“Executives’ commitment, corporate governance, and performance of Islamic banks: Evidence from the Saudi context”

This paper aims to investigate the impact of executives’ ethical commitment and cor- porate governance on the Islamic banks’ performance in the Saudi context. The sample of this study consists of Saudi Islamic banks over the period 2012–2020. The financial data were extracted from the Saudi stock exchange (Tadawul). While the behavioral data, particularly the executives’ ethical commitment, is measured through the ethical commitment index. In the econometric analysis, a generalized least square regression method (GLS) is applied to two different sub-models with different dependent vari- ables (return on assets and return on equity). Empirical results suggest that board size and board independence have a significant impact on bank performance. The ethical commitment of executives contributes positively and significantly to the performance of Islamic banks in terms of return on assets. However, there is no statistical evidence of the effect of ethical commitment on Islamic banks’ returns on equity. Therefore, boards of directors of Islamic banks should include expert independent directors to promote best governance practices and enhance executives’ commitment. Larger boards can improve their credit ratings and access to resources. and management have to be following Islam regulations. IBs have an ethical identity related to religion. Compliance with the Sharia principles will be achieved through a distinctive governance framework along with ethical commitment. To enhance the observance of business ethics, Islamic financial institutions should set an ethical culture that does not spurn the fundamentals of Sharia. Executives’ commitment assists in predicting the failure of business ethics observance and strengthens the stakeholders’ trust.


INTRODUCTION
The subprime mortgage crisis, which started at the end of 2007, has revealed the fragility of conventional banks (CBs). Economists highlighted the emergency of implementing a new substitute to overcome risks. Islamic finance has been considered an alternative model to mitigate the effects of the financial crisis. In recent years, the Islamic industry has witnessed significant growth, partially due to the high demand of many Islamic countries for Sharia'-compliant products, as well as providing a diversity of financial instruments required by corporate and individual investors.
Islamic banks (IBs) operate based on Sharia rules. Indeed, products, instruments, operations, practices, and management have to be following Islam regulations. IBs have an ethical identity related to religion. Compliance with the Sharia principles will be achieved through a distinctive governance framework along with ethical commitment. To enhance the observance of business ethics, Islamic financial institutions should set an ethical culture that does not spurn the fundamentals of Sharia. Executives' commitment assists in predicting the failure of business ethics observance and strengthens the stakeholders' trust.
IBs have a complicated governance system compared to CBs. This complexity stems from the diversity of stakeholders having a direct interest in the performance and the survival of IBs. Robust corporate governance (CG) is a priority to provide a flourished atmosphere to enhance ethical commitment. The Sharia board is a supplementary mechanism of governance responsible for ensuring the compliance of bank transactions to Islamic ethics (Hakimi et al., 2018).
Previous studies on Islamic finance can be broadly divided into three categories: 1) Some focused on comparing the instruments used in CBs and IBs.
2) Other studies investigated risks in IBs.
3) The other stream of research examines the efficiency of IBs.
This study tries to identify the attributes of CG mechanisms in financial institutions, particularly the IBs, and how CG and the ethical commitment of executives affect performance.
The Saudi vision 2030 aims to achieve an advanced banking sector to support a thriving and sustainable economy. New growth opportunities are offered to financial institutions, and developing national and global leaders helps with achieving future expectations and requirements. The high commitment of executives is a pillar of performance outcome and job embeddedness. This study provides recent data and information on the actual CG system in IBs in Saudi Arabia and especially the extent to which IBs will be alienated and boost the vision 2030.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
Previous literature has proven that bank performance fluctuation is affected by many elements such as cfiiceps-knab factors and behavioral aspects. The first part of the literature review will focus on the impact of ethical commitment on performance. The second part will examine the role played by banking governance in shaping the performance levels.
Over the last decades, the effect of managers' attitudes and behavior on firm performance has been widely investigated essentially in the setting of the Upper Echelon Theory (UET) ( Verschoor (1998), and Vogel (1991) find a positive link between corporate compliance with ethics and financial performance.
As the Islamic financial institutions' compliance with the Sharia ethics is mandatory, the consequences of non-compliance by several IBs show that it is essential to monitor and follow up IBs concerning the severe commitment to the business ethics set by the Sharia (Nathie, 2009). For example, unethical practices were at the origin of the collapse of the IBs of South Africa (Nathie, 2009), the Islamic International Bank of Denmark (Grais, 2004), and the Ihlas Finance House in Turkey.
Stakeholders' trust increases with the high ethical commitment of executives. Therefore, firms will achieve sustainable performance. In this context of sustainability, investors' interests are protected both in the short and long run. As a result, returns on investment will increase and greater value is added (Abidin et al., 2017).
Ethical commitment also builds a strong loyalty of stakeholders (customers and suppliers). which will contribute to improving the corporate performance. Executives are expected to set procedures and mechanisms to guarantee that bank transactions are conducted within an ethical context.
From an Islamic finance perspective, the sharia compliance requirements are aligned with Islamic work ethics' principles and values, which increases organizational commitment among executives. (Nasution & Rafiki, 2019).
Bank performance may be improved by many factors. One behavioral aspect, the ethical commitment, was discussed in the above section. The next part will explain how banking governance contributes also to the enhancement of performance. The governance of IBs is characterized by an additional mechanism of control, the Shariah Board, which ensures compliance with the Shariah for all financial transactions ex-ante and ex-post.
Almutairi and Quttainah (2017) investigated empirically the underpinnings of how Sharia Supervisory Boards affect organizational financial performance via agency theory and contingency theory. They revealed a strong positive relationship between Sharia board attributes and bank performance. The major findings of these authors consist of outlining the necessity of widening the size of corporate boards and Sharia Supervisor Boards to improve monitoring and advisory functions, and organizational performance.
Grassa and Matoussi (2014) distinguished several differences between CG systems of financial and non-financial institutions. They found that board fees, CEO duality, and CEO age affect positively IBs performance. However, the Sharia board characteristics do not have any clear evidence of the performance of IBs. Delorenzo (2007) clarified that the functions of the Sharia board include assisting IBs in the product development and structuring, certifying products through the fatwa, and ensuring Sharia compliance throughout the financial product's life cycle. The author considered that these functions help IBs improve their performance and their commitment to community services.
Hamza (2013) compared two different structures of sharia governance: the decentralized structure adopted by the Gulf Cooperation Council (GCC) and the centralized Malaysian form. The author investigated the link between the effectiveness of Sharia governance and the governance structure. The findings of the research highlight the importance of the decentralized structure in boosting the Sharia board effectiveness in GCC countries.
The centralized structure would be more advantageous for the industry and build trust and reassurance when dealing with IBs.
Musibah and Alfattani (2014) added new insight into examining the financial performance in the case of 36 IBs in the GCC region. They investigated the relationship between the effectiveness of the sharia governance system, corporate social responsibility, and intellectual capital. Financial performance has been considered the mediator of this relationship. The authors found that the effective sharia supervisory board positively affects the involvement of IBs in social activities.
Mollah and Zaman (2015) distinguished between the supervisory and advisory roles of the Sharia board. They found that the supervisory role is significant and has a positive effect on financial performance. However, the advisory role does not have any remarkable effect. Their research revealed that the board attributes such as size, composition, and CEO duality negatively affect performance. Indeed, sharia governance is more effective than the common CG in the Islamic framework. The Sharia board has to be strengthened to play its role effectively.
Zain and Shafii (2018) focused particularly on the specific characteristics of the sharia boards that affect financial and non-financial performance. They considered that the sharia committee, sharia risk, sharia audit, sharia review, and disclosure and transparency are governance variables. The researchers concluded that only the effect of the sharia review variable is not identified.
Ajili and Bouri (2018) confirmed the findings of Mollah and Zaman (2015). The authors built a CG index composed of the board of directors, audit committee, and sharia board indices. Their results showed that conventional CG does not have any impact on financial performance. The high performance in IBs in GCC countries is not associated with good CG. Then, Sharia governance is more prominent than conventional governance.
Despite the abundant literature on bank performance topic, there are still avenues to tackle deeper and new insights on the topic. The main objectives of this study are to deepen the understanding of the key determinants of performance in IBs based on an agency framework and upper echelon theory. This paper will shed light on the importance of executives' commitment and banking governance to the challenging environment of IBs.
Based on the literature review, the following hypotheses were developed: H1: Executives' commitment is positively related to IBs' performance.
H2: A high number of directors on the board is related positively to IBs' performance.
H3: A high percentage of independent directors is related positively to IBs' performance.
H4: A higher number of directors on the Shariah supervisory board is related positively to IBs' performance.

Data
The sample of this study is composed of four IBs in Saudi Arabia. Data were collected during the period 2012-2020. Financial data are extracted from the Saudi stock exchange (Tadawul). The commitment was measured by using an index composed of 13 items.

Control variables
Firm size (FSI) Ln (total assets) Two control variables were initially involved: firm size and managerial ownership. The manager shareholder will be more committed and interested in improving bank performance. Firm size has been used in almost empirical corporate studies. Managerial ownership was deleted due to the high correlation with other independent variables.
CEO duality was also involved as a governance variable and then it was deleted from the sample as it took 0 for all banks. There is a separation between the CEO role and the chairman of the board of directors in the context of IBs in Saudi Arabia.

Ethical commitment measurement
The scoring method (binary or rating) was used by previous researchers to measure disclosure items. In the context of social disclosure, the binary method is suitable and effective ( . Based on the items selected, the binary method will help assign a score of 1 or 0 for each item and calculate the total index for the considered type of disclosure.
In this study, management commitment to ethics measurement follows the same approach used in earlier studies. Based on the information provided by the board of directors and all documents published by the bank, each item will take 1 if it applies to the bank. However, if there is no disclosure, the item will take 0.
total score of all items I EI total number of items n = = ∑ where I represents the total score for each company, and n represents the total number of items which is 13.
The highest index reflects the highest commitment of the company towards the endorsement of ethical standards.
The results of Table 2 show that all banks of the sample emphasize the importance of business ethics. IBs stick to Maqāsid al-Sharia perspectives, which they enforce when addressing their business transactions. (item 1). Only one bank disclosed the importance of ethical behavior within its philosophy (mission and vision are examined): item 2.
All banks disclosed items 3, 4, 7, 12, and 13. However, no disclosure was found for items 8, 10 and 11. For items 6 and 9, two banks disclosed in their reports how they enhance business ethics practices through training, workshops, and open communication channels.

Empirical model
This study aims to investigate the impact of executives' commitment, CG on bank performance. Therefore, the relation may be modeled as follows:  (4) where i refers to the bank; t refers to the year; β0the intercept; β -the estimated coefficient for each variable; and εit -the error term.  In the first stage of data analysis, preliminary tests were used to avoid misleading results and to make sure how independent variables can be used to understand the statistical variation of the dependent variable. Table 4 shows that the correlation between independent variables is normal except for BSI*SBS (correlation > 0.8). Table 5 presents the variance inflation factor (VIF), which measures the multicollinearity of independent variables. The mean VIF is equal to 3.49, and there is no high risk of wide confidence intervals. VIF is less than 10 for all variables.  Note: ** -significance level at 5 %. To check the heteroscedasticity, Table 6 presents the results of the Breush-Pagan test.

Test of individual effects
This test consists in testing the following hypothesis: H0: Absence of individual effects.
H1: Presence of individual effects. Prob > F is equal to 0.8431 and superior to the level of significance of 10%. The null hypothesis is rejected and the hypothesis of the presence of individual effects is accepted. The Hausman test is used to specify which effects (fixed or random) have to be considered to estimate the panel regression.
The null hypothesis of the Hausman test is that random effects are preferred. The alternative hypothesis presumes that fixed effects are preferred. Prob > chi 2 is superior to 0.1, the null hypothesis is accepted and the random-effects model is adequate to estimate model 1.  In the case of IBs, commitment is significant as a predictor of executives' performance because of their religious engagement and their eagerness to comply with Sharia requirements. Tracey (2012) shows that religion is no more a "Hat" that employees can take off before entering their workplace. Nevertheless, religious cognitions and practices have become an important predictor of employee performance in a corporate setting.
The board size positively influences the management of assets and increases the returns on assets of IBs.  Note: **, *** -significance level at 5 and 1 %, respectively.

CONCLUSION
The purpose of the study was to explain the special features of Islamic banking governance and introduce a new determinant of corporate performance related to behavioral aspects. The findings of this study reveal that only board independence and board size have an impact on bank performance in the Saudi context. However, the executives' commitment hypothesis was significant only for model 1 (ROA as a dependent variable). The findings of this paper suggest that IBs should have a higher index of ethical commitment through the deployment of mechanisms able to predict the non-compliance to sharia rules. The appointment of ethics officers helps IBs build a strong ethical culture. The existence of an external ethics evaluation system will strengthen the commitment and improve a bank's performance.
In the Islamic banking context, there is an Islamic governance system assured by the Sharia supervisory board. This mechanism differentiates IBs from conventional ones. This study did not demonstrate a statistical significance of sharia board size. The size of the sharia board should be widened to operate efficiently and play its monitoring rule.
From an Islamic governance perspective, executives known for a good reputation and ethical integrity and who possess a solid background in Islamic finance and economy are able to encounter challenging issues in the Islamic banking industry. Ethical awareness and Islamic knowledge will influence the bank's performance.
Further research should focus on identifying the attributes of the Sharia board, which highlights its role of certifying the compliance of financial instruments and products to Islam rules. Executives have to enhance the ethical culture of employees and provide appropriate channels to report any violations of the rules. IBs have to disclose all information related to their ethical practices, philanthropic activities, and systems to detect the non-observance of business ethics. As IBs are expected to be strict about setting an ethical commitment built on sharia, high disclosure of ethical commitment helps executives to sustain a healthy and sustainable environment to improve a bank's performance.