in various jurisdictions because of the difference in regulatory frameworks, organizational structure and accounting standards. This paper brings together the theoretical views and empirical results to point out the processes by which Shariah governance and quality of accounting interact to affect performance. The results are likely to be informative to policymakers, regulators and bank executives who would wish to improve the quality of financial reporting and performance of Islamic banking institutions by ensuring that financial performance is well grounded in the Shariah.