A huge amount of non-performing loans in Bank Islam Malaysia Berhad are due to the incompetent of the director in the bank itself. Due to that reason, this study is conducted to examine the effect of Corporate Governance Mechanism and Shariah Governance Mechanism on the financial performance of Islamic Banks in Malaysia and Indonesia. This study employed a quantitative research technique by using secondary data collection. The study uses the data from annual report and Thomson Reuters. The study is using the data from year 2012 to 2017. There are four variables for Corporate Governance Mechanism (board size, board meeting, independent director and board remuneration) while three variables for Shariah Governance Mechanism (board size, board meeting, board remuneration). Return on Asset is used in this study to determine the financial performance of Islamic banks. Data analysis was conducted by using Descriptive Analysis and Multiple Regressions. The result of this study shows that six out of seven variables have an insignificant influence on the financial performance of Islamic banks in Malaysia and Indonesia. Only the remuneration for Shariah Supervisory Board has the significant influence on the financial performance of Islamic banks. Thus, the finding shows that only Shariah Governance Mechanism has the ability to influence the financial performance of Islamic banks. This is in accordance with the Agency Theory that suggests the use of remuneration as a tool in reducing Agency Problem.
