Do board characteristics influence Islamic banks’ capital structure decisions? Empirical evidence from a developing country

Abstract

This study investigates the relationship between board characteristics (Sharia boards and boards of directors) and capital structure decisions of Islamic commercial banks (ICBs). The sample consisted of 14 ICBs in Indonesia operated during 2007–2021. The data were analyzed using the random effect model and the feasible generalized least square model. The results reveal that the size and independence of the board of directors and Sharia board expertise have a positive impact on the Indonesian ICBs’ debt-to-total asset ratio decision. Furthermore, board gender diversity encourages ICBs in Indonesia to adopt a lower debt-to-total equity ratio (DTER) while the size and expertise of Sharia boards encourage ICBs to pursue higher DTER. This study reinforces the agency theory’s view regarding the relationship between board characteristics and corporate capital structure decisions.

PUBLIC INTEREST STATEMENT

Corporate financial management aims to maximize shareholders’ wealth. Furthermore, making optimal capital structure decisions is one of the functions of a financial manager, in addition to investment decisions and dividend payout policies, in order to achieve company goals. Besides being related to maximizing shareholders’ wealth, the capital structure decisions of Islamic banks also indicate the banks’ compliance with Sharia rules. Therefore, capital structure decisions in the context of Islamic banks become more important.

Keywords:

• Board characteristics
• Capital structure
• Islamic bank
• Indonesia
• Developing country

Reviewing editor:

• David McMillan
• University of Stirling
• UK

Subjects:

• Economics
• Finance
• Business, Management and Accounting

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes on contributors

Muhamad Umar Mai

Muhamad Umar Mai is an Associate Professor of Corporate Finance in the Applied Masters Program of Islamic Finance and Banking, Accounting Department, Politeknik Negeri Bandung, Bandung, Indonesia. His expertise is in the studies of corporate financial management, financial research methods, and Islamic banking financial performance.

Tjetjep Djuwarsa

Tjetjep Djuwarsa is an Lecturer of Economics and Econometrics in the Applied Study Program of Islamic Finance, Accounting Department, Politeknik Negeri Bandung, Bandung, Indonesia.

Setiawan

Setiawan is an Lecturer and Researcher in the Applied Study Program of Islamic Finance, Accounting Department, Politeknik Negeri Bandung, Bandung, Indonesia.