Corporate governance and liquidity creation nexus in Islamic banks—Is managerial ability a channel?

© 2020 Elsevier Inc. We examine the effect of dual board governance mechanisms (Shariah supervisory board and regular board of directors) on Islamic banks' liquidity creation. We also investigate whether managerial ability is a channel through which such governance mechanisms influence liquidity creation. Using data for 110 Islamic and conventional banks from 11 countries for the period of 2005–2015, we find that better Shariah supervisory board (SSB) governance increases on-balance sheet liquidity creation but decreases off-balance sheet liquidity creation. This result is robust to an analysis of subsamples, to individual governance attributes, to interactions of dual governance mechanisms, and when controlling for endogeneity issues. Our results reveal that both SSBs and regular boards of directors affect liquidity creation by enhancing managerial ability.