Journal of Contemporary Issues in Business and Government Vol. 28, No.

03, 2022
https://cibgp.com/
P-ISSN: 2204-1990; E-ISSN: 1323-6903
DOI: 10.47750/cibg.2022.28.03.010

Impact of Corporate Governance on the Financial

Performance of Islamic Banks in Pakistan

1Taimoor
Ali Shah (Corresponding Author)
PhD candidate, Qurtuba University of Science and Information Technology,
Peshawar, Pakistan Lecturer NCS University System Peshawar, Pakistan
2Dr. Naveed Shehzad

Associate Professor Qurtuba University of Science and IT Peshawar, Pakistan

3Umair Ahmad

Lecturer Qurtuba University of Science and Information Technology, Peshawar,

Pakistan
4Wajid Mehmood

PhD candidate, Qurtuba University of Science and Information Technology,

Peshawar, Pakistan, Lecturer NCS University System Peshawar, Pakistan

Abstract
The objective of the study was to examine the impact of corporate governance on the financial
performance of Islamic banks working in Pakistan. The population of the study was Islamic
banks working in Pakistan and seven (7) Banks were selected as a sample size through simple
random sampling technique. The dependent variable was return on assets while independent
variables were board size, female director, age of experience, firm size and productivity. Data
was collected from the annual reports of Islamic banks websites for the year 2017 to 2021. Panel
Diagnostic Test, regression analysis and correlation matrix were used for analysis. Results reflect
that firm size, board size and productivity were found positively significant. While age of
experience was inversely significant and female director was found statistically insignificant.
The magnitude of firm size was high as compared to other significant variables. However,
female director was found insignificant so it has no impact on return on assets.
Keywords:Corporate Governance, Board Size, Female Director, Age of Experience, Firm
Size, and Productivity

Introduction
The Past research studies on corporate governance around the world has proven a number of
empirical consistencies. Such different fundamentals of countries’ financial systems as the extent
and deepness of their capital markets, the pace of new security matters, corporate ownership
structures, dividend policies, and the efficacy of investment portion appear to be elucidated

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DOI: 10.47750/cibg.2022.28.03.010

mutually conceptually and empirically by in what way well the laws in these countries look after
external investors (Zahid & Rehman., 2018).
According toChahine &Safieddine, (2011)the security of shareholders and creditors by
means of the legal system is significant to understanding the forms of corporate finance is not the
same countries. Investor security turns out to be important because, in various countries,
expropriation of lesser shareholders and creditors by means of the controlling shareholders were
widespread. When external investors finance organizations, they confront a threat, and at times
nearby certainty, that the profits on their investments were never occurred for the reason that the
controlling shareholders or managers purely save them.
Corporate governance is, in the direction of a large range, a set of mechanisms over and
done with which external investors secure themselves alongside expropriation by the internals.
Expropriation knows how to make a variety of forms (Ranti, 2011: Khattak., Saeed, & Tariq,
2018; Nasir et al., 2020). In several countries, internals simply takes the profits. In other
countries, the internals sells the productivity of the assets of the organization they in hand, but
then which external investors have financed, to another unit they possess at lower market values.
Such transference rating and asset strip off, although frequently lawful; have mostly a similar
influence as stealing. In still other examples, effortlessly lawful expropriation takings the form of
installing probably unqualified family members in decision-making locations, or extra paying
directors. Overall, expropriation is associated on the way to the agency problem defined by
Meckling and Jensen (1976), who emphasis taking place the consumption of “perquisites” by
means of managers as of the firm’s 2 profits.
Adams and Ferreira (2009) suggested raising the proportion of woman administrators is
premised upon the knowledge that this was helpful for governance, and eventually, organization
enactment. A tricky situation with these creativities is that the emphasis taking place
demonstration may miscue the real amalgamation of woman directors into organization
governance. The economic effects of board gender diversity variety may be confusing if
decisions to rise woman demonstration on boards are, in part, focused by social and politically
aware stresses that raise concerns as regards token demonstration.
Corporate governance is a developing field and in concerts a dynamic role as a whole
enactment of a corporation. It can be purely defined as a relationship among stockholders, upper
management, the board of managers which has the arrangement to managerial achievement
(Wheelen& Hunger, 2011). Corporate governance shouldfurthermoredescribe the connection
between the goals of the panel of administrators and stockholders. Investors have
furthermoreeffectin line to corporate governance for the reason that it is in owned attention i.e.
workers, customers, lenders, borrowers, administrative offices, banks, finance house and
community at huge.
The objectives of the study are to examine the strong effect of Board size on the Financial
Performance of Islamic banks; Investigate the strong effect of Female directors on the Financial
Performance of Islamic banks; Empirically find the strong effect of the Age of Experience on the
Financial Performance of Islamic banks; Search out the strong effect of Firm Size on the

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Financial Performance of Islamic banks; Evaluate the impact of Productivity on the Financial
Performance of Islamic banks.
This study plays a crucial role in the financial performance point of view of Islamic
banks. The study helped the Islamic banks in Pakistan to have the in-depth sight of dimensions
of corporate governance that greatly influences the financial performance of these banks.
Corporate governance is one of the most important dimensions of any large organization and it
greatly influences the financial performance of the organization. Nowadays in this modern era,
corporate governance is affecting financial and non-financial aspects of any organization because
the strategic decisions have a significant influence on the overall organization (Mustaq et al.,
2017; Ahmad et al., 2022; Ghani et al., 2022).According to Hassan et al. (2014) in light of the
Islamic way of thinking established the money related foundation on the genuine guarantee of
some arrival and fixed pace of return. Since there is a strong relationship between corporate
governance and financial performance therefore, once the determinants of corporate governance
are known and their influence on the financial performance is known only then the organization
can achieve its financial goals.

Literature Review
Larcker et al. (2007) for instance found the relationship in corporate governance & firm
execution conflicting despite the fact that they surrender that their discoveries may result from
trouble in distinguishing solid and hearty estimations of corporate governance in a meta-
investigation concentrates identified with panel viability Dalton et al., (2015) infer that chief
executive officer duality and the pariah panel extent have no immediate relation to firm
execution.
Bhagat (2008) additionally expect nil connection between outward executive proportions &
resource returns or resource change. While Kleins (1998) look into proposed that no connection
is there in general panel autonomy & working execution, investigation recommends that there is
a huge connection between inward nearness on a few funds and venture advisory groups and
working execution concentrating on a different leading group of executive forte (Yarmack, 1996)
reports a converse connection between board size and firm benefit. In spite of the fact that the
connection between corporate Governance and the association's presentation is as yet not
obviously settled it was the basic business rule for organizations to set up top managerial staff in
screen trade execution prompting the organization's investors (Kosnik, 1990) is ensured.
Hussein and Othman (2012) thought about that good governance corporation performed during
the monetary emergency as going for broke for money related steadiness is a related issue during
the worldwide budgetary predicament. Surveying and estimating the connection and availability
between corporate Governance instruments and monetary execution utilizing different factors for
example CEO status.
Hassan et al. (2014) in light of the Islamic way of thinking established the money related
foundation on the genuine guarantee of some arrival and fixed pace of return. This framework

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supported business and advanced hazard sharing and underlined the accuracy of agreements with
legitimate organization and control.
The ramifications of corporate Governance structure and money related execution have been
examined in the current writing. It generally concurs that great corporate Governance rehearses
are in basic component for an upgrade in budgetary execution of a bank in both created and
creating nations (Mangla, 2017).
The qualities of the panel regarding panel size self-sufficient framework and viability had been
generally investigated in hypothetical and experimental research at some examinations have non-
covered that larger panel offices successfully observing & give banks more prominent
heterogeneous ability information and aptitudes (Chahine &Safieddine, 2011; Saeed 2017; Obaid
&naveed 2021).
Bahrain and Zain (2013) about Islamic banks experimentally survey corporate Governance
exposure practices and its effect on bank execution are for the most part saved the second target
of this audit is the connection between the degree of corporate Governance revelation by
peroxide of Islamic banks have to evaluate. Zakariyah (2012) contends that the impact of
refinements of Muslims from an interest in the current worldwide economy particularly property
venture especially in Pakistan was put Muslim the befouling of riches.

Corporate Governance:
Frameworks of corporate governance in company to company and country to country are
different (Jackson, 2010; Claessens&Yurtoglu, 2013; Matoussi and Jardak, 2012) and Rehman
et., (2018). They find from the results debated the question whether a common, international
framework of CG would be optimal for all countries.
(Askary, 2001; Maali et al., 2003; Hania&Hudaib (2007; Umar et al., 2020) are studied
on the topic of social reporting and Islamic corporate reporting only notable exceptions to the
analytical papers and normative papers. They find Muslims countries have cultures variable from
other religions and Muslim culture has an influence factor for others and in the same way Islamic
corporate governance follow Islamic law and corporate governance internal environment reflect
Islamic culture.
Fisman et al. (2013) Regardless of whether more grounded administration en-hances
hold/supplant choices relies on upon which of these impacts commands. We utilize our
hypothetical structure to survey the impact of administration on the nature of terminating and
enlisting choices utilizing information on the CEO expulsions of substantial U.S. partnerships
amid 1994-2007. Our discoveries are more reliable with a useful impact on feeble administration
on CEO expulsion choices, recommending that protection from shareholder weight may take into
ac-count better long haul basic leadership.
Islamic Banking in Pakistan:
Islamic banks need to look for after separated principles granted in the Quran Majid and also the
most appropriate cash techniques in Muslim social requests, especially Islamic banks (Suleiman,
2000).Banking, as demonstrated by the Sharia, resembles the standard budgetary structure by

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beneficiation various organizations and profit entity things to consumers and perceives this
devotion inside cash related trades between them. The Islamic Fiqh states to vital and common
Islamic decisions and make sure that overall pursuit actions continue in the light of Sharia law
(Siddiq, 1985).
Day by day Islamic budgetary structure is turning out to be rapidly worldwide especially
in Pakistan as it has been seen that for all intents and purposes every standard bank has separate
branches similarly as Islamic money related window (Asif et al., 2017; Saleh et al., 2022).
Premium free budgetary suggestions push ahead dependent on Sharia and Modaraba, Musharika,
Ijara, etc. which significantly sway Islamic banks. The Islamic money related system has grown
perseveringly since the last two decades and in specific years its bit of the pie is by 7% (Samad,
2004; Younas et., . 2017).
Conceptual Framework:
Independent Variable Dependent Variable

Board Size

Female Director

Age of Experience Return on Assets

Firm Size

Productivity

Source: Hassan et al., (2014)

Hypothesis of the Study

H1: Board size has a significant impact on the Financial Performance of Islamic banks.

H2: Female Director has a significant impact on the Financial Performance of Islamic banks.
H3: Age of Experience has a significant impact on the Financial Performance of Islamic banks.

H4: Firm Size has an important strong effect on the Financial Performance of Islamic banks.
H5: Productivity has a significant impact on the Financial Performance of Islamic banks.

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Research Methodology
Research Nature
The recent study was strong and purely quantifiable in nature. The study was based on
the Deductive Approach therefore hypotheses of study were confirmed statistically by using
STATA-16 through regression analysis.

Population of the Study

The target population of the study was Islamic banks working in Pakistan. Presently there
are seven such banks in Pakistan (SBP-IBP Bulletins).
 Al-Baraka Bank Limited (ABBL)
 Meezan Bank Limited (MBL)
 Dubai Islamic Bank (DIB)
 Bank Islami Pakistan Limited (BIPL)
 MCB Islamic Bank (MIB)
 Bank Al-Falah Limited (BAFL)
 Faysal Bank Limited (FBL)

Sample and Sampling Techniques

The study used simple random sampling techniques in which the researcher selected all
the Islamic banks mentioned above as a sample of the study i.e. seven. Since the Islamic banks
are fewer in number and the nature of data to be analyzed can be easily accessed, therefore all
the target banks were selected as samples.

Data Collection Tools and Procedures

The data was collected from the annual reports of official websites of Islamic banks
operating in Pakistan from 2017 to 2021.
Econometric Model
The relationship among variables is explained in the following equation:
ROA= β0 + β1 BS + β2 FD + β3 AE + β4 FS + β5 PRO + ei
Such that;
ROA: Return on Assets
BS: Board Size
FD: Female Director
AE: Age of Experience
FS: Firm Size
PRO: Productivity
β0: Intercept (Constant)
β1- β 5: Slope of Explanatory Variables

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ei: Error Term or Residual

Dependent Variable:
• Return on Assets:
Bosch's (2007) return on assets is the broadly useful monetary proportion that is
utilized to gauge the relationship of benefits earned to interests in resources important to
procure that benefit. Profit for resources is a standard and it can quantify the necessary
benefit commitment from new. As a speculation, it distinguishes the pace of return required
to keep up in any event for the present execution that all new ventures ought to expect
endorsement to set up the hindrance rates. An extensive investigation of the arrival of
resources was additionally done by George Waugh. Gallinger (2007) he built up a model
that included variable markers, for example, returns and deals, monetary profits, intrigue
costs. This offers an organization a chance to oversee resources and redeploy resources
later on. Concentrates on resources are an intermediary for money related execution. It very
well may be estimated as isolating net benefit by absolute resources.
Net profit
Measurement: ROA=Total assets
Independent Variables:
i. Board Size:
Board size states to the quantity of members of the board present on a
corporation's board of directorates. This should be restrained by the quantity of
individuals on the panel (Penny and Wama, 2012). The first prose on panel size exists
Lipton and Lorch (1992), & Jensen (1993) said that the inclination for minor panel sizes
trunks from technical and executive changes that eventually lead to price reductions then
declines. Hermlin and Wisbach (2003) claimed that greater panels may be fewer active
than smaller panels. Agency problems can increase when the board has too many
members, as some directors may tag as free-riders. Limiting the number of directors on
the board to 7 or 8 is recommended by Lipton and Lerch (1992), beyond which the Chief
Executive Officer would be difficult to the controller.
Measurement: (Board Size=Number of Board Members) \
Female Director:
Olutoye and Akinyomi (2014) discovered that having a lady executive on the
Panel of Administrators of Banks in Nigeria positively affected the productivity of the
bank. Letting' et al. (2012) inspected the connections between top managerial staff
assorted variety and corporate execution of the differing gathering of organizations from
every one of the areas recorded on the Nairobi Securities Exchange. Their discoveries
show that factually noteworthy positive relationship exists among ROA and time of load
up individuals, ladies on the load up, instructive capabilities and load up part proficient
specialization; DY and time of load up individuals and instructive capabilities.
Oba and Fodio (2013) completed an investigation onboard sexual orientation
assorted variety on money related execution in Nigeria. The learning-focused uniquely on

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the non-budgetary part organizations that are cited on the ground level of the Nigerian
stock exchange. Data examination was led utilizing a relapse model in other to test the
connection between the load up sex blend and organization execution. The outcomes
uncovered that there was a normal of nine chiefs on each example company's board while
44.4% of the tested firms had a female executive on the top managerial staff.
In the domain of cash connected revealing, company Governance, and speculation
decisions, a developing assortment of analysis offers proof that gender influences totally
different company results. Some studies have reached the accord that feminine
administrators area unit additional freelance than their man matching part which
organization enactment is higher for companies with additional feminine panel
illustration 2003 (He and Conyon, 2017) inexperienced (Liu et al., 2014 &Homroy,
2018). Furthermore, companies with feminine administrators build rarer acquirements
and pay lesser offer premier, serving to produce stockholder worth (Levi et al., 2014 )
and better shares are originated at companies with poor control that use dividends as a
control method (Chen et al., 2017). Whereas gender diversity on businessman groups is
related to lesser hazard and higher enactment (Perryman et al., 2016) alternative analysis
do not notice such a connection as well as need a lot of analysis to perceive the
advantages in this place (Sila et al., 2016 & Adams 2016).
Measurement: (Presence of Female Director in Board;
0=No Female in Board, 1=Female in Board)

Age of Experience:
Associations must return to current work forms, frameworks, arrangements, and
performances to figure out that one’s push to work wasteful aspects, thus might make
pointless pressure and exhaust for representatives" (Prottas, Andreassi& Thompson,
2003). Examine recommend that one out of five individuals experience the ill effects of
high work and word related pressure. It is by and large being said that one can battle very
well with word related pressure when the individual in question is in the period gathering
of eighteen years to forty years and following 40 years the intensity of battling with word
related pressure continues diminishing.
Measurement: Number of Years from the date of Commencement of business
Firm Size:
Firm Size utilized as a control variable and should be estimated even as the
regular record of all-out resources (Bauer et al., 2008). Firm size is frequently utilized as
an intermediary for data accessibility in the market. Data for huge firms ought to be more
accessible in the market than for little firms. Albrecth and Richardson (1990) discover
proof that huge firms have less motivation to smooth profit than little firms. Lee and Choi
(2002) additionally locate that firm size is a variable that could impact a company's
inclination to oversee income.
Measurement: Natural Log of Total Assets

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Productivity:
We pursue GaricanoGaricano (2000) and Rossi-Hansberg (2004, 2006 and 2011)
and model Örms as information founded chains of importance wherever chiefs manage
exemptions. In this generation arrangement laborers in Örm give working period. Aimed
at every part of the working period they are able to possibly deliver products. Issues must
be comprehended with the goal for yield to be figured out. So as to take care of issues
operators secure specific information. Gaining information is exorbitant, and laborers can
just utilize their insight to take care of the issue they face without anyone else generation
action. So all in all, it isn't to cause laborers to figure out how to take care of inconsistent
issues. Rather, chains of importance are made where administrators figure out how to
take care of the less basic issues the special case and laborers manage the standard issues.
At the point when laborers are gone up against an issue, they don't have the foggiest idea
how to understand, they ask the chief. The hierarchical structure decides the information
procured by operators, the request wherein various specialists go up against issues, and
how they speak with one another.
The consequence of the manner in which creation is composed given the degree
of interest for its items. This connection among request and profitability is available in
any creation innovation in which requirements to settle on some expensive speculation
choice so as to extend generation. An exemplary model is present the choice on the way
to grow by expanding the quantity of plant life. One more is the choice to put resources
into fresh advances (Yeaple, 2005; Burstein et al., 2008; Atkeson and Burstein, 2010,
Bustos, 2011, Lileeva&Treáer, 2010).
Data Analysis
MulticollinearityTable 1

Variable VIF 1/VIF

PRO 1.75 0.572862

FS 1.48 0.676335
AGE 1.39 0.719143
BS 1.11 0.897083

FD 1.10 0.908697

Mean VIF 1.37

The value of variance inflation factor (VIF) must be less than "10 "(Hair et al., 2006). The above
table suggesting that all the variables having VIF value less than 10, so there is no problem of
multicollinearity in the data.

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Panel Diagnostic Test Table 2

Tests Hypotheses P-values Decision
Breusch- H0 = Pooled OLS model is appropriate Pooled OLS model is
0.315
Pagan test H1 = Random Effect model is appropriate appropriate
H0 = Pooled OLS model is appropriate Fixed Effect model is
Chow test 0.028
H1 = Fixed Effect model is appropriate appropriate
Hausman H0 = Fixed Effect model is appropriate Fixed Effect model is
0.271
Test H1 = Random Effect model is appropriate appropriate

The above table shows that Breusch pagan test suggesting pooled OLS model as
appropriate model. While Chow test a test and Hausman test suggesting fixed effect model. As a
conclusion “Fixed Effect Model” is appropriate.
Regression Analysis
In statistical modeling, regression analysis is a set of statistical process for estimating the
relationship between dependent variables and one or more independent variables.

Coefficients Table 3
ROA Coef. Std. Err. t P>|t|
FS 8.635713 1.343083 6.429 0.000
BS 0.337278 0.089885 3.752 0.013
AGE -.4375586 .03140449 -13.933 0.000
PRO 1.2540236 0.165894 7.995 0.000
1.FD .2294199 1.962275 0.12 0.908
F- Stats= 13.28 (P-Value= 0.0000) | R-Squared= 0.7775 | N= 35

F-Stats of the model is 13.28 and its p value is 0.000 which shows that over all model
significant. R square shows the variation in dependent variable due to change in independent
variable the r square of the study model shows 77.7 5% variation in dependent variables due to
change in dependent variables ( i.e. firm size, board size, age of experience, productivity and
female director).
Further, the study result shows that firm size, board size and productivity are found positively
significant. While age of experience was inversely significant. However, female director is
statistically insignificant.
The magnitude of firm size is high as compared to other significant variables. It is 8.64,
which suggest that, if there is, a change of 1 unit in firm size it will increase the return on assets
by 8.64 units. The magnitude of productivity is 1.25 it shows that if there is change of 1 unit so it
will increase the return on assets by 1.25 units. The magnitude of board size 0.34 so its shows
that there is change of 1 unit in board size it will bring 0.34 units change in return on assets. Age
of experience has inverse relationship with return on assets with the magnitude of 0.44. It

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represent that a change in age of experience can reduce return on assets. Though, female director
was found in significant so it has no impact on return on assets.

Conclusion
Objective of the study was to find out the impact of corporate governance on the financial
performance of Islamic banks in Pakistan. Population of the study was full-fledged Islamic banks
working in Pakistan and sample we selected this on the simple random sampling technique.
Dependent variable was return on assets and independent variables were board size, female
director, age of experience, firm size, productivity. Data collection the data was collected from
the annual reports of seven Islamic banks from years 2017 to 2021 and the study of this research
was secondary data. Tools of analysis for this data were used regression analysis, Panel
Diagnostic test and correlation matrix.
Regression analysis used for estimating the relationship between the dependent variable
and one or more independent variables. Regression analysis shows that firm size, board size and
productivity were found positively significant. While the age of experience was inversely
significant and female director founded statistically insignificant. The magnitude of firm size
was high as compared to other significant variables. However female director was found in
significant so it has no impact on return on assets.
Recommendations
Manager must be focused on financial performance of Islamic banks and also must be try
to attract the customer announce different packages through which manager attract them to
Islamic banks rather than customer attract to other banks if unfortunately customers attract to
other banks due to this bad effect on the productivity of the banks. And also bad effect on the
return on assets of the banks. Investor must consider the important role of incorporated
administration in monetaryexecutionof Islamic banks .in the other perspective of investor
consideration must include the board size, firm size and most important productivity of the
banks if the productivity of the bank was more than investor want to more investment in banks
and investor also consider and see up the return on assets of the banks if the return on assets was
high then the investor get more profit from banks so investor was interested in the above context
of banks .
Corporate governance is the frame work of rules and practices by which a firm was
directed and controlled and also ensure the accountability of share holders.in financial
performance of Islamic banks matter a lot in the context of customer and customer’s attention.
Because customers attraction was closely linked with financial performance of Islamic banks. If
the financial performance of Islamic was able to attract the customers it’s very beneficial for
Islamic banks .so most of the Islamic banks depend upon on its financial performance and
operating working process.

Future Research Directions

 ROE can also be used as a dependent variable

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 In future study can be done by taking a big sample which can be more than 5 year.
 Some other variables can be used in future study while new codes of corporate
governance must be used.
 Other study can be done by including conventional banks for a comparison.
Limitation
The study was limited with Islamic banks operating in Pakistan. And this study not included any
perspective which is related to conventional banks and the financial performance of these banks
was also excluded from this study.

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