Social disclosure: compliance of Islamic banks to governance standards No. 7 of AAOIFI (2010)

Abstract

Purpose This paper aims to investigate the compliance of Islamic banks (IBs) with the AAOIFI standard No. 7, in Middle East and North Africa area during the period 2010-2014. The authors seek to identify, among the 15 countries and 72 banks, those which conform more to this standard. The level of compliance is expected to be more stringent in countries where AAOIFI standards are made mandatory. Design/methodology/approach The paper uses the unweighted disclosure method which measures the corporate social report disclosure (CSRD) score of a bank as additive. Each country and bank are assessed according to two obligatory and voluntary CSRDs. Findings The empirical results indicate that even though the global disclosure index has been improved over the observation period, it has remained relatively low. The results also allowed us to see that the global, mandatory and voluntary societal disclosures vary according to the country and banks. Further, it has been seen that banks allow more attention to the mandatory disclosure recommendations of AAOIFI Governance Standard No. 7, in comparison with the voluntary CSRD. Research limitations/implications One limitation of this study is that the sample is restricted to only the Islamic banking sector. Future research could include other Islamic financial institutions (IFIs) such as insurance companies. Second, the study could be extended to other countries to better control the religious system and cultural effects. Because in our modern era, traditional laws in the Muslim world have been widely replaced by statutes inspired by European models, the authors suggest then to apply a new classification that separates, for instance, countries that rely on an Islamic model from those with a western model, and national banks from those allied with western banks. Finally, the paper’s data collection relies solely on annual reports and does not include publications from bank sites. Future research could consider all these limitations. Another possible avenue could examine the determinants of such disclosure level. Practical implications Almost no study has been limited to the text of the AOIFFI. This detail is important for some countries where the AAOIFI standards are mandatory. Social implications The findings may be of interest to shareholders and all those who deal with IBs that have religious expectations. Originality/value Despite the fact that most studies investigated compliance of IB Sharia law, almost no study has been limited to the text of the AOIFFI. This detail is important for some countries where the AAOIFI standards are mandatory. The findings may be of interest to shareholders and all those who deal with IBs that have religious expectations.

A systematic literature review on AAOIFI standards

“…Several empirical studies have adopted content analysis for measuring the compliance level with AAOIFI (Vinnicombe, 2010; Vinnicombe, 2012; El-Halaby and Hussainey, 2016; Mnif Sellami and Tahari, 2017; Suandi, 2017; Ajili and Bouri, 2017; Ullah et al , 2018; Al-Sulaiti et al , 2018; Albarrak and El-Halaby, 2019; Nugraheni and Khasanah, 2019; Ehsan et al , 2019; Brahim and Arab, 2020; Elgattani and Hussainey, 2020; Harun et al , 2020). However, literature shows that several empirical studies have been conducted to examine the determinants of AAOIFI adoption wherever related to firm characteristics as well as corporate governance (CG) (El-Halaby and Hussainey, 2016; El-Halaby et al , 2017; Mnif Sellami and Tahari, 2017; Ajili and Bouri, 2017; Ullah et al , 2018; Nugraheni and Khasanah, 2019; Elgattani and Hussainey, 2020; Harun et al , 2020).…”

“…According to the categories of AAOIFI standards, literature shows that several empirical studies have been conducted to investigate AAOIFI accounting standards (Sarea, 2012; Atmeh and Hadi Ramadan, 2012; Vinnicombe, 2012; Mohamed Naim et al , 2013; Sarea and Mohd Hanefah, 2013a, 2013b; Gupta, 2015; Ahmad and Daw, 2015; Sarea, 2016; Ahmed et al , 2016; Hanif, 2016; Ben Abd El Afou, 2017; Mnif Sellami and Tahari, 2017; Suandi, 2017; Atmeh and Maali, 2017; Ullah et al , 2018; Al-Sulaiti et al , 2018; Nor Farizal et al , 2019; Umar and Kurawa, 2019; Ahmed et al , 2019; Ehsan et al , 2019; Saidani et al , 2020); AAOIFI Sharia standards (Che Azmi and Hanifa, 2015); AAOIFI governance standards (El-Halaby and Hussainey, 2016; Marie et al , 2018; Albarrak and El-Halaby, 2019; Nugraheni and Khasanah, 2019; Brahim and Arab, 2020; Elgattani and Hussainey, 2020; Harun et al , 2020); AAOIFI auditing standards (Fakhfakh, 2017); and finally AAOIFI ethics standards (El-Halaby and Hussainey, 2015) as presented in Table 1. To provide a wide view regarding the investigation and measuring AAOIFI standards, this section discusses these studies in the following section.…”

“…The analysis shows IBs are in compliance with more than 50% of AAOIFI (FAS-1) requirements. Matching with the previous studies that focus on AAOIFI-G7, Brahim and Arab (2020) investigate the compliance level of 72 IBs with AAOIFI (GS-7) across 15 countries in MENA countries during the period 2010–2014. The level of compliance is estimated to be stricter in these countries where AAOIFI are made obligatory.…”

Characteristics of the Sharia Supervisory Board (SSB) And Investment Account Holders (IAH) To Islamic Social Responsibility Disclosure (ISRD) In Islamic Banks

“…Corporate social responsibility in an Islamic perspective or Islamic Social Responsibility Disclosure (ISRD) is an alternative philosophical framework based on sharia principles regarding the rules of human relations with nature and with fellow humans in business as a form of worship to Allah SWT (Khurshid et al, 2014). The ISRD proxy uses ISRD scores in the categories of zakat, employees, communities, and the environment that have been developed by previous researchers, namely Othman & Thani (2010), Sofian & Muhamad (2020);and Brahim & Arab (2020). Scoring is done by giving a score of 1 for companies that disclose each disclosure index and a score of 0 for companies that do not disclose any disclosure index in the annual report, then the number of ISRD scores disclosed is divided by the maximum value of the ISRD score (Brahim & Arab, 2020;Dewindaru et al, 2019;Farook et al, 2011;Fauziah & J, 2013;Hassan & Harahap, 2010;Hussain et al, 2020;Jaiyeoba et al, 2018;Jannah & Asrori, 2016;Jati et al, 2020;Khasanah & Yulianto, 2015;Kurniawati & Yaya, 2017;Meutia et al, 2019;Nissa & Asrori, 2017;Novrizal & Fitri, 2016;Nugraheni & Khasanah, 2019;Othman & Thani, 2010;Prasetyoningrum, 2019;Ramadhani, 2016;Rimayanti & Jubaedah, 2017;Rosiana et al, 2016;Santoso et al, 2018;Setiawan et al, 2016;Sulistyawati & Indah, 2017) The independent variable used Sharia Supervisory Board (SSB) education level, SSB doctoral ratio, and Investment Account Holders (IAH) ratio.…”

“…The ISRD measurement uses four themes, namely the theme of zakat, employees, communities, and the environment adopted from previous research, namely Othman & Thani (2010), Sofian &Muhamad (2020), andBrahim &Arab (2020). This study also uses cross-country studies based on the highest percentage of poor people in selected parts of Asia and Europe, namely Indonesia (Southeast Asia), Bangladesh (South Asia), Jordan (West Asia), and Turkey (Southeast Europe).…”