Ethical disclosure in the Shari’ah annual reports of Islamic banks: discourse on Shari’ah governance, quantitative empirics and qualitative analysis

Abstract

Purpose As an essential component of Islamic governance for ensuring religious compliance, Shari’ah annual reports (SARs) play an important role in providing communication between Shari’ah board (SB) members and stakeholders. This paper aims to determine the ethical disclosure in SARs to identify how close the Shari’ah disclosure to the standards set by AAOIFI and also substantive morality of Islam. The research also aims to examine the factors determining disclosure performance. Design/methodology/approach Two disclosure indices are developed to generate data from the SARs: the AAOIFI standards for Shari’ah governance index for form related approach, an Islamic ethicality augmented index reflecting on substantive morality approach. The sample consists of 41 Islamic banks from 15 different countries for the period of 2007–2014. Sampled 305 SARs were examined through disclosure analysis in line with the two indices developed for this study. The econometric analysis was run to identify the factors determining disclosure performance. Findings The findings suggest that AAOIFI guidelines have an influence on the level of disclosure, even if Islamic banks have not adopted them. However, the level of disclosure for the ethically augmented index is found to be very limited with reliance on general statements in most of the cases. As part of determining factors, the popularity of Shari’ah scholars is significant for both indices, while the existence of an internal Shari’ah auditing department holds some explanatory power. The adoption of AAOIFI standards at the country level, the regulatory quality and the duration of Sharīʿah-compliance are particularly deterministic factors in terms of complying with AAOIFI standards for SARs. Originality/value Although SB is the most crucial division of corporate governance in Islamic banks in terms of securing the “Islamic” identity of these institutions, their most important communication instrument, namely, SAR, has not been explored sufficiently, alongside an insufficient attempt to constitute Islamic corporate governance. Initially, this study attempted to constitute an Islamic corporate governance framework as a theoretical construct, which provides context for the empirical part of the research and this should be considered a novel approach. Second, the empirical part of the research aims to fill the gap observed in the literature such as small sample size and index construction-related matters. This research is conducted with a larger sample size as compared to the available studies in the literature and it has developed two indices for disclosure analysis along with developing an Islamic morality-based index beside an index based on AAOIFI standards.

What determines the progress of online information access to banking corporate governance practices? The case of Paraguay

“…Concerning the evolution of the transparency policies over time, although the level of CG information increased, it did not do so substantially. This outcome is observed in studies focused on a single country, such as in the case of Bangladesh [ 40 ] or Nigeria [ 33 ], and when addressing banks operating in several countries [ 12 , 26 , 33 , 38 , 39 ]. Regarding the content most frequently reported, in general terms, previous studies state the transparency related to board structure, audit committee, and financial information are the most prevalent.…”

“…A content analysis was performed in line with previous studies regarding information disclosure in the banking sector (e.g. [ 12 ]). Content analysis was selected because of its reliability, validity, and the shortage of other means to effectively measure the extent of information disclosure.…”

“…The items are based on the literature review and the regulatory framework of the banking system in Paraguay, in line with Resolution N° 65/2010 of the CBP [ 64 ] (see S1 Appendix ). The first 15 items of the IOTCG correspond to mandatory information and analyzes the online information regarding the corporate rules related to the good governance of the bank, such as by-laws and shareholders meetings’ rules or other corporate rules such as Regulations of the Board of Directors [ 47 , 64 , 65 ] as well as information on the bank management such as corporate or Board Structure [ 12 , 19 , 28 , 33 , 38 , 44 , 64 – 66 ]. Likewise, the financial information available on financial statements from the last quarter and historical data are also included in the index according to similar studies and the regulation [ 28 , 40 , 64 , 67 , 68 ].…”

“…Regarding the content most frequently reported, in general terms, previous studies state the transparency related to board structure, audit committee, and financial information are the most prevalent. In contrast, the least frequently disclosed information is related to risk management and social responsibility practices [ 12 , 19 , 26 , 35 – 38 ]. This research aims to bridge the literature gap on CG practices in emerging LA economies like Paraguay.…”

“…Accordingly, various aspects which have yet to be explored in the literature have been identified. To start, although access to information regarding the management of these organizations is an essential aspect of effective banking CG, the issue of information transparency concerning the good governance of LA banking institutions remains an underdeveloped topic [ 11 , 12 ]. In this regard, it should be noted that although there is a vast array of valuable literature on CG transparency in the context of non-financial institutions [ 13 ], the related findings do not lead to an understanding of the information transparency policies of financial or banking institutions since these organizations possess unique characteristics, including a) having many more stakeholders than other entities b) a high degree of leverage; c) are opaque, and d) belong to a heavily regulated sector [ 14 , 15 ].…”