Information Disclosure in Islamic banks

1) Information disclosure in general

A bank discloses their financial and other information, aimed at providing a broad and reasonably up-to-date view of the bank through annual reports. Major groups of the reports users are ⒜ Shareholders; ⒝ Account holders and depositors (clients of the bank); ⒞ Borrowers and others who transact with the bank; and ⒟ Regulatory bodies.

Information disclosure leads to transparency and supervision and regulation of the banking sector. Moreover, it gives banks stability in consequence, despite the fact that almost all banks’ activities face a variety of risks. For that reason, major global financial institutions such as the World Bank and IMF’s Financial Sound Indicators system have emphasized the importance of transparency and disclosure as one of the core components of bank stability because transparency which arises from greater disclosure by banks will further benefit the financial system as a whole, by reducing the doubts and it provides an essential foundation to a more stable and efficient financial system.


2) Information disclosure in Islamic banks

Not only in conventional banks but also in Islamic banks, truthful and relevant disclosure of information is necessary and Islamic banks, which avoid Gharar and follow Mudarabah principle, are encouraged to make more extensive disclosure since it shows banks’ strategies and relevant risks and also assists depositors and other investors to make well-informed decisions on where to put their money.

Islamic banks apply a Shariah and legal framework which ensures effective risk management practices, adequate financial disclosure and governance to their information disclosure. This leads them to have a strong financial system by including these components as follow: ⒜ Performance Overview; ⒝ Statement of Corporate Governance; ⒞ Directors’ Report; ⒟ Statement by Directors; ⒠ Statutory Declaration by Director or person responsible for reparation of financial statements of the reporting institution; ⒡ Auditors’ Report; ⒢ Shariah Committee’s Report; ⒣ Balance Sheet; ⒤ Income Statement; ⒥ Statement of Changes in Equity showing either all changes in equity or changes in equity other than those arising from capital transactions with owners and distributions to owners; ⒦ Cash Flow Statement; and ⒧ Accounting Policies and Explanatory Notes.

This form of information disclosure based on a Shariah and legal framework has increased the reliability of the Islamic financial system and strengthened the incentives for banks to maintain sound banking practices. Besides, it provides both the supervisory authorities and the public with better information of a bank's strategies and risks including Islamic banks’ special risks.



Sources
1) Reserve Bank of New Zealand, “Your bank's disclosure statement: what's in it for you?”
2) Nafis Alam & Prof. Bala Shanmugam, “Promoting Transparency in Islamic Banks”, THJ Jan/Feb 2007 edition
3) Luca Errico & Mitra Farahbaksh, “Islamic Banking: Issues in Prudential Regulation and Supervision”, IMF Working Paper, March 1998
4) Islamic Banking and Takaful Department of Bank Negara Malaysia, “Guidelines of Financial Reporting for Licensed Islamic Banks”
5) Mohamed Abdelhamid, “Islamic Banking”, Department of Economics in Carleton University, September 2005