Journal of Business Ethics

, Volume 157, Issue 2, pp 567–587 | Cite as

Exploring the Nexus Between Human Capital, Corporate Governance and Performance: Evidence from Islamic Banks

  • Tasawar NawazEmail author
Original Paper


This paper offers novel insight into the Islamic banking business model by considering the effect of investments in human capital and corporate governance features on the market performance of Islamic banks. Based on a sample of 47 banks (30 full-fledged Islamic banks and 17 Islamic Shariah-windows) operating in different regions during the 2005–2010 period, and controlling for firm-specific characteristics, this paper finds investments in human capital to have a significant positive impact on the market value in the pre- and post-financial crisis period. Based on a market measure, this paper finds board size and CEO power to have a significant positive impact, while the size of Shariah Supervisory Board (SSB) has the opposite effect on market performance. The results further reveal that the Islamic banking sector is not a homogeneous group, with full-fledged Islamic banks having lax corporate governance mechanisms and large size, while their counterparts, Islamic Shariah-windows, having strong corporate governance mechanisms tend to invest more in human capital to yield positive market value. Overall, the analysis suggests that the financial crisis may have further spurred the impact of investments in human capital on the market performance.


Human capital investment Corporate governance Market performance Financial crisis Islamic banks Applied ethics 


Compliance with Ethical Standards

Conflict of interest

The author (Tasawar Nawaz) is the sole author of this paper, and there is no conflict of interest with any individual or organisation.

Ethical Approval

This article contains no studies with human participants or animals performed by any of the authors.


  1. Abdelsalam, O., Fethi, M. D., Matallín, J. C., & Tortosa-Ausina, E. (2014). On the comparative performance of socially responsible and Islamic mutual funds. Journal of Economic Behavior and Organization, 103, 108–128.Google Scholar
  2. Abedifar, P., Hasan, I., & Tarazi, A. (2016). Finance-growth nexus and dual-banking systems: Relative importance of Islamic banks. Journal of Economic Behavior and Organization. doi: 10.1016/j.jebo.2016.03.005.Google Scholar
  3. Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17, 2035–2096.Google Scholar
  4. Acedo, F. J., Barroso, C., & Galan, J. L. (2006). The resource-based theory: Dissemination and main trends. Strategic Management Journal, 27(7), 621–636.Google Scholar
  5. Adams, R. B., & Mehran, H. (2012). Bank board structure and performance: Evidence for large bank holding companies. Journal of Financial Intermediation, 21(2), 243–267.Google Scholar
  6. Aebi, V., Sabato, G., & Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking and Finance, 36(12), 3213–3226.Google Scholar
  7. Afuah, A. (2002). Mapping technological capabilities into product markets and competitive advantage: The case of cholesterol drugs. Strategic Management Journal, 23, 171–179.Google Scholar
  8. Al-Suhaibani, M., & Naifar, N. (2014). Islamic Corporate Governance: Risk-sharing and Islamic preferred shares. Journal of Business Ethics, 124(4), 623–632.Google Scholar
  9. Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking and Finance, 32(12), 2570–2580.Google Scholar
  10. Ariss, R. T. (2010). Competitive conditions in Islamic and conventional banking: A global perspective. Review of Financial Economics, 19(3), 101–108.Google Scholar
  11. Ashraf, D., Rizwan, M. S., & L’Huillier, B. (2016). A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation. Journal of Financial Stability, 25, 47–57.Google Scholar
  12. Baele, L., Farooq, M., & Ongena, S. (2014). Of religion and redemption: Evidence from default on Islamic loans. Journal of Banking and Finance, 44, 141–159.Google Scholar
  13. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of management, 17(1), 99–120.Google Scholar
  14. Barney, J. B. (2001). Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view. Journal of Management, 27(6), 643–650.Google Scholar
  15. Bartel, A. P. (2004). Human resource management and organizational performance: Evidence from retail banking. ILR Review, 57(2), 181–203.Google Scholar
  16. Beck, T., Cull, R., & Jerome, A. (2005). Bank privatization and performance: Empirical evidence from Nigeria. Journal of Banking and Finance, 29(8), 2355–2379.Google Scholar
  17. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2000). A new database on the structure and development of the financial sector. The World Bank Economic Review, 14(3), 597–605.Google Scholar
  18. Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37(2), 433–447.Google Scholar
  19. Becker, B. E., & Huselid, M. A. (2006). Strategic human resource management: Where do we go from here? Journal of Management, 32(6), 898–925.Google Scholar
  20. Becker, G. S. (1964). Human capital theory. New York: Columbia.Google Scholar
  21. Becker, G. S. (Ed.) (1975). Investment in human capital: Effects on earnings. In Human capital: A theoretical and empirical analysis, with special reference to education (2nd ed., Vol. I, pp. 13–44). New York: NBER.Google Scholar
  22. Beltratti, A., & Stulz, R. M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1–17.Google Scholar
  23. Berger, A. N., & Bouwman, C. H. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146–176.Google Scholar
  24. Berrone, P., Surroca, J., & Tribó, J. A. (2007). Corporate ethical identity as a determinant of firm performance: A test of the mediating role of stakeholder satisfaction. Journal of Business Ethics, 76(1), 35–53.Google Scholar
  25. Blatter, M., Muehlemann, S., & Schenker, S. (2012). The costs of hiring skilled workers. European Economic Review, 56(1), 20–35.Google Scholar
  26. Bosma, N., Van Praag, M., Thurik, R., & De Wit, G. (2004). The value of human and social capital investments for the business performance of start-ups. Small Business Economics, 23(3), 227–236.Google Scholar
  27. Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks’ soundness during the 2007–2008 financial crisis. Review of Financial Economics, 22(2), 68–77.Google Scholar
  28. Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007–2008. The Journal of Economic Perspectives, 23(1), 77–100.Google Scholar
  29. Bryant, C. E., & Javalgi, R. G. (2016). Global economic integration in developing countries: The role of corruption and human capital investment. Journal of Business Ethics, 13(63), 437–450.Google Scholar
  30. Bushman, R., Chen, Q., Engel, E., & Smith, A. (2004). Financial accounting information, organizational complexity and corporate governance systems. Journal of Accounting and Economics, 37(2), 167–201.Google Scholar
  31. Busta, I. (2007). Board effectiveness and the impact of the legal family in the European banking industry. In FMA European conference, BarcelonaSpain.
  32. Chen, K. Y., & Zhou, J. (2007). Audit committee, board characteristics, and auditor switch decisions by Andersen’s clients. Contemporary Accounting Research, 24(4), 1085–1117.Google Scholar
  33. Choi, S., & Hasan, I. (2005). Ownership, governance, and bank performance: Korean experience. Financial Markets, Institutions and Instruments, 14(4), 215–242.Google Scholar
  34. Choudhury, M. A., & Nurul Alam, M. (2013). Corporate governance in Islamic perspective. International Journal of Islamic and Middle Eastern Finance and Management, 6(3), 180–199.Google Scholar
  35. Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113.Google Scholar
  36. Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign entry affect domestic banking markets? Journal of Banking and Finance, 25(5), 891–911.Google Scholar
  37. Coff, R. W. (1997). Human assets and management dilemmas: Coping with hazards on the road to resource-based theory. Academy of Management Review, 22(2), 374–402.Google Scholar
  38. Coles, J. L., Daniel, N. D., & Naveen, L. (2008). Boards: Does one size fit all? Journal of Financial Economics, 87(2), 329–356.Google Scholar
  39. Colombo, M. G., & Grilli, L. (2005). Founders’ human capital and the growth of new technology-based firms: A competence-based view. Research Policy, 34(6), 795–816.Google Scholar
  40. Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J., Jr. (2011). Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3), 443.Google Scholar
  41. De Saá Pérez, P., & Falcón, J. M. G. (2004). The influence of human resource management in savings bank performance. The Service Industries Journal, 24(2), 51–66.Google Scholar
  42. Demski, J. S. (2003). Corporate conflicts of interest. The Journal of Economic Perspectives, 17(2), 51–72.Google Scholar
  43. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1514.Google Scholar
  44. Dotzel, T., Shankar, V., & Berry, L. L. (2013). Service innovativeness and firm value. Journal of Marketing Research, 50(2), 259–276.Google Scholar
  45. Dube, A., Freeman, E., & Reich, M. (2010). Employee replacement costs. UC IRLE Working Paper 201-10.Google Scholar
  46. Ebrahim, M. S. (2009). Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged? Journal of Economic Behavior and Organization, 72(3), 864–883.Google Scholar
  47. Effiok, S. O., Tapang, A. T., & Eton, O. E. (2012). The impact of human capital cost on gross domestic product (GDP) in Nigeria. International Journal of Financial Research, 3(4), 116–126.Google Scholar
  48. Elnahass, M., Izzeldin, M., & Abdelsalam, O. (2014). Loan loss provisions, bank valuations and discretion: A comparative study between conventional and Islamic banks. Journal of Economic Behavior and Organization, 103, 160–173.Google Scholar
  49. Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411.Google Scholar
  50. Fahlenbrach, R., Prilmeier, R., & Stulz, R. (2012). This time is the same: using bank performance in 1998 to explain bank performance during the recent financial crisis. Journal of Finance, 67, 2139–2185.Google Scholar
  51. Ferraris, A., Erhardt, N., & Bresciani, S. (2017). Ambidextrous work in smart city project alliances: Unpacking the role of human resource management systems. The International Journal of Human Resource Management. doi: 10.1080/09585192.2017.1291530.Google Scholar
  52. Francis, B., Hasan, I., & Wu, Q. (2012). Do corporate boards affect firm performance? New evidence from the Financial Crisis. Bank of Finland research, discussion papers No. 11.
  53. Galor, O., & Moav, O. (2004). From physical to human capital accumulation: Inequality and the process of development. The Review of Economic Studies, 71(4), 1001–1026.Google Scholar
  54. Galunic, D. C., & Rodan, S. (1998). Resource recombinations in the firm: Knowledge structures and the potential for Schumpeterian innovation. Strategic Management Journal, 19, 1193–1201.Google Scholar
  55. Grais, W., & Pellegrini, M. (2006). Corporate governance and Shari’ah compliance in institutional offering Islamic financial services. World Bank policy research working paper #WPS4054 (pp. 1–35).Google Scholar
  56. Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33(3), 114–135.Google Scholar
  57. Grant, R. M. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 17(2), 109–122.Google Scholar
  58. Grove, H., Patelli, L., Victoravich, L. M., & Xu, P. T. (2011). Corporate governance and performance in the wake of the financial crisis: Evidence from US commercial banks. Corporate Governance: An International Review, 19(5), 418–436.Google Scholar
  59. Haniffa, R., & Hudaib, M. (2007). Exploring the ethical identity of Islamic banks via communication in annual reports. Journal of Business Ethics, 76(1), 97–116.Google Scholar
  60. Hasan, M. M., & Dridi, J. (2010). The effects of the global crisis on Islamic and conventional banks: A comparative study. IMF working papers (pp. 1–46).Google Scholar
  61. Hatch, N. W., & Dyer, J. H. (2004). Human capital and learning as a source of sustainable competitive advantage. Strategic Management Journal, 25(12), 1155–1178.Google Scholar
  62. Holland, J. (2010). Banks, knowledge and crisis: A case of knowledge and learning failure. Journal of Financial Regulation and Compliance, 18(2), 87–105.Google Scholar
  63. Hsu, D. H. (2007). Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy, 36(5), 722–741.Google Scholar
  64. Hudaib, M., & Cooke, T. E. (2005). The impact of managing director changes and financial distress on audit qualification and auditor switching. Journal of Business Finance and Accounting, 32(9–10), 1703–1739.Google Scholar
  65. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831–880.Google Scholar
  66. Jin, J. Y., Kanagaretnam, K., & Lobo, G. J. (2011). Ability of accounting and audit quality variables to predict bank failure during the financial crisis. Journal of Banking and Finance, 35(11), 2811–2819.Google Scholar
  67. Kalbers, L. P., & Fogarty, T. J. (1993). Audit committee effectiveness: An empirical investigation of the contribution of power. Auditing, 12(1), 24.Google Scholar
  68. Keenan, J., & Aggestam, M. (2001). Corporate governance and intellectual capital: Some conceptualisations. Corporate Governance: An International Review, 9(4), 259–275.Google Scholar
  69. Knoke, D., & Kalleberg, A. L. (1994). Job training in US organizations. American Sociological Review, 59(4), 537–546.Google Scholar
  70. Kor, Y. Y., & Mahoney, J. T. (2005). How dynamics, management, and governance of resource deployments influence firm-level performance. Strategic Management Journal, 26(5), 489–496.Google Scholar
  71. Kotha, R., Zheng, Y., & George, G. (2011). Entry into new niches: the effects of firm age and the expansion of technological capabilities on innovative output and impact. Strategic Management Journal, 32(9), 1011–1024.Google Scholar
  72. Krause, R., Samadeni, M., & Candella, A. (2014). CEO duality: A review and research agenda. Journal of Management, 40(1), 256–286.Google Scholar
  73. Lara, J. M. G., Osma, B. G., & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies, 14(1), 161–201.Google Scholar
  74. Larcker, D. F., Richardson, S. A., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82(4), 963–1008.Google Scholar
  75. Lehn, K. M., & Zhao, M. (2006). CEO turnover after acquisitions: Are bad bidders fired? The Journal of Finance, 61(4), 1759–1811.Google Scholar
  76. Mamatzakis, E., & Bermpei, T. (2015). The effect of corporate governance on the performance of US investment banks. Financial Markets, Institutions and Instruments, 24(2–3), 191–239.Google Scholar
  77. Mansi, S. A., Maxwell, W. F., & Miller, D. P. (2004). Does auditor quality and tenure matter to investors? Evidence from the bond market. Journal of Accounting Research, 42(4), 755–793.Google Scholar
  78. Markarian, G., & Parbonetti, A. (2007). Firm complexity and board of director composition. Corporate Governance: An International Review, 15(6), 1224–1243.Google Scholar
  79. Mishra, C. S., & Nielsen, J. F. (2000). Board independence and compensation policies in large bank holding companies. Financial Management, 29(3), 51–69.Google Scholar
  80. Mollah, S., Hassan, M. K., Al Farooque, O., & Mobarek, A. (2016). The governance, risk-taking, and performance of Islamic banks. Journal of Financial Services Research, 51(2), 1–25.Google Scholar
  81. Mollah, S., & Zaman, M. (2015). ‘Shari’ah supervision, corporate governance and performance: Conventional vs. Islamic banks. Journal of Banking and Finance, 58, 418–435.Google Scholar
  82. Molloy, J. C., & Barney, J. B. (2015). Who captures the value created with human capital? A market-based view. The Academy of Management Perspectives, 29(3), 309–325.Google Scholar
  83. Morris, S. S., Alvarez, S. A., Barney, J. B., & Molloy, J. C. (2017). Firm-specific human capital investments as a signal of general value: Revisiting assumptions about human capital and how it is managed. Strategic Management Journal, 38(4), 912–919.Google Scholar
  84. Muehlemann, S., & Pfeifer, H. (2012). The structure of hiring costs in Germany. Economics of education. Working Paper Series 0077, University of Zurich, Institute for Strategy and Business Economics (ISU).Google Scholar
  85. Murjan, W., & Ruza, C. (2002). The competitive nature of the Arab Middle Eastern banking markets. International Advances in Economic Research, 8(4), 267–274.Google Scholar
  86. Nazim, A., & Kasbati, M. (2016). World Islamic Banking Competitiveness Report. Manama, Bahrain: EYGM.$FILE/ey-world-islamic-banking-competitiveness-report-2016.pdf. Accessed 5 Mar 2017.
  87. Olson, D., & Zoubi, T. (2016). Convergence in bank performance for commercial and Islamic banks during and after the Global Financial Crisis. The Quarterly Review of Economics and Finance, 65, 71–87.Google Scholar
  88. O’Mahony, M. (2012). Human capital formation and continuous training: Evidence for EU countries. Review of Income and Wealth, 58(3), 531–549.Google Scholar
  89. Ongena, S., & Şendeniz-Yüncü, İ. (2011). Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey. Journal of Banking and Finance, 35(12), 3213–3224.Google Scholar
  90. Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking and Finance, 33(7), 1340–1350.Google Scholar
  91. Pathan, S., & Faff, R. (2013). Does board structure in banks really affect their performance? Journal of Banking and Finance, 37(5), 1573–1589.Google Scholar
  92. Peña, I., & Villasalero, M. (2010). Business strategy, human resource systems, and organizational performance in the Spanish banking industry. The International Journal of Human Resource Management, 21(15), 2864–2888.Google Scholar
  93. Pincus, K., Rusbarsky, M., & Wong, J. (1989). Voluntary formation of corporate audit committees among NASDAQ firms. Journal of accounting and public policy, 8(4), 239–265.Google Scholar
  94. Platonova, E., Asutay, M., Dixon, R., & Mohammad, S. (2016). The impact of corporate social responsibility disclosure on financial performance: Evidence from the GCC Islamic Banking Sector. Journal of Business Ethics, 1–21. doi: 10.1007/s10551-016-3229-0.
  95. Prajogo, D. I., Prajogo, D. I., Oke, A., & Oke, A. (2016). Human capital, service innovation advantage, and business performance: The moderating roles of dynamic and competitive environments. International Journal of Operations and Production Management, 36(9), 974–994.Google Scholar
  96. Safieddine, A. (2009). Islamic financial institutions and corporate governance: New insights for agency theory. Corporate Governance: An International Review, 17(2), 142–158.Google Scholar
  97. Saks, A. M., & Burke-Smalley, L. A. (2014). Is transfer of training related to firm performance? International Journal of Training and Development, 18(2), 104–115.Google Scholar
  98. Salama, F. M., & Putnam, K. (2013). The impact of corporate governance on the financial outcomes of global diversification. The International Journal of Accounting, 48(3), 364–389.Google Scholar
  99. Schultz, T. W. (1961). Investment in human capital. The American Economic Review, 51, 1–17.Google Scholar
  100. Skaggs, B. C., & Youndt, M. (2004). Strategic positioning, human capital, and performance in service organizations: A customer interaction approach. Strategic Management Journal, 25(1), 85–99.Google Scholar
  101. Sorescu, A. B., & Spanjol, J. (2008). Innovation’s effect on firm value and risk: Insights from consumer packaged goods. Journal of Marketing, 72(2), 114–132.Google Scholar
  102. Subramony, M., Krause, N., Norton, J., & Burns, G. N. (2008). The relationship between human resource investments and organizational performance: A firm-level examination of equilibrium theory. Journal of Applied Psychology, 93(4), 778.Google Scholar
  103. Tanna, S., Pasiouras, F., & Nnadi, M. (2011). The effect of board size and composition on the efficiency of UK banks. International Journal of the Economics of Business, 18(3), 441–462.Google Scholar
  104. Tharenou, P., Saks, A. M., & Moore, C. (2007). A review and critique of research on training and organizational-level outcomes. Human Resource Management Review, 17(3), 251–273.Google Scholar
  105. Thornhill, S. (2006). Knowledge, innovation and firm performance in high-and low-technology regimes. Journal of Business Venturing, 21(5), 687–703.Google Scholar
  106. Úbeda-García, M., Cortés, E. C., Marco-Lajara, B., & Zaragoza-Sáez, P. (2014). Strategy, training and performance fit. International Journal of Hospitality Management, 42, 100–116.Google Scholar
  107. Úbeda-García, M., Marco-Lajara, B., Sabater-Sempere, V., & Garcia-Lillo, F. (2013). Training policy and organisational performance in the Spanish hotel industry. The International Journal of Human Resource Management, 24(15), 2851–2875.Google Scholar
  108. Ullah, S., Harwood, I. A., & Jamali, D. (2012). ‘Fatwa Repositioning’: The hidden struggle for Shari’a compliance within Islamic Financial Institutions. Journal of Business Ethics, 1–23. doi: 10.1007/s10551-016-3090-1.
  109. Wang, H. C., He, J., & Mahoney, J. T. (2009). Firm-specific knowledge resources and competitive advantage: The roles of economic-and relationship-based employee governance mechanisms. Strategic Management Journal, 30(12), 1265–1285.Google Scholar
  110. Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of corporate governance. Journal of Financial Economics, 105, 581–606.Google Scholar
  111. Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27(2), 185–203.Google Scholar

Copyright information

© Springer Science+Business Media B.V. 2017

Authors and Affiliations

  1. 1.Plymouth Business SchoolUniversity of PlymouthPlymouthUK

Personalised recommendations