GRM 2010 GRM 2011

Abstract Details

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The Effect of Corporate Governance on Islamic Banks’ Ratings: Evidence from GCC Countries
Paper Proposal Text :
The credit rating reflect an opinion of a rating agency of an entity overall credit worthiness and its capacity to satisfy its financial obligations (Standards & Poor’s, 2002). Credit agencies are not only concerned by profits and financial results but also concerned with the corporate governance of the firm because weak governance can impair a firm’s position and level debt stakeholders vulnerable to losses.
Islamic banks are particular financial institutions generating distinct corporate governance challenges. In fact, a central feature of corporate governance of an Islamic financial institution is ensuring Shari’a compliance. Hence, Islamic banks have a complicate system of corporate governance. Unlike conventional banks; Islamic financial institutions are submitted to a two internal structure of corporate governance: the Board of Directors and the Supervisory Shari’a Board.
During the last financial crisis, Islamic banks have displayed a strong resilience amid this crisis. Moreover, Islamic banks have known, in the last three decades, a rapid growth and an enormous increasing presence in the world financial markets. More than 950 Billion dollars are invested in more than 300 financial institutions operated all over the world with annual growth rate float between 20% and 30% (the banker, 2010).
The remarkable growth of the Islamic banks’ assets, the strong resilience displayed by Islamic banks amid the global financial crisis and the distinct corporate governance system of these banks; that entire draw our attention to study the effect of corporate Governance of Islamic banks on credit rating. In this paper, we try to investigate whether Islamic banks that process strong corporate governance benefit from higher credit ratings relative to banks with weak governance. Moreover, we investigate how the unique corporate governance’s characteristic: the Shari’a Supervisory Board can affect directly or indirectly the credit rating of Islamic banks.
For that, We conduct a comparative study between Islamic and non Islamic bank in GCC countries.
We conduct an empirical study using a sample of 50 Islamic banks and 50 conventional banks from 5 GCC countries observed for the year: 2006 (before the financial crisis), 2008 (the year of the financial crisis) and 2010 (post crisis year). We collect data for cooperate governance from the annual report of banks. For financial data, we gather data from financial statement of banks. And to structure our analysis, we adopt a framework developed by rating agency for evaluating firms’ corporate governance structures and practices. In generally, credit rating agencies frameworks focus on four major elements of corporate governance: Financial Stakeholder rights and relation, ownership structure and influence, financial transparency and internal corporate governance structure (Collins, LaFond and Skaife, 2006). The governance characteristic we investigate within each of these components are considered to enhance the monitoring of management’s actions to help effective decision making, limit the opportunistic behavior of top management and reduce the information asymmetry between the directors, shareholders, managements and external stakeholders.
Preliminary results throw some doubt on Islamic finance as a superior system; more analysis is needed before making any conclusion.
Key words: Islamic banks, Shari’a Governance, credit rating, Shari’a Supervisory Board, GCC