Factors that Affect Islamic Corporate Governance
Citra Sukmadilaga and Tri Utami Lestari
Department of Accounting, Faculty of Economics and Business, Universitas Padjadjaran, Bandung
citra.sukmadilaga@unpad.ac.id, triutamilestari88@gmail.com
Keywords: Corporate governance disclosure, Corporate governance strength, Mudharabah investment account, Sharia
supervisory board strength, Size of the Islamic Bank.
Abstract: Islam encourages people to do business activities (trying) to meet the economic needs. Conventional finance
is the basic function of the concept of borrowing with the consequences of their interest payments and
uncertainties. From the viewpoint of Islam, it is something that is forbidden. It attracted the attention of
practicing Muslim to make Islamic financial institutions are implemented based on Islamic principles in the
provision of services. The purpose of this paper is to explore the perceived importance of management about
various corporate governance disclosure dimensions being practiced in the Indonesian Islamic banking
context. Based on the results of research on the influence of corporate governance strength, shariah
supervisory board strength, mudharabah investment account, and size of the islamic bank toward the corporate
governance disclosure in Islamic Bank in Indonesia, conclusions can be drawn in accordance with the
formulation of research problems is corporate governance strength, shariah supervisory board strength,
mudharabah investment account and size of the islamic bank simultaneously have a significant influence on
corporate governance disclosure. Corporate governance strength and mudharabah investment account
partially has a positive significant effect toward corporate governance disclosure, and sharia supervisory board
strength has a negative effect toward corporate governance disclosure, however size of the Islamic Bank has
no influence toward corporate governance disclosure.
1 INTRODUCTION
Islam as a way of life provides a guide for muslims to
adapt and evolve according to the times. Islam allows
Muslims to innovate in muamalah, but not in aqidah,
worship and morals (Kamali, 1989). The purpose of
Islamic economics for Islamic banks not only focuses
on commercial purposes, but also must consider its
role in providing welfare widely available to the
public (Astuti, 2014). One such measure is the ability
of human resources in managing companies that are
integrated in corporate governance. In early 2000,
company's corporate governance structure is under
intense scrutiny after case of the Enron and
Worldcom. The failure of corporate governance does
not only affect shareholders but also affect the overall
stakeholders, includes agencies, creditors, supplier,
consumer, employee, retired, and society (Wan
Abdullah, 2013). In Indonesia, This issue was
brought up in particular when Indonesia was hit by
the prolonged economic crisis, ie back in 1998. In the
process of economic transition, corporate governance
practices can be an essence in ensuring the success of
health investment climate (Hassaan, 2013).
The concept of corporate governance has gained
great attention from various circles, especially
accountants and academics. However, the current
research on corporate governance in Islamic banks
have not done. Related to that, Researchers are
motivated to do research on corporate governance in
Islamic banks. On other hand, Another motivation for
doing this study is among the first, the high level of
transparency of information disclosure about
corporate governance and the importance of Sharia
Supervisory Board report in increasing stakeholder
confidence, particularly those related to compliance
with Islamic principles. The information provided by
companies has to be useful for the investors (Andreas
et. al, 2016).
Second, Islamic banks have unique
characteristics. Third, high corporate governance
standards expected of Islamic banks because of the
risks associated with equity participation, there is no
interest on financial instruments, as well as their
revenue-sharing agreements.
112
Sukmadilaga, C. and Lestari, T.
Factors that Affect Islamic Corporate Governance.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 112-117
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
Our discussion has demonstrate that corporate
governance strength, shariah supervisory board
strength, mudharabah investment account, and size of
the islamic bank has a effect toward the corporate
governance disclosure in Islamic Bank in Indonesia.
The paper is organized as follow: Section 2 reviews
prior theoretical and empirical work on corporate
governance dimensions and corporate governance
disclosure of Islamic banks. This is followed by
Section 3, which briefly discusses the characteristics
of the sample banks and methodology. In Section 4,
the results of CGDI scoring are presented and further
discussed. Finally, Section 5 concludes the paper.
2 LITERATUR REVIEW
2.1 Corporate Governance
Shleifer and Vishny (1997) stated that corporate
governance relates to the manner or mechanism to
convince the owners of capital to obtain the return on
investment that has been planted. (Iskander,
Meyerman, Gray, & Hagan, 1999) stated that
corporate governance refers to the framework of rules
and regulations that enable stakeholders to make the
company maximize the value and to obtain a return.
In Indonesia, Code of Good Corporate Governance
issued by the National Committee on Corporate
Governance has five principles that must be done by
each company of transparency, accountability,
responsibility, independence and fairness.
Corporate governance at the company, which is
based on sharia is different from the public company
that is related to who the stakeholders. At the
company, which is based on sharia, The main
stakeholder is Allah SWT. This means that the
company running the company running the company
and report all related not to the benefit of man, but
rather an attempt obedience to Allah SWT
(Alamanda, 2014).
2.1.1 Corporate Governance Strength
Corporate governance strength is a combination of
several characteristics of corporate governance. Wan
Abdullah (2013) in his study used three
characteristics corporate governance as follows:
1. Board Of Director Size
2. Audit Committee
3. Independent Chair
2.1.2 Shari’ah Supervisory Board (SSB)
Strength
Musibah dan Wan Sulaiman (2014) stated that a
significant element in differentiating Islamic bank
with conventional banks are sharia supervision
element.
This study used three characteristics using SSB
strength being adopted from the research Wan
Abdullah (2013).
1. SSB Size
2. SSB Cross-membership
3. SSB Experience
2.1.3 Mudharabah Investment Account
Salman (2012) in his book mentions that mudaraba
comes from the word adhdharby fil Ardhy is traveling
for the deal. Mudharabah investment account is the
biggest source of funding for Islamic financial
institutions (El-Hawary, Grais, and Iqbal, 2007).
2.1.4 Size of the Islamic Bank
Size of the islamic bank is a measure of Islamic
Banking to reflect the size of Islamic Banking which
can be shown by total assets, the number of sales,
average total sales, and average total assets (Sujianto,
2001).
2.1.5 Corporate Governance Disclosure
Corporate governance arises because there is a
separation between the ownership of the controlling
company, or often known as agency problems.
Corporate governance is needed to reduce the agency
problem between owners and managers. Some of the
concepts of corporate governance among others
proposed by Shleifer and Vishny (1997) stating
corporate governance with regard to means or
mechanism to convince the owners of capital in
obtaining a return on investment that has been
planted. Organisation for Economic Cooperation and
Development (OECD) revealed the principles of
corporate governance as follow:
“corporate governance involves a set of
relationship between a company’s management,
its board, its shareholders and other stakeholders.
Corporate governance also provides the structure
through which the objectives of the company are
set, and the means of attaing those objectives and
monitoring performance are determined. Good
corporate governance should provide proper
incentives for the board and management to
pursue objectives that are in the interests of the
Factors that Affect Islamic Corporate Governance
113
company and its shareholders and should
facilitate effective monitoring”.
Given the importance of desire and the drive to the
mechanism of governance, corporate governance
disclosure has become a component of every
company's strategy to maintain the relationship
between the company and its stakeholders (Gaa,
2009). (Holder Web, 2010) who found the structure
of directors (BOD) which became one of the
characteristics of corporate governance strength has a
positive influence on corporate governance
disclosure
3 METHODOLOGY AND MODEL
3.1 Characteristics of the sample banks
Target population in this study are all Islamic Bank in
Indonesia. The sampling method used in this research
is purposive sampling. Purposive sampling is not
random sample selection in which information is
obtained by using certain considerations tailored to
the purpose or research problems. Criteria for
selection of the sample in this study is:
Table 1: Criteria for selection of the sample.
Criteria
Qty
Islamic Banks in Indonesia
11
Islamic banks do not publish audited financial
statements consecutive year 2011 - 2014.
(2)
Islamic banks do not publish annual reports
consecutive years 2011 - 2014
(1)
The financial statements are not presented in
rupiah
(0)
The samples used in the research object
8
Source: secondary data were processed, 2016.
Samples used in this study are 8 Islamic banks.
The sample of the present study consists of 8 Islamic
banks whose publish annual reports are available on
their web sites, nemely BNI Syariah, BCA Syariah,
Bank Syariah Mandiri, Bank Mega Syariah, Bank
Victoria Syariah, Bank Syariah Bukopin, Bank Panin
Syariah, and Bank Muamalat Indonesia.
3.2 Measuring Independent Variables
1. Corporate governance strength (CG Strength):
a combination of several characteristics of
corporate governance that is represented be a
score.
2. Shari’ah Supervisory Board Strength (SSB
Strength): a combination of several
characteristics which represented the shari'ah
supervisory board into a score.
3. Mudharabah Investment Account
(IAHEQUITY): the ratio of investment to the
equity account.
4. Size of the Islamic Bank (Size): total assets of
Islamic banks.
The dependent variable in this study is the level of
corporate governance disclosure. CGD index in this
study using an index that adopts CGD research Wan
Abdullah (2013) the disclosure of which section 13:
(1) general, (2) effective shari’ah complience
structures, (3) fair treatment of equity-holders, GSIFI
No 6, (4) equitable treatment of fund providers and
other significant stakeholders, (5) fit and proper
conditions for board and management, (6) effective
oversight, (7) audit and governance committee, (8)
risk management, (9) avoidance of conflicts of
interest, (10) appropriate compensation policy
oversight, (11) public disclosures, (12) code of
conduct and ethics, dan (13) appropriate enforcement
of governance principles and standards which
consists of 81 items disclosure.
4 THE FINDINGS
4.1 Descriptive Statistic
Table 2: Corporate Governance Disclosure.
2014
2013
2012
2011
2010
68%
65%
67%
74%
69%
62%
63%
62%
62%
64%
74%
74%
74%
74%
65%
73%
73%
73%
73%
65%
70%
73%
75%
73%
72%
78%
78%
78%
78%
78%
73%
73%
73%
73%
73%
80%
79%
80%
79%
78%
Source: calculated, 2016
Based on Table II shows that from 2010 to 2014,
the index of the highest Corporate Governance
Disclosure owned by BNI Syariah. Meanwhile, the
index of the lowest corporate governance disclosure
is owned by Bank Mega Syariah.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
114
4.2 Regression Result
All model are run based on linear regression. For
further verification, ordinary least square (OLS) test
has been performed.
Tabel 3: Multiple Regression Analysis.
CGD_Index = α + β
1
Cg_Strength + b
2
Ssb_Strength +
b
3
Iahequity + b
4
Size + ε
Independen Variable
Model A
OLS
(N=32)
Konstanta
0.541848
(1.932939)
Cg_Strength
0.054106*
(2.944027)
Ssb_Strength
-0.059734*
(-4.392324)
Iahequity
0.011004*
(2.828460)
Size
0.002768
(0.115881)
Std. Error
0.045668
F-statistic
11.56060
Sig. F
0.000013*
R square
0.631361
Adj. R Square
0.576748
Source: calculated by Eviews 7.0, 2016.
4.2.1 Simultaneously Testing
Based on the results of data processing using
statistical software Eviews 7.0 the results obtained
determination coefficient is 0.631361 which shows
that the proportion of variables influence cg_strength,
ssb_strength, iahequity, and size toward cgd_index at
63.13%. This means that corporate governance
strength, shari'ah supervisory board strength,
mudaraba investment accounts, and the size of
Islamic banks have a proportion of influence on
corporate governance disclosure at 63.13%.
4.2.2 Partially Testing
Partial testing was conducted to determine the effect
of one independent variable on the dependent variable
assuming other variables constant. To interpret the
coefficient of the independent variable, can use the
results of the regression analysis as presented in Table
II. The regression model based on the analysis table
II is:
CGD = 0.542 + 0.054
CG_STRENGTH – 0.060
SSB_STRENGTH + 0.011
IAHEQUITY + 0.002 SIZE + ε
(1)
5 DISCUSSION
The following are descriptions of the effect of each
independent variable on the corporate governance
disclosure.
5.1 Corporate governance strength
(X
1
) towards corporate governance
disclosure (Y)
Based on table III seen that corporate governance
strength variables has a significant effect on corporate
governance disclosure. The effect of corporate
governance strength on the disclosure of corporate
governance has a positive influence, meaning that the
higher the strength of corporate governance index, the
higher the disclosures made by the Islamic bank. The
results of this research in line with Arcay and
Vazquez (2005) and (Holder Web, 2010) whose
found that the combination of some of the
characteristics of corporate governance strength that
includes (BOD size, audit committe, and independent
chair) can be an effective package in the mechanism
of corporate governance and have a positive influence
on the disclosure.
5.2 Shari’ah supervisory board
strength (X
2
) toward corporate
governance disclosure (Y)
Based on table III seen that shari’ah supervisory
board strength variables has a significant effect on
corporate governance disclosure. Effect of shariah
supervisory board strength against the disclosure of
corporate governance has a negative effect, that mean
the higher the index shariah supervisory board, the
lower strength disclosures made by the Islamic bank.
The results of this study indicate that the attention
given by SSB to Islamic banks still fall into the
category of less, so the SSB needs to optimize its role
in enhancing the disclosure report. In line with
Khoirudin (2013) whose stated that SSB size does not
affect the disclosure of Islamic social reporting is
because SSB are still focused on their duties and
responsibilities in the operations of Islamic banking.
In line with Wan Abdullah (2013) which revealed that
the number of members of SSB, the SSB functions
and tasks can be divided among the members so that
members can focus on their respective banks
reporting that they are responsible for the Review
procedure sharia.
Factors that Affect Islamic Corporate Governance
115
5.3 Mudharabah investment account
(X
3
) toward corporate governance
disclosure (Y)
Based on table III seen that mudharabah investment
account variables has a significant effect on corporate
governance disclosure. Effect of mudaraba
investment accounts to corporate governance
disclosure have a positive effect, that mean the higher
the investment mudaraba accounts represented by the
ratio of investment to the equity account, then the
higher the disclosures made by the Islamic bank. The
results of this research in line with Al-Baluchi (2006)
whose found that there is a positive relationship
between the proportion of investment account with a
voluntary disclosure. The relationship becomes an
opportunity for Islamic banks to increase investment
mudaraba accounts by doing more extensive
disclosures (Wan Abdullah, 2013).
5.4 Size of the islamic bank (X
4
) toward
corporate governance disclosure
(Y)
Based on table III seen that the variable size of the
islamic bank has no significant effect on corporate
governance disclosure. The results of this research in
line with Wan Abdullah (2013) whose found that the
size banks have no influence on corporate governance
disclosure. However, these results are not in line with
Ahmed and Courtis (1999) who found no evidence of
a positive effect of disclosure of the size of the
company. Further, Sharma (2012) found that there is
a positive relationship between firm size and
governance disclosure. In line with Farook and farooq
(2013) who found that there is a positive relationship
between size with voluntary disclosure. Companies
with large scale would be more likely to disclose
information widely.
6 CONCLUSION
Based on the results of research, corporate
governance strength, shariah supervisory board
strength, mudharabah investment account and size of
the islamic bank simultaneously have a significant
influence on corporate governance disclosure.
Corporate governance strength and mudharabah
investment account partially has a positive significant
effect toward corporate governance disclosure, and
sharia supervisory board strength has a negative
effect toward corporate governance disclosure,
however size of the Islamic Bank has no influence
toward corporate governance disclosure.
Referring to the results of research, average
corporate governance disclosure index Syariah Bank
in Indonesia which is 70% included in the category
enough and Bank Syariah could still improve
corporate governance disclosure index. Bank Syariah
has unique characteristics, the high level of
transparency of corporate disclosure disclosure is an
important thing in improving stakeholder confidence
against sharia compliance at Islamic Bank.
REFERENCES
Ahmed, K., Courtis, J. K. 1999, Associations Between
Corporate Characteristics And Disclosure Levels In
Annual Reports: A Meta-Analysis. The British
Accounting Review, 31(1), 35-61.
Alamanda, Amelia Rizky. 2014, Pengaruh Sharia
Intellectual Capital dan Sharia Social Responsibility
terhadap Efisiensi Bank Syariah di Indonesia dengan
Variabel Moderasi Sharia Corporate Governance.
Thesis, Padjadjaran University.
Al-Baluchi, A. E. A. 2006, The Impact of AAOIFI
Standards and Other Bank Characteristics on the Level
of Voluntary Disclosure in the Annual Reports of
Islamic Banks. School of Management University of
Surrey.
Andreas, Tan., Benni, Desmiyawati., and Liani, Warda.
2016, Determinants of CSR Disclosure and Investor
Reaction. International Journal of Economics and
Financial Issues (IJEFI), 6(S4), 11-17.
Arcay, R.B., Vazquez, F.M. 2005, Corporate
Characteristics, Governance Rules and the Extent of
Voluntary Disclosure in Spain. Advances in
Accounting, 21, 299-331.
Astuti, Tri Puji. 2014, Faktor-faktor yang Mempengaruhi
Pengungkapan Islamic Social Reporting (ISR) pada
Bank Syariah di Indonesia. Naskah Publikasi
Universitas Muhammadiyah Surakarta.
El-Hawary, D., Grais, W. and Iqbal, Z. 2007. Diversity in
the regulation of Islamic financial institutions. The
Quarterly Review of Economics and Finance, 46(5),
778-800.
Farook, Sayd and Farooq, Mohammad Omar. 2013,
Shari’ah Governance, Expertise and Profession:
Educational Challenges in Islamic Finance.
International Journal of Islamic Finance, 5(1), 137-160.
Gaa, J. C. 2009. Corporate Governance and the
Responsibility of the Board of Directors for Strategic
Financial Reporting. Journal of Business Ethics, 90(2),
179-197.
Hassaan, Marwa. 2013, The Introduction of Corporate
Governance Codes in a Transitional Economy and Its
Impact on Compliance with Mandatory Disclosure: The
Case of Egypt. International Journal of Research in
Business and Social Science, 2(1), 7-21.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
116
Iskander, M., Meyerman, G., Gray, D. F., & Hagan, S.
(1999). Finance and Development, 36, 42.
Kamali, M. H. 1989, Source, Nature and Objectives of
Shariah. The Islamic Quarterly.
Khoirudin, Amirul. 2013. Corporate governance dan
Pengungkapan Islamic Social Responsibility pada
Perbankan Syariah di Indonesia. Accounting Analysis
Journal, 2(2), 227-232.
Musibah, Anwar Salem and Wan Sulaiman, bin Wan
Yusoff Alfattani. 2014, The mediating effect of
financial performance on the relationship between
shariah supervisory board effectiveness, intellectual
capital and corporate social responsibility, of islamic
banks in gulf cooperation council countries. Asian
Social Science, 10(17), 139-164.
Salman, Kautsar Riza. 2012, Akuntansi Perbankan Syariah
Berbasis PSAK Syariah. Padang: Akademia.
Sharma, Narendra. 2012, A Correlational Study of the
Extent and Determinants of Corporate Governance
Disclosure in the Nepali Financial Industry.
Dissertation, Northcentral University.
Shleifer, A. dan R.W. Vishny. 1997, A Survey of Corporate
Governance. Journal of Finance, 52(2), 737-783.
Sujianto, 2001. Dasar-dasar management Keuangan.
Yogyakarta: BPFE.
Wan Abdullah, Wan Amalina. (2013), Determinants of
Corporate Governance Disclosure Practices of Islamic
Banks. Doctor of Phylosophy: Griffith University.
Factors that Affect Islamic Corporate Governance
117