What's in a name? Uncovering a link between intermediation margins of Islamic banks and the reputation of Shariah Supervisory Boards

Abstract

Using hand-collected information of Shariah scholars in 114 Islamic banks from 17 countries between 2012 and 2019, we investigate the link between the reputation of Shariah Supervisory Boards (SSBs) and intermediation margins. Consistent with the resource-based view and signalling theory, we find a positive association between reputable SSBs and higher intermediation margins after controlling for several bank-level and macroeconomic variables. These findings are robust across a variety of different estimation methods as well as alternative measures of bank performance. This implies that the inclusion of reputed scholars is a source of competitive advantage for Islamic banks. However, this advantage can only be realized if the percentage of reputed scholars is more than 25 % of the total board. Finally, we find that deposits and financing are the key channels through which reputation translates into higher intermediation margins.