The Impact of Corporate and Shari’ah Governance on Risk Profile of Islamic Financial Institutions

Abstract

This study analyses the effects of corporate governance and Shari’ah governance on risk-taking practices in Islamic financial institutions in Pakistan. It also investigates the role of institutional quality in moderating these effects. A sample of 28 institutions, including Islamic commercial banks, Takaful operators, and Modarba companies, over the period of 2011–2022, is utilised for the analysis. Applying a generalised method of moments (GMM) estimator, the results suggest that several individual characteristics of corporate governance and its index are significantly related to Shari’ah non-compliance risk and solvency risk. The results reveal that institutional quality significantly contributes to lowering risk. From the findings, it is recommended that modern corporate and Shari’ah governance practices be adopted to manage the Shari’ah non-compliance risk and solvency risk.