Organizational Form and Expense-Preference Behavior : Evidence from Islamic Banks

This paper examines the organizational forms of Islamic banks, corporate governance mechanism, and their effects on organizational behavior, specifically relating to managerial expense preferences. The paper opted for an OLS cluster regression and followed by a stochastic frontier approach test as a robustness test. Findings of this study indicate that organizational forms of Islamic banks influence managerial expense preferences. A stochastic frontier approach test supports the initial findings and reveals that the average noninterest cost inefficiency of Islamic banks without Shari'ah Boards is 23% compared to commercial banks. Islamic banks with Shari'ah Boards are, on average, 28% less noninterest cost inefficient compared to Islamic banks without Shari'ah Boards, and are on average, 16% less noninterest cost inefficient compared to commercial banks. Shari'ah Supervisory Boards' positive implications for Islamic Banks are independent of the expectations of the governing structure or ownership. Specifically when looking at Islamic Banks with Shari'ah Supervisory Boards, managerial propensity to engage in self-serving behavior is reduced. This paper fulfils an identified need to understand how the distinct nature of Islamic banks organizational forms and governance impact managerial behavior