The Islamic finance sector in Indonesia, particularly Islamic banking, has experienced significant growth. During the national economic recovery period in 2022, Islamic banking financing distribution increased by 21.99% (year-on-year) or 19.25% (year-to-date), surpassing the growth of national bank credit distribution, which was 11.43% (Bank Indonesia, 2023). The success of Islamic banking governance is expected to be a major driver for the development of Islamic finance and the economy as a whole, especially during times of crisis. However, despite this positive development, Islamic banking in Indonesia still faces challenges. Profitability performance, measured by Return on Assets (ROA) and Return on Equity (ROE), has shown a declining trend over the past three years.
This indicates that the performance development of Islamic banking in Indonesia is still not optimal. Some areas needing improvement include the need for increased government support through regulatory formulation and the perception of Islamic banking’s image, which is still viewed negatively by the public. To address these challenges and enhance the performance of Islamic banks, the implementation of Good Corporate Governance (GCG) and Sharia governance becomes crucial. GCG is a mechanism to regulate management performance in relation to the interests of stakeholders, aiming to achieve effective and efficient performance. The Sharia Supervisory Board (DPS) plays a significant role in Sharia governance, distinguishing Islamic banking from conventional banking. The DPS is an independent board responsible for supervising and auditing Sharia compliance in all financial transactions conducted by Islamic bank management.
This research evaluates the effectiveness of Sharia governance on the financial performance of Islamic banking in Indonesia. In the absence of regulations defining the optimal structure and qualifications of the Sharia Supervisory Board (DPS), this study examines the empirical relationship between DPS characteristics and financial performance. Data from 14 Islamic banks over seven years (2014-2020) were analyzed using multiple regression. This research reinforces that the existence of the DPS differentiates the governance of Islamic banks from conventional banks. The DPS serves as a support system to ensure the implementation of Islamic principles in the operations of Islamic banking. However, the study’s results reveal that the size, education, and financial expertise of the DPS are not significant in developing the financial performance of Islamic banking. Conversely, cross-membership in DPS negatively impacts performance. Regulations require revision to prioritize Sharia financial expertise over mere academic or religious backgrounds for DPS members. The optimal size of the DPS needs to be determined, and cross-institutional membership restrictions should be enforced to enhance DPS effectiveness. This research also identifies key areas to improve Sharia governance in Indonesian Islamic banking by strengthening the DPS position in terms of size, educational background, and membership status.
Author: Hanifiyah Yuliatul Hijriah, S.EI., M.SEI.
More information about this article can be found in Share: Jurnal Keuangan Islam Vol. 13, No. 01 January – June 2024, which can be accessed at the following link:
https://jurnal.ar-raniry.ac.id/index.php/Share/article/view/20233
