Abstract
This study empirically investigates the impact of Sharia governance mechanisms on the risk-taking behavior of Takaful (Islamic insurance) operators across major ASEAN markets, specifically Malaysia, Indonesia, and Brunei Darussalam. Utilizing a comprehensive panel dataset comprising 42 fully-fledged Takaful operators and Takaful windows over the period from 2012 to 2022, we model the dynamic interplay between Sharia governance attributes—including Sharia committee size, scholar independence, financial expertise, and meeting frequency—and institutional risk profiles, proxied by solvency risk and operational risk metrics. To address inherent endogeneity, unobserved firm heterogeneity, and dynamic persistence in risk-taking metrics, we employ a two-step System Generalized Method of Moments (GMM) estimation technique. The empirical findings reveal that Sharia board independence and the presence of dual-qualified scholars (possessing both Sharia and accounting/finance expertise) exert a statistically significant negative effect on operator risk profiles, thereby enhancing institutional stability. Conversely, excessive cross-membership among Sharia scholars exhibits a non-linear relationship with risk, suggesting potential monitoring fatigue beyond a critical threshold. The diagnostic tests, including the Arellano-Bond serial correlation tests and Hansen test of overidentifying restrictions, confirm the statistical validity and consistency of the GMM specifications. These results provide vital empirical insights for ASEAN financial regulators and Islamic financial institutions seeking to harmonize Sharia governance standards and fortify capital adequacy frameworks within the regional Takaful industry.
