The effect of external Shariah audit on the performance of Islamic banking: evidence from Bahrain and Oman

Abstract

Purpose

This paper aims to examine the effect of external Sharia audit on the performance of Islamic banks in Bahrain and Oman, which are countries that implement it. This study aims to explore the role of external Sharia audit in preventing prohibited profits and mitigating the risks of noncompliance with Sharia principles.

Design/methodology/approach

This paper opted a quantitative approach and collected data from the employees of the Sharia Supervision Board & Sharia Audit in the Islamic banks. This paper studied how external Sharia audit affects the financial profitability and compliance with Islamic Sharia principles of Islamic banks, using partial least squares structural equation modeling technique.

Findings

The results indicated that external Sharia audit had a significant positive effect on both financial profitability and compliance with Islamic Sharia principles in the Islamic banks under study. This means that external Sharia audit enhances the financial performance and the adherence to Islamic Sharia principles of the Islamic banks.

Research limitations/implications

This study has some limitations that suggest directions for future research, such as expanding the sample to other countries and measuring more performance indicators for Islamic banks.

Practical implications

This study suggests that external Sharia audit enhances the performance and compliance of Islamic banks and urges the regulators to adopt it and standardize it.

Originality/value

This study contributes to the literature on Islamic finance and external Sharia audit by providing empirical evidence on the impact of external Sharia audit on the performance of Islamic banks.