Corporate Governance 343
Islamic fi nancial institutions have made considerable efforts to improve the
level of transparency and the quality of information disclosure in the market
in the last couple of years. However, there are still several areas that demand
attention.
Analysts often have diffi culty in collecting useful information regarding
Islamic fi nancial institutions. One of the factors contributing to this prob-
lem is the lack of uniform reporting standards followed by the fi nancial
institutions. For example, a study was recently conducted on the basis of a
cursory survey of a sample of nine Islamic banks for which balance sheet
data was easily available. It showed that only one bank did not provide
suffi cient details as to the division of equity and deposits. However, when
it came to deposits, only fi ve provided a detailed division of the deposit
types that they offered, with the remaining three combining different types
of deposits together. Of these three, two made no specifi c reference to spe-
cial investment accounts, while the other one made no distinction between
demand and saving deposits.^31 The disclosure practices are highly varied, as
is the supervisor’s authority to impose norms.
The collection and dissemination of relevant information and credit rat-
ings need signifi cant improvement. However, this requires an institutional
infrastructure that facilitates the production of accurate fi nancial informa-
tion, the development of agents who can interpret and disseminate it, as
well as arrangements to protect its integrity. Considering that reliable and
timely information is critical for the Islamic fi nancial system, the current
level of infrastructure is not satisfactory. The existing limited infrastructure
reduces the role that information fl ows may play in promoting competition
and market activities that would induce managers to adopt sound corporate
governance practices.
A transparent Islamic fi nancial institution would ideally reveal the
duties, decision - making, competence and composition of the Shari’ah
board, as well as publish all fatwas issued by it. This would strengthen
stakeholders’ confi dence in the credibility of the board’s assessments. In
addition, public disclosure would provide a venue for educating the pub-
lic and pave the way for a larger role for market discipline with respect
to Shari’ah compliance. Again, this aspect of transparency is missing from
the market. Often, annual reports of the Shari’ah boards are not easily avail-
able to the public and other relevant information regarding fatwas is not
made available.^32
The application of fi nancial modeling to the measuring of asset/liability
risks is very limited. The use of quantitative methods such as VaR and PaR
(discussed in an earlier chapter) can enhance fi nancial disclosure, especially
in the area of credit and equity risk. Risk exposures can provide information
to the investors about their expected profi ts and losses.