Do ownership structures affect risk disclosure in Islamic banks? International evidence

Abstract

Purpose Previous works assessing the determinants of banks’ risk disclosure in emerging economies focused on one aspect of risk reporting such as market risk disclosure or operational risk disclosure. While banks’ transparency about other major risk types (e.g. capital adequacy, liquidity risk…) is important for both market discipline and for their financial stability, no previous research has tried to discuss their determinants for Islamic banks. This paper aims to fill the gap by assessing the effects of deposits structure and ownership concentration on risk disclosure for Islamic banks. Design/methodology/approach The authors based on a sample of 71 Islamic banks operating in 12 emerging economies and observed over the period 2009–2014. The authors used a risk disclosure index covering nine dimensions, and the authors used both generalized least squares (GLS) regression and generalized method of moments (GMMs) as econometric tools. Findings The findings suggests that the level of risk disclosure is lower for Islamic banks with higher ownership concentration, leveraged bank, listed banks and Islamic banks. However, risk disclosure is higher for Islamic banks with higher concentration of profit sharing investment account (PSIA) and higher foreign ownership, large Islamic banks, aged banks, Islamic banks operating in country with higher country transparency index, positively correlated to gross domestic products and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) adoption. By disaggregating total risk disclosure into the nine sub-categories, the authors are able to specify, also, the components of risk disclosure impacted by various determinants. Research limitations/implications This paper’s findings are subject, also, to a number of limitations. First, there was manual scoring of annual reports (subjectivity). Second, while some items might have higher information content or be more useful than others for users of Islamic banks’ annual reports, no weighting is assigned to items. Third, the research focuses exclusively on the 12 countries and excludes the other Middle East, Southeast Asia and Far East countries where ownership structure and deposits structure might affect risk disclosure differently. Originality/value The findings suggest many policy implications. First, regulators have to improve corporate governance mechanisms in Islamic banking system through the optimization of ownership structure (dispersed ownership) to promote transparency and disclosure. Second, regulators and policymakers should revise guidelines in the main purpose to protect PSIAs holders (considered as minor shareholders without voting power) through promoting disclosure and transparency. Third, the findings can be useful for many international supervisory bodies such as the IFSB and AAOIFI to evaluate transparency and disclosure standards.

Ownership structure and environmental, social and governance performance disclosure: the moderating role of the board independence

“…The results yielded that foreign ownership has a positive impact on the disclosure level. These results were supported by Barako et al (2006) and Grassa et al (2020).…”

Banks in India: A Balancing Act Between Profitability, Regulation and NPA

“…The impact of several factors such as regulation, ownership, competition, autonomy and provisioning have been discussed in the literature with regard to bank performance (Allen & Gale, 2004;Banerjee & Velamuri, 2015;Barnabas & Mekoth, 2010;Beck et al, 2004Beck et al, , 2006Bolt & Tieman, 2004;García-Marco & Robles-Fernández, 2008;Ghosh, 2015;Grassa et al, 2020;Haque & Shahid, 2016;Hu et al, 2004;Iannotta et al, 2007;Laeven & Majnoni, 2003;Maji & Hazarika, 2018;Ozili & Uadiale, 2017;Pennathur et al, 2012;Tan et al, 2017;Tandon & Mehra, 2017;Yang & Zhao, 2015). Petria et al (2015) found that among all indicators, regulation can severely impact the profitability and NPA levels of the banks considering that banks do not observe established regulatory and risk-management practices (Barth et al, 2004;Maji & Hazarika, 2018).…”

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

“…In line with Agency Theory, companies with a high degree of leverage have many creditors and high agency costs due to the potential transfer of wealth from debtholders to shareholders, and consequently, their stakeholders demand a high level of information [ 48 ]. In previous studies focused on financial entities, a positive relationship between leverage and disclosure practices has been found [ 31 , 32 ]. However, knowledge focused on the effect of leverage on CG disclosure in the banking sector is still scarce even though these are organizations with a high degree of leverage [ 15 ].…”

“…Most of the extant research regarding transparency in the banking sector is based on studies that mainly address access to the voluntary information of organizations in general (e.g., [ 10 , 29 , 30 ]). To a lesser extent, there are studies focused on specific aspects of banks’ management, such as social responsibility disclosure [ 18 ] or risk disclosure (e.g., [ 31 , 32 ]). Nevertheless, despite the vital role corporate governance disclosure plays in businesses such as banks [ 33 ], most empirical studies on CG transparency have been developed under the context in the US publicly traded companies [ 16 ].…”

“…According to Agency Theory, foreign investors tend to demand greater implementation of monitoring systems to oversee the management of local companies. Due to geographic and language barriers, foreign investors demand that directors provide a rich information environment to reduce the higher levels of information asymmetry they face compared to domestic investors [ 31 ]. Previous studies have posited that foreign ownership is a positive factor in good CG practices for banks [ 52 ].…”