Social Reporting by Islamic Banks

Maali, Bassam, Casson, Peter and Napier, Christopher (2003) Social Reporting by Islamic Banks (Discussion Papers in Accounting and Finance, AF03-13) Southampton, UK. University of Southampton 42pp.

Abstract

The last 30 years have witnessed the appearance and rapid expansion of Islamic banking both inside and outside the Islamic world. Islamic banks provide their customers with financial products that do not violate Sharia, the Islamic law of human conduct. Islamic banks now operate in Western countries such as the UK and USA, as well as most of the Islamic countries. In countries such as Pakistan and Sudan, the whole banking systems have been changed to comply with Sharia. The social role is very important for Islamic banks, and is specified or at least mentioned in many banks’ articles of association. The importance of the social role of these banks has led some researchers to describe Islamic banks as “banks having a
social face”. This role is mainly a reflection of the importance that the Islamic principles upon which these banks operate give to social issues.

In this paper, we extend the rich literature on social reporting. Applying the Islamic principles to which the Islamic banks subscribe, we develop a benchmark set of social disclosures appropriate to such banks. We then compare the actual social disclosures contained in the annual reports of 29 banks operating according to Islamic principles (located in 16 countries) to this benchmark. The comparison takes the form of a disclosure index measuring the extent to which each bank’s social disclosures met the benchmark. In addition, we undertake content analysis to measure the volume of
social disclosures.

The results of the analysis suggest that social reporting by Islamic banks falls significantly short of our expectations for entities whose operations are based on Islamic principles. In addition, the banks tend to disclose only those items that help to construct a positive image, such as matters relating to charity and Zakah (an Islamic religious tax). However, Islamic banks tend not to disclose issues that are potentially important to the users of financial statements but that may have a negative effect, such as transactions regarded as unlawful from the Islamic perspective. The results of the analysis also suggest that banks required to pay Zakah, provide more social disclosures than banks not subject to Zakah.

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