Factors influencing Islamic banks disclosure practices in selected jurisdictions

Abstract

The problem of variation in disclosure levels within countries is considered a serious problem that obstruct harmonization of accounting practises among countries. This study aims first, to investigate empirically the extent of compliance with AAOIFI accounting standards’ disclosure requirements in countries where AAOIFI accounting standards became part of the mandatory regulatory requirements – namely Bahrain, Qatar, Oman, Jordan, Sudan and Syria – over the period 2015 to 2017 and second, to explain why the level of disclosure varies across countries. To quantify the level of compliance with disclosure requirements, a series of measurement indices were constructed which are; overall self-constructed disclosure index (ODIEX), disclosure in the face of financial statements index (DIEXF), disclosure in the notes accompanying to financial statements index (DIEXN), mandatory disclosure index (DIEXM), voluntary disclosure index (DIEXV) and, disclosure by number of words coding system index (No. words). These disclosure indices are examined under two legal environments which are common law and civil law legal systems. The study utilized panel data analysis using OLS, Fixed, and random models to explore the relationship between the level of disclosure and explanatory factors. These explanatory factors include, regulatory, corporate attributes, Shariah governance and, corporate governance factors. This panel data analysis was conducted for three categories of data; first, for the whole data set; second, for common law countries’ data; third, for civil law countries’ data. This was done to investigate how the influential role of explanatory variables behave within each type of legal system. The outcome of disclosure measurements indices revealed that the average level of disclosure for all countries within the period of study is 73.98% for ODIEX, 67.43% for DIEXF, 77.13% for DIEXN, 87.45% for DIEXM, 70.28% for DIEXV and, 16823 for No. words. The results further revealed that the average level of ODIEX disclosure under regulated disclosure countries is higher than the average level of disclosure under unregulated disclosure countries. The results showed 83.59% ODIEX level for regulated disclosure countries and 70.66% level for unregulated disclosure countries. In terms of the influential role of explanatory variables on the disclosure level, results showed that ODIEX significantly increases with regulated disclosure, type of auditor, size, age and size of SSB. Moreover, the type of the legal system was found to play a role in reflecting the influence of the type of auditor, age of Islamic bank, size of SSB and board composition on the disclosure level. Further, “No. words” disclosure index was found to be significantly affected by auditor type and audit committee. The research has a three-dimensional contribution. First, to the theory, the research has contributed by demonstrating the regulatory theory and reaffirming the agency and signalling theories on the disclosure level for Islamic banks. Second, to the body of knowledge, the research contributed by studying the de jure, de facto, mandatory, voluntary, and a Number of Words disclosure levels. Third, to the methodology, the research contributed by developing nine disclosure checklists, 6 disclosure indices, and by including the financial reporting regulations and the type of legal system to the explanatory variables of the disclosure levels. The findings of this research therefore will assist, i) regulators in revising their financial reporting regulations to enhance disclosure levels, ii) supervision bodies to make additional supervisory efforts, iii) AAOIFI to understand the acceptance level of its standards and its determinants and, iv) investors to make sound investment decisions.