Determinants of Corporate Governance Disclosure Practices of Islamic Banks

Abstract

The Islamic community has an expectation that Islamic banks place utmost importance on corporate governance (CG), due to the additional risks embedded in Islamic financial instruments. However, recently, Islamic banks have been exposed to CG failures similar to conventional banks. Therefore, a higher standard of CG is now expected from Islamic banks to increase stakeholders’ confidence in their financial system. The central proposition of this study is that the difference in the capital structure of Islamic banks as compared to conventional banks and the need to comply with Shari’ah lead to different CG settings in Islamic banks such as Shari’ah governance and risk management systems. Solomon and Solomon (2004) argue that corporate disclosure transparency is an important component of a good CG system. Therefore, the aim of this thesis is to investigate factors determining CG disclosure transparency unique to the Islamic banking context. In analysing the CG disclosures of Islamic banks, the SSB Report is also examined. It is argued that specific characteristics of Islamic banks (the characteristics of the SSB and the mudarabah (profit-sharing investment account) influence the extent of CG disclosure of Islamic banks. Apart from the above-mentioned characteristics, this thesis also explores the association between CG disclosures and CG characteristics of Islamic banks and firm size. In order to mitigate the country-bias effect on the sample, the impact of the legal system and the level of political and civil repression on the CG disclosures of Islamic banks are also investigated. Subsequently, the determinants of the extent of disclosure in the SSB Report are also examined.