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Corporate social responsibility disclosure A comparison between Islamic and conventional financial institutions
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Zakaria Ali Aribi Lancashire Business School, University of Central Lancashire, Preston, UK, and
Simon Gao Edinburgh Napier Business School, Edinburgh Napier University, Edinburgh, UK Abstract Purpose – The purpose of this paper is to examine the influence of Islam on corporate social responsibility disclosure (CSRD) in Islamic financial institutions (IFIs). Design/methodology/approach – Using the content analysis approach, the paper examines the influences of Islam on CSRD by looking into the annual reports of 21 conventional financial institutions (CFIs) and 21 IFIs operating in the Gulf region. Findings – The results show significant differences in the level and the extent of the disclosure between IFIs and CFIs, largely due to the disclosure made by IFIs of religions related themes and information, including Shari’a supervisory board reports, the “Zakah” and charity donation, and free interest loan. Originality/value – This paper’s contribution to the literature is twofold: the paper reveals the actual difference of CSRD between IFIs and non-IFIs, by comparing the disclosures made by IFIs and non-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
Journal of Financial Reporting and Accounting Vol. 8 No. 2, 2010 pp. 72-91 q Emerald Group Publishing Limited 1985-2517 DOI 10.1108/19852511011088352
1. Introduction Corporate social responsibility disclosure (CSRD) is the provision of financial and non-financial information relating to an organisation’s interaction with its physical and social environment (Guthrie and Mathews, 1985). It is “the process of communicating the social and environmental effects of an organisation’s economic action to particular interest grouping within society and to the society at large” (Gray et al., 1987, p. 9). CSRD has played a significant role in business, through enhancing corporate transparency, developing corporate image and providing useful information for investment decision making (Gray et al., 1988; Patten, 1990; Owen et al., 1997; O’Dwyer 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 been employed 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;
Deegan, 2002; Deegan and Blomquist, 2006). However, the above theories were very much developed in the context of western market economies, and, therefore, their applicability in other parts of the world is questionable, in particular in Islamic societies where businesses operate in a totally different cultural context along with different business objectives and ethics. While the application of theories that were developed in a particular political, economic and culture environment to justify disclosure practice in other different environment is arguable (Hofstede, 1983; Perera, 1989), there has been little attempt to explain CSRD from the cultural and religious perspectives. The existing theoretical frameworks concerning CSRD rarely recognise religion as a foundation in explaining why organisations disclose social information and also in making assessment of organisation’s performance in terms of fulfilling their obligation to God, society and eco-system (Haniffa and Cooke, 2001). The aim of this paper is to presume Islam as a key factor inspiring CSRD of IFIs and differentiating corporate behaviours between Islamic financial institutions (IFIs) and conventional financial institutions (CFIs) in disclosing CSR information. The paper is organised as follows: Section 2 explains Islamic values with a view to justifying the need for this study. Section 3 reviews some prior studies. Section 4 describes research methods and samples. The results and discussion are presented in Section 5. Section 6 concludes the paper and highlights the limitation. 2. Islamic values Unlike 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 of society including politics, community, law and economy. The influence of Islam on people’s daily activities and businesses is well-documented in the Holy Qur’an and Sunah[1]. Islam is not merely a personal religion, but also an organisation for society and its institutions, as well as the guide for conduct of individuals within that institutional and social context (Tinker, 2004). Many of Islamic business values are part of core CSR activities. As shown in Table I, for example, the primary sources of social responsibility and business ethics in Islam are predominately based on the Holy Qur’an and Sunah. Socio-economic justice is an essential element of Islam. This is because the objective of Islam is to build a fair society, which was clearly stated in the Holy Qur’an. “We send our 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 Qur’an S57:25). Islam aims at the formation of a socio-economic order based on justice and considers economic activities 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 purpose of Shari’a 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 human well being and good life, which stresses brotherhood/sisterhood and socio-economic justice and requires a balanced satisfaction of both the material and spiritual needs of all humans (Chapra, 1992). The concept of Khilafah (Vicegerency) defines a person’s responsibility to the community and a person’s responsibility to himself or herself. According to Chapra (1992), the implication emanating from the concept of Khilafah is that an individual is regarded as a trustee for God’s resources. This has a different
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Source: Adopted from Rice (1999, p. 350)
Importance of knowledge seeking, research and development, scientific activities, training programme
Fairness in contracts negotiation
Whoever knows of defect in something is obliged to disclose it
Fulfilling obligations and trust in business relationships and workplace Give full measure and weight
Excellence and quality of work
Employee fair treatment, equal opportunity and non-discriminatory behaviour
The Holy Prophet said “I will be foe to three persons on the day of judgment, one of them being the one who, when he employs a person that has accomplished his duty, does not give him his due” (Al Bukhari, No. 2109) No Arab has superiority over a non-Arab and no non-Arab has any superiority over an Arab; no dark person has superiority over a white person and no white person has superiority over a dark person. The criterion of honour in the sight of God is righteousness and honest living (saying of prophet Muhammad) (Sallam and Hanafy, 1988) God likes that when someone does any thing, it must be done perfectly well (saying of the prophet Muhammad-pray and peace upon him) (Sallam and Hanafy, 1988) God does command you to render back your trusts to those to whom they are due (Quran 4:54) “Give just measure and weight, nor withhold from the people the things that are their due[. . .]” (Qur’an 11:85) “He who cheats is not one of us” (saying of the Prophet Mohamed-pray and peace upon him) (Keller, 1994) “[. . .] do not outbid one another in order to raise the price, fairness in contract negotiation [. . .] don’t enter into a transaction when other have already entered into that transaction and be as brothers one to another” (saying of prophet Mohamed-pray and peace upon him) The acquisition of knowledge is a duty incumbent on every Muslim, male and female (saying of the prophet Muhammad-pray and peace upon him) (Sallam and Hanafy, 1988)
Table I. Some examples of business ethics principle in Islam Related business practice
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Ethical principle
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meaning to the concept of private ownership in the context of a western-market economy. Under Khilafah, individuals will ultimately be accountable to God for their actions 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 transfer what He has entrusted them. Thus, Islam perceives wealth as a grant, which has been given as a trust from Allah into the hand of the human being, and, therefore, should be utilised in the most effective and efficient way to produce the maximum output and 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 the Zakah[2] on individuals and businesses and promotes charities[3] in order to harmonise between the rich and the poor. The main purpose of the Zakah is a redistribution of wealth (Lewis, 2001). The Zakah is collected from Muslim individuals and businesses and 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 a borrower requires to pay back the amount borrowed and the lender to be lenient with the borrower “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 Qur’an, 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) and violates 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 are indeed believers. If ye do it not, take notice of war from Allah and His Messenger: but if ye repent ye shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly (The Holy Qur’an, S2:279-80).
Islam concerns about safeguarding of natural resources. About 1,427 years ago, the Holy Qur’an warned against the negativity of spoiling the environment: “Mischief has appeared on land and sea because of (themed) that the hand of men have earned” (The Holy Qur’an S30:41). Islam advocates the mankind to take care everything created by Almighty Allah, as it is part of submission to Allah. In relation to the environmental responsibility in Islam, the Holy Qur’an underlines the importance of protecting the environment. The Qur’an says “do not spread mischief on the earth, after it has been set in order, and invoke Him with fear and hope; Surely, Allah’s Mercy is (ever) near unto the good-doers” (The Holy Qur’an, S7:56). In Islam, the mankind has been entrusted with the responsibility of protecting the earth. This trusteeship is seen as onerous and no other creature would accept it. Allah says: “We offered the trust unto the heavens and the earth and the hills, but they shrank from bearing it and were afraid of it and man assumed it” (The Holy Qur’an, S33:72). This concept of trusteeship in Islam, similar to the notion of sustainable development, does not regard natural resources as a free good to be wasted at the free well of any nation (Rice, 1999). No one has the authority to waste or corrupt the resources. “Eat and drink, but waste not by excess; Verily He loves not the excessive” (The Holy Qur’an:S7:31). Indeed, “Islam offers great advantage for environmental conservation, protection and sustainable development in that it is a source for law that is consistent with cultural values of Islamic Society and can be imported with ease into environmental policy that is both effective and implement-able” (Bagader et al., 1994, p. viii). There are hundreds of verses in the Holy Qur’an concerning environmental issues. Shari’a sets up
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the standards of human conduct and how businesses should deal with their external environment. Muslims are expected to conduct their business activities in accordance with the requirement of Shari’a. Since the foundation of IFIs is based on Islamic values, they are considered having ethical identity and have unique social and economic objectives (Haniffa and Hudaib, 2007). IFIs are guided by an Islamic economic worldview, which is 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 operate on the basis of banning interest (riba) and uncertainty, sharing risk and profits, encouraging ethical investments that enhance society and asset-banking. It requires each a financial transaction must be tied to a “tangible, identifiable underlying asset”. Under Shari’a, money does not belong to the asset category as it is intangible and thus should not earn a return. Businesses that follow Islam principles have to incorporate Shari’a fully into their business practice and objectives, leading to corporate behaviours that are different from the ones in the western market economy where profits maximisation including profits from interest on loans is the legitimate aim of business. In the context of Islam business world, businesses have to demonstrate their accountability to God and fulfillment of social objectives. This demonstration is expected to be reflected in the annual reports published to the public. 3. Prior research A number of studies have investigated the CSRD of companies conducting their business 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 that supports the contention that Islam has an effect on corporate environmental reporting. They compare the environmental practice of Shari’a-approved companies, which are conducting their activities in strict accordance to Islamic principles with the environmental practice of non-Shari’a-approved companies that operate in Malaysia, and show that the former has a higher level of environmental reporting compared to non-Shari’a companies. They suggest that the higher extent of environmental reporting among Shari’a-approved companies may reflect an attempt by such companies to present corporate reporting which embodies the Islamic principles of full disclosure and environmental accountability. While adopting a comparative approach, their study was very much limited to environmental reporting. Haniffa and Hudaib (2007) conduct a longitudinal survey study of the annual reports of seven IFIs in four Arabian Gulf region countries. Using content analysis to examine the effectiveness of Islamic banks’ communicating of their ethical identity, they investigate the discrepancy between the communicated information (based on information disclosed in the annual reports) and “ideal” disclosure (i.e. disclosure of information deemed vital based on the Islamic ethical business framework). While it expects that IFIs must comply with the precepts of Shari’a Islamiah in their reporting, their findings indicate fall far short of what would be enabling ethical and social communication in IFIs, and the reports “vary across the 3-year period”, suggesting that the communication by IFIs is very much minimal. They believe this was mainly due to a lack of pressure from stakeholders and also the prevailing secretive culture in the region (p. 111).
Yahya et al. (2005) measure the level of CSRD in Shari’a-approved companies in Malaysia. They find that only 102 companies out of 194 disclose their social activities in the annual reports. They further investigate the relationship between the level of CSRD and the number of Islamic equity funds holding shares in the companies. Their results reveal that the number of Islamic equity funds investing in any company is parallel 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 principles and Islamic code of ethics, Maali et al. (2006) develop a benchmark for social disclosure which they would expect Islamic banks to provide. Yet, their results indicate that the extent of social disclosure by Islamic banks falls far short of the benchmark and there is a considerable variation in the voluntary social reporting across Islamic banks. Overall, most of the studies tend to examine the gaps between the expectation of disclosure and the actual disclosure of Islamic businesses. While the identification of expectation gaps is useful, it fails to reveal the actual difference of CSRD between IFIs and non-IFIs. Our study attempts to make a contribution to the literature by comparing CSRD between IFIs and non-IFIs, with a view to identifying the extent to which Islam has influenced the CSRD of IFIs. Such a comparison would clearly enhance our understanding of the actual influence of Islam on CSRD. 4. Sample and research methods Our study is based on the annual reports of financial institutions. Of the 42 companies that were included in the sample, 21 (50 per cent) were fully Shari’a-approved companies and the rest were CFIs. Since the aim of our study is to compare CSRD between IFIs and CFIs, it is essential to control the political, social and economical variables. To achieve this, we focus on financial institutions operating in Gulf countries as these countries have, to a large extent, analogous economic, political and social environments. The entire population of IFIs was obtained from the General Council of Islamic Banks and Financial Institutions. Among these there are 24 IFIs operating in Gulf countries. The annual reports of three IFIs were not available. To make a valid comparison, the similar number of 2004[4] annual reports from 21 CFIs companies was obtained; those firms were randomly selected from companies listed on the stock exchanges in the region. To measure and compare the quantity and the quality of CSRD among financial institutions, content analysis was employed. Content analysis, as a commonly used method 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 different groups depending on particular criteria (Weber, 1988). Different units of a content analysis can be employed including number of words; number of sentences; number of lines; proportion of pages; or a mix of these units (Unerman, 2000). Each method has its pros and cons (Campbell, 2004). This study measures the level of CSRD with numbers of words disclosed as words are the smallest unit of measurement for analysis and can be expected to provide the maximum robustness to a study in assessing the quantity of disclosure (Zeghal and Ahmed, 1990; Campbell, 2004). The use of words will increase the 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 the themes and the sub-themes for CSRD was designed based on prior research in CSRD 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 of our themes in the checklist are formally required by the AAOIFI[5]. As AAOIFI standards are not mandated in all the sample countries and most IFIs in the sample operate in more than two countries including countries where AAOIFI was not mandated, the annual report produced by these institutions does not have a clear cut between mandatory and voluntary elements. Moreover, distinguishing between voluntary and mandatory disclosure is beyond the scope of this study as our purpose is to investigate the extent of CSR disclosures with a view to identifying the influence of 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; Zeghal and 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, which ensures to provide the same results on repeated trails. In other word, reliability and validity are determined to ensure that different researchers will code the text in the same way and therefore diminish the chance for inaccuracy and biases. A number of steps 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 fulfill objectivity. (2) One of the researchers, “main coder”, has undergone an extensive period of training prior to starting the process of analysing in order to have a better understanding of the subject. (3) To ensure reproducibility, three annual reports were tested by different coders in a pilot test. Ambiguities were discussed with the authors, who endeavour to ensure that all coders used the same coding rules; and any points made were used to develop the framework of analysis. (4) Each step in the research process must be fulfilled on the basis of explicitly formulated rules and procedures. Moreover, any definitions used in the data gathering must be negotiated to realise these “shared meanings” which recreate “the 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 annual reports, which were analysed by the researchers, were those which were analysed during the pilot test. The result was almost stabilised. This procedure was undertaken in order to ascertain if the initial categories identified and their measurement 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 repeated measurement to assess the degree to which correlation among the measurements is attenuated to random error (Botosan, 1997). For the seven categories, Cronbach coefficient a is 0.624, which is fairly within an acceptable level. However, there is no universal standard test of significance for this statistic (Botosan, 1997). Milne and Adler
(1999) note that any attempt to establish a single criterion value of acceptable coding reliability is problematic. 5. Results and discussions A 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 was greater by IFIs than CFIs. The mean of words disclosed by IFIs was 1,160 comparing to 750 by CFIs. A t-test shows the difference between the two groups is statistically significant (Table II). To determine the robustness of the results, a non-parametric Mann-Whitney U-test was also performed. The result of U-test supports the findings with p-value , 0.05. However, the differences in the level of disclosure varied across the different themes between the two groups. As shown in Table II, both t-test and U-test show statistically significant differences between the two groups in some themes. The proportion of IFIs reporting on philanthropy, Shari’a board report and other disclosure was higher than that of CFIs; this is probably because the two categories (philanthropy and Shari’a board report) were required by the AAOIFI standards. Excluding these two categories, the difference between the two groups of institutions was less statistically significant, even though IFIs disclosed slightly more than CFIs. Table II also shows that IFIs were more inclined to disclose monetary information with 2,965 words, comparing to 678 words by CFIs and there was no bad news disclosed by CFIs. Overall, IFIs intended to disclose more than their counterparts. 5.1 Employees All 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 words disclosed varies greatly among sub-themes under employees. While both groups showed more attention to training and development, and employee benefit, less disclosure was given to workplace environment and equal opportunity. The disclosures were very much in qualitative nature as shown in Table III. Also more space was dedicated to good news disclosure by both groups. IFIs were inclined to disclose more bad news than CFIs. 5.2 Community Disclosure under this theme covers sub-themes such as community investment, contribution to national economy and education, health support, provision of interest-free loans and public welfare. The disclosure results are presented in Table IV. Overall, 29 banks (69 per cent) of the total sample disclosed information as to the “community” and the average number of words disclosed by IFIs was 81 as compared to 109 by CFIs. Although CFIs reported more community information with total number of 2,303 words as compared to 1,718 words by IFIs, the number of banks disclosed community information was 15 (90 per cent) by IFIs as compared to 14 (66 per cent) companies in CFIs. The disclosure of positive community related information might offer a good opportunity for banks to portray themselves as a good citizen in their societies. Table IV shows that the level of disclosure varied between the two groups across all the sub-themes. However, there was a lack of disclosure under social loan by CFIs in comparison to the disclosure of 338 words by IFIs, which was
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Table II. CSRD comparisons between IFIs and CFIs
Themes Employee Community Philanthropy Product and services Customer Shari’a Supervisory Board report Other disclosure Total Significance p-value, two-tailed Quality Monetary Quantitative Qualitative Good news Neutral news Bad news 21 15 19 17 18 19 21 – t-test 0.007 2,965 885 23,874 2,2154 5,385 185
5,031 1,718 2,782 2,951 3,853 6,523 4,866 27,724
IFIs Number of words 239 81 132 140 183 310 75 1,160
Mean
Number of words
678 957 14,408 13,978 2,056 –
21 4,555 14 2,303 4 608 18 2,822 18 4,809 – – 13 946 – 16,043 Mann-Whitney test 0.004
Number of companies
CFIs
216 109 28 134 229 – 34 750
Mean
80
Category
Number of companies
0.601 0.619 0.004 0.783 0.514 0.000 0.019
0.950 0.636 0.000 0.724 0.782 0.000 0.001
t-test U-test Significance p two-tailed
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IFIs Category Sub-themes Employee data Equal opportunity Training and development Appreciation and thanks Employee benefit End service indemnity Pension Localisation of employees Work place environment Other Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
Number of companies
Number of words
Number of companies
Number of words
14 2 17 15 10 15 6 4 1 8 –
347 44 1,282 508 1,380 834 158 91 16 371 5,031
7 2 11 17 11 13 6 10 2 4 –
143 22 867 363 1,090 662 195 604 91 518 4,555
1,101 454 3,476 3,665 1,351 15 5,031
283 724 3,548 3,053 1,502 – 4,555
IFIs Category Sub-themes Community investment Contribution to national economy Education Health Social loan Social activities support Other Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
CSR disclosure
CFIs
Number of companies
81
Table III. Disclosure of employee information by IFIs and CFIs
CFIs Number of words
Number of companies
Number of words
6
575
8
455
8 4 2 5 1 – –
624 93 69 338 19 0 1,718
8 11 1 – 8 1 –
967 122 84 0 664 11 2,303
497 50 1,171 1,530 188 –
92 114 2,097 2,060 243 –
expected as disclosure by IFIs under this sub-theme is required under the AAOIFI standards. In addition, the high level of disclosure was of qualitative nature and tended to be good news for both groups. While both groups disclosed monetary information, IFIs provided more disclosure than CFIs.
Table IV. Disclosure of community information by IFIs and CFIs
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5.3 Philanthropy This category mainly includes the disclosure related to donation, charity and the Zakah. As shown in Table V, both groups provided some kinds of philanthropy disclosure. The total number of companies disclosed information under this theme was 22 (52 per cent of the total sample); of which 4 were CFIs and 18 IFIs. The total number of words disclosed was considerably higher by IFIs with 2,728 words comparing to 608 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 found in both groups was qualitative and monetary in nature and neutral. While good news was the dominated type of news, no disclosure was made of bad news by both groups. 5.4 Products and services Products and services disclosure are classified under four sub-themes including development and innovation of new products, quality of products and services, ISO or other quality awards and related disclosure. The number of institutions that disclosed information under this theme was quite similar for both groups. Table VI indicates that 35 (83 per cent) companies of the total sample disclosed information on products and services; 17 were IFIs and 18 were CFIs. The level of words disclosed was considerably high in both groups, with 2,951 words disclosed by IFIs and 2,822 words by CFIs. The vast majority of disclosures made by both groups were related to the sub-themes of development and innovation. The nature of information disclosed was very similar and tended to be qualitative with good news. 5.5 Customer Disclosure under this theme covers information concerning customer service, meeting customer needs, customer satisfaction and policy towards insolvent clients. As shown in Table VII, the disclosure of such information under customer category was very common among the two groups. A total of 18 companies of each group disclosed such information. The number of words disclosed ranged from 4,809 words by CFIs
IFIs Category
Table V. Disclosure of philanthropy information by IFIs and CFIs
Sub-themes Charity and donation Zakah Other Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
CFIs
Number of companies
Number of words
Number of companies
Number of words
9 18 – –
487 2,295 – 2,782
4 – – –
608 – – 608
1,224 279 1,279 1,319 1,463 –
235 81 292 608 – –
IFIs Category
Number of companies
Number of words
18 9 3 – –
2,524 256 171 – 2,951
Sub-themes New product development and innovation Products and services quality ISO and other awards Other Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
CFIs Number of Number of companies words
17 10 4 – –
– – 2,951 2,913 38 –
– – 2,822 2,806 16 –
IFIs Category Themes Customer service Meeting customer needs Customer satisfaction Policy towards insolvent clients Difficult to reach customer Other Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
2,284 386 188 – 2,822
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Table VI. Disclosure of product and service information by IFIs and CFIs
CFIs
Number of companies
Number of words
Number of companies
Number of words
14 6 7
2,826 135 267
16 – 8
3,742 – 250
1 11 –
12 25 588 3,853
– 1 9 –
– 19 798 4,809
– 77 3,776 3,543 310 –
– 38 4,771 4,514 295 –
to 3,853 words by IFIs. The most predominant sub-theme was customer service. There was a lack of disclosure by CFIs concerning the themes of policy towards insolvent clients and meeting customer needs. The nature of disclosure was somehow similar for both groups, with the vast majority of disclosure were qualitative and good news. 5.6 Shari’a supervisory board report (SSBR) The SSB is an independent external committee to observe the conduct of business and provide assurance to the stakeholders that the business is carried out in accordance with the Islamic principles. Annual reports produced by the SSB provide the necessary
Table VII. Disclosure of customer information by IFIs and CFIs
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assurance to Muslim clients and shareholders as to if the business meets their ethical expectations. As the disclosure of SSBR in annual reports is recommended under the AAOIFI standards, this theme was unique to IFIs and no disclosure of this theme was made by CFIs[6]. As shown in Table VIII, SSBR was included in the annual reports by 19 companies (90 per cent) out of 21 IFIs. The large number of IFIs disclosing SSBR was not surprising since IFIs need to assure their stakeholders that all their activities and products are complying with Shari’a. However, the level of information disclosed varied greatly among IFIs and across the sub-themes. As shown in Table VIII, the vast majority of the disclosures tended to be qualitative with a mixture of bad, neutral and good news. The bad news was largely concerned with transactions which contradicted Shari’a, and the ways of dealing with the income generated from such transactions. Very few companies disclosed monetary information. 5.7 Other CSR disclosures Other disclosures are concerned with social information in the sample of the annual reports that were not captured in the previous themes. It includes mentioning the name of Allah and his Prophet, praising Allah, verses from the Holy Qur’an, and adherence to Islamic principles and ethical conduct. A total of 34 companies within the sample disclosed some information under this theme. The information provided tended to fall into two streams, mainly the Islamic values and the ethical values. Table IX presents the disclosures by each group. All IFIs provided information with 4,866 words disclosed, 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 and commitment to Shari’a. Most of the disclosures by CFIs were related to commitment to ethical conducts. Few CFIs companies disclose monetary and quantitative disclosure. The majority of these disclosures by IFIs were purely qualitative with a mixture of good, bad and neutral news. 6. Discussion and conclusion The above results of content analysis reveal two interesting observations. First, CSRD is presently very much a common practice among financial institutions from IFIs Category
Table VIII. Disclosure of SSBR information by IFIs
Themes Background on the SSB members Provision of fatwa[7] and consultancy Examination of documents Compliance with Shari’a Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
Number of companies
Number of words
19 19 19 19 –
1,708 130 2,617 2,068 6,523 34 – 6,489 4,553 1,810 160
IFIs Category Themes Islamic values Commitment to ethical conduct Adherence to Shari’a General statement of CSR Total Quality Monetary Quantitative Qualitative Good news Neutral news Bad news
CSR disclosure
CFIs
Number of companies
Number of words
Number of companies
Number of words
15
1,261
3
79
4 21 9 –
121 3,288 196 4,866
2 – 9 –
232 – 635 946
109 25 4,732 4,631 225 10
68 – 878 946 – –
developing countries in the Gulf region, although the levels of disclosures differ across different institutions. In most of those disclosures there were little differences between IFIs and CFIs, suggesting that some common themes and concerns are applicable to all financial institutions, regardless of their business ethics and objectives. This perhaps reflects the accounting-globalization interrelation (Gallhofer and Haslam, 2006). Second, IFIs provide additional disclosures under the AAOIFI standards with a view to justifying their ethical values and accountability to God. So far little evidence suggests that such a disclosure would sufficiently discharge the accountability to God and meet the expectations of religious needs in the context of Islam environments. Nevertheless, such additional disclosures as shown in this study prove, to some extent, the influences of Islamic religion on CSRD. This raises an interesting question for further research as to whether other religions (e.g. Buddhism in some Asian countries and Christianity in the west) would also play some roles in CSRD. Such research would help identify whether the findings of this study are unique to Islamic societies (in this case it would dispute the universalism of religious influences on CSRD) or the findings share similar evidence from studies based on other religions. Clearly a questioning approach should be employed to interpret our results which were derived from a content analysis of limited numbers of annual reports. Yet, it can be argued that in addition to providing information for economic decisions, there may be a further primary objective for corporate reporting of IFIs from an Islamic perspective. This primary objective, noted in the literature, is to ensure that the organisation discharges the Islamic concept of accountability. The “statutory” requirement per se under the AAOIFI standards including the disclosure of SSBR, the Zakah, charity donation and free interest loan statement probably emphasises this objective. The lack of disclosure by CFIs under those theme and sub-themes could be justified on the basis that these disclosures merely relate to the religious practice and ensure that the IFIs discharge the Islamic concept of accountability; this has nothing to do with the business of CFIs, even they operate in the similar political and economic environment.
85
Table IX. Disclosure of other related information by IFIs and CFIs
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It can also be argued that the disclosure of negative news by IFIs (particularly regarding transactions which contradict Shari’a, and the ways to deal with the income generated from such transactions) is a sign of the positive role played by SSB in transparency and social responsibility. The duty to disclose or tell the truth is very important 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 is unclear due to a dearth of research, our results of additional disclosure, inter alia, the disclosure of negative news by IFIs could indicate some potential of this religion-based supervisory board and its reports on corporate social responsibility. An externally independent ethical board, in addition to the sole board of directors could be an option to overcome some of the drawbacks witnessed presently in the western market economy of corporate governance and corporate social responsibility. Our study presents an empirical result as to the current status of CSRD in IFIs through a comparison with CFIs operating in the identical political, social and economic environment. Using the content analysis approach, we compare the annual reports of 21 CFIs with 21 IFIs operating in the Gulf region. Our results show significant differences in the level and the extent of the disclosure between IFIs and CFIs, largely due to the disclosure made by IFIs concerning religion-related themes and information, including Shari’a supervisory board reports, the “Zakah” and charity donation and free interest loan under the guidance of the AAOIFI. Excluding this supplementary disclosure, the difference between IFIs and CFIs of CSRD was not significant. Yet, IFIs intended to disclose more negative news than CFIs. The above results lead intuitively to the conception of Islamic influence on CSRD, which may provide an additional perspective to the existing literature on CSRD. Nevertheless, the results of our study are subject to a number of limitations. We did not examine the longitudinal data of CSRD. As a result, our study can only unearth the status of CSRD in a particular year, but cannot provide a trend and development picture. Future research should try to overcome this limitation. Another limitation is that the sample is restricted to financial institutions operating in the Gulf region. The findings 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 other regions (e.g. South-East Asia and Africa) where IFIs are actively in operation as well as including non-financial institutions. Notes 1. Sunah linguistically means path. In this context, it stands for the saying, actions and approvals 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 is payable once every year at the end of the Zakah period (i.e. one lunar year). It is payable on a productive 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 for trade. 3. The prophet Mohamed (peace and prayer be upon him) said “When a person dies, his good deeds 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.
5. AAOIFI is an independent international professional body responsible for developing accounting, auditing, ethics, corporate governance and Shari’a standards for IFIs. AAOFIF is supported by institutional members (155 members from 40 countries) including central banks, Islamic financial institutions and other participants from the international Islamic banking and finance industry. 6. The vast majority of IFIs have the Shari’a Supervisory Board and, therefore, disclose SSBR. In a few countries such as Bahrain this report is required by law. However, in most other countries IFIs disclose this report on a voluntary basis despite it being recommended by the AAOIFI. 7. Fatwa is a religious opinion concerning Islamic law. It is issued by an Islamic scholar.
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Further reading Albukari, A. (n.d.), “Sahih Albukari”, available at: http://hadith.al-islam.com/Page. aspx?pageid¼192&BookID¼24&TOCID¼1430 (accessed 27 November 2008). Bauer, R. and Fenn, D. (1973), “What is a corporate social audit?”, Harvard Business Review, Vol. 51 No. 10, pp. 37-48. (The) Holy Qur’an (1410 H), Mushaf Al-Madinah An-Nabawiayah the Holy Qur’an: English Translation of Meanings and Commentary, King Fahd Holy Qur’an Printing Complex, Mecca. Khan, M. (1996), The English translation of Sahih Al Bukhari with the Arabic Text, Al-Saadawi, Alexandria, VA. Appendix
Employee
Community
Philanthropy Customer
Products and service Environment issue Shari’a Supervisory Board Report (SSBR)
Table AI. Disclosure themes and sub-themes
Other
This theme describes the impact of organisational activities on those who constitute the human resources of the organisation. This form of disclosures includes reporting on matters such as employee numbers and remuneration, equal opportunities, employee share ownership, employee benefit, pension, end service indemnity and work place environment. It also covers disclosures on employee consultation, training Community theme comprises any reference to community, including information relating to community investment, contribution to national economy (e.g. financing projects that lead to the economy development), free interest loan to low income people, social activities support, as well as supporting existing community activities (such as local health and education) Disclosure under this sub-theme, covers any information considering charity donation and Zakah, and any other philanthropy related activities This theme covers items such as customer service (e.g. provision for customer convenience). It also includes meeting customer needs, providing special services or branches, customer compliant/satisfaction, as well as specific customer relation such as policy for late payment by the client This concerns the qualitative aspects of the products, for example product development, product and service quality, ISO or any other awards for product and services It covers disclosures on environmental policy, lending and investment policy for environmental projects and conservation for natural resource The main reason for having SSB is to make sure that the company conduct its business according to Islamic moral and avoiding transaction that contradicts with Shari’a. Disclosure under SSBR includes items such as background of SSB members, exam of documents, provision of fatwa and consultation and compliance with Shari’a This theme includes any CSRD, which is not covered in the above themes. For example, commitment to ethical conduct, general statement of CSR, etc.
Evidence
Definition
Monetary Disclosure will be classified as monetary if it includes monetary value or measure Quantitative Disclosure will be classified as quantitative if it is expressed in quantitative terms Qualitative Disclosure that is not classified as monetary or quantitative, such as general statement of an opinion Type of disclosure Good news Disclosure which includes, for example, details where these details have a creditable reflection on company, any statements which reflect credit on company, upbeat analysis/discussion/statements, etc. Neutral news Disclosure will be counted as neutral news if it refers to general policy statement or intent within statutory minimum with no details of what or how; statement of facts whose credit/discredit to company is not obvious unaccompanied by editorializing Bad news Any statement, which reflects/might reflect discredit on the company, including, for example, numbers made redundant, accident, negative feedback from customers [. . .]
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Table AII. Defined evidence of CSRD and type of news
