Governance, Risk Management and Financial Sustainability in Islamic Financial Institutions:A Narrative Review

Abstract

This narrative review synthesizes 56 empirical studies from 2008 to 2025 to critically analyze the interconnections among governance, risk management, and financial sustainability in Islamic Financial Institutions (IFIs). Effective governance depends on smooth coordination between conventional corporate boards and Shariah Supervisory Boards (SSBs). The quality of governance, covering Board of Directors (BOD) independence, director expertise, committee structures, SSB qualifications, and strict compliance, directly boosts financial sustainability and indirectly does so by improving risk management. IFIs contend with a mixed risk profile that includes traditional risks (credit, liquidity) and Shariah-specific exposures (non-compliance, displaced commercial risk), which are often under-managed due to a lack of standardized indicators and costly hedging options. Financial sustainability goes beyond profit metrics (ROA, ROE) to include consistent Shariah compliance, stakeholder trust, and operational resilience. Despite advancements, gaps remain: a shortage of longitudinal studies, limited qualitative analysis of SSB processes, and overdependence on traditional metrics. This review offers an integrated framework with risk management as a mediator, expands Agency theory to a three-party monitoring system (shareholders, managers, SSBs), and suggests key areas for regulators, boards, and researchers.