THE PRACTICE OF SHARĪʿAH REPORTING IN MALAYSIA: DOES COUNTRY OF ORIGIN OR BEING A MEMBER OF AAOIFI MATTER?

The establishment of the Sharīʿah Supervisory Board (SSB) or Sharīʿah Advisory Board (SAB) as part of the governance mechanism has been supportive to the growth of the Islamic banking and finance industry. The existence of the SSB as an integral part of Islamic financial institutions (IFIs) has been essential in building up market confidence that the Islamic products and services of these institutions conform to the provisions of the Sharīʿah (Bakar, 2002). This is a distinctive characteristic that sets the Islamic finance industry apart from its conventional counterpart (Hasan, 2009; Mannan, 1986).

Many countries have amended or even enacted new laws and regulations to meet the needs of their Islamic finance markets whilst adhering to domestic and/or international standards (Alexakis and Tsikouras, 2009). Countries like Syria, Bahrain, Kuwait, Qatar, Sudan and Malaysia have enacted specific legal provisions pertaining to the compulsory composition of the SSB of any IFI. The SSB should comprise several Islamic scholars who should be qualified as defined by the laws and regulation of the country. In Malaysia, Shari’ah governance takes place at two levels: (i) the Shari’ah Advisory Council (SAC) at the Central Bank level as governed by Chapter 1 of Part VII of the Central Bank of Malaysia Act (CBMA) 2009; and (ii) the Shari’ah Advisory Board (SAB) at the institutional level, in accordance with Section 3(5) of the Islamic Banking Act (IBA) 1983. Internationally, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has issued the Governance Standard for Islamic Financial Institutions No. 1 on the institutionalization of the SSB and its operations.

Ensuring Shari’ah compliance of an IFI’s products and operations is in the hands of the SSB. Accordingly, the latter is required to provide evidence in the form of written statements on Shari’ah compliance. At the institutional level, the Shari’ah board will issue the Shari’ah report which is published in the annual report of the IFI. The Central Bank of Malaysia (CBM, 2003) has issued Guidelines on Financial Reporting for Licensed Islamic Banks (GP8-i) which aims to standardize Shari’ah reporting by including a specimen of a typical Shari’ah report to be adopted by the IFIs. AAOIFI (2010) also made available a sample Shari’ah report to be followed by the IFIs. It is worth noting that both samples were set out as the minimum requirements to be included in the IFIs’ Shari’ah reports. Looking at the two samples, there are some features that distinguish one from the other.

Previous research has agreed that the sample issued by AAOIFI seems to be lengthier and more stringent than the sample issued by the CBM (Besar et. al., 2009). As there is considerable divergence in the style of the Shari’ah reports by both local and international banks offering Islamic financial services in Malaysia, the factors influencing them to adopt the specific Shari’ah reporting practice warrant an academic discussion. Therefore, the study seeks to fill the gap in the literature on the two factors that might influence the practice of Shari’ah reporting by IFIs in Malaysia, namely country of origin and membership in AAOIFI.