Does Sharia governance deter bank risk-taking? Evidence from profit-sharing accounts and board financial expertise

What is it about?

Islamic banks are designed to follow religious rules that should limit risky behavior. But in practice, we still need to know which governance features actually make them safer. This study looks at two key factors: special investment accounts that share profits and losses with depositors (PSIAs), and whether Sharia board members, the scholars who oversee the bank’s compliance with Islamic law, also have training in finance and accounting. Using data from 37 banks in the Gulf over more than a decade, we find that both factors make banks less likely to take risks. Risk is further reduced when these features work alongside strong boards and risk committees. Our findings suggest that Islamic banks can protect depositors and strengthen stability by combining religious oversight with financial expertise.

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