Risk Management & Corporate Governance Characteristics in the Malaysian Islamic Financial Institutions

Abstract

Purpose – Aim to examine the association between board characteristics and risk management committee (RMC) whether it is combined or separate with audit committee in the Malaysian Islamic financial institutions. This study will give an in-depth overview to explore about the risk management and corporate governance practices in the Islamic financial institutions especially on the oversight function and performance.

Design/methodology/approach – This study employs secondary data collected from the Islamic banks’ annual reports for the period 2006 – 2009.

Findings – It was found that the existence of RMC is significantly associated with proper governance at the board of directors’ level and thus, an effective and adequate Board member with larger size tends to have greater oversight monitoring function towards the company’s activities. It is easier to establish a separate risk management committee (RMC) and with greater levels of resources offered by larger boards, there would be less pressure to establish a combined risk management and audit committee. Furthermore, the result shows that company leverage has positive significant relationship with the existence of RMC and separate risk management committee with audit committee (SRMC) where a large proportion of long-term liabilities entail greater financial risk and firms with high leverage are more likely to have debt covenants and higher going concern risks.

Originality/value – Since there are lack of studies conducted in this area, specifically among the Islamic banks in Malaysia, this study will broaden the scope by providing empirical evidence of the relationship between risk management committee and board characteristics in the Islamic financial institutions.

Keywords: Risk Management, Corporate Governance, Islamic Financial Institutions