The Need for Credible Reporting of Shariah Non-compliance Event by Islamic Banks in Malaysia

Abstract

The paper discovers the issue of Shariah non-compliance event disclosure as reported in the annual reports and Basel II Pillar 3 disclosure by Islamic financial institutions in Malaysia. The extent to which shareholders trust on the information reported in financial statements depends on the credibility of those annual reports. This Shariah non-compliance event disclosure has value-relevance to investors and the public interest, but previous studies lack the reasons that affect Islamic financial institutions’ decisions to willingly disclose the event. The paper aims to discuss whether the advisory role constrains the Shariah Committee members to improve disclosure which can increase the accountability of the company and market confidence. Shariah Committees are the backbone of Islamic financial structure and they play a substantial role in the efficient functioning of the system. Financial institutions establish the credibility of their annual report by having an independent Shariah Committee to verify the accuracy of those disclosures. This study also wants to provide understandings as to whether current Shariah non-compliance event disclosure practices of Islamic banks can achieve the anxieties of shareholders to assist them in improving transparency. This paper to uncovers the information released in the report for the year 2016 and 2017 of 16 Islamic banking in Malaysia. The paper discusses the need for improving transparency through sufficient, valid and pertinent disclosure of Shariah non-compliance event in the reports. What is required is not necessarily only the disclosure of the Shariah non-compliance event per se, but it should be consisted of an explanation, in plain and comprehensible language to mitigate the risk.