Shariah Compliance Disclosure In Islamic Financial Institutions
: Its Determinants And Effects On Performance

  • Zunaiba Abdulrahman

Student thesis: Doctoral Thesis


Studies on Shariah compliance disclosure and ethical performance are scarce despite significant research among Islamic banks. This thesis addresses these issues by exploring the Shariah Compliance Disclosure practices (hereafter referred to as SCD) of 89 Islamic Financial Institutions (hereafter referred to as IFIs) that provide English version annual reports operating in nineteen countries for the period 2010 - 2020 (i.e., 807 bank-year observations). The purpose of this thesis is three-fold. First, the present thesis measures the level of SCD; second, it analyses the effect of corporate governance (hereafter referred to as CG) mechanisms on SCD. Finally, it assesses the combined impact of the SCD and CG mechanisms on IFIs' performance.

Given the scarcity of empirical research on SCD, this study advances the growing literature by presenting novel evidence on the levels and range of SCD, its determinants, and their impact on performance. The analysis and findings are explained through the lenses of multiple theories (agency stakeholder, signalling, legitimacy, and resource dependency). SCD is measured using manual content analysis categorized into Shariah Supervisory Board (SSB) information, audit process, Shariah compliance review, and Zakat. CG mechanisms include board, Shariah supervisory board, and ownership structure, and performance is measured using return on average assets (ROAA), return on average equity (ROAE), Zakat on equity (ZOE), and deposits to total assets (DTA). The study used the Panel-Corrected Standard Error (PCSE) model to analyse the determinants of SCD and their combined effect on performance.

Several outcomes are documented. Firstly, using an unweighted disclosure index, the analysis showed the SCD level is above average (57.38%) in the sample of IFIs and improved considerably over the period 2010 to 2020. Though in any given year, some variation existed, generally, results evidence overall growth. Analysis of the four themes (SSB, audit process, Shariah compliance review and Zakat) of SCD and individual items also reveal interesting patterns. Secondly, regarding the second objective the results indicate that foreign investors, institutional investors, board size, board independence, SSB reputation, and SSB size are vital and influence the extent of SCD level. However, block holder ownership and SSB expertise are insignificantly negatively related to SCD. The study also conducted several tests to examine the main findings' robustness. The outcomes of these extra tests present evidence of the main results' robustness.

Finally, concerning the third objective, the findings reveal SCD is significant and negatively linked with ROAA but positively related to ZOE. There is no significant relation between SCD and ROAE and DTA. Similarly, and regarding CG mechanisms, the outcomes are mixed. For example, a larger board size revealed a significant positive effect on performance. In contrast, other CG mechanisms
are positive or negatively insignificant to performance. The findings also show that SCD enjoys a complementary effect on performance (ROAA) with two CG mechanisms (board independence and SSB expertise).

The thesis has numerous research and policy implications. It unlocks research paths investigating disclosure relationships, particularly research areas without convincing conclusions, such as the effect of disclosure on performance. The research will also provide in-depth empirical feedback to regulatory bodies on the current Shariah compliance disclosure practices of IFIs to assist policymakers in modifying reporting frameworks or guidelines accordingly. Additionally, this research can support academics, non-academics, policymakers or standard setters, and managers interested in seeking information about Shariah compliance disclosure, corporate governance, or the performance of IFIs.
Date of Award7 Jun 2023
Original languageEnglish
SupervisorTahera Ebrahimi (Main Supervisor) & Messaoud Mehafdi (Co-Supervisor)

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