The Extent of Information Disclosed in the Practice of Islamic Banking Annual Reports

This research investigates the extent of disclosure in Islamic banking annual reports. The period of study is from year 1997 to 2006, a period after the regulations for financial reporting rapidly developed. This study reviews the issues on disclosure extent and the Shari’ah perspectives related to contracts, governance and disclosure. Information disclosure can be divided into two categories -voluntary and regulated The traditional view on disclosure highlighted that the added value of information can be used to reduce conflicts. Meanwhile, from the perspective of the Shari’ah, the contracting parties need to observe the Shari’ah principles in identifying the information that need to be disclosed. This study examined the disclosure practice of 95 annual reports of full-
fledged Islamic banks (IB) and windows (Islamic banking scheme or IBS). Comparative analysis on the practices of IB and IBS indicated that information disclosed in the IB’s and IBS’s annual reports are slightly different especially for voluntary disclosure and in the period before and immediately after the enforcement of disclosure regulations (2000-2003). Furthermore, this study found that: i) bank size, board independence and the number of Shari’ah committee members significantly determine the extent of voluntary disclosure; ii) bank size, liquidity, board committee, board independence and audit committee independence significantly determine the extent of regulated disclosure; iii) size and board independence significantly determine the extent of all type of disclosure; and iv) there is an evident of co-integrated relationship among a few sets of variables in the long run. Overall, the minimum best practices are not satisfactorily met judging from both voluntary disclosure and the level of conformity to regulations. Regulators may find these findings to be useful for Shari’ah governance and monitoring purposes as well as in promoting transparency, ‘market discipline’ and the social functions of this industry to the Muslims.