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Role of Remuneration and Board Characteristics for Bank Performance A Study Based on Conventional and Islamic Banking Comparison

Kashif Naseer Toor
By Kashif Naseer Toor
1 week ago
Role of Remuneration and Board Characteristics for Bank Performance A Study Based on Conventional and Islamic Banking Comparison

Islamic banking, Shariah, Zakat

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  1. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 Role of Remuneration and Board Characteristics for Bank Performance A Study Based on Conventional and Islamic Banking Comparison Kashif Naseer Toor MS Finance Scholar Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad. Zulqurnain Zeeshan Rafique MS Finance Scholar Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad. Zahid Bashir Lecturer Department of Commerce, University of Gujrat, Pakistan. Abstract The standing study tried to analyze the role of board remuneration and board characteristics on the comparative performance of commercial and Islamic banking in Pakistan for the duration of 2006 to 2017. The data was collected in panel form for five leading conventional banks and five Islamic banks. Panel estimation techniques like fixed, random and pooled Ordinary least square were applied after conforming Hausman specification test and LM test. Using ROE and ROA, found that Director’s Remuneration is positively and significantly affecting banking performance while Account holder’s investment is positively and significantly affecting bank’s performance for conventional banks only and Social contribution is significantly and positively affecting Islamic banking performance in Pakistan. Using Tobin’s Q as a proxy of market performance indicates remuneration is negatively affecting conventional banking performance while Islamic banking market performance is negatively and significantly affected by board’s composition and positively and significantly affected by social contribution. The policymakers should enhance the remuneration of their directors so as to boost their bank’s performance. Moreover, the management of conventional banks should also consider the account holder’s investment to enhance the accounting performance of their banks. The policymaker in Islamic banks can increase their performance (accounting as well as market) by enhancing the social contribution like Zakat. The discoveries of this comparative study are restricted to the banking sector of Pakistan. Keywords: Board remuneration, board characteristics, bank performance, panel data modelling, islamic banks of Pakistan. The material presented by the authors does not necessarily represent the viewpoint of editor(s) and the management of the Khadim Ali Shah Bukhari Institute of Technology (KASBIT) as well as authors’ institute. © KBJ is published by the Khadim Ali Shah Bukhari Institute of Technology (KASBIT) 84-B, S.M.C.H.S, Off.Sharah-e-Faisal, Karachi-74400, Pakistan. Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 138 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  2. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 Introduction Study Background: The banking sector of any nation can play a significant role in the development of an economy’s financial system. (Narwal & Pathneja, 2016) stated that the existence of an efficient system of banking is crucial for technologically advanced as well as emerging nations. A solid segment of banking can excellently network financial goods and resources in a manner as to support the economic and financial system of any country (Sharma, Sharma, & Barua, 2013). In Pakistan, there are two types of banking services offered to customers; the one is based on interest system while the other is based on profit and loss sharing. Both banking system has its own pros and cons. Some of the Islamic banks are performing well in their domain while other are not. In the same way some of the conventional banks earning profit on continuous basis while other are irregular in their earnings. So, the profitability of banking system is based on many factors some are bank specific factors while other are industry specific. The current study is based on the board characteristics as well as board’s remuneration effect on banking profitability as comparison of leading commercial banks and Islamic banks of Pakistan. Problem Statement: The board of directors being the agent of shareholders have great pressure to ensure bank performance for which effective remuneration and board characteristics are pre-requisite. If the board characteristics and remuneration system in a bank are not effective or attractive to the board members especially for the executive board members, it may happen to affect negatively the performance of a bank. So, to analyze the problem empirically, it requires the proper identification of factors from board characteristics and remuneration of board member whether it enhances profitability or not. So the statement of the problem is as follows: Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 139 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  3. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 “To explore the role of director’s remuneration and director’s characteristics for comparative performance of conventional and Islamic banks in Pakistan”. Study Objectives: The drive of this investigation is the examination of board member’s remuneration and board characteristics for exploring the performance of conventional and Islamic banking on comparative basis in Pakistan for the duration of 2006 to 2017. The researcher tried to explore the present study by setting the following five objectives;  To investigate the relationship between the board’s remuneration and the bank’s performance as a comparison of Conventional and Islamic banks of Pakistan.  To inspect the connection between the board’s characteristics and the performance of conventional and Islamic banking on comparative basis.  To compare the proposed findings with earlier studies (consistency).  To find the difference of empirical findings for the proposed study on comparative basis for commercial as well as Islamic banks.  To determine the recommendations based on concluded findings for the policymakers, managements and for professional bankers for enhancing performance of commercial besides Islamic banking in Pakistan. Study Questions: This comparative econometric study attempted to evaluate the impact of board remuneration and board characteristics for performance of conventional along with Islamic banking in Pakistan during 2006 to 2017 years. The researcher tried to explore the empirical answer of the following research questions; Q.1: How do different features of board may affect the bank performance in Pakistan as a comparison of Commercial and Islamic banks? Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 140 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  4. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 Q.2: How does the remuneration of board members may affect the performance in Conventional along with Islamic banking of Pakistan? Q.3: Does the concluded findings of this comparative empirical study is consistent with the previous research studies? Q.4: What is the comparative difference between the findings of Conventional besides Islamic banking in Pakistan? Q.5: What are the practical and policy implications of this comparative study for the policymakers, management and future researchers in conventional in addition to Islamic banking in Pakistan? Significance of Research: The present research is beneficial for the policymakers, decision-makers and internal management to enhance the performance of Islamic as well as commercial banks on a comparative basis in Pakistan on the basis of different features of the board as well as on the basis of board’s remuneration. The policymakers and decision-maker after analyzing this study would be able to make the appropriate decision regarding the board structure and remuneration system in conventional besides Islamic banking in Pakistan. Literature Review The present study analyzes the effect of board member’s remuneration as well as board characteristics on bank performance for Islamic as well as commercial banks in Pakistan for the period of study 2006 to 2017. The factor wise review of board member’s remuneration and board’s characteristics in the form of conceptual framework is given below under their respective headings as follows; Remuneration and Bank performance: According to the study directed by Lee and Isa (2015), it was observed that the relationship between board’s remuneration and the performance is generally dependent on the theory of principalagent. Some of the evidences suggested no connection between director’s remuneration and the Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 141 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  5. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 performance (Fernandes, 2008 ; (Duffhues & Kabir, 2008; Omoregie & Kelikume, 2017). Furthermore, (Jaafar, Wahab, & James, 2012 ; Halaby 2014). discovered that performance of firms boosts by increasing director’s remuneration. On the other hand, (Sarkar & Sarkar, 2018; Wooi & Ming, 2009) reported an inverse link between director’s remuneration and the performance of firm. Board Characteristics and Banking Performance: The board’s characteristics may include a lot of factors, but the study included a selected number of factors like size of the board, composition of the board, duality of the CEO, investment account holder and social contribution (Bukair & Rahman, 2015). The affiliates of board of director should perform their obligations and tasks by taking their decision on the basis of three essential principles like ethics, shariah and Tawheed to assist all the stakeholders in real terms. They should have the necessary knowledge and education in banking related to Islamic principles and shariah field. This is the only way for the efficient performance of tasks through the affiliates of the board of directors (Bukair & Rahman, 2015). There is a strong link between board characteristics and performance of banks as reported by (Muhammad, 2019). The detailed literature review on these factors are given under their respective headings. Board’s Size and Bank Performance: The size of the board is well-thought-out as a core imperative instrument in structure of the board so the performance of a firm is influenced by it (Bukair & Rahman, 2015). In line with the theory of stakeholder, (Ghayad, 2008) stated that the degree for the representation of stakeholders can be improved by enhancing board of directors which will result in lessor denomination of decision by a small number of members of the board. Majority of the earlier evidences reported no effect of board size on the performance of firms (Rachdi & Ben Ameur, 2011 ; Al-Saidi & Al-Shammari, 2013 ; Belkhir, 2010 and Adusei, 2011). Board’s Composition and banking performance: Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 142 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  6. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 The earlier evidences regarding the connection between the composition of the board and the performance of the banks showed mixed results (Bukair & Rahman, 2015). A number of studies could not find the connection between composition of board and banking performance (Rachdi & Ben Ameur, 2011; Belkhir, 2010). On the other hand, Al-Saidi & Al-Shammari (2013) found that there is a negative relation between the composition of board and the performance of a bank. Furthermore, Hinson and Juras (2008) found a positive connection between the above said variables. CEO Separation and Bank Performance: Bukair & Rahman (2015) reported that CEO duality as role would originate a decline in the cost of agency that would enhance the performance of a firm. He further explained the reason for this response as duality of CEO keeps an authoritative person within a corporation as a sole person only. It enables the chief executive officer to effectively manage the board of directors for achieving the goals of that corporation. In contrast, some of the studies could not find any significant connection between Chief executive officer and the performance of a firm as (Al-Saidi & Al-Shammari, 2013). A study reported that bank performance is declined due to CEO separation (Sarkar & Sarkar, 2018). Board Meeting and Bank Performance: Ibrahim, Wirman, Alrazi, Nor, & Pramono (2011) stated that frequent meetings of board and frequent attendance of board member enhances the performance of a firm as well as board. Accountholder’s investment and bank’s performance: A lot of studies had analyzed the effect of the structure of ownership on the performance of Islamic banks like the studies conducted by (Abbas, Rahman, & Mahenthrian, 2009 ; Zouari & Taktak, 2014). Nevertheless, none of the studies had used an account holder’s investment ratio as an instrument of the structure of ownership. Therefore this study used account holder’s investment ratio as instrument to measure an alternative source of ownership structure in line with (Bukair & Rahman, 2015 ; Farook, Kabir Hassan, & Lanis, 2011). Role of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 143 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  7. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 Social Contribution and Banking Performance: According to the study conducted by (Bukair & Rahman, 2015), the social contribution is an important element which distinguishes conventional banks from that of Islamic. Ibrahim et al., (2011) stated that the performance of Islamic banking should be assessed on the basis of periodical payments of zakat. The major input of zakat is the progress of life quality of people and eradicate poverty from the society. Methodology The accounting data for the present study was obtained from financial statements available on their respective websites as well as the market level data like share price will be obtained from the Pakistan stock exchange website. The data is collected and formed in a panel shape. The target population of the present study is the banking sector (Commercial and Islamic banks) of Pakistan while the final sample includes five leading commercial banks as well as five Islamic banks that provided the required data for the years under observations 2006 to 2017. In order to make the present study in a comparative mode, the required data was analyzed on the basis of 5 leading commercial banks and 5 leading Islamic banks working in Pakistan. The present study uses two accounting measures as dependent variables like return on assets (ROA) and Return on equity (ROE) for bank performance indicator while one market measure of performance is also included like Tobin’s Q. The return on asset is measured as the ratio between profit before tax to total assets while the return on equity is measured as the ratio between profit before tax to total equity. The Tobin’s Q is measured as the ratio between the sum of debt book value along with share market value to total assets. The present study uses seven independent variables namely; director’s remuneration, board size, board composition, CEO separation, board meetings, Accountholder’s investment and social contribution ratio. The director’s remuneration is measured by taking the natural log of total remunerations of directors. The board size was computed by the total number of directors in aboard. The board composition was computed by the ratio of total nonRole of Remuneration and board characteristics for Bank Performance A study based on Conventional and Islamic Banking comparison 144 Kashif Naseer Toor Zulqurnain Zeeshan Rafique Zahid Bashir
  8. KASBIT Business Journal (KBJ) Vol. 12, 138-160, December 2019 executive directors in a board to total board members. The CEO-separation was indicated by 1 if the chairman and CEO are separate persons or 0 if both are same. Board meeting is indicated by 1 if the meeting held at least six times a year or 0 otherwise. Accountholder investment is indicated by the ratio between total investment account fund to total equity. The social contribution is indicated by the ratio of total zakat paid to total assets. Finally, the present study included three control variables namely bank’s size, leverage ratio and capital adequacy ratio. The bank’s size was computed by taking the natural log of total assets. Leverage ratio was indicated by total debt to total assets ratio. Finally, the capital adequacy ratio was computed by the bank’s capital to risk-weighted assets. Modelling of the Study: The present study is based on economic and econometric relationship between bank performance as the dependent variable and director’s remuneration as well as board characteristics as independent variables. The functional form of relationship between the dependent and independent variables including the controlled variables of the study can be stated as follows: Bank performance = f (board remuneration, board characteristics, C.V) The present study is based on a study conducted by (Lee & Isa, 2015). By keeping in view their modelling technique, the following models were developed for the conventional banks in Pakistan for the analysis of the present study; Model 1: remuneration and control variables (PER)Conv =