Transparency and legitimacy in profit-sharing investment accounts

Saida Dammak, Mohamed Triki

Abstract


Purpose - The purpose of the present work was to evaluate whether Islamic banks are transparent regarding profit (and loss) sharing to investment account holders. It also aimed to explore the shortcomings in the compliance of the full-fledged Islamic banks with the Tunisian Islamic banking institution (IBI) “Az-Zaytuna” disclosure guidelines associated to profit sharing investment accounts (PSIAs).

Design/methodology/approach - This study was conducted among a sample of 36 IBIs from 13 countries. Islamic banking institutions forming the study sample seem to attract the highest volume of profit sharing investment accounts, especially the unrestricted ones.

Findings - The research results showed that IBIs focus on gaining legitimacy continuously rather than on improving reporting transparency. Although reporting on profits distributed and compliance to Islamic tenets was very significant, information pertaining to the use of funds and profit distribution techniques was not delivered significantly.

Research limitations/implications- The main limitation is scarcity of data available. The maximum number of Islamic banks that disclose financial data covering the period of 2011-2013 limited the scope of the study to 36 banks.

Practical implications– The findings are very valuable for designing policies to improve transparency in Islamic banking.

Originality/value - This paper suggests new disclosure guidelines which incorporate transparency, legitimacy and timeliness to reduce information asymmetry and enhance governance disclosure regarding profit (and loss) sharing to investment account holders.


References


• Ausaf Ahmad. (1993). "Contemporary practices of Islamic financing techniques". Islamic Development Bank- Islamic Research and Training Institute.

• Bassam Maali, Peter Casson And Christopher Napier . (2006). "Social Reporting by Islamic Banks". ABACUS, Vol. 42, No. 2.

• Faouzi Mohamed Hamdi and Mohamed Ali Zarai. (2012). "Earnings Management to Avoid Earnings Decreases and Losses: Empirical Evidence from Islamic Banking Industry" . Research Journal of Finance and Accounting, Vol 3, No 3.

• Faouzi Mohamed Hamdi and Mohamed Ali Zarai. (2013). "Earnings Management and Investment Accounts Holders Interests In Islamic Banking Institutions". International Journal of Business and Management Invention, Volume 2, Issue 12, pp. 22-35.

• Frédérique Déjean, Bruno Oxibar. Diffusion d’information sociétale et stratégie de légitimation : une étude longitudinale appliquée au cas Péchiney. Comptabilite, Controle, Audit Et Institution(S), May 2006, Tunisia. pp.CD-Rom. .

• Hichem Hamza and Zied Saadaoui . (2013 ). "Investment deposits, risk-taking and capital decisions in Islamic banks". Studies in Economics and Finance Vol. 30 No. 3, pp. 244-265 .

• Islamic Financial Services Board. (2007). "Disclosures to promote transparency and market discipline for institutions offering islamic financial services (excluding islamic insurance (takaful) institutions and islamic mutual funds)". Malaysia: IFSB.

• Islamic Financial Services Board. (2010). "Guidance note on the practice of smoothing the profits payout to investment account holders". Malaysia: IFSB.

• Islamic Financial Services Board. (2013). "Islamic Financial Services Industry Stability Report ". Malaysia: IFSB.

• Mark C. Suchman. (1995). "Managing Legitimacy: Strategic and Institutional Approaches". The Academy of Management Review, Vol. 20, No. 3, pp. 571-610.

• Markus J. Milne and Ralph W. Adler . (1999 ). "Exploring the reliability of social and environmental disclosures content analysis". Accounting, Auditing & Accountability Journal, Vol. 12 No. 2, pp. 237-256.

• Mohamed Chelli, Jacques Richard and Sylvain Durocher. (2014). "France’s new economic regulations: insights from institutional legitimacy theory". Accounting, Auditing & Accountability Journal Vol. 27 No. 2, pp. 283-316.

• Mohammad Nejatullah Siddiqi. (2004). "Riba, bank interest and the rationale of its prohibition". Islamic Development Bank- Islamic Research and Training Institute.

• Mohammed El Qorchi. (2005). "Islamic Finance Gears Up". Finance & Development, Vol. 42, No. 4.

• Mohsin S. Khan and Abbas Mirakhor. (1990). "Islamic Banking: Experiences in the Islamic Republic of Iran and in Pakistan". Economic Development and Cultural Change, Vol. 38, No. 2, pp. 353-375.

• Munawar Iqbal, Ausaf Ahmad and Tariqullah Khan. (1998). "Challengences facing Islamic banking". Islamic Development Bank- Islamic Research and Training Institute.

• Neila Boulila Taktak, Sarra Ben Slama Zouari and AbdelKader Boudriga . (2010 ). "Do Islamic banks use loan loss provisions to smooth their results?". Journal of Islamic Accounting and Business Research Vol. 1 No. 2, pp. 114-127 .

• Oliver E. Williamson . (1998). "Transaction cost economics: how it works; where it is headed". De economist 146, NO. 1, pp. 23-58.

• Rashid Ameer, Radiah Othman and Nurmazilah Mahzan. (2012). "Information asymmetry and regulatory shortcomings in profit sharing investment accounts". International Journal of Islamic and Middle Eastern Finance and Management Vol. 5 No. 4, pp. 371-387.

• Rashidah Abdul Rahman, Apedzan Kighir, Lateefat Olabisi Oyefeso and Omneya Abdel Salam . (2013). "Risk Management Disclosure Practices of Islamic Banks in the Mena Region: An Empirical Analysis". Middle-East Journal of Scientific Research 15 (1), pp. 152-160.

• Sayd Farook, M. Kabir Hassan and Gregory Clinch. (2012). "Profit distribution management by Islamic banks: An empirical investigation". The Quarterly Review of Economics and Finance 52 , pp. 333– 347.

• Sayd Farook, M. Kabir Hassan and Roman Lanis . (2011). "Determinants of corporate social responsibility disclosure: the case of Islamic banks". Journal of Islamic Accounting and Business Research Vol. 2 No. 2 , pp. 114-141.

• Sharifah Khadijah Binti Syed Agil, Syed Musa Alhabshi and Effendy Rahaman. (2011). "Is Profit Sharing Investment Account A Deposit? The Case Of Institutions Offering Islamic Finance". Ieee Colloquium on Humanities, Science and Engineering Research (CHUSER), Penang.

• Simon Archer and Rifaat Ahmed Abdel Karim. (2009). "Profit-sharing investment accounts in Islamic banks: Regulatory problems and possible solutions". Journal of Banking Regulation Vol. 10, 4, pp. 300–306.

• Simon archer, rifaat ahmed abdel karim and talla al-deehani. (1998). "Financial Contracting, Governance Structures and the Accounting Regulation of Islamic Banks: An Analysis in Terms of Agency Theory and Transaction Cost Economics". Journal of Management and Governance 2, pp. 149–170.

• Simon Archer, Rifaat Ahmed Abdel Karim and Venkataraman Sundararajan. (2010). "Supervisory, regulatory, and capital adequacy implications of profit-sharing investment accounts in Islamic finance". Journal of Islamic Accounting and Business Research Vol. 1 No. 1, pp. 10-31.

• Steven Tadelis and Oliver Williamson. (2010). "Transaction Cost Economics".

• Usmani, M. M. (1998). "An Introduction to Islamic Finance".

• Venkataraman Sundararajan. (2007). "Risk Measurement and Disclosure in Islamic Finance and the Implications of Profit Sharing Investment Accounts". ISLAMIC ECONOMICS AND FINANCE.

• Venkataraman Sundararajan. (2008). "Issues in Managing Profit Equalization Reserves and Investment Risk Reserves in Islamic Banks". Journal of Islamic Economics, Banking and Finance.

• Venkataraman Sundararajan. (2011). "Profit sharing investment accounts-measurement and control of displaced commercial risk (dcr) in islamic finance". Islamic Economics Study, pp. 41-62.


Refbacks

  • There are currently no refbacks.


............................................................................................................................................................................................................................

HOW DO YOU REGISTER and SUBMIT AN ARTICLE?

Registering and Logging in

Submitting an Article