Does political connection affect sharia non-compliance risk? Evidence from Indonesian and Malaysian Islamic banks

ABSTRACT

This study aims to investigate the impact of political connection on sharia non-compliance risk of Indonesian and Malaysian Islamic Banks. The analysis of this study was based on annual reports, including state-owned and private Islamic banks, from 2006 to 2016. The data was then evaluated using panel data regression. The results show that politically connected Islamic banks in Indonesia could reduce their sharia non-compliance risk better than non-politically connected Islamic banks. However, we did not find any evidence for the case of Malaysian Islamic banks. This study aims to benefit policymakers on the sharia compliance supervision of Islamic banks. This study is also expected to provide information and contribution as a reference for the Indonesian and Malaysian society in using the services of Sharia-based financial institutions, particularly Islamic banks. The novelty of this study highlights the impact of political connection and sharia non-compliance risk of Islamic banks.

KEYWORDS:

• Indonesia
• Islamic banks
• Malaysia
• non-compliance risk
• political connection
• sharia risk

Disclosure statement

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

Notes

1 Citing an article from https://www.malaysia.gov.my/portal/content/30120.

2 Citing an article from The Jakarta Post, with a Muslim population of more than 200 million people, the performance of Islamic banks in Indonesia for three consecutive years from 2013 to 2015 is still below five percent. (https://www.thejakartapost.com/academia/2016/07/15/why-market-share-of-islamic-banks-is-so-small-in-indonesia.html).

3 The leading and largest credit rating agency in Malaysia and South-East Asia.