Assessing Shariah Disclosure in Pakistan: The Case of Islamic Banks

Abstract

The foundation of Islamic banking and finance is based on the Islamic law of business transactions/ muamlat, which also confines to the moral and ethical codes of Islam. Also, the involvement of Shariah and Islamic ethics in the governance structure of Islamic banks gives rise to a special kind of disclosure issue called Shariah disclosure. The literature suggests, that stakeholders, including customers and shareholders, use Shariah disclose as core criteria to direct their transactions with Islamic Banking Institutions (IBIs). However, the available disclosure indices in the established literature are not insufficient for assessing Shariah disclosure of the IBIs. The present research study attempts to assess the level of Shariah disclosure of five full-fledged Islamic banks in Pakistan. For this purpose, the study developed Shariah Disclosure Index (ShDI). ShDI will be used as the basis upon the disclosure requirements of State Bank of Pakistan (SBP), Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI), and Islamic business reporting literature. A survey design is used to collect the data for ShDI constructs by utilizing annual reports of the five full-fledged banks from the year of 2015 until 2017. The findings disclosed that the Shariah disclosure in Pakistani Islamic banks is satisfactory i.e., near 70% compared 30% Shariah disclosure of the foreign Islamic banks operating in Pakistan. It is appreciable that all the Islamic banks, particularly Pakistani Islamic banks, disclosing about 80%-90% of the SBP mandatory and AAOIFI recommended Shariah disclosure items. While, disclosure of the voluntary Shariah disclosure items are still very low i.e. 15%. It is also noted that the Shariah disclosure level was gradually improving which portrays in the increment of the average Shariah disclosure level in 2017 compared to2015. The research provides a benchmark and indicator for all stakeholders who are making their investment and business decisions In addition, the study is equally important for IBIs to comply with ShDI to ensure full Shariah disclosure in order to attract new investors, religiously excluded investors, and protect the ideological stance and religious commitments of the existing customers as well.