Journal of Islamic Finance (Special Issue) (2019) 001 – 018

IIUM Institute of Islamic Banking and Finance

ISSN 2289-2117 (O) / 2289-2109 (P)

The Effect of Corporate Governance on Islamic Banking

Performance: A Maqasid Shari’ah Index Approach on
Indonesian Islamic Banks
Audia Syafa’atur Rahmana, Razali Harona
a
IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia, Malaysia

Abstract

This study aims to provide empirical evidence on the Maqasid al-Shari’ah performance of Islamic banks in Indonesia for
the period from 2012 to 2016. The Simple Additive Weighting (TSAW) is employed to obtain the performance of IBs
according to the Maqasid al-Shari’ah. This study found that the Maqasid Index for Indonesia IBs within the range
between 11% and 28% with only few banks achieved above 20%. The impact of SSB characteristics and board structures
are then tested on the IBs Maqasid al-Shari’ah performance. Regression result indicates that SSB characteristics (SSB
size, SSB cross membership, SSB Education and SSB reputation) and board structures (Board size and Board
independence) have an essential role in improving the performance of IBs. The findings denote SSB with smaller size,
higher portion of SSB cross membership, lesser SSB hold doctorate degree, lesser reputable scholar, more members on
board of directors, and less independence non-executive directors enhance the performance of IBs. This study offers
practical implication and regulators in Indonesia should set up and impose a more robust and new tool to evaluate the
Maqasid al-Shari’ah performance index in order to assess how far the role of IBs have contributed to the society. This
will help all stakeholders to have informed decision which not only concentrates on performance based on financial ratios
but also the entire dimensions of IBs that reflect the main purpose of IBs.

Keywords: Maqasid al-Shari’ah, Corporate governance, Islamic banks, Shari’ah Supervisory Board

© IIUM Press

1. Introduction

The practices of Islamic banking is more attuned to the goals of profit maximization rather than obtaining
ethical profit (Asutay, 2012). According to Asutay, ethical profit is obtained from interest-free earnings and
to give an impact which benefits the growth of society and economy. Good Corporate Governance (CG)
practices are needed to assure the sustainability of Islamic Banks (IBs) in order to achieve Maqasid al-
Shari’ah with the main purpose of boosting people well-being (Asutay,2012). Mohammed and Taib (2015)
for example used the Maqasid al-Shari’ah performance measurement to measure the duties and
responsibilities expected to be performed by IBs. The measurement covers not only unification dimension
like financial measurement, but also many other dimensions to reflect the main purpose of IBs. The
implementation of good CG is essential because it covers the interests of the stakeholders and facilitates
effective monitoring to encourage IBs to utilize resources more efficiently in order to achieve the Maqasid
al-Shari’ah (Ginena and Hamid, 2015). In addition, CG should observe the rights of all stakeholders (Chapra
and Ahmed, 2002). Prioritizing the justice and fairness, and preserving the rights of all stakeholders are the
matters to be fulfilled.
Many studies have been conducted to measure the impact of CG on IBs performance. Some of the
measurements used to measure the performance of IBs, which take profitability into account are Tobins-Q,
return on assets (ROA), return on equity (ROE) and return on investment (ROI) (see for examples; Nomran
et al. (2017); Nomran et al. (2018); Almutairi and Quttainah (2017); Mollah and Zaman, 2015; Muttakin and
Ullah, 2012; Hoque et al. (2012); Syam and Najda (2012), and mixed results were recorded in those studies.
Mollah and Zaman (2015), Almutairi and Quttainah (2017) and Nomran et al. (2017) found that SSBs
2 Rahman & Haron / The Effect of Corporate Governance on IB Performance

attributes enhance financial performance of IBs based on Tobin’s Q, ROA and ROE. The SSB has a key role
in the IBs operation as an extra layer on its governance (Mollah and Zaman, 2015). The SSB supervises and
monitors the operation of IBs, for example supervising the board of directors and the management from
offering prohibited products like Collateralized Debt Obligations (CDOs), Mortgage Backed Securities
(MBS), and Credit Derivative Swap (CDS).
The board structure represented by the board of directors (BODs) and board independence has a
significant role to direct the IBs. The pivotal role of boards is to determine the strategic goals of the IBs and
the codes of conducts for senior executive and staffs (Chapra and Ahmed, 2002). They need to make sure that
the goals are achieved, executed and a continuous conformity with the codes of conducts in all of the IBs
operation while any mismanagement and inefficiency are reduced to protect all the stakeholders’ interest.
Muttakin and Ullah (2012) found that the size of the BODs positively affects the ROA; Hoque et al. (2012)
found not only BODs but also audit committee positively affects the ROA. However, Syam and Najda (2012)
claimed that CG quality has no influence on the IBs performance when measured by the ROA. Almutairi and
Quttainah (2017) on the other hand, emphasized the appropriate size of corporate boards and SSBs to enhance
the oversight capability, management conduct and institutional accomplishment.
As IBs has different features compared to conventional banks (CBs), the performance measurement
should be different as well (Nomran et al., 2017; 2018). Mohammed and Taib (2015) and Haron and Ibrahim
(2016) argued that IBs focus on the participatory way of business enterprises whereby risk and profit are
shared among the partners, money and debts are not treated as commodities and the bank and the customer
should have relationship as investor partners not as debtor and creditor. IBs are constructed not only based
on the financial dimensions to maximize profit but also religious dimensions to generate the ethical financial
system as the value of Islamic Moral Economy is embedded on the Maqasid al-Shari’ah (Asutay, 2012). Abu
Zahrah (1958) classified the Maqasid al-Shari’ah into three categories i.e. tahzib al-fard (education for
individuals), iqamah al-adl (justice), and maslahah (benefit/welfare). Mohammed et al. (2008) and Antonio
et al. (2012) used to measure the performance of IBs.
This study differs from the previous studies and contributes to the literature in several ways. Firstly, this
study examines the performance of IBs based on the Maqasid al-Shari’ah performance evaluation model in
contrast to the past studies that measure IBs according to accounting measures such as Tobins-Q, ROA, ROE
and ROI. This measurement is able to capture wider aspects of IBs performance such as income distribution
and social aspects compared to the accounting measures which merely emphasize on the profitability aspect.
In continuation to this, secondly, this study examines the impact of CG aspects i.e. the SSB and the board
structure on performance as measured by the Maqasid based performance evaluation model (MPEM).

2. Literature Review and Hypothesis Development

2.1 Performance Measurement Using the Maqasid Index

Several past researchers examined the performance of IBs by employing the Maqasid Index based on the
Maqasid al-Shari’ah developed by Abu Zahrah (1958). IBs are constructed not only based on the financial
dimensions to achieve maximum profit but also religious dimensions to generate the ethical financial system
(Asutay, 2012). Ethical financial system promotes the Islamic Moral Economy (IME) as an embodiment of
the ontology of Islam originating from the Quran and the Sunnah. IME upholds the economic and sustainable
development, social justice and social investing oriented principles (Asutay, 2012). The value of IME are
embedded on the Maqasid al-Shari’ah. Abu Zahrah (1958) classified the Maqasid al-Shari’ah into three
categories i.e. tahzib al-fard (education for individuals), iqamah al-adl (justice) and maslahah
(benefit/welfare). These concepts were then converted by researchers to measure the performance of IBs.
Mohammed et al. (2008) and Antonio et al. (2012) used the Maqasid Index to measure IBs performance.
The index was constructed using The Simple Additive Weighting (TSAW) method. Based on this method,
Mohammed et al. (2008) tested the performance of six IBs from various countries such as Indonesia,
Malaysia, Bahrain, Sudan, Bangladesh and Jordan for the period of six years (2000 – 2005). The selected IBs
comprise of Bank Syariah Mandiri (BSM) Indonesia, Bank Muamalat (Malaysia), Bahrain Islamic Bank
(Bahrain), Sudanese Islamic Bank (Sudan), Islamic Bank Bangladesh (Bangladesh) and IIABJ Jordan
(Jordan). The variables employed were referring to the Maqasid al-Shari’ah concept which considered all the
 Journal of Islamic Finance (Special Issue) (2019) 001-018 3

three categories i.e. tahzib al-fard (education for individual), iqamah al-adl (justice) and maslahah
(benefit/welfare). Seven ratios were employed to represent the performance indicators. The results showed
that no IBs has achieved high performance in the seven ratios representing all the three categories of the
Maqasid al-Shari’ah.
Antonio et al. (2012) employed the Maqasid Index approach with TSAW method to measure the IBs
performance based on samples of IBs from Indonesia and Jordan for the period 2008 - 2010. The result
showed that IBs in Indonesia showed better performance within all the objectives of Maqasid Index in
comparison with the IBs in Jordan. Another study using TSAW was conducted by Mughess (2008) analyzing
the growth and performance of three IBs which are Meezan Bank (Pakistan), Bank Islam (Malaysia) and the
Emirates Bank (UAE) in terms of financial growth and the Maqasid al-Shari’ah. Mughess then ranked the
banks according to TSAW in which Meezan Bank, Emirates Bank and Bank Islam obtained A rating, B rating
and C rating, respectively. Thus, Meezan Bank had the highest achievement on the Maqasid al-Shari’ah as
well as the financial performance.

2.2 Shari’ah Supervisory Board Size

Previous studies by Chapra and Ahmed (2002) and Haniffa and Hudaib (2006) examined the CG
characteristics of IBs in Indonesia. Firstly, they found the existence of Shari’ah Supervisory Board (SSB) as
a part of the CG structure. SSB has an independent role as Shari’ah supervision to ensure that IBs operation
fully complies with the Shari’ah. Besides, the SSB has to probe and verify the Shari’ah compliance
throughout any financial transactions (Almutairi and Quttainah, 2017). This is in line with the International
Financial Supervisory Board (IFSB) provision in which a good CG covers the interest of the stakeholders and
facilitates effective monitoring to encourage IBs to use resources more efficiently (Ginena and Hamid, 2015).
In addition, the fulfillment of compliance with the Shari’ah rules and principles is compulsory. Bank Negara
Malaysia (2013) stated that Shari’ah principles are the basis for the practice of Islamic finance through the
conformity of the tenets, conditions and principles espoused by Shari’ah. The comprehensive compliance
with Shari’ah principles would bring confidence to the general public and the financial markets on the
credibility of Islamic finance operations.
A multi-layer governance were proposed by Mollah and Zaman (2015) for IBs. Board of directors,
management executives, committees and SSB are together within the governance structure. The BODs are
not permitted to generate credit against credit because it will create interest (riba). In addition, they are not
allowed to offer investment products which contain doubtful (gharar) element, for instance, credit debt
obligation (CDO), mortgage backed securities (MBS) and credit derivative swap (CDS). Mollah and Zaman
(2015) emphasized on the contribution to social justice and evading aggressive risk taking as the
implementation of religious beliefs and ethics commitment. This is supported by Mokhtar et al. (2008)
whereby compliance with the Shari’ah rules gives the IBs a significant role to enhance social justice through
the maximization of financial performance. Proponents of the SSB existence claimed that SSB will enhance
reliability, credibility and legitimacy of IBs (Shaffaii, 2008) whereas the opponents found that SSBs caused
the IBs performance to decrease due to bureaucracy complexity (Grais and Pellegrini, 2006).
However, Almutairi and Quttainah (2017) found that the SSBs enhance financial performance of IBS.
IBs performed better when the number of SSBs increases. More members involved in SSB means more
expertise and many networks connected which could give positive impact to bank performance. Mollah and
Zaman (2015) claimed that SSB have significant effect on the performance of IBs and have potential to attain
the ethical goals. In Indonesia, the size of SSBs in the IBs as required by the regulation is at least 2 members
or the maximum of 50% from total board members (Rama, 2015) with one member from the SSB members
acting as the chairman. The members of SSB are allowed to hold concurrent positions as members of SSB
not more than four IFIs i.e. two IBs and two non-bank IFIs. The SSB may not concurrently serve as
consultants in all Islamic business entities and Islamic business units. In addition, at most, two members of
SSB may concurrently serve as a member of National Shari’ah Supervisory Board.
SSB size becomes the proxy for SSB. The integration of SSBs into the structure of IBs governance
enhances the strategic formulation and execution, and also proposes more direction for the BODs and the
management executives. Besides, the role of SSB is to ensure the products offered to customers are Shari’ah
compliant so that it could have positive effect on IBs performance. Almutairi and Quttainah (2017) suggested
that the enhancement on SSBs size would ameliorate oversight and advisory function and ultimately bank
4 Rahman & Haron / The Effect of Corporate Governance on IB Performance

performance. Hence, the following hypothesis is proposed: H1: SSB has positive effect on IBs performance.

2.3 SSB Cross Membership

SSB cross membership (SSBCM) is where a member of SSB also serves on another SSB of IBs. The SSBCM
practice is held with the purpose to enhance and enrich the application of Islamic banking law because SSB
members get opportunities to have more discussion between the various SSB members in another IBs (Farook
et al., 2011). SSB members with cross membership are able to take on tacit and vivid knowledge to the
practice of Shari’ah law in the IBs (Rahman and Bukair, 2013). On the other hand, cross membership can
create conflict of interest because SSB members know any confidential data and information of another IBs
(Grais and Pellegrini, 2006;Alman, 2012) and they will face difficulty in asserting notion of two IBs when
launching new products (Bakr, 2002).
Nomran et al. (2017) examined the association between SSBCM and performance of IBs. They found
that SSBCM resulted a negative effect to the large IBs performance measured by ROA and ROE with
argument that the SSBCM will reduce the effectiveness in work. However, Almutairi and Quttainah (2017)
found a positive effect between SSB interlocks and IBs performance based on ROA, ROE and Tobin’s Q.
They argued that the connection made by interlocking SSB triggers good connection among the IBs, equalizes
resource distribution, and raises the performance of the IBs. By having SSBCM, the advantages outweigh the
disadvantages. Hence, the following hypothesis is proposed: H2: SSB cross memberships has positive effect
to the IBs performance.

2.4 SSB Educational Qualification

SSB competency is a resource for the IBs (Huse, 2007). SSB roles are related to general and function-oriented
knowledge because it is related to advisory task on Shari’ah matters. Therefore, the SSB may have knowledge
in finance, accounting, Islamic law, common law or civil law, strategy and management behavior. The
knowledge in Shari’ah is extremely important to the SSB members. SSB is usually comprised of members
who are not only having specific knowledge on Islamic law but are also complemented with knowledge on
business and economics. According to Ginena and Hamid (2015), SSB members have to have sufficient
academic qualification to offer Shari’ah guidance for the IBs. In the industry, there is however no general
agreement on how to determine the Shari’ah scholar with sufficient qualifications.
Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI) on Shari’ah
standard No.29 argued that Shari’ah scholars should have knowledge on fiqh al-mu’amalat and Islamic
finance. However, having lack of knowledge on one of them will ruin the capabilities to fully practice the
principles and theory of Islamic laws (Ginena and Hamid, 2015). This will cause false fatwa issuance and
may interrupt the development and advancement of IBs. Rahman and Bukair (2013) emphasized on the
importance of having knowledge in Islamic law, business and economics in order to be able to interpret the
complex financial transactions within the IBs. The SSB members with doctorate degree are better informed
on the current implications of IBs (see for examples; Farook et al., 2011; Ginena and Hamid, 2015). Ayedh
and Echchabi (2015) found the competent SSB will enhance the technicality while doing Shari’ah supervision
and will increase the credence and trust from the customers in IBs. Nomran et al. (2017) found that
educational qualification has positive influence toward the IBs performance. Hence, this variable is
hypothesized that, H3: The SSB educational qualification has positive effect on IBs performance.

2.5 SSB Reputation

SSB reputation represents the recognition of the ability and knowledge of the SSB members in the industry
especially on Shari’ah, business, and Islamic finance issues. Rahman and Bukair (2013) argued that Shari’ah
scholar is someone who has the credibility and eminent knowledge in Islam and has prominent contribution
to the society. This is supported by Ginena and Hamid (2015) who observed that a reputable scholar is
someone who has recognition from many established scholars and expertise on Shari’ah law and Islamic
finance. According to Huse (2007), boards obtained advantages for bringing a highly reputable person in the
board. Highly reputable SSB is expected to comprehend latest implication of IBs (Farook et al., 2011;
Rahman and Bukair, 2013). Nomran et al. (2017) found that SSB reputation has significant influence on large
 Journal of Islamic Finance (Special Issue) (2019) 001-018 5

IBs performance because of their reputations. However, for small IBs, the SSB reputation has negative impact
on IBs performance because of a deficiency on Shari’ah governance implementation. Therefore, the
hypothesis proposed is, H4: SSB reputation has positive effect on IBs performance.

2.6 SSB Expertise

SSB expertise contextually means SSB members who have finance or accounting knowledge besides Islamic
law knowledge (Rahman and Bukair,2013). The primary task of the SSB is to conduct examination and
supervision on Shari’ah facet of IBs product and services. They have to examine and analyze the financial
contracts, agreements, and related documents to ensure conformity with Shari’ah principles. Ginena and
Hamid (2015) opined that finance knowledge is very important because it will help to reduce communication
gap among the SSB members, thus eases problem solving measures. The AAOIFI argued in its Shari’ah
standard No.29, that finance or accounting knowledge complements the SSB member to understand the IBs
practice and helps them do the job well. Nomran et al. (2017) examined the influence of SSB expertise on
IBs performance. They found that the SSB expertise have positive impact on the large IBs and small IBs.
Based on the abovementioned arguments, the hypothesis is, H5: SSB reputation has positive effect on IBs
performance.

2.7 Change in the SSB Composition

According to Ginena and Hamid (2015), the SSB changes could take place with the intention to bring new
insight and knowledge among the SSB members or non-conformity of SSB member with contracts. The other
factors are the inability to perform the task well and gross negligence which can lead to appointment
termination as the SSB member. Alman (2012) tested the impact of changes in SSB composition to IBs risk
taking behavior. The annual changes of SSB members have positive impact on loan portfolio risk taking of
IBs. The SSB members need more time to comprehend the loan portfolio risk on the asset side and this results
in them being more restrictive. After that, they allow the loan portfolio risk taking. Nomran et al. (2017)
found that the change in the SSB composition has negative influence to the performance of IBs. The reason
is because old SSB members have given significant contribution to the IBs and when they are replaced with
newly appointed SSB, these new SSB needs time to prove their contribution to the IBs. Therefore, this study
hypothesized H6: Change in the SSB composition has positive effect on IBs performance.

2.8 Board Structure

The board structure is represented by board size and board independence. Several empirical researches found
different findings on how board size and board independence influence firm performance. The stakeholder
theory states that the enhancement in terms of BOD numbers improves the stakeholders’ representation inside
the company. In the light of IBs, several studies have been conducted by Al-Saidi and Al-Shammari (2013),
Bukair and Rahman (2015) and Mollah and Zaman (2015). Mollah and Zaman (2015) found that small boards
tend to be profit driven while independent directors influence the decreased on IBs performance. They argued
that more independent directors selected with the intention to fulfill the regulatory requirement or market and
the scarcity of high independent directors are finite. However, board size and board independence interaction
has a highly significant and positive influence on the IBs performance. Al-Saidi and Al-Shammari (2013) and
Bukair and Rahman (2015) also studied the effect of board size on IBs performance. They found similar
finding with Mollah and Zaman (2015) that size of board has negative effect on bank performance. Al-Saidi
and Al-Shammari (2013) argued that smaller board size would enhance IBs performance.
In Indonesia, the Corporate Governance (CG) code does not determine the maximum or minimum
number of BODs for IBs. According to the Bank Indonesia (BI) regulation No 11/3/PBI/2009 (PBI) (BI,
2009), Independent Non-Executive Director means a party which does not have financial, management, share
ownership and/or family relationship with the controlling shareholders, members of the Board of
Commissioners and/or members of the Board of Directors. In addition, Independent Non-Executive Director
does not have financial relationship and/or share ownership relationship with the bank. Since a board structure
which comprises of board size and board independence produces different results based on the previous
studies, hence, the following hypotheses is proposed: H7: A higher (lower) number of board size will have
6 Rahman & Haron / The Effect of Corporate Governance on IB Performance

greater (lesser) effect on IBs performance. H8: A higher (lower) percentage of independent non-executive
director will have greater (lesser) effect on IBs performance.

2.9 Controlled Variables

Two controlled variables were used in this study, namely bank size (Al-Saidi and Al-Shammari, 2013; Bukair
and Rahman, 2015; Nomran et al., 2017) and bank age (Mkadmi and Halioui, 2016; Nomran et al., 2017).

3. Methodology

3.1 Measurement Model

The IBs performance is measured based on The Maqasid Performance Evaluation Model (MPEM). The
MPEM is adopted from Al-Ghazali. Al-Ghazali divided maslahah into three aspects which are necessities
(daruriyyat), complements (hajiyat) and embellishments (tahsiniyat). He further divided necessities to 5
aspects such as preservation of religion (al-din), life (al-nafs), intellect (al-‘aql), progeny (al-nasl), and wealth
(al-mal). Al-Ghazali’s framework focused on the human beings. However, this framework can also be
adjusted to fit within the IBs context because IB is classified as inanimate objects. Therefore, Mohammed et
al. (2015) solved this problem by incorporating Ibn Ashur (2006) theory of Maqasid. The association between
Al-Ghazali dimensions and Ibn Ashur (2006) elements are as follows:

Table 1: Associating Al Ghazali dimensions to Ibn Ashur’s elements

Al Ghazali Maqasid Dimensions Ibn Ashur’s Elements

1.Preservation of religion Freedom of faith
2.Preservation of life (i) Preservation of human dignity
(ii) Preservation of human right
3.Preservation of intellect (i) Propagation if scientific thinking
(ii) Avoidance of brain drain
4.Preservation of progeny Care of family or Care of stakeholder
5.Preservation of wealth (i) Wellbeing of society
(ii) Minimizing income and wealth disparity
Source: Adopted from Mohammed et al. (2015)

Mohammed et al. (2015) applied content analysis to connect the five aspects of necessities which are the
preservation of religion, life, intellect, progeny and wealth with Ibn Ashur’s elements as mentioned above. It
will help to match the interpretation and institutional elements for an institution like IBs. Mohammed et al.
(2015) used the Ibn Ashur interpretation on Al-Ghazali five Maqasid dimensions to assist the
operationalization of the Ibn Ashur’s elements to obtain the ratios in order to analyze the IBs performance.
The ratios are obtained by conducting the selection based on several criteria such as adopting the ratios used
by identical studies assessing performance of IBs, statistical convenience based on data source and by
assuring the reflection of Maqasid al-Shari’ah on the performance measurement i.e. the Maqasid al-Shari’ah
Performance Evaluation Model (MPEM).
This study employed the MPEM adopted from Mohammed et al. (2015) with certain adjustment and new
inclusion. This model provides a comprehensive measurement on all aspects of the Maqasid al-Shari’ah
(Refer Appendix 1 for definition and operational variables used).
Firstly, Maqasid performance measurement on the preservation of faith comprised of two ratios (R1 to
R2). These preservations mean that the IBs should protect the society from exercising riba. It aims to
safeguard ummah to have freedom performing their religion. IBs bear crucial responsibility in furthering
socio-economic development without charging riba with moral and ethical attributes that can effectively
motivate business to flourish in a more conducive financing environment in realizing the maqasid al-Shari’ah
(Haron and Ibrahim, 2016). In order to measure this dimension, two ratios are proposed which are (i)
 Journal of Islamic Finance (Special Issue) (2019) 001-018 7

mudarabah and musharakah investment/total investment and (ii) interest free income/total income. First ratio
is employed to comprehend how many percentage of profit and loss sharing investment to total investment
and the second ratio is used to examine the total interest free income with respect to total income. Secondly,
preservation of life is measured with two ratios (R3 to R4) which are (i) corporate social responsibility (CSR)
Expenditure/Total expenses, (ii) Zakat distribution/Net Asset. CSR expenditure and zakat portray IBs purpose
to protect human dignity and human rights. The higher the ratio means IBs concern to human life and dignity.
Thirdly, the Maqasid performance measurement on protecting mind comprised of two ratios (R5 to R6).
These ratios aim to protect the intellect with regards to the prohibitions i.e. intoxicants. Ibn ‘Ashur modified
this dimension into two elements which comprised of propagation of scientific thinking and avoidance of
brain drain. This dimension is measured with (i) investment in technology/total asset to ascertain IBs
commitment to the advancement of technology in order to support their operation; (ii) number of employees’
turnover/total number of employees to ensure this ratio stays as low as they can to maintain the stability of
bank’s performance.
Fourthly, the measurement focuses on preserving the offspring. This ratio refers to the term care for
family and also stakeholders. It includes the shareholders, customers, employees and government servants.
These elements are measured with R7 to R12. Shareholders are represented with R7 and R10. R7 related to
market value divided by book value. Most of IBs are unlisted in the Indonesia Stock Exchange. Since the
market value data cannot be obtained except for the Bank Panin Syariah which was listed on January 2015,
the market value divided by book value ratio is replaced with return on equity (ROE). ROE measures the
firms’ profitability by showing how much profit the IBs obtained from invested shareholders’ fund. ROE is
widely employed in several studies measuring IBs performance (see for examples; Mollah and Zaman, 2015;
Almutairi and Quttainah, 2017; Nomran et al., 2017). Employees are represented with R8 and R9, customers
are depicted with R11 and government servants are portrayed by R12. R11 is related to the credit risk in
which the performance ratio has not been defined by Mohammed et al. (2015). This study measures credit
risk based on non-performing financing (NPF) by dividing the NPF divided over total financing. NPF means
financing which has been overdue for more than 90 days. This proxy has been applied in several studies (see
for examples; Ahmad and Ahmad, 2004; Haryono et al., 2016).
Fifth, the preservation of wealth is also belong to necessity because it aims to protect the society
wellbeing and lessen the income disparity. R13-R15 portrayed on how much the IBs invested into real sector
business activities which can improve the society wellbeing and dampen the gap between the rich and the
poor.

3.1.1 Weightage Allocation of Banks’ Performance Variables

According to Bedoui (2012), the Maqasid al-Shari’ah performance measurement can be conducted based on
the balance concept. It is based on Surah Al-Baqarah verse 143 which stated that;

“And thus we have made you a just community that you will be a witnesses over the people and the
Messenger will be a witness over you”.

From this verse, many scholars argued that Islam and Shari’ah have a position as a middle way.
Therefore, the balance can be applied on companies as well. In terms of IBs, the balance can be applied
between all the five objectives (Maqasid al-Shari’ah). By taking into consideration the relationship between
dimension, elements and performance ratios, this study uses a quantitative method namely TSAW (The
Simple Additive Weighting) adopted from Multiple Attribute Decision Making (MADM) (Yoon and Hwang,
1995). This method has been applied in several studies like (Antonio et al., 2012; Asutay and Harningtyas,
2015; Mohammed and Taib, 2015). The MADM is a supporting management tool for decision making to
assess many options with multiple attributes which are usually in contrary (Yoon and Hwang, 1995). The
methodology attempts to get the valuable index from multidimensional data to assess various options. The
analysis is embarked with setting up the attributes to quantify the pertinent objectives achievement. It can be
done by conducting the literature review and interviewing experts to discover the attributes in the problem
scope after that the options are compared over the selected attributes. As for TSAW method, it requires
decision makers to determine weights for each attribute/reference. Total score for an alternative is obtained
by summing up all crossing result of the rating which can be contrasted across attributes and weight of each
8 Rahman & Haron / The Effect of Corporate Governance on IB Performance

individual.

In order to get the dimension score, the formula of TSAW is as follows:

V(Di) = Vi = ∑&'() #$ *$ (Xij), i= 1, …, m

V (Di) means the dimension score, whereas #$ and *$ (Xij) are the weight and value function of the
element (Yoon and Hwang, 1995). The weights are assumed to be equally proportioned because (Bedoui,
2012) argued that the balance is applicable to all 5 objectives of Maqasid al-Shari’ah. In this case, the weights
for the elements and the performance ratios are also equally proportioned (refer Appendix II for details).

3.1.2 Steps of Maqasid Index Calculation

Performance ratios are compared between samples of observation to provide a preliminary assessment results
of the Maqasid Index. Fifteen performance ratios are the representative of the five Maqasid al-Shari’ah
objectives (preservation of faith, life, intellect, progeny and wealth) (refer Appendix II).
The TSAW method attains an index by summing up the contributions from each attribute (Yoon and
Hwang, 1995). In this study, the attributes comprise of five dimensions of Maqasid al-Shari’ah and the intra-
attributes consist of eight elements and 15 performance ratios. The weights are assigned to be equally
proportioned because (Bedoui, 2012) argued that the balance is applicable to all the 5 objectives of Maqasid
al-Shari’ah. In this case, the weights for the elements and the performance ratios are also equally
proportioned. The assessments for the 15 performance ratios are generated from the annual reports for the
five years period (2012-2016). Total score for each IB is generated from the multiplication of the scale rating
for each attribute with each appropriate intra-attribute, then summing up all these multiplication results.
Mathematically, an evaluation of each IBs Maqasid al-Shari’ah performance (dimension, elements and
performance ratios) can be made by the following models (refer Appendix II for details).

First Maqasid (Preservation of Faith)

W1 is the weight for Preservation of Faith
PI (D1) = W1 (E1 (R1 + R2))………..……………………………………………….(1)
where,
- (D1) shows the first Maqasid al-Shari’ah that is Preservation of Faith
- W1 is the weight of D1
- E1 is the weight of first element of D1
- R1 is the weight of first performance ratio of E1
- R2 is the weight of second performance ratio of E1

Second Maqasid (Preservation of Life)

PI (D2) = W2 x (E2 x R3 + E3 x R4) ………………………………………...............(2)
where,
- (D2) shows the second Maqasid al-Shari’ah that is Preservation of Life
- W2 is the weight of D2
- E2 is the weight of the second element of the D2
- E3 is the weight of the third element of the D2
- R3 shows the weight of third performance ratio of E2
- R4 shows the weight of fourth performance ratio of E3

Third Maqasid (Preservation of Intellect)

PI (D3) = W3 (E4 x R5+ E5 x R6) ………….……………….……….……………… (3)
where,
- (D3) shows the third Maqasid al-Shari’ah that is Preservation of Intellect
- W3 is the weight of D3
- E4 is the weight of fourth element of D3
- E5 is the weight of fifth element of D3
 Journal of Islamic Finance (Special Issue) (2019) 001-018 9

- R5 shows the weight of fifth performance ratio of E4

- R6 shows the weight of sixth performance ratio of E5

Fourth Maqasid (Preservation of Progeny)

PI (D4) = W4 (E6 x (R7+ R8+ E9 + E10 + E11 + E12))….………………..................(4)
where,
- (D4) shows the fourth Maqasid al-Shari’ah that is Preservation of Progeny
- W4 is the weight of D4
- E6 is the weight of sixth element of D4
- R7 shows the weight of seventh performance ratio of E6
- R8 shows the weight of eighth performance ratio of E6
- R9 shows the weight of ninth performance ratio of E6
- R10 shows the weight of tenth performance ratio of E6
- R11 shows the weight of eleventh performance ratio of E6
- R12 shows the weight of twelfth performance ratio of E6

Fifth Maqasid (Preservation of Wealth)

PI (D5) = W55 (E51 x R51+ E52 x R52+ E53 x R53)…………………………...........(5)
where,
- (D5) shows the fifth Maqasid al-Shari’ah that is Preservation of Wealth
- W5 is the weight of D5
- E7 is the weight of seventh element of D5
- E8 is the weight of eighth element of D5
- R13 shows the weight of thirteenth performance ratio of E7
- R14 shows the weight of fourteenth performance ratio E8
- R15 shows the weight of fifteenth performance ratio E8

Then the multiplication between dimensions and performance ratios with their own weight are summed to
determine the largest total value as the best candidate. Mathematically the model is as follows:
MI = PI (D1) + PI (D2) + PI (D3) + PI (D4) + PI (D5) …………………….................(6)

3.1.3 Empirical Model

This study analyzed the CG variables and its impacts on the Maqasid Index performance of IBs in Indonesia.
The completed yearly data are obtained from each IB annual report from 2012-2016. The multiple regression
models will be used to test the relationship between SSB characteristics, board structure, bank size, and bank
age variables to the extent of IBs performance.

+,-.,0 = 23 + 2) ∗ 66,6.,0 + 27 ∗ 66,89:;;<=<>.,0 + 2? ∗ 66,@AB.,0 + 2C ∗ 66,D=E.,0 + 2F ∗

66,@GE.,0 + 2H ∗ 66,8ℎ8:<E.,0 +2J ∗ ,:K9A6LM=.,0 +2N ∗ ,:K9A+OA.,0 +2P ∗ ,6LM=.,0 + 2)3 ∗ ,QR=.,0 +
S.,0

Table 2 summarizes the definition of the dependent, independent and controlled variables which
illustrates how the dependent, independent, and control variables are measured in this study.
10 Rahman & Haron / The Effect of Corporate Governance on IB Performance

Table 2: Definition of the Dependent, Independent, and Controlled variables

Variable Definition Reference

Dependent Variable
Maqasid Performance Total value of MPEM by using TSAW Mohammed et al. (2015)
Evaluation Model (The Simple Additive Weighting)
(MPEM) Index
Independent Variable
Shari’ah Supervisory Total number of SSB members Rahman and Bukair (2013);
Board (SSB) Size Mollah and Zaman (2015)
(SSBS) Almutairi and Quttainah
(2017); Nomran et al.(2017)
SSB cross membership % of SSB member who serve on another Farook et al. (2011); Rahman
(SSBCrossmemb) SSBs and Bukair (2013); Almutairi
and Quttainah (2017);
Nomran et al.(2017)
SSB educational % of SSB member who hold Farook et al. (2011); Rahman
qualification (SSBEdu) PhD/Doctorate title and Bukair (2013); Nomran et
al.(2017)
SSB reputation % of SSB member who sit on National Farook et al. (2011); Rahman
(SSBRep) Supervisory Board of Indonesia (Majelis and Bukair (2013); Nomran et
Ulama Indonesia) and at least another al.(2017)
SSB
SSB expertise (SSBExp) % of SSB member with accounting, Nomran et al.(2017, 2018)
business or finance knowledge
Change in the SSB Dummy variable (1 if the SSB Nomran et al.(2017)
composition composition changed annually and 0
(SSBChComp) otherwise)
Board Structure:
Board Size (BoardSize) Number of members on the board of Al-Saidi and Al-Shammari,
directors (2013); Bukair and Rahman
(2015); Mollah and Zaman
(2015) Almutairi and Quttainah
(2017)
Board Independence % of Independent Non-Executives Mollah and Zaman (2015)
(BoardInd i,t) Directors on the board
Controlled Variable
Bank Size (BSize) Natural logarithm of total revenues Nomran et al.(2018)
Bank Age (BAge) Age of bank Nomran et al.(2017)

3.2 Data Collection and Sample Selection

This study examines 11 IBs in Indonesia. Data were obtained from the annual report of each bank. According
to OJK (2017), there are 13 Islamic Banks in Indonesia as per June 2017. The study period is five years from
2012-2016. Banks that are founded after 2012 (Bank Aceh Syariah and Bank Tabungan Pensiunan Nasional
Syariah) were excluded in order to get a balanced panel data.
 Journal of Islamic Finance (Special Issue) (2019) 001-018 11

4. Empirical Findings and Discussion

4.1 Maqasid Performance of Islamic Banks

The Maqasid index performance ratios of the preservation of faith are measured with the mudarabah and
musharakah Investment/ Total Investment (R1) and the Interest Free Income/Total Income (R2). The highest
score for the first objective is achieved by the Bank Jabar Banten Syariah (BJBS) that reached up to 0.1972
in 2013. This is because the BJBS had the highest mudarabah and musharakah Investment and lower
investment on the securities due to the maturity of Shari’ah Government Bond (SBSN) IFR 004 in 2013. In
addition, BJBS had less non-halal income in 2013 so the accumulation of R1 and R2 has led the BJBS get
the highest score compared to other IBs. The high ratios for both show that the BJBS intent to maintain the
attainment of Maqasid al-Shari’ah. On the other hand, Maybank Syariah Indonesia (MSI) obtained the lowest
score which accounted for 0.0983 in 2012. The MSI had not provided the mudarabah and musharakah
Investment in 2012 but they provided the receivables based on murabahah, istishna and ijarah.
The Maqasid index performance ratios of the preservation of life are quantified with the Corporate Social
Responsibility (CSR) Expenditure/Total Expenses (R3) and the Zakat distribution/Net Asset (R4). The
highest score for the second objective is obtained by the Bank BNI Syariah (BBNS) with R3 reached up to
0.00087 in 2016. The reason is that there was an increase in CSR fund from 7.55 billion rupiahs in 2015 to
8.32 billion rupiahs in 2016. In addition, total zakat distributed also increased from 12.79 billion rupiahs in
2015 to 15.74 billion rupiahs in 2016. However, MSI scored the lowest accounted for 0.0000048 in 2015.
According to MSI 2015 annual report, the bank has not started to manage the zakat fund and distribute zakat
fund so the statements of source and uses of zakat funds are not available. According to OJK (2015a,b), the
regulation of transparency and publication on the article number 14 requires the IBs to have a report on source
and distribution of zakat fund. When the MSI starts to pay and manage the zakat fund, the report on source
and distribution of zakat fund have to be available. Non-payment of corporate zakat can occur because there
is no clear accounting standard which regulate the corporate zakat for IBs (Atmahadi and Dewi, 2011).
However, the practice of corporate zakat are still done by IBs, for example, BSM determined the zakat rate
at 2.5% from the profit before zakat and tax in 2016 which was based on the general meeting of shareholders.
The total amount CSR distributed reached up to 60 million rupiah. This amount is relatively small if compared
with the total expenses incurred by MSI.
The Maqasid index performance ratios of the preservation of intellect are measured with the Investment
in technology/total asset (R5) and the Number of employees left/Total number of employees (R6). The highest
score for the third objective is obtained by Bank Mega Syariah (BMS) which reached up to 0.0261 in 2015.
In 2014, there are 4,767 employees but drastically decreased to 2,316 employees in the upcoming years.
Based on the BMS annual report in 2015, there was an alteration and transformation of BMS business model
in order to improve their organization and distribution networks. The total technology invested until 2015
showed 43 billion rupiahs recorded in the office equipment section. On the other hand, Bank Syariah Bukopin
(BSB) attained the lowest figure accounted for 0.000002 in 2015. Their employees increase year by year as
their business grows. From 2014 to 2015, their total employees increased by 2.97%. Employee turnover was
maintained at a low rate by implementing a strategy for new employees, who are majority fresh graduates, by
giving them work contract for graduate management development program. The total technology invested
until 2015 showed 25 billion rupiahs recorded in the technology section and another allocation was added
making the total investment of 243 million rupiahs.
The Maqasid index performance ratios of the preservation of progeny are quantified with the Net
Income/Shareholder’s Equity (R7), Research Expense/Total Expense (R8), Training and development
expense/total expense (R9), Net Income/total asset (R10), Credit Risk (R11), and Tax Paid/Profit before tax
(R12). BMS obtained the highest score of 0.0290 in 2012. The biggest contribution comes from the ROE
which accounted for 57.98%. BMS obtains 0.57 rupiahs of net income for every rupiahs invested by the
shareholders. This is because BMS had a significant contribution on the 61 billion rupiahs of tax paid which
resulted on tax paid/profit before tax ratio equal to 25.07%. On the contrary, the lowest score was obtained
by BJBS amounted to -0.0219 in 2016. This problem arose due to the significant increase of losses occurred
in 2016. The total loss was 545 billion rupiahs due to the increase which was approximately 10 times on the
provision for possible losses on the earnings asset from 2015. This had impacted the result of ROE, ROA,
and tax paid/profit before tax showing negative results.
12 Rahman & Haron / The Effect of Corporate Governance on IB Performance

The Maqasid index performance ratios of the preservation of wealth are measured by Investment in the
real economic sector/total investment (R13), Investment in SMEs/total investment (R14) and Investment in
Agriculture/total investment (R15). Bank BRI Syariah (BBS) obtained the highest score which accounted for
0.0625 in 2013. The highest contribution for this objective derived from R14. BBS had significant portion of
mudarabah and musharakah investment in SME. For mudarabah investment, the total figure was 868 billion
rupiahs or 92.7% from total mudarabah Investment. For musharakah investment, the total figure reached up
to 1.55 trillion rupiahs or 89% from total of musharakah investment. However, MSI gets the lowest score of
0.000 in 2012. MSI did not have any mudarabah and musharakah Investment in 2012 but they had product
of receivables based on murabahah, istishna and ijarah. Table 3 shows the highest score of Maqasid index
which is obtained by BBS at 0.2815 while MSI the lowest with 0.1137.

Table 3: Maqasid Index based on MPEM

Islamic Banks 2012 2013 2014 2015 2016

Bank Muamalat Indonesia (BMI) 0.2399 0.2319 0.2330 0.2341 0.2386
Bank Victoria Syariah (BVS) 0.1570 0.1690 0.1888 0.1960 0.1905
Bank BRI Syariah (BBS) 0.2789 0.2815 0.2616 0.2239 0.1951
Bank Jabar Banten Syariah (BJBS) 0.2051 0.2612 0.2353 0.2215 0.1433
Bank BNI Syariah (BBNS) 0.1782 0.1815 0.1923 0.2009 0.1905
Bank Syariah Mandiri (BSM) 0.2474 0.2486 0.2316 0.2045 0.2139
Bank Mega Syariah (BMS) 0.1480 0.1351 0.1344 0.1547 0.2001
Bank Panin Syariah (BPS) 0.2087 0.2398 0.2478 0.2400 0.2251
Bank Syariah Bukopin (BSB) 0.2180 0.2081 0.2213 0.2294 0.2362
BCA Syariah (BCAS) 0.1906 0.2098 0.2303 0.2170 0.2068
Maybank Syariah Indonesia (MSI) 0.1137 0.1197 0.1490 0.1347 0.1301

From all the sample observations, the lowest contribution comes from the second objective which is
preservation of life. The total amount of CSR and zakat contribution must be improved by raising the amount
given to the society. Therefore, the Maqasid al-Shari’ah attainment will increase as well.

4.2 Random Effect – Generalized Least Square Regression Results

Table 4: SSB characteristics, board structure of IBs and performance of IBs

R2 0.4638
Adjusted R2 0.3419
Standard Error 0.0333
F-statistic 3.8065
F-significance 0.0009
Number of observations 55
Variables Coefficient Standard t- Significance Hypotheses Result
Error statistic and sign
Constant -0.1400 0.1437 -0.9742 0.3353 - ---
Corporate Governance Variables
SSBS -0.0394 0.0107 -3.6996 0.0006* H1 Supported (-)
SSB
Crossmemb 0.0792 0.0358 2.2139 0.0321** H2 Supported (+)
SSBEdu -0.0393 0.0192 -2.0470 0.0467** H3 Supported (-)
SSBRep -0.0426 0.0240 -1.7704 0.0836*** H4 Supported (-)
SSBExp 0.0118 0.0446 0.2642 0.7928 H5 ---
SSB
ChComp -0.0058 0.0170 -0.3416 0.7343 H6 ---
BoardSize 0.0090 0.0044 2.0607 0.0453** H7 Supported (+)
BoardInd -0.0911 0.0533 -1.7093 0.0944*** H8 Supported (-)
Bank specific variables as controlled variables
 Journal of Islamic Finance (Special Issue) (2019) 001-018 13

BSize 0.0146 0.0060 2.4458 0.0185**

BAge 0.0001 0.0011 0.0844 0.9331
Notes: This Table exhibits the full sample result of RE-GLS for the all variables. No issue on multi-collinearity since VIF for each
variable is < 10 (Haron and Ibrahim, 2012). The sign of *, **,and *** on the variable shows the significance at 1%, 5%, and 10%
respectively. N = number of observations, MPEM = Maqasid performance evaluation model, SSBS = SSB size, SSBCrossmemb = SSB
Cross membership, SSBEdu = SSB educational qualification, SSBRep = SSB reputation, SSBExp = SSB expertise, SSBChComp =
Annual changed SSB composition, BoardSize = Board Size, BoardInd = percentage Independent non-executive directors on the board,
BSize = Bank size, BAge = Bank age.

The result of RE-GLS is significant (p=0.05) and produces R2 of 0.3419, indicating that the SSB
characteristics (SSBS, SSBCM, SSBEdu, SSBRep, SSBExp, SSBChComp), board structure (BoardSize,
BoardInd) and controlled variables (BSize, BAge) are able to explain 34 percent of the variation in the
MPEM. It means that all the independent variables have a significant influence on the performance of IBs.
Ten hypotheses are examined in this study. SSB Size (H1) is statistically significant at one percent level
and has a negative relationship with the performance of IBs. The negative relationship exhibits that IBs with
large SSB size tend to reduce the performance of IBs. The SSB size of all the 55 observations in Indonesia
ranged from two to three. However, this result is distinct from Mollah and Zaman (2015); Almutairi and
Quttainah (2017) where statistically significant and positive association was recorded with the performance
of IBs. Cross-membership (H2) is statistically significant at 5% level and has a positive association with the
performance of IBs. If more SSB members have cross membership within IBs, the IBs performance will
increase. This result is consistent with Almutairi and Quttainah (2017), where SSB cross membership makes
SSB members well connected, and it will create a better resource allocation. Thus, it has positive and
statistically significant relationship with the performance of IBs. In Indonesia, SSB cross membership is
regulated based on the BI Regulation Number 6/24/PBI/2004. It is stated that SSB can only be concurrent
member of SSB not more than four IFIs, i.e. two other IBs and two other non-bank financial institutions. By
having this regulation, restriction on cross-membership of SSB will reduce the independence issues and
conflict of interests. Furthermore, it will increase the effectiveness of SSB to monitor and advise the IBs
(Nomran et al., 2017). Therefore, the SSB members can focus more and be more effective in preparing an
evaluation report to National Supervisory Board of Indonesia (Majelis Ulama Indonesia) related to the
Shari’ah principles implementation in IBs (Rama, 2015).
SSB Education (H3) is statistically significant at 5% level and has a negative influence on the
performance of IBs. SSB members with doctorate degree do not have positive impact on the performance.
This result is similar with Nomran et al. (2017) which found a negative relationship of SSB educational
qualification with the IBs’ performance. In Indonesia, all the SSB members in several IBs such as BMI, BVS,
BBNS, BSM, BCAS hold a doctorate degree. Most of the members hold the doctorate degree specialization
on the Shari’ah field. More SSB members need to have doctorate degree specializing in the banking and
finance to strengthen the advisory tasks and to be better informed on the current implications of IBs. However,
this education requirement is not required by BI regulation and National Supervisory Board of Indonesia
(Majelis Ulama Indonesia - MUI) (Rama, 2015). Based on the BI regulation Number 11/3/PBI/2009, SSB
member should have a competence in the field of fiqh muamalat. MUI decision Number 03/2000 stated that
SSB member must have knowledge and experience in Shari’ah and have general finance and banking
knowledge. This has an implication on SSB members who do not have doctorate degree, which accounted to
32% from all the sample observations of IBs in Indonesia.
SSBRep (H4) is statistically significant at 10% level and has a negative association with the performance
of IBs. The increase on the percentage of SSB members who sits on the MUI and at least another SSB will
decrease the performance of IBs. In Indonesia, Shari’ah governance allow the SSB members from MUI to sit
on the SSB of IBs which can lead to a conflict of interest (Rama, 2015). The implication of this regulation is
that there is one scholar who sits at three IBs (27% of SSB IBs) and two non-bank financial institutions in
2016. By having good reputation, the demand to hire this type of Shari’ah scholar is very high. This will have
an impact on the effectiveness to deliver task as Shari’ah scholar and ultimately impact the performance of
IBs.
Board Size (H7) is statistically significant at 5% level and has a positive influence on the performance
of IBs. An increase in the number of board of directors will lift up the performance of IBs. This result is in
agreement with a notion of stakeholder theory which stated that as the number of BOD increase, the
stakeholders’ representation increases. This will result in a more balanced decision making because it is not
14 Rahman & Haron / The Effect of Corporate Governance on IB Performance

dominated by a person or group of people. In the Indonesian context, the appointment and/or replacement of
members of the board of directors have to go through general meeting of shareholders which takes into
account the recommendations of the remuneration and nomination committee. Thus, the selected board of
directors with appropriate competencies and skills will lead the IBs. This result is different from the findings
from Al-Saidi and Al-Shammari (2013); Bukair and Rahman (2015); Mollah and Zaman (2015) who found
a negative relationship between board size and IBs performance. All of these studies argued that large BOD
size leads to an ineffectiveness in performing their function. It will complicate the coordination and
communication which could then cause ineffectiveness in monitoring the performance of IBs.
BoardInd (H8) is statistically significant at 10% level and has a negative association with the performance
of IBs. An increase in the percentage of independent non-executive directors on board decrease the
performance of IBs. This result is in contrast with the role of independent non-executive directors based on
the stakeholder theory in which they should reinforce religious matters, social justice, and welfare rather than
focus solely on maximizing shareholders’ wealth (Nienhaus, 2006). Then, it will lead to better improvement
on the Maqasid performance. However, this result is consistent with prior studies conducted by Al-Saidi and
Al-Shammari (2013); Bukair and Rahman (2015); Mollah and Zaman (2015). The justification is that the
independent BODs selected tend to correspond with the regulatory requirements (Mollah and Zaman, 2015).
In Indonesia, the selection process of independent non-executive directors have to comply with the BI
regulation No.11/3/PBI/2009. They should not have financial, management, share ownership and/or family
relationship with the controlling shareholders, members of the board of commissioners and/or members of
the board of directors. Another possible justification related to the independent non-executive directors who
do not have strong Shari’ah, banking, and finance knowledge (Rahman and Bukair, 2013). It leads to an
inefficiency in conducting monitoring to control executives and shareholders performing their authorities and
responsibilities in IBs.

5. Conclusion

In this study, the effects of CG on Indonesia IBs performance between the periods of 2012 to 2016 are
examined. This study enhances the existing literature which focuses on the CG by examining the influence
of the characteristics of SSB and board structures on the performance of IBs that are measured by the Maqasid
performance index. The measurement utilizes the Maqasid Performance Evaluation Model (MPEM) to
compute performance score and a quantitative method called The Simple Additive Weighting (TSAW) to
obtain the Maqasid Shari’ah achievement of IBs.
The Maqasid index for all the IBs in Indonesia between 2012 and 2016 ranged from above 11% to 28%
with only one bank (BMI) achieved a consistent achievement. Other IBs however show a fluctuating value
of the Maqasid performance index every year. The Maqasid index for all the IBs in Indonesia is relatively
low. This study recommends the improvement on the achievement of Maqasid al-Shari’ah in Indonesia IBs
especially on the second objective namely preservation of life. The increasing amount of CSR and zakat is
very important to enhance human life and dignity. The existing accounting standard number 101 regulates
that IBs should make the report for sources and uses of zakat. It will help to determine the effectiveness and
efficiency of zakat funds managed by IBs. However, on the accounting standard number 101, there is no
detail explanation related to the accounting treatment of zakat except on the reporting and disclosure aspects.
However, AAOIFI FAS 9 regulates not only reporting and disclosure aspects but also the percentage,
calculation and recognition of zakat. The improvement needs to be made to the existing accounting standard
for uniformity on zakat rate of IBs and the calculation and recognition mechanism on zakat for IBs. The
application of net asset method and net invested funds based on AAOIFI FAS 9 will potentially increase the
amount of zakat paid by IBs. Furthermore, the regulators should set up and impose a more robust and new
tool to evaluate the Maqasid performance index in order to have an illustration on how far the role of IBs
have contributed to the society. This will help investors to have an informed decision which not only
concentrates on the financial ratios but also the entire dimensions of IBs that reflect the main purpose of IBs.
The impact of SSB characteristics (SSB size, SSB Cross membership, SSB Education, SSB Reputation)
and board structures (Board Size, Board Independence) are found to have significant influence on the
Maqasid performance of IBs in Indonesia during the period. The role of CG mechanism through SSBs and
BODs should be strengthened to lift up to the Maqasid al-Shari’ah achievement.
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 17
Appendix I: Definition and Operational Variables

Dimension Element Performance Ratio Ratio Explanation Source

R1. Mudarabah and Musharakah Comprehend on how many percentage of profit and Annual
Investment/Total loss sharing investment to total investment Report
D1.Preservation of E1. Freedom of Faith Investment
Faith R2. Interest Free Income/Total Income Find out the total interest free income with respect Annual
to total income Report
E2. Preservation of R3. Corporate Social Responsibility (CSR) Annual
human dignity Expenditure/Total Expenses CSR expenditure and zakat portray the Islamic bank Report
D2. Preservation of E3. Protection of R4. Zakat distribution/Net Asset purpose to protect the human dignity and human Annual
life human right rights Report

E4. Propagation of R5. Investment in technology/total asset Ascertain bank’s commitment to the advancement Annual
D3. Preservation of scientific thinking of technology in order to support their operation Report
Intellect E5. Avoidance of R6. Number of employees left/Total number Maintain the stability of bank’s performance by Annual
brain drain of employees having low percentage of employee turnover Report
R7. Net Income/Shareholders’ Equity Contribution to Shareholders Annual
Report
R8. Research Expense/ Total Expense Contribution to Annual
E6. Care for family Employees Report
D4. Preservation of [in case of Public R9. Training and development expense/total Contribution to Annual
Progeny Listed Company expense Employees Report
(PLC)] R10.Net Income/total asset Contribution to Shareholders Annual
Report
R11.Credit Risk Contribution to Annual
Customers Report
R12. Tax Paid/Profit before tax Contribution to government servants Annual
Report
E7.Wellbeing of R13. Investment in the real economic How much the Islamic banks invested into real Annual
society sector/total investment sector business activities which can improve the Report
D5.Preservation of E8.Minimising R14. Investment in SMEs/total investment society wellbeing and dampen the gap between the Annual
Wealth income and wealth rich and the poor Report
disparity R15. Investment in Agriculture/total Annual
investment Report
Source: Mohammed et al. (2015) with Authors’ adjustment and new inclusion
 18

Appendix II: Weighted of Maqasid Index Variables

Dimension Weight Average Weight (Out Element Average Weight (Out Performance Ratio Average
(W) of 100%) of 100%) Weight (Out
of 100%)
D1. W1 20 E1. Freedom of Faith 100 R1. Mudarabah and Musharakah 50
Preservation of Investment/Total
Faith Investment
R2. Interest Free Income/Total Income 50
Total 100 100
D2. W2 20 E2. Preservation of 50 R3. Corporate Social Responsibility 50
Preservation of human dignity (CSR) Expenditure/Total Expenses
life E3. Protection of 50 R4. Zakat distribution/Net Asset 50
human right
Total 100 100
D3. W3 20 E4. Propagation of 50 R5. Investment in technology/total 50
Preservation of scientific thinking asset
Intellect E5. Avoidance of 50 R6. Number of employee left/Total 50
brain drain number of employees
Total 100 100
R7. Net Income/Shareholders’ Equity 16.67
R8. Research Expense/ Total Expense 16.67
E6. Care for family R9. Training and development 16.67
[in case of Public expense/total expense
D4. W4 20 Listed Company 100 R10.Net Income/total asset 16.67
Preservation of (PLC)] R11.Credit Risk 16.67
Progeny R12. Tax Paid/Profit before tax 16.67
Total 100 100
D5.Preservation W5 20 E7.Wellbeing of 50 R13. Investment in the real economic 33.33
of Wealth society sector/total investment
E8.Minimising income 50 R14. Investment in SMEs/total 33.33
and wealth disparity investment
R15. Investment in Agriculture/total 33.33
investment
Total 100 Total 100 100
Source: Adopted from (Bedoui, 2012; Mohammed et al., 2015)