Corporate Governance and Credit Rating of Islamic Banks: Moderating Role of Shariah Governance Attributes

Abstract

Shariah governance is the mechanism to monitor and implicate shariah compliance in Islamic banks. The study’s goal of exploring the Islamic bank’s governance attributes and credit scores or rating relationship in the presence of shariah board attributes as moderators. The study collected time-variant data from 22 Asian banks (286 observations) from 2006 to 2018. Applied descriptive statistics, correlations, Likelihood Ratio (LR) test and the Ordered Logistic Regression model, a suitable technique for the ordinal dependent variable. The study findings provide evidence of shariah governance’s moderating role in the relationship between corporate governance attributes and credit rating. Moreover, shariah board characteristics strengthen the association between the corporate board and credit worthiness nexus. This research recommends that credit score evaluating agencies consider the shariah governance characteristics in evaluating Ib’s credit rating. The shariah governance attributes as part of credit rating can be an appropriate method for investors to measure the shariah compliance level of Ibs. Accordingly, Ibs can gain the confidence of investors or sukuk investors by improving shariah compliance and can access competitive fund sources. The study’s uniqueness is in determining the impact of shariah governance attributes as moderators on the board-rating nexus. This study suggested that credit rating agencies revise or amend their assessment procedures for Ibs. Abundant literature is available from the owner’s point of view. Nonetheless, this research explores governance and shariah governance attributes concerning Sukuk holders.