POZO SHUSHUFINDI – 113D, ARENA “U INFERIOR”

This study was initially designed to collect the entire data set through questionnaire survey design. However, the collection of data from IBs proved to be very difficult and also due to the fact that only 28 questionnaires could be collected, a change in the research methodology, design and method was inevitable to provide a more efficient and effective empirical research. For this, reason, disclosure analysis was considered to substantiate the questionnaire based analysis. In the disclosure analysis, the research utilises secondary data in the form of IBs’ annual reports to gauge how much information the banks disclosed in relation to the index created as a best practice. Thus, the same research questions were considered to be tested through the data collected through a content analysis of the annual reports of Islamic banks for the disclosure analysis. This unobtrusive research method is discussed in this section and the method of estimation is presented in Chapter 6.

It should be noted that content analysis is now a widely used method of analysis in financial accounting research (Beattie; 2005). As evidenced in recent years, the use of content analysis and its significant issues has been discussed by several studies (Beattie, 2005). This study uses secondary data to complement the primary data obtained through the questionnaire through content analysis in conducting disclosure analysis.

This research, hence, employs content analysis to examine the strength of the CG-RM relationships using the information provided in the annual reports to explore the

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communication aspect of the IBs. In the disclosure approach, the index for the respective CG and RM is constructed in terms of best practice and the information that IBs release in their annual reports was sought to provide responses to the established best practices dimensions and constructs.

The dimensions included in the disclosure index for CG and RM are presented in Table 4.5 with the number of statements or constructs included in each dimension. The detailed indices for both CG and RM with all the constructs can be found in Appendix 2.

A total of 53 IBs are taken as a sample to represent different regions. From the 53 IBs, a collection of 181 online versions of annual reports from the years: 2007, 2009, 2011 and 2012 are included. For banks that do not have ARs of these years, the sample banks’ annual reports between the years 2003 and 2012 are examined. The data is primarily gathered from online published annual reports of the IBs from their individual websites. There are compilations of financial statements and risk management reports which are also used to analyse CG and RM as lack of standardisation prevents the efficient collection of secondary data. Besides that, data from various sources such as Islamic banking magazines, online articles, and web- pages are also gathered to complement information gathered from the annual reports. The sample banks are as shown in Table 4.4.

In terms of sampling, the annual reports are chosen based on the criteria that: they have to be from Islamic financial institutions, they have to be available online, and they have to be published in English between certain years of the 2000s.

To examine disclosure from the annual reports, the data from the reports are tabulated based on a specific worksheet. The worksheet comprises 9 themes grouped into 15 dimensions (8 dimensions for CG and 7 dimensions for RM) and codified into 135 constructs. The CG index with its 8 dimensions has a total of 75 constructs while RM with its 7 dimensions has 60 constructs (please see Table 4.5 for the number of constructs for each of the dimension).

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Table 4.4: Sample Banks’ Annual Reports

No. Country No. Bank No. Country No. Bank

1 _Bahrain 1 ABIB 8 Pakistan 28 Al-Falah

2 Bahrain Islam. 29 Meezan

3 As-Salam 30 Bujr (Daw.)

4 Khaleeji 9 Qatar 31 QIB

5 Ithmaar 32 Rayan 6 Eskan 33 IBQ 7 ABCIB 34 QIIB 8 Capinnova 10 Saudi Arabia 35 AlRajhi 9 KFH 36 AlJazira

2 Bangladesh 10 S.Jalal 37 AlInma

11 Islami 38 Jadwa

12 Al-Arafah 11 Sudan 39 Al-Shamal

3 Egypt 13 Faisal 40 Albaraka

14 Albaraka 41 Faisal

4 Indonesia 15 Muamalat 12 Turkey 42 Albaraka

16 BSM (Sy.M.) 43 Asya

17 BNI Syariah 44 KuveytTurk

5 Jordan 18 JIB 13

UAE

45 ADIB (A.Dh)

19 IIAB 46 DIB (Dubai)

20 JDIB 47 Hilal

6 Kuwait 21 Boubyan 48 Emirates Isl.

22 Kuwait Intern. 14

UK

49 Gatehouse

7 Malaysia 23 BIMB 50 BLME

24 CIMB 51 IBB 25 RHB 52 EIIB 26 Affin 15 Yemen 53 Tadamon 27 HLIB

The themes included are: ‘bank mission’, ‘board effectiveness’, ‘effective committees and senior management’, ‘Shari’ah governance and compliance’, ‘ethical business conduct’, ‘audit’, ‘risk governance and practices’, ‘reporting and accounting’, and ‘risk control’. Each theme may comprise of one or more dimensions.

The 9 themes are extended into the following dimensions: ‘mission’, ‘composition of the board of directors’, ‘board leadership’, ‘board meetings’, ‘nomination and compensation committee’, ‘Shari’ah governance’, ‘Shari’ah compliance’, ‘ethical business conduct’; ‘audit committee’, ‘risk management committee’, ‘risk management control and disclosures’, ‘reporting and accounting’, ‘market and liquidity risks’, ‘credit risk’, and ‘other risks’. Each dimension is denoted by D1 through D15.

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Table 4.5: Dimensions in Disclosure Index for CG and RM

Part Dimension Number of

Statement

Corporate Governance

Mission 7

Composition of the BOD 9

Board Leadership 3

Board Meetings 2

Nomination Committee or / and Compensation

Committee 11

Shari’ah Governance 12

Shari’ah Compliance 18

Ethical Business Conduct & Corporate Responsibility 13

Risk Management

Audit Committee 22

Risk Management Committee or / and Asset Liquidity

Committee 6

Risk Management, Control Items & Risk Disclosures 10

Reporting - Accounting and Funding 9

Market and Liquidity Risks 6

Credit Risks 5

Other Risks 2

Total 135

The theme ‘board mission’ consists of the ‘mission’ dimension (D1); the theme ‘board effectiveness’ consists of the ‘board composition’ (D2), ‘board leadership’ (D3) and ‘board meetings’ (D4) dimensions; the theme on ‘effective committees and senior management’ consists of ‘nomination and compensation committee’ (D5); the theme on ‘Shari’ah and compliance’ consists of ‘Shari’ah governance’ (D6) and ‘Shari’ah compliance’ (D7); the theme on ‘ethical business and practices’ consists of ‘ethical conducts’ (D8); the theme on ‘audit’, consists of ‘audit committee and audits’ (D9); the theme on ‘risk governance’ consists of ‘risk committees’ (D10) and ‘risk management and control items’ (D11); the theme on ‘reporting and disclosure’ consists of ‘audit’ and ‘reporting’ (D12); and the theme on ‘risk control’ consists of ‘market and liquidity risk’ (D13), ‘credit risk’ (D14) and ‘other risks’ (D15).

Each dimension has a varying number of statements, which are also known interchangeably as constructs, of which the statements act as qualifiers to identify the presence or absence of specific items pertaining to CG and RM.

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Based on the above worksheet, the CG and RM indices are developed by basing them on a weighted average formulated through a series of worksheets. In summary, the general layout of the worksheet is shown in Table 4.5.

As mentioned, the calculation method is presented in Chapter 6, which provides the empirical results developed through the disclosure analysis. In addition, further explanations related to the estimation method are provided in the following section.