The impact of corporate governance on bank risk-taking: evidence from an emerging market

Purpose This paper examines the impact of gender diversity and the number of highly educated managers on the risk-taking of Islamic banks. Particularly, this paper aims to investigate how the existence of females and PhD holders influences bank risk. Design/methodology/approach The authors use a range of econometric estimators to ensure the robustness and reliability of the analysis. Initially, pooled ordinary least squares is used to estimate a single equation across multiple cross-sectional units. To address potential endogeneity concerns arising from unobserved heterogeneity and simultaneity bias, this study further uses the system-generalized method of moments, which is particularly suitable for dynamic panel data and the control of endogenous regressors. In addition, a random effects model is used to account for within-entity variation over time and to provide further validation of the robustness of the findings. The dependent variables in the analysis include capital adequacy, the ratio of common equity to total assets and several distinct indicators of credit risk. Findings The empirical results of this study reveal that the presence of females in departmental management is significantly associated with a reduction in bank risk. In addition, findings on the influence of highly educated individuals show a positive association between the shares of PhD holders in top management positions at both the departmental manager’s level and the board of directors, on the one hand, and the capital-to-assets ratio and equity-to-assets ratio, on the other hand. Additionally, the results demonstrate that highly educated senior managers and the board of directors have a significantly negative influence on credit risk when it is assessed by loan loss provision to total loans and loan loss provision to total assets. Research limitations/implications It is recommended that Islamic banks appoint highly educated senior managers at both the departmental and board of directors levels, as this enhances managers’ decision-making capabilities and risk management strategies. Moreover, banks are encouraged to increase gender diversity in managerial positions to enhance their resilience against unforeseen losses. Originality/value The influence of diversity on banks’ risk-taking behavior remains an important yet insufficiently explored area, especially in the realm of Islamic finance. Although existing literature has addressed several attributes of board composition, there is a noticeable lack of focus on how diversity functions within Islamic banking institutions (Jabari and Muhamad, 2022). This research aims to address that shortfall by examining the link between diversity at the leadership level and risk-taking tendencies in Islamic banks. The study concentrates on two underexamined facets of diversity – gender representation and educational heterogeneity – within both the Board of Directors and senior executive teams. By analyzing these dimensions within the distinctive operational and ethical parameters of Islamic finance, this study endeavors to generate new insights into how leadership diversity may influence strategic risk decisions. Ultimately, the findings are expected to enhance our understanding of governance practices in Islamic financial institutions and contribute to broader debates surrounding inclusive leadership in the Islamic banking sector.