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THE SHARIAH COMPLIANCE WITH AAOIFI GOVERNANCE STANDARDS

RELATED SSB INFORMATION: A STUDY ON INDONESIA ISLAMIC BANKS

Article · November 2020

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Iwan Fakhruddin Mohd Abdullah Jusoh

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 Volume: 5 Issues: 33 [November, 2020] pp. 175 - 181]
Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

THE SHARIAH COMPLIANCE WITH AAOIFI

GOVERNANCE STANDARDS RELATED SSB
INFORMATION: A STUDY ON INDONESIA ISLAMIC
BANKS
Iwan Fakhruddin1
Mohd. Abdullah Bin Jusoh2
Norlia Binti Mat Noerwani3
1
Faculty of Economics and Business, Universitas Muhammadiyah Purwokerto
Email: iwanfakhruddin@ump.ac.id
2
Fakulti Pengurusan dan Ekonomi, Universiti Pendidikan Sultan Idris Malaysia
Email: mohd.abdullah@fpe.upsi.edu.my
3
Fakulti Pengurusan dan Ekonomi, Universiti Pendidikan Sultan Idris Malaysia
Email: norlia@fpe.upsi.edu.my

Article history To cite this document:

Received date : 21-9-2020
Fakhruddin, I., Jusoh, M. A., & Mat Noerwani, N.
Revised date : 25-9-2020
(2020). The Shariah Compliance with AAOIFI
Accepted date : 26-10-2020
Governance Standards Related SSB Information: A
Published date : 30-11-2020
Study on Indonesia Islamic Banks. Journal of Islamic,
Social, Economics and Development (JISED), 5(33),
175 - 181.
___________________________________________________________________________

Abstract: The purpose of this paper to analyze the influence of Shariah Supervisory Board
Cross Memberships and Shariah Supervisory Board Qualification toward shariah compliance
related SSB information. In addition, this paper also explains the variable firm size as a control
variable. The use of control variables so that the influence of SSB on compliance does not
depend on other variables. This study reviews the shariah compliance related SSB information
as stated in the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) standard, primarily compliance level with AAOIFI standards No 1 and No 5 related
to Shariah Supervisory Board (SSB). This paper finds that’s the coefficient estimates variable
of SSB Cross membership is positive significant at the 10% level. The coefficient estimates on
SSB Qualification is positive significant at the 5% level. Furthermore, we also find that the
bank size as a control variable has a significant positive effect at 1% level.

Keywords: SSB cross membership, SSB qualification, Shariah Compliance, SSB information.
___________________________________________________________________________

Introduction
Islamic financial institutions as one of the Islamic business organizations must do operations
by Islamic Sharia principles. Islamic financial institutions (IFIs) were established as a response
to an order from the Islamic Sharia regarding the prohibition of paying and receiving riba
(interest) (Muhammed, Farizal Nor.Fahmi, Fadzlina Mohd., Ahmad, Asyaari Elmiza., 2015)
(Rahman, Azhar Abdul & Abdullah Awadh Bukair, 2013). Islamic Shari’ah is a law from Allah

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Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

that regulates human behavior in individual and social life. The source of shari'ah is the Al-
Qur'an and the Sunnah of the Prophet Muhammad Sallallahu 'Alaihi Wassalam. All Muslims
believe that the Koran is the last revelation sent to the Prophet Muhammad Sallallahu 'Alaihi
Wassalam.

The first objective of IFIs in the Islam context is reporting their operations to comply with
Shari’ah principles (Baydoun, N., & Willett, R. , 2000), (Haniffa, R. , 2002). Shari’ah
Compliance is one of the important values of Islam. Shariah Compliance is a part of the
corporate governance application. IFIs that implement good corporate governance better, will
yield positive information. Positive information disclosed by the company will affect the
company's reputation. This is following agency theory by (Jensen, M. and Meckling, W. ,
1976). Regulation of the Corporate Governance process affects the success and increasing the
value of a company by (Khan, M., Bhatti, M., 2008), (Mollah, Sabur and Zaman, Mahbub,
2015), and (Hashim, F., Mahadi, N.D., Amran, A., 2015).

Good corporate governance can overcome the problem of mistrust from the principal as the
owner of the company to the agent, namely management companies (Hashim, F., Mahadi, N.D.,
Amran, A., 2015), (Mussa, Hussam; Musováa Zdenka, and Debnárováa, Lenka, 2015). The
application of corporate governance has been studied extensively in several IFIs in the Muslim
world. The research was conducted to improve the reputation and public trust in Islamic banks
According to (Chapra, M.U., & Ahmed, H., 2002). Shari’ah Compliance disclosure related to
the corporate governance in Islamic Financial Institutional. During the last decade, Islamic
finance standard setting bodies such as AAOIFI (Accounting and Auditing Organization for
Islamic Finance Institutions) made an attempt to issue guidelines on corporate governance and
Shari’ah governance in IFIs.

Islamic Financial Institutional in Indonesia has only an asset of 2.5 percent total IFIs global
assets and 3.7 percent total national asset in 2014 (Ernst & Young, 2016). The development of
Islamic financial institutions in Indonesia has not been comparable with the 87% Muslim
population. The market share of Islamic banks in Indonesia in 2019 is around 8.47% of total
bank assets national. The number of Islamic bank customers is currently around 23.28 million
people (Pramono, Hadi, And Fakhruddin, Iwan , 2019).

Shari'ah governance system in Indonesia Shari’ah banking is regulated in Law no. 21 of 2008
concerning Shari’ah Banking. The technical and operational concepts of the Shari’ah
governance system are described in the form of Bank Indonesia Regulation (PBI) and Bank
Indonesia Circular Letter (SEBI). Based on Law no. 21 years 2008. Shari’ah Supervisory Board
(SSB) has a role in the supervisory process of compliance related Shari’ah principles in Shari’ah
banking. SSB also has the role of giving advice and advice to the board of directors and oversee
the bank's activities following the principles of Shari’ah. At the national level, there is a
National Shari’ah Council (DSN) established by the Indonesian Ulama Council (MUI) which
is in charge and has the authority to establish a fatwa on products and services in the business
of a bank conducting business based on Shari’ah principles. The process of Shari’ah supervision
in Islamic financial institutions is very important to do to assess the level of performance
conformity with generally accepted Shari’ah. Based on previous research, it was found that
Indonesians do not believe in Shari’ah compliance with Islamic financial institutions
(Martasari, Laila., Mardian, Sepky., 2015). Although the research results of (Fakhruddin, Iwan.

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 Volume: 5 Issues: 33 [November, 2020] pp. 175 - 181]
Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

Setyadi, Edi Joko, and Pramono, Hadi, 2018) show that users of Shari’ah accounting reports
still believe in Shari’ah accounting information. who can convey and separate halal and haram
transactions

Research Methodology
The sample in this study is the Shari’ah Banks registered in Bank Indonesia 2014-2018 (65
annual reports). The analysis was limited in 2014-2017 because in this period the development
of Shari’ah financial institutions increased rapidly. Besides, in these periods the Islamic
Financial Accounting Standard has been compiled more fully. The sample Technique used is
Saturated Sampling. The Saturated Sampling Technique is a sample determination technique
that makes all members of the population sample.

This study uses multiple regression analysis to investigate the influence between the SSB Cross
membership and SSB Qualification toward Shari’ah compliance level. Shari’ah Compliance
Level with AAOIFI Governance Standards No 1 and No 5 related to Shari’ah Supervisory
Board information. The equation of this regression is as follows:

SSB_INFO = β0 + β1SSB_NUMBER + β2SSB_CROSSMEMBER +

β3SSB_QUALYFICATION + β4BANK_SIZE + 0
Where:
SSB_INFO = Shari’ah Compliance Level with AAOIFI Governance Standards No 1 and No
5 related to Shari’ah Supervisory Board information

SSB_NUMBER = SSB as measured the number of SSB in Islamic Financial Institutions

SSB_CROSS = SSB as measured by the number of SSB Membership in more than one Islamic
Financial Institutions

SSB_QUALY = SSB as measured by Number of Shari’ah Supervisory Board Ph.D. (Doctor)

Qualification

BANK_SIZE = Bank as measured by LN Assets Total

Finding

Descriptive Analysis

Table 1. Descriptive Statistics

N Minimum Maximum Mean Std. Deviation
SSB_INFO 65 5.00 11.00 8.4038 1.70650
SSB_NUMBER 65 2.00 3.00 2.3654 .48624
SSB_CROSSMEMBER 65 1.00 6.00 3.5962 1.38987
SSB_QULAIFICATION 65 .00 3.00 1.4808 .75382
BANK_SIZE 65 27.87 32.11 29.91 1.18978
Valid N (listwise) 65

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 Volume: 5 Issues: 33 [November, 2020] pp. 175 - 181]
Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

Table 1 reports the result of descriptive statistics analysis. It shows that the average compliance
level on AAOIFI standard related SSB information is 8 items or 53% from 15 items about SSB
information. The sample bank has an average of 3 shari’ah supervisory boards. Variable of SSB
cross membership, the average of 4 Islamic financial institutions for each SSB member. SSB
Qualifications are 2 people who have doctoral qualifications for the average of each Islamic
Financial Institution

Multiple Regression Analysis

Table 2. Regression Result

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -23.190 4.938 -4.697 .000
SSB_NUMBER -.716 .442 -.204 -1.619 .112
SSB_CROSSMEMBER .264 .125 .215 2.109 .040
SSB_QULAIFICATION -.503 .314 -.222 -1.605 .115
BANK_SIZE .011 .002 .771 6.728 .000
a. Dependent Variable: SSB_INFO

The regression result is shown in Table 2. It shows that’s the coefficient estimates variable of
SSB Number is not influence the shari’ah compliance with AAOIFI Governance standards
related to SSB Information. The coefficient estimates on the variable of SSB Cross membership
is positive significant at the 5% level. While The coefficient estimates on SSB Qualification
does not affect the shari’ah compliance with AAOIFI Governance standards related to SSB
Information. Furthermore, we also find that the size of the company as a control variable has a
significant positive effect at the 1% level.

Discussion
The number of SSB is one of the important variables affecting the level of Islamic disclosure
in Islamic banks (Farook, S. , 2008). However, the findings of this study imply that Islamic
financial institutions that have more members of the SSB provide less information regarding
the Shari’ah Supervisory Board (SSV) information. The number of SSB) has not been able to
make information more transparent. The number of SSB has not effectively controlled the
disclosure of Shari’ah compliance related to SSB information.

Cross membership is an important aspect of SSB members. SSB will influence the disclosure
of Islamic banks (Farook, S. , 2008). There is evidence that cross directorship makes
information more transparent by comparing the knowledge that is gained from other companies
(Dahya, J. Lonie, A. & Power, M., 1996). The decisions taken in one board may become part
of the information for decisions on other boards (Haat, M. Abdul Rahman, R. & Mahenthiran,
S., 2008). (Rahman, Azhar Abdul & Abdullah Awadh Bukair, 2013) find a positive association
between CSR disclosure and the SSBSCORE at a five percent significance level. (Fakhruddin,
Iwan., & Jusoh, Mohd. Abdullah, 2018) found that the cross member has a positive influence
on the Shari’ahh compliance disclosure. This implies that cross memberships are effective for

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Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

monitoring and controlling the Islamic banks’ activities related to social issues according to
Shari’ah rules and principles.

Educational background is a significant factor in the disclosure practice. Education can be used
as a sole measure for determining the professional level (Farook, S. , 2008). Previous studies
indicate that the increase in the education level of SSB members has a corresponding increase
in the level of CSR disclosure by Islamic banks (Farook, S. , 2008). With regards to the unique
role that SSB members are expected to fulfill, SSB members should know especially of Islamic
law, economics, and financial and accounting practice, which will enable them to know not
only the Shari’ah problems but also problems relating to law and economics, since such
problems in many situations are brought about by how they are interpreted. Members of the
SSB with a doctorate are better-versed in the present implications of Islam for the banks,
especially regarding the disclosure of CSR. (Rahman, Azhar Abdul & Abdullah Awadh Bukair,
2013) find a positive association between CSR disclosure and the SSBSCORE at a five percent
significance level. But, In This Study find a negative association between Shari’ah Governance
disclosure and the Members of the SSB with a doctoral at a five percent significance level. This
implies that SSB Qualification with a doctoral is not effective for monitoring and controlling
the Islamic banks’ activities related to social issues according to Shari’ah rules and principles.
In the Indonesian context, only about 25% of DPS in Indonesia have doctoral backgrounds in
the fields of Islamic law, economics, and finance and accounting, and only about 10% of SSB
have doctoral backgrounds in the fields of economics, and finance and accounting.

With regards to controlling variable bank size were significant at 1% levels. Its mean Banks
that have larger assets will affect the performance of SSB in monitoring and controlling the
activities of Islamic banks related to social problems following Shari’ah rules and principles
The result consistent with (Farook, S. , 2008); (El-Halaby, Sherif., Hussainey, Khaled,, 2016).
It may indicate that a large bank makes more disclose Shari’ah compliance related SSB
information with AAOIFI standards No 1 and No 5 related to SSB.

Conclusion
This paper has aimed to gauge the influence of Shari’ah Supervisory Board Number, Shari’ah
Supervisory Board Cross memberships, and Shari’ah Supervisory Board Qualification toward
Shari’ah compliance related SSB information. This paper also explains the variable firm size
as a control variable. The use of control variables so that the influence of SSB on compliance
does not depend on other variables.

This paper finds that’s SSB Number and SSB Qualification are not influence the shari’ah
compliance with AAOIFI Governance standards related to SSB Information. The coefficient
estimates on the variable of SSB Cross membership are influencing positive significance at the
5% level and bank size as a control variable is positive significant at the 1% level.

These results have suggested that more attention should be paid to variables that may explain
the variation in Shari’ah concern with SSB characteristics. These results indicate that bank
reporting that formally implements an AAOIFI standard significantly improves the disclosure
level for Shari’ah compliance.

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Journal of Islamic, Social, Economics and Development (JISED)
eISSN: 0128-1755
Journal website: www.jised.com

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