Corporate Governance of Islamic Financial Institutions in Malaysia

Given the phenomenal increase in Islamic banking activities globally, it is important that there exists good governance practice around Islamic financial institutions (IFIs). This is primarily to ensure its sustainability in the long run. More importantly, in order for Islamic banks to play an optimum role in the development of Islamic countries, it is pertinent to develop regulatory structures to control fraud, exploitation, and un-Islamic behavior. Additionally, the development of strong governance practices will win public confidence and thereby promote trust amongst equity holders, investors and other parties dealing with these IFIs. However, promulgating and developing standards and guidelines on corporate governance (CG) may not be adequate. What is needed is to examine the extent IFIs are actually following such guidelines. This is precisely what we have attempted to do. There are two stages to the study. A disclosure index is first developed using the guidelines issued by the Central Bank of Malaysia (BNM), the standard on CG promulgated by the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) and the framework introduced by the Islamic Financial Services Board (IFSB). The index developed in the first stage is then used to assess the annual reports of all 16 IFIs operating in Malaysia. This paper reports on the second stage of the study. The results do not appear too promising. On a scale of 0 to 100, the CG disclosure index ranges from a low of 42.28 to a high of 68.29, with the average score hovering around 51.42. The implications of the results, the limitations of the study and suggestions for future research are also discussed. © Authors