Noordin2019 Does Shariah Committee Composition Influence Shariah Governance Disclosure

Journal of Islamic Accounting and Business Research
Does Shariah Committee composition influence Shariah governance disclosure? Evidence from Malaysian
Islamic banks
Nazrul Hazizi Noordin, Salina Kassim,
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To cite this document:
Nazrul Hazizi Noordin, Salina Kassim, "Does Shariah Committee composition influence Shariah governance disclosure?
Evidence from Malaysian Islamic banks", Journal of Islamic Accounting and Business Research, https://doi.org/10.1108/
JIABR-04-2016-0047
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Does Shariah Committee composition influence Shariah
governance disclosure? Evidence from Malaysian Islamic banks
Abstract
Purpose – The primary objective of this paper is to investigate the empirical linkage between
the composition of Shariah Committee and the extent of Shariah governance disclosure in 16
licensed Islamic banks in Malaysia.
Design/methodology/approach – This paper adopted a multiple regression analysis in order
to test the association between the composition of Shariah Committee and the extent of
Shariah governance disclosure. A disclosure index was developed to measure the extent of
Shariah governance disclosure made by the Islamic banks. Whereas, in order to measure the
extent of Shariah governance disclosure, this study used content analysis as a method of
coding qualitative information in the annual reports.
Findings – Using 2009 data, the study found a significant association between different
compositions of the Shariah Committee in the Malaysian Islamic banks and their Shariah
governance disclosure level before the introduction of the Shariah Governance Framework
(SGF). However, due to less variation in the composition of Shariah Committee after the
introduction of SGF 2010, a weak linkage was found between the composition of Shariah
Committee AND the extent of Shariah disclosure of Malaysian Islamic banks in 2013.
Research implications - Findings of this study offer several implications for further
improvements of the Malaysian Islamic banking sector in particular, and other Islamic banks
globally. Since better composition of Shariah Committee in terms of its size, academic
background and other relevant expertise would result in effective monitoring system leading
to better practices of Shariah disclosure, this finding highlights the relevance and important
role of the Shariah Committee in improving voluntary Shariah disclosure level of the Islamic
banks. This finding suggests that ample focus has to be channelled in strengthening the
composition of Shariah Committee in crafting future development of Shariah governance
framework in Malaysia. It is also suggested that Islamic banks need to give priority in
providing more education and training in various areas of expertise to their Shariah
Committee members that would result in greater confidence of investors, stakeholders and
the society on the information disclosed by the banks.
Originality/value – The novelty of this paper lies in highlighting the importance of different
composition of Shariah Committee in determining the extent of voluntary disclosure made on
Shariah matters by the Islamic banks.
Keywords – Shariah Committee, Shariah governance, voluntary disclosure, Islamic banks
Paper type Research paper
1.0 Introduction
In addition to systematic and unsystematic risks faced by the conventional financial
institutions, the Islamic financial institutions (IFIs) are also exposed to Shariah non-
compliance risks due to the requirement to operate in conformity with the Shariah principles
such as prohibition of riba, excessive uncertainties and gambling (Abdul Rahman and Bukair,
2013). In order to minimize these risks, the IFIs establish an additional stratum of governance
to the existing governance structure of financial institutions known as Shariah governance
with the objective of increasing accountability and transparency (Chik, 2012). According to
Hassan et al. (2014), Shariah governance is an Islamic mechanism of corporate governance
system that places the religion of Islam at the apex of its accountability. Indeed, Shariah
Committee of the IFIs has become the key catalyst of Shariah governance practice in many
countries wanting to develop the Islamic banking industry.
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In the context of Malaysia, the Shariah Committee is a self-regulated governance
entity who is responsible for reviewing financing and investment activities as well as the
internal policies of the Islamic banks to ensure compliance with Shariah. The Shariah
Committee also advises the Board of Directors and management team on other matters
related to Shariah. A significant aspect of duties and responsibilities of the Shariah
Committee relates to the adequacy of disclosures with regard to the bank’s compliance to the
Shariah made in its annual reports (BNM, 2005). This becomes our area of research interest.
Tremendous efforts have been initiated by regulators and standard setters both at the
domestic and international levels to strengthen the Shariah governance in the Islamic finance
industry for the past few years. In 2009, the Islamic Financial Services Board (IFSB), in its
ninth Council meeting in Jeddah had approved the issuance of a set of Guiding Principles on
the Shariah Governance System that complements other prudential standards and guidelines1
issued by the IFSB with its mandate to promote soundness and stability of the Islamic finance
industry. Besides, the Accounting and Auditing Organization for Islamic Financial Institution
(AAOIFI) has attempted to enhance the independence of the Shariah Supervisory Board
(SSB) members by issuing several guidelines on shareholdings by SSB members in the banks
that they serve and imposing a limit on the number of SSB cross-memberships. The central
bank of Malaysia - Bank Negara Malaysia (BNM) also stressed on the need to enhance
Shariah governance that serves as the hallmark of Islamic financial system (BNM, 2008). An
important area of Shariah governance that requires substantial attention from the Islamic
finance regulators relates to transparency, accountability and disclosure level of IFIs in
compliance with the Shariah principles. This is crucial in instilling public confidence on the
sanctity and etiquette of the business operations of the IFIs operating in the country.
This study is motivated by the recent debate on the effectiveness of Shariah
governance in light of the importance of Shariah compliance disclosure by IFIs (Harahap,
2003; Abu Kasim, 2012; Wan Abdullah et al., 2013), the independence and confidentiality of
Shariah Committee (Van Gruening and Iqbal, 2008) and their failures to detect and disclose
violations of Shariah principles by the IFIs accordingly (Grais and Pellegrini, 2006).
According to Sulaiman (2001), Islam as a significant force in affecting the way Muslim
society conduct their social and business activities has conspicuous influence in accounting
matters particularly in respect of the level of disclosure. The Islamic perspective of corporate
governance supports the idea of full disclosure as an effective instrument to promote social
accountability and corporate transparency (Baydoun and Willet, 2000; Lewis 2001). In fact,
IFIs that operates within the frontier set by Shariah are anticipated to be more transparent in
reporting their business activities (Haji and Mohd Ghazali, 2013). However, several studies
have found that the IFIs were significantly inferior in meeting the expectation that they
should be more transparent (Maali et al., 2006; Haniffa and Hudaib, 2007; Hassan and
Harahap, 2010). Therefore, this study aims to investigate whether these shortfalls in
transparency may necessarily happen to the Malaysian IFIs despite remarkable series of
actions taken by the BNM to enhance Shariah governance including the introduction of the
Shariah Governance Framework (SGF) 2010.
Another motivating factor to conduct this study is the lack of literature on Shariah
governance disclosure in the context of the Malaysian Islamic financial system with notable
exceptions of the study conducted by Ousama and Fatima (2010), Wan Abdullah et al. (2013)
and Haji and Mohd Ghazali (2013). Besides, the relationship between internal corporate
governance attributes such as Shariah Committee characteristics and voluntary disclosures by
1 These include (i) Guiding Principles for Governance for Institutions offering only Islamic Financial Services (IIFS –
excluding Islamic insurance/Takāful institutions and Islamic mutual funds), also known as IFSB-3 (2006); (ii) Guiding
Principles on Governance for Islamic Collective Investment Schemes, also known as IFSB-6 (2008) and (iii) Guiding
Principles on Governance for Takāful Operations, also known as IFSB-8 (2009).
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IFIs remained largely unexplored with notable exception of the study by Abdul Rahman and
Bukair (2013). However, Abdul Rahman and Bukair (2013) investigated mainly on corporate
social responsibility (CSR) disclosure by Islamic banks in GCC countries with no emphasis
on disclosure of Shariah-related issues. Other prior studies on corporate governance of
conventional companies show that voluntary disclosure is significantly influenced by a
number of factors including corporate governance attributes (Ho and Wong, 2001; Adams,
2002; Cheng and Courtney, 2006). Hence, this study intends to fill this gap in the existing
literature.
The objective of this study is to investigate the extent of Shariah governance
disclosures in the 2009 and 2013 corporate annual reports of 16 licensed Islamic banks in
Malaysia. The reason for confining our scope to Islamic banks in Malaysia is because as an
international Islamic financial centre, Malaysia holds comparative advantage over other
regional financial centres due to its holistic and integrated approach in developing its Islamic
finance industry through well-defined Shariah governance framework (PwC, 2008). Islamic
banks in Malaysia operate in a dual banking system alongside the conventional banks which
comes as no surprise that many of the corporate governance structures of the Islamic banks
are similar to those of the conventional banks (Aggarwal and Yousef, 2000; Chong and Liu,
2009; Alam, 2012). Besides, the Islamic principle of property rights and contracts, the need to
comply with Shariah law and the full protection of the stakeholders’ rights have led to the
formation of unique and exclusive governance principles associated to the Islamic banks in
Malaysia. This study also aims to examine whether different compositions of Shariah
Committee in terms of its size, professional qualifications, directorship and other expertises
affect the extent of Shariah governance disclosures by Malaysian Islamic banks. The
determinants of the composition of the Shariah Committee are derived from what has been
suggested by BNM in the SGF 2010. In other words, this study runs a pre and post analysis to
assess the indirect impacts of the SGF through its recommendations made on the composition
of Shariah Committee on the extent of Shariah governance disclosure by Islamic banks in
Malaysia. The study finds significant association between the composition of the Shariah
Committee and Shariah governance disclosure level. The Shariah Committee characteristics
such as size and diversity in members’ background are found to be important determinants in
influencing the extent of Shariah governance disclosure of the Islamic banks such that they
tend to provide better disclosure with regards to the banks’ Shariah issues.
This study makes a number of key contributions to the existing literature. Most prior
studies on disclosure practices of the Islamic banks have focused on the GCC countries (see,
for example, Haniffa and Hudaib, 2007; Abdul Rahman and Bukair, 2013) and only few
studies have generally examined voluntary disclosure by Malaysia’s Islamic banks, but only
as a small part of the global study together with GCC countries and other Southeast Asian
countries (Farook and Lanis, 2007; Farook et al., 2011; Wan Abdullah et al., 2013). Besides,
other studies on disclosure practices in Malaysia such as Ousama and Fatima (2010), Haji
and Mohd Ghazali (2013) and Abu Kasim (2012) investigated overall voluntary disclosure
(i.e. consists of both conventional and Shariah elements) of Shariah approved companies
listed on Bursa Malaysia and takaful companies respectively. Therefore, the present study
helps Islamic finance regulators in Malaysia to observe whether the results from prior studies
on the extent of Shariah disclosures can be generalized to the Islamic banking institutions in
Malaysia.
Compared to many prior studies that have been descriptive in nature (Maali et al.,
2006; Haniffa and Hudaib, 2007; Abdeldayem, 2009; Abu Kasim, 2012), this study
empirically examines the influence of Shariah Committee’s composition on Shariah
governance disclosure by developing a disclosure index. This disclosure index is developed
based on the ethical dimensions of Islamic banks proposed by Haniffa and Hudaib (2007) that
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has been used to assess the disclosure of information in relation to specific Shariah issues
surrounding the IFIs in Malaysia such as Shariah non-compliance events and the amount of
income generated by the Islamic bank from those events. The index can be a useful reference
for future studies on Shariah disclosure practices of Malaysian IFIs. This study also
contributes to the policy discussion on Shariah governance by highlighting the importance of
Shariah compliance disclosure and the significant role that Shariah Committee plays in
preparing top-notch Shariah disclosures.
2.0 Overview of Shariah Governance Structures

2.1 Different Shariah Governance Models Adopted by Countries
At the international level, the practice of Shariah governance in IFIs may vary depending on
different countries’ legal frameworks governing the Islamic banking and finance activities
(Hassan et al., 2011). In general, the global Shariah governance practice can be divided into
three different models or structures, namely centralized, laissez faire and hybrid. Firstly, in
the centralized model, a Shariah Advisory Council is established at the central level which is
responsible in issuing centralized fatwa on Islamic business dealings, advising the Central
Bank on Shariah matters, issuing guidelines on the governance of IFIs’ Shariah Committee
and executing centralized appointment of Shariah Committee at bank level. This model is
seen to have more comprehensive guidelines and detailed implementation of Shariah
governance yet has a more stringent requirement to be met by the IFIs compared to other
models. Countries which have adopted this model of Shariah governance include Malaysia,
Brunei, Indonesia, Iran and Sudan. Secondly, the laissez faire or self-regulated approach have
seen no intervention by the market regulators is made in the provision of Shariah advisory to
the IFIs. In fact, Shariah compliance is perceived at best as a reputational issue in this model.
Therefore, this more flexible Shariah governance model may require the IFIs to construct
their own ways of ensuring Shariah compliance and mitigating Shariah risks associated with
their banking products. As a result, different IFIs may have different approaches of handling
Shariah non-compliance issues with no final authority to decide on Shariah matters.
Countries which have adopted the laissez faire model mostly consists Gulf Cooperation
Council (GCC) countries such as Saudi Arabia, Qatar and Kuwait, and non-Islamic
jurisdictions such as UK, France, Germany, Japan, South Korea and Hong Kong. Lastly, the
IFIs in the countries which have adopted hybrid model are obliged to ensure Shariah
compliance by themselves and report their efforts to the central regulatory authority. For
instance, in Pakistan, the Shariah advisors of Islamic banks must observe “fit and proper”
criteria and submit a report on Shariah compliance to the Shariah Board of the State Bank of
Pakistan, which has the highest authority and supervisory roles of ensuring Shariah
compliance in the country. Another country that has implemented similar Shariah governance
structure is UAE. Any arising issues on Shariah compliance shall be reported to the UAE’s
National Council of the Shariah Supervisory Committees of IFIs.
2.2 Development of Shariah Governance Practice in Malaysia

Malaysia’s aspiration to become a global hub for Islamic finance has become the main
motivation for the country to undertake serious measures to sustain its position at the helm of
the competition. The advancement of Islamic finance in Malaysia has effectively triggered
the Malaysian government to implement more conducive regulatory environment that is
supportive of the industry’s growth. An important milestone in the Islamic finance industry in
Malaysia is the implementation of the Shariah Governance Framework for Islamic Financial
Institutions (SGF), which was issued in late 2010 and took effect starting 1st January 2011.
Under the SGF, all the IFIs in Malaysia are required to comply with the new framework
within a six-month period from its effective date. Currently, Shariah governance of IFIs in
-4-
Malaysia is administered in accordance to the Central Bank Act 2009, Islamic Financial
Services Act (IFSA) 2013 and the SGF 2010.
BNM continuously plays essential role in paving the way for the development of the
Islamic finance industry as well as ensuring the overall Islamic financial system operates in
compliance with Shariah. For instance, the establishment of the Islamic Banking Act 1983
requires all licensed Islamic banks in Malaysia to disclose about the compliancy of their
operations and products with Shariah principles in their articles of association and general
publication. Besides, the Guidelines on the Governance of Shariah (or Garis Panduan
Syariah - GPS1) which were introduced in 2004 instructed all IFIs in Malaysia to appoint
their own Shariah Committee based on the definition, roles, duties and responsibilities of
Shariah Committee prescribed by the GPS1. This guideline was later repealed by the SGF
2010. Besides, the Shariah Advisory Council (SAC) of BNM was established under the
Central Bank of Malaysia Act 2009 section 51 with the main purpose of advising and
supervising IFIs on Shariah matters in relation to their business operations, activities or
transactions.
Shariah principles indeed become crucial foundation for the business practices of IFIs
in Malaysia. Full compliance to the Shariah is highly critical as it helps to boost public
confidence on the credibility and purity of the practices in the Islamic banks. In regard to this,
the newly issued SGF 2010 is anticipated to be one of the major contributing factors that will
lead Malaysia to become one of the most successful countries in the global Islamic financial
industry (Hassan et al., 2014). The main objectives of the issuance of the SGF 2010 as an
independent assessment tool are to: (i) convey the expectations of BNM on an IFI’s Shariah
governance structures, processes and arrangement, (ii) provide a comprehensive guidance on
the roles and duties of the Board, Shariah Committee and management of the IFI in relation
to Shariah matters and (iii) set out the functions of Shariah review, Shariah audit, Shariah risk
management and Shariah research (BNM, 2010).
The SGF 2010 also aims to strengthen the composition of Shariah Committee through
its regulations and recommendations made on the accountability, independence, and
competence of the Shariah Committee members as outlined in the Principles 2, 3 and 4 of the
framework, respectively. Additionally, a new Shariah audit function is introduced in the SGF
2010, which basically operates an independent assessment on a periodical basis in order to
ensure the confidence and assurance level with regard to the effectiveness of internal control
system for Shariah compliance in the IFI. The SGF 2010 itself is applicable to all licensed
IFIs in Malaysia including: (i) all Islamic banks listed under Islamic Banking Act 1983, (ii)
takaful or retakaful operator registered under Takaful Act 1984 and (iii) financial institutions
licensed under the command of Banking and Financial Institutions Act 1989. As a result, we
observe that a number of IFIs has adopted the Shariah Governance Framework Model for
IFIs and a quite extensive discussion about the model has been provided in their annual
reports.
3.0 Literature Review

3.1 Islamic Perspective of Accountability
An Islamic perspective of accountability comprises of (i) accountability to Allah as the
ultimate Creator and the Sustainer and (ii) accountability to the society (Abdul Rahman and
Bukair, 2013). Besides, according to Al-Safi (1992), all Muslims are accountable for their
actions and responsibilities on the Day of Judgement. Based on the divine revelation
mentioned above, an Islamic worldview on social accountability is derived to urge business
organizations to be accountable firstly to Allah through the principles of tawhid (Oneness of
Allah) and also be responsible to their stakeholders such as employees, customers and
society. Therefore, in Islam, business organizations are prohibited to engage in activities that
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lead to exploitation, unfairness, and damages to a society and provide a full protection on the
stakeholders’ rights. This is different from the objectives of conventional corporate
governance that mainly emphasizes on how to maximize the shareholder’s interest.
3.2 Concept of Islamic Corporate Governance

Although one could argue that corporate governance is not a peculiar concept to Islam,
adopting obliviously the conventional interpretation of corporate governance would disregard
the fact that the Islamic ideology which is based on the full submission to Allah holds a
contrary view to the rationalism that seems to govern today’s mainstream practice of
corporate governance (Choudhury, 2008; Choudhury and Alam, 2013). In fact, if we were to
borrow bluntly from the existing literature and deliberately establish a link between these and
Islamic values, there is no special need for a discussion on Shariah governance to be made at
first place. Thus, in order to correctly illustrate the Islamic perspective of corporate
governance, one must make a reference to the Islamic worldview of accountability and the
concept of oneness of Allah as discussed in the earlier section. A good understanding on this
Islamic worldview then can be translated in the distinct features of Shariah governance as
compared to its conventional counterparts, namely the ultimate priority given to Allah and
closer attainment of social objectives. As argued by Hasan (2011), the corporate governance
practice in the Islamic economic system tend to follow the stakeholder-centred model in
which much wider interests and rights of all stakeholders are protected rather than the
shareholders per se. Akthar (2006) added that despite the faith-based approach that aligns
business conducts with Shariah principles, the implementation of Islamic corporate
governance does not stop companies from becoming profit-motivated hence maximizing the
shareholder’s wealth.
3.3 Islamic Social Reporting

The concept of social accountability in Islam encourages the practice of full disclosure that
gives the society right to know about the activities and operations of the company and how it
does affect them (Baydoun and Willett, 1997). A full disclosure according to Haniffa and
Hudaib (2002) requires the company to report on only relevant and reliable information that
can help the external users in making a well-informed economic and religious decision.
Hameed (2000) asserted that disclosure on Shariah compliance is one of the primary
objectives of Islamic social reporting. Maali et al. (2006) and Sulaiman (2001) added that
Islamic social reporting should not only inform the users whether or not the company is
compliant with Shariah principles, but also reveal on how they will be affected by the
company’s business operations and hence helps Muslim decision makers to perform their
religious duties. In addition, as mentioned by Haniffa (2002), Islamic social reporting is an
expansion of the mainstream practices of social disclosure that encompasses not only
conventional disclosure related to a broader expectation of the society on the company’s roles
in the economy, but also from a spiritual perspective. It provides more relevant information
conforming to the spiritual needs of Muslim decision makers that would result in higher
transparency of business operations. In fact, Ariffin et al. (n.d.) agreed that transparency is an
important pillar in the practice of Islamic banks in enhancing their ethical responsibility and
credibility.
According to Abdul Rahman and Bukair (2013), one of the methods for IFIs to
discharge their social responsibilities is by publicizing Shariah information in their annual
reports. Islamic banks, in their annual reports should not only disclose the mandatory
required information but also the voluntary disclosure which can boost the customer’s
confidence in religious decision making. Many studies opined that a large section of the
annual report of Islamic banks should be allocated for information related to social matters
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such as zakat, charity, profit sharing, environment, social activities and employees (Baydoun
and Willet, 2000; Haniffa, 2002; Maali et al., 2006; Ousama and Fatima, 2010; Farook et al.,
2011). Besides, information related to academic qualification, field experience and
independence of both members of the Board and Shariah Committee and their decisions
made on the bank’s internal risk management and policies regarding Shariah matters are
highly necessary to be disclosed in the annual report.
4.0 Development of Hypotheses

4.1 Size of Shariah Committee
Prior studies found a positive relationship between board size and disclosure level (Chaganti
et al., 1985; Belkaoui and Karpik, 1989; Akhtaruddin et al., 2009). Farook et al. (2011)
argued that an Islamic bank is able to boost the level of monitoring and signify a greater
consent on Islamic laws and principles if it has decided to employ greater number of Shariah
board members and hence enhance the extent of disclosure on Shariah matters in the bank’s
annual report. Besides, a larger size of the board may solve the problems of information
asymmetry and lack of information as the board with larger members will usually have better
composition in term of expertises from different backgrounds (Chen and Jaggi, 2000;
Birnbaum, 1984). According to Haji and Mohd Ghazali (2013), a larger board size is able
offer more knowledge and expertise in strengthening company’s level of accountability and
transparency and has more capacity to monitor the efficiency of company’s voluntary
disclosure. As argued by Abdul Rahman and Bukair (2013) who suggested that the SSB
should consist of between 3 to 7 members, a larger size of SSB should result in higher level
of accuracy in monitoring and revising the bank’s transactions in compliance to Shariah.
Mohd Ghazali (2007) in his study of corporate governance practices in Malaysia found a
positive relationship between board size and the extent of voluntary disclosure of Malaysian
firms.
In contrast, there are few prior studies which found weak relationship between size of
board committee and level of disclosures. For instance, Wan Abdullah et al. (2013) found
that there is no significant relationship between the size of Shariah board and the extent of
Shariah disclosures in the annual reports of 23 Islamic banks in Malaysia and Indonesia.
Similarly, a study conducted by Cheng and Courtenay (2006) found that there is no
significant relationship between board size and the level of voluntary disclosure of
Singaporean listed companies. Garas (2012) argued that the number of SSB members does
not significantly determine their control over the financing and investing activities of Islamic
banks. He further mentioned that high number of SSB members can cause lots of arguments
resulting in inefficiency in decision making process.
H1: There is a significant association between size of Shariah Committee and Shariah
disclosure level.
4.2 Directorship of Shariah Committee

One of the main objectives of having a Shariah Committee as an independent advisory entity
is to guide Islamic banks in setting the internal policies and board regulations in accordance
to Shariah principles (Daoud, 1996). BNM has suggested that by appointing at least one
member of the Shariah Committee to be in the Board of Directors of Islamic bank can foster
greater understanding and appreciation by the Board members on every Shariah resolutions
made by the Shariah Committee. This Shariah Committee member who is also now a director
of the Islamic bank would act as a ‘bridge’ to facilitate the communication between the Board
and the Shariah Committee (BNM, 2010). This recommendation aligns with the ruling made
by AAOIFI in 2005 that SSB should not be acting independently from the Board but is
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permitted to freely argue and express their concerns pertaining to Shariah issues in the Board
of Directors’ meetings. Contrary to this view, the Islamic Banking Department of State Bank
of Pakistan (2014) recently pronounced that SSB members must discharge their duties and
responsibilities independently and neither involves nor be responsible in any manners in the
operational and managerial functions of the Islamic bank that they serve.
H2: There is a significant association between directorship of Shariah Committee and

Shariah disclosure level.
4.3 Shariah Qualification

Previous studies argued that fundamental knowledge on Shariah is essential for SSB
members in certifying and monitoring business transactions of Islamic banks (Alexander
2010; Rider 2012). By having Shariah knowledge, it allows a legitimate scope of
interpretation and opinions to be made by SSB members in differentiating between strictly
prohibited and permissible elements. In addition, as argued by Lahsasna and Saba (2014), it
is significantly crucial for Shariah board members to hold Shariah qualifications due to the
vital roles of Shariah board of Islamic banks to ensure that all financial products and services
offered and even the behaviour of employees are in accordance to Shariah.
Moreover, Abdul Rahman and Bukair (2013) opined that by holding a Shariah degree
qualification, the members of Shariah Committee is able to receive better reputation amongst
the public. Subsequently, in order to perpetuate their credibility and essential roles in the
community, the Shariah Committee members now have to reassure Islamic banks to disclose
adequate information on Shariah matters in the annual report for public discretion. In
addition, Al-Walidi (2013) based on his study of Shariah supervision of IFIs in Yemen
concluded that a SSB which consists of majority qualified and experienced Shariah scholars
will be able to serve its purpose efficiently including preparation of a proper disclosure on
Shariah matters in the bank’s annual report. In the case of Kuwaiti Shariah-compliant
companies, Al-Shammari (2013) propagated that having a credible qualification in Shariah is
important for SSB to execute investigation on adherence of the company to Shariah
principles including examination of the company’s memoranda, articles of association and
business contracts before publicizing the results of its investigation in the annual reports.
H3: There is a significant association between Shariah Qualification of Shariah Committee

and Shariah disclosure level.
4.4 Other Relevant Backgrounds

Farook et al. (2011) found that an increase in the education level of SSB members has a
corresponding positive impact on the level of social disclosure of Islamic banks. This is
because when SSB has richer composition in term of its member’s educational background
such as finance, accounting and law it will become more efficient in disclosing social
information to the public. Abdul Rahman and Bukair (2013) also argued that a combination
of Shariah and other relevant backgrounds would help SSB members to better understand not
only Shariah issues but also problems that relate law and economics, since such problems in
many occasions are brought about the way in which they are interpreted. The results of a
qualitative survey conducted by Echchabi (2015) at Yemeni Islamic banks on Shariah
supervision showed that the competency level of SSB members was rated based on their
extensive education on economics, finance as well as Islamic law. A similar study made by
Al-Sarhi (2013) also illustrated the importance of enhancing SSB members’ knowledge on
other areas than Shariah through various educational assistances in form of scholarships,
trainings and seminars. Barako et al. (2006), on the other hand found that the board
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composition in term of secular academic background has a significant negative association
with the extent of voluntary disclosure of Kenyan listed companies. Similarly, a study
conducted byEng and Mak (2002) using a sample of Singaporean listed companies also found
a negative result.
H4: There is a significant association between diversity of Shariah Committee’s knowledge

and Shariah disclosure level.
4.5 Bank Size

In a number of studies on social disclosure, company size was found to be a significant factor
in influencing the level of CSR disclosure. Belkaoui and Karpik (1989) developed a model
considering possible important factors categorised into social performance, economic
performance, financial performance, and political visibility that could be influencing social
disclosure, in which size is included as one of the variables. Based on an empirical test on 23
corporations in the US, the study found supportive evidence pointing towards the important
role of size in influencing social disclosure. It is further argued that large firms are more
sensitive than small firms and face different incentives in their choice of responding to
accounting procedures, leading to different level of social disclosure. This phenomenon of
size hypothesis is in line with the findings of several studies such as Deakin (1979), Lilien
and Pastena (1982), and Daley and Vigeland (1983). Similarly, in France, Ayadi (2004)
investigate the importance of the size factor on social disclosure of 82 major corporations and
found that size plays a significant role in influencing social disclosure. Meanwhile, in the
context of the Islamic banks, According to Abdul Rahman and Bukair (2013), larger Islamic
banks tend to contribute more in social activities and for the development of Muslims society,
consequently provide more information in their annual report to discharge their social
accountability.
H5: There is a significant association between bank size and Shariah disclosure level.
4.6 Financial Performance

The role of financial performance in influencing social disclosure by firms has been the
subject of focus by many studies (see, for example Hackston and Milne, 1996; Smith et al.,
2007; Othman et al., 2009). Findings of these studies, however, have been mixed. While
studies such as Herremaus et al. (1993), Cormier and Magnan (1996); and Stanwick and
Stanwick (1998) found significant positive relationship between financial performance and
corporate disclosure, a few other studies have found significant negative relationship between
them. In particular, Ayadi (2004) investigated the role of financial performance in a model of
social disclosure. Three indicators of financial performance are considered, namely (i) ratio
of profit to sales, (ii) return on earnings (ROE), and (iii) return on assets (ROA). All three
indicators of financial performance are shown to be significant, yet the results showed a
negative relation.
H6: There is a significant association between bank’s financial performance and Shariah
disclosure level.
5.0 Research Methodology

5.1 Sample and Data Collection
This study considered all licensed Islamic banks operating in Malaysia at the time of the
writing. As at 31 December 2013, there were 16 Islamic banks registered with BNM. This
study used the corporate information disclosed in the 2009 and 2013 annual reports published
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by these Islamic banks. The annual reports were downloaded from the banks’ official
websites and other reliable and authentic resources. We identified that both 2009 and 2013
financial years are the most suitable periods to best achieve the objectives of this research as
this study attempts to conduct a pre and post-test on the impacts of the issuance of the SGF
2010 on the composition of Shariah Committee and the Shariah governance disclosure level.
The reporting year of 2009 is approximately a year before the issuance of the SGF in 2010,
which took effect starting 1st January 2011. The rationale of choosing 2013 financial year is
to give ample time for the Islamic banks to comply with the SGF and hence by doing so we
anticipated it could produce significant results on banks’ operation, management, as well as
disclosures. Besides, the 2013 annual reports were the latest annual reports available for all
Islamic banks at the date of conducting this study.
Information regarding Shariah matters was derived from the entire sections of the
annual reports particularly in the Chairman of Shariah Committee’s statement, report of
Shariah Committee, and statement of internal control. In addition, details about the
composition of Shariah Committee such as number of members, education background and
qualification were mainly gathered from the profile of Shariah Committee and statement of
corporate governance sections. We also used other reliable and genuine sources such as the
banks’ official websites to further explore on the background of Shariah Committee members
in the event of no information available in the annual reports. Financial information such as
total assets and net income used to calculate accounting ratios such as bank’s size and return
on assets were extracted from the bank’s financial statement.
The annual reports were used as the primary sources of this study due to several
reasons. Firstly, it is highly reliable source of corporate information widely used by the
stakeholders for decision making (Deegan and Rankin, 1997; Ahmad et al., 2003; Harahap,
2003). Secondly, it is perceived as a snapshot of management’s corporate vision in the
current operating period (Neimark, 1992) that is very powerful to influence the users due to
its widespread distribution (Adams and Harte, 1998). Finally, it is widely recognised due to
its highly credible information (Hamid, 2004; Haniffa and Cooke, 2005), provided in high
continuity and regular basis (Gray et al., 1995) and easily accessible for research purposes
(Deegan and Rankin, 1997; Haniffa and Cooke, 2005).
5.2 Measurement of Dependent Variable
5.2.1 Developing Shariah Governance Disclosure Index
This study used a disclosure index to measure the extent of Shariah governance disclosure
made by the Islamic banks. The disclosure index was prepared as a checklist of different
disclosure items with a specific focus on Shariah principles. The following were the steps
undertaken to develop the Shariah governance disclosure index (SDI) in this study:
1. Adopting the “ideal” ethical identity checklist instruments developed by Haniffa and
Hudaib (2007, p. 103), which comprises a comprehensive list of elements in relation
to the ethical identity of Islamic banks that should be communicated via annual report.
A primary list of 78 constructs was adopted (with 5 themes and 8 dimensions) (see
Appendix 1).
2. Modifying the checklist instrument adopted in (1) in order to develop a SDI:
 Removing some constructs and dimensions that are not directly related to
Shariah governance issues e.g. disclosure items under the board of directors
and top management dimension.
 Summarizing and grouping concurrent constructs e.g. all constructs on social
contributions of the banks to its stakeholders are summarized under CSR
activities dimension.
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 Changing the terminology to the one that commonly used by Islamic banks in
Malaysia as the study of Haniffa and Hudaib (2007) mainly focused on
Islamic banks in GCC countries.
3. Sending the modified disclosure checklist, now known as SDI to be reviewed by
members of the Shariah Advisory Council of BNM. Their constructive feedbacks
were taken into consideration and the disclosure checklist had been amended
accordingly.
4. Finally, a list of 39 Shariah governance disclosure items (with 4 themes and 6
dimensions) was finalized to be applied in this study (see Appendix 2).
5.2.2 Content Analysis

In order to measure the extent of Shariah governance disclosure, this study used content
analysis as a method of coding qualitative information in the annual reports to test its
association with other research variables (Guthrie and Parker, 1989; Zeghal and Ahmed,
1990; Maali et al., 2006; Abdul Rahman and Bukair; 2013; Wan Abdullah et al., 2013).
Expression in sentences was used as the unit of measurement of SDI in this study as it
provides high validity, becomes preferable units of written English as well as conformist unit
of speech and writing, and is less subject to different interpretation or judgment (Milne and
Adler, 1999; Hughes and Anderson, 1995; Hackston and Milne, 1996; Ingram and Frazier,
1980).
This study employed a single coder as suggested by Milne and Alder (1999) in order
to ensure high reliability of the data collected. Also, an unweighted approach was adopted for
scoring the SDI purpose as each disclosure item was treated equally important in this study
(Cooke, 1989; Hossain et al., 1994; Ousama and Fatima, 2010). Under this approach, a
dichotomous procedure was conducted where 1 is assigned when an item of the SDI is
disclosed in the annual report and 0 otherwise. Therefore, the SDI of the Islamic banks (i)
was calculated as follows;
ADS𝑖
SDI𝑖 =
TDI𝑖
Where;
SDI Shariah disclosure index
ADS Actual disclosure score of the Islamic bank
TDI Total disclosure items
We did not rule out the fact that content analysis is not completely free from any
limitations: first, it is based on the judgement of the researcher that may lead to human
judgment error and bias; second, it only considers the presence or quantity of sentences
without assessing the quality of the information itself.
5.3 Measurement of Independent Variables

The independent variables of this study are the criteria used to determine the composition of
Shariah Committee, namely; (i) size of Shariah Committee; (ii) directorship of Shariah
Committee; (iii) Shariah qualification and; (iv) other relevant backgrounds. These criteria
were derived from the principles and appendices of the SGF 2010 as shown in Table 1.
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Table 1 Derivation of independent variables from the SGF 2010
Principles/Appendices Independent variables
Principle 2 (2.3) Size of Shariah Committee
The number of Shariah Committee members to be
appointed must not be less than five (5)
Principle 2 (2.4) Directorship of Shariah Committee
The board may consider appointing at least one (1)
member of the Shariah Committee as a member of the
Board
Principle 1 (1.3) Shariah qualification
A Shariah Committee of which the majority shall
comprise persons with appropriate qualifications and
experience in Shariah.
Appendix 2 Qualification no. 2
The majority of members in the Shariah Committee

shall at least hold bachelor’s degree in Shariah
Appendix 2 Qualification no. 4 Other relevant backgrounds
The Shariah Committee may comprise experts from
relevant backgrounds such as finance and law
Appendix 2 Qualification no. 5
The Shariah Committee preferably shall comprise
members of diverse backgrounds in terms of
qualification, experience and knowledge
We also employ a dichotomous procedure for the independent variables where 1 is assigned
when a criterion is met and 0 otherwise. This calculation on the composition score of Shariah
Committee was done as follows;
ACS𝑖
SCC_SCORE𝑖 =
TCS𝑖
Where;
SCC_SCORE Shariah Committee composition score
ACS Actual composition score by the Islamic bank
TCS Total composition score
5.4 Measurement of control variable

Two control variables were included in this study, namely, bank size and financial
performance. The size of the bank was calculated by the log of total book value of assets at
balance date and financial performance was measured by return on assets (ROA), which is
based on the ratio of net income to average of the bank’s total assets. We included these two
control variables in this study as they were determined to have high impacts on the extent of
disclosure. Hence, controlling these two research variables would provide more powerful
explanation on the association between the composition of Shariah Committee and the extent
of Shariah governance disclosure by the Islamic banks.
5.5 Multiple Linear Regression Model

A statistical analysis was conducted using the multiple regression model developed in order
to test the association between the composition of Shariah Committee and the extent of
Shariah governance disclosure. This research ran two set of multiple regression analyses for
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both 2009 and 2013 research data. The research data collected are provided in Appendix 3.
The multiple regression analyses were conducted based on the following equations;
SDI 2009 = β0 +/- β1 SCC_SCORE +/- β2 BSIZE +/- β3 ROA + ε

SDI 2013 = β0 +/- β1 SCC_SCORE +/- β2 BSIZE +/- β3 ROA + ε
Where;
SDI Shariah disclosure index of Islamic banks
SCC_SCORE Shariah Committee composition score (SCSIZE + DIRECT +
SHARIAH + OTHER)
SCSIZE size of Shariah Committee
DIRECT` directorship of Shariah Committee
SHARIAH Shariah qualification
OTHER other relevant backgrounds
BSIZE size of Islamic banks
ROA return on assets

ε error term
5.6 Operationalization of Research Variables

Table 2 below provides a summary of the operationalization of the research variables, which
illustrates how the dependent, independent and control variables were measured in this study.
Table 2 Summary of the Operationalization of the Research Variables

Variables Acronym Measurement
Dependent Variable:
Shariah Governance Index SDI Ratio of actual scores awarded to the Islamic
banks to the total disclosure score
Independent variables:
The Score of Shariah SCC_SCORE
Committee Composition
Size of Shariah Committee SCSIZE Dichotomous variable; 1 if the Shariah
Committee consists of 5 or more members
and 0 if less than 5
Directorship of Shariah DIRECT Dichotomous variable; 1 if the Committee
Shariah Committee member is also a
member of the Board and 0 if otherwise
Shariah Qualification SHARIAH Dichotomous variable; 1 if majority of
Shariah Committee members have credible
qualification in Shariah and 0 if otherwise
Other relevant backgrounds OTHER Dichotomous variable; 1 if the Shariah
Committee consists of member with other
relevant backgrounds than Shariah and 0 if
otherwise
Control variables:
Size of Islamic banks BSIZE Log of total book value of assets at balance
date
Return on Assets ROA Ratio of net income to average of total assets
(Financial Performance) of the Islamic bank
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6.0 Results and Discussion
6.1 Descriptive Analysis of Shariah Governance Disclosure
Table 3 presents the descriptive analysis of the overall Shariah governance disclosure items
for both year 2009 and 2013. As reflected by the mean scores, the average disclosure level of
the Islamic banks increased from 38 per cent (15/39 items) in 2009 to 47 per cent (18/39
items) in 2013, reflecting an increase in the overall disclosure level following the
implementation of the SGF 2010. These results are comparatively lower than those reported
by Wan Abdullah et al. (2013) for the Malaysian local and foreign Islamic banks at 69 per
cent and 55 per cent respectively in 2009. In addition, the study also investigated the
disclosure about zakat and found the average disclosure scores of 54 per cent and 52 per cent
for both Malaysian local and foreign Islamic banks respectively. These higher mean
disclosure scores reported by Wan Abdullah et al. (2013) as compared to our findings were
possibly due to their narrower focus of two separated SSB-related and zakat disclosures
which allowed for more disclosure items to be included under each disclosure checklist.
Besides, we compared our findings with the study of Ousama and Fatima (2010) on
the extent of voluntary disclosure by Shariah approved companies listed (ShACs) on Bursa
Malaysia. Ousama and Fatima (2010) found a lower mean disclosure score of Islamic items
of 17 per cent. This could be because the study used quite ‘old’ data extracted from the 2003
annual reports when there were perhaps different needs for and regulations applied on
voluntary disclosures between Islamic banks and ShACs at the time of conducting the study.
Table 3 Descriptive Statistics of the Shariah Governance Disclosure Index

Minimum Maximum Mean Median Standard deviation
Overall items (2009) 0.282 0.538 0.378 0.359 0.067
Overall items (2013) 0.333 0.641 0.471 0.487 0.106
Note: Number of banks is 16.
Table 4 presents the descriptive statistics of each themes of the SDI for both year
2009 and 2013. We found significant improvement on each disclosure themes from 2009 to
2013. Under the interest-free and Shariah compliance theme, the mean score increased from
24 per cent (2/9 items) in 2009 to 46 per cent (4/9 items) in 2013. This is mainly because, in
2013 many Malaysian Islamic banks started to disclose about the amount of non-halal income
that they receive, reasons for involvement in Shariah non-complaint activities and how they
are going to handle the non-halal income as recommended by BNM in the SGF 2010, as
compared in the pre-SGF era when Bank Islam Malaysia Berhad (BIMB) was the only bank
which previously disclosed about these matters in 2009. In general, we found that this theme
recorded among the lowest mean scores both in 2009 and 2013 as similarly what was found
by Abdul Rahman and Bukari (2013) that unlawful transactions were the least items recorded
in banks’ disclosures.
Whilst, under the development and social goals theme, in 2013, we found that many
Islamic banks became more transparent about their charity activities either for purifying non-
halal income or voluntary contribution to the society and the calculation on zakat. However,
there was not much improvement in the disclosure of social corporate responsibility (CSR)
made by the Islamic banks whereby only Bank Mualamat, Affin Islamic Bank and Hong
Leong Islamic Bank Berhad were committed to continuously provide information on CSR
activities in both years. Besides, our findings are in conformity with the study of Abdul
Rahman et al. (2010) and Abdul Rahman and Bukair (2013), who found that the theme on
Shariah Committee had the highest disclosure.
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The extent of Shariah governance disclosure among Islamic banks in Malaysia in
2009 and 2013 is provided in Appendix 3. We found that all Malaysian Islamic banks
recorded a significant improvement in their overall Shariah disclosure level with an exception
of AmIslamic Bank Berhad and CIMB Islamic Bank Berhad. The study also observed that
Hong Leong Islamic Bank Berhad recorded the biggest improvement in 2013, mainly due to
its disclosure made on Shariah non-compliance activities and information on CSR activities.
In general, this study would suggest that Islamic banks in Malaysia should improve its
disclosure on the following areas: (i) current and future CSR plans; (ii) current and future
directions in serving the needs of Muslim society and; (iii) descriptions of their Islamic
financial products offered to the public.
Table 4 Descriptive Statistics of Themes of Shariah Governance Disclosure Index

2009 data
SDI Themes Minimum Maximum Mean Median Standard
deviation
Underlying philosophy and values 0.429 1 0.527 0.429 0.154
Interest-free and Shariah compliance 0.222 0.444 0.243 0.222 1.931
Development and social goals 0.077 0.462 0.313 0.308 0.112
Shariah Committee 0.3 0.7 0.481 0.5 0.128
2013 data
SDI Themes Minimum Maximum Mean Median Standard
deviation
Underlying philosophy and values 0.429 0.714 0.491 0.429 0.090
Interest-free and Shariah compliance 0.222 0.778 0.458 0.444 0.229
Development and social goals 0.231 0.692 0.428 0.423 0.161
Shariah Committee 0.4 0.7 0.525 0.5 0.106
6.2 Descriptive Analysis of Research Variables

Table 5 presents the descriptive analysis of the research variables for both year 2009 and
2013. The mean of SDI increased from 38 per cent in 2009 to 47 per cent in 2013 as
discussed in the previous section. The descriptive statistics show that there were only 5
Islamic banks which had more than five Shariah Committee members in 2009. In 2013, this
number increased to 15 Islamic banks mainly due to the recommendation made in the
Principle 2 (2.3) of SGF 2010. We found that the recommendation made by BNM on the
directorship of Shariah Committee members was not widely being implemented by Islamic
banks with evidence showing only 2 Islamic banks which had their Shariah Committee
member in the Board of Directors in 2013. In both 2009 and 2013, Shariah Committee
members with credible qualification in Shariah dominated the committee in the case of all
Malaysian Islamic banks. However, this study found that there was a significant increase in
the participation of Shariah Committee member with other professional backgrounds such as
accounting, economics and law from 44 per cent in 2009 to 75 per cent in 2013.
Table 5 Descriptive Statistics of Research Variables

2009 data
Panel A: Continuous variables n=16
SDI Themes Minimum Maximum Mean Median Standard deviation
SDI 0.282 0.538 0.378 0.359 0.067
BSIZE 21.453 24.250 22.975 23.038 0.836
ROA 0.011 0.042 0.023 0.022 0.008
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2013 data
Panel A: Continuous variables n=16
SDI Themes Minimum Maximum Mean Median Standard deviation
SDI 0.333 0.641 0.471 0.487 0.106
BSIZE 21.789 25.552 23.583 23.587 0.944
ROA 0.014 0.042 0.025 0.024 0.008
2009 data
Panel B: Dichotomous variables
Variable: Yes Percentage (%)
SCSIZE 5 31.25
DIRECT 0 0
SHARIAH 16 100
OTHER 7 43.75
2013 data
Panel B: Dichotomous variables
Variable: Yes Percentage (%)
SCSIZE 15 93.75
DIRECT 2 12.50
SHARIAH 16 100
OTHER 12 75
6.3 Regression Analysis

This study used a multiple linear regression analysis to examine the relationship between the
composition of Shariah Committee and the extent of Shariah governance disclosure. The
results of the multiple regression analysis for both data of year 2009 and 2013 are illustrated
in Table 6 and Table 7 respectively.
Table 6 Regression result of 2009 data

R2 0.521
Adjusted R2 0.400
Standard Error 0.052
F-statistic 4.346
F-significance 0.027
Number of observations 16
Variables: Coefficient Standard error t- statistic Significance
Constant -0.151 0.383 -0.395 0.700
SCC_SCORE 0.203 0.069 2.964 0.012
BSIZE 0.016 0.017 0.972 0.350
ROA 2.730 1.809 1.509 0.157
Table 7 Regression result of 2013 data

R2 0.285
Adjusted R2 0.106
Standard Error 0.101
F-statistic 1.591
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F-significance 0.243
Number of observations 16
Variables: Coefficient Standard error t- statistic Significance
Constant -0.387 0.649 -0.596 0.562
SCC_SCORE 0.174 0.146 1.193 0.256
BSIZE 0.028 0.028 1.007 0.334
ROA 3.055 3.319 0.920 0.375
The 2009 multiple regression model is significant at five per cent level and produces
an adjusted R2 of 0.4, indicating that the Shariah Committee composition score (SCC-
SCORE) is able to explain 40 per cent of the variation in the SDI. The results of the
regression analysis of 2009 data show a positive association between SCC-SCORE and the
extent of Shariah governance disclosure at one per cent significance level. This aligns with
the study of Farook et al. (2011) and Abdul Rahman and Bukair (2013), who found a similar
positive association. Therefore, this implies that the composition of Shariah Committee was
an important determinant in influencing the extent of Shariah governance disclosure of

Islamic banks in Malaysia. Therefore, a Shariah Committee with larger members, has board
directorship, strong knowledge of Shariah and other professional expertises is positively
associated with effective supervising and controlling the disclosure activities of Islamic bank
in relation to Shariah matters.
In contrast, the 2013 multiple regression model is found insignificant and produces a
very low adjusted R2 of 0.1, indicating that the regression model has less explanatory power
in explaining the total variation between the composition score (SCC-SCORE) and the SDI.
This could be due to reduced variance of the composition of Shariah Committee members
since in 2013, when mostly all Islamic banks moved towards complying with the SGF 2010
by appointing more than five Shariah Committee members including some experts in other
fields than Shariah such finance, economics and accounting. As a result, this causes very least
significant difference among the Islamic banks in term of its composition of Shariah
Committee and hence it would be very difficult for the regression model to determine the
significance of the above-mentioned relationship. Inclusion of other significant factors that
determine the composition of Shariah Committee such as ownership, language, remuneration
and the reputation gained from international regulatory bodies such as AAOIFI and IFSB in
the model could improve the significance of the research findings.
With regard to the control variables, this study found that both bank size and financial
performance were insignificant for both 2009 and 2013 data. This result contradicts to the
findings of many prior studies (Roberts, 1992; Gray et al., 2001; Haniffa and Cooke, 2005;
Hossain et al., 2006; Smith et al., 2007; Abdul Rahman and Bukair; 2013). This perhaps due
to a smaller data used of only 16 Islamic banks (this is the entire population of licensed
Islamic banks in Malaysia) in this study as compared to the number of sample data used by
the above-mentioned previous studies.
7.0 Conclusion
The objective of the present paper is to examine the extent of Shariah governance disclosures
in the 2009 and 2013 corporate annual reports of 16 licensed Islamic banks in Malaysia. This
paper also aims to investigate the association between the composition of Shariah committee
and the extent of Shariah governance disclosure of the Islamic banks in 2009 and 2013.
Overall, this study found that there was significant improvement in the extent of Shariah
governance disclosure by Islamic banks in Malaysia in 2013 as compared to 2009 particularly
in the issues related to non-halal income, charity and calculation of zakat. In addition, the
results of multiple regression analysis found a significant positive association between the
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Shariah Committee composition score (SCC-SCORE) and the Shariah governance disclosure
level (SDI) in 2009. This finding implies that the Islamic banks, which have larger size of
Shariah Committee whose majority members have excellent fundamental knowledge of
Shariah together with participation from experts in other professional knowledge and
backgrounds such as finance, accounting and economics tend to provide better disclosure
with regards to the bank’s Shariah issues.
Findings of this study offer several implications for further improvements of the
Malaysian Islamic banking sector as well as for other Islamic banks globally. This current
study supports the fact that better composition of Shariah Committee in term of its size,
academic background and other relevant expertise would result in an effective monitoring
system to ensure compliance of the bank’s business transactions with Shariah principles,
hence lead to the practice of full disclosure of Shariah matters. This finding signals attention
to policy-makers of Malaysia Islamic financial system that Shariah Committee, acting as an
important catalyst of Shariah governance can be a vital mechanism in improving the
voluntary Shariah disclosure level of Islamic banks in Malaysia. Therefore, it is suggested
that an ample focus has to be channelled in strengthening the composition of Shariah

Committee in the discussion on the future development of Shariah governance framework in
Malaysia. It is also suggested that Islamic banks need to give priority in providing more
education and training in various areas of expertise to their Shariah Committee members that
would result in greater confidence of investors, stakeholders and the society on the
information disclosed by the banks.
Finally, this study should also be viewed in the light of several limitations that
provide a number of avenues for future research. Firstly, the study used a small data which is
restricted to only Islamic banks in Malaysia that prevents us from executing more rigorous
analysis and obtaining more conclusive findings. Thus, future studies may want to include
other categories of IFIs such as takaful service providers and unit trust companies or even
IFIs in other parts of the world. Secondly, this research focused solely on the annual reports
to measure the extent of Shariah governance disclosure. Therefore, future studies can include
other means of disclosure such as interim reports, bank’s websites, press releases and stock
market announcement. Thirdly, due to lack of prior literature, the current study only adopted
the criteria for determining the composition of Shariah Committee found in the SGF 2010.
Future studies can consider other factors such as ownership and reputation of Shariah
Committee members. Finally, although the number of items in Shariah governance disclosure
index developed in this study is comparatively fewer than other studies, it can be a useful
reference for future studies to enhance the use of SDI in the Malaysian environment of
Islamic financial system.
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Appendices
Appendix 1 The “ideal” ethical identity checklist instrument by Hudaib & Haniffa (2007)
Theme: underlying philosophy and values 4. Uses/beneficiaries of zakah
A. Dimension: vision and mission statement 5. Balance of zakah not distributed–amount
1. Commitments in operating within Shariah 6. Reasons for balance of zakah
principles/ideals 7. SSB attestation that sources and uses of zakah
2. Commitments in providing returns within Shariah according to Shariah
principles 8. SSB attestation that zakah has been computed
3. Focus on maximising shareholders returns according to Shariah
4. Current directions in serving the needs of Muslim 9. Zakah to be paid by individuals-amount
community 10. Sources of charity (saddaqa)
5. Future directions in serving the needs of Muslim 11. Uses of charity(saddaqa)
community 12. Sources of qard al-hassan
6. Commitments to engage only in permissible 13. Uses of qard al-hassan
investment activities 14. Policy for providing qard al-hassan
7. Commitments to engage only in permissible 15. Policy on non-payment of qard al-hassan

financing activities E. Dimension: employees
8. Commitments to fulfil contracts via contract 1. Employees appreciation
(uqud) statement 2. Number of employees
9. Appreciation to shareholders and customers 3. Equal opportunities policy
B. Dimension: BOD and top management 4. Employees welfare
1. Names of board members 5. Training: Shari’a awareness
2. Positions of board members 6. Training: other
3. Pictures of board members 7. Training: student/recruitment scheme
4. Profile of board members 8. Training: monetary
5. Shareholdings of board members 9. Reward for employees
6. Multiple-directorships exist among board F. Dimension: debtors
members 1. Debt policy
7. Membership of audit committees 2. Amount of debts written off
8. Board composition: executive vs non-executive 3. Type of lending activities-general
9. Role duality: CEO is Chairman of board 4. Type of lending activities-detailed
10. Names of management team G. Dimension: community
11. Positions of management team 1. Women branch
12. Pictures of management team 2. Creating job opportunities
13. Profile of management team 3. Support for org. that provide benefits to society
Theme: interest-free & Islamically acceptable deals 4. Participation in govt. social activities
C. Dimension: product 5. Sponsor community activities
1. No involvement in non-permissible activities 6. Commitment to social role
2. Involvement in non-permissible activities-% of 7. Conferences on Islamic economics
profit Theme: Reviews by Shari’ah Supervisory Board
3. Reason for involvement in non-permissible H. Dimension: Shariah Supervisory Board (SSB)
activities 1. Names of members
4. Handling of non-permissible activities 2. Pictures of members
5. Introduced new product 3. Remuneration of members
6. Approval ex ante by SSB for new product 4. Report signed by all members
7. Basis of Shariah concept in approving new 5. Number of meetings held
product 6. Examination of all business transactions ex ante
8. Glossary/definition of products and ex post
9. Investment activities–general 7. Examination of a sample of business transactions
10. Financing projects–general ex ante and ex post
Theme: Developmental and Social Goals 8. Report defects in product: specific and detailed
D. Dimension: Zakah, charity and benevolent loans 9. Recommendation to rectify defects in product
1. Bank liable for zakah 10. Action taken by mgmt. to rectify defects in
2. Amount paid for zakah product
3. Sources of zakah 11. Distribution of profits and losses comply to
Shariah
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Appendix 2 Shariah Governance Disclosure Index
Theme: Underlying philosophy and values 2. Zakat to be paid by individual

A. Dimension: Vision and Mission Statement 3. Calculation of zakat according
1. Commitment in operating within Shariah principles 4. Amount of zakat paid
2. Commitment in providing returns within Shariah principles 5. Amount of charity
3. Focus on maximizing shareholders returns 6. Sources of charity
4. Current directions in serving the needs of Muslim community 7. Uses of charity
5. Future directions in serving the needs of Muslim community 8. Amount of qard-al Hassan
6. Commitments to engage only permissible activities 9. Policy on qard al-hassan
7. Appreciation to Shareholders and customers E. Dimension: Corporate Social R
Theme: Shariah Compliance 1. Current CSR activities
B. Dimension: Product 2. Future plan for CSR activities
1. The main business activities are in compliance with Shariah Theme: Information on Shariah
principles F. Dimension: Background of Sha
2. Disclosing Shariah non-compliance events 1. Name of members
3. Reasons for involvement in shariah non-compliance events 2. Profile of SC members
4. Handling of the shariah non-compliance events 3. Remuneration of members
5. Amount of non-halal income 4. Number of meetings held
6. How non-halal income is disposed 5. Review of all business transac
7. Islamic financial product descriptions 6. Approval of new product
C. Dimension: Debt Policy 7. Report on defects in product
1. Debt policy is designed in accordance to Shariah perspective 8. Recommendation to rectify the
2. Amount of debt written off 9. Duties and responsibilities of S
Theme: Development and Social Goals 10. Report signed by all members
D. Dimension: Zakat, charity and benevolent loans
1. Bank is liable to pay zakat
-20-
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
AFFIN ISLAMIC
AL RAJHI
ALLIANCE ISLAMIC
AMISLAMIC
ASIAN FINANCE BANK
BANK ISLAM
BANK MUAMALAT
CIMB ISLAMIC
HSBC AMANAH
HONG LEONG ISLAMIC
-21-
KUWAIT FINANCE
HOUSE
MAYBANK ISLAMIC
Shariah Disclosure Level
OCBC AL-AMIN
PUBLIC ISLAMIC
RHB ISLAMIC
STANDARD CHARTERED
SAADIQ
Appendix 3 Extent of Shariah disclosure by Malaysia Islamic banks in 2009 and 2013
2013 SDI
2009 SDI
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2.0 Overview of Shariah Governance Structures

2.2 Development of Shariah Governance Practice in Malaysia

3.0 Literature Review

3.2 Concept of Islamic Corporate Governance

3.3 Islamic Social Reporting

4.0 Development of Hypotheses

4.2 Directorship of Shariah Committee

H2: There is a significant association between directorship of Shariah Committee and

4.3 Shariah Qualification

H3: There is a significant association between Shariah Qualification of Shariah Committee

4.4 Other Relevant Backgrounds

H4: There is a significant association between diversity of Shariah Committee’s knowledge

4.5 Bank Size

4.6 Financial Performance

5.0 Research Methodology

5.2.2 Content Analysis

5.3 Measurement of Independent Variables

The majority of members in the Shariah Committee

5.4 Measurement of control variable

5.5 Multiple Linear Regression Model

SDI 2009 = β0 +/- β1 SCC_SCORE +/- β2 BSIZE +/- β3 ROA + ε

ROA return on assets

5.6 Operationalization of Research Variables

Table 2 Summary of the Operationalization of the Research Variables

Table 3 Descriptive Statistics of the Shariah Governance Disclosure Index

Table 4 Descriptive Statistics of Themes of Shariah Governance Disclosure Index

6.2 Descriptive Analysis of Research Variables

Table 5 Descriptive Statistics of Research Variables

6.3 Regression Analysis

Table 6 Regression result of 2009 data

Table 7 Regression result of 2013 data

an important determinant in influencing the extent of Shariah governance disclosure of

that an ample focus has to be channelled in strengthening the composition of Shariah

7. Commitments to engage only in permissible 15. Policy on non-payment of qard al-hassan

Appendix 2 Shariah Governance Disclosure Index

Theme: Underlying philosophy and values 2. Zakat to be paid by individual

ASIAN FINANCE BANK

HONG LEONG ISLAMIC

Organizations and Society, 23(80), 781–812.

technology industries. Academy of Management Journal, 27(3), 489-510.

and Business Research, 2(2), 114-141.

Research Academy for Islamic Finance.

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