Islamic banking

The effect of Islamic banking on financial reporting quality: a comparative analysis between the Islamic banks of GCC and South-eastern countries

Abstract

This dissertation is based on Islamic banking system and has supported to offer the brief understanding regarding financial reporting quality. This research is based on comparative analysis and for this purpose, Islamic banks of GCC countries and South-eastern countries have selected by the researcher. In the context of GCC countries, banks of Dubai and Saudi have taken by the researcher. However in the context of South-eastern countries Malaysia and Indonesia banks have taken.

This research paper is based on secondary data analysis method and has supported to offer in-depth knowledge regarding the research topic on the basis of literature review and case study. While collecting the data from the literature review, researcher has given focus towards critically analyze the research topic while referencing the studies of various past authors which has enabled the researcher to understand the point of view of the past authors. Researcher has given huge emphasis towards ethical parameter as it remains assistive to conclude the study in a reliable manner. In like manner, it has supported to execute the research in the right direction.

This study has supported to analyze the effect of Islamic banking on financial reporting quality in the context of GCC and South-eastern countries while analyzing the case studies of Dubai, Saudi, Malaysia and Indonesia banks which has enabled to conduct comparative analysis. Furthermore, this study has also supported to offer recommendations to improve the financial performance of the Islamic banks in GCC as well as South-eastern countries. This research paper remained highly assistive to conclude the study in the direction that it remained assistive to achieve the research objectives at a greater extent.

Chapter 1: Introduction

1.1 Research Background

Poor governance of banking sector can create huge consequences towards the economy. It is identified that banking crisis creates the situation of instability in economy and governance and also creates the situation of intense poverty (Johnes, Izzeldin, & Pappas, 2014). Due to this reason, at present government has increased concern towards bank governance as it is essential to focus to eliminate the situation of global financial. However in this context, Islamic banks have shown a strong elasticity during the situation of current financial crises. From the survey, it is identified that financial crisis does not impact the Islamic banking finance system and due to this reason, this banking system has shown growth at a greater extent. Islamic banks are showing growth and competitiveness at a worldwide platform and it is expanding its business services at a greater extent (Hanen, Emrouznejad, & Ouertani, 2014). It is identified that in the year 2007, when global financial crisis has taken place, many countries had started to work towards searching the alternative framework for the purpose of enhancing the stability of the financial systems. At that time, various countries have embraced the Islamic banking system (Osamwonyi, & Michael, 2014). However, they faced the challenges regarding the ethical issues towards integrity and viability of Islamic banking and finance system.

Islamic banking system follows the rules and regulations of Shariah law. However it is identified that in different countries, there is difference in financial reporting in the context of Islamic banking system. This research paper has assisted towards analyzing the financial reporting quality of four different countries, i.e. Dubai, Saudi, Malaysia and Indonesia. This research paper has supported to offer in-depth knowledge regarding the research topic while focusing towards the Islamic banking system (Louhichi, & Boujelbene, 2016). For the purpose of comparative analysis, researcher has given huge emphasize towards the facts, figures and data. For increasing the relevancy of the research, researcher has only included reliable data sources.

It is identified that there is a difference in financial reporting of different countries in the context of Islamic banks. There are various reasons behind it, for instance in the context of directors, there are more women directors on the board of Southeast Asian countries as compared to GCC countries. However in the contrary, in the context of foreigner directors, GCC countries have more foreigner director members on the boards as compared to Southeast Asia countries (Kanwal, & Nadeem, 2013). So, this research paper has supported to focus towards these parameters while conducting the comparative analysis. Additionally, this paper has supported to put the light on the unique corporate governance structure and framework of Islamic banks while evaluating the different SSB (Shariah Supervisory Board) structure and its impact on the financial performance.

1.2 Research Aim and Objectives

The research aim of this study is to comparative analyze the Islamic banking of GCC countries and South-eastern countries while evaluating the financial reporting quality.

Research objectives of this study are:

  • To analyse the impact of Islamic principles, laws and traditions in the Islamic banking system of various countries, especially in the context of Dubai, Saudi, Malaysia and Indonesia
  • To evaluate the quality of financial information of Islamic banks by utilizing economic and financial ratios
  • To identify the challenges and issues faced by the Islamic banking system
  • To evaluate the ethical parameters which are leading the system towards poor quality in financial reporting in the context of Islamic bank

1.3 Research Questions

Research questions of this study are:

  • What is the impact of Islamic principles, laws and traditions in the Islamic banking system of various countries?
  • Which Islamic banking system has the best quality of financial reporting among Dubai, Saudi, Malaysia and Indonesia?

This research paper has supported to analyze the research topic on the basis of the research questions and has supported to identify the answers while evaluating the research study in an effective manner.

 1.4 Research Significance

From the survey, it is identified that Islamic banking industry is growing at a fast pace and showing the average growth rate of 10-15% (Musa, 2015). The growth of the Islamic banks is not limited to the Islamic countries. Due to this reason, it is identified that due to expansion of the Islamic banks at global platform, the concern towards ethical issues is also arising on a regular basis. It is identified that rapid growth of Islamic bank also raising various questions. In this context, this research paper has supported to give concern towards analyzing the effect of Islamic banking on financial reporting quality. There are various challenges identified in the context of Islamic banking system. In this context, this study remained highly assistive to offer in-depth knowledge regarding the challenges and problems faced by Islamic banking system in the current scenario while dealing in different countries and market places (Shahzad Bukhari, Awan, & Ahmed, 2013). This study has supported to analyze the opportunities as well as challenges of the Islamic banking system which has supported towards offering adequate information and knowledge.

This research paper has supported to analyze the quality of financial reporting of Islamic banks in GCC countries and South-Eastern companies. In this context, four countries (Dubai, Saudi, Malaysia and Indonesia) has taken place which has supported towards critically analyze the research topic. At the same time, this study has enabled towards identify the impact of Islamic principles, laws and traditions in Dubai, Saudi, Malaysia and Indonesia in the context of Islamic banking system. The motivational factor of conducting this study is to analyze the effect of Islamic banking on financial reporting quality. It has supported to comparative analyze the Islamic banks of GCC and South-eastern countries.

1.5 Research Structure

Chapter 1: Introduction

In this chapter, researcher has introduced the dissertation on the basis of research background, research aim, research objectives, research questions, research justification and research structure. It has supported to offer brief understanding regarding the research topic. This section has supported to offer the detail of the research topic.

Chapter 2: Literature Review

In this chapter, researcher has critically analyzed the research topic while utilizing existing theories, concepts & framework. For this purpose, researcher has referenced the past findings of various authors while utilizing articles, novels, reports, magazines, etc. It has supported to understand the point of view of various past researchers regarding the research topic. To increase the relevancy of the data, researcher has involved only relevant data sources to increase the reliability of the output.

Chapter 3: Research Methodology

This chapter has supported to structure the research while selecting the methods which are used for the purpose of conducting the research in the right direction. At the same time, to conduct the study in an effective manner secondary data collection method has taken. Under this, case study method is used which has supported towards conducting the research on the basis of various facts and figures. It has supported to collect the relevant data while utilizing effective research methods.

Chapter 4: Data Analysis

In this chapter researcher has utilized qualitative data analysis method. Qualitative data analysis method remained highly assistive to evaluate the research outcome in an effective manner. It has supported to analyze the research outcome on the basis of case study while correlating the data with the outcomes of the literature review. It has supported to comparative analyze the quality of financial performance of Dubai, Saudi, Malaysia and Indonesia.

Chapter 5: Conclusion and Recommendations

This chapter has enabled the researcher to conclude the whole research in an effective manner while correlating the research outcomes with the research objective. At the same time, researcher has offered the recommendations to increase the financial reporting and performance of Islamic bank of different countries.

Chapter 2: Literature Review

2.1 Introduction

This chapter of the research has supported to critically analyze the research topic while focusing towards the past studies. In this section, researcher has discussed the research topic on the basis of various articles, journals, reports, magazines, etc. which has supported to offer in-depth knowledge regarding the research topic and has supported to understand the point of view of various past authors (Ghosh, & Ghosh, 2016). This section has supported to understand the effect of Islamic banking on financial reporting quality while utilizing comparative analysis between Islamic banks of GCC as well as South-eastern countries. In this section, researcher has focused towards offering the explanation regarding theoretical concept of banking system, Islamic banks and difference in financial reporting quality (Von Glahn, & Taulbee, 2015). Furthermore, this study discusses impact of Islamic principles, laws and tradition on different countries. In like manner, this study has supported to put light on the challenges faced by Islamic banking, problems of Islamic banking that degrades the quality and the ethical parameters which are leading the Islamic banking system towards poor quality in financial reporting. This chapter has supported to offer the clear picture of the Islamic banking system in the context of GCC and South-eastern countries while critically analyzing the financial reporting quality. Moreover, to increase the reliability of the research, researcher has focused to include only relevant data sources, which has enabled to enhance the relevancy of the data.

2.2 Theoretical Concept

2.2.1 Banking System

According to the views of Alaabed, et al. (2016), banking system can be defined as the group of institutions which supports to offer financial services to the customers while taking the responsibility of operating the payment system. Banking system offers various products and facilities to the consumers such as offering loans, taking deposits, providing financial assistance and consultancy in the context of investments, etc. Panta, & Bedari (2015) stated that banking sector supports to play crucial role in the context of economic growth of a country and it’s customers through channelizing the public savings in the segment where investments are required to increase the productivity.

In the views of Ofoeda (2016), banks deal with various financial functions and the performance of the bank depends on its network. Majorly banks deal towards its profit maximization and bank earns profit from its stockholders. At the same time, banking system is based on structural network of financial institutions. The main functioning of banking system is to depositing the funds while offering the loans to the customers while offering the facility of currency exchange too. Banking system follows the monetary policies which are set on standardized basis. According to Babbie (2013), the Banking system helps to provide payment and clearing infrastructure. It helps to improve the capabilities of financial analysis. The system helps to provide quick, efficient, appropriate interfaces in banking and has no chances of losing customer account transactions.

2.2.2 Islamic Banking System

Islamic bankind system is completely based on the Shariah principles. Due to this reason, interest or Riba is prohibited. According to Islam, Shariah law supports to define ‘the way to the source of life’ (Hakim, & Chkir, 2014). It enables to refer the legal system which needs to be followed for the purpose of maintaining the code of behavior while focusing towards the Holy Islamic book, i.e. Quran. While following the Shariah law of equity, Islamic banks share the profit as well as loss with its clients. Islamic banking system follows conduct of value system which enables to accomplish the banking activity. The major focus of the Islamic banks is to provide assistance to the Islamic economy. Poposka, & Trpkoski (2013) depicted that Islamic banks have shown fast pace growth and in the current scenario, it is dealing in more than 60 countries worldwide. Not only this, but also receipts are also prohibited under Islamic law. This bank deals with the functioning of commercial investment while promoting the social activities to accomplish civilized mission. Additionally, Kumar (2013) depicted that justice equity enables the firm to share profit and loss to eliminate the chances of risk on an individual. Islamic banks earn profit by sharing profit and loss (PLS), charging the fees for the offered services, trading, leasing, etc. In like manner, this banking system also utilizes other Shariah contracts too for earning the profit.

Panta, & Bedari (2015) depicted that financial crisis has impacted the economy at a global platform however this impact has not seen in the financial system of Islamic bank. In the past three decades, Islamic banking system has shown remarkable growth. This banking system is showing quick and transparent solution and supporting towards the development of Islamic finance. This banking system applies religious tax too for the upliftment of Islamic society and welfare. It also supports the Islamic bank to increase the economic growth while eliminating the chances of risk.

In word of Andrew, et al., (2011), the Islamic Banks use two different notions for saving account, current account and deposit account. Al- Wadiah Yad Damanah is used in current account transactions. In this the bank take guaranteed safe custody and utilization of funds. The banks have to quickly redeem the payment to the customers when they demand for the amount or payment. There are no profits given for current accounts and it also has no returns on this account. The second concept is for the saving account and fixed account. Mudarabah is the second concept, in this the bank act as “Mudarib”  and take deposits to invest the funds in Sharia’ah by the customer. The capital is entitled to the customer in Mudarabah which is called as “Rabb-ul-Mal” and Bank as Mudarib. Mudarib share the profits with a pre-agreed ratio coming out of investments. In support of this, Collins (2010) stated that the bank as “mudarib” is liable only for the cost that is invested by it in the operations. But the funds from the customers are liable to share the losses which arise out of the investments. The estimated profit rate is not guaranteed and is subject to change with the actual profit which arises out of the investments at maturity. It promotes sharing of risk among the user of the funds and the provider of capital. It provides due consideration to the public maslahah, which aims to protect the growth and equity.

According to Flick (2011) the Islamic Banking adopts certain rules that aren’t forbid by divine guidance through its messenger. It is expected by all Banks to implement and execute with Islamic spirit. It is further expected not to perform any activity which is not permitted and should be eliminated. Islamic Banking is promoted by the Muslim community against replacing the capitalist Banking system to Islamic banking mode. In Egypt, Islamic banking was introduced in 1973 as disclosure of a single bank which was not able to function after some years. Yet it gave rise to the concept that Islamic Banking is practicable.

In research of Gilani (2015), it is found that Islamic banks and Islamic Financial institutions are having their presence all over the world in very large number. There are large numbers of Islamic institutions in 75 various countries around the globe which also include Non-Muslim states. Muslim community believes that Islamic Banking System is an alternative of conventional banking system which has the same characteristics and feature. In addition, Hair, et al., (2015) stated that it is believed that Islam being the only region recommends full code of life. It also not prohibits any individual to indulge in Riba based transactions as well as provides ways to address the monetary requirements. Riba is of two types, Riba Al-Naseah and Riba Al-Fadl.

According to Samra (2016), Islamic Banking allows monetary transactions which are based on investments and assets in terms of joint ventures. For the deposit and financing, Islamic Banks have established various types of Sharia’ah complaint products. This will in return help the customers to gain an advantage of Islamic Banking.  Conventional Banking is considered as Haram in Islam and it is expected from every individual to raise the Islamic Banking System. This will help to give a troublesome time to the conventional banking.

2.3 Impact of Islamic principles, laws and tradition on other countries

The impact of Islamic principles and laws creates huge adverse impact on the global financial stability and relationship with other various countries. The research study of Von Glahn & Taulbee (2015) stated that Islamic law and principles are developed for betterment of Islam community in order to increase their belief and values in the economy. Islamic law is complete package of general principles which help in developing a relationship as well as develop a way of living life. According to Baderin (2017), Shariah is known as Islamic law that includes principles and disciplines rules which governs the behavior of Muslim towards their family, friends, community and nation. In this context, Islamic banking system remains highly assistive to increase equity in the society by sharing profit and loss as well as by eliminating the interest. In like manner, Islamic banking system eliminates the risk too which supports to increase the stability of the system.

In other words, Shariah governs the interactions between communities and groups, social and economic organizations. Islamic laws help in dealing with the physical aspects of faith like obligations, prohibition and actions which are recommended to improve the Islamic community condition in the economy. But at the same time, Castells (2011) also explained that there are various principles which are developed consistently in order to guide the Islamic economy through Islamic laws. In context to Islamic banking, it is determined that Islamic laws and principles creates positive impact on the community as a whole as it helps in managing the banking activities in efficient manner in form of Riba which are prohibited for Islamic. Islamic banking system supports towards the upliftment of the Islamic region by offering them the fund to enhance their presence on a global platform.

According to the Crowther & Lancaster (2012) the Islamic laws, principle and tradition restricts the fast growing economy, because of the Islamic low increases the complexity of the banking product in the other countries. The Shariah governs the economy and Islamic laws believe on the physical aspects that prohibits the interest on the saving. It is noticed that the Islamic law for the banking focuses on the community for the positive impact. On the other hand, Fang & Foucart (2014) explained that The Islamic finance prohibited the interest on the value and Muslim customer get the loan at the rate of free interest. This interest free rate on the loan provides the less cost of the product which is helpful for the economy. In addition, the Islamic countries follow the ethical standards for the banking activities and have separate rules to regulate the Muslim banks.

Islamic finance involves three principles which are developed under the Islamic law Shariah i.e., prohibition of interest, ethical standards, moral values and social, etc. The prohibition of Riba (interest free) is effective principles of Islamic finance as it provide Muslim customers with loan without interest so that they can develop their standard of living in the developing and competitive economy. This free interest rates loan help the Islamic firms to develop relation with business firm in other countries by investing in their projects and this results into the positive impact of the society and community welfare. The second principles related to Islamic principle is ethical standards which are set for Islamic banks so that banking activities are followed under these standards. Farook, et al., (2011) stated that for Islam community, there is separate rules and regulations which are followed for Muslim and Islamic banks in their financial activities. In concern to it, Islamic investing must be considered as a business investment in order to improve the products and services and reduction in the negative impact on the society and environment. On the other hand, Kamla & G. Rammal (2013) described that moral and social values is principle of Islamic which help in developing moral values and beliefs in Muslim by providing them best quality of services when they are in need with the help of Islamic financial institutions.

In the research study of Samra (2016), it is identified that under the Islamic laws (Shariah) four main Islamic juristic schools are developed for taught lesson to the Muslim people from Quaran and Sunna which are known as a primary sources. While studying, it is observed that these principles create a positive impact on the traditions in the banking system transactions which are followed for various countries. The Shariah law and principles huge impact on the economy as this help the Islam to focus on doing investment so that they can enter to competitive environment easily. However, Otto (2016) depicted that Islamic laws and principles support Islam community but this creates negative impact on the business transactions as there is no interest rates charged by Islamic banks when any Islam business firm does business transaction with other countries like Pakistan doing business financial transaction with Dubai or Malaysia.

These principles and Shariah law of Islamic has created negative impact on the other communities as this affects the financial stability in the economy. According to Kanwal & Nadeem (2013), it is identified that Islamic scholars are deducted from the stated principles in order to establish or set the benchmark in economy in comparison of other community.

From the survey, it is identified that Islamic banks show more profitability as compared to non-Islamic banks. Islamic banks earn profit by sharing profit and loss (PLS), charging the fees for the offered services, trading, leasing, etc. At the same time, Ofoeda (2016) depicted that the Islamic banks of GCC countries show more profitability as compared to Southeast Asian countries. However, in the contrary Alaabed, et al. (2016) depicted that the Islamic Supervisory Board (ISB) characteristics do not impact the financial performance of the banking system. It is identified that difference in culture, economic and social perspective impacts the quality of financial reporting of different countries.

2.4 Challenges faced by Islamic banking

There are various challenges which Islamic banking faces while doing business with other large business firms in different rich countries such as Dubai, Saudi, Malaysia and Indonesia. In the research study of Efrat (2016), it is clearly that that Islamic banking is facing challenge because there is no central authority that promulgates Shariah laws and understanding related to Islamic jurisdictions and scholars. Generally, Islamic banks are governed by Shariah boards i.e., religious scholars that considers a Shariah product and complaints. In context to it, Belal, et al., (2015) elaborated that growth of Islamic banking is rapid from many years which resulted into the development of complex banking products and services and for which Islamic banking requires a harmonization at global level. In present scenario, it is found that Shariah harmonization is lacking and this is creating huge impact and bringing challenges for Islamic bank on the way of growth and development.

At the same time, there is a major challenge i.e., prohibition of the interest rates for the Islamic bank and also to maintain their business customers for long-term period. In comparison to other conventional banks, it is observed that Islamic banking standards and policies are different. According to Johnes, et al., (2014), conventional banks have separate harmonization and approved central authority which set standards for banks to follow around the world. This separate authorized standard makes easy for conventional banks to expand and conduct operations in different countries in comparison to unauthorized standards of Islamic banks. This is difference in standards develops challenges for Islamic bank as it is difficult for Islamic bank to follow the standards and policies which are developed by conventional banks at a global level. In similar manner, Khan (2016) also stated that capital structure is another factor which differ the Islamic banks from conventional banks.

Rashid, et al., (2013) illustrated that there are other most important challenges which Islamic banking industry is facing in rapidly growing economy. Islamic banking faces challenges like increase in competition, building proper institutional and supervisory framework, Research and development, financial engineering and Shariah aspects. In the research study of Sufian, et al., (2017), it is studied that every banking system has its own institutional framework and requirements. In like manner, Islamic banking don’t cater all its institutional requirements and for which Islamic banks are provided with alternative ways for meeting the requirements of venture capital, consumer finance, short term and long term capital, etc. so, it is challenge for Islamic banking industry to build a proper institutional set framework.

But in support to it, Mollah & Zaman (2015) stated that supervision of Islamic banks is also challenge and important similarly like for conventional banks. This supervisory framework is developed to protect the interests of public and economy from any financial problems or issues. In concern to this, Islamic banks are also required to have supervisory framework which is to be developed under the supervision of central bank of the country. Similarly, Mansour, et al., (2015) also explained that Islamic banks also faced challenge with the increase in the competition in banking industry in terms of market coverage, size, and experience. These factors help in exposing the Islamic banks are facing intense competition as survival of bank depends on ability to increase efficiency and performance.

On the other hand, financial engineering is also a challenge for Islamic banks because today’s financial market is becoming more challenging and sophisticated. In relation to it, Islamic bank uses classical instruments as essential financial tool in developing economy which is developed to meet the requirements of the societies. According to Wasiuzzaman & Nair Gunasegavan (2013), financial engineers plays significant role as they develop new and modern financial tools like mortgage, options, derivatives, hedging and insurance plans and many more (Wasiuzzaman, & Nair Gunasegavan, 2013). However, financial engineering is desirable as it focuses on adopting a ‘need approach’ and ‘ijtehad principles’ of Islamic finance. Thus, Islamic bank is facing various challenges and for that Islamic banks are required to develop new strategies and principles which help in meeting these challenges efficiently and effectively.

The Islamic banks have a complex banking products and a composite structure but it also growing rapidly over the years and forwarding globally. According to the view of, Flick (2011) it is stated that the Islamic banking has difficulty to follow the global conventional surrendered it is because the Islamic banking has a different capital structure from the conventional banking. The most challenge for the Islamic banking is to provide the loan to the Islamic organization without interest. The Islamic banking are making the most appropriate rules and regulation for the solution of this problem and finding the solution of the problem that are faced in the global banking environment. Gilani (2015) identified that the product structure and investment practices are also affected on the credibility, capability and reputation of the Islamic banking system.

It is identified that there are shortfalls of standardization in rules, regulations and policies. Due to this reason, there is a huge difference found in the financial reporting quality of Islamic banks in GCC countries and in South-eastern countries. According to the views of Samra (2016), there is a significant difference and divergence can be found in the corporate governance structure of IBs in the context of GCC countries and in Southeastern Asia countries which directly impacts the performance of Islamic banks.

From this, it can be identified that there is a shortcomings in the existing governance framework which needs improvement as well as there is a need of standardization too. In like manner, Hakim, & Chkir (2014) depicted that there is huge divergences can be seen between not only Islamic and conventional banks but also among the Islamic banks of different countries create challenge towards the effective execution of Islamic banking system. The reason found behind it is related to economic, social and cultural perspectives as these parameters affect the composition of the ISB board of directors.

2.5 Problems that degrades the quality of Islamic banking

The problem that degrades the quality of Islamic banking is no transparency mechanism and disclosure to public. This affects the customer’s relation with banks as Islamic bank don’t ensure customer protection and safety to their funds which are deposited by customers in their banks. Meanwhile, Gilani (2015) identified that customer satisfaction is a major problem which affects directly on the quality of Islamic banking. Customer satisfaction is defined as a modern approach for maintaining the quality of services by the organization which they serve to their customers. Customer satisfaction involves various factors like services and products quality, location, interest rates and so on. According to Johnes, et al., (2014), Islamic banks emerged as a combination of both Islamic and financial reputation as well as quality services which are offered by the bank.

In context to it, Karim, et al., (2014) also stated that Islamic bank laws faces problems related to legal support through its own separate framework which offers execution of commercial transaction and financial contracts. However, laws related to commercial banking is supported appropriately for implementation of Islamic banking but not exist for doing financial contracts. According to Efrat (2016), Islamic bank contracts are treated as properties which are sold and buy and due to which tax are charged twice on the contract. However, the provisions of commercial banking and company laws prohibit the scope of Islamic banking activities and define provisions narrowly within conventional limits.

On the other side, impaired financing is also emerged as a problem for the business in society. This impaired financing creates huge negative impact on the quality of services which are offered to customers. In support of this, Otto (2016) elaborated that Islamic banks also faces problem related to impairing financing as it provide interest-free services and loans to its customers. This interest free service leads to non-receivables which results into bank’s own deficiency as it is not able to manage its valuation of credit and debt collection. Therefore, Islamic bank faces problem in managing its credit system and debt collection from its customers in comparison to conventional banks.

In like a manner, Hakim & Chkir (2014) defines that the Islamic banking system has been deficient in the quality of their manpower and in the advertisement of the banking system. The manpower quality of the Islamic bank can easily be solve by providing the systematic training to the personnel and time to time take the feedback of the quality of the work. The Islamic financial institution should provide the training to the manpower of the Islamic bank to remove the conflict of the personnel. in addition to this, Kamla & Rammal (2013) the pricing formulas for the Islamic financial products are done through the Shari’ah principle which degrades the quality.  At the same time, the Islamic bank faces the problem in the context of legal support in the financial transaction and commercial contracts.

According to the views of Alaabed, at al. (2016), Islamic banks are the financial institutions which follow religion laws rather than standardized rules and regulations. In like manner, it generates distinct corporate governance which creates challenge towards the firm. Additionally, corporate governance in Islamic banking firms in Gulf cooperation Council countries and Southeast Asia countries differ from each other in various perspectives. From the survey, it is identified that there are huge divergences can be found in the corporate governance of Islamic banks in GCC countries and and Southeast Asia moreover, Islamic banks also show difference from the corporate governance of conventional banks too. Due to this issue, it is identified that these are the problems which are degrading the quality of Islamic banking.

2.6 Ethical Parameters

According to the views of Belal, Abdelsalam, & Nizamee (2015), Islamic bank is showing fast pace growth at a global market. IBF is extending the approach of Islamic bank, due to this reason, ethical concerns have become essential. At the same time, it is identified that Western economists and financial experts are also showing their interest and willingness towards Islamic finance and banking. It has increased the demand of ethical practices. However, it is identified that there are various issues which has created question towards ethical practices of Islamic banks. In this context, Musa (2015) depicted that Islamic banks follow the novelty system; this system increases the complexity of legal and regulatory frameworks of Islamic banking system rules and regulation.

At the same time, it is identified that Islamic banking system shows lacking point towards the standardization format too. In support of this, Rashid, et al. (2013) depicted that Islamic banks applies variety of accounting practices, due to which there is not any standardized format. It has created issues towards the universal recognized standards. Some Islamic banks utilizes International Accounting Standards (IAS) however some other banks follow Accounting Auditing Organization Standards and some uses local market accounting standards. Utilization of different standards creates issues towards uniformity. These variations have created the scenario of huge confusion and create challenge while dealing with the Islamic bank. At the same time, Shahzad Bukhari, Awan, & Ahmed (2013) depicted that Islamic banks show unsatisfactory records in the context of R&D and innovation. It offers poor quality in financial reporting which is directly impacting the banking performance and creating the issues towards the ethical consideration. It is increasing the pressure towards Islamic banks in the context of the development of genuine Islamic report and impacting the productivity of the system and its products. Improper management has created the ethical issues and also created challenge towards the satisfaction level of the consumers. Kamla, & G. Rammal (2013) opined that Islamic banks need to enhance the focus towards distinctiveness, innovation and competitive products.

Furthermore, Kamla, & Alsoufi (2015) depicted that in South-eastern Islamic banks there is huge deficiency of skilled human resources. Moreover, Islamic banks do not e offer adequate training to the employees to increase their knowledge and proficiency so that they can deal in an adequate manner in the current scenario. This is the major reason behind poor quality in financial report. Not only this, but also it is identified that Islamic banks follow the Shariah law and its all rules and regulations are designed while focusing towards Shariah. In this context, Fang, & Foucart (2014) depicted that the employees of the Islamic banks are not properly trained and are not knowledgeable about Shariah law. Due to this reason, Islamic banking system does not become able to deal in an adequate manner and they handle the complaints according to their interpretation and perception rather than employing adequate rules. As compared to South-eastern countries, GCC has more knowledgeable and experienced workforce as they are well-versed and aware about the Islamic and Sharia’h rules.

Additionally, it is identified that there are only competent personalities who are Shariah experts and these experts mostly serve in on Shariah boards of Islamic banks (Mansour, Ben Jedidia, & Majdoub, 2015). Due to which, there is huge deficiency of experienced and knowledgeable Shariah expert employees within the banks. This deficiency can be seen at a global platform. This is one of the major reasons of inadequacy in financial performance of Islamic banks. Furthermore, the Shariah employees do not show any adequate proficiency to deal with the current financial market complex situation. These are the major reason behind the Islamic banking system is facing the issue of poor quality in the context of ethicality.

According to the views of Karim, et al. (2014), ethical consideration is one of the major aspect which the organization or system needs to focus while dealing at a global platform. However, in the contrary there are some scholars who perceive that ethical consideration is the contrast of efficiency. Due to this reason, it is perceive that there should be neutral ethical consideration as it supports towards dealing with the self-interest and enables to increase the profitability of the organization. At the same time, some scholars determined that ethical consideration is the parameters which are hardly observed. However, in the contrary, Mollah, & Zaman (2015) depicted that giving concern towards ethical parameters are essential. Additionally, while dealing in global environment it becomes essential to increase the concern towards ethicality. In this context, Gilani (2015) depicted that Islamic banking system follows the Islamic law but in some cases it also complies with national laws and statutes. Islamic banks are dealing at a global platform so it is essential for the firm to operate in an ethical manner. Ethical practices include integrity, skill, care, diligence, etc. while avoiding the chances of conflicts of interest. However, Islamic banks are dealing towards the upliftment of Islamic society and the economical growth of Islamic economy however it does not follow adequate operational strategies. In like manner, customer complaints are also not handled in an adequate manner in Islamic banks (Kamla, & Alsoufi, 2015). At the same time, there is an issue of transparency and integrity can be seen which is decreasing the trust and creating ethical consideration.

In this context, Hanen, et al., (2014) The Islamic banks are extending their growth very fast so the ethical parameter is very essential in the today’s economic world. The standard of the Islamic banking system is not very good according to the current scenario. The Islamic banking has a high level of confusion in the standardization and so the Islamic banking not provides the high satisfaction to the customer in other countries. The Islamic financial intuitions have a less quality in the financial reporting due to untrained employees and different Islamic laws and regulation. In addition, the low quality work of the banking system directly impacted on the performance of bank.

It is identified that Islamic banking system is only working towards the benefit of Islamic economy due to which it is dealing on a religion perspective. So, it creates limitation to join everyone with Islamic banking system. However, in the contrary, Ibrahim (2015) depicted that Islamic banking system remains highly assistive to uplift the Islamic society. For instance, London has adopted Islamic Finance system which has supported towards the inclusion of Islamic finance and has supported to include the Muslims who are living in the UK to meet their financing needs to run their business in an effective manner. According to the views of Khan N. (2016), Islamic banking system shows huge negligence towards the ethical requirements. Due to which, Islamic banking system has to face various challenges too. It also creates issues while benchmarking the profits.

2.7 The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

Belal, Abdelsalam, & Nizamee (2015) defined that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body which is focused towards preparing accounting, auditing, governance, ethics and Shariah’ standards in the context of Islamic financial institutions as well as the industry. All the Islamic banks have to comply with the rules, regulations and laws of AAOIFI. The financial reporting of the Islamic Financial Institutions based on AAOIFI. Belal, Abdelsalam, & Nizamee (2015) determined that AAOIFI organization was established at 26 February 1990 in Algiers. This institution was designed in the accordance with the Agreement of Association and this agreement was signed by Islamic financial institutions. After that, AAOFI was registered in the year 1991 on 27 March in Bahrain. More than 45 countries are the members of AAOFI which includes central banks as well as Islamic financial institutions and other parties too which are working in finance and banking industry. Fang, & Foucart (2014) determined that the Commission has gained the support in the context of standards of application. These standards are dependent on the Kingdom of Bahrain as well as on the Dubai International Financial Centre, Sudan, Qatar, Jordan, Lebanon, and Syria.

The guidelines were issued by the competent authorities in several countries Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa as of the standards and publications. The Islamic finance industry has been made the possibility of the rapidly growth with the optimistic outlook in Malaysia, it does happen because of the comprehensiveness in the Islamic financial system. This financial system has a strong support of regulation, legal and Shari’s government structure (Gilani, 2015). The Islamic Financial Service Act 2013 (IFSA) was finding the growth opportunity in the Malaysian financial industry. Malaysia promotes the development of the Islamic financial industry that is the main reason that the Malaysia is well developed among the countries. The main agenda of the Malaysia is to be the global hub and become the leader of Islamic finance. At the same time, the Malaysia also hosts the international events for welcoming of the leading Shari’a academics and industry practitioners (Hanen, Emrouznejad, & Ouertani, 2014). The Malaysia is trying to find the members and host countries of the Islamic Financial Services Board (IFSB). These members will help to provide the sets of the standards of international prudential and the principle of guidance to enhance the soundness with the stability of the Islamic financial services industry.

The financial reporting standards are unanimously accepted by the country with the adoption of all the challenges and achievements while the Islamic financial instruments have the uniqueness in the nature. The Malaysian government was also invested in some other countries which have complaints about the Shari’a financial instruments (Farook, Kabir Hassan, & Lanis, 2011). It provided the peculiarity of the Islamic financial instruments that it is helpful to solve the issue related with the financial reporting. The IFRS is only compatible for the Islamic financial instruments that why many people argue against it and that is the main reason of the less adoption of IFRS in other countries. The Islamic financial institution requires a long time period to develop the complete set of standard because the short run does not have any practical alternative for develop the set of standard. In the initial stage, the approach of the Bahrain can provide a suitable solution for the primary sets of the standards (Ghosh, & Ghosh, 2016).  This approach applies the AAOIFI accounting standard for the financial reporting of the Islamic financial instruments. In addition, where AAOIFI standards are silent in the financial reporting it applies the IFRS. The alternative way can be develop to implement the IFRS guideline and the most requirements for the disclosure for Islamic financial institutions and Islamic financial instruments. It will provide the help to IFRS by the stability convergent in the financial statement but the criticisms should be avoided which are related with the Shari’a precepts (Ahmed, et al., 2016).

The AAOIFI standards are very important to the Islamic financial institution, so it is developed by the support of the banking authorities. After all, the development of the AAOIFI standards is hopefully providing growth to the nascent market and promotion to the Shari’a standards. The AAOIFI’s accounting standards also adopts the principles they do not make conflict with the Shari’a rules and regulation (Mohammed, Ahmad & Fahmi, 2016). It provides the treatments of the accounting which are related with the Islamic finance and also governs the transactions of the Islamic bank without any conflict.

Chapter 3: Research Methodology

3.1 Introduction

Research methodology is useful to complete the research objectives in a systematic manner. In addition to this, it provides the answers of the research question with the optimum solutions of the research problems (Adler & Clark, 2014). The research methodology process includes the collection of information, data collection and research solutions to obtain a proper conclusion of the research. On the other hand, the research methodology is useful for the purpose of collation of the detailed information in a systematic manner from the relevant sources to reach on the proper conclusion of the research. Research methodology is a process, which helps to find out the proper solution of the defined problem by the collection of the information with a systematic manner to achieve the objective of the research.

In this chapter, the researcher provided several methods to this research, which are useful to provide a right direction to this study (Hair, at el., 2015). The research methodology provides the best way to the selection of effective method from the different data collection methods. This section of the research has discussed about the research strategy, data collection method, and research design and data analysis. Furthermore, it discusses about ethical consideration and research limitations too.

3.2 Research Strategy

Research strategy provides a proper guidance to the efforts to conduct the research according to the system and quality results are provided for the research issues. The research strategy also provides the answer of the research in a systematic arrangement (Andrew, et al., 2011). A successful research strategy should include the clear research objectives and aim, proper questions, research methods, recourses of data collection and valid data. At the same time, it is also necessary for the researcher that it concentrates about the time limitation with the related ethical issues. The researcher uses the various techniques and collection of the data to get the effective outcome of the research. The researcher includes the several methods in this, like- cash study, survey and interview. It also provides the direction to the research for the effective planning, implementation and observation the study. In this research, researcher has utilized literature review strategy as well as case study strategy which have supported to accomplish the qualitative analysis in an adequate manner (Babbie, 2013).

Literature review has supported to critically analyze the research topic on the basis of past findings while utilizing journals, textbooks, magazines, newsletters, articles, websites, annual report, etc. In like manner, case study strategy enabled to conduct the comparative analysis of Islamic banking financial reporting quality in the context of GCC and South-eastern companies (Johnson & Christensen, 2010). Case study has supported to analyze the research topic in an effective manner.

3.3 Data Collection Method

There are basically two types of data collection method which are used by the firm including primary and secondary data collection method. The primary data collection method is useful to collect the data first time. In this method, the researcher collects the information from the respondents to understand their point of view by using surveys, observations and experiment (Babbie, 2013). On the other hand, the secondary data collection methods allow the research data collected from other sources such as past findings, books, newspapers, magazines etc. which provide the correct data related with the research topic.

For the purpose of conducting this study, researcher has utilized secondary data collection method. For this purpose, researcher has utilized the case study which has supported to analyze the difference between financial reporting quality of GCC countries and South-eastern countries (Bird, 2008). The reason behind selecting secondary data collection method in this research is that it has supported to conduct the comparative analysis in an effective manner and has supported to correlate the literature review with the secondary data to evaluate the reliability of the research outcome.

3.4 Research Design

There are three kinds of research design that are useful to carry out the research in an effective way namely qualitative research design, quantitative research design and mixed research design (Blaikie, 2009). Qualitative research design provides the overview of the quality based judgment of the research design. It is based on the viewpoint of subjective judgment. Quantitative research design is helpful to provide the research analysis on the basis of tables, graphs, charts, etc. It provides the research outcomes in a statistical mean. The third one is the mixed research design is a combination of both quantitative and qualitative research design methods. All the methods of the research design are selected on the need of the research.

In this study, researcher has utilized qualitative research design as it supports to analyze the financial reporting quality of Islamic banking system on the basis of case study while conducting comparative analysis between the Islamic banks of GCC and South-eastern countries (Lee, at el., 2013). This method remained assistive to offer in-depth knowledge regarding the research topic on the basis of subjective judgments which is based on unquantifiable information.

3.5 Data Analysis

The data analysis is used by the researcher, to analysis of the collected data and information for the purpose to get a valid outcome of the research. Additionally, there are two types of the data analysis methods, qualitative data analysis and quantitative data analysis. The qualitative research includes the interview, focus group, experiment etc. that focuses on the quality of the data such as concepts, opinion, value and behaviour of people (Collins, 2010). In addition to this, it is helpful to get response of the research aims and objectives that are specify the quality only. The quantitative data analysis is just opposite of the qualitative data analysis. In this analysis, all the quantitative studies are involved such as interpretation in number and figures. It also involves the critical analysis, rational analysis to find and comparison in a numerical format.

In this research study, researcher has utilized qualitative data analysis method which has supported to analyze the collected data in an effective manner (Crowther & Lancaster, 2012). In this section, case study outcome has correlated with the literature review which has supported to increase the reliability of the study and has enabled to test the adequacy of the secondary data. It has enabled to identify the consensus of the output with theories, concepts and framework in the context of analyzing the effect of Islamic banking on financial reporting quality while comparing the Islamic banks of GCC and South-eastern companies.

3.6 Ethical Consideration

In the ethical consideration, the researcher provides the relevancy in their study. During the secondary data collection the researcher has certain huge consideration related with the copyright, patent and plagiarism in the research. In addition to this, the researcher also focused on referencing and in-texting the data that was composed from the past researchers (Miller, at el., 2012). The researcher also provided credit to the authors, whose sources are used for the study. If there was any kind of hindrance then provide a support to eliminate it. In addition, the researcher also followed the rules and parameter of the university, if there is any chances of occurring issue during the submission of the dissertation then try to eliminate it. It has a request to eliminate any kind of ethical violation related with the copyright, patent and plagiarism.

3.7 Research Limitations

In this study, the researcher used the secondary data collection method that is not well assistive (Flick, 2011). If the primary data collection method was used by the researcher then it contains original response of the respondent which helps to provide the relevancy of the research. In future there is an opportunity for the researcher to utilize the primary data collection method for the relevancy (Gratton & Jones, 2010). In like manner, this study has included only case study method which has limited the research outcome. Additionally, utilization of case study method has only enabled the researcher to conclude the research outcome on the basis of past findings. So, future researchers have an opportunity to utilize the techniques which can enhance the reliability and relevancy of the research outcome. Additionally, this study is based on qualitative data analysis method however utilization of quantitative data analysis method remains assistive to represent the data on the basis of tables and charts which enables towards statistical representation (Shankar, 2013). So, future researchers can utilize quantitative data analysis approach which will remain assistive to increase the efficiency of the research.

Chapter 4: Data Analysis

4.1 Introduction

In this chapter, researcher has analyzed the data to develop the outcome of the research in an effective manner. This section has enabled to discuss the data in a manner so that researcher becomes able to interpret the findings. Researcher has taken the case study to analyze the effect of Islamic banking on financial reporting quality while doing comparative analysis between Islamic banks of GCC and South-eastern countries. In like manner, researcher has correlated the findings of the case study from the literature review which has supported to increase the reliability of the secondary data findings. On the basis of the literature review and case study, researcher has interpreted the research outcome which has enabled to increase the effectiveness of the study findings. In this context, in this section, researcher has analyzed the financial performance of the banks of Dubai and Saudi which are GCC countries and Malaysia and Indonesia which are Southeastern countries. This analysis remained supportive in the perspective of comparative analysis and has supported to analyze the effect of Islamic banking on financial reporting quality of GCC as well as South-eastern countries.

4.2 Case Study Analysis

4.2.1 Top Five GCC Banks

From the case study of Al-Rajhi Bank, Saudi Arabia, it is identified that in GCC countries, Islamic banks need to strictly follow the rules and regulations of Shariah. To get the detailed understanding regarding the effect of Islamic banking on financial reporting quality of GCC countries, following table can be utilized.

Figure1: Top Five Banks of GCC Countries and their Financial Performance (in $m)

(Source: MEED. n.a.)

Above data supports to analyze the financial performance of top five banks of GCC countries in the year 2009 and 2010. From the above data, it can be evaluated that Al-Rajhi Bank, Kuwait Finance House, Dubai Islamic Bank, Abu Dhabi Islamic Bank and Al-Baraka Banking Group all these five banks have shown increase in assets from the year 2009 to 2010. These banks are from different countries of GCC, i.e. Saudi Arabia, Kuwait, UAE and Bahrain. In like manner, it is analyzed that Abu Dhabi Islamic Bank has shown huge growth in profit from the year 2009 to 2010, however Al-Baraka Banking Group has shown considerable growth in profit and Al-Rajhi Bank has shown only $ 1million growth. At the same time, Kuwait Finance House and Dubai Islamic Bank have shown considerable decrease in profit. In like manner, in the context of deposit, accept Dubai Islamic Bank, all the remaining four banks have shown growth. In the context of Dubai Islamic Bank, in the year 2009, its deposit was $ 330 million which was decreased in 2010 by $ 262 million. From the above facts and figures, it can be analyzed that all five banks are showing the increasing trend in the context of assets and deposits however in the context of profit, there is fluctuation as three companies are showing the trend of growth but two companies are showing decrease in profit from the year 2009 to 2010.

These figures and facts have supported to analyze the financial performance of GCC Islamic banks, where Sahria’h law is strictly followed. Al-Rajhi Bank, Kuwait Finance House, Dubai Islamic Bank, Abu Dhabi Islamic Bank and Al-Baraka Banking Group are the top five banks of GCC countries which are focused towards follow strictly adhere the rules and regulations of Shariah as well as the employees of these organizations, well known about Shariah laws which enable them to apply the Islamic law in an effective manner. From the above data and facts of Saudi Arabia bank, it can be analyzed that Al-Rajhi bank has shown increasing trend in profit as well as in assets too.

4.2.2 Al-Rajhi Bank, Saudi Arabia

Figure 2: Financial Performance of Al-Rajhi Bank, Saudi (2015-16)

(Source: Annual Report, 2016)

From the above table, it can be analyzed that from the year 2015 to 2016, total operating income has increased from the 13,745,775,000 SR to 15,283,611,000 SR. In like manner, the operating expenses have also increased from 6,615,700,000 SR from 7,157,651,000 SR. Additionally; the net income has also shown increase from 7,130,075,000 SR to 8,125,960,000 SR. On the other hand, it is evaluated that weighted average number of shares outstanding remained stable, i.e. 1,625 million and the basic and diluted earnings per share has increased from 4.39 to 5.00 SAR. It has supported to analyze that Al-Rajhi has shown growth in the context of its overall performance from the year 2015-16.

4.2.3 Dubai Islamic Bank, Dubai

Figure 3: Financial Performance of Dubai Islamic Bank, Dubai (2015-16)

(Source: Dubai Islamic Bank P.J.S.C, 2016)

From the above consolidated statement regarding profit or loss, it can be evaluated that from the year 2015 to 2016, the net income of the bank has increased from 6,488,608,000 AED to 6,760,999,000 AED (Dubai Islamic Bank P.J.S.C, 2016). In like manner, the operating expenses are also increasing from 2,223,232,000 AED to 2,297,306,000 AED. At the same time, this report has supported to analyze that the net profit for the year 2015 to 2016 has increased from 3,839,260,000 AED to 4,050,051,000 AED. However the basic and diluted earnings per share have decreased from 0.74 AED to 0.67 AED.

4.2.4 Alliance Islamic Bank, Malaysia

Figure 4: Financial Performance of Alliance Islamic Bank, Malaysia, Southeast (2016-17)

(Source: Annual Islamic Bank, 2017)

From the figure 2, statement of comprehensive income for the financial year ended 31st March 2017, it can be analyzed that Alliance Islamic Bank Berhad has shown net profit 52,406,000 RM in the year 2016 which has increased growth in the year 2017 by 76,647,000 RM. In like manner, total distributable income in the year of 2016 was 419,967,000 RM which was increased by 453,793,000 RM in the year of 2017 (Annual Islamic Bank, 2017). Additionally, it is identified that the total net income was 170,388,000 RM in 2016 and it was increased by 202,541,000 RM in 2017.

4.2.5 PT Bank Syariah Muamalat, Indonesia

From the case study of PT Bank Syariah Muamalat Indonesia, it is identified that this bank offers various banking products and services in Indonesia as well as in international level. Firm has included some rules and regulations of conventional banking too which remain supportive for the firm to deal in the international level. This bank operates through consumer, SME (Small and Medium Enterprise), micro-retail, corporate, and many other segments. This bank offer the facility of savings accounts and deposits and also offer the facility of financing products; debit cards and bank assurance (Bloomberg, 2017). In like manner, it is dealing in international banking, treasury services, trade finance and cash management. Moreover, firm is focused towards offering Internet and mobile banking as well as ATM services. This bank is operating in 83 branches, 202 sub-branches and 78 cash offices.

Figure 5: Financial Performance of PT Bank syariah Muamalat Indonesia (2015-16)

(Source: Bank Muamalat, 2016)

From the above table, it can be analyzed that available operating income for profit sharing has decreased from the year 2015-16 from 4,976,743,905,000 Indonesian Rupiah to 3,614,216,165,000 Indonesian Rupiah (Annual Islamic Bank, 2017). So, from this, it can be analyzed that firm is showing decreased trend in the context of profit sharing which represents negative image over the quality of the bank product.

4.2.6 Efficiency of the GCC Islamic Banking Countries

Efficiency measures Mean Min Max SD
Panel 1: GCC Islamic Banks 2006
Technical Efficiency 0.887 0.575 1 0.157
Pure Technical Efficiency 0.926 0.647 1 0.129
Scale Efficiency 0.955 0.782 1 0.082
Panel 2: GCC Islamic Banks 2007
Technical Efficiency 0.944 0.691 1 0.106
Pure Technical Efficiency 0.99 0.888 1 0.032
Scale Efficiency 0.952 0.761 1 0.089
Panel 3: GCC Islamic Banks 2008
Technical Efficiency 0.766 0.369 1 0.214
Pure Technical Efficiency 0.885 0.561 1 0.136
Scale Efficiency 0.857 0.482 1 0.164
Panel 4: GCC Islamic Banks 2009
Technical Efficiency 0.879 0.595 1 0.132
Pure Technical Efficiency 0.921 0.601 1 0.119
Scale Efficiency 0.954 0.773 1 0.072
Panel 5: GCC Islamic Banks 2010
Technical Efficiency 0.721 0.367 1 0.219
Pure Technical Efficiency 0.806 0.387 1 0.185
Scale Efficiency 0.888 0.521 1 0.132
Panel 6: GCC Islamic Banks 2011
Technical Efficiency 0.814 0.444 1 0.191
Pure Technical Efficiency 0.907 0.469 1 0.145
Scale Efficiency 0.899 0.577 1 0.146
Panel 7: GCC Islamic Banks 2012
Technical Efficiency 0.784 0.359 1 0.236
Pure Technical Efficiency 0.885 0.47 1 0.169
Scale Efficiency 0.877 0.507 1 0.167
Panel 8: Domestic Islamic Banks 2013
Technical Efficiency 0.847 0.539 1 0.148
Pure Technical Efficiency 0.908 0.598 1 0.134
Scale Efficiency 0.935 0.775 1 0.086
Panel 9: Domestic Islamic Banks 2014
Technical Efficiency 0.876 0.654 1 0.133
Pure Technical Efficiency 0.957 0.702 1 0.075
Scale Efficiency 0.914 0.723 1 0.106
Panel for All: Domestic Islamic Banks All Years
Technical Efficiency 0.828 0.359 1 0.187
Pure Technical Efficiency 0.905 0.387 1 0.141
Scale Efficiency 0.91 0.482 1 0.127

Figure 6: Efficiency of the Domestic Islamic Banking Sectors (GCC Countries)

(Source: Kamarudin, et al., 2017)

Graphical Representation

From the figure 6 and graph, the technical efficiency, pure technical efficiency and scale efficiency can be analyzed for the year 2006 – 2014 from the panel 1 to panel 9. Additionally, panel for all the domestic Islamic banks are also analyzed. From the above data, it can be evaluated that GCC Islamic banks are showing the mean fluctuation trend in the context of mean of TE which was 88.7% in 2006 and was declined to 87.6% in 2014. It reflects the decomposition of TE into PTE and SE components which reflects that SIE has dominated PTIE of domestic Islamic banks except the years 2006, 2009, 2010 and 2013 as in these years SE was higher instead of PTE.

4.2.7 Efficiency of the South eastern Islamic Banking Countries

Efficiency measures Mean Min Max SD
Panel 1: South Eastern Islamic Banks 2006
Technical Efficiency 0.354 0.001 1 0.56
Pure Technical Efficiency 0.733 0.198 1 0.463
Scale Efficiency 0.438 0.001 1 0.511
Panel 2: South Eastern Islamic Banks 2007
Technical Efficiency 0.712 0.168 1 0.471
Pure Technical Efficiency 0.772 0.341 1 0.373
Scale Efficiency 0.829 0.494 1 0.29
Panel 3: South Eastern Islamic Banks 2008
Technical Efficiency 0.598 0.137 1 0.302
Pure Technical Efficiency 0.761 0.19 1 0.313
Scale Efficiency 0.786 0.424 1 0.204
Panel 4: South Eastern Islamic Banks 2009
Technical Efficiency 0.676 0.417 0.876 0.197
Pure Technical Efficiency 0.926 0.741 1 0.117
Scale Efficiency 0.749 0.417 0.996 0.26
Panel 5: South Eastern Islamic Banks 2010
Technical Efficiency 0.665 0.432 1 0.207
Pure Technical Efficiency 0.797 0.616 1 0.144
Scale Efficiency 0.839 0.467 1 0.2
Panel 6: South Eastern Islamic Banks 2011
Technical Efficiency 0.761 0.6 1 0.173
Pure Technical Efficiency 0.815 0.656 1 0.151
Scale Efficiency 0.931 0.837 1 0.068
Panel 7: South Eastern Islamic Banks 2012
Technical Efficiency 0.729 0.516 1 0.174
Pure Technical Efficiency 0.807 0.623 1 0.133
Scale Efficiency 0.898 0.749 1 0.1
Panel 8: South Eastern Islamic Banks 2013
Technical Efficiency 0.843 0.801 0.914 0.05
Pure Technical Efficiency 0.905 0.819 0.986 0.062
Scale Efficiency 0.935 0.82 0.996 0.071
Panel 9: South Eastern Islamic Banks 2014
Technical Efficiency 0.92 0.83 1 0.076
Pure Technical Efficiency 0.955 0.9 1 0.041
Scale Efficiency 0.963 0.874 1 0.054
Panel for All: South Eastern Islamic Banks All Years
Technical Efficiency 0.716 0.001 1 0.258
Pure Technical Efficiency 0.84 0.19 1 0.199
Scale Efficiency 0.842 0.001 1 0.222

Figure 7: Efficiency of the South Eastern Islamic Banking Sectors (GCC Countries)

(Source: Kamarudin, et al., 2017)

Graphical Representation

From the above data, it can be analyzed that from the year 2006 to 2014, for the panels 1 to 9, foreign Islamic banks have represented the mean value of TE is 71.6% while producing the input waste of 28.4%. In like manner, the decomposition of the TE into PTE reflects the inefficiency mainly to PTIE, i.e. 16% rather than SIE, i.e. 15.8%. These facts and figures represent that for all banks in all years confirm that the earlier findings reflect the managerial inefficiency. From this, it can be evaluated that the foreign Islamic banks become able to produce the same amount of outputs with 71.6% amount of inputs used or they can also reduce the inputs by 28.4% for the production of the same amount of outputs.

4.3 Comparative Analysis

From the above case studies, it can be analyzed that GCC countries are showing strong performance in the context of profit as Dubai (Dubai Islamic Bank) as well as Saudi (Al-Rajhi) both are showing increased trend of profit. However in the context of South Eastern countries PT Bank Syariah Muamalat Indonesia is showing decreased trend of profit from the year 2015 to 2016 as well as Alliance Islamic Bank, Malaysia is showing increasing trend. From this, it can be analyzed that GCC countries are showing better financial performance as compared to South Eastern countries.

From the case study analysis of Islamic banks, it is identified that there is a huge difference in the financial reporting quality of Islamic banks in GCC countries as well as in South-eastern countries. Above finding has shown similarity with the findings of Samra (2016), that there is significant difference and divergence can be found in the corporate governance structure of IBs in different countries especially in the context of in the context of GCC countries and in Southeastern Asia, which directly impacts the performance of Islamic banks. In like manner, it can be analyzed that GCC countries are based on Islamic culture due to this reason, they follow Islamic rules and regulations on a strict basis however in the context of Southeastern countries they follow different culture. Due to this reason, there is different can be found in the context of the financial analysis quality of both the countries. In like manner, it can be analyzed that Southeastern countries are also influenced by the culture of conventional banking system so they also use the trend of conventional banking too. Above findings have shown consistency with the literature review as in this context, Kamla, & Alsoufi (2015) identified that in South-eastern countries there is huge deficiency of skilled human resources in Islamic banks as these countries follow different culture and the staff members do not get adequate training to increase their knowledge and proficiency regarding Islamic banking laws and Sharia’h. Due to which, they do not become able to deal in an adequate manner. It is identified that it is the major reason behind the poor quality in financial report. Due to which, they handle the complaints according to their interpretation and perception rather than employing adequate rules.

In this context, while conducting the case study PT Bank syariah Muamalat, Indonesia (Southeastern bank), it is evaluated that difference in culture, economic and social perspective impacts the quality of financial reporting of different countries. In the context of Alliance Islamic Bank, it is found that the employees are less knowledgeable about Sharia’h law. Due to which they do not become able to apply the Islamic rules and regulations in an adequate manner which directly impacts the financial performance. This creates the situation of difference in standardization of policies which develop challenges for Southeastern Islamic banks.

In like manner, from the figure, 6 and 7, it can be analyzed that that GCC Islamic banks have higher TE value as compared to South-eastern countries in the context of Islamic banks (82.8% vs. 71.6%). In like manner, GCC Islamic banks are showing increase trend in PTE (90.5% vs. 84%) and SE (91% vs. 84.2%) too. So, from the above facts and figures, it can be analyzed that both the countries’ Islamic banking system not utilizing the inputs efficiently to produce the same outputs due to which the quality of the financial performance is decreasing. From this, it can be exhibited that the GCC and Southeastern Islamic banks behave similarly due to the level of TE is tainted by the managerial inefficiency. Above finding has also shown similarity with the findings of Efrat (2016) that there is no central authority in Islamic banks and the competent personalities who are Shariah experts are only few who mostly serve on Shariah boards of Islamic. So, there is huge deficiency of experienced and knowledgeable Sharia’h experts in Southeastern banks. However due to deficiency of proper training this deficiency can also be found in GCC banks. This deficiency is seen at a global platform. This is the major reasons behind the decrease efficiency in financial performance of Islamic banks in both the countries. Banks. This finding has also shown similarity with the findings of Mansour, Ben Jedidia, & Majdoub (2015) that Sharia’h employees do not show any adequate proficiency to deal with the current financial market complex situation due to improper knowledge and training which is decreasing the efficiency of the quality of the financial performance and face the issue of poor quality. Moreover the findings of Belal, et al. (2015) reflected that Sharia’h harmonization is lacking in Islamic banks of different countries which is creating huge impact and creating challenges for towards the growth and development.

From the above data findings, it can be interpreted that both the banking system is facing the challenge of inadequate financial performance quality. However in the context of Southeastern countries, this trend is higher as the employees of these countries not become able to get proper knowledge about Sharia’h law and Islamic banking as compare to GCC although, GCC has also not shown good ideal financial performance. So, there is a need of focusing towards this parameter regarding utilization of standard rules and regulations at a global platform while offering adequate training regarding effective utilization of the resources as well as towards Islamic law.

Chapter 5: Conclusion and Recommendations

5.1 Conclusion

In the above study researcher has utilized qualitative approach and has enabled to conduct the study on the basis of secondary data analysis. It has enabled to evaluate the research outcomes on the basis of subjective perspective. This remained assistive to achieve the research objective at a greater extent.

To analyze the impact of Islamic principles, laws and traditions in the Islamic banking system

This study remained highly assistive to analyze the Islamic principles, laws and traditions of Islamic banking system in the context of GCC and Southeastern countries. For this purpose, researcher has selected the banks from Dubai, Saudi, Malaysia and Indonesia to conduct the study in the right direction. This study has analyzed the Islamic laws on the basis of Riba, legal system, ‘the way to the source of life’, Sharia’h law of equity, etc. to get deeper understanding regarding Islamic law in an effective manner.

To evaluate the quality of financial information

This study has analyzed the annual report of Dubai, Saudi, Malaysia and Indonesia banks to analyze the financial performance of the banks to identify the difference in the quality of financial performance of GCC and Southeastern countries. Case study analysis has remained highly assistive to evaluate the profit, income and expenditure of different banks. In like manner, it has also analyzed technical efficiency, pure technical efficiency and scale efficiency.

To identify the challenges and issues faced by the Islamic banking system

This study has supported to analyze that GCC as well as Southeastern countries both are facing the issues of non-standardization of rules and regulations which are creating direct impact towards the quality of financial reporting. So, there is a need of focusing towards making the global staff members aware about the rules and regulations of Islamic banking system so that the employees can become able to resolve the issues in an effective manner.

5.2 Recommendations

From the above study, following can be recommended:

  • There is a need of improving the rules and regulations while making them applied on the centralized level. So, Islamic bank should be focused towards standardization of the rules and regulations so that the issues can be resolved in a similar manner in every branch and in every country where Islamic banks are dealing.
  • There is a need of offering proper training and development to the employees of Islamic bank to make them aware about Sharia’h regulations. So, that the awareness regarding the Islamic banking system can be increased and the employees become able to resolve the issues adequately.
  • There is a need of making the employees trained regarding how to use the resources in an adequate manner to increase the productivity while increasing the usability of technical efficiency to decrease the trend of wastage.
  • Moreover, there is a need of following the rules of conventional banking system where there is any shortfall found in the context of Islamic banking rules and regulations.
  • Islamic banking system needs to focus towards increasing the concern towards centralized control so that all the branches of the Islamic banks show adequate quality regarding financial performance.

5.3 Research Limitations

The research limitation of this study is that in this research, researcher has only utilized secondary data collection method which has created the limitations towards the research outcome. In like manner, in this study, researcher has only applied only qualitative approach, so there is an opportunity for the future researcher to utilize quantitative data analysis approach too. In like manner, this study is based on secondary data collection method so there is an opportunity for the future researchers to collect the primary data directly from the respondents which will remain assistive for the future researcher to conclude the study on the basis of fresh data. It will remain supportive to increase the relevancy of the research.

5.4 Research Implications

This research can be utilized for the purpose of academic as well as managerial implications. The managers of Islamic banks can utilize the research outcome to improve the financial performance of the bank. In like manner, it can be utilized for the academic purpose to increase the understanding regarding the Islamic banks and its financial performance. Additionally, the findings of this research can be utilized for the future perspective.

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