Journal of Financial Reporting and AccountingCorporate social responsibility disclosure: A comparison between Islamic andconventional financial institutionsZakaria Ali Aribi Simon Gao

Article information:To cite this document:Zakaria Ali Aribi Simon Gao, (2010),"Corporate social responsibility disclosure", Journal of FinancialReporting and Accounting, Vol. 8 Iss 2 pp. 72 - 91Permanent link to this document:http://dx.doi.org/10.1108/19852511011088352

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Users who downloaded this article also downloaded:Abul Hassan, Sofyan Syafri Harahap, (2010),"Exploring corporate social responsibility disclosure: the caseof Islamic banks", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 Iss3 pp. 203-227 http://dx.doi.org/10.1108/17538391011072417Sayd Farook, M. Kabir Hassan, Roman Lanis, (2011),"Determinants of corporate social responsibilitydisclosure: the case of Islamic banks", Journal of Islamic Accounting and Business Research, Vol. 2 Iss 2pp. 114-141 http://dx.doi.org/10.1108/17590811111170539Zakaria Ali Aribi, Simon S. Gao, (2011),"Narrative disclosure of corporate social responsibilityin Islamic financial institutions", Managerial Auditing Journal, Vol. 27 Iss 2 pp. 199-222 http://dx.doi.org/10.1108/02686901211189862

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Corporate social responsibilitydisclosure

A comparison between Islamic andconventional financial institutions

Zakaria Ali AribiLancashire Business School, University of Central Lancashire, Preston, UK, and

Simon GaoEdinburgh Napier Business School, Edinburgh Napier University,

Edinburgh, UK

Abstract

Purpose The purpose of this paper is to examine the influence of Islam on corporate socialresponsibility disclosure (CSRD) in Islamic financial institutions (IFIs).

Design/methodology/approach Using the content analysis approach, the paper examines theinfluences of Islam on CSRD by looking into the annual reports of 21 conventional financialinstitutions (CFIs) and 21 IFIs operating in the Gulf region.

Findings The results show significant differences in the level and the extent of the disclosurebetween IFIs and CFIs, largely due to the disclosure made by IFIs of religions related themes andinformation, including Sharia supervisory board reports, the Zakah and charity donation, and freeinterest loan.

Originality/value This papers contribution to the literature is twofold: the paper reveals theactual difference of CSRD between IFIs and non-IFIs, by comparing the disclosures made by IFIs andnon-IFIs; and the paper identifies the extent of influence of Islam upon the CSRD of IFIs.

Keywords Corporate social responsibility, Disclosure, Islam, Financial institutions

Paper type Research paper

1. IntroductionCorporate social responsibility disclosure (CSRD) is the provision of financial andnon-financial information relating to an organisations interaction with its physical andsocial environment (Guthrie and Mathews, 1985). It is the process of communicating thesocial and environmental effects of an organisations economic action to particularinterest grouping within society and to the society at large (Gray et al., 1987, p. 9). CSRDhas played a significant role in business, through enhancing corporate transparency,developing corporate image and providing useful information for investment decisionmaking (Gray et al., 1988; Patten, 1990; Owen et al., 1997; ODwyer and Gray, 1998;Alnajjar, 2000; Friedman and Miles, 2001; Deegan and Blomquist, 2006).

Over the past decades, CSRD became an expanding area of accounting research.A number of theories, including agency theory, stakeholder theory, legitimacy theory,political economy theory, accountability theory and institutional theory have beenemployed to justify why companies disclose or not disclose corporate social responsibility(CSR) information (Guthrie and Parker, 1989; Ness and Mirza, 1991; Gray et al., 1995a, b;Deegan and Gordon, 1996; Deegan and Rankin, 1996; Adams and Harte, 1998; Ince, 1998;

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Journal of Financial Reporting andAccountingVol. 8 No. 2, 2010pp. 72-91q Emerald Group Publishing Limited1985-2517DOI 10.1108/19852511011088352

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Deegan, 2002; Deegan and Blomquist, 2006). However, the above theories were very muchdeveloped in the context of western market economies, and, therefore, their applicabilityin other parts of the world is questionable, in particular in Islamic societies wherebusinesses operate in a totally different cultural context along with different businessobjectives and ethics.

While the application of theories that were developed in a particular political,economic and culture environment to justify disclosure practice in other differentenvironment is arguable (Hofstede, 1983; Perera, 1989), there has been little attempt toexplain CSRD from the cultural and religious perspectives. The existing theoreticalframeworks concerning CSRD rarely recognise religion as a foundation in explainingwhy organisations disclose social information and also in making assessment oforganisations performance in terms of fulfilling their obligation to God, society andeco-system (Haniffa and Cooke, 2001).

The aim of this paper is to presume Islam as a key factor inspiring CSRD of IFIs anddifferentiating corporate behaviours between Islamic financial institutions (IFIs) andconventional financial institutions (CFIs) in disclosing CSR information. The paper isorganised as follows: Section 2 explains Islamic values with a view to justifying theneed for this study. Section 3 reviews some prior studies. Section 4 describes researchmethods and samples. The results and discussion are presented in Section 5. Section 6concludes the paper and highlights the limitation.

2. Islamic valuesUnlike in the western value-free society where religion is considered as a private matter(Rice, 1999), in many parts of the Muslim world, Islam is integrated in all aspects ofsociety including politics, community, law and economy. The influence of Islam onpeoples daily activities and businesses is well-documented in the Holy Quran andSunah[1]. Islam is not merely a personal religion, but also an organisation for society andits institutions, as well as the guide for conduct of individuals within that institutionaland social context (Tinker, 2004). Many of Islamic business values are part of core CSRactivities. As shown in Table I, for example, the primary sources of social responsibilityand business ethics in Islam are predominately based on the Holy Quran and Sunah.

Socio-economic justice is an essential element of Islam. This is because the objectiveof Islam is to build a fair society, which was clearly stated in the Holy Quran. We sendour Messengers with clear signs and sent down with them the Book and the Balance(Right and Wrong), that men may stand forth in justice (The Holy Quran S57:25). Islamaims at the formation of a socio-economic order based on justice and considers economicactivities as a means to an end and not an end in itself (Ebrahim and Joo, 2001).According to Al-Gazzali, one of the famous scholars in the eleventh century, the purposeof Sharia is to promote the welfare of the people, which lies in safeguarding their faith,their life, their intellect, their prosperity and their wealth (cited in Kamla (2005, p. 112).

Social responsibility in the Islamic context is based on the Islamic concept of humanwell being and good life, which stresses brotherhood/sisterhood and socio-economicjustice and requires a balanced satisfaction of both the material and spiritual needs of allhumans (Chapra, 1992). The concept of Khilafah (Vicegerency) defines a personsresponsibility to the community and a persons responsibility to himself or herself.According to Chapra (1992), the implication emanating from the concept of Khilafah isthat an individual is regarded as a trustee for Gods resources. This has a different

CSR disclosure

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Table I.Some examples ofbusiness ethics principlein Islam

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meaning to the concept of private ownership in the context of a western-marketeconomy. Under Khilafah, individuals will ultimately be accountable to God for theiractions as they agree to assume their great responsibility in a covenant with God(Hamid et al., 1993; Lewis, 2001). Allah empowers individuals to own, enjoy and transferwhat He has entrusted them. Thus, Islam perceives wealth as a grant, which has beengiven as a trust from Allah into the hand of the human being, and, therefore, should beutilised in the most effective and efficient way to produce the maximum outputand to follow Allah guidance of establishing prosperity and justice on the earth(Metwally, 1997).

To lay emphasis on social responsibility in society, Islam imposes payments of theZakah[2] on individuals and businesses and promotes charities[3] in order to harmonisebetween the rich and the poor. The main purpose of the Zakah is a redistribution ofwealth (Lewis, 2001). The Zakah is collected from Muslim individuals and businessesand then paid to the poor, needy and for the interest and welfare of the community.In addition to charities and the Zakah, Islam encourages free of interest loan where aborrower requires to pay back the amount borrowed and the lender to be lenient with theborrower if the debtor is in a difficulty, grant him time till it is easy for him to repay.But if ye remit it by way of charity, that is best for you if ye only knew (The Holy Quran,S2:280). Islam strictly bans charging interest on any loan under any circumstances.Interest is regarded as a prominent source of unjustified advantage (Sarker, 2000) andviolates the principle of social justice (Mirza and Baydoun, 2000):

O ye who believe! fear Allah and give up what remains of your demands for usury, if ye areindeed believers. If ye do it not, take notice of war from Allah and His Messenger: but if yerepent ye shall have your capital sums; deal not unjustly and ye shall not be dealt withunjustly (The Holy Quran, S2:279-80).

Islam concerns about safeguarding of natural resources. About 1,427 years ago, theHoly Quran warned against the negativity of spoiling the environment: Mischief hasappeared on land and sea because of (themed) that the hand of men have earned(The Holy Quran S30:41). Islam advocates the mankind to take care everything createdby Almighty Allah, as it is part of submission to Allah. In relation to the environmentalresponsibility in Islam, the Holy Quran underlines the importance of protecting theenvironment. The Quran says do not spread mischief on the earth, after it has been setin order, and invoke Him with fear and hope; Surely, Allahs Mercy is (ever) near unto thegood-doers (The Holy Quran, S7:56). In Islam, the mankind has been entrusted withthe responsibility of protecting the earth. This trusteeship is seen as onerous and noother creature would accept it. Allah says: We offered the trust unto the heavens and theearth and the hills, but they shrank from bearing it and were afraid of it and manassumed it (The Holy Quran, S33:72). This concept of trusteeship in Islam, similar tothe notion of sustainable development, does not regard natural resources as a free goodto be wasted at the free well of any nation (Rice, 1999). No one has the authority to wasteor corrupt the resources. Eat and drink, but waste not by excess; Verily He loves not theexcessive (The Holy Quran:S7:31).

Indeed, Islam offers great advantage for environmental conservation, protectionand sustainable development in that it is a source for law that is consistent withcultural values of Islamic Society and can be imported with ease into environmentalpolicy that is both effective and implement-able (Bagader et al., 1994, p. viii). There arehundreds of verses in the Holy Quran concerning environmental issues. Sharia sets up

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the standards of human conduct and how businesses should deal with their externalenvironment.

Muslims are expected to conduct their business activities in accordance with therequirement of Sharia. Since the foundation of IFIs is based on Islamic values, they areconsidered having ethical identity and have unique social and economic objectives(Haniffa and Hudaib, 2007). IFIs are guided by an Islamic economic worldview, whichis based on the principle of social justice and the well being of society (Dusuki and Dar,2005). Llias (2008, p. 1) outlines major differences between IFIs and CFIs. IFIs operateon the basis of banning interest (riba) and uncertainty, sharing risk and profits,encouraging ethical investments that enhance society and asset-banking. It requireseach a financial transaction must be tied to a tangible, identifiable underlying asset.Under Sharia, money does not belong to the asset category as it is intangible and thusshould not earn a return.

Businesses that follow Islam principles have to incorporate Sharia fully into theirbusiness practice and objectives, leading to corporate behaviours that are differentfrom the ones in the western market economy where profits maximisation includingprofits from interest on loans is the legitimate aim of business. In the context of Islambusiness world, businesses have to demonstrate their accountability to God andfulfillment of social objectives. This demonstration is expected to be reflected in theannual reports published to the public.

3. Prior researchA number of studies have investigated the CSRD of companies conducting theirbusiness according to Islam (Anuar et al., 2004; Yahya et al., 2005; Haniffa and Hudaib,2007). For instance, using content analysis, Anuar et al. (2004) provide evidence thatsupports the contention that Islam has an effect on corporate environmental reporting.They compare the environmental practice of Sharia-approved companies, which areconducting their activities in strict accordance to Islamic principles with theenvironmental practice of non-Sharia-approved companies that operate in Malaysia,and show that the former has a higher level of environmental reporting compared tonon-Sharia companies. They suggest that the higher extent of environmental reportingamong Sharia-approved companies may reflect an attempt by such companies topresent corporate reporting which embodies the Islamic principles of full disclosure andenvironmental accountability. While adopting a comparative approach, their study wasvery much limited to environmental reporting.

Haniffa and Hudaib (2007) conduct a longitudinal survey study of the annualreports of seven IFIs in four Arabian Gulf region countries. Using content analysisto examine the effectiveness of Islamic banks communicating of their ethical identity,they investigate the discrepancy between the communicated information (basedon information disclosed in the annual reports) and ideal disclosure (i.e. disclosure ofinformation deemed vital based on the Islamic ethical business framework). While itexpects that IFIs must comply with the precepts of Sharia Islamiah in their reporting,their findings indicate fall far short of what would be enabling ethical and socialcommunication in IFIs, and the reports vary across the 3-year period, suggesting thatthe communication by IFIs is very much minimal. They believe this was mainly due toa lack of pressure from stakeholders and also the prevailing secretive culture in theregion (p. 111).

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Yahya et al. (2005) measure the level of CSRD in Sharia-approved companies inMalaysia. They find that only 102 companies out of 194 disclose their social activitiesin the annual reports. They further investigate the relationship between the level ofCSRD and the number of Islamic equity funds holding shares in the companies. Theirresults reveal that the number of Islamic equity funds investing in any company isparallel to the level of social activities disclosed by the company. Maali et al. (2003,2006) investigate the influence of Islam on social reporting. Based on Islamic principlesand Islamic code of ethics, Maali et al. (2006) develop a benchmark for social disclosurewhich they would expect Islamic banks to provide. Yet, their results indicate that theextent of social disclosure by Islamic banks falls far short of the benchmark and thereis a considerable variation in the voluntary social reporting across Islamic banks.

Overall, most of the studies tend to examine the gaps between the expectation ofdisclosure and the actual disclosure of Islamic businesses. While the identification ofexpectation gaps is useful, it fails to reveal the actual difference of CSRD between IFIsand non-IFIs. Our study attempts to make a contribution to the literature by comparingCSRD between IFIs and non-IFIs, with a view to identifying the extent to which Islamhas influenced the CSRD of IFIs. Such a comparison would clearly enhance ourunderstanding of the actual influence of Islam on CSRD.

4. Sample and research methodsOur study is based on the annual reports of financial institutions. Of the 42 companiesthat were included in the sample, 21 (50 per cent) were fully Sharia-approved companiesand the rest were CFIs. Since the aim of our study is to compare CSRD between IFIs andCFIs, it is essential to control the political, social and economical variables. To achievethis, we focus on financial institutions operating in Gulf countries as these countrieshave, to a large extent, analogous economic, political and social environments. The entirepopulation of IFIs was obtained from the General Council of Islamic Banks and FinancialInstitutions. Among these there are 24 IFIs operating in Gulf countries. The annualreports of three IFIs were not available. To make a valid comparison, the similar numberof 2004[4] annual reports from 21 CFIs companies was obtained; those firms wererandomly selected from companies listed on the stock exchanges in the region.

To measure and compare the quantity and the quality of CSRD among financialinstitutions, content analysis was employed. Content analysis, as a commonly usedmethod in disclosure research (Gray et al., 1995a; Deegan and Rankin, 1996; Gao et al.,2005) is an approach of codifying the text (or content) of a piece of writing into differentgroups depending on particular criteria (Weber, 1988). Different units of a contentanalysis can be employed including number of words; number of sentences; number oflines; proportion of pages; or a mix of these units (Unerman, 2000). Each method has itspros and cons (Campbell, 2004). This study measures the level of CSRD with numbersof words disclosed as words are the smallest unit of measurement for analysis and canbe expected to provide the maximum robustness to a study in assessing the quantity ofdisclosure (Zeghal and Ahmed, 1990; Campbell, 2004). The use of words will increasethe reliability of content analysis.

Content analysis requires the researcher to implement a coding (checklist) scheme(Wolfe, 1991). In this study, a checklist instrument (Appendix, Table AI) describing thethemes and the sub-themes for CSRD was designed based on prior research inCSRD generally and Arab Muslim countries particularly (Ernst and Ernst, 1978;

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Gray et al., 1995a; Kamla, 2005; Maali et al., 2006; Haniffa and Hudaib, 2007). Some ofour themes in the checklist are formally required by the AAOIFI[5]. As AAOIFIstandards are not mandated in all the sample countries and most IFIs in the sampleoperate in more than two countries including countries where AAOIFI was notmandated, the annual report produced by these institutions does not have a clear cutbetween mandatory and voluntary elements. Moreover, distinguishing betweenvoluntary and mandatory disclosure is beyond the scope of this study as our purpose isto investigate the extent of CSR disclosures with a view to identifying the influenceof Islam. So this study does not differentiate mandatory and voluntary disclosures.In order to enrich the content analysis data and to provide a detailed in-depth analysis,an effort was made to capture the quality and type of disclosure.

Consistent with prior studies (Guthrie and Mathews, 1985; Gray et al., 1995b; Zeghaland Ahmed, 1990), the themes were further analysed under three categories of evidence(i.e. monetary, qualitative and quantitative) and type of news (i.e. good, neutral and bad)(Appendix, Table AII).

Reliability and validity in content analysis refer to a measuring procedure, whichensures to provide the same results on repeated trails. In other word, reliabilityand validity are determined to ensure that different researchers will code the text in thesame way and therefore diminish the chance for inaccuracy and biases. A number ofsteps were taking to ensure reliability:

(1) Well specified coding instruments, with well-specified decision rules (Appendix,Tables AI and AII) have been developed to minimise discrepancies and fulfillobjectivity.

(2) One of the researchers, main coder, has undergone an extensive period oftraining prior to starting the process of analysing in order to have a betterunderstanding of the subject.

(3) To ensure reproducibility, three annual reports were tested by different codersin a pilot test. Ambiguities were discussed with the authors, who endeavour toensure that all coders used the same coding rules; and any points made wereused to develop the framework of analysis.

(4) Each step in the research process must be fulfilled on the basis of explicitlyformulated rules and procedures. Moreover, any definitions used in the datagathering must be negotiated to realise these shared meanings which recreatethe same referents in all the associated investigators (Gray et al., 1995b, p. 80).

(5) In order to ascertain stability in the measurement procedure, a few annualreports, which were analysed by the researchers, were those which wereanalysed during the pilot test. The result was almost stabilised. This procedurewas undertaken in order to ascertain if the initial categories identified and theirmeasurement have remained stable at different times (stability).

For the examination of the internal consistency of CSRD, Cronbach coefficient was used.Cronbach coefficient a, is a measure of internal consistency that uses repeatedmeasurement to assess the degree to which correlation among the measurements isattenuated to random error (Botosan, 1997). For the seven categories, Cronbachcoefficient a is 0.624, which is fairly within an acceptable level. However, there is nouniversal standard test of significance for this statistic (Botosan, 1997). Milne and Adler

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(1999) note that any attempt to establish a single criterion value of acceptable codingreliability is problematic.

5. Results and discussionsA summary of the disclosures made by both IFIs and CFIs is presented in Table II,indicating that all the sample reports provided CSRD. The overall level of CSRD wasgreater by IFIs than CFIs. The mean of words disclosed by IFIs was 1,160 comparingto 750 by CFIs. A t-test shows the difference between the two groups is statisticallysignificant (Table II). To determine the robustness of the results, a non-parametricMann-Whitney U-test was also performed. The result of U-test supports the findingswith p-value,0.05. However, the differences in the level of disclosure varied across thedifferent themes between the two groups. As shown in Table II, both t-test and U-testshow statistically significant differences between the two groups in some themes. Theproportion of IFIs reporting on philanthropy, Sharia board report and other disclosurewas higher than that of CFIs; this is probably because the two categories (philanthropyand Sharia board report) were required by the AAOIFI standards. Excluding thesetwo categories, the difference between the two groups of institutions was lessstatistically significant, even though IFIs disclosed slightly more than CFIs.

Table II also shows that IFIs were more inclined to disclose monetary informationwith 2,965 words, comparing to 678 words by CFIs and there was no bad newsdisclosed by CFIs. Overall, IFIs intended to disclose more than their counterparts.

5.1 EmployeesAll companies in the sample disclosed some sorts of employee-related information.Table III reveals the quantity of words on human resource disclosed by each group.While there is no overall difference in the number of companies between the two groups,IFIs appear to provide more words of the disclosure than CFIs. The level of wordsdisclosed varies greatly among sub-themes under employees. While both groups showedmore attention to training and development, and employee benefit, less disclosure wasgiven to workplace environment and equal opportunity. The disclosures were verymuch in qualitative nature as shown in Table III. Also more space was dedicated to goodnews disclosure by both groups. IFIs were inclined to disclose more bad news than CFIs.

5.2 CommunityDisclosure under this theme covers sub-themes such as community investment,contribution to national economy and education, health support, provision ofinterest-free loans and public welfare. The disclosure results are presented inTable IV. Overall, 29 banks (69 per cent) of the total sample disclosed information as tothe community and the average number of words disclosed by IFIs was 81 ascompared to 109 by CFIs. Although CFIs reported more community information withtotal number of 2,303 words as compared to 1,718 words by IFIs, the number of banksdisclosed community information was 15 (90 per cent) by IFIs as compared to14 (66 per cent) companies in CFIs. The disclosure of positive community relatedinformation might offer a good opportunity for banks to portray themselves as a goodcitizen in their societies. Table IV shows that the level of disclosure varied between thetwo groups across all the sub-themes. However, there was a lack of disclosure undersocial loan by CFIs in comparison to the disclosure of 338 words by IFIs, which was

CSR disclosure

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Table II.CSRD comparisonsbetween IFIs and CFIs

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expected as disclosure by IFIs under this sub-theme is required under the AAOIFIstandards. In addition, the high level of disclosure was of qualitative nature and tendedto be good news for both groups. While both groups disclosed monetary information,IFIs provided more disclosure than CFIs.

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

Sub-themesEmployee data 14 347 7 143Equal opportunity 2 44 2 22Training and development 17 1,282 11 867Appreciation and thanks 15 508 17 363Employee benefit 10 1,380 11 1,090End service indemnity 15 834 13 662Pension 6 158 6 195Localisation of employees 4 91 10 604Work place environment 1 16 2 91Other 8 371 4 518Total 5,031 4,555QualityMonetary 1,101 283Quantitative 454 724Qualitative 3,476 3,548Good news 3,665 3,053Neutral news 1,351 1,502Bad news 15

5,031 4,555

Table III.Disclosure of employee

information byIFIs and CFIs

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

Sub-themesCommunity investment 6 575 8 455Contribution to nationaleconomy 8 624 8 967Education 4 93 11 122Health 2 69 1 84Social loan 5 338 0Social activities support 1 19 8 664Other 0 1 11Total 1,718 2,303QualityMonetary 497 92Quantitative 50 114Qualitative 1,171 2,097Good news 1,530 2,060Neutral news 188 243Bad news

Table IV.Disclosure of community

information byIFIs and CFIs

CSR disclosure

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5.3 PhilanthropyThis category mainly includes the disclosure related to donation, charity and theZakah. As shown in Table V, both groups provided some kinds of philanthropydisclosure. The total number of companies disclosed information under this theme was22 (52 per cent of the total sample); of which 4 were CFIs and 18 IFIs. The total numberof words disclosed was considerably higher by IFIs with 2,728 words comparing to608 words disclosed by CFIs. This is expected because under the AAOIFI standards,IFIs are required to disclose information on their involvement in the Zakah and charity.Two types of philanthropy information were disclosed. Much of the information foundin both groups was qualitative and monetary in nature and neutral. While good newswas the dominated type of news, no disclosure was made of bad news by both groups.

5.4 Products and servicesProducts and services disclosure are classified under four sub-themes includingdevelopment and innovation of new products, quality of products and services, ISO orother quality awards and related disclosure. The number of institutions that disclosedinformation under this theme was quite similar for both groups. Table VI indicates that35 (83 per cent) companies of the total sample disclosed information on products andservices; 17 were IFIs and 18 were CFIs. The level of words disclosed was considerablyhigh in both groups, with 2,951 words disclosed by IFIs and 2,822 words by CFIs. Thevast majority of disclosures made by both groups were related to the sub-themes ofdevelopment and innovation. The nature of information disclosed was very similar andtended to be qualitative with good news.

5.5 CustomerDisclosure under this theme covers information concerning customer service, meetingcustomer needs, customer satisfaction and policy towards insolvent clients. As shownin Table VII, the disclosure of such information under customer category was verycommon among the two groups. A total of 18 companies of each group disclosedsuch information. The number of words disclosed ranged from 4,809 words by CFIs

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

Sub-themesCharity anddonation 9 487 4 608Zakah 18 2,295 Other Total 2,782 608QualityMonetary 1,224 235Quantitative 279 81Qualitative 1,279 292Good news 1,319 608Neutral news 1,463 Bad news

Table V.Disclosure ofphilanthropy informationby IFIs and CFIs

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to 3,853 words by IFIs. The most predominant sub-theme was customer service. Therewas a lack of disclosure by CFIs concerning the themes of policy towards insolventclients and meeting customer needs. The nature of disclosure was somehow similar forboth groups, with the vast majority of disclosure were qualitative and good news.

5.6 Sharia supervisory board report (SSBR)The SSB is an independent external committee to observe the conduct of business andprovide assurance to the stakeholders that the business is carried out in accordancewith the Islamic principles. Annual reports produced by the SSB provide the necessary

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

Sub-themesNew product developmentand innovation 18 2,524 17 2,284Products and services quality 9 256 10 386ISO and other awards 3 171 4 188Other Total 2,951 2,822QualityMonetary Quantitative Qualitative 2,951 2,822Good news 2,913 2,806Neutral news 38 16Bad news

Table VI.Disclosure of product and

service information byIFIs and CFIs

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

ThemesCustomer service 14 2,826 16 3,742Meeting customer needs 6 135 Customer satisfaction 7 267 8 250Policy towards insolventclients 12 Difficult to reach customer 1 25 1 19Other 11 588 9 798Total 3,853 4,809QualityMonetary Quantitative 77 38Qualitative 3,776 4,771Good news 3,543 4,514Neutral news 310 295Bad news

Table VII.Disclosure of customer

information by IFIsand CFIs

CSR disclosure

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assurance to Muslim clients and shareholders as to if the business meets their ethicalexpectations. As the disclosure of SSBR in annual reports is recommended under theAAOIFI standards, this theme was unique to IFIs and no disclosure of this theme wasmade by CFIs[6]. As shown in Table VIII, SSBR was included in the annual reports by19 companies (90 per cent) out of 21 IFIs. The large number of IFIs disclosing SSBRwas not surprising since IFIs need to assure their stakeholders that all their activitiesand products are complying with Sharia. However, the level of information disclosedvaried greatly among IFIs and across the sub-themes. As shown in Table VIII, the vastmajority of the disclosures tended to be qualitative with a mixture of bad, neutral andgood news. The bad news was largely concerned with transactions which contradictedSharia, and the ways of dealing with the income generated from such transactions.Very few companies disclosed monetary information.

5.7 Other CSR disclosuresOther disclosures are concerned with social information in the sample of the annualreports that were not captured in the previous themes. It includes mentioning the nameof Allah and his Prophet, praising Allah, verses from the Holy Quran, and adherenceto Islamic principles and ethical conduct. A total of 34 companies within the sampledisclosed some information under this theme. The information provided tended to fallinto two streams, mainly the Islamic values and the ethical values. Table IX presentsthe disclosures by each group. All IFIs provided information with 4,866 wordsdisclosed, in comparison to only 13 companies by CFIs with total 946 words disclosed.Table IX shows that most of these disclosures by IFIs came under Islamic value andcommitment to Sharia. Most of the disclosures by CFIs were related to commitment toethical conducts. Few CFIs companies disclose monetary and quantitative disclosure.The majority of these disclosures by IFIs were purely qualitative with a mixture ofgood, bad and neutral news.

6. Discussion and conclusionThe above results of content analysis reveal two interesting observations. First,CSRD is presently very much a common practice among financial institutions from

IFIsCategory Number of companies Number of words

ThemesBackground on the SSB members 19 1,708Provision of fatwa[7] and consultancy 19 130Examination of documents 19 2,617Compliance with Sharia 19 2,068Total 6,523QualityMonetary 34Quantitative Qualitative 6,489Good news 4,553Neutral news 1,810Bad news 160

Table VIII.Disclosure of SSBRinformation by IFIs

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developing countries in the Gulf region, although the levels of disclosures differ acrossdifferent institutions. In most of those disclosures there were little differences betweenIFIs and CFIs, suggesting that some common themes and concerns are applicable to allfinancial institutions, regardless of their business ethics and objectives. This perhapsreflects the accounting-globalization interrelation (Gallhofer and Haslam, 2006).Second, IFIs provide additional disclosures under the AAOIFI standards with a view tojustifying their ethical values and accountability to God. So far little evidence suggeststhat such a disclosure would sufficiently discharge the accountability to God and meetthe expectations of religious needs in the context of Islam environments. Nevertheless,such additional disclosures as shown in this study prove, to some extent, the influencesof Islamic religion on CSRD. This raises an interesting question for further research asto whether other religions (e.g. Buddhism in some Asian countries and Christianity inthe west) would also play some roles in CSRD. Such research would help identifywhether the findings of this study are unique to Islamic societies (in this case it woulddispute the universalism of religious influences on CSRD) or the findings share similarevidence from studies based on other religions. Clearly a questioning approach shouldbe employed to interpret our results which were derived from a content analysis oflimited numbers of annual reports.

Yet, it can be argued that in addition to providing information for economicdecisions, there may be a further primary objective for corporate reporting of IFIs froman Islamic perspective. This primary objective, noted in the literature, is to ensure thatthe organisation discharges the Islamic concept of accountability. The statutoryrequirement per se under the AAOIFI standards including the disclosure of SSBR, theZakah, charity donation and free interest loan statement probably emphasises thisobjective. The lack of disclosure by CFIs under those theme and sub-themes could bejustified on the basis that these disclosures merely relate to the religious practice andensure that the IFIs discharge the Islamic concept of accountability; this has nothing todo with the business of CFIs, even they operate in the similar political and economicenvironment.

IFIs CFIs

CategoryNumber ofcompanies

Number ofwords

Number ofcompanies

Number ofwords

ThemesIslamic values 15 1,261 3 79Commitment to ethicalconduct 4 121 2 232Adherence to Sharia 21 3,288 General statement of CSR 9 196 9 635Total 4,866 946QualityMonetary 109 68Quantitative 25 Qualitative 4,732 878Good news 4,631 946Neutral news 225 Bad news 10

Table IX.Disclosure of other

related information byIFIs and CFIs

CSR disclosure

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It can also be argued that the disclosure of negative news by IFIs (particularlyregarding transactions which contradict Sharia, and the ways to deal with the incomegenerated from such transactions) is a sign of the positive role played by SSB intransparency and social responsibility. The duty to disclose or tell the truth is veryimportant in the Islamic context and this applies to businesses as much as to individuals,even if such disclosure would work against the firm or person himself (Maali et al., 2006).Although the effectiveness of SSB under the Islamic corporate governance system isunclear due to a dearth of research, our results of additional disclosure, inter alia, thedisclosure of negative news by IFIs could indicate some potential of this religion-basedsupervisory board and its reports on corporate social responsibility. An externallyindependent ethical board, in addition to the sole board of directors could be an option toovercome some of the drawbacks witnessed presently in the western market economy ofcorporate governance and corporate social responsibility.

Our study presents an empirical result as to the current status of CSRD in IFIsthrough a comparison with CFIs operating in the identical political, social andeconomic environment. Using the content analysis approach, we compare the annualreports of 21 CFIs with 21 IFIs operating in the Gulf region. Our results showsignificant differences in the level and the extent of the disclosure between IFIs andCFIs, largely due to the disclosure made by IFIs concerning religion-related themes andinformation, including Sharia supervisory board reports, the Zakah and charitydonation and free interest loan under the guidance of the AAOIFI. Excluding thissupplementary disclosure, the difference between IFIs and CFIs of CSRD was notsignificant. Yet, IFIs intended to disclose more negative news than CFIs. The aboveresults lead intuitively to the conception of Islamic influence on CSRD, which mayprovide an additional perspective to the existing literature on CSRD.

Nevertheless, the results of our study are subject to a number of limitations. We didnot examine the longitudinal data of CSRD. As a result, our study can only unearth thestatus of CSRD in a particular year, but cannot provide a trend and developmentpicture. Future research should try to overcome this limitation. Another limitation isthat the sample is restricted to financial institutions operating in the Gulf region. Thefindings would be more generalisable if more IFIs and CFIs are included in the sample.Future research might extend the scope of this study by including IFIs from otherregions (e.g. South-East Asia and Africa) where IFIs are actively in operation as well asincluding non-financial institutions.

Notes

1. Sunah linguistically means path. In this context, it stands for the saying, actions andapprovals of prophet Mohamed pray and peace upon him.

2. The Zakah, literally means purification. It is one of the five pillars of Islam. The Zakah ispayable once every year at the end of the Zakah period (i.e. one lunar year). It is payable on aproductive asset that has been possessed for one lunar year. However, assets and goods,which are for consumption, are exempt from the Zakah, provided they are not aimed fortrade.

3. The prophet Mohamed (peace and prayer be upon him) said When a person dies, his gooddeeds come to end, except for three things: charity that continues to benefit others,knowledge that continues to be benefit, and pious child who prays for him.

4. Fiscal year of 2004 was chosen when this study initially as a PhD project started.

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5. AAOIFI is an independent international professional body responsible for developingaccounting, auditing, ethics, corporate governance and Sharia standards for IFIs. AAOFIFis supported by institutional members (155 members from 40 countries) including centralbanks, Islamic financial institutions and other participants from the international Islamicbanking and finance industry.

6. The vast majority of IFIs have the Sharia Supervisory Board and, therefore, disclose SSBR.In a few countries such as Bahrain this report is required by law. However, in most othercountries IFIs disclose this report on a voluntary basis despite it being recommended by theAAOIFI.

7. Fatwa is a religious opinion concerning Islamic law. It is issued by an Islamic scholar.

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Appendix

Employee This theme describes the impact of organisational activities onthose who constitute the human resources of the organisation.This form of disclosures includes reporting on matters such asemployee numbers and remuneration, equal opportunities,employee share ownership, employee benefit, pension, endservice indemnity and work place environment. It also coversdisclosures on employee consultation, training

Community Community theme comprises any reference to community,including information relating to community investment,contribution to national economy (e.g. financing projects thatlead to the economy development), free interest loan to lowincome people, social activities support, as well as supportingexisting community activities (such as local health andeducation)

Philanthropy Disclosure under this sub-theme, covers any informationconsidering charity donation and Zakah, and any otherphilanthropy related activities

Customer This theme covers items such as customer service (e.g.provision for customer convenience). It also includes meetingcustomer needs, providing special services or branches,customer compliant/satisfaction, as well as specific customerrelation such as policy for late payment by the client

Products and service This concerns the qualitative aspects of the products, forexample product development, product and service quality,ISO or any other awards for product and services

Environment issue It covers disclosures on environmental policy, lending andinvestment policy for environmental projects and conservationfor natural resource

Sharia Supervisory Board Report(SSBR)

The main reason for having SSB is to make sure that thecompany conduct its business according to Islamic moral andavoiding transaction that contradicts with Sharia. Disclosureunder SSBR includes items such as background of SSBmembers, exam of documents, provision of fatwa andconsultation and compliance with Sharia

Other This theme includes any CSRD, which is not covered in theabove themes. For example, commitment to ethical conduct,general statement of CSR, etc.

Table AI.Disclosure themes andsub-themes

JFRA8,2

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Corresponding authorSimon Gao can be contacted at: s.gao@napier.ac.uk

Evidence Definition

Monetary Disclosure will be classified as monetary if it includes monetary value or measureQuantitative Disclosure will be classified as quantitative if it is expressed in quantitative termsQualitative Disclosure that is not classified as monetary or quantitative, such as general statement

of an opinionType of disclosureGood news Disclosure which includes, for example, details where these details have a creditable

reflection on company, any statements which reflect credit on company, upbeatanalysis/discussion/statements, etc.

Neutral news Disclosure will be counted as neutral news if it refers to general policy statement orintent within statutory minimum with no details of what or how; statement of factswhose credit/discredit to company is not obvious unaccompanied by editorializing

Bad news Any statement, which reflects/might reflect discredit on the company, including, forexample, numbers made redundant, accident, negative feedback from customers [. . .]

Table AII.Defined evidence of

CSRD and type of news

CSR disclosure

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This article has been cited by:

1. Haslinda Yusoff, Faizah Darus. 2014. Mitigation of Climate Change and Prevention of Pollution Activities:Environmental Disclosure Practice in Islamic Financial Institutions. Procedia - Social and BehavioralSciences 145, 195-203. [CrossRef]

2. Ataur Rahman Belal, Omneya Abdelsalam, Sardar Sadek Nizamee. 2014. Ethical Reporting in Islami BankBangladesh Limited (19832010). Journal of Business Ethics . [CrossRef]

3. Zakaria Ali Aribi, Thankom Arun. 2014. Corporate Social Responsibility and Islamic FinancialInstitutions (IFIs): Management Perceptions from IFIs in Bahrain. Journal of Business Ethics . [CrossRef]

4. Ruhaya Atan, Suhailah Dullah, Saunah ZainonCorporate social responsibility reporting 529-534.[CrossRef]

5. M. Mansoor Khan. 2013. Developing a Conceptual Framework to Appraise the Corporate SocialResponsibility Performance of Islamic Banking and Finance Institutions. Accounting and the Public Interest13, 191-207. [CrossRef]

6. Zakaria Ali Aribi, Simon S. Gao. 2011. Narrative disclosure of corporate social responsibility in Islamicfinancial institutions. Managerial Auditing Journal 27:2, 199-222. [Abstract] [Full Text] [PDF]

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