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Sigits Paper for Prof Omar Conference

Sigits Paper for Prof Omar Conference

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Published by: Dr. Shahul Hameed bin Mohamed Ibrahim on Jan 08, 2009
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10/16/2011

 
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ANALYSIS OF CORPORATE GOVERNANCE DISCLOSUREIN ISLAMIC COMMERCIAL BANKS’ ANNUAL REPORTS:A COMPARATIVE STUDY OF ISLAMIC COMMERCIAL BANKSIN MALAYSIA AND INDONESIAShahul Hameed bin Mohamed Ibrahim
1
 M.I. Sigit Pramono
2
 
Paper presented at theAccounting, Commerce and Finance: The Islamic PerspectiveConference, Jakarta, March 29-31, 2005
 
1
Dr. Shahul Hameed bin Mohamed Ibrahim is Head of Department of Accounting, Kulliyah of Economics andManagement Sciences (KENMS) at the International Islamic University Malaysia (IIUM)
2
M.I. Sigit Pramono is Lecturer at STIE SEBI, Jakarta. He is in the final stages of Master of Science in Accountingdegree program at KENMS-IIUM
 
 
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ANALYSIS OF CORPORATE GOVERNANCE DISCLOSUREIN ISLAMIC COMMERCIAL BANKS’ ANNUAL REPORTS:A COMPARATIVE STUDY OF ISLAMIC COMMERCIAL BANKSIN MALAYSIA AND INDONESIAShahul Hameed bin Mohamed Ibrahim
3
 M.I. Sigit Pramono
4
 ABSTRACT
Although, corporate governance has been an element of the business world for a long time,only in recent years has it become more in the realm public interest since the occurrence of several corporate scandals involving huge corporations such as Enron, WorldCom, and soforth. Corporate governance issues have become of great prominence over the last twodecades (Wright, 2002). A review of the literature shows a dearth of studies thatspecifically elaborate corporate governance issues in Islamic banks. This study is meant asa small contribution to overcome the paucity. It is an exploratory study which tries toexamine the extent of disclosure of corporate governance practices in Islamic banks’annual reports in Malaysia and Indonesia. Through this research, there are three objectivesthat are expected to be fulfilled.
Firstly
, to elaborate the nature and theoretical implicationsof good corporate governance in Islamic banks.
Secondly
, to explore the level of voluntarycorporate governance disclosure practices of Islamic banks in Malaysia and Indonesiabased on the scoring of corporate governance disclosure made in the annual reports. Lastly,to provide descriptive analysis of the implementation of code of best practices forcorporate governance between Islamic banks in Malaysia and Indonesia. This comparativestudy will be discussed within the banking regulations and institutional background of corporate governance frameworks in each country. We develop two set of corporategovernance scores indices for Islamic banks. The first set will use national codes of corporate governance in each country. In this approach, each of the Islamic banks’ annualreport will be examined for disclosures of corporate governance practices which arerequired by code of each country. On the other hand, the second set of corporategovernance scores, which we consider as a comprehensive benchmark of corporategovernance requirements for Islamic banks are derived from some international standardsand codes such as: Code of Best Practices for Corporate Governance in Islamic FinancialInstitutions (Chapra and Ahmed, 2002), The Governance Standard for Islamic FinancialInstitution (GSIFI) (AAOIFI, 2002) and recommendations in Enhancing CorporateGovernance for Banking Organisations (Basel Committee on Banking Supervision, 1999).This study would contribute to present a better understanding of the process and issues of corporate governance in Islamic banks. It will also contribute to the empirical literature oncorporate governance practices in Islamic banks in Malaysia and Indonesia. In turn, thiswill hopefully enable the scholars and the regulators to further develop a model foreffective corporate governance mechanisms for Islamic banks.
 Keywords:
Corporate governance, Islamic banks, investment account holder,
shari’ah
 compliance
 , accounting for Islamic banks, Islamic bank annual reports.
3
Dr. Shahul Hameed bin Mohamed Ibrahim is Head of Department of Accounting, Kulliyah of Economics andManagement Sciences (KENMS) at the International Islamic University Malaysia (IIUM)
4
M.I. Sigit Pramono is Lecturer at STIE SEBI, Jakarta. He is in the final stages of Master of Science in Accountingdegree program at KENMS-IIUM
 
 
 3
1.0.
 
I
NTRODUCTION
 
Corporate governance issues have become of great prominence over the last twodecades (Wright, 2002). Although, corporate governance has been an element of thebusiness world for a long time, only in recent years has it become more in the realm publicinterest since the occurrence of several corporate scandals involving huge corporationssuch as Enron, WorldCom, and so forth.Recently, since there is a demand to fulfill a high level of corporategovernance practices requirement from business entities, many countries in the worldhave drawn up rules and codes of practice to improve governance. (McConomy and Bujaki,2000; Goodwin and Seow, 2002).One of the central issues of the corporate governance debate is the effectivenessof corporate governance in the banking sector. Since the banking system is a criticalelement of the economy, the quality of corporate governance of banks has become a crucialissue and the approach to the regulation and supervision of banks will tend to categorizebanking industry as a highly regulated industry (Basel Committee on Banking Supervision,1999). Therefore, the implementation of rule and code practices in corporate governance inbanking industry will play an important role in ensuring sound business practices in thebanking industry.Over the last 25 years, we have witnessed that a large number of Islamic financialinstitutions have been set up around the world (Chapra and Ahmed, 2002). According toSuleiman (2000), there are more than 180 financial institutions world-wide which complywith Islamic banking and financing principles. These financial institutions have beendeveloped in more than 45 countries around the world.

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