Research Methodology

This chapter describes the methods used to roll up informations, the variables associating to CG and public presentation, the development of hypothesis and the statistical techniques used to demo the consequence of CG on public presentation of IBs. Consequently, this is done to accomplish the cardinal purpose of this survey i.e. : to cognize the impact of CG on public presentation.

  1. Research Methods

Datas can be collected from two chief beginnings. First, primary informations is new or original informations that is collected by the research worker for a peculiar intent. It can be derived from first manus beginnings, for illustration: questionnaire, interview, study research, observation and focal point group. Further, secondary information refers to informations already collected in a anterior research which will be analysed by another research worker for another intent. Examples include: one-year studies, web sites, records kept by houses, published statistics and books.

Chiefly for this research secondary information has been used as it would hold been really hard to utilize questionnaire to aim IB as merely one Islamic bank exists in Mauritius. For this ground, Malaysia has been selected due to the presence of many IBs at that place. Data has been collected from the one-year studies of each IB based on the research methods used in anterior surveies ( Ansari and Siddique, 2013 ) , Matoussi and Grassa, 2012 ; Anon, 2011 ; Ramiz and Rehman, 2010 ) . The research workers used these informations to carry on arrested development analysis to mensurate the consequence of CG on public presentation.

More specifically, informations on internal CG mechanism has been extracted from the CG subdivision of the one-year study or for any losing informations the banks’ web sites have been inspected. Financial informations were derived from the published statistics including one-year fiscal statements, income statements and amalgamate public presentation sum-ups of IBs.

  1. Sample Selection

The sample consists of 18 fully fledged Islamic Bankss in Malaysia for the period 2009-2012. All IBs were selected for the survey to stand for the overall Islamic banking industry in Malaysia.

  1. Types Of Data Collected

There are two types of informations that have been collected chiefly CG and public presentation informations. The CG informations include SSB, board composing i.e. : per centum of outside managers on the board, board size, frequence of board meetings, CEO dichotomy and board commissions.

On the other manus, public presentation informations consist of Return on equity ( ROE ) and Return on entire assets ( ROA ) ; all of which were calculated manually utilizing expressions. The CG data/ variables were tested against the accounting based public presentation variables. This is consistent with the methodological analysiss used by Ansari and Siddique ( 2013 ) , Matoussi and Grassa ( 2012 ) , Anon ( 2011 ) in their research.

  1. Variable Description

Table 1a and 1b show the independent and dependent variables used in the survey.

Table 1a: Mugwump Variable Description

Corporate Governance Variables Acronym

Definition

Measurement

SSB

Size of Shari’ah Supervisory Board

Number of spiritual bookmans on the board

BCOMP

Board Composition

Percentage of independent NED managers on the board

Mugwump NED

Entire figure of managers

BSIZE

Board Size

Entire figure of managers on the board

Fecal matter

Frequency of Board Meetings

Number of board meetings in a twelvemonth

Chief executive officer

CEO Duality

Dummy variable:

0 if CEO isNOTpresident

1 if CEO isALSOpresident

BCOM

Board Committees

Entire figure of board commissions in each bank

Table 1b: Dependent Variable Description

Performance Variables Acronym

Definition

Measurement

Roe

Tax return on Equity

Net income after revenue enhancement

Shareholders’ equity

ROA

Tax return on Total Assetss

Net income after revenue enhancement

Book Value of Total Assets

Tantalum

Entire Assetss

Book Value of Total Assets

  1. Specifying CG Variables and Hypotheses Development
    1. 3.5.1 SSB

SSB is the most of import differentiation between CG of Islamic and conventional Bankss. The presence of SSB members is really of import as it is upon their trust that IAH or other depositors will put in IBs. Undeniably this will hold an impact on public presentation of IB.

As evidenced by bulk of the research workers ( Farook et al. , 2011 ; Rahman and Bukair, 2013 ; Matoussi and Grassa, 2012 ) , we assume that the inclusion of SSB in IBs has positive consequence on public presentation and therefore hypothesise:

HydrogenO: SSB has positive consequence on public presentation of IBs H1: SSB has negative consequence on public presentation of IBs

3.5.2 Board Composition

For this survey, board composing is measured by the per centum of independent NED managers ( outside managers ) in relation to the entire figure of board members ( Anon 2011 ; Matoussi and Grassa 2012 ; Ansari and Siddique, 2013 ) .

The Agency theory suggests that a higher proportion of outside managers should take to better public presentation since it reduces the struggle of involvements between the stockholders and directors and do direction more effectual through monitoring ( Fama and Jensen, 1983 ; Shleifer and Vishny, 1997 ) . This is line with the surveies discussed earlier for IBs ( Matoussi and Grassa, 2012 ; Anon, 2011 ) . Therefore to prove these statements, we hypothesise:

Holmium: Higher proportion of outside managers has positive consequence on public presentation of IBs

H1: Higher proportion of outside managers has negative consequence on public presentation of IBs

  1. Board Size

This variable is calculated by numbering the entire figure of board members busying the board of each IB. Based on the grounds of Anon ( 2011 ) , Matoussi and Grassa ( 2012 ) ; we suggest that smaller board size is positively related to public presentation of IB. The undermentioned hypothesis is used in order to prove this statement:

HydrogenO: Small board size has positive consequence on public presentation of IBs H1: Small board size has negative consequence on public presentation of IBs

3.5.4 Frequency of Board Meetings

The Guidelines on CG for Licensed IBs province that board meeting is an of import facet which helps BODs in supervising the fiscal public presentation of IBs. It besides lays out that meetings should be held on a regular footing i.e. : non less than one time every two months.

Hence an addition in the frequence of board meetings leads to better monitoring which has ultimate positive consequence on public presentation ( Vafeas, 1999 ) . We hypothesise the followers to prove this contention:

HydrogenO: Frequent Board Meetings has positive consequence on public presentation of IBs H1: Frequent Board Meetings has negative consequence on public presentation of IBs

  1. CEO Duality

Most of the surveies ( Matoussi and Grassa, 2012, Anon, 2011 ) have represented CEO dichotomy by a dummy variable set to 1 if CEO is besides president. In instance CEO and president places are occupied by different persons, the variable is set to 0.

Consistent with the findings of bulk of the surveies ( Yermack, 1996 ; Sunday, 2008 ; Anon, 2011 ) , it is conclusive that clear separation of functions between CEO and president has good effects on public presentation. Besides based on the statements put frontward in Chapter 2, the disadvantage of holding CEO dichotomy ( Jensen ( 1993 ) Cerbioni and Parbonetti, 2007 ; Haat et al. , 2008 ; Li et al. , 2008 Orwall and Gentile, 2004 ) exceeds its advantage ( Davis, Schoorman and Donaldson, 1997 ; Donaldson and Davis, 1991 ) . Therefore on the footing of these facts, we hypothesise:

HydrogenO: Separate functions of CEO and president has positive consequence on public presentation of IBs H1: Separate functions of CEO and president has negative consequence on public presentation of IBs

  1. Board Committees

The Guidelines on CG for Licensed IBs ( subdivision 2.17 ) in Malaysia recommends IBs to be composed of Nominating, Remuneration, Risk Management, Audit and Shari’ah Committee. In add-on, IFSB ( 2006a ) besides proposes the inclusion of a Governance Committee to supervise attachment to CG.

Since anterior findings are grounds that board commissions have positive impact on public presentation ( Heenetigala, 2011 ; Roche, 2005 ; Lefort and Urzua, 2008 ; Laing and Weir, 1999 ) ; for this survey we presume that IBs composed of these six commissions will positively impact public presentation. We therefore hypothesise:

HydrogenO: Board Committees has positive consequence on public presentation of IBs H1: Board Committees has negative consequence on public presentation of IBs

  1. Specifying Performance Variables

To measure public presentation of Bankss, fiscal ratios are normally used. For illustration, Samad & A ; Hassan ( 2000 ) ; Akkas ( 1994 ) and Sabi ( 1996 ) assert that bank regulators use fiscal ratios to measure bank’s public presentation. In the instance of IB, most of the research workers ( Anon, 2011 ; Matoussi and Grassa, 2012 ; Rehman and Mangla, 2010 ) have used ROE and ROA as indexs of public presentation. Consequently, these ratios will be used in this survey.

3.6.1 ROE

Roe shows the profitableness to stockholders after all disbursals and revenue enhancements ( Van Horne, 2005 ) . In other words, it indicates the efficiency of a house in utilizing shareholders’ investing to do net income. ROE is besides an index of measuring managerial efficiency ( Ross, 1994 ; Sabi, 1996 ; Hassan 1999 ) . That is, a high the ratio indicates better managerial efficiency. This can be straight linked to CG and public presentation i.e. : if those charged with administration are efficient, there is a possibility that company public presentation will besides be better. It is calculated as follows:

ROE=Net income after revenue enhancementShareholders’ equity

3.6.2 ROA

ROA shows the profitableness on the assets after subtracting all disbursals and revenue enhancements ( Van Horne 2005 ) . It measures the bank’s ability to change over its assets into net incomes ( Samad & A ; Hassan, 2000 ) . Furthermore, ROA is a common technique to mensurate managerial public presentation ( Ross, Westerfield, and Jaffe 2005 ) . That is a higher ratio indicates better efficiency of direction in utilizing the firm’s assets to do net income. It is calculated as follows:

ROA=Net income after revenue enhancementBook Value of Total Assets

In the instance of IB, they pay zakat ( charitable contributions ) , so profitableness after subtracting all disbursals, revenue enhancements and zakat has been taken into consideration to cipher both ROE and ROA.

  1. Statistical Analysis

3.7.1 Descriptive Statisticss

Descriptive statistics merely nowadayss and summarises of import information in a information set. It is a common method used in anterior surveies ( Anon, 2011 ; Matoussi and Grassa, 2012 ) to mensurate cardinal inclination and scattering. Examples of steps of cardinal inclination include mean, manner and average while steps of scattering include minimal, maximal, percentiles, standard divergence, discrepancy and others. For this survey, mean, lower limit, upper limit and standard divergence will be used. Minimum and upper limit will be used to cognize the lowest and highest value severally in the information set. Standard divergence measures the scattering from the expected value/ mean. Mean being the most of import step of cardinal inclination ; is calculated as follows:

3.7.2Pearson’s Correlation

Pearson’s correlativity is a method of mensurating the strength of relationship between independent and dependent variables. The Pearson’s correlativity coefficient is indicated by ‘r’ which ever lies between -1 and +1. -1 indicates a perfect negative relationship while +1 shows a perfect positive relationship. If r= 0, it means the variables are non correlated to each other. To accomplish the purpose of this survey, that is to cognize the consequence of internal mechanisms of CG on IB public presentation, the undermentioned Model of CG has been used which clearly describes the CG variables to be tested against the public presentation steps, ROE and ROA.

Table 2: Model of Corporate Governance and Islamic Banks Performance

Multiple arrested development analysis has been used to happen the nexus between explanatory variables and public presentation ( Hair et al.,1992 ; Weir, 1997 ) . The undermentioned arrested development theoretical account is used to prove the hypotheses described in this chapter:

REO= ?1 + ?1 SSB + ?2 BCOMP + ?3 BSIZE + ?4 BM + ?5CEO + ?6 BCOM + ?7 FSIZE+ vitamin E

ROA= ?1 + ?1 SSB + ?2 BCOMP + ?3 BSIZE + ?4 BM + ?5CEO + ?6 BCOM + ?7 FSIZE+ vitamin E

( Chen, Firth et Al. 2006 ; Mashayekhi and Bazaz 2008 ; Moin 2008 )

Chen, G. , M. Firth, et Al. ( 2006 ) . “ Ownership construction, corporate administration, and fraud: Evidence from China. ” Journal of Corporate Finance 12 ( 3 ) : 424-448.

Mashayekhi, B. and M. S. Bazaz ( 2008 ) . “ Corporate administration and house public presentation in Iran. ” Journal of Contemporary Accounting & A ; Economicss 4 ( 2 ) : 156-172.

Moin, M. S. ( 2008 ) . “ Performance of Islamic banking and conventional banking in Pakistan: a comparative survey. ”

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