Does social reporting matter? Empirical evidence
| DOI | https://doi.org/10.1108/JFRC-09-2020-0088 |
| Published date | 20 May 2021 |
| Date | 20 May 2021 |
| Pages | 353-370 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Adel Sarea,Monsurat Ayojimi Salami |
Does social reporting matter?
Empirical evidence
Adel Sarea
Department of Accounting and Economics,
College of Business and Finance, Ahlia University, Manama, Kingdom of Bahrain, and
Monsurat Ayojimi Salami
Department of Real Estate Development and Management, Ankara University,
Ankara, Turkey
Abstract
Purpose –This paper aims to examine the level of Islamic social reporting (ISR) disclosure of Islamic
banking in Gulf Cooperative Council (GCC) countries usinga checklist based on Accounting and Auditing
Organizationfor Islamic Financial Institution (AAOIFI) standards.
Design/methodology/approach –A quantitative method–Tobit Model –is adopted in this study. The
unweighted disclosure method used to measure the ISR disclosure checklist consist of 51 items in Islamic
banks (IBs) in the GCC countries. The stakeholder theoryand legitimacy theory are used to investigate the
possiblebanking performance factors affecting theaccounting practices such as ISR disclosure in IBs.
Findings –The findings show that the ISR disclosureindex is linked to the IBs’performance indicators in
GCC countries. The result indicates both Islamic banking profitability and age establish positive and
statistically significant relationship with ISR disclosure while leverage establishes significant negative
relationship with ISR disclosure. This implies that Islamic banking profitability, leverage, and age are
essential bank performance indicators that make ISR disclosure worthy of doing even in the presence of
Islamic bank stakeholders in GCC countries.This finding linked compliance with the mandatory disclosure
recommendationsof AAOIFI Standard No. 7, as well as voluntarydisclosure.
Research limitations/implications –This study used cross sectionaldata for the year 2019, which is
considered more recent despite its beinga year data analysis. However, future research should consider mix
method aswell as more analysis tools provided theirnumber of observations are sufficientenough.
Social implications –The study identifies the factors that may enhance Islamic financial institutions,
including Islamic banking in GCC countries, to comply with ISR disclosure. The application of this study
supports Accounting standardssetters to consider standards that support ISR disclosurein Islamic banking
in differentcountries.
Originality/value –To the best of the authors’knowledge,this study is novel in exploring the level of ISR
disclosure in Islamic banking in GCC countries by using a checklist based on AAOIFI standard No. 7 and
establishes the relationship between ISR disclosure index and IBs profitability, leverage, as well as age of
Islamic bankingin operation.
Keywords Social reporting, AAOIFI, Social disclosure, Gulf Cooperative Council (GCC) countries,
Bank Performance Indicators
Paper type Research paper
1. Introduction
Islamic social responsibility (ISR) disclosure index is a value-added index that incorporate
Shariah-laws into the reporting disclosure. In addition, such disclosure increases long term
of corporation success (Michaels and Grüning, 2018). It has been reported that Jordan
Islamic banks’(IBs’) adoptionof social responsibility as culture which enable them toassist
in community building,reduces unemployment problem and support SMEs on development
Social
reporting
353
Received9 September 2020
Revised28 January 2021
Accepted2 March 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 4, 2021
pp. 353-370
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2020-0088
The current issue and full text archive of this journal is available on Emerald Insight at:
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sustainability as wellas increases productivity (Haddad, 2017). Furthermore, severalstudies
have linked ISR disclosure to Islamic bank performance which is expected to enhance
transparency and trustworthinessof the whole activities in the presence of stakeholders. To
achieve this, both mandatoryand voluntary ISR are worth of disclosing in the context of IBs
to meet stakeholders’expectation.
Obviously, ISR has been extensively studied in Malaysia and Indonesia than the rest of
Muslim countries or countries practicing Islamic finance. In some situations, researchers
conducted comparative studies on ISR as in the context of Malaysia and Indonesia(Amran
et al.,2017;Wardani and Sari, 2018;Nofitasari and Endraswati, 2019;Nugrahaet al.,2019).
However, most researchers on ISR focus on single country studysuch as Indonesia (Lestari,
2013;Nugraheni and Wijayanti, 2017;Suwarsiand Azib, 2017;Cahya et al.,2017;Herwanti
et al.,2017;Inten and Devi, 2017;Afrizal and Putra, 2018;Hosen et al.,2019;Indayani et al.,
2019;Amyulianthy et al.,2020;Yuliana and Sartika, 2020;Khoiriyah, 2020;Khoiriyah and
Surakarta, 2020) and ISR studieson Malaysia (Othman et al., 2009;Othman and Thani, 2010;
Handayani and Jember, 2017;Mazri et al., 2018). Pakistan ISR studies (Hussain et al.,2021)
and Saudi Arabia ISR studies (Zubairu et al.,2011). Whilst study on GCC ISR disclosure is
rare, most of the GCC countries have different stringent policy that should have made the
compliances of GCC Islamic bank with ISR disclosure more attractive to the researchers.
Similarly, with reference to accounting standard differences adopted in different countries
those findings from the above studies may not be directly applicable in the case of GCC
countries. In another word, findings from those countries may not be appropriately fitin
explaining ISR in GCC countries. Therefore, studies on ISR still remains inconclusive. As
being well argued that studies on ISR are many, their findings are conflicting which also
signifies inconclusiveness on the ISR findings. Jannah and Asrori (2016) and Nofitasari and
Endraswati (2019) reported that there is no formal guided rule for ISR disclosure in
Indonesia, therefore ISR remains voluntary in the context of Indonesia. Contrarily,
Amyulianthy et al. (2020) reveal that ISR has become common practice in Indonesia. These
conflicting findings indicate that even in the context of Indonesia studies, ISR remains
inconclusive which furtherimplies the research gaps on ISR study. Furthermore, the level of
ISR disclosure is not necessary to be the same in all Muslimor countries practicing Islamic
banking; ISR disclosure in Bahrain and Malaysia was reported to be 50% based on the
study conducted in 2016 (Rahman et al.,2016) which opposes the finding by Sarea (2012)
reveals that IBs in Bahrain disclosed 85% of ISR requirement. In addition, Handayani and
Jember (2017) reveal that an average ISR disclosure among 10 Malaysian IBs between 2015
and 2017 was 32.81%. Those findings consistentlysupport degree of ISR disclosure among
IBs still remain debatable.
Besides that, ISR disclosure remains essential for IBs because transactions of IBs as
reflected in the financial reporting are prepared under varieties of accounting standards,
which pose threats to the accounting system. Thus, the need for Islamic accounting
standards ensures a compatible accounting system. Therefore, this led to the growing
aspiration for a financial statement that has the potential to enhance the credibility of
financial statements endorsedby ruling of the Shari’ah, which makes the Islamic accounting
standards operationalized. However, before the implementation of the Islamic accounting
standards such as Auditing Organization for Islamic Financial Institution (AAOIFI) by
Islamic financial institutions, it is necessary to ascertain whether the AAOIFI accounting
standards are appropriate and suitablefor IBs. In addition, whether the compliance with the
AAOIFI accounting standards may disclose more information to stakeholders in order to
create confidence in the investorsand the public to invest their money in these sectors.
JFRC
29,4
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