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The conflicts of interest inside theShari’a supervisory board
Samy Nathan GarasNew York Institute of Technology, Manama, Bahrain
Abstract
Purpose – The purpose of this study is to identify the relation between the conflicts of interest in theShari’a Supervisory Board (SSB) in the Islamic financial institutions (IFIs) and six independentvariables: the SSB executive position, the SSB remuneration, the relation between the SSB membersand the Board of Directors (BoD), and the multiple memberships in Islamic funds, issuers of Islamicbonds (Sukuk), and companies trading in capital markets.
Design/methodology/approach – The variables are articulated in six hypotheses and tested byordinary least square regression. The data were collected via a questionnaire which was sent to theshareholders, the BoD, and the SSB members of all of the IFIs in the Gulf Cooperation Council (GCC)countries.
Findings – The results indicate that the SSB executive position, the relation between the SSBmembers and the BoDs, and the membership in Islamic funds and issuers of Islamic bonds aresignificantly related to the conflicts of interest, whereas remuneration and membership in companiestrading in capital markets have insignificant relation.
Research limitations/implications – The paper does not address the impact of SSB ownership inthe IFIs, or the relation between the SSB and the shareholders, or the impact of the corporategovernance codes on the relationship between the IFI and the SSB.
Practical implications – The study recommends testing the hypotheses in other geographies togeneralize the results, and measuring the impact of the SSB ownership on the conflicts of interest aswell as its relation with shareholders, regulators, and clients.
Social implications – The paper provides practical implications to the SSB members and the BoDin the IFIs and calls for setting a maximum number of SSBs for each SSB member.
Originality/value – This study contributes to the literature gap of the SSB role in the governance ofIFIs. It is believed to be one of first studies that provide empirical evidence about the SSB conflicts ofinterest in the IFIs of the GCC region.
Keywords Shari’a supervisory board, Conflicts of interest, Islamic financial institutions,Board governance, Corporate governance, Islam
Paper type Research paper
1. IntroductionAlthough there is a gap between religion and financial system, under Islam there is noseparation between religious life and business life (Nicholas, 1994). The principles of theIslamic financial system are derived from Islamic canon law (Shari’a), which regulatesevery aspect of Muslims’ life, including the way of generating profit. The Islamic Shari’ahas established specific guidelines for Islamic financial system such as prohibition ofinterest in all transactions (Gerrard and Cunningham, 1997; Haque, 1999; Khan andMirakhor, 1992; Quran, n.d.; Saeed, 1996), prohibition of gambling which takes differentforms of combative relationship between two contracting parties (Rosenthal, 1975), andprohibition of some lines of business such as arms, alcohol, and tobacco (Wilson, 1997).On the other hand, the Islamic Shari’a emphasizes full disclosure and transparencyamong trading parties in every transaction (Ebrahim, 2001; Thomas et al., 2005).
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International Journal of Islamic andMiddle Eastern Finance andManagementVol. 5 No. 2, 2012pp. 88-105q Emerald Group Publishing Limited1753-8394DOI 10.1108/17538391211233399
Since Muslims could not have authority on the conventional financial institutions toadapt the aforementioned principles in their transactions, they established the IslamicFinancial Institutions (IFIs) based on Shari’a principles. The IFIs are controlled byclassical Board of Directors (BoD) as well as Shari’a Supervisory Board (SSB) to ensuretheir compliance with Shari’a. The IFIs started in 1970s in Egypt and spread around inthe Middle East, North Africa, Far East, Europe, and the USA. In 2009, the number ofIFIs has reached 458 worldwide as reported in the Appendix.
The Gulf Cooperation Council (GCC) countries excluding Oman (Bahrain, Kuwait,Qatar, Saudi Arabia, and United Arab Emirates (UAE)) hold 219 IFIs out of 458 whichconstitute almost half of the total number of IFIs. This large number of IFIs in smallgeographical countries (except Saudi Arabia) has brought several challenges before theIFIs such as the shortage of qualified manpower that understands the IFIstransactions, and the shortage of the qualified Shari’a scholars who suits the SSBmembership. In 2009, the SSB members were found to be 100 Shari’a scholars in theGCC region (CIBAFI, 2009; Zawya, 2009; IFIS, 2009), which is way below the number ofIFIs. In the meantime, the Accounting and Auditing Organization for Islamic FinancialInstitutions (AAOIFI) has set the Governance Standard No. 1 requiring the Islamicbanks to establish their SSBs with three members as a minimum in each SSB andrecommending the same requirement for other types of IFIs such as Islamic insurancecompanies, Islamic funds, Islamic real estate companies and Islamic corporationstrading in capital markets (AAOIFI, Governance Standards, 2008; Hassan, 2001). Theshortage of Shari’a scholars coupled with AAOIFI requirements has ended by havingsome Shari’a scholars sitting on several SSBs, which creates conflicts of interest andlimits their contributions in each SSB (Al Qattan, A., 2008; Hameed, 2009). Moreover,some of the SSB members were offered executive positions inside the IFIs, while othersreceived high remuneration. On the other hand, some of the SSB members haveestablished their relations with the BoD. This study defines the conflicts of interest anddiscusses the impact of these variables on the conflicts of interest.
2. Literature review and research hypothesesIslamic Shari’a has defined conflicts of interest as offenses (haram). One hadeeth says“leave that which makes you doubt for what does not make you doubt” (Hadeeth fromMohammed al-Hassan bin Ali narrated by Al-Tirmidhi; Al Nesaa’i; and Ahmed). Thishadeeth considers conflicts of interest as any situation that creates doubts in others.Another hadeeth says “who keeps himself away from doubts, will highly exalt hisreligion and his integrity; and whoever commits doubtful things, commits offenses(haram)” (Hadeeth narrated by Al Boukhari; Muslim; Al-Tirmidhi; and Al Nesaa’i). Thesecond hadeeth emphasizes the positive side of the eliminating the conflicts of interest,which is exalting the individual’s religion and integrity. Accordingly, conflicts ofinterest are not desirable in Islam whether in personal life or in business arena.
Al Qari (2008) defines conflicts of interest as “the shortage in fulfillment of twodesires in a contractual agreement because they go against each other”. This definitionaddresses the conflicts of interest in all kinds of relationship. Also, Rizk-Al Qazzaz(2008) defines conflicts of interest as:
[. . .] the impairment of the decision maker’s objectivity and independence due to physical oremotional desire for himself or his relative(s) or his friend(s); or the changes in the person’sperformance due to direct or indirect personal concerns or awareness of some information.
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This definition highlights the impact of conflicts of interest on decisions andperformance which is relevant to the SSB work. Based on the second definition, Faddad(2008) and Al Qattan (2009) conclude that conflicts of interest are not treason becauseconflicts resemble competition between different desires that raise suspicion in others’minds, while treason is an illegal crime which leads to a legal penalty. Since Shari’ascholars are the most reverent people among Muslims, they do their best to keepthemselves away from doubtful situations to maintain their integrity.
The shortage of Shari’a scholars’ number might create conflicts of interest when theSSB member sits on several SSBs and takes advantage from the information of the IFIs.Thomas et al. (2005) confirms that the number of qualified Shari’a scholars is too limitedto meet the growing demand of the IFIs. However, Bakr (2002) argues that theinvolvement of Shari’a scholars in more than one SSB leads to conflicts of interestbecause it is hard to express an independent opinion for two different IFIs during therelease of new products by two competitors. On the other hand, the IFIs’ regulators didnot issue a standard or address the consequences of violating the privacy rules andsharing the information of one IFI with another (Bakr, 2001). However, the existence of acode of ethics inside the IFIs can work as a supplementary document that informs theSSB members about the rules of privacy, and information sharing (Faddad, 2008; Issa,2009). The discussion is theoretically sound; nevertheless, it is hard to be appliedpractically because the IFIs are obliged to choose from the available Shari’a scholars(Al Qari, 2008; Al Qattan, A., 2008, 2009; Al Qattan, M., 2008; Issa, 2009). Some of the IFIs(Khaleeji Commercial Bank in Bahrain, Dubai Islamic Bank in Dubai, and Qatar IslamicBank in Qatar) have recruited popular Shari’a scholars who are multi-lingual withadvanced knowledge in economy and law in order to have a relative advantage in themarket.
However, sitting on several SSBs will enable the SSB member to have access to a lot ofcrucial information such as new products and services, managerial violations inside oroutside the operation which might lead to potential losses, and the performance of thecurrent projects and products (Issa, 2009). This information can bring tangible orintangible benefits to the SSB member such as moving the investments fromone institution to another in case of potential losses and sharing the information of oneinstitution with its competitors, clients or other stakeholders (Al Qari, 2008; Faddad,2008). Hence, the AAOIFI Governance Standard (No. 1, 2008, Para 7) recommendsrecruiting an expert in the field of Islamic finance with normal knowledge in Shari’a tobecome an independent member and do the SSB functions as Shari’a scholars except forthe right of voting on fatwas (Al Nashmi, 2002). The recruitment of this type of memberswill fill the shortage of Shari’a scholars by increasing the available number of SSBmembers. On the other hand, Al Salaheen (2005) recommends training the SSB membersin different areas of knowledge.
The conflicts of interest do not only arise from the multiple memberships in severalSSBs, but also from holding executive position in the organization. Previous studies(Al Bayrkdar, 2008; Al Qari, 2008; Al Qattan, 2009; Bakr, 2002; Faddad, 2008; Issa,2009) confirm that holding executive position by SSB members besides their initialposition as SSB members leads to conflicts of interest. The AAOIFI GovernanceStandard (No. 5, 2008, Paras 7-8) recommends that SSB members should not take anyexecutive position in the institution because it impairs the SSB independence.Accordingly, we can infer the first hypothesis:
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H1. Conflicts of interest in the SSB are positively related to SSB executivepositions inside the IFI.
Although the establishment of SSB is obligatory for Islamic banks to be licensed, it isrecommended for other types of IFIs such as Islamic funds. According to theAppendix, the total number of Islamic funds in the GCC countries is seven funds (one inQatar, one in Saudi Arabia, and five in UAE), which indicates their small market sharein the financial markets. The small number of Islamic funds indicates the lack ofinvestment in Islamic funds and the shortage in experts who can manage these fundsincluding Shari’a scholars. Hence, the shortage in Shari’a scholars in this area ofbusiness might be challenged by conflicts of interest, as they sit on the SSBs of all thesefunds. Consequently, we can infer a positive relation between conflicts of interest andthe membership in Islamic funds as in the second hypothesis:
H2. Conflicts of interest in the SSB are positively related to membership of SSBs inIslamic Funds.
The other types of IFIs that mainly deal with Islamic bonds (Sukuk) and the capitalmarket might have the same type of conflicts as Islamic funds due to their similar natureof business. However, there are 34 IFIs (three in Bahrain, 13 in Kuwait, two in Qatar, fivein Saudi Arabia, and 11 in UAE), which deal with Islamic Sukuk and capital markets inthe GCC region compared to seven Islamic funds (the Appendix). The difference in thetwo numbers indicates issuers of Islamic Sukuk and capital markets have more investorsand management than those who deal with Islamic funds. Consequently, the multiplememberships of SSB members in these types of IFIs might not create conflicts of interestbecause of the diversified activities which are conducted by these institutions. Thus, weassume a negative relation between conflicts of interest and membership of issuers ofIslamic Sukuk and capital market companies as in third and fourth hypotheses:
H3. Conflicts of interest in the SSB are negatively related to membership of SSBsin issuers of Islamic Sukuk.
H4. Conflicts of interest in the SSB are negatively related to membership of SSBsin capital market companies.
In addition to the two factors of multiple memberships and holding executive position,the remuneration might play a major role in creating conflicts of interest. Since the SSBwork is one of the commercial inputs in the IFIs, the SSB members are eligible to receiveappropriate remuneration for their work (Al Qari, 2002). Al Shafei states that, “the Mufti[Shari’a Scholar] should have enough resource of income; otherwise, the people will puthim under pressure” (Al Harani, 1977). This statement emphasizes the importance ofremunerating the SSB members for their work. Some studies (AAOIFI GovernanceStandard, 2008; Al Nashmi, 2002; Bakr, 2001) recommend that shareholders approve theremuneration based on the BoD recommendation. Other studies (Abu Me’mer, 1994;Al Shemry, 1996; Wilson, 1990) recommend external parties for approval, such as theIslamic Development Bank, or Ministry of Awqaf, or Ministry of Justice, or theInternational Islamic Union Bank, or central banks. However, the collaboration betweenthe IFIs and other external parties such as the central banks and SSC might leadto standardizing the remuneration in the market and mitigating the competition amongthe IFIs.
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The remuneration should not only be established by the right party, but also for therelevant amount. The remuneration amount might be computed as a percentage of theannual profit, similar to the BoD remuneration, or a monthly salary, or an annual fixedamount, or no remuneration at all. Several studies (Al Bayrkdar, 2008; Al Qari, 2002;Al Salaheen, 2005; Issa, 2009) confirm that computing the remuneration as apercentage of annual income leads to conflicts of interest. On the other hand, they rejectthe monthly salary because it brings down the level of SSB members to the employees’standard, which negatively affects the SSB authority and independence. Furthermore,AAOIFI Governance Standard (No. 5, 2008, Paras 7-8) recommends that SSB membersshould not take any unusual fees, or bonus, or become significant shareholders becauseit impairs their independence. Also, Issa (2009) recommends that SSB remunerationshould be computed as a fixed amount and recorded in the SSB contracts. Otherwise,the SSB members should not take any reward from the executive management. Al Qari(2002) emphasizes that SSB remuneration should be disclosed in the IFI financialstatements to eliminate any conflicts of interest. He argued the ethical foundation forthe SSB remuneration and called for excluding the remuneration from the priorities ofthe SSB members due to their integrity, knowledge, and piety. He emphasized that SSBmembers will never forsake their eternity for temporal benefits. Other studies(Abu Ghudda, 1997; Daoud, 1996) call for seeking God’s reward rather than a humanreward of cash, which is a high ethical motive. Hence, we can propose the fifthhypothesis which assumes a positive relation between conflicts of interest andremuneration:
H5. Conflicts of interest in the SSB are positively related to SSB remuneration.
Besides the aforementioned factors that might create conflicts of interest, the influentialrelation between the SSB members and the BoD might lead to conflicts of interest. Sincethe number of qualified Shari’a scholars is limited and their names are popular in thecommunity due to their religious position, there is a possibility of building an influentialrelation between the two boards outside the workplace, which might have impact on therecruitment of the SSB members. In practice, there are four different approaches used bythe IFIs in recruiting the SSB members, where the BoD is included in three of them. First,the shareholders recruit the SSB members as they recruit the BoD (Abu Me’mer, 1994;Al Haiti, 2009; Al Tayyeb, 2009). This approach is followed by Qatar Islamic Bank,Faisal Islamic Bank of Egypt and Sudan, AlBaraka Bank of Sudan and Mauritania, andthe Islamic International Bank for Investment and Development. The advantages of thisapproach include the enhancement of the SSB independence, the absence of theinfluential relation between the two boards (Al Qari, 2002; Bakr, 2001; Hassan, 2001), andthe confirmation to its ultimate authority over other governance organs (Abu Me’mer,1994; Al Dareer, 2001; Al Nashmi, 2002; International Islamic Union Bank Law, 1982).However, the limitation of this approach is derived from the lack of the shareholders’experience in recruiting the unqualified members (Al Bayrkdar, 2008; Al Salaheen,2005). Second, the recruitment of SSB members might be made by the shareholders upona recommendation from the BoD due to its experience and awareness of businessrequirements. This approach is recommended by AAOIFI Governance Standard andother scholars (AAOIFI Governance Standard No. 1, 2008; Abu Ghudda, 2003; Al Qattan,2004; International Institute of Islamic Thought, 1996) to overcome the limitation of theprevious approach; however, the influential relation between the two boards might
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have an impact on the recruitment. Third, the BoD might recruit the SSB membersdirectly as it occurs in Jordan Islamic Bank, Dar Al Mal Al Islami, and the KurdistanInternational Bank for Investment and Development. Previous studies (Al Bayrkdar,2008; Al Salaheen, 2005; El-Khelaifi, 2003; International Institute of Islamic Thought,1996) criticize this approach because it grants the BoD the right of dismissing the SSBmembers and opens the door for the influential relation to control the BoD decision.Nevertheless, this approach is recommended in the case of losing one member for anyreason before the end of his contract (Al Dareer, 2001). Fourth, the executivemanagement might recruit the SSB members in collaboration with the BoD. This way isalso criticized because of the influential relation between the two boards and thepressure the SSB receives from the executive management (Abu Ghudda, 2001;Al Nashmi, 2002). Thus, the relation between the members of the two boards mightcreate conflicts of interest. Accordingly, we propose the sixth hypothesis that assumes anegative relation between conflicts of interest and the relation between the two boards:
H6. Conflicts of interest in the SSB are negatively related to the SSB relation withthe BoD.
The H6 are articulated in equation (1) using ordinary least square (OLS) regression totest the relation between conflicts of interest as the dependent variable and thesix independent variables:
conflicts ¼ aþ b1position þ b2Memb1 2 b3Memb2 2 b4Memb3 þ b5Remun2 b6Relation þ 1i ð1Þ
The probabilities of difference (b) are compared by using OLS regression for a givenlevel of significance (a). Position indicates the executive position that might be held bythe SSB members, Memb1 indicates the multiple memberships in Islamic funds,Memb2 indicates the multiple memberships in corporations issuing Islamic bonds,Memb3 indicates the multiple memberships in companies trading in Islamic capitalmarkets, Remun refers to the remuneration of the SSB, and Relation refers to therelation between the SSB members and the BoD.
3. MethodologyThe hypotheses have been tested by a questionnaire, which was mailed to all the IFIsin the GCC countries to collect the data in June, 2009. The questionnaire was examinedagainst general appearance, wording and principles of measurement. The a for theconflicts of interest model was 0.658, which confirms the reliability of the measure as itapproaches the standard measure of 0.70 (Cronbach, 1951; Nunnaly, 1978). Thequestionnaire was also examined against the different types of validity tests such asface validity, content validity, concurrent validity, criterion validity, predictivevalidity, and construct validity (Sekaran, 2003).
The population of the research included all the IFIs (219) in the GCC countries due totheir relative small number, and the desire to produce reliable results. The elements ofthe population are the BoD, the SSB and the CEOs if they are board members. Thepopulation frame for IFIs is drawn from different resources such as central banks, stockexchanges of GCC countries, Arab Banking and Finance directory (2009/2010),Securities database (IFIS, 2009) and Zawya database (Zawya, 2009). Since the researchdiscusses the relationship among two groups: the SSB and the BoD; the population was
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divided into two mutually exclusive groups to be meaningful to the study. Accordingly,the unit of analysis is at the group level, and the data was collected in a manner thatwould assess the needs of each group in the population. Stratified random sampling wasemployed among the different types of complex probability sampling (Sekaran, 2003;Thompson, 2002). The average response rate from each group in the five countriescollectively exceeded 20 percent (Ritchie and Lewis, 2003) as per Table I except in theBoD of Saudi Arabia. Table I indicates the details of the response rate for each group.
4. Descriptive statisticsConflicts of interest inside the SSB have been tested by six questions. Three questionshave scaling answers while the other three have multiple choice answers. Table IIincludes the questions with scaling answers.
The above three variables are included in one question which asks “do you prefer torecruit a Shari’a scholar that works already in another SSB?” The question wasaddressed to the BoD. The answer includes membership in different types of IFIs:membership in Islamic funds (Memb1), membership in corporations issuing Islamicbonds (Memb2), and membership in companies trading in Islamic capital markets(Memb3). Each variable is measured on a scaling level from 1 to 5 where 1 means nopreference, 2 slight preference, 3 normal preference, 4 significant preference, and5 strong preference. Memb1 has a mean of 3.3030 and SD of 1.61693, while Memb2 hasa mean of 3.3788 and an SD of 1.65264. Memb3 has a mean of 3.4394 and an SD of1.57996. Since the mean and the SD of the three variables are almost the same in thethree variables, it indicates that the board members significantly prefer the Shari’ascholars who are members in other SSBs of Islamic funds, issuers of Islamic bonds, andcompanies trading in Islamic capital markets. The second group of questions includesthree questions with multiple choice answers represented in Table III.
SSB BoDCountry No. Rate (%) No. Rate (%)
Bahrain 18 45.00 19 47.50Kuwait 26 33.33 29 37.18Qatar 10 50.00 9 45.00Saudi Arabia 9 23.68 6 15.79UAE 13 30.23 10 23.25Average collection 76 34.70 73 33.33
Table I.Response rate as apercentage of population
Variable Valid Missing Mean Median Mode SD Min. Max.
Memb1 66 10 3.3030 4 5 1.61693 1 5Memb2 66 10 3.3788 4 5 1.65264 1 5Memb3 66 10 3.4394 4 5 1.57996 1 5
Notes: n ¼ 76; Memb1 – membership in Islamic funds; Memb2 – membership in issuers of Islamicbonds (Sukuk); Memb3 – membership in companies trading in Islamic capital markets
Table II.Scaling questionsmeasuring the SSBconflicts of interest
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The first question asks “which of the following positions is held by SSB members?”The question was posed to the BoD where 1.3 percent declared that some of the SSBmembers are department managers, while 1.3 percent indicated that some of the SSBmembers are shareholders with significant ownership. However, the majority of theanswers (93.4 percent) confirmed that SSB members do not hold any managerialposition. All the respondents indicated that the SSB has no representative on the BoDor other committees or even main clients. The missing answers were 3.9 percent only.Hence, the absence of the executive position among the SSB members indicates theabsence of conflicts of interest.
The second question asks “is the average remuneration of SSB membershigher/equal/lower than that of the BoD?” which was addressed to the BoD.The collected answers revealed that SSB remuneration is lower than the BoDremuneration in 59.2 percent of the IFIs, while the SSB remuneration is higher than theBoD remuneration in 14.5 percent of the IFIs. Only 15.8 percent confirmed that the twoboards receive the same amount of remuneration. The missing answers were 10.5 percent.The results indicate that the SSB remuneration might not create conflicts of interest due toits small amount compared to the BoD remuneration.
The third question asks “is there any relation between the SSB member(s) andthe board member(s)?” The question was addressed to the BoD where answersrevealed the absence of influential relations between the two boards. About 23.7 percentof the respondents confirmed the existence of non-influential relation but the majorityof the respondents (72.4 percent) indicated the absence of all relations among themembers of the two boards. The missing answers were 3.9 percent only. The absenceof relation between the two boards indicates the absence of conflicts of interest thatmight happen in the case of having influential relation. To conclude, the two groups ofquestions measure the six variables that affect conflicts of interest.
Valid MissingVariable Frequency % Total % Total %
1 Other positions for SSB membersa. Department manager 1 1.3 73 96.1 3 3.9b. Member in the BoD 0 0.0 73 96.1 3 3.9c. One of the main Shareholders 1 1.3 73 96.1 3 3.9d. One of the main clients 0 0.0 73 96.1 3 3.9e. Member of the Board Comm. 0 0.0 73 96.1 3 3.9f. Does not hold any position 71 93.4 73 96.1 3 3.9
2 SSB Remuneration vs BoD Remunerationa. SSB Rem. , BoD Rem. 45 59.2 68 89.5 8 10.5b. SSB Rem. ¼ BoD Rem. 12 15.8 68 89.5 8 10.5c. SSB Rem. . BoD Rem. 11 14.5 68 89.5 8 10.5
3 Relation between SSB and BoDa. Influential relation 0 0 73 96.1 3 3.9b. Non-influential relation 18 23.7 73 96.1 3 3.9c. No relation 55 72.4 73 96.1 3 3.9
Note: n ¼ 76
Table III.Multiple choice questionsmeasuring the conflicts of
interest
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5. Empirical resultsConflicts of interest will be measured by applying joint confidence interval test toregression line coefficients from a multivariate least square regression technique. As itwas mentioned the relation between the dependent variable and the independentvariables will be formulated in equation (1).
The true values of different variables used in the model are described by Greekcharacters, while estimates are denoted with italic letters. The true values of the regressioncoefficients are represented by (a) as the intercept, while (b1, b2, b3, b4, b5, andb6) are theslopes of different variables, and (ei) represents the error term. The multiple linearregression model is applied to examine the observed relations among the six variables andcompare them with theoretical relations. Plots of control against each one of the variablesindicate that the relation between conflicts of interest and each independent variable islinear (Martinez et al., 2002). Table IV represents the product-moment correlation matrixbetween the conflicts variable and other independent variables.
Table IV indicates that most of the variables have significant correlation which isstatistically acceptable in social science where it is not expected to get significantcorrelation among all the variables (Cohen, 1988). Nevertheless, it should be noted thatthe correlation among the variables does not reflect a causal relation (Simon, 1954).
Since the regression analysis is generally robust against minor violations ofassumptions except for gross violation of normality assumption, the focus will be onthe test of normality assumption. The following histogram in Figure 1 and the residualplots in P-P plot of Regression Standardized Residual in Figure 2 are used to test thenormality assumption as they were used in previous research (Berry and Feldman,1985; Cohen and Cohen, 1983; Goldfeld and Quandt, 1976). The results confirm thenormal distribution of error (eis) with N , (mean ¼ 23.57 £ 10216, SD ¼ 0.959).A slight skewness is noticed in both histogram and P-P plot of regression; however, theregression analysis is robust in spite of this slight departure from its assumptions(Cook and Weisberg, 1982; Efron, 1988).
By testing the model against the four assumptions of regression, there is no majorviolation detected. Table V reports the results of regression analysis correlated.
In addition, Table V indicates the significance of the model ( p ¼ 0.0001). Sincep-value is determined from F ratio, the large F ratio (5.009) indicates a significant resultwhich cannot be referred to coincidence. On the other hand, Table VI highlights thesignificance of each one of the independent variables.
Table VI indicates that four out of six variables have a significant relation withconflicts variable while two remain with insignificant relation. These results
Conflicts Position Memb1 Memb2 Memb3 Remun Relation
Conflicts 1.000Position 0.444 * * * 1.000Memb1 0.073 0.211 * * 1.000Memb2 20.068 0.215 * * 0.766 * * * 1.000Memb3 20.013 0.259 * * 0.634 * * * 0.594 * * * 1.000Remun 0.201 * * 0.267 * * 20.011 0.056 0.079 1.000Relation 20.134 20.018 0.225 * * 0.126 20.090 20.118 1.000
Notes: Significant at: *p , 0.10, * *p , 0.05 and * * *p , 0.01
Table IV.Product-momentcorrelation matrix
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significantly support the proposed hypotheses. The Position variable has significantrelation with Conflicts variable because its p-value, 0.01. Also, it has ab of 0.456 whichindicates the positive relation between the two variables. This result supports H1:
H1. Conflicts of interest in the SSB are positively related to SSB executivepositions inside the IFI.
Figure 1.Histogram of conflicts
of interest model
Dependent variable : COIBD25
Regression Standardized Residual
Freq
uen
cy
30
20
10
0–3 –2 –1 0 1 2 3
Mean = –3.57E–16Std.Dev. = 0.959
N = 76
Figure 2.Normal P-P plot of
regression standardizedresidual for conflicts of
interest model
Dependent Variable: Conflicts
Observed Cum Prob
Exp
ecte
d C
um
Pro
b
1.0
0.8
0.6
0.4
0.2
0.00.0 0.2 0.4 0.6 0.8 1.0
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The result of Memb1 variable indicates a significant relation with Conflicts variablebecause its p-value , 0.05. In addition, it has a b of 0.417 which indicates the positiverelation between the two variables. This result supports H2:
H2. Conflicts of interest in the SSB are positively related to membership of SSBs inIslamic Funds.
The result of Memb2 variable indicates a significant relation with Conflicts variablebecause its p-value , 0.05. However, it has a b of 20.338 which indicates a negativerelation between the two variables. This result supports H3:
H3. Conflicts of interest in the SSB are negatively related to membership of SSBsin issuers of Islamic Sukuk.
The result of the Memb3 variable indicates an insignificant relation with Conflictsvariable because its p-value . 0.10. However, it has a b of 20.219 which indicates anegative relation between the two variables. This result partially supports H4 becausethe proposed relation was significant while the actual result revealed an insignificantrelation:
H4. Conflicts of interest in the SSB are negatively related to membership of SSBsin capital market companies.
The result of Remun variable indicates an insignificant relation with Conflicts variablebecause its p-value . 0.10. However, it has a b of 0.098 which confirms the positiverelation between the two variables. This result partially supports H5 because theproposed relation was significant while the actual result revealed an insignificantrelation:
H5. Conflicts of interest in the SSB are positively related to SSB remuneration.
The result of the Relation variable indicates a significant relation with Conflictsvariable because its p-value , 0.10. Moreover, it has a b of 20.185 which indicates anegative relation between the two variables. This result supports H6:
H6. Conflicts of interest in the SSB are negatively related to the SSB relation withthe BoD.
The derived conclusions confirm the validity of the model in measuring the conflicts ofinterest. Furthermore, Table VI includes the multicollinearity statistics with theirtolerance and the variance inflation factor (VIF) which is well below the recommendedthreshold of 10.0. The lower the VIF, the more it indicates the absence of collinearitybetween conflicts of interest and other variables. The multicollinearity among the
Model Sum of squares df Mean square F Sig.
1 Regression 56.180 6 9.363 5.009 0.000a
Residual 128.978 69 1.869Total 185.158 75
Notes: aPredictors: (constant), Position, Memb1, Memb2, Memb3, Remun, Relation; dependentvariable: Conflicts
Table V.Analysis ofvariance (ANOVA)
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independent variables does not limit the use of multiple linear regression for prediction,yet it limits the use of multiple linear regression for identifying how variables arerelated. Also, it helps in identifying the form of relation among the independentvariables (Netter, 1996).
Finally, Table VII indicates that explanatory power of the whole model (coefficientof determination ¼ R 2) is 0.303; which means the independent variables explain30.30 percent of the change in the dependent variable (Conflicts). In addition, the resultindicates that Durbin-Watson (d ) is 1.793. The D-W test detects the presence ofautocorrelation (serial correlation). The value of the D-W test is usually between 0 and 4.If (d ) is around zero, the variables will be positively correlated. If (d ) is around 4, thevariables will be negatively correlated. In either case, the model validity will bequestionable. However, if (d ) is around 2, such as in our model (d ¼ 1.793), the variableswill not be serially correlated.
To conclude, we find that the model of conflicts of interest is significant as a wholeand four out of the six variables are significantly related to Conflicts variable. Theresults significantly support the H6 of conflicts of interest.
6. Research limitationsAlthough the derived conclusions can be used as a platform for measuring the conflictsof interest in the SSB, there are still several limitations to this study. First, the researchdoes not address the impact of SSB ownership in the IFIs which might create conflictsof interest if it is significant. Second, the research does not address the impact of therelation between the SSB and the shareholders, the clients, and other stakeholderswhich might create conflicts of interest if the relation is influential. Third, the researchdoes not measure the impact of the codes of corporate governance in framing therelationship between the SSB and the IFI. Moreover, the research was conducted on across-sectional basis rather than longitudinal basis. Finally, the research was focused
Collinearitystatistics
Variable Standardized coefficients b SE t-value p-value Tolerance VIF
Position 0.456 0.127 4.222 0.000 * * * 0.864 1.157Memb1 0.417 0.147 2.379 0.020 * * 0.329 3.043Memb2 20.338 0.132 22.102 0.039 * * 0.390 2.562Memb3 20.219 0.118 21.554 0.125 0.508 1.970Remun 0.098 0.196 0.931 0.355 0.908 1.101Relation 20.185 0.192 21.701 0.093 * 0.851 1.174
Note: Significant at: *p , 0.10, * *p , 0.05 and * * *p , 0.01
Table VI.Multivariate leastsquare regression
Model R R 2 Adjusted R 2 SE Durbin-Watson (d )
1 0.551a 0.303 0.243 1.36721 1.793
Notes: aPredictors: (constant), Position, Memb1, Memb2, Memb3, Remun, Relation; dependentvariable: Conflicts
Table VII.Model summary
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on the GCC region which might affect the generalization of the results due to its uniqueculture. Although the GCC region has a large number of IFIs, yet the sample size isrelatively small.
7. Research implicationsThe results of this research corroborate the results of previous studies (Al Qari, 2002;Issa, 2009; Faddad, 2009). The research findings indicate that conflicts of interest areminimized if the SSB members do not hold any managerial position in the IFIs so thatthe SSB becomes independent from the management restrictions. Also, the absence ofrelation between the BoD and the SSB will eliminate the conflicts of interest and releasethe SSB from the BoD pressure. On the other hand, fixing the SSB remuneration willenhance its independence and bring more transparency if it is included in the financialstatements. Finally, the multiple memberships of Shari’a scholars in several SSBs havedifferent impact on the conflicts of interest according to the type of IFIs.
8. ConclusionThe conflicts of interest in the SSB is significantly affected by the executive position ofthe SSB members, the membership in Islamic funds and issuers of Islamic Sukuk,and the relation between the SSB members and the BoD. The executive position andthe membership in Islamic funds are positively related to the conflicts of interest, whilemembership in issuers of Islamic Sukuk, and the relation between the two boards arenegatively related to the conflicts of interest. On the other hand, the SSB remunerationand membership in companies trading in the capital markets have no impact on theconflicts of interest.
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(The Appendix follows overleaf.)
Corresponding authorSamy Nathan Garas can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints
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Appendix
No.
Cou
ntr
yB
ank
Insu
ran
ceIn
ves
tmen
tB
ank
Cap
ital
Mar
ket
Rea
lE
stat
eF
un
dT
otal
1A
lban
ia1
12
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eria
22
3A
ust
rali
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11
34
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rbai
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11
5B
ahra
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918
33
40
6B
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51
17
7B
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11
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13
9E
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pt
21
310
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bia
11
11G
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any
33
12G
uin
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113
Ind
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12
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32
515
Iran
121
21
1616
Iraq
11
217
Jord
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32
718
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36
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85
138
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11
32S
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12
(con
tinued
)
Table AI.The number ofIFIs worldwide
IMEFM5,2
104
No.
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ank
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tmen
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ank
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Mar
ket
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33S
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11
35
34S
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135
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dan
105
71
52
3036
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itze
rlan
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13
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36
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lan
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139
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11
340
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rkey
21
35
41
UA
E10
77
11
35
43
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44
27
528
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43
512
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31
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otal
130
8312
040
5530
458
Note:
Th
eco
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the
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CC
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es;
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IFIS
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kin
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Table AI.
The Shari’asupervisory
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105
