JASR Publish

Journal of Asian Scientific Research
ISSN(e): 2223-1331
ISSN(p): 2226-5724
DOI: 10.55493/5003.v13i4.4926
Vol. 13, No. 4, 149-167.
© 2023 AESS Publications. All Rights Reserved.
URL: www.aessweb.com
Strengthening governance mechanisms and corporate social responsibility

disclosure: Drivers of performance in Islamic banks
Fahru Azwa Mohd Faculty of Business and Management, Universiti Sultan ZainalAbidin,
1,2,4,5
Zain1+ 21300 Kuala Nerus, Terengganu, Malaysia.

1
Email: fahrumdzain@unisza.edu.my
Wan Amalina Wan 2
Email: amalina@unisza.edu.my
Abdullah@Wan 4
Email: sheikhafaiz@unisza.edu.my
5
Email: hamdy@unisza.edu.my
Muda2 (+ Corresponding author)
Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan ,
3
SitiFariha 16100 Kota Bharu, Kelantan, Malaysia.

Muhamad3 3
Email: fariha@umk.edu.my
Sheikh Ahmad Faiz
Sheikh Ahmad
Tajuddin4
Hamdy Abdullah5
ABSTRACT
Article History This research examines the factors influencing the performance of Islamic banks in
Received: 16 August 2023 Southeast Asia (SEA) and the Gulf Cooperation Council (GCC) regions. It focuses on
Revised: 10 October 2023
Accepted: 2 November 2023 three key areas: corporate governance (CG), Shari’ah supervisory board (SSB)
Published: 8 December 2023 mechanisms, and corporate social responsibility (CSR) disclosure. This research
employed rigorous panel data regression analysis, covering data from 79 Islamic banks
Keywords spanning the years 2012 to 2021. This analytical approach revealed intricate
Corporate governance
Corporate social responsibility
connections between CG practices, SSB mechanisms, CSR disclosure, and bank
disclosure performance. Strong CG and SSB mechanisms, in conjunction with robust CSR
Islamic banking
Shari’ah supervisory board.
disclosure, positively impacted Islamic bank performance. These factors facilitated value
creation, accountability, and stability, even during the COVID-19 pandemic. This
underscores the significance of enhancing CG, SSB mechanisms, and CSR disclosure to
bolster transparency and trust within the Islamic banking sector. Collaborative efforts
among regulators, investors, and creditors are imperative for enforcing regulations,
formulating CSR guidelines, and strengthening governance. This research contributes
to a deeper understanding of CG practices, their impact, and the role of CSR disclosure
in Islamic banks. It offers valuable insights for stakeholders and enhances
comprehension of these mechanisms within the context of the SEA and GCC regions.
Contribution/Originality: This study contributes to the literature by offering a holistic examination of Islamic
banks, focusing on key factors, employing rigorous methodology, and providing insights amidst global challenges.
It offers practical implications for stakeholders and contributes to the advancement of knowledge in Islamic finance.
1. INTRODUCTION
Islamic banking has become an important sector in many countries, contributing to economic wealth and
development. The recent global financial crisis in the years 2007-2008 has received significant attention from
academics and practitioners [1]. They argue that the Corporate Governance (CG) mechanisms have resolved the
conflict among stakeholders and management of the company, and the CG mechanisms aim to function
appropriately to preserve stakeholders’ interests. CG is about accountability, responsibility, systems, methodologies,
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Journal of Asian Scientific Research, 2023, 13(4): 149-167
conveyance, and control of the power by which companies guarantee and keep up the parity of connections between
various classes of investors as well as between other premium gatherings and related partners. It is appreh ensive
about the arrangement of the interests of the societies that involve the administration and the investors of
companies [2].
The structure of CG differs between Islamic banks and conventional banks. The governments of different
countries where Islamic banking is practiced have put in place certain legal and regulatory frameworks that control
its activities.Different Islamic banking governance structures naturally have different philosophical bases, bank
goals, types of contracts, key player in CG practices, and how these stakeholders interact with each other [3].
Shari’ah governance constitutes an indispensable layer of oversight in Islamic banks, ensuring alignment with
Shari’ah rules and principles. The components of Shari’ah governance, both internal and external, bear
responsibility for supervising and monitoring Islamic banks. The primary mechanism of Shari’ah governance is the
Shari’ah Supervisory Board (SSB), tasked with ensuring that Islamic Financial Institutions (IFIs) adhere to Shari’ah
principles [4]. This adherence ensures compliance and enhances the institution's reputation among clients,
shareholders, and stakeholders [5].
There are two main factors driving this study. Firstly, previous studies on the Islamic banking governance
system mostly either focus on the CG or Shari’ah governance [6-9] or previous studies that provide empirical
evidence on the corporate and Shari’ah governance mechanisms in relation to the Islamic banks’ performance [10-
14] have used the only SSB characteristics as a proxy or measurement for Shari’ah governance. Based on the study
by Mollah and Zaman [11], these studies used other components of corporate and SSB mechanisms, such as board
diligence, audit diligence, SSB cross membership, SSB expertise, and a combination of the CG and SSB strengths as
a variable for interpreting the performance of Islamic banks. A higher score for the SSB would suggest that the SSB
is more analytical, knowledgeable, and reliable. With a higher SSB ranking, the Islamic banks will better monitor
and control the bank's operations and thus increase their financial efficiency. This study used strength to capture the
strengthened CG and SSB, as suggested by Wan Abdullah, et al. [15]; Mohd Zain, et al. [16] , and Ajili and Bouri
[17]. Secondly, the general limitation of the previous studies on the Islamic banks is that they were mostly
conducted in a relatively specific country or region, making the sample small and lackingin richness of data.
Therefore, an investigation of corporate and SSB practices across regions lacking empirical evidence is crucial to
understanding the impact of corporate and SSB mechanisms and practices on performance.
2. REVIEW OF LITERATURE AND HYPOTHESES DEVELOPMENT

2.1. Performance of Islamic Banks
Recent studies conclude that Islamic banks performed better than their conventional counterparts during the
2007-2008 global financial crisis [13]. According to Sahyouni and Wang [18], Islamic banks have higher liquidity
creation compared with conventional banks. Parashar [19] found that the profitability of Islamic banks decreased
during the crisis. However, it is still higher compared to conventional banks. Ajili and Bouri [17] measured the
performance of Islamic banks operating in GCC countries in light of CG quality. Their findings showed that the
compliance and conformity of Islamic banks to CG practices are not oriented towards maximising shareholders'
performance. On the contrary, Kusuma and Ayumardani [20] found that a well-governed CG structure is more
efficient and serves as a distinctive feature that distinguishes performing and non-performing banks.
2.2. Corporate Governance Strength and Performance

2.2.1. Board Size and Performance
One of the essential elements of internal control for CG is board size. Prior studies have argued that banks with
larger boards tend to perform well. Additional directors on the board cultivate a more vigorous decision -making
process, boosting banks’ performance [21]. Larger boards are assumed to be weak due to the dominance of chief
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executive officer (CEO) power on the board [22]. A smaller board makes banks perform better, and the additional
number of directors deteriorates bank performance [23, 24]. Because of free-riding directors, a large board is
thought to be unhelpful because it would eventually reduce the board’s ability to make decisions [11]. More
directors on the board create issues of inefficiency, free-riding problems, and ineffective communication [25].
2.2.2. Board Independence and Performance

The Board of Directors (BOD) is recognised as the entity responsible for upholding the interests of all
stakeholders involved. To acquire and enhance stakeholders' trust, it's crucial to have a mix of both executive and
non-executive members on the board. Nevertheless, there's contention that non-executive directors must fulfill their
roles effectively, especially when functioning as independent board members. Failure to do so could hinder their
ability to make impartial and fair decisions. Previous research has yielded mixed results regarding the relationship
between board independence and bank performance. While Al Manaseer, et al. [26]; Liu, et al. [27]; Shaukat, et al.
[28] and Fuzi, et al. [29] have reported a positive impact of independent boards on performance. Al‐Saidi and
Al‐Shammari [30] found a negative effect. Al‐Saidi and Al‐Shammari [30], argue that true independence and
business knowledge are lacking, as major shareholders have exclusive control over appointing independent board
members, even within banks. This study aligns with the findings of Al Manaseer, et al. [26]; Shaukat, et al. [28]
and Fuzi, et al. [29] in supporting a positive correlation between board independence and the performance of
Islamic banks.
2.2.3. Board Diligence and Performance

The frequency of board meetings is considered crucial to enhancing the board's effectiveness [31-33]. Previous
research suggests that board meetings and active participation therein serve as essential avenues through which
managers gain access to firm-specific knowledge and fulfill their monitoring duties. Lin, et al. [33] conducted a
study indicating that companies with inadequate board meeting performance experience more severe enforcement
issues compared to those with strong attendance during financial crises. Aryani, et al. [32] demonstrated a
connection between frequent board meetings and improved performance, possibly because more frequent meetings
are convened to address subpar performance. Similarly, Liang, et al. [34]; Lin, et al. [33]; Andres and Vallelado
[35] and Aryani, et al. [32] have all found that the frequency of board meetings has a positive and significant
impact on performance.
2.2.4. Audit Committee Size and Performance

The audit committee (AC) is the most integral component of the governance mechanism, which is responsible
for ensuring transparency in the disclosure of financial reporting. LargeACs size are argued to contribute better to
performance due to the diversity of skills and knowledge that do not exist in smaller ACs [36, 37]. AC is
responsible for ensuring transparency in the bank, such as providing credible and right information to their
shareholders and stakeholders. Furthermore, it is also responsible for preserving and protecting shareholders’
equity and interest, both internally and externally. Previous studies found a positive association between the size of
AC and firms’ performance [38-41]. This study uses the same argument as the studies mentioned above: when the
company hasmore representatives on AC, the committee uses more varied skills and knowledge to improve
oversight and potentially positively impact performance.
2.2.5. Audit Committee Independence and Performance

An AC is independent if it is mostly and legally made up of non-executive auditors whose job it is to find bad
financial management practices and keep an eye on internal control and regulatory compliance in order to lower the
risk of fraud and false financial information in order to get good results. ACs with a majority of non-executive
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auditors are considered to be less independent than those with more executive auditors. They are less exposed to
financial fraud. There are various empirical results of the association between AC independence and firm
performance of the company. Several studies [42-46] found that independence positively influences the company's
firm performance. However, in their study, Klein [47] and Dar, et al. [48] state that AC independence negatively
impacts performance.
2.2.6. Audit Committee Financial Expertise and Performance

According to Salloum, et al. [49], financial literacy is defined by accounting, finance, and audit expertise and
skills, including appropriate years of experience in these areas. The presence of this expertise on the audit committee
would assist the board of directors in improving the internal control and monitoring role and enhan cing the audit
committee's effectiveness in performing its functions [50]. Their expertise and experience are crucial in assessing
different issues, the quality of the company's operations and finances, and engaging in the scheduling and
preparation of audit tasks that will allow them to promote and validate external auditors' concerns at board
meetings [51]. Their technical knowledge enables them to evaluate and reduce inappropriate risks-taking that may
jeopardise banks' stability [52].
2.2.7. Audit Committee Diligence and Performance

There have been studies that looked at how useful the number of AC meetings was for different institutional
variables. The results depended on the type of variable being studied and how it interacted with other variables,
such as the category (economic, financial, accounting, and governance variables) the number (one or many
variables), the class (quantitative or qualitative variables), and the measurement (number, ratio, and binary variable).
The number of meetings as a determinant of the AC diligence showed that it was the best indicator of the
effectiveness of this governance body. Previous studies depended predictably on the total number of AC meetings as
a metric for AC diligence because other diligence measures are not publicly observable [53, 54]. In general,
previous studies found that more frequent AC meetings decreased the probability of problems in financial reporting
[53, 55-58]. The relationship between AC meetings and firms’ performance has been extensively discussed among
scholars. However, the reported results are still inconclusive. Many researchers declared th ese two variables
positively related (e.g., [38, 59]). The overall CG score is calculated for the Islamic banking sector (the score will be
indicated later as CG strength). So, the following hypothesis:
H1: There is a significant and positive relationship between CG strength (board size, board independence, board diligence,
audit committee (AC) size, AC independent, AC financial expertise, and AC diligence) and Islamic bank performance.
2.3. SSB Strength and Performance

2.3.1. SSB Size and Performance
Mollah and Zaman [11] found that SSB significantly influences Islamic banks' performance. According to
Hamdi and Zarai [3], larger Islamic banks are more likely to employ larger SSB sizes, as large Islamic banks'
enormous numbers of transactions require more monitoring and certifying work from SSB members. Nomran, et al.
[60] showed that the impacts of SSB characteristics are significant in large Islamic banks, as Shari’ah governance
practices are more prevalent in large Islamic banks. According to Mollah and Zaman [11], large SSBs influences the
performance of Islamic banks positively when the SSB has a supervisory role. A larger SSB is more efficient in
dealing with different monitoring and advisory roles compared to a small SSB. It also improves monitoring and
advisory functions in the bank, thus instigating better management behaviour and lowering organisational risk
[61].
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2.3.2. SSB Cross-Membership and Performance

A cross-membership SSB allows them to establish interaction and broader connections with other Islamic banks
and create more efficient resource allocation that, in turn, would enhance Islamic bank performance Almutairi and
Quttainah [61]. Almutairi and Quttainah [61]; Nomran, et al. [60] , and Rahman and Haron [62] found that SSB
cross-membership has a positive and significant impact on Islamic banks performance. SSB cross-membership
triggers good connections among the Islamic banks, equalises resource distribution, and raises the performance of
the Islamic banks Rahman and Haron [62]. Cross-membership SSBs get chances to increase their experience and
knowledge and strengthen their reputation [62, 63], which will eventually also enhance their knowledge as they are
exposed to more discussions about the application of Islamic law in banking [64]. Proponents of resource
dependency theory suggest that cross-membership Shari’ah scholars are exposed to several Shari’ah discussions and
have access to many transactions. This situation enhances the Shari’ah scholars’ knowledge and improves their
experience, which promotes the high innovation and development of new products in Islamic banks.
2.3.3. SSB Financial Expertise and Performance

Regarding SSB members in Islamic banks, scholars with more experience in financial knowledge are more
efficient in their performance as SSB members than scholars with no such skills [65]. Indeed, a large percentage of
SSB representatives in Islamic banks are Islamic scholars, with only a few possessing experience in accounting,
banking, economic, and financial matters [66]. For this reason, most SSB scholars lack the banking services that
affect their ability to execute well-informed decisions on financial products and activities [67]. SSB scholars with
skills in finance and accounting could positively and significantly impact the performance of Islamic banks, as
expertise in Shari’ah law, apart from market, accounting, and finance experience, will help them improve the quality
of performance of Islamic banks [68, 69]. Therefore, the following hypothesis is tested:
H2: There is a significant and positive relationship between SSB strength (SSB size, SSB expertise, and SSB cross-
memberships) and Islamic bank performance.
2.4. Mediating Variable

CSR disclosures play a significant role in business by improving corporate transparency, enhancing corporate
image, and providing valuable information for investment decision-making [70-73]. There are several studies
conducted on the relationship between CG mechanisms and CSR disclosures [7, 74-77]. While an excessive amount
of research attempts to examine the association between CSR disclosures and the performance of companies and
conventional financial institutions, the study of the associations between disclosures of CSR and the performance of
IFIs remains scarce [78-80]. The following hypothesis is based on the above argument: it wants to look into the
connection between CSR disclosures as a variable that acts as a bridge between CG mechanisms (CG strength) and
the performance of Islamic banks. This leads to the following hypothesis:
H3: CSR disclosures of the Islamic bank mediate the relationship between CG strength as well as SSB strength and the
Islamic banks’ performance.
3. RESEARCH METHOD
3.1. Sample and Data Collection
This research investigates the effectiveness of CG and the SSB in relation to the performance of Islamic banks
from 2012 to 2021. In recent years, the Islamic finance sector has gained increasing attention from policymakers,
central banks, investors, and scholars as a more viable alternative to Western financial systems [81]. Notably, since
it began in the middle of the 1970s, Islamic banking has grown significantly, forming an imp ortant part of the
Islamic financial industry [79]. The choices of Islamic banks in the SEA and GCC regions have been motivated by
the past three decades of growth in the banking sector. Data collection for this study concluded in the fiscal year
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2021, as it marked the latest available data when data collection commenced online. Our research sample comprises
79 Islamic banks operating across 12 countries in the SEA and the GCC region, based on the selection criteria
established in prior studies by Wan Abdullah, et al. [66] and Wan Abdullah, et al. [15]. To conduct this research,
secondary data from various archival sources was utilised. Financial data, encompassing metrics like Return on
Average Assets (ROAA), Return on Average Equity (ROAE), and Tobin's Q, were extracted from annual reports
and financial databases aggregating financial information from banks' financial statements. CG and SSB data were
acquired from each bank's annual reports and CG reports.
3.2. Variable Measurement

These studies use accounting and market-based measures to test the CG and SSB against bank performance.
Consistent with prior literature, these studies include accounting-based variables, the return on average assets
(ROAA), the return on average equity (ROAE), and the market-based variable of Tobin’s Q [11, 80]. The CG
strength and SSB strength are measures based on the studies by Al-Malkawi, et al. [82]; Wan Abdullah, et al. [15];
Ajili and Bouri [17] and Mohd Zain, et al. [83]. These studies have tested factor analysis for CG and SSB
mechanisms as strengths. The result of KMO shows that CG strength (board size, board independence, board
diligence, AC size, AC independence, AC financial expert , and AC diligence) is 0.711, and the Bartlett test of sphericity
is p=0.000. Meanwhile, KMO for the SSB strength (SSB size, cross-membership, and financial expertise) is 0.63, and
the Bartlett test of sphericity is p=0.000. The Cronbach’s alpha of CG strength and SSB strength is 0.903, and 0.905
means that the index has been developed to be reliable or internally consistent. The measurements of theitems in
this study are shown in Appendix 1.
3.2.1. Corporate Social Responsibility Disclosure Index

Based on the previous studies by Haniffa and Hudaib [84] and Platonova, et al. [80], this study identifies
dimensions and sub-dimensions for CSR disclosure in Islamic banks. Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) and previous research on CSR disclosure [85-89] serve as the basis for
developing CSR disclosure categories and items from the Shari’ah perspective. As a result, six key areas of CSR
disclosure for the Islamic banks have been established, which are “mission and vision statement”, “products and
services”, “zakat, charity, and benevolent fund”, “commitment towards employees”, “commitment towards debtors”,
and “commitment towards the community”. The key indicators of CSR disclosure are shown in Appendix2.
3.3. Model Specification and Estimation Method

These studies use seemingly unrelated regression to estimate the relationship between CG, SSB , and
performance. Seemingly unrelated regressions are a generalisation of a linear regression model consisting of
multiple regression equations, each having its own dependent variable and possibly different sets of exogenous
explanatory variables [90, 91]. The F-statistics for the POLS are not significant at 1 percent level of significance.
The Hausman test determines whether a fixed-effect or random-effect method is more appropriate for this study.
Based on the Hausman test result, after the rejection of the Breusch-Pagan test, this study employs the random
effect for market-based measurement and the fixed-effects (FE) method for accounting-based measurement [92].
To test the hypotheses, the following model is employed:
𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒𝑖𝑡 = 𝛼 + 𝛽1 𝐶𝐺𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ𝑖𝑡 + 𝛽2 𝑆𝑆𝐵𝑆𝑡𝑟𝑒𝑛 𝑔𝑡ℎ𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝐺𝐷𝑃𝑖𝑡
+ 𝛽6 𝑃𝑅𝐶𝐿𝑖𝑡 + 𝛽7 𝐿𝑒𝑔𝑎𝑙 𝑖𝑡 + 𝛽7 𝑀𝑢𝑠𝑙𝑖𝑚𝑃𝑜𝑝𝑖𝑡 + 𝜀𝑖𝑡
Where:
Performance = Performance (ROAA, ROAE or Tobin’s Q).
CGStrength = Corporate governance strength.
SSB Strength = Shari’ah Supervisory Board strength.
154
Size = Size of the Islamic banks.

Lev = Leverage of Islamic banks.
GDP = Gross domestic product.
PRCL = Political right and civil liberties.
Legal = Legal system.
MuslimPop = Muslim population.
i = Bank.
t = Time.
α = Intercept.
β1…βn = regression coefficient.
ε = Error term.
The Equation of the Mediator Model:
𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒𝑖𝑡 = 𝛼 + 𝛽1 𝐶𝐺𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝑖𝑡 + 𝛽2 𝑆𝑆𝐵𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝑖𝑡 + 𝛽3 𝐶𝑆𝑅𝐷𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝑖𝑡 + 𝛽6 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽7 𝐿𝑒𝑣𝑖𝑡
+ 𝛽8 𝐺𝐷𝑃𝑖𝑡 + 𝛽9 𝑃𝑅𝐶𝐿𝑖𝑡 + 𝛽10 𝐿𝑒𝑔𝑎𝑙 𝑖𝑡 + 𝛽11 𝑀𝑢𝑠𝑙𝑖𝑚𝑃𝑜𝑝𝑖𝑡 + 𝜀𝑖𝑡
Where:
Performance = Performance (ROAA, ROAE or Tobin’s Q).
CGStrength = Corporate governance strength.
SSB Strength = Shari’ah Supervisory Board strength.
CSRDisclosure = Corporate social responsibility disclosure.
Size = Size of the Islamic banks.
Lev = Leverage of Islamic banks.
GDP = Gross domestic product.
PRCL = Political right and civil liberties.
Legal = Legal system.
MuslimPop = Muslim population.
i = Bank.
t = Time.
α = Intercept.
β1…βn = Regression coefficient.
ε = Error term.
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Journal of Asian Scientific Research, 2023, x(x): xx-xx
Table 1. Descriptive statistics.

Full sample SEA sample GCC sample Two sample
Variable
Obs. Mean Std. dev. Min. Max. Skewness Kurtosis mean mean T-test
ROAA 790 0.978 1.795 -3.92 8.92 0.595 0.311 0.582 1.262 4.136***
ROAE 790 5.495 5.840 -6.92 18.62 -0.167 -0.226 5.398 5.564 0.303
Tobin’s Q 790 0.457 0.262 0.057 1.281 0.633 -0.092 0.391 0.505 4.770***
CSR disc 790 0.811 0.082 0.593 0.907 -0.365 -1.187 0.779 0.834 7.565***
CG strength 790 3.966 2.793 0 7 -0.132 -1.768 3.035 4.634 6.401***
SSB strength 790 1.736 1.225 0 3 -0.206 -1.59 1.313 2.040 6.654***
Size 790 7.981 1.514 4.576 10.941 -0.342 -0.502 7.911 8.031 0.848
PRCL 790 9.960 1.946 5 14 -0.248 -0.443 10.258 9.746 -2.842***
Leverage 790 0.669 0.470 0.017 2.08 0.547 -0.752 0.561 0.746 4.317***
GDP 790 4.072 1.723 -0.93 7.24 -1.168 1.044 5.015 3.396 -11.384***
Muslim pop 790 0.778 0.132 0.43 0.952 -0.306 -1.134 0.794 0.766 -2.253**
Note: ROAA= Return on average assets; ROAE= Return on average equity; Tobin’s Q= Tobin’s Q; CSR Disc= CSR Disclosure; CG Strength= Index of CG mechanisms (BOD size, BOD independence, BOD
diligence, AC size, AC independence, AC financial expert and AC diligence); SSB Strength= Index of SSB mechanisms (SSB size, SSB cross membership and SSB financial expertise; SIZE= Log total asset;
PRCL= Political right and civil liberties; Lev= Leverage of Islamic bank, GDP= Gross domestic product; Muslim Pop= Muslim population
***Significant at 1 %-level; **Significant at 5 %- level; *Significant at 10 %-level.
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4. RESULTS AND DISCUSSION

4.1. Descriptive Statistics
Table 1 presents summary statistics of descriptive analysis for dependent variables and independent variables,
which are performance, CG, and SSB strength. Besides that, six control variables have been included in this study.
Another essential point is that Table 1 shows the result of the Skewness and Kurtosis for the main variable in this
study. Skewness refers to the symmetry of the distribution, and Kurtosis indicates the distribution's peak [93].
Furthermore, Hair Jr, et al. [94] and Hair, et al. [95] recommended that Skewness and Kurtosis's acceptable values
range between -1 and 1. However, several authors claimed that the acceptable limit between -2 and 2 was
deliberated adequately to verify a normal univariate distribution [96, 97]. Henceforth, Skewness, and Kurtosis's
absolute values for the entire main item in the study are within the acceptable range of -2 to 2, respectively.
Skewness is within the range of -1.168 to 0.633, while Kurtosis is within the range of -1.768 to 1.044.
4.2. Panel Data Analysis

Based on the statistical analysis shown in Table 2, the results show that CG strength and SSB strength are
positive and significant for the performance of accounting-based and market-based measurements, supporting
hypotheses 1 and 2 of these studies. The result is consistent with the studies on board size [98-101], board
independence [26, 27, 29, 102], and board diligence [31-34]. These results indicate that companies need a greater
pool of knowledge and skills, which leads to appointing more directors to the board. Similar to Mak and Li
[98];Adams and Mehran [99]; Coles, et al. [100] and Chen [101], this study suggests that a large board could
provide more experience, expertise, specialised skills, and communication opportunities, which eventually leads to
better performance of Islamic banks. Liang, et al. [34]; Lin, et al. [33]; Andres and Vallelado [35] and Aryani, et
al. [32] argued that board meetings and participation in meetings are considered to be important channels through
which directors receive firm-specific details and can fulfil their monitoring role.
In the same way, the result is consistent with the study on AC size [38-41], AC independence [42-46], AC
expertise [36, 37, 42, 103-105], and AC diligence [38, 53, 59]. This study argues that when the company has more
representatives on AC, the committee employs more diverse skills and knowledge to improve supervision and
eventually positively affect performance.
SSB strength in this research is significant in accounting-based and market-based measurements, supporting
hypothesis 2. The SSB system had three main roles: advising, monitoring, and maintaining the Shari’ah rule of the
Islamic banks [106]. The first task included the certification of the approved financial instruments and a description
of how the Zakat should be measured [107]. Besides, the SSB played an important role as an internal control
mechanism to evaluate and manage the operations of the Islamic bank [72]. Having regard to this brief review, it
can be concluded that the SSB is one of the keys to CG mechanisms that enhance stability and, ultimately, the
profitability of the IFIs. Mollah and Zaman [11] found that SSB positively affected Islamic banks' performance
when they played the supervisory role, while their impact was negligible when they played an advisory role. Based
on this finding, these studies can conclude that the SSB in these studies played more of a supervisory role than an
advisory role, as in the Mollah and Zaman [11] study. Large SSB size leads to different perspectives and skills from
different fiqh schools, leading to a better understanding of products and operations and , hence, better results.
Meanwhile, cross-memberships of SSB can enhance scholars' knowledge and experience, and financial expertise
exposes scholars to more Islamic banking-related debates and thus enhances Islamic bank efficiency [14]. These
statements can instill trust in stakeholders regarding Islamic banking products.
Besides that, Farook, et al. [64] reported that scholars have better informed Islam's current implications for
IFIs with a doctorate in accounting, business, and economics. Hence, this study combined the three SSB
characteristics (SSB size, cross-membership of SSB, and expertise of SSB members) into an index to measure its
effectiveness. A higher SSB score indicates that SSB is more intellectually honest, knowledgeable, and efficient [108,
157
109]. Thus, an Islamic bank with a higher SSB score would lead to more monitoring and control of the banks’
activities and thus improve performance.
The result concerning the legal system provides evidence that Islamic banks in common-law countries tend to
provide more disclosures and better performance than those in code-law countries. The result shows that the legal
system has a statistically significant and negative relationship with accounting and market -based measurement
performance. This result is consistent with the La Porta, et al. [110] study. According to La Porta, et al. [110],
empirical research is significantly influenced by variations in accounting standards, and practices across nations.
These studies illustrate that countries with English common law systems tend to have better economic
development, healthier capital markets, higher accounting standards and better enforcement compared to countries
with code law systems. Complementary to this, the size and Muslim popul ation results are significant at 5 and 10
percent on the market-based measurement performance only. These results show the different significance of the
variable because market-based performance uses random effects, whereas accounting-based performances are based
on fixed-effect testing.
Table 2. Result of regression analysis between CG strength, SSB strength and ROAA.
ROAA ROAE Tobin's Q
Variable
Fixed effect robust Fixed effect robust Random effect
Constants -0.047 0.014 -0.041
0.313*** 0.346*** 0.322***
CG strength
(0.000) (0.000) (0.000)
0.387*** 0.328*** 0.396***
SSB strength
(0.000) (0.000) (0.000)
-0.194 0.025 0.080**
Size
(0.285) (0.881) (0.043)
0.117 -0.086 -0.049
PRCL
(0.377) (0.428) (0.320)
-0.364*** -0.271*** -0.194***
Legal
(0.000) (0.014) (0.002)
0.053 0.001 0.020
Lev
(0.190) (0.980) (0.581)
0.026 -0.011 0.013
GDP
(0.596) (0.815) (0.771)
0.002 -0.105 0.083*
Muslim pop
(0.981) (0.132) (0.059)
Observation (N) 790 790 790
R-squared 0.454 0.488 0.508
Adjusted R-squared Na Na Na
F-Stat / Wald chi2 14.78*** 21.29*** 415.18***
177.31*** 167.50*** 4.50
Breush Pagan test
(0.000) (0.000) (0.017) **
32.35*** 17.14** 14.27*
Hausmantest
(0.000) (0.029) (0.075)
Multicollinearity (Vif) 1.72 1.72 -
31366.94*** 3411.35***
Heteroskedasticity -
(0.000) (0.000)
0.400 2.028
Serial correlation -
(0.529) (0.158)
Note: ROAA= Return on average assets; ROAE= Return on average equity; Tobin's Q= Tobin's Q; CG Strength= Index of CG mechanisms (BO D
size, BOD independence, BOD diligence, AC size, AC independence, AC financial expert and AC diligence); SSB Strength= Index of SSB
mechanisms (SSB size, SSB cross-membership and SSB financial expertise); SIZE= Log total asset; PRCL= Political right and civil lib erties;
Legal= legal systems of countries; Lev= Leverage of Islamic bank, GDP= Gross domestic product; Muslim Pop= Muslim population
1. *** Significant at 1% level; ** Significant at 5% level; and * Significant at 10% level .
2. The sample of Islamic banks panel data runs from 2012 to 2021 (strongly balanced).
158
4.3. Result of Mediating Analysis

In Table 3 , you can see the outcome of comparing the CSR disclosure of CG and SSB, as well as the
performance and strength of Islamic banks. This study applied the Parashar [19] method of bootstrapping the
indirect effect to determine the presence of the mediation effect. The results for CSR disclosure mediating effects on
the relationships between CG strength, SSB strength, and Islamic bank performance have been shown in Table 3.
The result shows that CSR disclosure partially mediates the relationship between CG strength and Islamic banks’
performance in accounting-based and market-based measurements. The results support Hypothesis 3 of the study.
CSR disclosures play a significant role in business by improving corporate transparency, enhancing corporate
image, providing valuable information for investment decision-making, and leading to better performance for the
company [70-73]. The legitimacy theory argues for the role of corporations in the eyes of society. It delineates an
implied contract between corporate societies to meet the expectations of society and legitimise their existence.
Islamic banks with a higher expectation of social development and well -being need to disclose more in the domain
of CSR [111]. Then, a higher level of CSR disclosure can positively influence Islamic banks’ performance based on
the premise that it has improved communication.
Table 3.The mediation effect of CSR disclosure on the relationship between CG and SSB strength on performance.
Effect percentile
Variable Indirect
Total Direct bootstrap 95 per cent Mediation
P-value
effect effect confidence interval effect
Dependence Independents (Bootstrap)
Lower Upper
0.369*** 0.246*** 0.246*** Partial
CG strength 0.145 0.347
(0.000) (0.000) (0.000) mediation
ROAA
0.353*** 0.234*** 0.234*** Partial
SSB strength 0.112 0.355
(0.000) (0.000) (0.000) mediation
0.413*** 0.301*** 0.301*** Partial
(0.000) (0.000) (0.000) mediation
ROAE
0.344*** 0.237*** 0.237*** Partial
(0.000) (0.000) (0.001) mediation
0.342*** 0.234*** 0.234*** Partial
(0.000) (0.000) (0.000) mediation
Tobin’s Q
0.385*** 0.281*** 0.281*** Partial
(0.000) (0.000) (0.000) mediation
Note: ***Significant at 1 per cent level.
**Significant at 5 per cent level.
*Significant at 10 per cent level.
4.4. Robustness Test

These studies try to test the two-step system GMM using the approach by Arellano and Bover [112] and
Blundell and Bond [113] using the commands “xtabond” and “xtdpdsys” in Stata 14 software, and the result shows
lagged dependence is not significant. The result of lagged dependent is not significant, showing that the data are
not dynamic and considered either static (unchanging) or persistent, which is infrequently accessed data that is not
likely to be modified.
5. CONCLUSION
Past literature has proven that sound CG mechanisms are the contributing factors that influence the
performance of conventional and Islamic banks. Based on the previous study, this research examines the effect of the
CG's strength and the SSB's strength on Islamic bank performance. The CG strength was measured based on the
characteristics of the total CG and is the same as the measurement of the SSB resistance. These techniques are
based on the studies of Al-Malkawi, et al. [82]; Wan Abdullah, et al. [15] and Ajili and Bouri [17]. Based on the
previous literature examined and the results of this study, we can conclude that a better CG mechanism will lead to
159
better corporate performance at the Islamic bank. Beyond that, the revelation of the CG mechanism directly affects
the Islamic bank's good performance. The implementation of a good CG will increase efficiency and stimulate
economic growth. The presence of an effective CG will contribute to increasing the level of trust necessary for the
proper functioning of the financial sector, particularly in the capital market and Islamic banking sectors.
Considering the unique challenges posed by the COVID-19 pandemic, effective governance mechanisms are
crucial for the resilience of Islamic banks. Strengthened governance structures, coupled with robust CSR disclosure
practices, not only promote transparency and accountability but also contribute to fraud prevention and financial
system stability. Regulators, investors, and creditors should focus on implementing specific disclosure requirements
and developing CSR disclosure guidelines tailored to Islamic banks. By doing so, they can enhance performance,
minimise disparities in CSR disclosure practices, and attract more investors to the sector. Additionally, more
research should be done to address the study’s limitations and learn more about how governance structures affect
CSR disclosure in IFIs. This will help us understand these dynamics better.
Recommendations for future studies include conducting comparative analyses across different regions to assess
the effectiveness of governance mechanisms and CSR disclosure in Islamic banks. Moreover, exploring the impact
of specific events or crises, similar to the COVID-19 pandemic, on the relationship between governance
mechanisms, CSR disclosure, and bank performance would provide valuable insights. Additionally, further research
could delve into the specific attributes and practices of SSBs and their impact on Islamic bank performance. Lastly,
investigating the long-term effects of strengthened governance standards and disclosure practices on attracting
investors and enhancing the reputation and credibility of Islamic banks would contribute to a more comprehensive
understanding of the field.
Funding: This research is supported by Ministry of Higher Education Malaysia the Fundamental Research
Grant Scheme (Grant number: FRGS/1/2019/SS01/UNISZA/02/1).
Institutional Review Board Statement: Not applicable.
Transparency: The authors state that the manuscript is honest, truthful, and transparent, that no key
aspects of the investigation have been omitted, and that any differences from the study as planned have been
clarified. This study followed all writing ethics.
Data Availability Statement: The corresponding author can provide the supporting data of this study
upon a reasonable request.
Competing Interests: The authors declare that they have no competing interests.
Authors’ Contributions: All authors contributed equally to the conception and design of the study. All
authors have read and agreed to the published version of the manuscript.
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APPENDIX
Appendix 1.Measurement of variables.
Variable Measurement
Performance ROAA = Net income divided by total average asset
ROAE = Net income divided by total average equity
Tobin’s Q = The total market value of the firm divided by the total asset value of the firm
CG strength Board size + Board independence + Board diligence + AC size + AC independence + AC
financial expertise + AC diligence
Board Size = 1 for the number of directors on the board above the median of 8, 0 otherwise
Board Independence = 1 for the number of independent directors on the board above the
median of 0.667, 0 otherwise
Board diligence = 1 for the number of the meeting held above the median of 5, 0 otherwise
AC Size = 1 for the number of members in the AC above the median of 4, 0 otherwise
AC independence = 1 for the number of Independence AC above the median of 0.667, 0
otherwise
AC financial expertise = 1 for the number of AC financial expertise above the median of
0.750, 0 otherwise
AC diligence = 1 for the number of the AC meeting held above the median of 4, 0 otherwise
SSB strength SSB cross-memberships +Number of SSB members + Financial expertise of the SSB
SSB size = 1 for the number of SSB members above the median of 4, 0 otherwise
SSB cross-memberships = 1 for the average number of cross-memberships of the SSB
members in institutions offering Islamic financial services above the median of 3.250, 0
otherwise
SSB financial expertise = 1 for the number of SSB financial expertise above th e median of
0.333, 0 otherwise
CSR disclosure Disclosure’s index incorporates items from AAOIFI [106], Governance Standards No 7
and previous study
SIZE Total asset of the Islamic banks (Natural logarithm of total assets)
PRCL Overall23ombined index scores of political rights and civil liberties based on the work of
Gastil [114]and Freedom House [115]for the given nation: 1 (Freedom) to 14 (Repression)
Legal 1 if Common law, 0 otherwise
Leverage Total debt divided by total asset
GDP The annualised growth rate of GDP per capita
MuslimPop Percentage of the Muslim population (Number of Muslim populations divided by total
number of population)
Appendix 2.Summary of CSR disclosure checklist.

No Categories Number of items
1 Mission and vision statement 9
2 Product and services 8
3 Zakat, charity and benevolent finds bank 15
4 Commitment towards employees’ 10
5 Commitment towards debtors 5
6 Commitment toward community 7
Total 54
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Journal of Asian Scientific Research

Strengthening governance mechanisms and corporate social responsibility

Zain1+ 21300 Kuala Nerus, Terengganu, Malaysia.

SitiFariha 16100 Kota Bharu, Kelantan, Malaysia.

2. REVIEW OF LITERATURE AND HYPOTHESES DEVELOPMENT

2.2. Corporate Governance Strength and Performance

2.2.2. Board Independence and Performance

2.2.3. Board Diligence and Performance

2.2.4. Audit Committee Size and Performance

2.2.5. Audit Committee Independence and Performance

2.2.6. Audit Committee Financial Expertise and Performance

2.2.7. Audit Committee Diligence and Performance

2.3. SSB Strength and Performance

2.3.2. SSB Cross-Membership and Performance

2.3.3. SSB Financial Expertise and Performance

2.4. Mediating Variable

3.2. Variable Measurement

3.2.1. Corporate Social Responsibility Disclosure Index

3.3. Model Specification and Estimation Method

Size = Size of the Islamic banks.

Table 1. Descriptive statistics.

4. RESULTS AND DISCUSSION

4.2. Panel Data Analysis

4.3. Result of Mediating Analysis

4.4. Robustness Test

Appendix 1.Measurement of variables.

Appendix 2.Summary of CSR disclosure checklist.

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