International Journal of Ethics and Systems

Determinants of Shari’ah governance disclosure in financial institutions: Evidence

from Saudi Arabia
Toseef Azid, Ali A. Alnodel,
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Toseef Azid, Ali A. Alnodel, (2018) "Determinants of Shari’ah governance disclosure in financial
institutions: Evidence from Saudi Arabia", International Journal of Ethics and Systems, https://
doi.org/10.1108/IJOES-07-2018-0111
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Determinants of Shari’ah Shari’ah

governance
governance disclosure in disclosure

financial institutions
Evidence from Saudi Arabia
Toseef Azid Received 4 August 2018
Revised 4 September 2018
Department of Finance and Economics, College of Business and Economics, 21 October 2018
Qassim University, Qassim, Saudi Arabia, and 4 November 2018
Accepted 8 November 2018
Ali A. Alnodel
Department of Accounting, College of Business and Economics, Qassim University,
Qassim, Saudi Arabia
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Abstract
Purpose – This paper aims to investigate factors influencing Shari’ah governance disclosure (SGD) in
financial institutions.
Design/methodology/approach – Using content analysis approach, 46 annual reports published in
2015 by banks and insurance companies were investigated based on a self-constructed disclosure index.
Findings – The results show that the average level of voluntary disclosure of Shari’ah governance in Saudi
financial institutions is 11.7 per cent, which is lower than expectations Moreover, regression analysis shows
that industry type, ownership structure and board composition significantly determine the extent of
voluntary disclosure of Shari’ah governance. Local financial institutions which are owned by non-
governmental agencies are more likely to disclose voluntarily their Shari’ah governance, in particular from
the banking industry.
Research limitations/implications – It also bridges the gap between theory and practice and can be
used to practice economic and commercial impact in teaching to influence public policy in research
contributing to the body of knowledge and especially for the insurance sector and government.
Social implications – It provides guidance to the ethical investors and supports them in the decision-
making process.
Originality/value – This research extends the investigation of SGD into insurance sector in a country that
has a general policy about adhering to Islamic principles. Financial institutions might go beyond the country
affirmations to legitimate their identity in response to the society critiques about the issue. Accordingly,
internal attributes and strategies of financial institutions may play a significant role in distinguishing its
compliance with Islamic principles to respond to the society critiques about financial transactions.
Keywords Saudi Arabia, Voluntary disclosure, Shari’ah compliance, Insurance sector,
Tawhidi methodology
Paper type Research paper

1. Introduction
Shari’ah governance implies different perspectives about accountability and transparency.
From Islamic worldview, all Muslims are accountable to Allah (SWT) and then accountable
to the society. The model of accountability in Islam originates from Tawhid (the unity of International Journal of Ethics and
Systems
Allah). The concept of Tawhid brings broader and different dimensions of accountability in © Emerald Publishing Limited
2514-9369
comparison with the conventional mode of accountability in Western models DOI 10.1108/IJOES-07-2018-0111
 IJOES (Baydoun and Willett, 2000; Choudhury and Alam, 2013; Choudhury and Hoque, 2006;
Choudhury and Harahap, 2007).
The most common approach to discharge this responsibility is establishing a Shari’ah
board or committee responsible for observing compliance with Shari’ah principles and
teachings (Noordin et al., 2015). Disclosure of Shari’ah governance in the firms’ annual
reports is crucial to ensure this compliance. Legitimacy theory underlines a significant part
of this behavior, implying that the lack of sufficient disclosure to maintain social perceptions
could result in a legitimacy threats (Laan, 2009).
Shari’ah governance procedures and transparency may differ among countries,
industries and firms. At the country level, different countries may adopt different policies
and procedures to emphasize the level of stockholders’ protection against forbidden and
haram transactions in terms of the country’s laws, culture, norms and institutions. The
impact of country-level governance on cross-country differences in business practices and
financial policies has been well documented (Abdi and Aulakh, 2012; Griffin et al., 2017;
Choudhury and Alam, 2013; Choudhury and Hoque, 2006; Choudhury and Harahap, 2007).
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Industry practices could also affect firms in the same industry (Zervas et al., 2016). On the
other hand, at the firm level, Shari’ah governance may play an important role within a
corporation to ensure compliance with Shari’ah principles.
In the literature, there is limited research investigating the issue of Shari’ah governance
disclosure (SGD), particularly research investigating insurance firms. Also, most of the
previous research has been investigating the issue in environments with no governmental
policies regarding compliance with Islamic principles. In general, the results of the previous
studies revealed low social corporate disclosure compared to the expectations (Aribi and
Gao, 2010; El-Halaby and Hussainey, 2015; Farook et al., 2011; Haniffa and Hudaib, 2007;
Choudhury and Alam, 2013; Choudhury and Hoque, 2006; Choudhury and Harahap, 2007).
These observations, further, are influenced by the practice of Shari’ah governance in the
banking industry.
Considering all the above dimensions, the objective of this study is to investigate
factors influencing SGD in Saudi Arabia. This research could contribute to the existing
literature in a number of ways. First, this research is extending previous research by
covering insurance companies, then it is also investigating the issue in a society that is
considered as a conservative society, whereas the government adopts a country-level
mechanism to insure stockholders’ protection against forbidden and haram transactions.
Contrary to the mainstream literature on corporate governance, it is also observed that
the use of Shari’ah basis of corporate governance appears as an unsettled affair or
imposed by authorities formed by the government to impose a certain Shari’ah
viewpoint. The substitutive use of Tawhidi worldview in the context of the unity of
knowledge between the elements of good corporate governance and financial disclosure
is a universal affair. The imminent of relational dynamics of the unity of knowledge is not
constrained by the random character of Shari’ah on disclosure and governance
(Choudhury and Alam, 2013; Choudhury and Hoque, 2006; Choudhury and Harahap,
2007). Further, this research considers some new dimensions of SGD which has not been
addressed in the previous studies.
The rest of the paper is organized in the following manner. The first part of Section 2
reviews previous studies and then reviews the Tawhidi worldview in the context of the
unity of knowledge based on the corporate governance and disclosure of information, and
then it develops hypothesis. Section 3 describes methodology and data collection, Sections 4
and 5 discuss results and Section 6 provides the study’s conclusion.
 2. Literature review and hypothesis development Shari’ah
From the perspective of the corporate social disclosure, one can find two major theories governance
explaining corporate social disclosure, i.e. “stakeholder theory” (Donaldson and Preston,
1995) and “legitimacy theory” (Deegan, et al., 2002). Stakeholder theory explains most of
disclosure
compulsory disclosure, while legitimacy theory explains most of voluntary disclosure.
Organizational legitimacy refers to the appropriateness and acceptance of the action of an
entity within a social system (Suchman, 1995). Institutional theory emphasizes that
organizational legitimacy is critical to the survival of an organization, similar to the material
resources and technical information in the organization (Powell and DiMaggio, 1991). From
this vein, disclosures are necessary for firms to enhance their images among their
stakeholders (Cooke, 1992). Management is motivated to voluntarily disclose information to
maintain an appropriate perception about the company. Gray et al. (2001) thus argue that
voluntary corporate social disclosure is a case of information inductance. The behavior of
management in reporting voluntary information is influenced by a number of factors
relating to the general practice in the industry, the overall country environment and society
perceptions and the internal system of the corporation.
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With respect to the literature on social disclosure in Islamic financial institutions,

there is limited research investigating the issue, especially in the insurance sector. The
general findings of these studies have shown a low level of corporate social disclosure
compared to the expectations (Aribi and Gao, 2010; El-Halaby and Hussainey, 2015;
Farook et al., 2011; Haniffa and Hudaib, 2007). On the other hand, if the level is high, then
quality is low (Alotaibi and Hussainey, 2016). Also, it is observed from the existing
literature that a number of factors affect the social reporting, e.g. type of industry, size of
company, profitability, board size and composition, size of audit committee, type of
ownership, risk, concentration, percentage of managerial ownership and independent
directors (Albassam and Ntim, 2017; Alotaibi and Hussainey, 2016; Othman et al., 2009).
On the other hand, Alotaibi and Hussainey (2016) constructed corporate social disclosure
indices and observed that firms are good in providing the quantity of disclosure, but in
relative terms, quality is low.
Most of the previous research has been investigating the issue in an environment, where
the government has no policies regarding compliance with Islamic principles. In these
previous studies, there is an insufficient consideration of the possible impact of the
mechanisms at the country level to ensure such compliance. Moreover, these observations
are influenced by the practice of Shari’ah governance in the financial institutions (Noordin
et al., 2015) or emerged from the taqwa dimension (El-Halaby and Hussainey, 2015).
Albassam and Ntim (2017) find that Islamic values play a significant role in the process of
voluntary corporate disclosure, and that those firms which show more commitment toward
Islamic values have high disclosure than otherwise.

3. An alternative view: tawhidi worldview and unity of knowledge

In the current literature, it has been observed that an imperfect relation exists in between the
market and institutional factors because of the lower degree of ethical responsibility. In this
environment, one can observe the loss of information, lack of transparency and less degree
of confidence among the different stakeholders. These are the outcomes of the dishonest
functions of the finance/accounts departments of the companies and also observe high
transaction cost of the rules and regulations imposed by the authorities. There are certain
rules and regulations which gave the advantage of the companies that not to disclose the
information for the reasons of confidentiality. This is all because of the absence of
interaction among different economic agents and stakeholders. There is a need to develop a
 IJOES structure where all the stakeholders (principal, agent, market and polity) have a common
well-being function. In resultant, this will give us an ethical-moral environment and leads to
a transparent and honest environment in the context of all the dimensions (Choudhury and
Harahap, 2007; Belkaoui and Karpik, 1989). This may only be possible if there is a
participation and interaction among the market and social agents. These relations will be
evolved on the moral and ethical grounds, and the source of guidance is the Qur’an and
Sunnah. These divine laws have their specific learning through the interactive and
integrative approach and then evolved into an ethico-moral system. The complementarities
among the relationships of different stakeholders and particularly in between the principal
and agent increases the transparencies and decreases the transaction cost which incurs
because of the exogenous regulatory forces. Consequently, there is social and market failure
without the participation of the principal, agent, market, administration and shareholders.
Such interrelationships dynamically enhanced the interaction, integration and evolutionary
learning (Choudhury and Harahap, 2007). Thus, in the competitive–cooperative
environment, the phenomenon of transparencies increases, so there is a low degree in the
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loss of information and higher degree of disclosure. The exogenous regulatory system will
be replaced by the participatory one which depends on the participation of the different
stakeholders and shareholders. Through this circular causation and participatory system,
the degree of disclosure will be higher, with no room for the accounting corruption and false
reporting, less chances of financial robbery, whereas consequently, the role of the exogenous
factors will decline. Williamson (1987) said that the absence of shareholders’ participation
increasing the social and transaction cost. This will also create social trust instead of moral
hazards and asymmetric information.
It is also worth to note that interest is not permitted in the Islamic system, whereas
mudharabah and musharakah are the financial instruments, and these are participatory in
their nature. Hence, this leads to the practice of just and truth for the accountants. Hence, the
disclosure of the information in the absence of immoral environment and unethical
instruments used by the corporations, the firms are selecting a participatory model for their
economic activities which will give the transparent/true information regarding the value of
the assets and other activities of the firms. And this disclosure has a lot of worth for the
stakeholders and shareholders (Choudhury and Harahap, 2007). This mode of participation
creates knowledge among the economic agents (principal, agents, polity and market order),
which will enhance the confidence of these agents on the corporations. This participatory
framework constructs an environment where exogenous regulation is required at minimum
level, whereas the endogenous changes create the ethico-moral-economic in which there is no
need to emphasize more on the disclosure, because all the agents already have their share in
the decision-making because of interaction, integration and later evolution. In this
participatory framework of learning among the stakeholders and shareholders, the
exogenous policies and instruments must be replaced by the participatory transparency and
disclosure. Choudhury and Harahap (2007) argued that “An overall ethico-economic general
equilibrium model of unity of knowledge is thus established to take account of the internal
stability, transparency, disclosure and sustainable socioeconomic coexistence with the
ethics of corporate behavior generated and revealed in the participatory framework of the
principal-agent, polity and market venue” (p. 14).
In the system of Islam, on one side, the shareholders are a mixture of principal and
common shareholders, and on the other side, they are also stakeholders and have the right of
ownership and decision-making. However, all of these are due to the nature of the IIE
(Interaction Integration and Evolutionary) model, which is a participatory one (Choudhury
and Hoque, 2006). However, it is not automatically established, but it is established under
 the umbrella of Qur’an and Sunnah. In this framework, the function of Shari’ah board is not Shari’ah
to maximize the wealth of the shareholders; instead of that, the function of Shari’ah board is governance
to stimulate the social well-being function. Resultantly, the external governance has no
value and exogenous regulations become redundant, whereas the endogenous players will
disclosure
play their game under the umbrella of ethico-moral environment (Choudhury and Alam,
2013).
This study will focus on SGD. It will extend previous literature in different ways;
covering insurance companies, reinvestigating the issue in a society where the government
adopts country-level mechanisms to insure stockholders’ protection against forbidden and
haram transactions and examining some new dimensions of SGD which have not been
addressed in previous studies. It will also be analyzed that how the corporations are
performing in this exogenous regulatory framework. Accordingly, the research hypotheses
are developed as follows.

3.1 Industry type and Shari’ah governance disclosure

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Generally speaking, industry practices could affect firms in the same industry (Zervas, et al.,
2016); therefore, Shari’ah governance to ensure compliance with Shari’ah principles may be
influenced by the practices in the same industry. Unfortunately, most of the research
investigating disclosure around Islamic financing concentrates on corporate social
disclosure and focuses on the banking industry. For example, using the method of content
analysis approach, Hassan and Harahap (2010) report a level of 38 per cent corporate social
disclosure in annual reports of seven Islamic banks, suggesting that the issue of csorporate
social disclosure was not a major concern. Similarly, Ousama and Fatima (2010a, 2010b)
report a low degree of voluntary disclosures in Shari’ah-compliant banks. Belal et al. (2014)
examine social reporting of Islamic banks in Bangladesh from 1983 until 2010 and report a
level of 42 per cent, whereas Abdullah et al. (2015) observed less than 40 per cent in the
Islamic banks of South Asian and Gulf Cooperation Council (GCC) regions; however, they
provide evidence that corporate governance is highly correlated with the higher level of
disclosure. Aribi and Gao (2010) examine the extent of corporate social disclosure in 21
Islamic banks. They found that the level of social disclosure was lower than their
benchmark index[1].
The impact of the type of the industry on social reporting has been tested by Othman
et al. (2009). They examine factors influencing Islamic social reporting in Malaysia. The
sample consisted of 56 non-financial companies. They found that the size, profitability and
the board composition influence the Islamic social reporting.
This study will extend the results of the previous studies by comparing SGD in banks
with that of insurance corporations. Hence, the first hypothesis of the study is:

H1. There is an association between levels of SGD and the type of industry of financial
institutions.

3.2 Ownership structure and Shari’ah governance disclosure

Ownership structure is influenced by the country-level mechanisms to insure stockholders’
protection. With respect to corporate social disclosure in Islamic financial institutions, a
number sof studies have shown differences across countries because of variety in ownership
structure. For example, Farook et al. (2011) examined the determinants of corporate social
responsibility disclosure in the annual reports of 47 Islamic banks in 14 countries. They
found significant variation across the sample due to the influence of the relevant publics,
 IJOES Shari’ah supervisory boards and the proportion of investment account deposits to total
assets. In contrast, Sulaiman (2001) reports no differences among banks from different
countries with respect to social disclosure.
Ramli et al. (2014) provide an explanation for the possible difference in social disclosure.
They concluded that domestic ownership has a positive influence on the voluntary social
disclosure in Malaysia. Haniffa and Cooke (2005) observed that after the financial crises of
1997, most firms in Malaysia which were dominated by Muslim stockholders are more
concerned about social disclosures. El-Halaby and Hussainey (2015) investigate
determinants and level of corporate social responsibility disclosure in Islamic banks around
the world. They used content analysis approach to examine annual reports of 138 Islamic
banks in different countries. Their study reveals a very low disclosure level around 26 per
cent. Further, they reported an association between corporate social responsibility
disclosure in Islamic banks and accounting standards, auditor type, bank size and the
existence of a Shari’ah auditing department. Maali et al. (2006) used a cross-country content
analysis approach to measure the level of corporate social disclosure of 29 Islamic banks
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from. They reported a very low level of social discloser (13.3 per cent), which is lower than
their expectations.
From a different perspective, Haniffa and Hudaib (2007) underline the ethical perspective
in examining the social disclosure of seven Islamic banks from four countries in the GCC
region. They report a large disparity between the communicated and ideal ethical,
highlighting the inconsistency in practice and suggesting that communication is not static
and often minimal.
On the other hand, some other studies examine the impact of standards issued by
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) on
disclosure of Islamic financial institutions in different countries. These standards promote
transparency, disclosure and comparability of financial reporting of Islamic financial
institutions across countries (Garas, 2012). Grais and Pellegrini (2006) argue that the
implementation of AAOIFI standards increases the level of voluntary disclosures. However,
El-Halaby and Hussainey (2015) find that the degree of disclosure in the Islamic financial
institutions is much lower than the requirements under AAOIFI standards, though they
conclude that adopters of AAOIFI standards have shown more disclosures than non-
adopters. Maali et al. (2006) demonstrate that because there is no required level of disclosure
in Islamic financial institutions in Malaysia, managers are well equipped with the social
dimensions of the institutions.
In the Saudi environment, adoption of AAOIFI standards by financial institutions is not
compulsory. This might be based on the assumption that the government has established its
own mechanisms to ensure compliance with Shari’ah principles; therefore, financial
institutions may not need to emphases this issue. For example, Cooperative Insurance
Companies Control Law, (2003) states that insurance activities in the Kingdom of Saudi
Arabia shall be provided only by insurance companies registered and operating in
accordance with the practice of cooperative insurance (Cooperative Insurance Companies
Control Law, 2003). This might be evident in the study of Alotaibi and Hussainey (2016),
who report that Shari’ah disclosure is negatively correlated with the percentage of
government ownership in Saudi non-financial listed firms.
Thus, the ownership of the financial institutions has been tested in the current study.
Ownership variable is measured in this study to represent two dimensions. The first
dimension measures the extent of the international link of the company (foreign-owned) and
the second dimension refers to the governmental ownership of the financial institution.
Therefore, the following two hypotheses are developed:
 Shari’ah
H2. There is an association between levels of SGD and financial institution’s governance
international ownership. disclosure

H3. There is an association between levels of SGD and financial institution’s

governmental ownership.

3.3 Firm characteristics and Shari’ah governance disclosure

Corporations have its own internal systems to ensure compliance with Shari’ah principles.
Accordingly, disclosures are necessary for firms to convey their images about Shari’ah
compliance to their stakeholders (Cooke, 1992). The exiting literature has reported a number
of factors affecting the extent of social reporting such as board composition, age, size,
leverage and profitability of the company. This study will extend these results by
investigating the issue in a different environment where the government has adopted a
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country-level mechanism to insure stockholders protection against forbidden and haram

transactions.
The board composition and characteristics, among the firm characteristics, are also
examined in this study. Within Islamic financing, previous studies have reported mixed
results about each of these features. Othman et al. (2009) found a positive relationship
between board composition and the level of Islamic social reporting, while other studies
report conflicting results (El-Halaby and Hussainey, 2015; Rahman et al., 2016). In the
present study, two proxies were used to measure the impact of the board composition on
SGD; membership of CEO in the board of directors and board size[2]. Hence, the following
two hypotheses are developed:

H4. There is an association between levels of SGD and membership of CEO in the board
of directors.

H5. There is an association between levels of SGD and board of director’s size.
Another firm attribute that may influence SGD is the age of the firm. Age of the company
could influence the companies’ disclosure because established companies have accumulated
experience and more information to disclose. Haniffa and Cooke (2002) found a positive
association, whereas El-Halaby and Hussainey (2015) and Akhtaruddin (2005) found no
association between age and corporate social disclosure. Thus, the following hypothesis is
developed:

H6. There is an association between levels of SGD and financial institution’s age.
The study controls some variables that could have an impact on the disclosure of Shari’ah
governance. Variables that have been used in this study as control variables are size,
leverage and profitability of the company. Results of previous studies have reported that
large companies disclose more information about their social reporting (Aras et al., 2010;
Abdul Rahman and Bukair, 2013; Brammer and Pavelin, 2004; El-Halaby and Hussainey,
2015; Gray et al., 2001; Othman et al., 2009). Company’s leverage could also have an impact
on the disclosure of the company. Previous studies have found a positive relationship
between leverage and social disclosure (Elshandidy et al., 2013; Jensen and Meckling, 1976).
We also control for profitability as measured by their return on assets (ROA). The majority
 IJOES of previous studies concluded a positive association between profitability and social
disclosure, suggesting that profitable firms disclose more social information than non-
profitable firms (Haniffa and Cooke, 2002; Gray et al., 2001; Othman et al., 2009).

3.4 Methodology and data

This study covers all banks and insurance companies listed in the Saudi stock market at the
end of 2015. In total, 46 companies were included in the study, consisting of 12 banks and 34
insurance companies. The data were collected manually from their annual reports by using
content analysis approach. The annual reports were downloaded from the official website of
the Saudi Stock Exchange (Tadawul).
Using content analysis approach to examine documents is common when the purpose is
to cover a large number of documents (Robson, 2002) and effective in codifying qualitative
information in the annual report (Noordin et al., 2015; Wan Abdullah et al., 2013). Hassan
and Marston (2010) report that among common approaches in studying transparency and
disclosure in accounting literature is the content analysis approach.
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To measure the extent of SGD, a self-constructed disclosure index was developed. A

number of steps were taken to develop this disclosure index. First, a consultation was
made to the AAOIFI Governance Standards. These standards were issued to provide
guidance on Shari’ah compliance as a framework for Islamic financial institutions
(AAOIFI, 2007). Then, a comprehensive disclosure index was designed to compare the
primary list of items with those used in similar studies such that of Haniffa and Hudaib
(2007). Later, a copy of the final disclosure index was shared with some experts/
colleagues for constructive validity. At the end of this process, an index consisting of 20
items was developed to measure the extent of SGD in financial institutions. Generally,
these items reflect several dimensions of disclosure of Shari’ah governance such as
appointment, composition, report, approvals and services of Shari’ah committee. Table I
presents these items and their descriptive statistics.
In the scoring process of annual reports, the study followed the approach used by
Haniffa and Cooke (2002) and Haniffa and Hudaib (2007) where a binary variable is
used, i.e. 1 for items specifically disclosed and 0 otherwise. To check the stability of
coding and reliability several approaches were performed, i.e. recording a random
sample of annual reports, scanning for any odd coded cases and discussion of any
potential discrepancies. In calculating scores, an un-weighted approach is used
as suggested by Cooke (1991). Accordingly, SGD for each financial institution is
calculated as:

ASGD
SGD ¼
TSGD

where,
 SGD: Shari’ah governance disclosure for a financial institution.
 ASGD: Actual disclosed items about Shari’ah governance made by the company.
 TSGD: Total items in the Shari’ah governance disclosure index.

4. Descriptive statistics
The dependent variable is the SGD made by a financial institution. The descriptive
statistics show that the average level of SGD made by financial institutions is 11.7
 Shari’ah
Banks Insurance All
Items Mean SD Mean SD Mean SD
governance
disclosure
Items relating to company’s assertions 0.313 0.347 0.099 0.217 0.155 0.270
P1- Does the company provide
assertions about its compliance with
the provisions of Islamic Shari’ah in its
annual reports? 0.750 0.452 0.000 0.000 0.196 0.401
P2- Does the company affirm
establishment of a body or unit to
ensure compliance with the provisions
of Islamic Shari’ah? 0.417 0.515 0.206 0.410 0.261 0.444
P3- Does the company provide that
responsibilities of this body are to
ensure about compliance with Shari’ah
instructions? 0.250 0.452 0.176 0.387 0.196 0.401
P4- Does the company make a reference
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to the independence of this body? 0.167 0.389 0.088 0.288 0.107 0.315
P5- Does the company state its
commitment to the decisions of the
oversight body about compliance with
Shari’ah instructions? 0.250 0.452 0.176 0.387 0.196 0.401
P6- Does the company state that
oversight body is giving access to
review company’s policies, contracts
and products to ensure about
compliance to Shari’ah instructions? 0.250 0.452 0.118 0.327 0.152 0.363
P7- Does the company report that the
oversight body is giving right to
monitor company’s adherence to their
decisions about compliance with
Shari’ah? 0.250 0.452 0.029 0.171 0.087 0.285
P8- Does the company identify any
other unit that could support Shari’ah
board in its duty? 0.167 0.389 0.000 0.000 0.044 0.206
Items relating the oversight body 0.208 0.294 0.051 0.138 0.092 0.200
F1- Is there a reference made to the
number of members of Shari’ah board? 0.250 0.452 0.147 0.359 0.174 0.383
F2- Is there a reference made to the
name of the chairman of Shari’ah
board? 0.250 0.452 0.118 0.327 0.152 0.363
F3- Is there a reference made to the
names of the members of Shari’ah
board? 0.333 0.492 0.147 0.359 0.196 0.401
F4- Does the company assert that the
selection and appointment of members
of Shari’ah board was made by the
General Assembly? 0.083 0.289 0.000 0.000 0.022 0.147 Table I.
E1- Is it reported whether one or more Items disclosed by
members are a financial expert or an financial institution
equivalent under the applicable code? 0.250 0.452 0.059 0.239 0.109 0.315 and their descriptive
(continued) statistics
 IJOES
Banks Insurance All
Items Mean SD Mean SD Mean SD

V1- Is there a reference made to the

structure of Shari’ah board and its
relationship to other units in the
company? 0.250 0.452 0.000 0.000 0.065 0.250
V3- Is there a reference made to a list of
services or approvals of documents,
contracts or products that have been
achieved during the year? 0.250 0.452 0.000 0.000 0.065 0.250
M1- Is the number of meetings held
during the year reported? 0.333 0.492 0.088 0.288 0.152 0.363
M2- Is there a reference made to the
issues discussed during the meetings? 0.167 0.389 0.000 0.000 0.044 0.206
M3- Is there a reference made to how
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many meetings were attended by each

member? 0.083 0.289 0.029 0.171 0.044 0.206
M4- Is there a reference made to the
number of audits, inspections or review
made by the Shari’ah board or
affiliated departments during the year
to ensure compliance with Shari’ah
instructions? 0.250 0.452 0.000 0.000 0.065 0.250
R1- Is there a reference made to the fees
and/or allowances that have been
received by Shari’ah board? 0.000 0.000 0.029 0.171 0.022 0.147
Aver. Score of disclosure about
Table I.
Shari’ah compliance 0.250 0.308 0.071 0.146 0.117 0.213

per cent, which is lower than expectations. In the literature, we observed the same
pattern, for example, Maali et al. (2006) reported 13.3 per cent, Hassan and Harahap (2010)
reported 38 per cent and Haniffa and Hudaib (2007) reported a large disparity between
the communicated and ideal ethical and non-consistent in practice, suggesting that
communication is not static and often minimal. Aribi and Gao (2010) found lower than
their benchmark index, Ousama and Fatima (2010a, 2010b) observed a low degree, and
El-Halaby and Hussainey (2015) reported 28 per cent in a study covering over 138 Islamic
banks. Azmi et al. (2017) find that most of the companies in Malaysia are not reporting the
non-halal activities in which they are not involved and most of the firms are only
interested in the accounting related disclosures. Table I lists items and their descriptive
statistics.
In more details, most disclosed information about Shari’ah governance can be classified
into two types of information. The first type of information is in the form of assertions and
policies made by financial institutions about their compliance with Shari’ah principles. The
second type of disclosed information relates to the unit, committee or body established to
oversight this compliance.
Establishing a committee to oversight compliance with Shari’ah is the most common
practice, nevertheless, there is a little information about the performance of this
committee such as the number and types of services or approvals and products
achieved in the year. Most importantly is that very little information was given about
 the dependency of this committee. Only 2.0 per cent of these annual reports provides Shari’ah
that the Shari’ah committee was appointed by the General Assembly. This is also governance
reported by Srairi (2015), who finds the Shari’ah disclosure is high in some dimensions
(Shari’ah Supervisory Board dimension, board structure, risk management, etc.) and
disclosure
low in the other dimensions (ownership structure, board remuneration and bank Zakat
obligations). Overall, it can be suggested that the real practice of Shari’ah governance is
dynamic and differs among financial institutions. For example, some of these
institutions approach this compliance by establishing a unit within the company
responsible for this compliance. Other has appointed a kind of committee responsible
for inspecting transactions of the company to ensure their compliance with Shari’ah
principles. Very few of them (2 per cent) have taking further steps to give more
independence to this established body, emphasizing that the appointment and selection
of Shari’ah committee are taken by the General Assembly of the company in its annual
meeting.
Therefore, these observations suggest that conveying Shari’ah governance procedures
that have been applied by financial institutions in Saudi Arabia are not sufficient in terms of
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nature and quality relating to the appointment and nominations, independence, knowledge,
experience, time and quality of the work of Shari’ah committee. This has been also
suggested by Alotaibi and Hussainey (2016) reporting that Saudi firms are good in
providing the quantity of disclosure but in relative terms quality is low. The importance of
reporting this information is emphasized by a number of studies, suggesting that revealing
the composition of Shari’ah board is critical in Shari’ah disclosure for financial institutions
(Noordin et al., 2015) and publicizing Shari’ah information in annual reports is important for
Islamic financial institutions to discharge their social responsibilities (Abdul Rahman and
Bukair, 2013).
Table II provides descriptive statistics about the study sample. These factors reflect
industry, ownership and the firm’s characteristics and attributes. Table II shows that out of
the total numbers of annual reports that have been examined, 34 belong to insurance
companies, while 12 annual reports belong to banks. Also, other variables differ evenly
among the study sample. For example, financial institutions differ in their age between
newly established companies to well established financial institutions. The average age for
all companies is 17.65 years.

(%) Mean SD

Industry type Insurance 73.6

Banks 26.4
International ownership Non-Inter 34.1
Inter 65.9
Gov. ownership Semi-Gov 24.2
Private 75.8
Is the CEO member of board No 46.2
Yes 53.8
Size of the board Number of members in 8.92 1.479
Board of Directors
Company age Age 17.65 15.026 Table II.
Size of the company Total assets 44,109,729.71 8.939E þ 07 Descriptive statistics
Leverage Leverage 74.83% 0.17947 about independent
Profitability ROA 9.24% 6.4199 variables
 IJOES 5. Empirical estimations
A multiple regression analysis was applied to estimate the relationship between SGD made
by financial institutions and various potential predictors. Appropriate tests are applied for
checking the ordinary least square assumptions, normality and linearity of the data are
approved, no multicollinearity was detected as Tolerance and VIF are within the acceptable
levels and there are no errors in variables and autocorrelation (Durbin-Watson = 2.148).
Table III describes the dependent variable, independent variables and their measurements.
Table IV summarizes the analysis of the results. The multiple regression model with all
predictors produced R2 = 0.696, F (9, 36) = 9.155, p < 0.000. Table IV shows the factors
relating to the identity of the financial institutions determine the extent of voluntary
disclosure of Shari’ah governance. These factors represent the type of the industry, the
nature of the ownership (participation of the government in the ownership of the company,
the extent of international link of the company) and the composition of the board of directors
of the financial institutions.
On the other side, there is no impact of the other factors relating to the operation
attributes of the financial institutions on the disclosure of Shari’ah governance such as age,
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the total assets and ROA or leverages. These results might reflect the arguments of Haniffa
(2002) and Albassam and Ntim (2017) demonstrating that from an Islamic point of view, a
company is expected to provide full disclosure regardless of other factors.
In more details, the dimension of the type of industry describes the strong motivation for
financial institutions to disclose more information about their Shari’ah governance. For
testing the H1, type of industry is taken as an independent variable. Table IV shows that the
industry type factor (Banks = 1 and Otherwise = 0) is positive and significantly different
from zero (t = 2.162) indicating that companies working in the banking industry are
disclosing more information about their Shari’ah governance. These results support the
findings of Ousama and Fatima (2010a) and are inconsistent with the findings of Othman
et al. (2009). It evident from the regression results that type of industry significantly plays its
role in the mechanism of SGD.
However, the difference between banks and insurance companies about their disclosure
of their Shari’ah governance procedures might be due to a number of reasons. The first
reason relates to the advancement of Islamic finance and activities in comparison to the
status of the insurance activities in the Muslim world. In recent years, there have been
significant attempts in the banking industry to develop financial transactions according to
Islamic teachings and principles, leading to the development of a number of products and
mechanisms to ensure compliance with Islamic Shari’ah. This could have contributed to the
general trend toward more Islamic banking. This could be explained by the observation of
Haniffa and Cooke (2005), explaining that after the financial crises of 1997, most firms in
Malaysia which were dominated by Muslim stockholders are more concerned about the
social disclosures.
The second reason relates to the advancement of the banking industry in Saudi Arabia.
In contrast to the insurance industry, banking has a long history in Saudi Arabia while the
insurance industry is still in the premature stage. For example, prior to 2007, there was only
one insurance company operating in Saudi Arabia and most type of insurance services is
optional (Alnodel, 2016). Also, these results could be reflecting the publicity of services
provided by banks in contrast to the services provided by insurance companies. In Saudi
society, almost everyone has to interact with banks whether as a client or an investor, while
most insurance services are optional for most of the Saudi residents. Accordingly, the nature
of the relationship between society and each industry may contribute to the differences
between banks and insurance companies about their attitude toward Islamic principles. As
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Variables Measurements

Dependent variable
SGD Shari’ah governance disclosure Actual disclosed items to the total items in the index
Independent variables
INDT Industry type Dummy variable: 1 = Bank; 0 = Otherwise
INTO Int. vs non Int Dummy variable: 1 = Local; 0 = Otherwise
CGO Gov. vs Private Dummy variable: 1 = Non Gov.; 0 = Otherwise
CMB Is the CEO member of board Dummy variable: 1 = CEO is member of the Board of Directors; 0 = Otherwise
NMB Number of members in Board of Directors Number of members in the Board of Directors
AGR Age Number of years from foundation to the date of the annual report
SIZE Total Assets The natural log of total assets
LTA Liability to assets Ratio of total liability to total assets
ROA Return on assets ROA
SGDi ¼ b 0 þ b 1 INDTi þ b 2 INTOi þ b 3 CGOi þ b 4 CMBi þ b 5 NMBi þ b 6 AGRi þ b 7 SIZEi þ b 8 LTAi þ b 9 ROAi þ ui

Dependent variable
Table III.

variables and their

and independent
disclosure
governance
Shari’ah

measurements
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for SGD
IJOES

Table IV.
Regression results
Unstandardized Standardized Collinearity
coefficients coefficients statistics
B Std. error Beta t Sig. Tolerance VIF

(Constant) 0.827 0.627 1.318 0.196

Industry Dummy 0.366 0.169 0.332 2.162 0.037 0.358 2.793
Local vs Int 0.369 0.075 0.641 4.912 0.000 0.496 2.018
Private vs Govt 0.383 0.127 0.434 3.028 0.005 0.412 2.428
Is the CEO member of Board 0.143 0.081 0.240 1.755 0.088 0.452 2.212
Number of members in Board of Directors 0.110 0.045 0.312 2.458 0.019 0.523 1.911
Age 0.003 0.003 0.181 1.209 0.235 0.377 2.649
Total Assets 0.000 0.000 0.158 0.958 0.344 0.311 3.214
Liability To Assets 0.655 0.654 0.131 1.002 0.323 0.497 2.012
ROA 0.015 0.017 0.086 0.850 0.401 0.819 1.221
R 0.834
R Square 0.696
Adjusted R Square 0.620
Std. Error of the Estimate 346.112
Durbin-Watson 2.148
F 9.155
Sig 0.000
 most of the business of banks rely heavily on deposits made by the society, banks may be Shari’ah
under more pressure to comply with Shari’ah principles to attract more deposits from the governance
society. Therefore, banks disclose more information about their Shari’ah governance in
comparison with other types of industry. On the other side, there is no such relationship
disclosure
between the insurance industry and society as their services are not common in the country.
On the basis of the above reasons, we accept our H1.
The second motivation for disclosure of Shari’ah governance relates to the ownership
and type of management of the company. For this purpose, we developed H2 and H3.
Table IV depicts that the results of the regression analysis show positive and statistically
significant coefficient at 1 per cent of the confidence interval (t = 4.912), indicating that
companies that are local with no international investors are willing to disclose more
information about their compliance with Shari’ah principles and teachings. A Similar
observation has been reported by Haniffa and Cooke (2005). It confirms H2. With respect to
the government ownership of the company, the coefficient of non-government is statistically
significant at 1 per cent confidence interval (t = 3.028), indicating that companies which are
owned by individuals (private) in comparison to those financial institutions that are semi-
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owned by governmental agencies (semi-government) are willing to disclose more

information about their Shari’ah governance. The same is suggested by Albassam and Ntim
(2017) for the Saudi-listed firms. So we are accepting H3.
These results suggest that when the ownership structure of the company is composed of
private investors and from the local society, the company will disclose more information
about their Shari’ah governance. This might reflect the general appreciation and
understanding of the Islamic principles by the local society, highlighting the legitimacy of
the company in the society. These findings support the results of Ramli et al. (2014) and
opposite to the findings of Sulaiman (2001). Because of the above mentioned reasons, we did
not reject H2 and H3.
Another factor affecting the disclosure of Shari’ah governance relates to the nature of the
management of the company. H4 and H5 are developed on the basis of the following two
factors. From Table IV, it is observed that companies those have a CEO as a member in the
board of directors is statistically significantly different from 0-10 per cent of confidence
interval so willing to disclose more information and, similarly, those have smaller number of
board of directors are willing to disclose more information about their compliance with
Shari’ah teaching. So we are not rejecting H4 and H5. This might describe the nature of the
type of financial institutions focusing on Islamic financing and interested in a general new
trend in Islamic financing. These results support the findings of Othman et al. (2009), who
report a positive relationship between board composition and the level of Islamic social
reporting. Haniffa and Cooke (2005) also report such new trends in most firms in Malaysia
that are dominated by Muslim stockholders. However, contrary to the above significant
associations, H6 is statistically insignificant, that is an association between levels of SGD
and financial institution’s age. It is a well-known factor that the Islamic financial industry is
still in its primitive stage and has massive challenges to establish in the financial market.
May be because of this reason, age has no significant effect on the factor of disclosure. These
results are supporting the findings of El-Halaby and Hussainey (2015) and Akhtaruddin
(2005), who report no association between age and corporate social disclosure.

6. Conclusion
This research aims to extend SGD into insurance sector and investigate the issue in a
country that has a general policy about adhering to Islamic principles. The study covers all
banks and insurance companies listed in the Saudi stock market at the end of 2015.
 IJOES The results show some trends toward more disclosure about compliance with Shari’ah
principles and teaching. Regression analysis shows that industry type, ownership structure
and board composition significantly determine the extent of disclosure of Shari’ah
governance. These results suggest that the environment surrounding financial institution
plays an important role in motivation for such disclosure. The environment plays an
important role in shaping the identity and reflects the general concern of the local society
about compliance with Shari’ah principles and teaching. The respond of financial
institutions to such issues go beyond the government assertions about enforcement of
Islamic principles. Internal attributes and strategies of financial institutions may play a
significant role in distinguishing its compliance with Islamic principles to respond to the
society critiques about financial transactions. Therefore, legitimacy threats in a
conservative society may require further governance and disclosure beyond the government
affirmations.
It is observed from the analysis of the data and empirical observations that there is a
lack of transparency and disclosure because of the prevailing exogenous regulatory
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policies, which ultimately lead to the high transaction cost. This cost can be reduced by
applying the participatory model under the umbrella of Tawhidi methodology and also
can be reduced through the evolutionary learning in the framework of the unity of
knowledge.
Despite being commonly practiced in academic research, we do not rule out the fact that
content analysis approach is not completely free from any limitations. First, it is based on
the judgment of the researcher that may lead to human judgment error and bias. Second, it
only considers the presence or quantity of sentences without assessing the quality of the
information itself.

Notes
1. It observes from the above discussion that the exogenous regulatory system is not very much
effective. It should be replaced by the participatory framework as discussed by the proponents of
Tawhidi methodology and unity of knowledge. In this endogenous framework (IIE) all agents are
involved in the decision-making process, i.e. principal, agent, market and polity.
2. All these are exogenous determined factors, but the endogenous training of the principle and
agent has not been observed, which will enhance the participatory environment of corporate
governance.

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Corresponding author
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Toseef Azid can be contacted at: toseefazid@hotmail.com

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