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Specific
The effect of Islamic banks’ corporate
specific corporate governance governance
mechanisms
mechanisms on compliance with
AAOIFI governance standards
Yosra Mnif Received 13 November 2018
Revised 6 November 2019
Department of Accounting, Taxation and Law, 7 April 2020
Higher Institute of Business Administration, University of Sfax, Sfax, Tunisia, and 4 July 2020
24 August 2020
22 September 2020
Marwa Tahari Accepted 6 October 2020
Faculty of Economics and Management, University of Sfax, Sfax, Tunisia

Abstract
Purpose – The purpose of this paper is to examine the effect of specific Islamic banks’ (IBs) corporate
governance (CG) mechanisms on compliance with the Accounting and Auditing Organization for Islamic
Financial Institutions’ (AAOIFI) governance standards (GSs) disclosure requirements.
Design/methodology/approach – Using an unweighted governance compliance index, the authors
measure the extent of IBs’ compliance with 7 AAOIFI GSs’ disclosure requirements over the period 2009–2015
(372 bank-year observations). In addition, a multivariate regression analysis was used to test the four
hypotheses.
Findings – This study’s results report substantial non-compliance (the mean of compliance level with
AAOIFI’s GSs over the covered years for the entire sampled IBs is 52.1%). The findings reveal that the
Shariah Supervisory Board’s (SSB) remuneration, SSB’s members with only industry expertise, SSB’s
members with the combined industry expertise and accounting and financial expertise, the existence of
internal Shariah Auditing Department and the level of investment accounts holders’ funds are positively
associated with the level of compliance with AAOIFI’s GSs.
Originality/value – The existing studies focusing on the determinants of compliance with AAOIFI’s
standards are in the early research stage, as to the best of the authors’ knowledge, there is a paucity of
empirical research testing this issue. The authors extend these studies by examining all the AAOIFI’s GSs
and focusing on the specific IBs’ CG mechanisms. Furthermore, a major contribution of this study is the
examination of the relationship between some SSB’s characteristics and compliance level. To the best of the
authors’ knowledge, this is the first research that has examined the effect of the SSB’s remuneration and
expertise on compliance level.
Keywords SSB, IAHs, SAD, Compliance, AAOIFI’s GSs, Islamic banks
Paper type Research paper

1. Introduction
Islamic banks (IBs) are exposed to a unique set of risks (such as Sharīʿah non-compliance
risk, fiduciary risk, withdrawal risk and reputational risk) as they have to comply with
Sharīʿah. These specific risks arise from the nature of their business environment and
competition (Iqbal and Mirakhor, 2007; Greuning and Iqbal, 2008). Thus, these risks have
led IBs to establish an additional layer of governance (Abdullah et al., 2015). According to Journal of Islamic Accounting and
Business Research
Hasan (2011), corporate governance (CG) in Islam adds additional value to the existing © Emerald Publishing Limited
1759-0817
governance structure and the unique feature of the Islamic CG model requires another layer DOI 10.1108/JIABR-11-2018-0188
JIABR of governance structure. In fact, IBs need a specific organizational arrangement as part of
their CG framework for the purpose of Sharīʿah compliance and to ensure an effective and
independent oversight over Sharīʿah-related matters.
Previous studies [1] revealed that IBs require other elements of governance which are the
Shariah Supervisory Board (SSB), the internal Shariah Auditing Department (SAD) and a
governance unit to protect the interests of the investment accounts holders (IAHs). These
studies showed that IBs include three other special CG factors that differentiate their CG
structure from that of conventional banks. In fact, a key mechanism of IBs’ specific
governance structure is the SSB. The SSB assists IBs to efficiently manage their funds while
complying with Sharīʿah and it has to assess further information and report, such as
circulars, operating and financial reports and policies (Abdullah et al., 2015). This authority
is similar to that of external auditors (Karim, 2001).
The second specific factor is the internal SAD. Indeed, the internal Sharīʿah audit
function is fundamental to the IB’s CG success. The main purpose of this department is to
assess the Sharīʿah audit activities of the IB and improve their Sharīʿah compliance. This
function can be accomplished by evaluating and presenting recommendations regarding the
efficiency of the internal Sharīʿah control and risk management systems, the compliance of
activities with SSB’s fatawa, the Accounting and Auditing Organization for Islamic
Financial Institutions’ (AAOIFI) Sharīʿah standards and the other relevant guidance
(Ginena and Hamid, 2015).
Moreover, there is an important difference between conventional and IBs that adds
another dimension to CG. This difference relates to the equally weighted importance of other
stakeholders. There are two types of owners in IBs, the shareholders, as in conventional
institutions, and the IAHs. In fact, instead of earning a fixed rate of return on investments,
the Sharīʿah principles call for equity participation contracts (Mudaraba and Musharaka),
which create IAHs (Aggarwal and Yousef, 2000). The IAHs of IBs bear risks similar to those
of the shareholders; however, they do not have any right to control and monitor the
management. This provides a strong justification for including the interests of IAHs (that is,
“Islamic depositors”) in CG mechanisms (Ginena and Hamid, 2015).
Recognizing the importance and the specificity of governance for the Islamic financial
institutions (IFIs), the AAOIFI has attempted to strengthen the specific governance system
of IBs by issuing governance standards (GSs). These standards are expected to effectively
solve various issues related to CG for IBs (Meutia and Adam, 2019). Furthermore, these
standards provide guidance to achieve better practices in terms of governance disclosure.
Indeed, the AAOIFI’s GSs include a somewhat different set of disclosure requirements
specific for the Islamic banking sector [2].
Nevertheless, the adoption of the AAOIFI’s standards could not automatically imply
that the IBs are fully compliant with these standards. In fact, many prior studies
(Vinnicombe, 2012; Sarea, 2012; Sarea and Hanefah, 2013; Ahmad and Khatun, 2013;
Ahmad and Daw, 2015; El-Halaby and Hussainey, 2016; Sellami and Tahari, 2017; Al-
Sulaiti et al., 2018; Srairi, 2018) reported a problem of non-compliance with AAOIFI’s
standards. It is notable, however, that the focus of most of these studies (Hassan and
Syafri Harahap, 2010; Sarea, 2012; Ahmad and Khatun, 2013) is descriptive or analytical
in nature as they emphasize the level of compliance with AAOIFI’s standards without
exploring the main determinants of the compliance level.
To our knowledge, the existing studies exploring the determinants of compliance with
AAOIFI’s standards are in the early research stage (El-Halaby and Hussainey, 2016; Sellami
and Tahari, 2017; Ajili and Bouri, 2017). We note that all these studies have focused only on
some AAOIFI’s standards. Thus, we extend these studies by focusing on all the AAOIFI’s
GSs. Moreover, the majority of previous studies have examined only the effect of corporate Specific
characteristics on compliance with AAOIFI’s standards. To our knowledge, the relationship corporate
between CG characteristics and compliance with AAOIFI’s standards has been empirically
investigated only by El-Halaby and Hussainey (2016). We extend to this study by focusing
governance
on the specific IBs’ CG characteristics. Furthermore, a major contribution of our study is the mechanisms
examination of the relationship between some SSB’s mechanisms and mandatory
disclosure. To our knowledge, this is the first research that examines the effect of SSB
remuneration and expertise on compliance level. Moreover, with respect to the SSB
expertise, we provide additional evidence on the effect of possessing industry expertise with
accounting and financial expertise in the SSB in enhancing IBs’ compliance with AAOIFI’s
GSs.
As a consequence, the aim of this paper is to examine the effect of the specific IBs’ CG
mechanisms on compliance with the AAOIFI’s GSs’ disclosure requirements. Using panel
regressions, our results show that compliance with AAOIFI’s GSs is positively associated
with the SSB’s remuneration, SSB’s members with only industry expertise, SSB’s members
with the combined industry expertise and accounting and financial expertise, the existence
of internal SAD and the level of IAHs. In fact, a large remuneration paid to the SSB’s
members may increase their effort and therefore the quality of their work. Moreover,
industry expertise could provide members of the SSB with more experience, enabling them
to make comparisons of the best practices among IBs. In addition, having SSB’s members
with the combined industry expertise and accounting and financial expertise better
enhances the level of compliance than SSB’s members with industry expertise alone.
Moreover, IBs with internal SAD can detect more fraud within their organizations and thus
assist IBs in ensuring compliance with AAOIFI’s standards. Furthermore, to convince the
current IAHs to continue investing their funds with the IB and attract potential IAHs, IBs
tend to provide more disclosure and thus will be more compliant with AAAOIFI’s GSs’
disclosure requirements.
This paper is structured as follows. The institutional background is presented in Section
2. Section 3 highlights the hypothesis development. Section 4 presents the adopted research
methodology. Section 5 reports the results of the study. Finally, a brief conclusion of the
study is presented in the Section 6.

2. Institutional background
The AAOIFI is an Islamic international autonomous not-for-profit corporate body that
prepares accounting, auditing, governance, ethics and Sharīʿah standards for IFIs (AAOIFI,
2018). It was established in 1991 in the state of Bahrain after a series of scandals in the
Islamic banking industry, which gave rise to calls for specific standards. The AAOIFI
foundation was significant for providing IFIs with legitimacy and confidence in the
emerging Islamic finance market. However, since its foundation, the AAOIFI was faced with
a problem of combining religious values with capital market requirements of “efficiency,”
“standardisation” and “decision-usefulness.” Moreover, AAOIFI is not the result of a single-
country effort to develop their standards. Indeed, the implantation of the AAOIFI’s
standards depends mainly on the cooperation of national regulators (Kamla and Haque,
2017).
The AAOIFI is supported by over 200 institutional members from over 40 countries.
Members are central banks, regulatory authorities, financial institutions, accounting and
auditing firms and legal firms. Currently, the AAOIFI has published 88 standards including
26 accounting standards, 5 auditing standards, 7 GSs, 2 ethics standards and 48 Sharīʿah
standards. According to the AAOIFI, the GSs are adopted either fully or partially as
JIABR mandatory regulatory requirements in many jurisdictions. Moreover, AAOIFI’s standards
are mandatory for all IBs operating in Bahrain, Qatar, Jordan, Syria, Sudan, Oman and
Yemen. Besides, all IBs in Palestine adopt the AAOIFI’s GSs (AAOIFI, 2018). In fact, the
adoption of AAOIFI’s GSs is mandatory since 1998 for IBs in Bahrain (the CBB: Rule Book
Volume 2, IBs, 2005) and Sudan (Bank of Sudan Act, 2002). Concerning IBs in Jordan
(Banking Law, 2000: Article 50–59), Qatar (Islamic Finance Rule Book of Qatar, 2005) and
Syria (Islamic banks CG Code, 2009), AAOIFI’s GSs are mandatory for all IBs operating in
these countries since 2002. Moreover, the adoption of AAOIFI’s GSs is mandatory since 2012
for IBs in Oman (Islamic banking Regulatory Framework, 2012) and since 2013 for those in
Yemen (Banks Governance Guide in the Republic of Yemen).
The Islamic banking CG environment for the countries adopting the AAOIFI’s standards
is different. Indeed, IBs in Bahrain, Palestine and Jordan are regulated by the same law and
regulations that stipulate CG requirements for conventional banks and IBs. Concerning IBs
in Oman and Sudan, they are subject to specific laws and regulations. In fact, IBs in Oman
are regulated by the Islamic banking regulatory framework which was issued by the Central
Bank of Oman in 2012 (Central Bank of Oman, 2018). Furthermore, IBs in Sudan are
governed by the Bank of Sudan Act (2002) (IMF, 2017). Regarding IBs in Yemen, Syria and
Qatar, they are subject to the same laws and regulations applicable to CBs but they have
also their specific laws (the Islamic Banking Law 1996 in Yemen, the IBs’ CG Code 2009 in
Syria and the Islamic Finance Rule Book 2005 in Qatar).

3. Literature review and hypotheses development

The study of AAOIFI’s standards has grown contemporary with considerable contributions
from scholars (Sarea, 2012; Sarea and Hanefah, 2013; Ahmad and Daw, 2015; Al-Sulaiti et al.,
2018; Srairi, 2018); we note that the focus of most of these studies is descriptive in nature,
emphasizing the level of compliance with AAOIFI’s standards without exploring the main
determinants of this level. Indeed, the existing studies that have explored the determinants
of compliance with AAOIFI’s standards are in the early research stage, and as to the best of
our knowledge, there is a paucity of empirical research testing this issue (El-Halaby and
Hussainey, 2016; Sellami and Tahari, 2017; Ajili and Bouri, 2017; Srairi, 2018). The main
results of these previous studies are summarized in Table 1.
From this table, we notice that all these studies have focused only on some AAOIFI’s
standards and have examined only the effect of corporate characteristics on compliance with
AAOIFI’s standards. We extend these studies by focusing on the specific IBs’ CG
mechanisms and examining the relationship between SSB characteristics and mandatory
disclosure. Moreover, with respect to the SSB expertise, we provide additional evidence on
the role of having combined industry expertise with accounting and financial expertise in
the SSB in enhancing IBs’ compliance level with AAOIFI’s GSs’ disclosure requirements.

3.1 Shariah Supervisory Board’s characteristics

The extent to which the SSB affects the level of compliance relies on the SSB’s
characteristics, such as the remuneration and expertise.
3.1.1 Shariah Supervisory Board’s remuneration. The board’s remuneration can be used
as a measure of its effectiveness, as it captures the skills and the effort carried out by the
directors in discussing and establishing the overall strategic management, monitoring the
financial and managerial actions and evaluating the work of the executive management
(Ferrero-Ferrero et al., 2012).The agency theory has been used by empirical studies to
explain the relationship between the remuneration of the agent (director) and the benefit of
the principal (shareholders). Indeed, high remuneration may motivate and retain directors to
 Findings
Specific
Studies Sample Period/year Significant variables Non-significant variables corporate
governance
El-Halaby and 43 IBs from 8 2013 Size þ Number of block holders
Hussainey (2016) countries Age þ Institutional ownership mechanisms
SAD þ Foreign ownership
Uncertainty – Duality in position
avoidance
SSB’s þ Board independence
characteristics
Sellami and 38 IBs from 8 2011–2013 Listing status þ Bank’s size
Tahari (2017) countries The existence of þ Auditor’s type
an AC
Age þ
The country of þ
domicile
Ajili and Bouri 39 IBs in the GCC 2010–2014 Size þ Leverage
(2017) region Age þ
Multinational þ
subsidiaries
Srairi (2018) 29 IBs operating 2013–2016 Bank size þ Audit size
in the GCC region Leverage þ Ac independence
Cross-border þ SSB meetings
Listings þ SSB cross membership
The level of – Leverage
political and civil
regression
Table 1.
Board size þ Profitability
SSB size þ SSB expertise Main previous
Leverage research studies on
Profitability compliance with
Adoption of IFRSs AAOIFI’s standards

perform their duty and work harder in the best interest of the shareholders (Razali et al.,
2018). Moreover, according to Aslam et al. (2019), the conflict of interests can be ironed off by
offering attractive remuneration contracts based on the organization’s performance.
By extending this argument to the SSBs, remuneration paid to the SSB’s members can
affect the quality of their work (Alman, 2012). In fact, the SSB’s members are eligible to
receive the appropriate remuneration for their work, which is one of the commercial inputs
in IBs (Al Mannai and Ahmed, 2018). Furthermore, they deserve compensation as they are
dedicating most of their time to issue fatwa and provide Sharīʿah guidance. Moreover, this
compensation also encourages the SSB’s members, who are often quite busy to devote time
to IBs’ matters to honor their contractual commitments (Ginena and Hamid, 2015).
A high amount of remuneration paid to the SSB’s members may increase their effort and
therefore the quality of their work. Moreover, a high remuneration is necessary to attract
and retain high-quality scholars and therefore, is associated with higher financial reporting
quality (Alman, 2012). Thus, SSB remuneration can be a better construct for Sharīʿah review
quality and thus enhances governance disclosure of IBs. Indeed, it is assumed to accelerate
the Sharīʿah review effort which is associated with greater Sharīʿah audit coverage and thus
leading to better financial reporting quality. By providing higher remuneration, SSB’s
members will be motivated to work harder and increase their productivity; this will boost up
the compliance level with AAOIFI’s GSs.
JIABR Based on these arguments, we predict that a higher SSB remuneration improves the
compliance level with AAOIFI’s GSs’ disclosure requirements.

H1. SSB’s remuneration is positively associated with the level of compliance with
AAOIFI’s GSs’ disclosure requirements.
3.1.2 Shariah Supervisory Board’s expertise. According to Ghafran and O’Sullivan (2017),
audit committee expertise is important in safeguarding the financial reporting process.
Specifically, financial accounting experts on ACs are seen as being better placed to evaluate
those areas of the committee’s work requiring technical evaluation and decision-making.
Similar to the arguments on AC expertise, it is expected that the effectiveness of the SSB is
affected by the expertise of its members in accounting or finance.
The SSB plays an important role like the AC and the external auditor. It has to review all
contracts, agreements, financial products and activities and ensure that they conform to the
Islamic rules and principles. For this reason, SSB’s members with more experience can
perform their responsibilities more effectively than members without such experience
(Rahman and Bukair, 2013).
SSB’s members come from a variety of backgrounds such as Islamic law jurisprudence,
common law, banking, finance, economics and accounting. The vast majority of SSB’s
members are Islamic scholars, and only some of them have accounting and financial
expertise. Using the perceptions of the resource dependence theory, Rahman and Bukair
(2013) revealed that SSB’s members who have financial and accounting knowledge are more
efficient in their work compared to scholars without these capabilities. In fact, most SSB’s
scholars have limited experience in banking which affect their ability to issue well-informed
decisions on financial products and activities (Ginena and Hamid, 2015). Furthermore,
according to Bakar (2016), many IBs have replaced their SSBs as the scholars have limited
product knowledge, and hence, they could not function well. Moreover, the SSB’s members
with accounting and financial expertise can have a positive and significant impact on the
IBs’ performance. Indeed, knowledge in Sharīʿah law in addition to knowledge in accounting
and finance assist the SSB in ameliorating the performance of IBs (Nomran et al., 2018).
Therefore, expertise in accounting or finance will help the SSB to be independent when
making decision. Indeed, SSB’s member with good knowledge in finance and accounting can
ensure better quality of supervision and consulting. This person will help the board to have
robust understanding in what is happening in day-to-day operation of the IB. Moreover, SSB
may be ignorant of the true implications of the complex financial products and transactions
brought before them because of the lack of accounting and financial knowledge (Grassa,
2015). Therefore, the presence of scholars in SSB with accounting and financial knowledge is
an effective CG mechanism in IBs (Grassa and Matoussi, 2014).
Many previous studies argued that the SSB expertise positively influences the Islamic
banking disclosure (Rahman and Bukair, 2013; Abdullah et al., 2015). In fact, the existence of
SSB’s members with accounting and financial expertise could influence the extent of
disclosure because of their awareness of the importance of transparent reporting. In
addition, SSB’s members with a better accounting or financial background are more likely to
seize the importance of disclosure to stakeholders. As a consequence, during the process of
Sharīʿah review, an SSB with accounting and financial expertise could influence the
managers to disclose more information (Abdullah, 2013).
Furthermore, Rahman and Bukair (2013) reported that SSB’s members with more
financial experience are efficient in monitoring and controlling the IBs’ activities related to
social issues according to Sharīʿah rules and principles. In the same vein, Abdullah (2013)
found that the higher the expertise in accounting and finance, the higher the disclosure made
on the SSB for IBs in Malaysia and Indonesia. In contrast, Abdullah et al. (2015) reported an Specific
insignificant association between SSB expertise and voluntary CG disclosure. corporate
Concerning the industry expertise, Cohen et al. (2013) found that the existence of industry
experts on the AC improves the financial reporting quality. By extending these arguments
governance
to the SSB, industry expertise could enhance the financial reporting of the IFIs. In fact, when mechanisms
the SSB’s members sit on several boards, they will be exposed to many discussions
regarding the application of Islamic law in the Islamic banking industry (Farook et al., 2011).
Moreover, having cross-memberships within IBs could provide SSB’s members with
more experience, enabling them to make comparisons of the best practices among IBs. As a
consequence, these members are able to understand the best corporate reporting practices
(Abdullah, 2013).
Based on these arguments and following Cohen et al. (2013), two kinds of expertise are
considered in this study, accounting and financial expertise and industry expertise. As a
consequence, we test a general hypothesis on the association between SSB expertise
and compliance with AAOIFI’s GSs’ disclosure requirements. Then, SSB’s members are
classified into only accounting and financial experts, only industry experts and accounting
and financial experts who are also industry experts. This classification helps better
understand the impact of having only one kind of expertise on the compliance with
AAOIFI’s GSs’ disclosure requirements and having two kinds of expertise on the
compliance with AAOIFI’s GSs’ disclosure requirements.

H2. SSB expertise is positively associated with the level of compliance with AAOIFI’s
GSs’ disclosure requirements.
H2a. SSB’s members with only accounting financial expertise are positively associated
with the level of compliance with AAOIFI’s GSs’ disclosure requirements.
H2b. SSB’s members with only industry expertise are positively associated with the
level of compliance with AAOIFI’s GSs’ disclosure requirements.
H2c. SSB’s members with both accounting and financial and industry expertise are
positively associated with the level of compliance with AAOIFI’s GSs’ disclosure
requirements.
3.1.3 Existence of the internal Shariah Auditing Department. It is recommended that the IB
conducts an internal Sharīʿah review of all the activities, which is usually executed by the
internal Sharīʿah department (Stanley, 2008). The internal Sharīʿah audit function is
fundamental to the IB’s success. The main purpose of this department is to assess the
Sharīʿah audit activities of the IB and improve their Sharīʿah compliance. This function can
be accomplished by evaluating and presenting recommendations regarding the efficiency of
the internal Sharīʿah control and risk management systems, the compliance of activities
with SSB’s fatawa, the AAOIFI’s Sharīʿah standards and the other relevant guidance
(Ginena and Hamid, 2015).
Many previous studies showed that the internal auditing department has a positive
impact on both the financial reporting oversight and the level of disclosure. According to
Mercer (2004), the internal auditing department serves as the first line of defense against
disclosure errors as it ferrets out unintentional errors caused by weaknesses in the
company’s internal controls and intentional errors because of fraud.
By extending these arguments to the internal auditing in IBs, we notice that the existence
of internal SAD is very important inside IBs. In fact, they advise the IFIs on how to achieve
their objectives. Moreover, they are regarded as the key element in the application of the
JIABR accounting systems, which in turn, helps evaluating the work of the department. In fact, the
internal SAD is considered as the backbone of the business accounting as it is the section
that records all businesses related to the sector.
Moreover, the internal Sharīʿah audit is concerned with sound and effective internal
control system for Sharīʿah compliance through continuous periodical assessment (Rahman,
2011). Furthermore, the internal Sharīʿah auditor should formulate accurate judgment that
the transactions and controls he examined during his audit process comply with the Islamic
Sharīʿah rules and principles (Yahya and Mahzan, 2012).
The AAOIFI’s guidelines on Sharīʿah audit can be considered as the most relevant
guideline available for Sharīʿah audit practice (Khalid et al., 2017). According to the
AAOIFI’s standards, effectiveness is the performance of internal Sharīʿah audit work such
as the ability to plan, implement, document information and Sharīʿah audit findings, and the
ability to make recommendations, numbers of repeated reports, follow-up and evaluation of
extent of Sharīʿah compliance with Islamic Sharīʿah rules and principles, fatwas and
guidelines (AAOIFI, 2015). Therefore, IBs with internal Sharīʿah audit function can detect
more fraud within their organizations. Hence, an effective internal Sharīʿah auditor is the
one who assist IFIs in ensuring compliance with AAOIFI’s standards.
With respect to the Islamic banking’s compliance literature, to our knowledge, only El-
Halaby and Hussainey (2016) have examined the association between the existence of SAD
and compliance with some AAOIFI’s standards. They found that the existence of SAD is
significantly associated with the compliance level with AAOIFI’s FAS 1 and AAOIFI’s GS 1.
Therefore, following El-Halaby and Hussainey (2016), we predict that the existence of this
department improves the compliance level with AAOIFI’s GSs’ disclosure requirements.
Thus, we test the following hypothesis:

H3. The existence of the internal SAD is positively associated with the level of
compliance with AAOIFI’s GSs’ disclosure requirements
3.1.4 Level of investment accounts holders. There is an important difference between
conventional and IBs that adds another dimension to CG. This difference relates to the
equally weighted importance of other stakeholders. Indeed, there are two types of owners in
IBs, the shareholders, as in conventional institutions, and the IAHs. In fact, instead of
earning a fixed rate of return on investments, the Sharīʿah principles call for equity
participation contracts (Mudaraba and Musharaka), which create IAHs (Aggarwal and
Yousef, 2000). According to Greuning and Iqbal (2008), the IAHs represent an important
difference between IBs and conventional banks.
The IAHs represent the largest source of funds for IBs. Islamic investors are more likely
to invest their funds as IAH rather than as shareholders. In fact, Islamic investors are more
interested in the services that IBs offer rather than share ownership of the IBs. Although, the
IAH do not have any formal voting rights, they influence the level of “vicariously”
monitoring of management through shareholders (Archer et al., 2012).
The agency problems can be created between IB’s managers, IB’s shareholders and IAHs
by potentially providing opportunities to manipulate returns at the expense of IAH (Archer
and Karim, 2007; Karim, 2001). In the agency structure of an IB, the bank’s managers act as
agents of shareholders as well as Mudarabah. However, the contract of Mudarabah does not
allow the IAHs to intervene in the decision-making of IBs. Thus, the IAHs risk more of their
investment than shareholders do. Consequently, the concern over the lack of protection for
IAHs suggests that there is a need for IBs to provide more transparent disclosures
(Abdullah, 2015).
 To convince the current IAHs to continue investing their funds with the bank and attract Specific
potential IAHs, IBs tend to provide more voluntary disclosure (Al-Baluchi, 2006). Moreover, corporate
the relative effect of IAHs will determine the extent to which the bank complies with
Sharīʿah and accordingly the level of disclosure obtainable by the bank because the IAHs
governance
are more concerned than stockholders about the bank’s compliance with Sharīʿah (El- mechanisms
Halaby, 2015).
Empirical evidence on the effect of the level of IAHs on voluntary disclosure reports
controversial results. In fact, Farook et al. (2011) found that there is a significant positive
relation between the level of IAHs and the level of corporate social responsibility (CSR)
disclosure. Likewise, Al-Baluchi (2006) reported a significant positive relation between the
level of IAHs and voluntary disclosure. Furthermore, Grassa et al. (2018) found a significant
positive association between IAHs funds and levels of products and services disclosure in
IBs. However, Abdullah et al. (2015) found that there is no significant association between
voluntary CG disclosure and the level of IAHs for IBs in the Southeast Asia and the Gulf
Cooperation Council (GCC) regions. Their result seems to reflect a lack of demand for CG
disclosure by the IAHs.
Concerning the mandatory disclosure, El-Halaby (2015) found that the IAHs are
positively associated with three categories of CG disclosure, which are overall, Sharīʿah and
financial disclosure. Thus, the disclosure increases with the increase of the IAHs’ level.
Based on the agency theory and the finding of prior studies (Al-Baluchi, 2006; Farook et al.,
2011; El-Halaby, 2015; Grassa et al., 2018), and given that the number of AAOIFI’s GSs
require the disclosure of information that helps IAHs in their economic decisions, it can be
argued that the compliance with these standards is positively related to the level of IAHs.
Thus, we test the following hypothesis:

H4. The level of IAHs is positively associated with the level of compliance with
AAOIFI’s GSs’ disclosure requirements.

4. Research methodology
4.1 Sample selection
To achieve the objective of the current study, our sample consists of IBs that adopted
AAOIFI’s standards from 2009 to 2015. The year 2009 was selected because at the time of
data collection, the 2009’s annual reports were the oldest reports, which were still available
for most IBs. Furthermore, the year 2015 was the last year for which the IBs’ annual reports
were filed and accessed.
Based on reviewing the Bankscope database, the AAOIFI’s website and IBs’ annual
reports, IBs that adopt AAOIFI’s standards are located in Bahrain, Qatar, Yemen, Jordan,
Syria, Sudan, Oman, Palestine and Libya. However, we have excluded Libya because of the
unavailability of the IBs’ annual reports. Therefore, IBs which are the subject of this study
are selected using the central bank’s website of each sampled country. Indeed, the
preliminary sample consists of all IBs in Bahrain, Yemen, Qatar, Syria, Palestine, Sudan,
Oman and Jordan.
In our study, we use data from the selected IBs’ annual reports (Arabic or English
version) which are available on their websites from 2009 to 2015, resulting in 483
observations. However, from this sample, we have excluded foreign Islamic branches
(14 observations). Furthermore, IBs with missing data have been also excluded (69
observations). Additionally, we have excluded IBs with unavailable annual reports; either in
Arabic or English version (28 observations).
JIABR As a consequence, a total of 372 bank-year-observations have been analyzed. Table 2
demonstrates the sample selection process and Table 3 presents the sample distribution per
country and per year.

4.2 Dependent variable

To calculate the compliance level, we construct a comprehensive checklist in line with
previous researchers on compliance with mandatory disclosures (Street and Gray, 2002;
Tsalavoutas, 2011; Vinnicombe, 2012; Glaum et al., 2013; El-Halaby and Hussainey, 2016;
Mazzi et al., 2018). In our study, mandatory disclosure items are collected from all the
AAOIFI’s GSs. Indeed, each standard contains a specific named disclosure requirements
with a list of items required to be disclosed in the annual report by each IB. Table 4 shows
the number of items by standard [3].
As reported in this table, the checklist contains 161 disclosure items. To ensure the
content validity of this checklist, two other researchers and an Islamic finance expert
reviewed it independently [4]. Moreover, to ensure the reliability of coding, 15 randomly

Selection criteria Bank year observations

Initial sample 483

Foreign Islamic branches (14)
Table 2. Unavailable annual reports (28)
The sample IBs with missing data (69)
determination Final sample 372

Country/year 2009 2010 2011 2012 2013 2014 2015 Total

Bahrain 17 18 19 19 19 19 19 130
Qatar 4 5 6 6 6 6 6 39
Jordan 2 3 3 3 3 3 3 20
Syria 2 2 3 3 3 3 3 19
Sudan 15 16 16 16 16 16 14 109
Table 3. Palestine 2 2 2 2 2 2 2 14
The sample Yemen 3 3 3 3 3 3 3 21
composition by Oman 0 0 0 0 6 7 7 20
country Total 45 49 52 52 58 59 57 372

Standard title No. of items

GS 1 SSB: appointment, composition and report 24

GS 2 Sharīʿah review 10
GS 3 Internal Sharīʿah review 18
GS 4 Audit and governance committee for Islamic financial institution 37
Table 4. GS 5 Independence of SSB 7
Number of items by GS 6 Statement on governance principle for Islamic financial institution 34
standard in the GS 7 Corporate social responsibility conduct and disclosure for Islamic financial institution 31
checklist Total 161
selected IBs were scored. No significant differences in the compliance levels across the Specific
investigators were detected when comparing the researchers’ findings. corporate
Based on AAOIFI’s GSs, a governance compliance index was calculated. This index is
unweighted and consistent with prior compliance studies (Akhtaruddin, 2005; Aljifri, 2008;
governance
Hassan et al., 2008; Al Mutawaa and Hewaidy, 2010; Juhmani, 2013). Nevertheless, according mechanisms
to Tsalavoutas (2011) and Abdullah et al. (2015), this index has a relevant limitation because
the number of items required by the different GSs may vary considerably. For instance, GS 4
requires 37 items to be disclosed and GS 5 only 7 items, it will appear to be more important
than GS 5. Thus, to avoid this problem, we use the partial compliance (PC) unweighted
method. Under this method, all examined standards have equal weight and thus, each one is
of equal importance (Tsalavoutas, 2011; Glaum et al., 2013; Abdullah et al., 2015; Mazzi et al.,
2018). Therefore, this is derived by using the following formula:
X
T
i¼1 it
GCIjt ¼
Mjt

Where GCIjt is the governance compliance index for each IBj during yeart and it ranges from
0 to 1. Tit is the level of compliance with each standard’s mandatory disclosures. Mjt is the
total number of standards applicable to that IBj during yeart. This means that, we first
compute the compliance with each standard separately. Subsequently, the sum of these
compliance indices (T) is divided by the total number of applicable standards for each IBj
during yeart.

4.3 Measurement of the independent variables

The data were manually collected collected from IBs’ annual reports and websites during the
2009–2015 period. With respect to the SSB’s characteristics, we examine the SSB
remuneration and expertise. Furthermore, we examine the existence of the SAD and the level
of IAHs’ funds as other specific IBs’ CG mechanisms. Concerning the control variables, we
identify the IB’s size, IB’s profitability and the level of leverage. The definitions and measures
of these independent variables, data sources and references are presented in Table 5.

4.4 Model specification

To examine the effect of the specific IBs’ CG mechanisms on compliance with the AAOIFI’s
GSs’ disclosure requirements, we execute the following model:

CTjt ¼ a0 þ a1 SSBREMjt þ a2 SSBAFEjt þ a3 SSBIEjt þ a4 SSBBEjt þ a5 SADjt

þ a6 IAHjt þ a7 SIZEjt þ a8 PROFjt þ a9 LEVjt þ « jt:

Where:
CT = transformed compliance index;
SSBREM = SSB remuneration;
SSBAFE = SSB members, who are only accounting financial experts, and not industry
experts;
SSBIE = SSB members, who are industry experts and not accounting and financial
experts;
SSBBE = SSB members, who are accounting financial experts and industry experts;
SAD = Shariah Auditing Department;
JIABR Predicted Examples for prior
Variable name Description sign Data sources studies

SSBREM The log of total SSB þ Hand-collected  Grassa and Matoussi

remuneration translated into (2014),
USD Nomran et al. (2018)
SSBAFE The proportion of members on þ Hand-collected  This measure was also
the SSB who are only used by Cohen et al.
accounting and financial (2013) as a proxy for AC
experts, but are not industry only accounting and
experts. Indeed, where the finance expertise
SSB’s member is an
accounting and financial
expert if his/her biography
indicates that he/she has at
least one of the following
qualifications: certified public
accountant, chief financial
officer, auditor, chief
accounting officer, controller,
treasurer or vice president of
finance
SSBIE The proportion of members on þ Hand-collected  This measure was also
the SSB who are only industry used by Cohen et al.
experts (experts in the Islamic (2013) as a proxy for AC
banking industry) and not only industry expertise
accounting and financial
experts. Indeed, SSB’s member
is considered as an industry
expert if he was employed by
another IB in the SSB
SSBBE The proportion of members on þ Hand-collected  This measure was also
the SSB who are accounting used by Cohen et al.
and financial experts and also (2013) as a proxy for AC
industry experts accounting and finance
and industry expertise
SAD Indicator variable coded 1 if þ Hand-collected  El-Halaby and
the IB has a SAD and 0 Hussainey (2016),
otherwise  Khalid et al. (2017)
IAH Ratio of total amount of þ Hand-collected  Farook et al. (2011),
investment account funds to  El-Halaby (2015)
paid up capital in
shareholders’ equity
Control variables
SIZE The natural log of total assets þ Hand-collected  Al Mutawaa and
translated into USD Hewaidy (2010),
Table 5.
Grassa et al. (2018)
Summary of the PROF The return on equity ratio þ Hand-collected  Juhmani (2013)
independent LEV Total liabilities divided by þ Hand-collected  El-Halaby and
variables: description total assets Hussainey (2016),
and data sources Grassa et al. (2018)
 IAH = level of investment account holders’ funds; Specific
SIZE = Islamic bank’s size; corporate
PROF = Islamic bank’s profitability; and
LEV = level of leverage.
governance
mechanisms
5. Empirical results
5.1 Descriptive statistics
Table 6 reports the main descriptive statistics of the dependent and independent variables.
Panel A presents the descriptive statistics of the continuous variables, while panel B shows
the frequencies for the dummy variables.
For the dependent variable, the mean of compliance level with AAOIFI’s GSs over the
covered years for the entire sampled IBs is 52.1%, which reflects a relatively low level of
compliance. The average remuneration of the SSB’s members is 10.08 with a minimum of
2.80 and a maximum of 13.50. The average percentage of scholars sitting on the SSB and
having only accounting and financial knowledge is 19.9%, while the average percentage of
scholars sitting on the SSB and having only industry expertise is 55.2%. On the other hand,
the average percentage of scholars sitting on the SSB and having both accounting and
financial knowledge and industry expertise is 18.4%. It is observed that the mean ratio of
IAH is 4.315. Regarding the control variables, IB’s size has a minimum value of 9, a
maximum value of 17.36 and a mean value of 13.073. The mean profitability is of 0.071
ranging from 0.041 to 0.228 and the average leverage ratio is 46.4%. Concerning the
dummy variables, 70.70% of the sampled IBs have a SAD.

5.2 Correlation analysis

Because of the non-parametric data nature, Spearman collinearity test is used to test for
multicollinearity between our variables. Gujarati (2003) indicated that variables are highly
correlated if the correlation coefficient is greater than 0.80. The Spearman rank correlation
coefficient between the dependent and all the explanatory variables of the current study is
presented in Table 7. The table indicates that the correlation coefficients among all variables

Panel A: The descriptive statistics of the continuous variables

Variable Mean Minimum Maximum Median SD
The dependent variable
Compliance level 0.521 0.131 0.849 0.580 0.182
The independent continuous variables
SSBREM 10.081 2.802 13.503 11.415 2.936
SSBAFE 0.199 0 1 0 0.352
SSBIE 0.552 0 1 0.667 0.394
SSBBE 0.184 0 1 0 0.303
IAH 4.345 0 25.200 1.952 5.934
SIZE 13.073 9 17.367 13.043 1.809
PROF 0.071 0.041 0.228 0.053 0.084
LEV 0.464 0.002 0.950 0.428 0.277
Panel B: Frequencies for dummy variables
Dummy variables N Frequency Percentage
0 1 0 1 Table 6.
SAD 372 109 263 29.30% 70.70% Descriptive statistics
JIABR are relatively low, less than 0.80, suggesting that there is no variable exhibiting
multicollinearity problem.
Further check for multicollinearity is performed by calculating the variance inflation
factor (VIF). Statistically, the higher the correlation between variables, the higher the
possibility of the tolerance coefficients to approach to zero and the higher the possibility to
have multicollinearity problem. There appears to be a unanimous agreement in the
econometrics literature regarding the cut-off point of VIF. If the VIF of a variable exceeds 10,
we consider it to be highly collinear (Gujarati, 2003; Field, 2009).
From Table 8, we note that the highest VIF is equal to 1.84. Therefore, we can deduce the
absence of any multicollinearity problems.

5.3 Regression results

We have performed a Fisher test to test whether there is a panel effect and more precisely to
decide between a fixed effects regression and a simple ordinary least squares (OLS)
regression. The null hypothesis of which is not confirmed. Hence, this result reveals that the
test is significant at the level of 1% (F = 73.69). As a consequence, for our study, a panel data
analysis is more appropriate. Furthermore, a Breusch–Pagan Lagrange multiplier test is

SSBREM SSBAFE SSBIE SSBBE SAD IAH SIZE PROF LEV

SSBREM 1
SSBAFE 0.1538*** 1
SSBIE 0.2738*** 0.2411*** 1
SSBBE 0.2903*** 0.0352 0.3608*** 1
SAD 0.0831 0.0056 0.0351 0.1330** 1
IAH 0.2969*** 0.3808*** 0.3217*** 0.0826 0.1067** 1
SIZE 0.0361 0.2039*** 0.0336 0.1594*** 0.1030** 0.0836 1
PROF 0.0699 0.1908*** 0.2096*** 0.1124** 0.0631 0.0451 0.1234** 1
LEV 0.2579*** 0.3167*** 0.1670*** 0.0085 0.0109 0.1125** 0.3230*** 0.1671*** 1

Notes: This table reports Spearman rank’s correlation coefficients regarding all variables used in our
analysis. SSBREM is the SSB remuneration; SSBAFE is the SSB’s members who are accounting financial
experts and not industry experts; SSBIE is the SSB’s members who are industry experts and not accounting
and financial experts; SSBBE is the SSB’s members who are accounting financial experts and industry
experts; SAD is the Shariah Auditing Department; IAH is the level of investment account holders’ funds;
Table 7. SIZE is the Islamic bank’s size; PROF is the Islamic bank’s profitability; and LEV is the level of leverage. **
Correlation matrix and *** denote significance at the 5% and 1% level, respectively

VIF

SSBIE 1.84
SSBBE 1.73
SSBREM 1.46
IAH 1.44
SSBAFE 1.43
SIZE 1.37
Table 8. LEV 1.27
Results of the VIF PROF 1.18
test SAD 1.14
used to test whether there is a panel effect and more precisely, it helps to decide between a Specific
random effects regression and a simple OLS regression. The null hypothesis is that variance corporate
across entities is zero (e.g. no panel affect). The result indicates that the test is significant at
the level of 1% (Chibar2 = 730.54). The null hypothesis is not confirmed. Thus, a panel data
governance
analysis is more adequate for our study. mechanisms
From Table 9, we can conclude that our research model is generally significant. Indeed,
the Wald chi2 is significant at the level of 1%. The results derived from our regression model
indicate that there is a positive association at 1% level between the compliance levels with
AAOIFI’s GSs and the SSB remuneration. This finding provides support for H1, which is
consistent with the agency theory. Our result implies that a higher SSB remuneration
improves the compliance level with AAOIFI’s GSs’ disclosure requirements. This result can
be explained by the fact that a large remuneration paid to the SSB’s members may increase
their effort and therefore the quality of their work. Moreover, SSB remuneration can be seen
as a better construct for Sharīʿah review quality and thus enhances governance disclosure of
IBs. Indeed, it is assumed to accelerate the Sharīʿah review effort which is associated with
greater Sharīʿah audit coverage and thus leading to better financial reporting quality. By
providing higher remuneration, SSB’s members will be motivated to work harder and
increase their productivity; this will boost up the compliance level with AAOIFI’s GSs.
Regarding the SSB expertise, empirical evidence indicates that there is a significant
positive relationship at 1% level between the compliance levels with AAOIFI’s GSs and the
SSB’s members with only industry expertise. This finding supports H2b. Besides, it is in
accordance with the findings of Abdullah (2013), Rahman and Bukair (2013) and El-Halaby
and Hussainey (2016) and also consistent with the resource dependence theory. In fact, when
the SSB’s members have an expertise in the Islamic banking industry, they will be exposed
to many discussions regarding the application of Islamic law in the Islamic banking sector.
Moreover, industry expertise could provide members of the SSB with more experience,
enabling them to make comparisons of the best practices among IBs. As a consequence,
these members are able to seize the best corporate reporting practices. Thus, the existence of
industry experts (experts in Islamic banking industry) on the SSB improves the financial

Independent variables Predicted sign Coefficient Z-statistic

Constant 0.274*** 5.39

SSBREM þ 0.001*** 10.93
SSBAFE þ 0.034 1.46
SSBIE þ 0.459*** 21.11
SSBBE þ 0.510*** 18.22
SAD þ 0.027* 1.91
IAH þ 0.010** 2.37
SIZE þ 0.000 0.05
PROF þ 0.017 0.48
LEV þ 0.000 0.00
Wald chi2 1515.88
Prob > chi2 0.000
Relevant Wald tests Coefficient (Chi2 statistic)
SSBBE vs SSBIE 0.051** (4.21) Table 9.
Multivariate
Note: *, ** and *** denote significance at the 10%, 5% and 1% level, respectively regression
JIABR reporting quality and therefore the level of compliance with AAOIFI’s GSs’ disclosure
requirements.
Interestingly, the results show that accounting and financial experts who are also
industry experts are positively and significantly associated with the level of compliance
with AAOIFI’s GSs’ disclosure requirements. Thus, H2c is supported. This result implies
that accounting and financial experts who also have sound knowledge of the Islamic
banking industry considerably ameliorate the compliance level with AAOIFI’s GSs’
disclosure requirements. Indeed, SSB’s members with a better accounting and financial
background are more likely to seize the importance of disclosure to stakeholders. As a
consequence, during the process of Sharīʿah review, an SSB with accounting and financial
expertise could influence managers to disclose more information.
To better seize if combined industry expertise and accounting and financial expertise
better improve the level of compliance than industry expertise alone, a difference in
coefficients test (Wald test) is conducted. The result demonstrates a significant positive
difference (at the level of 1%) between being an SSB’s member with accounting and
financial expertise and also industry expertise and being SSB’s member with only industry
expertise. This finding implies that getting SSB’s members with the combined industry
expertise and accounting and financial expertise better enhances the level of compliance
than SSB’s members with industry expertise alone.
Moreover, our findings reveal that there is a positive significant relationship at 10% level
between the level of compliance with AAOIFI’s GSs and the existence of internal SAD.
Hence, H3 is supported. This result is in accordance with that of El-Halaby and Hussainey
(2016) who found that the existence of SAD is significantly associated with compliance level
with FAS 1, GS 1 and GS 7. Our findings suggest that the existence of an internal SAD as
internal audit function can enhance the disclosure quality which may assist IBs in ensuring
their compliance with AAOIFI’s standards. Indeed, IBs with internal SAD can detect more
fraud within their organizations and thus assist IBs in ensuring compliance with AAOIFI’s
standards.
Furthermore, our results indicate a significant positive relation at 5% level between the
compliance level with AAOIFI’s GSs and the level of IAH, which provides support of H4.
This finding is in line with those of Al-Baluchi (2006), Farook et al. (2011), El-Halaby (2015)
and Grassa et al., 2018). Indeed, Al-Baluchi (2006) found a significant positive association
between the level of IAH and voluntary CG disclosure. Similarly, Farook et al. (2011)
documented that the level of IAH is positively associated with CSR disclosure. Our results
show that the relative effect of IAH will determine the level of disclosure obtainable by the
bank and accordingly the extent to which the IB complies with GSs. Indeed, as the IAHs are
more concerned than stockholders in the IB’s compliance with Sharīʿah, they will exert more
pressure on disclosure. Furthermore, to convince the current IAHs to continue investing
their funds with the IB and attract potential IAHs, IBs tend to provide more disclosure and
thus will be more compliant with AAAOIFI’s GSs’ disclosure requirements.
However, we find that having only accounting and financial expertise in the SSB is not
significant, thus H2a is rejected. This result implies that SSB’s members with an expertise
only in accounting and finance are not efficient in controlling the disclosure activities of IBs
in relation to the AAAOIFI’s GSs.
Concerning the control variables, the findings reveal that there is an insignificant
association between the compliance level and IB’s size. This result is in line with that of
Sellami and Tahari (2017). Moreover, the coefficient on profitability is not significant. This
result is in accordance with that of Haniffa and Cooke (2002) who argued that, from an
Islamic perspective, the IB may provide a full disclosure in any situation (even they make a
profit or otherwise). Furthermore, the coefficient on leverage is not significant. This result is Specific
consistent with that of El-Halaby and Hussainey (2016) and Sellami and Fendri (2017). corporate
governance
5.4 Robustness tests
In line with Tsalavoutas (2011), Glaum et al. (2013) and Mazzi et al. (2018), we transform our
mechanisms
dependent variable into percentile ranks. In fact, we begin by constructing ranks that are
transformed into percentiles that range from 0 (for the lowest-ranking IB) to 1 (for the
highest-ranking IB). Then, IBs are ranked in an ascending order, where those with a higher
compliance level receive a higher rank. The main results of our analysis (untabulated) are
not changed.
Furthermore, alternative proxies were used for some independent variables which are
profitability and SSB expertise. Regarding profitability, it was measured using return on
assets in accordance with El-Halaby (2015) and El-Halaby and Hussainey (2016). The main
results of our analysis (untabulated) remain unchanged.
Concerning SSB expertise, we re-run our analysis using the number of experts who serve
on the SSB, and also a dummy variable equaling one if the SSB has at least one expert and
zero otherwise. Table 10 presents our regression results. Column (1) provides the results
when expertise is measured as the number of experts and column (2) presents the results
using a dummy variable.
As reported in this table, when SSB expertise is measured as the number of experts, the
results of our analysis are not changed (exception for SAD and SIZE). Likewise, when SSB
expertise is measured using an indicator variable, our results remain unchanged (exception
for SIZE).

6. Conclusion
The purpose of this study was to examine the effect of the specific IBs’ CG mechanisms on
compliance with the AAAOIFI’s GSs’ disclosure requirements. To achieve this purpose, we
have calculated a global governance compliance index based on the “PC unweighted
method”.

(1) Number of experts (2) At least one expert

Independent variables Coefficient Z-statistic Coefficient Z-statistic

Constant 0.289*** 5.41 0.280*** 5.61

SSBREM 0.003*** 19.57 0.002*** 17.65
SSBAFE 0.003 0.63 0.027 1.33
SSBIE 0.030*** 6.47 0.065*** 3.77
SSBBE 0.048*** 9.95 0.155*** 8.17
SAD 0.005 0.41 0.026** 2.00
IAH 0.022*** 4.26 0.021*** 4.23
SIZE 0.007** 2.05 0.008*** 2.82
PROF 0.042 1.05 0.058 1.30
LEV 0.005 0.30 0.000 0.01
Wald chi2 1388.10 849.49 Table 10.
Prob > chi2 0.0000 0.0000
Relevant Wald tests Coefficient (Chi2 statistic) Coefficient (Chi2 statistic)
Regression results of
SSBBE vs SSBIE 0.018*** (7.67) 0.018*** (14.59) compliance level
using other proxies
Note: ** and *** denote significance at the 5 and 1% level, respectively for SSB expertise
JIABR Our findings revealed substantial non-compliance with AAAOIFI’s GSs and
provided evidence that a higher level of compliance is associated with stronger
specific CG mechanisms. In fact, our findings showed that compliance with
AAAOIFI’s GSs is positively associated with the SSB’s remuneration, SSB’s
members with only industry expertise, SSB’s members with the combined industry
expertise and accounting and financial expertise, the existence of internal SAD and
the level of IAH.
The results of this study have some distinctive implications: first, our findings
reveal some weaknesses in the levels of compliance and indicate that there is a scope for
further improvement in national and international monitoring and enforcement
mechanisms in the sampled countries. Our findings show that the adoption of
AAAOIFI’s GSs is de jure but not de facto. In fact, these standards are adopted by law
in some countries but not in practice as substantial non-compliance is observed.
Furthermore, the results of the study reveal a lack of commitment to the governance
disclosure by IBs, and confirmed that there are still many areas to be improved with
respect to compliance with AAAOIFI’s GSs.
Second, this study provides evidence that a stronger specific CG is associated with a
higher level of compliance. Therefore, regulatory bodies, such as the AAOIFI, are expected
to be more proactive in guiding IBs toward the best practices of governance disclosure as
banks look for such guidance. The AAOIFI is also expected to have a strong collaboration
with countries’ regulatory bodies in enhancing specific governance disclosure practice
among IBs.
Third, our study reports that SSB’s characteristics are associated with greater
compliance with AAAOIFI’s GSs. In particular, the evidence concerning the positive
association between the extent of compliance with AAAOIFI’s GSs and SSB remuneration
may assist regulators of Islamic finance as they seek to develop guidelines and standards
relating to SSB remuneration. Then, our findings imply that there is a need to re-examine the
qualifications and the expertise of the SSB’s members. Indeed, the standards’ organizations
could collaborate with regulatory authorities on such a project because of the importance of
the topic and its implications for the Islamic banking industry. Although the SSBs are
unique elements in the IBs’ governance structure, they do not contribute to the solution of
old governance problems. Instead, they add new governance issues, especially at the macro
and political levels. As a consequence, we suggest that the existing specific IBs’ governance
structure needs further enhancement and improvement to reinforce the Islamic finance
industry’ development and growth.
Fourth, this study has implications for several stakeholder groups. Indeed, our findings
are important for IBs, which may be aware that more compliance with AAAOIFI’s GSs
might have a significant impact on their banking image. Our results should wary of the
managers of IBs to the problem of compliance with AAOIFI’s standards. Again, our
findings might help those preparing the IBs’ annual reports to improve and upgrade the
quality of the information disclosed in the respective annual reports. Additionally, our
results might help investors, who are looking to invest in the sampled countries to have a
detailed idea about the disclosure practices of IBs.
Furthermore, our findings may be relevant to national regulators in their efforts to
harmonize financial reporting. In fact, our results may give a signal to supervisory
authorities, such as, central banks. More efforts are necessary to enforce effectively and
consistently AAOIFI’s standards across the sampled countries. In addition, our results
may be relevant to the AAOIFI. Indeed, testing the compliance level of IBs will be
useful in facilitating the development of the AAOIFI’s GSs. Moreover, the AAOIFI
should support IBs to introduce the importance of their GSs to the staff by additional Specific
training for the members of the internal Sharīʿah audit and governance committee. This corporate
could potentially improve the level of AAOIFI’s GSs’ disclosure. Furthermore, our
research may encourage regulators to improve CG mechanisms in the Islamic banking
governance
system. mechanisms
This study is not without limitations. Indeed, we have focused on one major sector of the
Islamic financial service industry (IBs). Therefore, future research may consider other IFIs
such as Islamic insurance companies (takaful). In addition, we have not explored the
consequences of compliance level (such as the economic consequences). Additional research
could examine the economic consequences of the compliance level with AAOIFI’s standards
on IB’s value.

Notes
1. Chapra and Habib (2002), Stanley (2008), Safieddine (2009), Grais and Pellegrini (2006), Hasan
(2011), Grassa (2015), Ginena and Hamid (2015), Abdullah et al. (2015), Farag et al. (2018) and Al
Mannai and Ahmed (2018).
2. The disclosure requirements formulated by AAOIFI’s GSs are divided into mandatory and
voluntary disclosure requirements. In our study, we focus on mandatory disclosure as it is the
minimum standard of information which accounting standards require from an entity and it bind
the firm to disclose both “good news” and “bad news.” In addition, if the firms comply with the
standards’ requirements, the information provided should be the result of what the standards
mandate (Tsalavoutas, 2009).
3. The compliance checklist is available from the corresponding author.
4. This independent Islamic finance expert is a chartered accountant who has taught AAOIFI’s
standards at the university and has more than five years’ experience in Islamic banking industry.

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About the authors

Yosra Mnif (PhD) is an Associate Professor in Accounting at the Higher Institute of Business
Administration of Sfax, Tunisia and a member of the GFC Laboratory: (Gouvernance, Finance et
Comptabilité), Faculty of Economics and Management, University of Sfax, Tunisia. Yosra Mnif is the
corresponding author and can be contacted at: yosra.mnif.sellami.isaas@gmail.com
Marwa Tahari is a Doctor in Accounting at Faculty of Economics and Management, University of
Sfax,Tunisia and a member of the GFC Laboratory: (Gouvernance, Finance et Comptabilité), Faculty
of Economics and Management, University of Sfax, Tunisia.

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