An Empirical Examination into the Social Reporting Practices of Islamic Banks in Malaysia and Bahrain

Abstract

Purpose-This study examines the social disclosure by Islamic banks in Malaysia and Bahrain. By viewing it through the lenses of the legitimacy and stakeholder perspective, the study explores the commitment of Islamic banks towards wider stakeholders in 7 dimensions (Shariah/Social Internal/Social External/Environmental/Shariah Governance/Governance/Ethics) and 20 themes. Known as the two most advanced countries with distinct models of Islamic banking, Malaysia and Bahrain are an ideal two-country sample to be explored. It is important to learn how Malaysia’s moderate approach and Bahrain’s conservative attitude may contribute to differences in their Shariah, Social, Environmental, Governance & Ethics (SEGE) disclosure. Furthermore, this thesis introduces the ‘Islamic Accountability Theory Model’ and ‘SEGE Disclosure Framework’ for Islamic banks to the literature to be further explored and enhanced.
Design/methodology/approach- The approach taken uses an in-depth 3-Stages content analysis (Volume Measurement/ Ordinary Index/ 3-Level Score) of 18 Malaysian and 16 Bahraini Islamic banks’ annual reports for a period of 5 years (2010-2014). This ‘triple method’ was made possible using the Microsoft Excel sheet (Ordinary Index), special design manual sheet (Quality Score & Volume) and Nvivo software (Recording Method & Analysis). Furthermore, the 3-level score was later estimated using the STATA software to further support the results in chapter 6 and test the relationship between the variables of interest (Religiosity & Regulatory quality) towards SEGE Quality disclosure.
Findings- The overall findings show an interesting differentiation between the two models of Islamic banking. The top 5 performing Islamic banks in disclosure quality were dominated by Malaysian Islamic banks. Furthermore, the top 10 performing Islamic banks ranking in disclosure movement from ordinary (index) to quality (3-level score) were much steadier in Malaysia while they were more unstable in Bahrain. In addition, religiosity and regulatory quality seem to have influenced SEGE disclosure. In short, the Islamic banks that operate in environments with supportive governing bodies, collaborative institutions, sustainable talent management systems and moderate values tend to perform comparatively better in their SEGE disclosure.
Practical Implication- This research may draw attention to regulators and non-governmental organisations to produce a set of SEGE disclosure standards for Islamic financial institutions. Moreover, the SEGE disclosure framework may be used as a part of training material for practitioners in the industry. Furthermore, this research might help managers, Board of Directors, and Shariah Supervisory Boards to have a greater view on the role of Islamic banks in social reporting initiatives.
Originality/value- The study fills gaps in Islamic accounting literature by having an in-depth examination of the Malaysian and Bahraini model of Islamic banking. It goes beyond previous literature in Islamic accounting literature by enhancing the method and suggesting a theoretical foundation and disclosure framework for the Islamic finance industry, particularly in Islamic banks.
Keywords: SEGE (Shariah, Social, Environment, Governance & Ethic), Social Reporting, Islamic Accounting, Legitimacy, Stakeholder, Islamic Accountability, Islamic Bank Disclosure Framework.