Determinants of Ethical Identity Disclosure among Malaysian and Bahrain Islamic Banks

In Islam, the practice of transparent and adequate disclosure is stressed and recommended, especially with regard to the ethical identity of Islamic institutions. This is to ensure that the business activities are in line with Shariah principles since Shariah is the main component and the foremost salient feature in Islamic banks, which differentiate them from conventional banks. Thus, this study examines the ethical identity disclosure of sixteen Malaysian and five Bahrain Islamic banks for five consecutive years, 2007 to 2011. The study further identifies the determinants affecting the ethical identity disclosure in both countries. The ethical identity disclosure index developed for measuring the level of ethical identity disclosure comprises nine dimensions consisting of 81 constructs. The results indicate that the overall disclosure level in both countries is 51.6%, which suggests a low level of ethical identity disclosure. Room for improvement includes information on vision and mission statement product; Zakat, charity and benevolent loans; community; environment, and Shariah Supervisory Board. In examining the determinants affecting the ethical identity disclosure, the results show that independent directors do not affect the level of ethical disclosure. However, board size, Shariah supervisory board and investment account holders significantly influence the disclosure level by both banking industries. Hence, contrary to the agency theory, the results indicate that independent directors in both Malaysian and Bahrain Islamic banks are not effective or competent in performing their role in monitoring the performance and activities of the management of Islamic banks. However, in line with the institutional theory, having greater monitoring by the board of directors, Shariah supervisory Board and investment account holders could enhance the disclosure compliance by Malaysian and Bahrain Islamic banks, and, thus, could attract more Muslim investors to participate in the Islamic banking industry. © Authors