Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Shariah Governance Disclosure Index and Institutional Ownership
of Islamic Financial Institutions in Malaysia
Nathasa Mazna Ramli, Amilia Syuhada Abdul Majid, Nurul Aini Muhamed, and Nor
Asiah Yaakub*
The issuance of the Shariah Governance (SG) Framework by the Central Bank of
Malaysia in 2011 had indicates the importance of good governance practices by
Islamic financial institutions (IFIs). Assessment of SG becomes an important aspect,
as it could boost shareholders confidence in the Islamic financial markets. Therefore,
there is a need to assess SG using a disclosure index, to assist stakeholders in
measuring SG compliance in IFIs.
Using annual reports of 7 selected IFIs in
Malaysia, this paper assess the SG disclosure of IFIs in Malaysia based on a
developed SG Index. In addition, this study analyze whether there are differences on
SG disclosure index between institutional owned and non-institutional owned IFIs as
well as between domestic owned IFIs and foreign owned IFIs. Results of the study
are expected to provide new insights on SG disclosure and practices of IFIs in
Malaysia.
JEL Code: M1, G20 and G21
1. Introduction
The development of Islamic banking and finance industry has leads to the importance and
establishment of Shariah components in Islamic Financial Institutions’ (IFIs) governance. The
inclusion of Shariah elements in the governance of IFIs is recognized as Shariah Governance
(SG). These practices could ensure that organizations’ activities are aligned with Shariah
principles. Recent development on SG in Malaysia, particularly on the issuance of Shariah
Governance Framework (SGF) by The Central Bank of Malaysia (BNM) is another milestone
towards strengthening the SG in Malaysia. The framework, which is effective in January 2011,
could enhance further the reliability of IFIs’ operations. In addition, the framework can also ingrain
the SG into the current governance structure of Anglo Saxon approach which are adopt by the
IFIs.
Assessment of SG is important, as it is not only demanded by the IFIs’ customers, but also other
stakeholders, including institutional investors and Muslim society who are directly and indirectly
involve with the institutions. Under the Anglo Saxon system, monitoring the firms’ performance
and governance by stakeholders have been gaining much attention. For example, Institutional
investors engage with the investee companies to ensure that the direction of the firm is align with
their aims (Black & Coffee 1994, Hendry et al. 2006). Bushee (1998) states that institutional
shareholders monitor companies by participating in a company’s governance activities or by
gathering information and correcting the pricing impact due to managerial decisions. Institutional
shareholders are also found to use dividend policy as a corporate governance (CG) device in
their investee companies (Grinstein & Michaely, 2005; Short, Zhang & Keasy, 2002; Renneboog
& Trojanowki, 2007). Therefore, institutional shareholders could play important roles in influencing
IFIs that they have stake in and subsequently, enhance the governance of IFIs.
*
Dr. Nathasa Mazna Ramli, Amilia Syuhada Abdul Majid, Dr. Nurul Aini Muhamed, and Nor Asiah Yaakub, Faculty of
Economics and Muamalat, Universiti Sains Islam Malaysia, 71800 Bandar Baru Nilai, Negeri Sembilan, Malaysia,
Email: nathasa@usim.edu.my (corresponding author).
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Malaysia has promoted a comprehensive CG system after the Asian financial crisis in 1997-1998.
The Finance Committee on Corporate Governance (FCCG) was formed in 1998 and this followed
by the issuance of the Malaysian Code on Corporate Governance (MCCG) in March 2000 (the
code was amended in 2007). These developments have also led to the establishment of the role
of institutional shareholders in ensuring that good CG is in place in Malaysia. Thus, institutional
shareholders’ monitoring function in IFIs also could contribute towards the development of Islamic
Capital Market in Malaysia.
One way stakeholders to evaluate the SG compliance of IFIs is based on the disclosure in annual
reports of the respective IFIs. Annual report can become a device for management to
communicate with the stakeholders relating to firm performance and governance matters (Healy
and Palepu, 2001). This paper attempts to answer the three following questions: (1) what is the
extent of SG disclosure of IFIs operating in Malaysia?; (2) is there a difference in the extent of SG
disclosure between institutional-owned IFIs and non-institutional-owned IFIs?; and (3) is there a
difference in the extent of SG disclosure between domestic-owned IFIs and foreign-owned IFIs?
A disclosure index is developed to answer the first question, and then the index will be used to
assess annual reports of selected IFIs. The ownership of selected IFIs is collected and is
analyzed on its relationship towards SG. Thus, the second and third research questions are
answered.
The rest of the paper is organised as follows. The next section provides the literature review and
the theoretical framework. Section 3 describes the data and methodologies used in this study.
While in section 4, we present the results and some discussion, ultimately concluding remarks
are in section 5.
2. Literature Review and Theoretical Framework
2.1. Background of IFIs in Malaysia
Malaysia is known as one of the countries that put their effort to support the Islamic banking and
financial system. The idea of the establishment is to fulfill the demand of Muslims clients who
need for the own financial system based Shariah. Malaysian Government took the approach of
dual financial system; whereby conventional and Islamic banking and, financial system are
operating in parallel under the supervision of BNM. The formation of the Bank Islam Malaysia
Berhad (BIMB) in 1984 is viewed as a significant milestone towards the establishment of the
system in Malaysia.
Since the establishment of the Islamic banking is to serve the Muslims’ needs, the objective of the
Islamic banks should be in line with the Shariah. The Islamic banks are expected to serve the
public interest, in addition to increasing their shareholders’ wealth. The banks should adhere to
Islamic principles of prohibition of interest, gambling, uncertainty, alcohol and pork. Differently
from the conventional banks, their deposit, financing and investment activities should avoid all the
impermissible activities. As well, the Islamic contracts are used to develop and structure the
Islamic banking products. Among Islamic contracts that are currently used by Islamic banks in
Malaysia are wadiah yad dhamanah, mudarabah, qard, tawarruq, wakalah, ijarah, bai’ dayn,
istisna’, bai’ bithaman ajil, murabahah, ar-rahn, hiwalah, kafalah, ujr and musharakah (Malaysia
International Islamic Financial Centre 2012).
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
There are several acts that regulate the Islamic banking industry, related to their operation and
corporate governance. The Islamic Banking Act 1983 is the first act related to Islamic banks and
regulate the fully fledge Islamic banks. In addition, the Banking and Financial Institution Act 1989
that serve the conventional banks also regulates the conventional banks with Islamic banking
division. These two of the acts regulate these banking institutions to have their own Shariah
Committee. Based on the structure stated in these acts, the Committee has a direct relationship
with the Board of Directors to oversee the Islamic banking operation. These regulations and
additional features on corporate governance structure ideally are directed to ensure these banks
to fulfill the objectives.
2.2. Shariah Governance
SG situated within the domain of CG, which is broadly defined as a set of processes, policies and
law that could affect organization’s way in being directed, administered and controlled. On top of
ensuring a proper framework established in the corporation, IFIs also has the responsibility in
ensuring that their operations comply with the Shariah principles, including in their products,
practices, management and etc.
Compliance towards SG is important for IFIs, as it differentiate the core component between
conventional financial institutions and IFIs. Therefore, assessment of SG is an important aspect
towards strengthening the Islamic banking and finance industry. The compliance on SG is not
only demanded by the IFIs’ customers, but also other stakeholders, including shareholders
institutional investors and Muslim society who are directly and indirectly involve with the
institutions. Comprehensive compliance with Shariah principles would boost confidence to the
general public and financial markets on the credibility of IFIs operation. In addition, noncompliance towards Shariah aspects would expose the IFIs to risks, such as reputational risks
and fiduciary risk.
BNM plays a vital role in ensuring that IFIs operates in accordance with Shariah principles. In
Malaysia, a two-tier SG infrastructure is being introduced that consists two important components.
The first component is a centralized Shariah advisory body at BNM. The second component is an
internal Shariah Committee formed in each IFIs. BNM has developed a SGF for IFIs that
superseded the Guideline on the Governance of Shariah Committee for Islamic Financial
Institutions issued in 2004.
The primary objective of the introduction SGF is to enhance the role of the board, the Shariah
Committee and the management in relation to Shariah matters. This includes enhancing relevant
aspects in organizations that have the responsibility to execute the Shariah compliance and
research functions (BNM, 2011). The framework is effective on 1 January 2011, where IFIs are
given six months from the effective date to comply with all the requirements.
2.3. Shareholders Ownership and stakeholder theory
Based on the Stakeholder Theory, stakeholders such as customers, institutional shareholders
and the society are defined as parties who affect and are affected by a firm’s behaviour. Built on
this view, stakeholders of an IFI could also affect and be affected by the institution’s operation,
including compliances with Shariah rulings. Institutional shareholders, especially have the
potential to influence companies as they typically invest on a larger scale in a company, able to
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Proceedings of 5th Asia-Pacific Business Research Conference
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collect information and monitor the management. Thus, they have the capability to become an
external monitor to IFIs’ governance system.
Institutional shareholders are fiduciary bodies and Barnard (1990) categorizes these shareholders
into public pension funds, corporate pension funds, union pension funds, retail mutual funds,
banks and thrifts, insurance and annuity companies and private foundations. The literature
recognizes that institutional shareholders play a significant function as external monitors in the
share market (Agrawal and Mandelker 1990). Institutional shareholders have large amounts of
funds invested in companies, therefore, giving them the potential to substantially influence
companies. Institutional shareholders usually invest on a larger scale in a company because they
manage large pools of funds. Therefore, they have more incentive to monitor the companies that
they have invested in. The role of institutional shareholders in listed companies has expanded
over the past years. Previously, when institutional shareholders have not been satisfied with the
management or companies’ shares performance, they will leave the companies by reducing their
holdings in the share market (Joher, Ali & Nazrul 2006). However, institutional shareholders have
changed their behaviour from being passive investors to active monitors (Coffee 1991). Indeed,
the corporate monitoring done by institutional shareholders played an important function in CG.
Shareholder activism or advocacy in investee companies is the external mechanism of CG, which
is utilize to control and supervise the investee companies. Shareholder activism can be divided
into two approaches, hard and soft activism. While hard activism focuses on shareholder
proposal to the proxy statement, direct negation and public targeting through the media; soft
activism can be divided into several approaches such as dialogue and voting (Kreander 2001,
O’Rouke 2002).
The basis of shareholder activism perhaps is not new in Islam, due to its stress on responsible
capital owners and managers. This can be seen under the partnership contracts that underlies
the business corporations, which urge the managers to preserve rights of shareholders and other
stakeholders. Discussions on the Stakeholder Theory from the Islamic position also show the
same direction, which highlights the responsibility of the firms towards stakeholders, based on
maslahah (Dusuki 2007). In Islam, the role of capital owners and who are being given rights to
management are not only limited to create wealth since they need to be responsible for the
capital. As reflection of this, engagement with investee companies is also a way for the
institutional investors to manifest their obligations under tiers of contractual agreement. However,
not much study focused on institutional shareholders activism in Islamic-based institutions, even
though these approaches are believed can be part of effective controlling and supervision.
The ownership of the IFIs can also be divided into domestically-owned and foreign-owned.
Sulaiman, Majid and Ariffin (2011) stated that foreign-owned IFIs are likely to make more
disclosure relating to governance information as they have a broader group of community to
serve (ummah). Sulaiman et al (2011) also stated that foreign IFIs are likely to adopt the
governance guideline to attract the confidence of domestic and foreign stakeholders.
3. Research method and data collection
The study focuses on licensed Islamic banks that are listed on BNM website (www.bnm.gov.my).
The data uses in the analysis consist are randomly picked of 7 IFIs as the financial year ended
2012. The list of the sample IFIs are Bank Islam Malaysia Berhad (BIMB), Bank Muamalat
Malaysia Berhad (BMMB), Bank Rakyat Berhad (BRB), Maybank Islamic Berhad (MIB), Hong
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Proceedings of 5th Asia-Pacific Business Research Conference
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Leong Islamic Bank Berhad (HLIB), RHB Islamic Bank Berhad (RHB) and Citibank Malaysia
Berhad (CBMB).
3.1. Developing SG Index
Sources of SG items are identified from Shariah governance index is developed based on SGF as
developed by BNM. SG variables are hand-collected from annual report of each of the IFIs.
Content analysis is used to determine the extent of IFIs compliance with the developed index.
SGF addresses 8 Shariah governance subjects of board of directors (BOD), shari’ah supervisory
board (SSB), internal Shariah review (ISR), Shariah audit (SA), Shariah risk management (SRM),
Shariah research (SR), management (M), and Shariah secretariat (SS). This study categorized
each Shariah governance subject into 5 sub-categories of function, competency, composition,
independency and others. The process of the development of SG index will be based on the
stages in Figure 1.
Figure 1: Stage of Developing Shariah governance Index
Stage 1
Identification of Shariah
governance items from relevant
sources
Stage 2
Compilation of the items and
construction of Shariah
governance index
Stage 3
Assign scores for the Shariah
governance items
The following table summarizes the respective Shariah governance subjects and the number of
its applicable items.
Table 1: Summary of Shariah governance subjects by BNM and its total applicable disclosure
items
Shariah governance subjects
Board of directors (BOD)
Shari’ah supervisory board (SSB)
Internal Shari’ah review (ISR)
Shari’ah audit (SA)
Shariah risk management (SRM)
Shariah research (SR)
Management (M)
Shar’ah secretariat (SS)
Total applicable
disclosure items
6
9
4
6
4
5
5
1
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Proceedings of 5th Asia-Pacific Business Research Conference
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The results on the scoring of the respective SG are then converted into disclosures ratio. The SG
disclosures ratios are developed by diving the disclosed items with the total applicable items; as
follows.
Σ Disclose items
Shariah governance disclosure ratio =
i,j
Σ Applicable items
i,j
The formula is widely used in disclosure studies such as Haniffa and Cooke (2005), Li, Pike and
Haniffa (2008) and Singh and Vander Zahn (2008).
3.2.
Ownership Data
In answering the second and third questions of this paper, the study also collected information
relating to the ownership of the IFIs. The basic ownership information is collected from the
BankScope database produces by Bureau van Dijk Electronic Publishing. Apart of the databases,
the study uses the respective bank’s annual reports to confirm the reliability of the data gathered
from the BankScope database and thus, further improve the data accuracy.
This study focuses on the largest shareholding, as the largest shareholding is a unique type of
shareholder. This due to the fact that the largest shareholding can be associated with costs and
benefits, especially the underinvestment costs (Claessens et al., 2002; Truong & Heaney, 2007).
Indeed, the role of the largest shareholder in a corporation is not well developed in the ownership
literature (Holderness, 2003). The immediate largest shareholding and its types are obtained from
the BankScope database for each bank. The largest shareholder is defined as the largest
shareholder who owns directly and indirectly (total) holding of ordinary shares of the bank.
According to BankScope, indirect ownership by the largest shareholder refers to as the
shareholding by the largest shareholder through intermediate entities. Furthermore, the largest
shareholder is identified as a shareholder of the bank who holds at least 5 percent of the bank’s
total shares. Following Truong and Heaney (2007), the study also uses Bureau van Dijk
Electronic Publishing (BvD) independence indicators for ownership measurement. These
indicators reveal variations in the level of ownership concentration. Details of the indicators are
shown in Table 2.
Table 2: Definition of Independence Indicators
Indicator
A
B
Definition
Assign to companies where no recorded shareholder has an ownership
percentage exceeding 24.99%. The sub categories of A+, A and A- refer to the
level of certainty associated with this allocation. Essentially, it is assumed that the
more specifically identified the shareholding the greater the chance that the
24.99% hurdle reflects the actual maximum individual ownership level. If the
company has 6 or more identified shareholders whose ownership percentage is
known then A+ is allocated to the company. If the company has 4 or 5 identified
shareholders whose ownership percentage is known then A is allocated to the
company. If the company has 1 to 3 identified shareholders whose ownership
percentage is known then A- is allocated to the company. In this study, A+, A and
A- are ranked as A.
Assign to companies where no recorded shareholder has share ownership
exceeding 49.99% but having one or more shareholders with an ownership
percentage of at least 24.99%. The sub categories of B+, B and B- refer to the
level of certainty associated with this allocation. If the company has 6 or more
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Proceedings of 5th Asia-Pacific Business Research Conference
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identified shareholders whose ownership percentage is known then B+ is
allocated to the company. If the company has 4 or 5 identified shareholders
whose ownership percentage is known then B is allocated to the company. If the
company has 1 to 3 identified shareholders whose ownership percentage is
known then B- is allocated to the company. In this study, B+, B and B- are ranked
as B.
C
This is allocated to companies with a recorded shareholder who has share
ownership exceeding 49.99%. This is also allocated to companies that are
classified as having an ultimate owner.
D
This allocated to companies with a recorded shareholder (excluding the three
above) with a direct ownership over 50%
Source: BankScope and Truong and Heaney (2007)
4. Results and discussions
4.1. SG Disclosure Index Score
The following table presents the Shariah Governance (SG) disclosure index score for each
sample IFIs.
Table 3: SG disclosure index score of each IFI
Board of
directors (BOD)
Shari’ah
supervisory
board (SSB)
Internal
Shari’ah review
(ISR)
Shari’ah audit
(SA)
Shariah risk
management
(SRM)
Shariah
research (SR)
Management
(M)
Shar’ah
secretariat (SS)
Average SG
score each IFI
BIMB
BMMB
BRB
MIB
HLIB
RHB
CBMB
0.75
0.75
0
1
0.67
0.5
0.5
Average
results
on each
SG
subject
0.60
0.71
0.79
0.67
0.78
0.78
0.11
0.44
0.61
1
1
0
0
0
0.5
0
0.36
1
1
0
0.25
0.67
0.33
0
0.46
0.25
1
0
1
0.75
0.5
0.2
0.53
0.6
0
0
0
0
0
0
0.09
0.5
0
0
1
0
0.8
0.33
0.38
0
0
0
1
0
0
0
0.14
0.60
0.57
0.08
0.63
0.36
0.34
0.18
The results show averagely board of directors (BOD) and Shariah supervisory board (SSB) show
higher disclosure in IFIs annual reports with respective score of 0.60 and 0.61. Shariah research
(SR) shows the lowest average disclosure score (0.09) amongst the IFIs. The average score of
each SG subject is presented the in following figure
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Proceedings of 5th Asia-Pacific Business Research Conference
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Figure 2: Summary of Average SG Disclosure on Each Subject
Among the sample IFIs selected, MIB shows better SG disclosure (average score 0.63), followed
by BIMB and BMMB (average score 0.60 and 0.57 respectively). RBR, on the other hand, has the
lowest SG disclosure (average score 0.08). However, it should be noted low disclosure does not
mean low SG implementation in any of the IFIs as the disclosure is voluntary in nature. The
average SG score of each IFI is presented the in following Figure 3.
Figure 3: Summary of Average SG Disclosure of Each Selected IFI
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Proceedings of 5th Asia-Pacific Business Research Conference
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4.2.
Ownership of IFIs
The immediate largest shareholder ownership of the Islamic banks based on its direct and
indirect holdings are presented in Table 4. The table also shows the type of the largest
shareholder and the BvD independences indicator. It is observed that mainly of selected IFIs are
unlisted entities and hence, the largest shareholder owns 100 percent of the share capital. The
only exception is BIMB and BMB. However, the two listed Islamic banks in Malaysia are majority
owns by its respective largest shareholder. In terms of concentration of ownership, based on BvD
independence indicators, all selected IFIs are group under D indicator.
From Table 4, it can also be observed that all banks are owned by another financial institution.
This is expectable the selected IFIs are subsidiaries of another banks. BIMB is substantially owns
by the government via its funds. While BMB’s largest shareholder is an industrial company, DRBHicom Berhad. Therefore, it can be concluded majority of the selected IFIs in Malaysia are
owned by institutional shareholders. Column 4 of Table 4 shows whether the IFIs are domestic or
foreign-owned. All the selected IFIs are owned by a domestic shareholder, except for CBMB.
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Proceedings of 5th Asia-Pacific Business Research Conference
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Table 4: The Immediate Largest Shareholder of Islamic Banks in Malaysia
No.
Bank Name
BvD Indep.
Indic.
Immediate Largest Shareholder
Type
Ownership
Shareholding (%)
1
Bank Islam Malaysia Berhad
D
GOVERNMENT OF MALAYSIA VIA ITS FUND
Public authority,
State, Government
Domestic
71.11
2
Bank Muamalat Malaysia Berhad
D
DRB-HICOM BERHAD
Industrial company
Domestic
70.00
3
Hong Leong Islamic Bank Berhad
D
HONG LEONG BANK BERHAD
Bank
Domestic
100.00
4
Maybank Islamic Berhad
D
MALAYAN BANKING BERHAD – MAYBANK
Bank
Domestic
100.00
5
RHB Islamic Bank Berhad
D
RHB BANK BERHAD
Bank
Domestic
100.00
6
Bank Kerjasama Rakyat Malaysia
Berhad (BRB)
n.a
COOPERATIVE
cooperative
Domestic
100.00
7
Citibank Malaysia Berhad (Islamic
Banking Division)
n.a
CITIBANK GROUP
Bank
Foreign
100.00
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4.3.
SG Disclosure Index and Institutional ownership
Table 5 presents the difference of SG disclosure index score between institutional-owned IFIs and
non-institutional-owned IFIs as well as between domestic-owned IFIs and foreign-owned IFIs.
Table 5: SG Disclosure Score based on Ownership
Board of directors (BOD)
Shariah supervisory board (SSB)
Internal Shariah review (ISR)
Shariah audit (SA)
Shariah risk management (SRM)
Shariah research (SR)
Management (M)
Shariah secretariat (SS)
Average BNM SG disclosure ratios
Average BNM Shariah governance disclosure ratio
results
InstitutionalNonDomesticForeignowned IFIs
Institutional- owned IFIs
owned IFIs
(N= 5)
owned IFIs
(N= 6)
(N=1)
(N=2)
0.53
0.75
0.61
0.5
0.56
0.75
0.64
0.44
0.1
1
0.42
0
0.25
1
0.54
0
0.49
0.63
0.58
0.2
0
0.3
0.1
0
0.43
0.25
0.38
0.33
0.2
0
0.16
0
0.32
0.59
0.57
0.18
Whilst it is expects institutional-owned IFIs promotes better disclosure, the results show noninstitutional-owned IFIs has higher score with average disclosure score of 0.32 and 0.59
respectively. The results reflect where it goes to compliance on shariah rulings, not withstanding
institutional or non-institutional owned IFIs discloses their SG practices to legitimize and educate the
public on best practice of Shariah rulings in their business operation. The disclosure enhances
credibility on their business operation.
The results may support Baydoun and Willett (1994 and 2000) and Sulaiman and Willett (2003)
where from the ethical precept, companies operating in Islamic community serve better Islamic
(Shariah) reporting. This is because IFIs are considered as having ethical identity since the
foundation of their business philosophy is closely tied to religion (Haniffa and Hudaib 2007). Hence,
IFIs possess greater social accountability towards the stakeholders (society) (as discussed in
Sulaiman and Willett 2001) rather than the individual institutional shareholders.
In contrast to the expectation that foreign-owned IFIs presents better disclosure in their corporate
annual report, the results show domestic-owned IFIs has a higher SG disclosure score (0.18 and
0.57 respectively). This result do not support Sulaiman et al (2011), where foreign-owned IFIs are
likely to make disclosure relating to governance information. Whilst the SG disclosure by BNM is
voluntary, foreign-owned IFIs may face a competitive disadvantage compared to domestic-owned
IFIs providing wide range of information (Mayes and Vesala 1998). Such disclosure by domesticowned IFIs provide better image and social accountability on Shariah implementation by the IFIs
towards the shareholders and stakeholders. Foreign-owned IFIs, on the other hand, may face coordination difficulties for home and host country supervisors in obtaining appropriate information that
they require from banks under the principle of home country control (Mayes and Vesala 1998).
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Hence, they might focus their effort towards fulfilling other compulsory reporting by the company’s
home and host country requirements.
5. Conclusion
BNM has issued a SGF in January 2011 with the primary objective of enhancing the role of the
board, the Shariah Committee and the management in relation to Shariah matters. Looking at this
development, there is a need in developing a SG index that can become tool for stakeholders in
assessing SG disclosure and practices of IFIs.
This paper developed a SG Index based on SGF issued by BNM. Assessment was made on 7 IFIs
in Malaysia. The result shows SGF implementation is moderately discloses in IFIs annual reports.
However, it should be noted that this index solely assesses the SG disclosure of the banks, but not
the operation of SG in the respective banks. The result is not withstanding the institutional or noninstitutional owned IFIs. In addition, domestic-owned IFIs shows better disclosure than foreign
owned IFIs.
Future research should extend this study by incorporating other standard of Shariah governance,
such as issued by Islamic Financial Services Board (IFSB) and Accounting, Auditing and
Governance Standards for Islamic Financial Institutions (AAOIFI) in the developed index. Future
research should also extend in using the developed index to other IFIs in Malaysia. In addition,
future research could also analyze whether the firm characteristics have any influence on the SG
index. It would be very interesting should the results of the index can be compared with the actual
operation of IFIs relating SG. This can be done by conducting questionnaire or interviews with the
key organs of SG function in IFIs. Finally, study on governance practices between Islamic and
conventional financial institution may highlight whether Islamic practices place role in corporate
business operation and disclosures.
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