The impact of the Sharia Supervisory Board on Islamic Bank soundness: Does political system matter?

This research aims to examine the impact of the Sharia Supervisory Board (SSB) on the Islamic bank soundness. This research also will test whether the political system of the country is a moderating variable on the relationship of SSB on Islamic bank soundness. The study uses moderated regression analysis with the period 2012-2016 which includes 99 Islamic banks from 17 countries. The political system for this study is measured by the political or legal system implemented, whether this is a democractic system, the legal sharia law system, or a hybrid. Using 384 firm-year, the results show that stronger SSB characteristic only increases the capital adequacy ratio. The strength SSB characteristic does not have an impact on the Islamic bank soundness measurements (asset quality, management efficiency, earning and liquidity). The moderated variable of the Sharia law legal system or hybrid is only proven in the influencing the strength of the SSB characteristic on the capital adequacy ratio model, and not for other ratios. The implication of the research is that a country with a Sharia law legal system or a hybrid is better equipped to increase the qualification of the SSB characteristics to increase their capital.