Heliyon: Quang Khai Nguyen

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Heliyon 7 (2021) e07798

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Heliyon
journal homepage: www.cell.com/heliyon

Research article

Oversight of bank risk-taking by audit committees and Sharia committees:


conventional vs Islamic banks
Quang Khai Nguyen *
School of Banking, University of Economics Ho Chi Minh City, Viet Nam

A R T I C L E I N F O A B S T R A C T

Keywords: By utilizing the Fixed effect and GMM estimators for a sample of 57 Islamic banks and 102 conventional banks
Sharia committee from 10 countries for the period 2002–2018, we examine the effect of the audit committees' and Sharia com-
Audit committee mittees' effectiveness on the bank risk-taking behavior and its transmission mechanisms. The results reveal that an
Bank risk-taking
audit committee's independence, number of meetings, and financial expertise negatively affect conventional
Conventional bank
Islamic bank
banks' risk-taking, suggesting that the high effectiveness of their audit committees may constrain banks' risk-
taking activities. However, no such relationship is evident or observed case of Islamic banks. Instead, with a
different transmission mechanism, the proportion of female members and the financial expertise in the Sharia
committees negatively affect risk-taking, but the Sharia committee size positively affects risk-taking in Sharia
banks. These results indicate that a Sharia committee's high effectiveness can constrain risk-taking behaviors in
Islamic banks.

1. Introduction of Islamic banks. In contrast to the failures of conventional banks, Islamic


banks performed effectively and stably since the financial crisis (Chapra,
After the 2008 financial crisis, the role of banks in corporate gover- 2011; Green, 2010). Actually, charging interest payments are prohibited
nance, as overseeing and restricting risk-taking becomes a concern in Islamic banks. They must apply the risk-sharing model; thus, Islamic
(Pathan, 2009; Sun and Liu, 2014; Nguyen, 2020). Some studies observe banks are better than conventional at managing risks (Hassan et al.,
that poor corporate governance caused the 2008 financial crisis, for 2019). Bilgin et al. (2021) provide evidence that credit growth is weakly
example, lax board oversight encouraged excessive risk-taking (Erkens affected by economic uncertainty in Islamic banks but strongly in con-
et al., 2012; Kowalewski, 2016). The role of the audit committee in ventional banks, implying that conventional banks are less stable than
overseeing risk-taking became increasingly critical after the financial Islamic banks.
crisis of 2008. According to a survey conducted by KPMG 2009, most Moreover, many studies show that corporate governance differs
members of the audit committee agreed that they had “increased their widely between conventional and Islamic banks. While corporate
hands-on involvement with management because of the financial crisis…”, governance of conventional banks comprises the board of directors and
suggesting that they were required to improve the company's risk man- its committees, referred to as “single-layer”, the institution of Sharia
agement by strengthening their oversight role in the period of the committees in Islamic banks makes their governance “multi-layer” (see
financial crisis. The Basel regulatory reforms pressured the banks' boards Mollah and Zaman, 2015). The difference is rooted in the fact that the
of directors to become involved with risk-management oversight and Islamic perspective sees the practice of corporate governance as a
recommended a stand-alone risk committee as part of a board that would Muslim's obligation to God, thus leading to the existence of, and
focus specifically on risk. obedience to, the “implicit” contract with God and the “explicit” con-
In addition, although some prior studies provide evidence that the tract with humans. In the end, these place God and Islam itself in roles
audit committee played an important role in overseeing risk-taking and as key players in the practice of corporate governance. This contrasts
preserving bank stability (Sun and Liu, 2014; Nguyen and Dang, 2020), with the conventional point of view that focuses on the material aspects
they focused only on conventional banks. Some studies recently found of governance. In practice, the differences are minor. The mechanism
many differences between the risk-taking of conventional banks and that and tools for the effective implementation of corporate governance are

* Corresponding author.
E-mail address: nqkhai.sdh@gmail.com.

https://doi.org/10.1016/j.heliyon.2021.e07798
Received 2 December 2020; Received in revised form 14 March 2021; Accepted 12 August 2021
2405-8440/© 2021 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Q.K. Nguyen Heliyon 7 (2021) e07798

relatively similar. Nevertheless, as Islamic financial institutions deal Finally, we examine what mechanism compels the audit and Sharia
with more complicated financial transactions and must comply with committees' effectiveness in constraining banks' risk-taking. Our results
Sharia rules, they require relatively stronger internal controls. Islamic suggest that audit and Sharia committees’ effectiveness principally drives
banks establish a Sharia committee to review and ensure that bank risk lower via different means: the audit committees of conven-
Sharia-compliant products are in line with Sharia rules. The ethics tional banks drive bank risk lower via incentives to maintain higher
committees and religious beliefs in Islamic banks helps the boards avoid capital ratios as well as through the reallocation effect for profit, but the
poor-quality lending and take less risk. Overall, the corporate gover- Sharia committees drive bank risk lower via incentives to increase effi-
nance of Islamic banks, with Sharia supervision as an additional ciency and reduce the volatility of profits in Islamic banks.
mechanism, suggests that Islamic banks showed less financial difficulty This article proceeds as follows: Section 2 outlines relevant literature
than that faced by conventional banks (see Mollah and Zaman, 2015). and develops hypotheses about the association of audit committees,
Analyzing banks in Gulf Cooperation Council (GCC) countries, Raouf Sharia committee effectiveness with risk-taking behavior. Section 3 ex-
and Ahmed (2020) provide evidence that risk governance, i.e corporate plains the methodology used in empirical tests and describes the data set.
governance related to risk management, in Islamic banks is less effective Section 4 contains the main results and Section 5 is conclusion.
than in conventional banks. Therefore, as an additional mechanism, the
Sharia committee in Islamic banks may play an important role in 2. Literature review and hypothesis development
oversight risk-taking.
Although the roles of the audit committee and the Sharia committee 2.1. Audit committee effectiveness and bank risk-taking
become more and more important in banking sectors, there is a lack of
empirical data evaluating the role of Sharia and audit committees in According to the moral hazard theory, shareholders encourage the
oversight risk-taking in both Sharia and conventional banks. Although bank management to invest in high-risk projects. Galai and Masulis
Mollah et al. (2017) provide strong evidence that Islamic banks with (1976) state that the shareholders effectively hold a “call option” on the
effective corporate governance allows them to take higher risks and firm's value with an exercise price of the total amount of debt
achieve better performance than conventional banks overall, which of outstanding. With a risk-insensitive deposit insurance premium, bank
the factors that make a difference between the kinds of banks were not shareholders want to increase leverage and bank risk. Therefore, they
investigated. In fact, not all components of the governance structure of encourage the bank management to invest in “excessively” risky projects
banks play a role in oversight risk-taking. By focusing on the roles of that potentially benefit shareholders at the expense of the deposit in-
the audit committee and Sharia committee, our studies can help both surance fund and the taxpayers who back it. Pathan (2009) supports this
conventional and Islamic banks to enhance the effectiveness of view and finds that strong boards (i.e., boards that reflect shareholders'
corporate governance and reduce risk-taking behavior in appropriate interests) positively affects banks' risk-taking. However, Boards has the
ways. role in oversight risk as a requirement of the Basel Committee. Akbar
Our study examines whether the “multi-layer” mechanism of gover- et al. (2017) and Younas et al. (2019) find that Board independence has a
nance in Islamic banks and the “single-layer” mechanism of governance negative relation to risk-taking, and Board effectiveness enables better
in conventional banks can reduce the banks' risk-taking. Specifically, we monitoring of the CEO, which leads to decision-making based on a more
examine the relationship between Sharia and audit committees’ effec- appropriate level of risk. In conventional banks, the Board usually plays
tiveness and risk-taking behaviors in Islamic banks vis-a-vis conventional the oversight risk-taking role through the audit committee (Sun and Liu,
banks. Our focus on this comparison is important because there has been 2014). Nguyen (2021) provide evidence that audit committee can
some debate about profitability, efficiency, and stability that casts doubt enhance bank stability. Therefore, the high effectiveness of an audit
on the current state of Islamic banks (see Ariss, 2010; Beck et al., 2013; committee can reduce the bank's risk-taking.
Abedifar et al., 2013; Bourkhis and Nabi, 2013; Hasan and Dridi, 2010). In addition, per agency theory, the value of managers is mainly
This study contributes to the prior studies in some ways. concentrated in the companies they manage, aside from when share-
First, this is the first study to examine the impact of audit committee's holders' investments are distributed in a diversified way. The managers
effectiveness on risk-taking in both conventional and Islamic banks, as tend to avoid risky strategies to protect their jobs. Through their over-
well as the relationship between the Sharia committee's effectiveness and sight role, the audit committee can support bank managers in avoiding
risk-taking in Islamic banks. Sun and Liu (2014) find that conventional excessive risk-taking. Since the audit committee may constrain the bank's
banks with audit committees whose members have long board tenure risk-taking, we develop the following hypothesis:
have a lower risk but busy directors increase bank risk. They suggest that
H1a. The audit committee effectiveness negatively associates with risk-
audit committees have oversight in risk-taking in conventional banks.
taking in conventional banks.
Additionally, we examine the audit committee's role of performing
Given the differences in corporate governance between conventional
oversight of risk-taking in both conventional and Islamic banks. Due to
banks and Islamic banks, the main function of the audit committee at an
the differences between corporate governance of Islamic and conven-
Islamic bank is to review and supervise the financial reporting, as well as
tional banks, the role of the audit committee may differ. Our result shows
provide oversight of the internal and external auditors (Safieddine,
that only the audit committee's effectiveness can reduce the risk-taking in
2009). Thus, they may not have an oversight risk function. Based on five
conventional banks. Similarly, the effectiveness of the Sharia committee
dimensions of risk governance (Board, Risk committee, Audit committee,
can reduce risk-taking in Islamic banks.
Chief risk officer and Internal audit), Raouf and Ahmed (2020) report the
Second, we examined the effectiveness of the audit and Sharia com-
lower strength of risk governance in Islamic banks than conventional
mittees on the banks' risk-taking behavior during the 2008 financial
banks. It implies that risk governance in Islamic banks has lower effec-
crisis. This enabled us to examine whether the roles of corporate
tiveness in oversight risk-taking than conventional banks. In addition,
governance only manifest itself in exceptional times, which was not
Haddad et al. (2021) report the positive relationship between audit
examined in past literature. Thus, we extended the literature (e.g., Sun
committee and banks’ liquidity in conventional banks, but this relation is
and Liu, 2014; Pathan, 2009) in terms of the different effects of audit and
unclear in Islamic banks. Therefore, we expect that the audit committees
Sharia committees effectiveness on banks’ risk-taking during different
in Islamic banks have no role in oversight risk-taking, and we propose the
time periods by splitting the sample into multiple periods. We find that
null hypothesis:
the oversight risk-taking role of audit and Sharia committees in con-
ventional and Islamic banks respectively remained unchanged in all pe- H1b. There is no relationship between the audit committee effective-
riods. However, the role of the audit committee in Islamic banks was ness and Islamic bank's risk-taking.
found important in crisis period.

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Q.K. Nguyen Heliyon 7 (2021) e07798

Table 1. Sample distribution.

Country Conventional banks Islamic banks Full sample Obs Percentage


Bahrain 11 13 24 365 18%
Indonesia 15 4 19 218 11%
Malaysia 20 12 32 468 23%
Pakistan 18 8 26 315 16%
Singapore 8 2 10 125 6%
Kuwait 4 5 9 118 6%
Qatar 5 3 8 93 5%
Saudi Arabia 7 2 9 84 4%
UAE 5 4 9 75 4%
Bangladesh 9 4 13 167 8%
Total 102 57 159 2028 100%

Note: The study used data of 159 banks (57 Islamic banks and 102 conventional banks) in 10 countries from 2002 to 2018.

2.2. Sharia committee's effectiveness and risk-taking in Islamic banks were published and which had enough information about audit and
Sharia committees over all the periods covered by this study (i.e., pre-
Unlike conventional banks, Islamic banks are responsible for ensuring crisis, crisis, and post-crisis). We then excluded the banks that lacked
compliance with the Sharia rules of their operations, products, in- data. Our final data includes 159 banks, of which 57 are Islamic banks.
struments, management, and practices. In this paper, we argue that the We also eliminated outliers in all variables by winsorizing at the 1st and
Sharia committee has an oversight role in risk-taking, as well as the re- 99th percentiles within each country. Our data includes 2,028 observa-
sponsibility to reduce the moral hazard problem in Islamic banks. Some tions after excluding outliers as well as observations with missing data.
past studies support this view. Hamza (2013) finds that non-compliance The sample distribution is presented in Table 1.
with Sharia affects public confidence in Islamic finance and exposes Is-
lamic banks to incredible risk. Furthermore, based on Islamic rules, Is- 3.2. Research methodology
lamic banks have a higher asset quality, higher intermediation ratio,
more stability, and better capitalization (Beck and Demirguc-Kunt, 3.2.1. Measures of bank risk-taking
2013). Safieddine (2009) finds that the key roles and responsibilities of Our primary measure of bank risk-taking is the Z-score of each bank
the Sharia committee typically include setting Sharia-related rules and which was used in the literature (Pathan, 2009; Berger et al., 2016;
overseeing compliance; advising the boards of directors; and issuing Nguyen, 2020). The Z-score captures the number of standard deviations
verdicts (fatwa) to enable confidence with respect to Sharia compliance. by which returns must diminish in order to deplete the equity of a bank.
These roles of the Sharia committee make Islamic banks more stable and The higher the Z-score value, the lower the bank's risk-taking. We
less risky than conventional banks, as some previous studies concluded calculate Z-score as follow:
(El-Hawary et al., 2007; Hasan and Dridi, 2011). Elamer et al. (2020) also
find that Sharia supervisory boards can increase the operational risk ROA þ ETA
Z¼ (1)
disclosures of Islamic banks in MENA countries. This finding indicates δROA
that Sharia supervisory boards play an important role in the oversight of
operational risk. Moreover, Sharia rules prohibit management from where ROA is the ratio of return on assets and δROA is its standard de-
taking excessive risks for short term profit when such behavior does not viation. ETA is the ratio of equity on assets.
truly maximize bank value. AlAbbad et al. (2019) finds that the size of the To check the robustness of the results, this study also uses some
Sharia supervision board and the proportion of busy board members on alternative measures of bank stability. First, we use the natural logarithm
Sharia supervision boards positively and significantly influence Islamic of the Z-score, which has also been used in previous studies (Aljughaiman
banks' asset-return and insolvency risks. This indicates that the Sharia and Salama, 2019; Houston et al., 2010). Second, we use the proportion
supervision board's quality affects bank risk by reviewing Sharia of non-performing loans to total loans (NPLS) as a dependent variable.
compliance. Overall, we expected that the Sharia committee could NPLS is another measure of bank risk-taking which is used in the liter-
constrain risk-taking, and as such our second hypothesis is: ature (Dwumfour, 2017; Jiang et al., 2020). The lower the ratio, the
lower the bank risk-taking. Finally, we use Altman's Z-score (see Altman,
H2. Sharia committees' effectiveness is negatively correlated with bank 1968) as an alternative bank risk-taking measure. The higher the Alt-
risk-taking in Islamic banks. man's Z-score, the lower the risk-taking and the lower the odds that a
bank is heading for bankruptcy.
3. Data description and methodology
3.2.2. Measures of audit committee and Sharia committee effectiveness
3.1. Data description We measure the effectiveness of the audit and Sharia committees in
multiple dimensions. We consider the following five characteristics in the
This paper uses data from Bankscope (Orbis Bank Focus), a global audit and Sharia committees as a proxy for their effectiveness. We used
database with data on both listed and non-listed banks for the period these proxies in our model to test our hypothesis.
2002–2018. Some variables are collected manually from banks’ financial
statements, annual reports, and bank websites. For the purposes of this (1) Female members: Eckel and Grossman (2008) posit that women
study, we use a sample that comprises the 10 countries with the large are more risk-averse in decision-making. Barber and Odean
number of Islamic banks. These countries have both conventional and (2001) and Niederle and Vesterlund (2007) consider women less
Islamic banks, which allows us to control for any unobserved time- overconfident and more sensitive to risk. They also manage
variant effect by introducing country-year dummy variables. We risk-taking better than their male counterparts. In addition, some
initially selected all the banks in each country from which annual reports prior studies provide evidence that women are more effective in

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Q.K. Nguyen Heliyon 7 (2021) e07798

Table 2. Definitions of variables.

Variables Measure
Panel A: Bank risk-taking (BRT)
Z-score Z-score ¼ [Return on assets ratio þ (Equity on Total assets ratio)]/δ(Return on assets ratio)
LZ-score Natural logarithm of the Z-score
AZ-score AZ  score ¼ 1:2x1 þ 1:4x2 þ 3:3x3 þ 0:6x4 þ 1:0x5 , “where x1 is the working capital/total assets, x2 the
retained earnings/total assets, x3 the earnings before interest and taxes/total assets, x4 the market value of
equity/total assets, and x5 the sales/total assets”
NPLS Nonperforming loans to total loans ratio
Panel B: Sharia and audit committees' effectiveness
1. Female members on audit committee/Sharia committee (AFM-SFM) Proportion of female members on the audit/Sharia committee
2. Audit committee/Sharia committee size (ACS-SCS) Number of audit/Sharia committee members
3. Audit committee/Sharia committee independence (ACI-SCI) Proportion of independent directors on the audit/Sharia committee
4. Accounting or financial expertise in audit committee/Sharia Proportion of accounting or financial expert on the audit/Sharia committee.
committee (AFE-SFE)
5. Meeting frequency in audit committee/Sharia committee (AMF-SMF) Number of meetings of the audit/Sharia committee a year
Panel C: Other control variables
Diversification index (DIV) A diversification index - It is defined as:

Net interest income  Other operating income


1j j
Total operating income
Bank size (BSIZE) Log (total assets)
Net interest margin (NIM) NIM ratio
Listed bank (IPO) Dummy variable that equals one for listed banks; otherwise zero
Asset quality (ASSQ) Ratio of loan loss provisions to total assets
P3 Pki
Bank concentration (CR3) Concentration ratio for three largest banks ¼ branchn= branchk, n ¼ 1; . . .; 3 are the three largest banks
n¼1 k¼1
by number of bank branches
GDP per capita (GDP) Natural logarithm of GDP per capita in a year
Institutional quality (INS) Quality of Governance Index – mean value of six governance dimensions for each country every year

their oversight role. Bennouri et al. (2018) postulate that female effective. Following Xie et al. (2003), our third measure of audit
directors possess high monitoring capabilities and contribute to and Sharia committee effectiveness is the ratio of outside directors
the board's human capital more than their male counterparts. to total members.
Chen et al. (2018) also contend that firms with female directors (4) Accounting or financial expertise: From a risk management
tend to invest more in innovation to make their firms more effi- perspective, directors with accounting or financial knowledge and
cient. Based on prior studies, we expect that a large number of experience are better at risk assessment. Therefore, the proportion
female members on a committee will result in a more effective of accounting or financial experts on boards and committees can
audit and Sharia committee. Therefore, our first measure of improve risk monitoring. García-Sanchez et al. (2017) assert that
committee effectiveness is the percentage of female members on financial experts on audit committees can reduce insolvency risk
the committee. and support the monitoring advantage hypothesis of financial
(2) Audit committee and Sharia committee size: Evidence from prior expertise. Moreover, accounting and financial experts on boards
studies suggests that a large board will create a more complex and and committees enhanced internal control quality (Agrawal and
less effective internal corporate governance (Boone et al., 2007; Chadha, 2005; Krishnan, 2005). Therefore, we expect that ac-
Mak and Kusnadi, 2005; Mollah and Zaman, 2015). Several counting or financial experts enable audit committees, as well as
studies that support this viewpoint find that a larger board will Sharia committees, to be more effective in overseeing managers'
reduce firm performance (Guest, 2009; Kao et al., 2019). Based on risk-taking. Following DeFond et al. (2005), accounting or finan-
these studies, we might expect that smaller audit and Sharia cial expertise is people who have experience as accountants, au-
committees may oversee risk-taking more effectively. We, there- ditors, or financiers or have an accounting or finance degree.
fore, use the committee's size which is measured by the number of Therefore, we use the proportion of accounting or financial
members on the committee as a second measure of the audit and expertise as the fourth measure of audit and Sharia committee
Sharia committees' effectiveness. effectiveness.
(3) Audit committee and Sharia committee independence: Many (5) Meeting frequency: Conger et al. (1998) suggest that more
studies agree that the presence of independent directors can in- frequent board meetings improve a board's effectiveness, as the
crease the audit committee's effectiveness. For example, Alderman sessions are a crucial dimension of board operations. Moreover,
and Jollineau (2020) contend that an audit committee's inde- firms with a higher number of audit committee meetings have less
pendence is positively associated with the autonomy of the financial restatement (Abbott et al., 2004) and are associated with
auditor, thus increasing the effectiveness of audit works. Raimo lower earnings management (Xie et al., 2003). These studies
et al. (2021) maintain that an audit committee's independence can suggest that the committees that meet regularly during the
enhance the quality of financial reporting. In addition, Mohamad financial year are linked to effective monitoring. Basiruddin and
and Muhamad Sori (2016) also find that the independence of the Ahmed (2019) also find that a higher frequency of Sharia com-
Sharia committee leads to more efficient Sharia decisions. Based mittee meetings reduces the risk of Sharia non-compliance.
on previous studies, we believe that the independence of the audit Therefore, frequently meetings may suggest that the committee
and Sharia committees may make their oversight roles more is hard-working and may make them more effective in their

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Q.K. Nguyen Heliyon 7 (2021) e07798

Table 3. Descriptive statistics.

Full sample Ibs sample CBs sample Two-sample


mean mean T-test
Variables Obs Mean Stdev Min Q_25 Q_50 Q_75 Max

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Z-score 2028 7.942 5.278 -4.732 2.224 4.275 8.562 23.823 9.234 8.125 3.916***
LZ-score 1963 3.152 0.157 -2.563 -1.154 1.658 3.652 5.641 3.214 2.925 2.235**
AZ-score 2028 8.923 7.215 -93.651 -20.325 17.269 52.123 72.168 9.236 6.122 0.423
NPLS 2028 0.045 0.081 0.000 0.002 0.028 0.031 0.581 0.036 0.049 -8.922***
AFM 2028 0.312 0.445 0 0 0 0.225 1 0.285 0.405 -3.924**
ACS 2028 0.143 0.345 0 0 0 0.214 1 0.167 0.135 0.224
ACI 2028 0.785 0.372 0 1 1 1 1 0.686 0.793 -0.287
AFE 2028 0.689 0.296 0 0 0 1 1 0.587 0.703 -11.265**
AMF 2028 5.216 0.456 2 1.246 4.445 6.269 13 4.926 5.412 -0.228
SFM 2028 0.412 0.341 0 0 0 0.225 1 - - -
SCS 2028 0.241 0.326 0 0 0 0.214 1 - - -
SCI 2028 0.683 0.271 0 0 1 1 1 - - -
SFE 2028 0.619 0.216 0 0 0 1 1 - - -
SMF 2028 6.211 0.516 3 1.246 4.445 6.269 16 - - -
DIV 2028 0.434 1.561 -22.135 0.282 0.458 0.674 1 0.531 0.411 0.248
BSIZE 2028 9.702 0.698 6.257 9.175 9.794 10.821 12.606 8.726 11.743 -4.665***
NIM 2028 0.083 0.044 -0.013 0.023 0.039 0.147 0.325 0.075 0.091 -0.541
IPO 2028 0.218 0.427 0 0 0 1 1 0.128 0.319 -1.289*
ASSQ 2028 0.007 0.027 -0.026 0.001 0.005 0.012 1.574 0.006 0.007 -0.125
CR3 2028 0.672 0.145 0.248 0.356 0.522 0.69 0.97 - - -
GDP 2028 4.215 0.316 2.84 3.023 3.481 3.634 5.82 - - -
INS 2028 -0.421 0.435 -1.565 -0.512 -0.387 -0.318 1.655 - - -

This table presents the descriptive statistics for all variables. IBs and CBs are Islamic and conventional banks, respectively. See Table 2 for variable definitions. *
Significance at the 1% level, ** Significance at the 5% level, *** Significance at the 10% level.

oversight role. Our fifth measure of audit and Sharia committee X


5 X
5

effectiveness is the number of meetings per year of the audit BRTit ¼ α0 þ αj ADCit þ βk SRCit þ γ 1 DIVit þ γ 2 BSIZEit þ γ 3 NIMit
j¼1 k¼1
committee and Sharia committee.
þ γ 4 IPOit þ γ 5 ASSQit þ γ 5 CR3t þ γ 6 GDPt þ γ 7 INSt þ γ i þ γ t þ γ c
3.2.3. Other control variables þ εit
At the bank level, we control bank size by using the natural logarithm (2)
of the total assets. In addition, we use a diversification index to control
diversification (Laeven and Levine, 2009; Shim, 2019). We also control where ADC is a matrix of audit committee characteristic variables, SRC is
asset quality by using the loan loss provisions to the ratio of the total a matrix of Sharia committee characteristic variables, α, β and γ are the
assets. Banks that have been selected for IPOs usually have more effi- parameters to be estimated, γ i , γ t , and are the bank, year, and country
ciency than others (Zhang et al., 2014). We, therefore, control IPO by fixed effect respectively, ε is the error term. All variables are summarized
using a dummy variable. The dummy variable equals 1 if the bank is in Table 2.
listed in the year of observation and 0 otherwise. As a result, listed banks
are expected to have a lower risk than others. In addition, we control the 3.4. Estimation method
effect of banking spread concerning their “traditional activities” in bank
risk-taking by using NIM (net interest margin). The higher values of NIM Fixed effect and random effect estimation methods are widely used
are expected to reduce risk-taking. for panel data in the literature. In this study, the primary estimation
At the country level, we control for differences in economics across method for Eq. (2) is the fixed effect (FE) technique after performing the
countries by using several country-level variables to. Prior studies pro- Hausman Test (Wooldridge, 2002).
vide evidence that the macro-economic environment can affect bank risk-
taking (Moudud-Ul-Huq, 2019; Zhang et al., 2021). First, we control the 4. Empirical analysis
country economic development by using the natural logarithm of the
GDP per capita. Second, we include the CR3 ratio to control the level of 4.1. Descriptive statistics and correlation matrix
bank competition (Chong et al., 2013). Finally, we include the World-
wide Governance Indicators to proxy for institutional quality indexes The overall descriptive statistics of the main variables are presented
(Kaufmann et al., 2006). These indicators are constructed from 276 in- in Table 3. We report the descriptive statistics in columns 3–9. We pre-
dividual variables taken from 31 sources produced by 25 organizations. sent the mean for Islamic banks, the mean for conventional banks, and
Table 2 show all variables which used in this study. the two-sample t-test (comparison of the means of Islamic banks vs.
conventional banks) in columns 10–12.
3.3. Empirical models First, we find that for the Islamic banks (IB) sample (conventional
banks-CB sample; full sample), the mean Z-score is 9.234 (8.125; 7.942).
To test our hypotheses, we use the following model T-tests reveal a significant difference in bank risk-taking between

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Q.K. Nguyen Heliyon 7 (2021) e07798

Table 4. Correlation matrix.

Z-score AFM ACS ACI AFE AMF SFM SCS SCI SFE SMF DIV BSIZE NIM IPO ASSQ CR3 GDP INS
Z-score 1.000
AFM 0.183 1.000
ACS -0.246** 0.423 1.000
ACI 0.311* 0.075* 0.476 1.000
AFE -0.231 -0.091 -0.293** -0.173 1.000
AMF 0.103* -0.112** -0.393 -0.044 -0.282** 1.000
SFM 0.026** 0.387 0.025 0.338*** 0.153** 0.113* 1.000
SCS -0.272*** 0.072 0.187*** 0.098 -0.224 -0.009* 0.042** 1.000
SCI -0.134* 0.234 0.425 0.154 -0.385* 0.252** 0.027 0.252* 1.000
SFE 0.189 0.352* 0.152** -0.019* -0.162*** -0.301 0.220*** 0.017 -0.154** 1.000
SMF 0.429** 0.298 0.324 0.392*** 0.004** 0.091*** 0.161** 0.021** -0.001* 0.017 1.000
DIV -0.371 -0.173* -0.123* -0.595 0.025 0.013* -0.311** 0.243*** 0.318* -0.183** -0.005* 1.000
BSIZE -0.175 -0.274 -0.004 -0.335** 0.165* -0.064 -0.232 -0.078** -0.228** 0.006** -0.142 0.056 1.000
NIM 0.213** 0.117*** 0.136 -0.106 -0.014** -0.032 0.006* 0.331 0.318*** 0.271* 0.133*** -0.032 -0.212 1.000
IPO 0.092* 0.184 0.204** 0.013*** -0.183 0.151* 0.015** 0.338** 0.080 -0.352*** 0.027* 0.031 -0.241** -0.012* 1.000
ASSQ 0.257 0.327** 0.027 -0.211 0.451** -0.371 -0.361 0.274 0.124** 0.142* 0.056** 0.148** 0.018 0.235** -0.122 1.000
CR3 0.021*** 0.565 0.041* 0.121* -0.210 -0.373** 0.068** 0.403*** 0.004* 0.524 0.006 -0.124* -0. 041* 0.145 -0.007** 0.056** 1.000
GDP 0.154*** -0.159 -0.352** 0.001 0.381** -0.109 -0.008* 0.249 0.182** -0.246*** 0.047** 0.021** 0.174** 0.031*** 0.137* 0.043* -0.170** 1.000
INS 0.065* 0.359 0.066 -0.153 -0.123 -0.262* 0.174 -0.007** 0.039* 0.416 0.024 -0.071 -0.104 0.007 -0.062 0.189 0.372*** 0.728** 1.000

Note: * Significance at the 1% level, ** Significance at the 5% level, *** Significance at the 10% level.

Table 5. Audit committee and Sharia committee effectiveness on bank risk-taking, all periods (2002–2018).

Variable Audit committee effectiveness Sharia committee effectiveness

(1) IBs (2) CBs (3) Full sample (4) (5)


AFM 0.242* -0.235 -0.423 0.535
ACS -0.031 -0.261 0.225 -1.223
ACI -0.143 0.203*** 0.115** 0.562
AFE 0.312 0.426*** 0.216* 0.445*
AMF 0.281 0.351*** 0.237** 0.521
SFM 0.382*** 0.641***
SCS -0.912*** -1.833***
SCI 0.312 1.509
SFE 0.525*** 0.673**
SMF 0.452 3.248
DIV 1.821** 3.158* 3.211 2.269 1.924*
BSIZE -0.323** -0.213** -0.457** -1.822* -1.223**
NIM 0.592** 0.241* 1.326*** 2.521** 1.137*
IPO 0.137 -5.152 -3.642 3.653 -2.621
ASSQ -5.622 -3.126 -2.125 -1.119 -3.174
CR3 3.215** 5.396*** 6.234*** 3.278*** 4.100***
GDP 1.526 -5.513 -2.265 -7.368 -2.281
INS 0.264** 2.294*** 1.497*** 2.325** 3.156*
R2 0.41 0.38 0.35 0.37 0.44
Year fixed effect yes yes yes yes yes
Bank fix effect yes yes yes yes yes
Country fixed effect yes yes yes yes yes
Obs 895 1133 2028 895 895

Note: This table presents the Fixed effect estimation results for the effects of the audit committee's effectiveness, Sharia committee's effectiveness, and bank risk-taking
for all periods. Model 1 to 3 shows the regression results of testing the effect of audit committee effectiveness on risk-taking for Islamic banks, conventional banks, and
full data respectively while models 4 and 5 show the regression results of testing the effect of Sharia committee effectiveness on risk-taking. Model 4 does not include
audit committee variables while model 5 includes both audit committee variables and Sharia committee variables. A description of the variables has been presented in
Table 2. * Significance is at the 1% level, ** Significance is at the 5% level, *** Significance is at the 10% level.

conventional banks and Islamic banks. We find the same result for the LZ- (ACS) is 0.167 (0.135; 0.143); audit committee independence (ACI) is
score and the NPLS. The means of the audit committee characteristic 0.686 (0.793; 0.785); the proportion of financial experts (AFE) is 0.587
variables for the IB sample (CB sample; full sample) are: the proportion of (0.703; 0.689); and meeting frequency of the audit committee (AMF) is
female members (AFM) is 0.285 (0.405; 0.312); audit committee size 4.926 (5.412; 5.216). The results of the t-tests in column 12 show a

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Table 6. Effect of audit committee and Sharia committee effectiveness on bank risk-taking: pre-crisis, crisis and post-crisis.

Variable Pre-Crisis Crisis Post-Crisis

(1) IBs (2) CBs (3) Sharia committee (4) IBs (5) CBs (6) Sharia committee (7) IBs (8) CBs (9) Sharia committee
AFM -0.352 -1.212 -4.186* -1.469 2.246 -1.421 -1.952 0.561 -0.372
ACS 0.321 -1.862 -2.239 -1.935 -3.287 3.849 4.245 -0.518 -2.281
ACI 1.387 1.762* 0.763 0.281** 0.995** 1.232*** 1.643 1.7751*** 0.935
AFE 0.543 0.384*** 0.451 0.447 1.621** -0.653 1.318 0.221** 1.903
AMF -0.348 0.382** 0.289 0.657 0.461** 2.751 -1.464 0.681** 0.675
SFM 0.322** 1.246* 0.698**
SCS -2.746*** 0.524*** -2.790***
SCI -2.163 4.163 3.318
SFE 0.437** 0.719** 0.715***
SMF 3.187 2.278 4.241
DIV 2.362*** 1.905** 6.751 3.215** 4.635* 6.014 -2.458 1.668 2.928***
BSIZE -2.028** -0.724* -1.553** -1.092* 0.363** -5.928 -3.391* 1.765** -3.016*
NIM 0.725* 0.677** 1.276* 0.891* 1.204* 7.641 2.218 2.218* 1.954*
IPO 1.211 -9.165 -2.548 2.445 -1.129 -1.576 3.675** -1.167 -1.751
ASSQ -3.092 -7.591 -3.194 -3.621 -3.535 8.135 -5.627 -2.915 -4.914
CR3 3.521* 2.801*** 4.151** 4.255* 5.928*** 3.126* 1.586* 3.161*** 2.181**
GDP 3.129* -3.702 -2.790 1.598 -8.512 4.715 3.572 -4.576 -7.613
INS 0.915* 3.387*** 3.187* 0.694** 1.323*** 2.198 0.154* 1.612*** 3.388*
R2 0.34 0.37 0.37 0.35 0.34 0.36 0.34 0.39 0.40
Year fixed effect yes yes yes yes yes yes yes yes yes
Bank fixed effect yes yes yes yes yes yes yes yes yes
Country fixed effect yes yes yes yes yes yes yes yes yes
Obs 320 340 320 171 304 171 404 489 404

Note: Table 6 presents the impacts of the audit committee's effectiveness, Sharia committee's effectiveness on bank risk-taking for pre-crisis, crisis, and post-crisis
periods. Model 1, 4, and 7 show regression results of testing the effect of audit committee effectiveness on risk-taking in Islamic banks for all three phases of pe-
riods respectively. Model 2, 5, and 8 show regression results of testing the effect of audit committee effectiveness on risk-taking in conventional banks for all three phases
of periods, respectively. Model 3, 6, and 9 show regression results of testing the effect of Sharia committee effectiveness on risk-taking in Islamic banks for all three
phases of periods, respectively. * Significance is at the 1% level, ** Significance is at the 5% level, *** Significance is at the 10% level.

significant difference between Islamic banks and conventional banks committee structure variables, and bank risk-taking in Tables 5 and 6. In
only for the AFM and AFE. Table 5, we present the regression results of Eq. (2) examining the effect
We find that the means of the Sharia committee characteristic vari- of the audit committees' and Sharia committees' effectiveness on bank
ables are: the proportion of female members (SFM) is 0.412; Sharia risk-taking over the period (2002–2018). Model (1) is for the Islamic
committee size (SCS) is 0.241; Sharia committee independence (SCI) is bank sample, model (2) is for the conventional bank sample, and model
0.683; the proportion of financial experts (SFE) is 0.619; and meeting (3) is for the full sample. First, we find that audit committee indepen-
frequency of the Sharia committee (SMF) is 6.211. In addition, the means dence, accounting or financial expertise in the audit committee, and
of the bank-specific variables for the IBs (CBs; full sample) are: diversi- meeting frequency of the audit committee all have a positive relationship
fication index (DIV) is 0.531 (0.411; 0.434); bank size (BSIZE) is 8.726 to the Z-score in both the conventional bank sample and full sample. The
(11.743; 10.702); net interest margin (NIM) is 0.075 (0.091; 0.083); results are quite consistent with prior studies (Sun and Liu, 2014;
listed bank (IPO) is 0.128 (0.319; 0.218); and asset quality (ASSQ) is Nguyen, 2021; Xie et al., 2003). The empirical results of Liu and Sun
0.006 (0.007; 0.007). The results of the t-tests in column 12 show a (2021) show that audit committee members' independence and expertise
significant difference between the IBs and CBs in bank size (BSIZE) and can constrain bank risk-taking behavior and enhance performance. Our
listed bank (IPO). The country-specific variables have the following results indicate that the audit committee's effectiveness may constraint a
means: bank concentration (CR3) is 0.672; GDP per capita (GDP) is bank's risk-taking, and an appropriate audit committee structure can
4.215; and institutional quality (INS) is -0.421. enhance its effectiveness in oversight risk-taking in conventional banks.
To examine the correlation among variables, we present the Pearson's This result strongly supports the H1a hypothesis and provides strong
pairwise correlation coefficients in Table 4. The results show that the evidence that audit committee in conventional banks plays an important
maximum value is 0.728 for a positive correlation between institutional role in oversight risk-taking. However, we find no evidence of a rela-
quality (INS) and GDP per capita (GDP). All other coefficients are lower tionship between the effectiveness of audit committee and risk-taking in
than 0.7, indicating that problem of multicollinearity may be not a Islamic banks. We find only a positive relationship between AMF and the
concern. However, the correlation measures might be highly unreliable Z-score, with significance at 10% level. It is weak to reject the H1b hy-
indicators of the relationships among many variables such as bank size pothesis. This result is consistent with some literature findings that audit
and ownership structure, and other attributes are likely to affect bank committee may not be a key factor of corporate governance in Islamic
stability. Therefore, we continued to test our hypotheses by using a banks. For example, the empirical results of Alkdai and Hanefah (2012)
multiple regression framework. show that audit committee size and financial experts on an audit com-
mittee have relation to Malaysian firm's earning management. Budiyono
4.2. Effects of audit and Sharia committee effectiveness on bank risk-taking and Sabilla (2021) find that audit committees in Indonesian Islamic
banks do not affect financial reporting quality. Moreover, risk gover-
We use fixed effect (FE) estimation and present the results of our nance in Islamic banks has lower effectiveness than conventional banks
analysis of the relationship among audit committee structure, Sharia (Raouf and Ahmed, 2020); thus audit committee may not consider

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Table 7. Effect of audit committee and Sharia committee effectiveness on the components of the Z-score.

Variable E/A ROA δROA

(1) IBs (2) CBs (3) Sharia committee (4) IBs (5) CBs (6) Sharia committee (7) IBs (8) CBs (9) Sharia committee
AFM 5.412 -2.213 -5.143 3.614 1.622 -0.765 -2.434* 1.182 -3.052
ACS -12.315 -4.651 3.671* 3.245 -5.190 2.927 2.623 2.422 -2.916
ACI 4.081* 0.732** 2.865 -0.383 0.521** 4.174* 2.518* -0.291 -0.539***
AFE 0.161 2.541* 0.613 3.120* 1.625* -0.481 1.325 2.013 1.507
AMF -0.639 0.923** 1.254 2.187* 0.081* 3.281 -1.416 -0.562 -1.260
SFM 0.321* 2.287** -0.612**
SCS -2.189 -1.065** 3.265*
SCI -0.182 0.354 2.584
SFE 2.456 4.826*** -0.675**
SMF 2.898 3.871 4.241
DIV 2.764** 2.347 -2.042 1.267** 2.268** 4.504 3.482 -3.614** 3.921*
BSIZE -3.722 4.621* -3.258** 1.0935 -2.946*** -5.696* -2.421 2.358*** -2.922*
NIM 1.226 1.474** 3.241 0.257 2.4781* -4.602 3.261*** 0.258* 1.932*
IPO 0.342 -4.260 -0.875** 2.966* 0.442 4.091 2.128* -4.180 -1.721
ASSQ -3.853*** -0.263 -3.821 -1.635 -1.944 2.865 -4.115 -3.141 -4.974
CR3 5.175 3.193** 4.412* 3.237** 1.803** 3.054** 1.288 1.491*** 4.112**
GDP -2.354* -5.804 -3.225 4.156 3.025 3.255 5.401 -7.543 -2.908
INS 1.421** 4.123*** 4.285* 2.203* 1.387** 5.370** 2.129 3.686*** 3.141*
R2 0.26 0.31 0.33 0.31 0.34 0.34 0.32 0.29 0.35
Year fixed effect yes yes yes yes yes yes yes yes yes
Bank fixed effect yes yes yes yes yes yes yes yes yes
Country fixed effect yes yes yes yes yes yes yes yes yes
Obs 895 1059 895 895 1059 895 895 1059 895

Note: this table presents the fixed effect estimation results for the effects of audit committee's effectiveness, Sharia committee's effectiveness on the components of the Z-
score. Models (1), (4), (7) and (2), (5), and (8) examine the relationship of the audit committee's effectiveness and the components of the Z-score in Islamic banks and
conventional banks, respectively. Models (3), (6), and (9) examine the relationship of the audit committee's effectiveness, Sharia committee's effectiveness, and the
components of the Z-score in Islamic banks. See Table 2 for a description of the variables. * Significance at the 1% level, ** Significance at the 5% level, *** Significance
at the 10% level.

constraint risk-taking effectively in Islamic banks. Second, we find that crisis). We have defined the full period as 2002–2018, the pre-crisis
female members on the Sharia committee and accounting or financial period as 2002–2007, the crisis period as 2008–2011 (following the
expertise on the Sharia committee positively relate to the Z-score, but studies of Bennett et al., 2015; Arthur et al., 2015; and Andrieș and Ursu,
that Sharia committee size negatively affects the Z-score (see models 4 2016), and the post-crisis period as 2011–2018. Models 1–3 represent the
and 5). This strongly supports the H2 hypothesis and is consistent with pre-crisis phase of the period, models 4–6 represent the crisis phase of the
previous studies (Gul et al., 2011; Mollah and Zaman, 2015). However, period, and models 7–9 represent the post-crisis phase of the period.
the results in Table 5 do not provide evidence about the relationship The results in both the pre-crisis and post-crisis periods are consistent
between the independence of the sharia committee and risk-taking. This with our first result. These results are also consistent with Nguyen
finding does not support prior studies which found that independence (2021). During the crisis period, however, we find that the audit com-
can enhance Sharia committee effectiveness (Hamza, 2013; Basiruddin mittee independence (ACI) generally has a positive effect on the Z-score
and Ahmed, 2019). Although not all Sharia committee variables affect of both conventional and Islamic banks. However, coefficients on AFM,
risk-taking, we have evidence that Sharia committee effectiveness can ACS, AFE and AMF are not significantly related to the Z-score. Thus, it is
increase or influence constraint bank risk-taking in Islamic banks. weak to reject hypothesis H1B. Interestingly, we find that the Sharia size
Overall, audit committees have a role in the oversight of risk-taking in (SCS) positively relate to the Z-score in the crisis period. This result may
conventional banks, but they do not have the same role in Islamic banks. be explained by Baxter and Cotter (2009), who argue that large com-
In Islamic banks, Sharia committees play a crucial role in the oversight of mittees with members with varied expertise are more likely to have
risk-taking. effective oversight. The sign of the coefficient of the Sharia committee's
Furthermore, we find that bank size has a negative association with size, however, becomes negative in the post-crisis period.
the Z-score of both conventional and Islamic banks. Interestingly, both
concentration and institutional quality have a positive significant asso- 4.3. Extensions
ciation with the Z-score of conventional and Islamic banks, according to
our findings. These results have indicated that the level of bank risk To better understand the driving forces behind the hypothesized
depends on the bank's net interest revenue, the level of competition, and mechanisms of the audit and Sharia committees' effectiveness, in this
the quality of institutions in the countries. Our findings are compatible case measured by their efficiency with respect to bank risk, we performed
with previous studies (Dwumfour, 2017; Houston et al., 2010; Beck et al., two additional tests. First, we focused on the components of the Z-score
2013; Klomp and de Haan, 2014). Because of the high degree of risk, this to establish whether we could attribute the beneficial effect of the audit
result suggests that major banks of both types should consider proper risk and Sharia committee variables on bank risk-taking to the effects of these
governance to restrict risk-taking. variables’ capitalization level (E/A), profitability (ROA), or the volatility
As seen in Table 6, we further explore whether there is any change in of profits (δROA).
audit and Sharia committees role in oversight risk-taking. Our sample In Table 7 we find that audit committee independence (ACI), ac-
was divided into three phases of periods (ie. pre-crisis, crisis, and post- counting or financial expertise on the audit committee (AFE), and

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Table 8. Effect of audit committee and Sharia committee effectiveness on bank risk-taking, GMM method.

Variable Z-score LZ-score AZ-score NPLS

(1) IBs (2) CBs (3) Sharia (4) IBs (5) CBs (6) Sharia (7) IBs (8) CBs (9) Sharia (10) IBs (11) CBs (12) Sharia
committee committee committee committee
AFM 5.418 0.419 -2.192 0.014 0.079 -3.102 -1.425 -2.673 1.283 0.008 0.019 -1.127
ACS -2.312* -0.421 -1.585* 0.125 -3.027 -1.025 3.042 -1.892 3.225* 0.012* 0.021 0.085*
ACI 0.197 1.724** 2.819 0.097 0.028** 0.812 0.424 5.421*** -3.841 0.007 -0.021** 2.819
AFE 0.592 3.342*** 5.115 0.102* 0.142*** 0.145 -4.815 1.305** 2.165 0.002 -0.002** -3.196
AMF -0.336 2.415** 1.903 -0.006 0.419** 1.043 3.312 4.449** 0.952 -1.336 -0.015 0.915
SFM 2.484*** 0.074*** 3.929** -0.004***
SCS -0.922*** -0.007*** -6.516*** 0.192***
SCI 3.451 0.469 0.873 2.441
SFE 3.783*** 0.713*** 1.242** -0.003***
SMF 12.094 2.254 0.271 -2.15
DIV 3.719*** 5.823** 2.917 1.029** 1.203** 4.912 8.219** 4.715** 0.422 -1.219* -1.723** 0.847
BSIZE -0.318*** -1.685** -5.245* -0.117* -1.195** -0.242* -4.730*** -5.454 -3.673 0.018** 0.005** -1.215
NIM 2.217** 0.284 0.275 3.207 0.981 1.225 3.574* 4.623** 2.248* 3.217 0.784 0.075
IPO -7.918 -6.168 -3.541 -1.910* -3.162 -1.561 1.342 -6.175 -2.507 -0.928 -2.1612 -4.201
ASSQ -2.615 10.155 4.812 -5.411 8.154 -7.831 0.689 -5.476 -0.825 -2.615 1.251 3.810
CR3 4.285*** 3.467*** 2.173** 0.215*** 0.468*** 1.203** -4.272 7.413*** 1.189** 1.205 2.414*** 0.173**
GDP 4.533** -7.515 -0.721 1.003** -5.541 -2.746 2.568* -2.548 -3.743 0.587** -0.524 -0.742
INS 2.145* 2.316*** 4.281* 0.124 0.312*** 4.221* 3.672* 1.359** 3.881 -2.105* 1.317*** 1.081*
Hansen J test (p-value) 0.723 0.645 0.718 0.723 0.645 0.718 0.481 0.458 0.315 0.123 0.045 0.314
AR (1) (p-value) 0.000 0.000 0.002 0.012 0.018 0.009 0.001 0.023 0.012 0.054 0.016 0.013
AR (2) (p-value) 0.364 0.654 0.425 0.367 0.851 0.321 0.512 0.245 0.398 0.463 0.153 0.521
Obs 895 1133 895 868 1095 868 895 1133 895 895 1133 895

Note: This table presents the GMM estimation results for the effects of the audit and Sharia committee's effectiveness on bank risk-taking using Z-score (regression 1–3);
LZ-score (regression 4–6); AZ-score (regression 7–9); and NPLS (regression 10–12), respectively. See Table 2 for a description of the variables. * Significance at the 1%
level, ** Significance at the 5% level, *** Significance at the 10% level.

meeting frequency of the audit committee (AMF) are positively associ- Arellano and Bover (1995) and Blundell and Bond (1998), may be
ated with efficiency (ROA) and capital ratio (E/A) in conventional banks. appropriate way to deal with endogeneity concerns associated with the
These findings indicate that the audit committee's effectiveness in con- various determinants of bank risk-taking. Moreover, by using Hansen's
ventional banks is largely due to constraints on banks' risk-taking via J-statistic, we test the instrument validity. To test for order serial auto-
incentives to hold higher capital ratios as well as the reallocation effect of correlation, we apply the Arellano and Bond (1991). The effects of the
profits. These findings are consistent with Nguyen (2021). Aldamen et al. audit and Sharia committee's effectiveness on some proxies of risk-taking
(2012) propose that smaller audit committees with more financial are presented in Table 8.
expertise can enhance both the market and accounting performance of a We find that ACI, AFE, and AMF positively relate to the Z-score, LZ-
firm during a financial crisis. Kallamu and Saat (2015) find that inde- score, and AZ-score and negatively relate to NPLS in conventional
pendent audit committee members provide effective monitoring of the banks. The coefficient of the audit committee effectiveness variables is
firm's management, thereby enhancing profitability and reducing the almost insignificant; SFM and SFE positively and SCS negatively relate to
possibility of opportunistic behavior by management. We find, however, the Z-score, LZ-score, and AZ-score, and negatively relate to NPLS in Is-
that the proportion of female members (SFM) and the proportion of lamic banks. These results are consistent with our first finding and
financial and accounting experts (SFE) positively relate to ROA in Islamic continue to support our hypothesis. The effectiveness of the audit and
banks (model 6) but negatively relate to δROA (model 9). The coefficient Sharia committees may constraint bank risk-taking.
of SCS is negative and significant with the ROA but positive and signif- The diagnostics tests in Table 8 show that the model is appropriate to
icant with the δROA. This result indicates that the Sharia committee's test our hypotheses. The first-order autocorrelation (AR1) should be
effectiveness serves to constrain bank risk-taking via incentives to in- significant, and test results show a p-value lower than 0.05. The statis-
crease efficiency and reduce the volatility of profits in Islamic banks. tically insignificant AR2 (p > 0.05) in Table 8 suggests that if we fail to
Taken together, we find that the audit and Sharia committees' effec- reject the null hypothesis that there is no serial correlation in the idio-
tiveness have an effect on the bank risk of conventional and Islamic syncratic disturbances. Likewise, the Hansen test results indicate that the
banks, respectively, but with a difference in transmission mechanism. instruments are valid in their respective estimation. Overall, the system
Our findings provide an explanation about the mechanism – that GMM estimates in Table 8 demonstrate that the audit and Sharia com-
corporate governance effectiveness influences risk-taking – which the mittee's effectiveness are found to relate to bank risk-taking in a way
literature does not sufficiently address. consistent with our expectations.

4.4. Robustness tests 5. Conclusion

In this section, we use an alternative measure of bank risk-taking and Our research examines the effect of the effectiveness of the audit
a two-step system GMM to ensure that the estimates are robust to un- committee and Sharia committee on bank risk-taking and yields some
observed heterogeneity, simultaneity, and dynamic endogeneity (if any). important results. First, we find that the audit committee's effectiveness
The two-step system GMM estimation method, which is introduced by can oversee and constrain risk-taking in conventional banks but not in

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Q.K. Nguyen Heliyon 7 (2021) e07798

Islamic banks. The Sharia committee's effectiveness, however, can Akbar, S., Kharabsheh, B., Poletti-Hughes, J., Shah, S.Z.A., 2017. Board structure and
corporate risk taking in the UK financial sector. Int. Rev. Financ. Anal. 50, 101–110.
constrain risk-taking in Islamic banks. Second, the effectiveness of the
AlAbbad, A., Hassan, M.K., Saba, I., 2019. Can Shariah board characteristics influence
audit committee and Sharia committee demonstrate different mecha- risk-taking behavior of Islamic banks? Int. J. Islam. Middle E Finance Manag.
nisms that affect banks' risk-taking. Finally, the role of the audit com- Aldamen, H., Duncan, K., Kelly, S., McNamara, R., Nagel, S., 2012. Audit committee
mittee in conventional banks and the role of the Sharia committee in characteristics and firm performance during the global financial crisis. Account.
Finance 52 (4), 971–1000.
Islamic banks overseeing risk-taking are unchanged in different periods Alderman, J., Jollineau, S.J., 2020. Can audit committee expertise increase external
(pre-crisis, crisis, or post-crisis periods). Our results suggest that con- auditors' litigation risk? the moderating effect of audit committee independence.
ventional and Islamic banks should improve their corporate governance Contemp. Account. Res. 37 (2), 717–740.
Aljughaiman, A.A., Salama, A., 2019. Do banks effectively manage their risks? The role of
by enhancing the effectiveness of their audit committees and Sharia risk governance in the MENA region. J. Account. Publ. Pol. 38 (5), 106680.
committees to constrain risk-taking. Any change in the structure of the Alkdai, H.H., Hanefah, M.M., 2012. Audit committee characteristics and earnings
audit committee or Sharia committee should take into account the eco- management in Malaysian Shariah-compliant companies. Bus. Manag. Rev. 2 (2),
52–61.
nomic cycle. In addition, regulators in countries that have two kinds of Altman, E.I., 1968. Financial ratios, discriminant analysis and the prediction of corporate
banks should have different guidelines for each kind of bank to restruc- bankruptcy. J. Finance 23 (4), 589–609.
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European banks. Econ. Res. Ekon. Istra. 29 (1), 485–497.
taking. Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo
Since information about the audit committee and Sharia committee evidence and an application to employment equations. Rev. Econ. Stud. 58 (2),
was not published by many banks, we did not analyze some character- 277–297.
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