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Sharia disclosures: A comparative study of a South African and Nigerian Islamic Bank

Riyad Moosa

Abstract

The aim of this paper was to determine the extent of sharia disclosures made in the 2017

annual reports for an Islamic Bank in South Africa, hereafter referred to as ‘Bank A’, and an

Islamic Bank in Nigeria, hereafter referred to as ‘Bank B’. The study is qualitative in nature

using a case study method, content analysis and disclosure index. The findings indicate that

for the Sharia Supervisory Board (SSB) report, the disclosures for Bank A are assessed to

be 82% compliant versus Bank B whose disclosures are assessed as being 45% compliant.

The results, in so far as the sharia report is concerned, shows that Bank A is 94% compliant

while Bank B is 81% compliant.

Keywords: Sharia governance, Sharia supervisory board, Corporate governance, Islamic

finance, Sharia disclosures

1. INTRODUCTION

Corporate governance (CG) from an Islamic viewpoint is underpinned by the sharia (Islamic

law) (Bukhari, Awan & Ahmed, 2013:403). Ghayad (2008:208) asserts that the aims,

purposes and outcomes of business conducted by an Islamic bank are similar to that of its

western counterparts, except for the condition of sharia compliance. The question then is,

what are the requirements imposed by the sharia when conducting business?

Muslims view compliance with the requirements of the sharia as a path to seeking the

pleasure of Allah (God) (Wahab & Rahman, 2011:44). These requirements include the total

elimination of riba (interest) from all business dealings. It further includes the removal of any

gharar (uncertainty) from business transactions, as well as the avoidance of the selling and

purchase of any prohibited goods such as alcohol and pork (Lewis, 2010:47). In light of

Bukhari, Awan and Ahmed’s (2013:401) point of view, corporate governance is a way to

monitor the corporate conduct of companies. An Islamic bank is required to appoint a sharia

board to monitor the bank’s operations and activities in order to ensure that it complies with

the sharia (Ghayad, 2008:213). Bank A in South Africa and Bank B in Nigeria both comply

with the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI)

guidelines, and are the only fully fledged Islamic banks in their respective countries and as

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such conduct their business in accordance with the sharia.

As part of ensuring their compliance with the sharia, both banks employ an independent

Sharia Supervisory Board (SSB) to ensure compliance with Islamic economic principles. This

additional aspect of sharia governance is unique to Islamic banks (Hasan, 2011:30) and

provides an opportunity to conduct research into the CG disclosures of these banks relating

to their sharia compliance. According to Hasan (2011:30), studies conducted on the CG

practices of Islamic banks are limited. This is particularly the case in Africa, as research is

scant on the CG practices of Islamic banks. This study is therefore aimed at contributing to

the literature by providing insight into the sharia CG disclosures of two Islamic banks in Africa.

The following research question is addressed in this study:

RQ: To what extent are sharia disclosures made in the 2017 annual reports for Bank A and

Bank B?

The findings of this study will contribute to the limited literature that exists for this area, as

well as to an enhanced understanding of the CG practices of the SSB.

2. CORPORATE GOVERNANCE FOR ISLAMIC BANKS

The idea of CG has been in existence for a long time so as to counter the agency problem

that arose due to business owners affording the management responsibility to agents (Wixley

& Everingham, 2002:7; Ibrahim & Htay, 2006:1-2; Alexander et al., 2014:198). The negative

impacts of corporate scandals, as witnessed in the latter part of the 20th century, instigated

the development of better CG practices as a means to restore investor confidence (Ibrahim

& Htay, 2006:2; Mallin, 2007:1; Alexander, et al., 2014:197). The Cadbury Committee in the

United Kingdom released the Cadbury Report in 1992, which was the first code providing

guidance on CG practice (Wong, 2015:498). Thereafter, a number of codes on CG have been

developed (Roberts, Weetman & Gordon, 2005:108). The Cadbury Report defined CG in

paragraph 2.5 as “a system by which companies are directed and controlled.” Different

researchers provide a variety of definitions (Choudhury & Hoque, 2006:117; Lee, 2006:21;

Dunn & Steward, 2014:62), while others contend that no unique definition captures the

essence of CG (Roberts, Weetman, & Gordon; 2005:108; Muneeza, 2014:33). This is

because business practice and business values are not homogenous between countries and

can be influenced by cultural, institutional and religious factors (Wong, 2015:497 & 500). The

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Islamic finance industry presents a different dimension to CG (Lewis & Algaoud, 2001:158;

Van Greuning & Iqbal, 2008:184).

The existence of the Islamic finance industry depends on its ability to comply with sharia

principles (AAOIFI, 2015:962). Thus sharia governance is critical to the industry (Muneeza,

2014:42). Sharia governance can be defined as the process by which Islamic institutions are

monitored to ensure that they conform to the requirements of the sharia (Ginena, 2013:88).

The stakeholders of an Islamic bank, while concerned with its financial performance, may be

more concerned with its ethics or adherence to religious precepts (Grais & Pellegrini, 2006:2).

Therefore the non-compliance with the sharia presents a sharia risk that can have disastrous

consequences for the viability of the Islamic bank (Ariff & Iqbal, 2011:104; Grassa & Matoussi,

2014:347).

The principles used in conducting business dealings that conform to Islamic religious beliefs

are derived from the sharia (Islamic law) (Venardos, 2006:41). The sharia is derived from the

Quran, which is Islam’s holy book, as well as the sayings, actions and approvals of prophet

Muhammed (PBUH) (Warde, 2010:30). The sharia provides a comprehensive set of values

and principles to assist Muslims in living a life of righteousness to conform with God’s

commands (Ahmed, 2006:92; Visser, 2009:10). The sharia as such provides guidance for

every aspect of a Muslim’s life, which includes parameters for engaging in business dealings

which are agreed upon by the vast majority of Muslim scholars (Karim, 2001:172; Henderson,

2007:218). Kettel (2010:37) and Warde (2010:7) state that these parameters include the

following: (1) the total elimination of interest from all business dealings whether the receipt or

payment of it, (2) the removal of any uncertain or speculative transactions, (3) all business

dealings must be backed up by real assets, (4) a payment of 2.5% of one’s wealth acquired

through business dealings as a zakat (religious tax) to be paid to poor Muslims, (5) all

business transactions should not include prohibited items such as alcohol, pork or gambling,

and (6) the use of contracts to facilitate profit and loss sharing in business contracts in order

to avoid interest.

As the business model, credibility and reputation of an Islamic bank are based on the

compliance with the above principles (Jamaldeen, 2012:114), it is imperative that an SSB is

established to govern the Islamic bank’s compliance therewith in order to reduce sharia risk

(Ariff & Iqbal, 2011:104; Grassa & Matoussi, 2014:353). Sharia risk leads to market

disruptions as well as reputational and credibility issues that have dire consequences for the

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industry (Abdullah, Percy & Stewart, 2013:121; Hamza; 2013:226; Malwaki, 2013:576).

Malwaki (2013:576) is of the opinion that proper sharia governance is the main reason that

Islamic banks enjoyed less risk as compared to their conventional counterparts during the

financial crisis in 2008.

2.1. SHARIA SUPERVISORY BOARD

The SSB is a unique CG structure of an Islamic bank (Van Greuning & Iqbal, 2008:187;

Grassa, 2013:333). It is mandated to oversee compliance with the sharia, and as such it is

seen as the most important aspect of governance and hence central to the success of an

Islamic bank (Malwaki, 2013:541; Hasan, 2014:22; Gebba & Aboelmaged, 2016:147; Hakimi

et al., 2018:252). The discussion that follows will entail the governance system, appointment,

composition, independence and membership, qualifications, duties, sharia audit and opinion

and disclosure requirements of an SSB.

2.1.1. GOVERNANCE SYSTEM

A decentralised system of sharia governance entails that the SSB make decisions on the

sharia compliance of the Islamic bank that is independent of the SSB of the Central Bank.

This type of governance is popular in countries such as Kuwait, and Indonesia (Hamza,

2013:231). A centralised system of governance maintains that while individual Islamic banks

must have an SSB, they cannot make decisions independent of the SSB that is attached to

the Central Bank, and as such have to comply with all directives issued by this board. This

type of governance is popular in countries such as Malaysia and Sudan (Hamza, 2013:233).

The difference in governance systems often leads to divergent sharia rulings applied to

Islamic banks, which poses a threat to the credibility of the industry (Hamza, 2013:236).

2.1.2. APPOINTMENT

Every Islamic bank is required to establish an SSB. Each member of the SSB is appointed

by the shareholders at the annual general meeting. An engagement letter is required to

formalise the appointment. It should include the duties to be performed by the SSB member

as well as a statement that the Islamic bank will comply with all sharia requirements (Van

Greuning & Iqbal, 2008:189; Ariff & Iqbal, 2011:108; AAOIFI, 2015:885-886).

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2.1.3. COMPOSITION

The composition of the SSB should include at least three members who are not directors or

material shareholders of the Islamic bank (AAOIFI, 2015:886). The average number of sharia

board members in the United Arab Emirates is 3.6 members (Gebba & Aboelmaged,

2016:147). In Bahrain, the size of the SSB does not impact on the performance of Islamic

banks, despite a positive but insignificant effect on the profitability of assets and equity

(Hakimi et al., 2018:264). Garas (2012:8) found that the size of the SSB is insignificant in

relation to the SSB’s control over transactions. Hassan et al., (2018:258) examined 54 Islamic

indices between 2007-2014 and found that a relationship exists between the SSB members,

specifically boards with more members having similar backgrounds and education and a

higher risk taking profile on Islamic indices. Interestingly, Jaballah, Peillex and Weill

(2018:360) studied the impact of adding to or removing information from the Dow Jones

Islamic Market index as it relates to sharia compliance and changes in pricing thereof. They

found that greater sharia compliance is perceived more favourably in Muslim countries owing

to religious beliefs resulting in positive stock market reactions and less favourably in the

United States owing to negative perceptions about Islam and sharia compliance.

2.1.4. INDEPENDENCE AND MEMBERSHIP

The requirement that SSB members are to be independent from the Islamic bank is vital in

maintaining its credibility in fulfilling the role of instilling confidence in all stakeholders that the

Islamic bank’s operations, including its products and services, are sharia-compliant (Hamza,

2013:229; AAOIFI, 2015:939). Therefore the SSB functions as an external organ that is

devoid of any managerial or operational responsibilities (Cima, 2011:44, AAOIFI, 2015:940).

As such, SSB members are required to assess their independence status and, if any

impairment arises that cannot be resolved, it should result in the SSB member’s resignation

from their position (AAOIFI, 2015:940-941). The resignation or dismissal of SSB members is

final on the approval of the Islamic bank’s shareholders at a general meeting (AAOIFI,

2015:886).

SSB members are not restricted to serving in the same capacity on the boards of multiple

Islamic banks, thereby increasing the potential for independence problems (Garas,

2012a:100; Malwaki, 2013:571). In fact, 71% of SSB members from 43 Islamic banks across

eight countries serve on multiple boards (El-Halaby & Hussainey, 2015:158). Bassens,

Derudder and Witlox (2010:338) identified a global sharia elite, consisting of a small group of

scholars that serve on multiple boards. These sharia scholars are sought out by Islamic

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banks, as having an association with these ‘gatekeeper’ scholars allows the bank to ‘tap’ into

markets, knowledge hubs and sources of capital otherwise out of reach. This situation does

not allow for other scholars to gain experience within the industry (Malwaki, 2013:575),

therefore Garas and Pierce (2010:396) suggest that scholars seek membership in other types

of Islamic financial institutions rather than just focusing on banks.

To further reduce instances of problems with independence:

SSB members must not hold managerial positions or have relationships with management

in the Islamic bank (Garas, 2012a:100);

SSB remuneration should be fixed by shareholders and disclosed in the annual reports

(Garas, 2012a:100; Hamza, 2013:227; Gebba & Aboelmaged, 2016:148); and

Appointments should be made by shareholders and not management (Hamza, 2013:227;

Gebba & Aboelmaged, 2016:148).

2.1.5. QUALIFICATIONS

The members of an SSB should primarily be Islamic scholars (Abdul-Rahman, 2010:77). An

Islamic scholar is an expert in Islamic jurisprudence (Hamza, 2013:228). These scholars are

also required to be knowledgeable in conventional economic practices (Muneeza & Hassan,

2014:125). SSB members who are experts in both Islamic jurisprudence and conventional

economic practice is rare. In practice, most SSB members have PhDs in Islamic

jurisprudence while less than 40% have degrees in conventional economics. This problem is

further exacerbated as there is no set education or curricula coordinated for SSB members

(Hamza; 2013:228; Hayat, Den Butter & Kock, 2013:611 Malwaki, 2013:570; Hakimi et al.,

2018:258; Hassan et al., 2018:249). Van Greuning and Iqbal (2008:190) state that because

of this lack of expertise, the SSB may have a member who is not an Islamic scholar, but who

is an expert in both Islamic and conventional business practices (Hamza, 2013:228). Hakimi

et al., (2018:263) found that SSB members with expertise in conventional finance and

accounting positively affects performance and return on capital for Islamic banks operating

in the Middle East.

2.1.6. DUTIES

The duties to be performed by the SSB are informed by the Islamic bank’s articles of

association, as well as the terms of engagement as agreed upon when its members were

appointed (Van Greuning & Iqbal, 2008:187; AAOIFI, 2015:886). For this reason, the duties

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performed by the SSB may vary between Islamic banks. The literature highlights the following

duties that are typical for the SSB: (Abdul Jabbar, 2010:287; Abdul-Rahman, 2010:77-78;

Garas & Pierce, 2010:395; Kettel, 2011:25-26; Abdel-Baki & Sciabolazza, 2013:103;

Malwaki, 2013:572)

Issuing Islamic verdicts (Fatwas) on all activities undertaken that are legally binding and

required of top management to abide by;

Advising and consulting top management on religious issues;

Preparing operating manuals and transactional procedures that are in line with the

sharia,

Approving products, contracts and services for sharia compliance;

Preventing and controlling financial crimes as they are prohibited in sharia;

Designing and facilitating training programmes on sharia-compliance;

Issuing a sharia opinion by conducting a sharia audit to provide assurance that top

management complies with the sharia verdicts as issued by the SSB, including the

annual financial statements;

Approving the distribution of profit share between the bank and investment account

holders; and

Providing guidance to management about allocating income to charity that is non-sharia

compliant.

Differences in educational backgrounds and jurisprudential schools subscribed to by SSB

members of Islamic banks does result in conflicting Islamic verdicts (fatwas) issued by

various Islamic banks, ultimately impacting on the image of the industry (Malwaki, 2013:569).

These verdicts also often lack legal sanction, thus compromising the robustness and

effectiveness of the industry’s sharia governance mechanisms (Hamza, 2013:230; Malwaki,

2013:576).

The overarching responsibility of the SSB is to provide guidance to top management

regarding sharia-compliance; however, the responsibility of compliance rests with top

management (Nathan & Ribière, 2007:476).

2.1.7. SHARIA AUDIT AND OPINION

The SSB performs a sharia audit that culminates in a sharia report providing stakeholders of

the Islamic bank with the reassurance that it is managed in compliance with the sharia

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(Hamza, 2013:228). Thus the SSB is given unrestricted access to all required information in

order to be in a position to issue a sharia opinion on an annual basis in the annual report of

the Islamic bank (Muneeza & Hassan, 2014:127; AAOIFI, 2015:899). Ahmadova (2016:1)

states that the sharia audit can be conducted by either internal or external auditors, but must

be supervised by the SSB.

The presence of a sharia report and opinion by the SSB has both explicit and implicit costs.

The explicit costs are directly related to sharia certification while implicit costs relate to the

time taken to obtain sharia certification. Other issues with giving sharia opinions as identified

by Hayat, Den Butter and Kock (2013:611) include:

Lack of consensus on what constitutes sharia compliance;

Small pool of scholars who benefit substantially in terms of financial gains and are thus

prone to being lenient when giving a sharia opinion to attract business;

Scholars who belong to regulatory bodies such as AAOIFI, who supervise the industry

and inadvertently end up supervising themselves; and

The technical ability of scholars to evaluate complex business operations, products and

transactions for sharia compliance.

2.1.8. DISCLOSURE

Abdullah, Percy and Stewart (2013) examined the sharia disclosures of 23 Islamic banks in

Malaysia and Indonesia, specifically those related to the SSB and the content of their report.

To meet this purpose, they employed a disclosure index, content analysis and hypotheses

testing. They found that the SSB disclosure is limited, and their detailed findings are as

follows:

The SSB disclosures made show that a majority disclosed duties, membership, background,

appointment and remuneration of SSB members; however disclosure of activities were

limited (meetings, audit and sharia compliance procedures).

The SSB report shows that all the banks ‘title’ their report appropriately. All banks except one

Indonesian bank provide their sharia opinion in the report. Thirty-five percent of reports

contain an opening paragraph stating the nature of the engagement. Fifty-seven percent of

Islamic banks disclose the nature of the work performed in the annual report. Thirty percent

of Islamic banks confirm that the processes followed in the sharia audit are valid and reliable.

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Limited disclosure relating to items of a sensitive nature e.g. profit and loss allocation and

lawfulness of earnings, and three banks had their SSB report signed before the directors

approved the financial statements.

They also found that Malaysian foreign Islamic banks provide the least disclosure. They put

this down to their holding companies being conventional foreign banks. They also surprisingly

found that foreign owned Islamic banks originating from predominantly Muslim countries

(GCC) provide limited disclosure. They put this down to different emphasis being placed in

different jurisdictions on what to disclose as opposed to the influence of the Muslim

community. That in turn also suggests that stakeholders are passive in driving the types of

disclosure to be provided by Islamic banks and the need for SSB members to play a more

active role in this regard.

Malwaki (2013:575) opines that the SSB is criticised for its lack of transparency when making

sharia disclosures. This criticism relates specifically to how to fulfil its mandated duties as

well as the process followed when providing its opinion on the sharia compliance of the

Islamic bank. A mandatory requirement when making sharia disclosures should include all

instances where a conflict of interest exists or membership with other Islamic banks for all

SSB members.

El-Halaby and Hussainey (2015:159) found that when Islamic banks have sharia boards

containing more than four members who are also members of AAOIFI, they provide more

detailed sharia disclosures in the annual reports.

Azmi et al., (2016) used a structured interview process to uncover the reasons for the low

level of sharia disclosures by sharia compliant companies in Malaysia. Their respondents

included those who prepare the reports as well as the professional users of the reports. They

found that both groups of respondents agree that sharia disclosures are understood as found

in the financial statements; however the professional users are most concerned about the

sharia screening methodology used in determining sharia compliance.

Asrori (2017:160) examined the disclosures of eight Islamic banks in Indonesia and found

that disclosures relating to sharia compliance and SSB members’ attendance of meetings

had a positive impact on performance, while the educational background and number of

memberships with other Islamic banks did not have an impact on performance.

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Muda (2017) conducted research to determine the impact that cross-membership and

expertise of SSB members based on 12 Islamic banks in Indonesia had on sharia disclosure

using regression analysis. They found that cross-membership did not affect the quality of

disclosure, while expertise of SSB members did impact on the quality of sharia disclosure.

Ariff and Iqbal (2011:105) state that the qualifications of the SSB members should be

disclosed in the Islamic bank’s annual report.

3. METHODOLOGY

The study is qualitative in nature using a case study method and content analysis. The case

study approach is suitable for this study, as the banks selected are the only ‘cases’ in these

respective countries that provide sharia disclosures in their annual reports. The sharia

disclosures in the 2017 published annual report of Bank A in South Africa and Bank B in

Nigeria will be examined by using “content analysis” and compared to a disclosure index.

Guthrie and Farneti (2008:362), as well as Marx, Barac and Moloi (2011:324) respectively,

used content analysis to determine the extent of CG disclosures in their research. Mayring

(2000) defines qualitative content analysis as an “empirical approach to controlled analysis

of text within their context of communication.” The literature has examples of sharia

disclosure indexes (Grais & Pellegrini, 2006:34; Abd Majid, Sulaiman & Ariffin, 2011:20; El-

Halaby & Hussainey, 2015:155). This study will, however, use an adapted version, of the

sharia disclosure index developed by Abdullah, Percy and Stewart (2013:129-130) to

examine the SSB disclosures and sharia audit report of the selected cases. Each disclosed

item will be scored using a binary system where items disclosed are given a score of “1”, and

where items are not disclosed a score of “0” is given. Each disclosure item is given the same

weighting due to its subjective nature, and as such the scores will be totalled and presented

as a ratio of the actual score to the maximum possible score of each Islamic bank (Abdullah,

Percy and Stewart (2013:110).

4. RESEARCH FINDINGS AND DISCUSSION

The research findings for the sharia disclosures in the 2017 annual report of Bank A in South

Africa and Bank B in Nigeria is shown below.

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Table 1 presents the SSB disclosure index of Bank A and Bank B.

Table 1: Sharia supervisory board disclosure index

No. Description Bank A Bank B

1 Report of SSB 1 1

2 Duties and responsibilities 1 1

3 Remuneration 0 0

4 Appointments 0 0

5 Multiple memberships with other Islamic banks 1 0

6 Educational background 1 1

7 Experience 1 1

8 Independence 1 0

9 SSB meetings 1 0

10 Sharia compliance procedures 1 1

11 Sharia audit 1 0

Total Score 9 5

Max Score 11 11

Percentage 82% 45%

The findings related to the SSB disclosure index show that Bank A significantly outperforms

Bank B with an overall score of 82% as compared to 45%. Bank A refers to this report as the

“Sharia Supervisory Report”, while Bank B refers to it as “Our Advisory Committee of Experts”

report.

Bank A has four members on its SSB, one of whom is a foreigner and three who are South

African, as compared to Bank B who has six SSB members, one of whom is a foreigner and

five who are Nigerian. These findings are supported in the literature (AAOIFI, 2015:886;

Gebba & Aboelmaged; 2016:147). Bank A states that all its SSB members are independent,

while such a statement is not made for Bank B. This non-disclosure by Bank B regarding the

independence of its members is not supported in the literature (Hamza, 2013:229; AAOIFI,

2015:939). The finding by El-Halaby and Hussainey (2015:159) that SSBs with more

members who are also members of AAOIFI provide greater disclosures, is supported for

Bank A and not supported for Bank B.

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Bank A discloses that three of its members also sit on the SSB of other Islamic financial

institutions. Two of these members are also affiliated with AAOIFI. Details of the affiliation is

not given for one member, while the other is an AAOIFI certified Sharia Accountant and

Auditor. Bank B does not disclose this information related to its members. These findings for

Bank A are in line with the studies performed by Bassens, Derudder and Witlox (2010:338),

Garas, (2012a:100), Malwaki (2013:571) and El-Halaby & Hussainey (2015:158).

The educational background of the SSB members of Bank A shows that one member has a

PhD in sharia from an Egyptian university, while the remaining three members have a

background in Islamic jurisprudence. One member is a lawyer and another has a Diploma in

Islamic banking and finance. None of the members had any training in conventional

economics. The educational background of SSB members of Bank B, shows that two

members have training in conventional economics, specifically a PhD in economics and a

professor in accounting. The remaining members are all experts in Islamic jurisprudence,

with three members holding a PhD in Islamic jurisprudence. The finding that SSB members

are generally experts in Islamic jurisprudence with minimal knowledge in conventional

economics is supported in the literature (Abdul-Rahman, 2010:77; Ariff and Iqbal, 2011:105;

Hamza; 2013:228; Hayat, Den Butter & Kock, 2013:611 Malwaki, 2013:570; Hakimi et al.,

2018:258; Hassan et al., 2018:249).

Bank A’s SSB also contains a section informing users about another committee in existence

called the “Sub-Committee of the Sharia Supervisory Board”. This committee is tasked with

ensuring that investment funds used by the bank are sharia compliant. It is interesting to note

that this committee is comprised of all the South African members of the SSB, and part of

their duty is to report to the SSB on sharia compliance, which appears redundant as they are

reporting to themselves. Additionally, on further inspection of the sharia report, there is no

statement giving assurance regarding the sharia compliance of these investment funds

overseen by the sub-committee. No such committee is reported for Bank B. The disclosures

for Bank A also indicate that the SSB should hold meetings at least annually and that the

sub-committee should meet at least four times a year. However, no mention is made whether

these meetings were convened and who attended them. Bank B does not provide disclosures

relating to meetings held during the year. The finding related to meetings is supported by the

study conducted by Abdullah, Percy and Stewart (2013).

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Finally, while Bank A does disclose what the duties of the SSB members are in the SSB

report, the duties related to members of the SSB of Bank B is disclosed in the sharia report

which is called the “Advisory Committee of Experts Report on Shariah Compliance”. This

finding is supported in the literature by Abdul Jabbar (2010:287), Kettel (2011:25-26) and

Malwaki (2013:572).

Table 2 presents the sharia audit report disclosure index of Bank A and Bank B.

Table 2: Sharia audit report disclosure index

No. Description Bank A Bank B

1 Title 1 1

2 Addressee 1 1

3 Opening paragraph (clear purpose of engagement) 1 1

4 Scope paragraph describing the nature of work performed

1 1

5 Statement that management is responsible for ensuring sharia compliance

1 1

6

Statement that SSB performed tests and procedures on: Transactions and dealings Appropriateness of profit and loss allocation Earnings (lawful or prohibited) Zakat compliance

1 1 1 1

1 1 1 0

7

Sharia opinion on: Transactions and dealings Appropriateness of profit and loss allocation Earnings (lawful or prohibited) Zakat compliance

1 1 1 1

1 1 1 0

8 Statement on any violation of sharia compliance 1 1

9 Report signed by all members of the board 1 1

10 Date of the report signed after management sign-off on annual financial statements

0 0

Total Score 15 13

Max Score 16 16

Percentage 94% 81%

The findings related to the sharia audit report disclosure index show that Bank A only slightly

outperforms Bank B with an overall score of 94% as compared to 81%.

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The sharia report of Bank A provides additional information about the scope of transactions

covered in their review which includes sukuk (Islamic bonds), Islamic wills, Forex transactions

and banking and finance fees. This information is not given in the disclosures made by Bank

B.

The sharia report of both banks does give an indication of the types of audit procedures that

are performed to ensure sharia compliance as well as compliance by both banks with the

Islamic verdicts issued by the SSB. What is not clear, however, is what sharia compliance

means or what Islamic verdicts have been issued and how compliance thereof is assessed.

This information would be useful to the users of these financial statements to reconcile this

with their own understanding of sharia compliance. This supports the finding by Hayat, Den

Butter and Kock (2013:611).

Bank A informs users in their sharia report that impermissible income has been designated

to be paid to charities. On inspection of note 14 titled “Welfare and Charitable Funds” in the

financial statements, while 14 million rand has been donated during the year, the fund at

year-end, has a balance of 15 million rand. Bank B provides clearer communication in this

regard by informing its users that illegal income has been set aside or transferred to a

foundation for charitable purposes. On inspection of the “Statement of Sources and Uses of

Charity Funds”, all impermissible income, that is 20.3 million naira, was distributed during the

year, leaving the fund with a “zero” balance.

Zakat information is provided by Bank A but no such information is given by Bank B. Both

banks highlight to users that erroneous transactions were identified and that management

has been instructed to correct them, but no information is given regarding what these errors

are, or if they were eventually corrected.

It was also found that the sharia report of both banks was signed before management

approved the annual financial statements. This increases the risk that non-sharia compliant

transactions could have been processed in this period, and potential accountability for

erroneous transactions identified by the SSB was ignored by management.

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These findings on the sharia report are supported by the studies conducted by Abdullah,

Percy and Stewart (2013) and Hayat, Den Butter and Kock (2013:611), except for disclosing

sensitive information such as profit and loss allocation and impermissible income for both

banks.

5. CONCLUSION AND AREAS FOR FUTURE RESEARCH

The aim of this paper was to determine the extent of sharia disclosures made in the 2017

annual reports for Bank A in South Africa and Bank B in Nigeria. The findings indicate that

for the SSB report, Bank A’s disclosures are assessed to be at 82% compliance versus Bank

B’s whose disclosures are assessed at being 45% compliant. The results, insofar as the

sharia report is concerned, shows that Bank A is 94% compliant while Bank B is 81%

compliant.

The study is not without limitations. Only two Islamic banks were included for the study as

they provide sharia disclosures, and only their 2017 annual report was analysed as it was the

latest disclosure at the time the study was conducted. Future research should extend this

analysis to other Islamic banks that operate in Africa. Additionally, future research could also

focus on determining whether there is any correlation between the performances of Islamic

banks operating in South Africa and Nigeria in relation to the types of CG disclosures made

to ensure sharia compliance.

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