The Influence of Shari’ah Supervisory Board Characteristicson Shari’ah Disclosuresof
Indonesia Islamic Financial Institution
Iwan Fakhruddin1,Mohd. Abdullah Jusoh2, Norlia Mat Norwani3, Ani Kusbandiyah4, Norria Zakaria5
1,2,3,4Faculty of Management and Economics, Universiti Pendidikan Sultan Idris, Malaysia 1,4
Faculty of Economics and Business, Universitas MuhammadiyahPurwokerto
5School of Business Management, Universiti Utara Malaysia, Malaysia
1mohd.abdullah@fpe.upsi.edu.my
Article History: Received: 10 November 2020; Revised: 12 January 2021; Accepted: 27January 2021; Published online: 05April 2021
Abstract: The intention of this paper is to analyze the role of the interfaces of the Shari'ah Supervisory Board on Shari'ahahDisclosures.The population in this study are financial institutions that administer transactions in Indonesian Islamic banking based on the principles of Shari'ah. An Islamic financial institution registered with the Central Bank of Indonesia is a sample of this project. Data collected from the Central Bank of Indonesia website and from websites that are part of the sample of the organization. Final sample of 90 Islamic banks' annual reports in 2010-2018.Utilizing multiple regression analysis showed the impact of regression analysis SSB Qualification and SSB Experiences on Shari‟ah Disclosures.The result showed that SSBqualificationsdo not influence Shari‟ah Disclosures. However,SSB Experience showeda positive effect on Shari‟ah Disclosures.The finding provides useful insight in formulating shari‟ah compliance disclosure particularly among Islamic Financial Institution in Indonesia.
Keywords: SSB Qualification, SSB Experience, AAOIFI Shari‟ah Disclosures
1. Introduction
Islamic Financial Institutions have principles and different practices from conventional banks. Islamic financial institutions such as Islamic financial institutions shall function in accordance with Islamic Shari'ah rules and principles. Historically, the application of the Shari'ah legislation instrument was a solution to the prohibition of riba'ah (interest) (Muhamed, Fahmi& Ahmad, 2015; (Rahman&Bukair, 2013). Al-Qur'an and Sunnah (sayings, behavior, and tacit agreements) of the Prophet are the source of Shari'ah, where all Muslims believe that Qur'an is the last revelation sent to Prophet Muhammad Shalallahu 'AlaihiWassalam as mentioned in Al-Qur'an Yusuf: 1-3.
From Islamic Perspective,the first and main target of IFIs is to announce their behaviors in accordance with the principles of Shari'ah (Baydoun& Willet, 2000; Haniffa,2002). (Baydoun& Willet, 2000; Haniffa,2002). One of Islam's fundamental principles is Shari'ah Adherence. In some IFIs in the Muslim world, the adoption of corporate governance is evidenced in research. Shari‟ah compliance is expected can to improve the compliance the community's legitimacy and honesty in the banks of Shari'ah (Chapra& Ahmed, 2002). Disclosure of Shari'ah Compliance pertaining to corporate governance in Islamic Indicates That the impact. Islamic finance standard setting bodies such as AAOIFI (Accounting and Auditing Agency for Islamic Finance Institutions) have managed to set standards for corporate governance and Shari'ah governance in IFIs over the last decade.
The existence of IFI in Indonesia gradually shows the progress of Islamic economic and business system. Indonesia is a country whose majority population is dominated by the Muslim community. In 2014, IFI in Indonesia still had around 3.7% of total national assets (Fakhruddin&Jusoh, 2018). Indonesia collected 2% of total global assets (Fakhruddin, Setyadi&Pramono, 2018). Indonesia's Shari'ah governance system The IFI is established in Law No. 21 of 2008 on Shari'ah Banking. The Shari'ah governance system's technical and operational constructs are presented in the form of the Bank Indonesia Regulation (PBI) and Bank Indonesia Circular Letter (SEBI). Based on Law No. 21 of 2008, the Sharia Supervisory Board (SSB) has a huge part to play in the supervisory framework in compliance regarding Sharia banking concepts in the Sharia banking sector.SSB also has the advantage of protecting the board of directors with guidance and advice and coordinating the liquidity management in harmony with Shari'ah principles. There is a National Shari'ah Council (DSN) at national level appointed by the Indonesian Ulama Council (MUI) which is in charge and has the authority to establish a fatwa on goods or services in the business of a bank conducting business based on Shari'ah principles. The existence of an active role the Supervisory Board of Sharia (SSB) is a must and indeed exists. One of the factors that distinguishes the Supervisory Board of Shari'ah is conventional banks with Islamic banks or other Islamic financial institutions. Islamic Financial Institutions in Indonesia is still relatively low in disclosure of Shari‟ah compliance compared to other countries. Research by Abdullah, Percy, and Stewart, (2013) and
AlmutairiandQuttainah (2017) show the results that the disclosure of Islamic Social Responsibility (ISR) Islamic banks in Indonesia is lower than Islamic banks in Malaysia.
Comprehensive definition of IFIs is very important to have some working knowledge of Shariah rules and practice (Ho, 2015).Vinnicombe (2010) stated that education become one of the indicator to measure professional level of SSB. According Farook (2008), the increasing education level of SSB members contributed to increasing in retraction of CSR by Islamic banks. They should have good understanding of the unique situation of SSB members, especially in Islamic law, economics, financial and accounting activity.
In Indonesia, only about 25% of Indonesia's Sugary beverages have a doctoral background in Islamic law, economics, finance and accounting, and only about 10% of Indonesia's Tobacco products have a doctoral background in economics, finance and accounting. (Fakhruddin&Jusoh, 2018). SSB Limited knowledge of accounting and Islamic finance might have had a negative impact on the value of Islamic banks (Bakar, 2016). Previous research has found, however, that SSB members' levels of educational attainment will increase CSR disclosure by Islamic banks (Farook, 2008).
Islamic Financial Institutions must be able to provide optimal benefits for the community.The role and responsibility of Islamic financial institutions is to provide certainty for all activities carried out by financial institutions sharia according to sharia the doctrines. The purpose of this study is to assess the impact of SSB Qualification and SSB Experience on Shari'ah Disclosure. Understanding on Shari'ah Disclosure and SSB is very mandatory in order to give the public confidence in SSB. In the scenario of sharia financial institutions, the SSB may guarantee the adherence of the principles of sharia.
2. Methodology
The population in this study are financial institutions that exist in Indonesian Islamic banking according to Shari'ah principles. An Islamic financial institution registered withthe Central Bank of Indonesia is a sample of this report. Data was collected via the Central Bank of Indonesia website (www.bi.co.id) and websites that are part of an example of an organization. Saturated Sampling is the four variables used.The Saturated Sampling Technique is a technique for sample determination that extracts all members of the population. Samples in Indonesia contain 13 Islamic financial institutions. A final sample of 90 Islamic banks' annual reports for 2010-2018. In important to maintain access through the company's Internet, data is also very modern. The data obtained gives a fair view of the nature of disclosure of shari'ah legislation.
Shari'ah Disclosure is the dependent variable to use in this experiment. This is done because Shari'ah material is very significant for the public to believe the Shari'ah in the Islamic Financial Institution.SSB is a community that will guarantee the execution of the principles of sharia in financial institutions of sharia. This experiment uses multiple regression technique to test the impacts on Shari'ah Disclosures between the SSB qualification and SSB experiences. As follows, the equation of this regression is
SHARIA_DISC = α0 + β1SSB_QUALYit + β2SSB_EXPit + eit
Where:
α = The Constant
SHARIA_DISC =Shari‟ahDisclosure AAOIFI Governance Standards No 1 and No 5
SSB_QUALY = SSB as measured by Number of Shari‟ah Supervisory Board with Ph.D.
(Doctor) Qualification
SSB_EXP = SSB as measuredbyNumber of year of Shari‟ah Supervisory
BoardwithExperience in Islamic Financial Institution
eit = Errorof Regression
3. Findings Descriptive Analysis Table 1.Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
SHARIAH_DISC 90 7,00 19,00 12,92 3,51
SSB_EXPERIENCE 90 1,00 20,00 8,28 4,77
Table 1 reports the validity of the research of descriptive statistics. Everything confirms that the AAOIFI average Shari‟ah Disclosure is 13 items with minimum and maximum 7 and 19 items respectively.Islamic financial institutions in Indonesia have at least 1 doctoral qualified person and a maximum of 3 people. Each Islamic Financial Institution has2 SSB with doctoral qualifications on average. SSB Experience has a minimum of 1 year and a maximum of 20 years. SSBhasexperience for 8 years for each Islamic financial institution, the average
Multiple Regression Analysis Table 2.ANOVAa
Model Sum of
Squares
df Mean Square F Sig.
1 Regression 652.001 2 326.001 63.813 .000b
Residual 444.454 87 5.109
Total 1096.456 89
a. Dependent Variable: SHARIAH_DISC
b. Predictors: (Constant), SSB_EXPERIENCE, SSB_QULIFICATION
Under the usual assumption, the p value of obtaining an F value of as much as 63.813 or greater is almost zero, leading to rejection of the hypothesis that togethervariables of SSBQualification, and SSBExperience do not affect Shari‟ah Disclosure. The F Statistics produced (F=63.813) is significant at the 0.000 level. With the F value produced (F=63.813) is more than the F critical value of 2.45. This F value is highly significant. It is known that models are fit. Table 2 shows that the calculated F value of 63.813 with a significance value of 0.000. This means a significance value 0.000 under α 0.05 and the model is fit to be used in testing independent variables.
Table 3.Regression Result
Model Unstandardized Coefficients Standardized
Coefficients t Sig. B Std. Error Beta 1 (Constant) 8,436 0,650 12,988 0,000 SSB_QUALIFICATION -0,178 0,385 -0,035 -0,463 0,645 SSB_EXPERIENCE 0,578 0,056 0,786 10,379 0,000
a. Dependent Variable: SHARIAH _DISC
The consequence of the regression is shown in Table 3. It displays that the SSB Qualification coefficient calculation component is irrelevant. Doctoral qualification is not effective, according to Shari'ahrules and principles, for controlling and monitoring the activities of Banks related to social issues.SSB members who have constrained awareness in the fields of accounting and Islamic finance may have a detrimental effect on Islamic banks' results (Bakar, 2016). The SSB Experience coefficient estimates become positive at the 0.05 level.SSB must understand information, especially in the areas of accounting, financial, economic, Islamic law, and other practices.
Shari‟ah Supervisory Board is a body independent directing, recommending (consulting), testing (evaluating), and supervising (supervising) tasks of Islamic banks. The Shari‟ah Supervisory Board must ensure that Islamic bank business activities comply with the principle sharia. The Shari‟ah Supervisory Board in Indonesia in overseeing the operations of Islamic banks refers to the DSN-MUI fatwa.
4. Discussion
This study found that the Sharia Supervisory Board standards didn't effect the AAOIFI Shari‟ah disclosure. This implies that SSB Qualification with a doctoral is not effective for monitoring and controlling the Islamic banks‟ activities related to social issues according to Shari‟ahrules and principles. Members including its SSB should have qualifications and history in integral education, both in modern Islamic finance, muamalahfiqh science and economics. In addition, many Islamic financial institutions raised the members of the SSB only because of its influence as a cleric, not because of its knowledge of the procedures owned within Islamic financial institutions. This is why the regulation conducted out by the SSB is not optimal, because they do not know the technicalities of Islamic financial institutions. Therefore, graduates withthe abilityto manage
economics and Islamic finance can be selected either by National Board of Trustees (DSN, in the Indonesian context). Optimizing the job of SSB in supervision will be accomplished with integral analysis, and the better.The results of this study do not support previous research. AlmutairiandQuttainah (2017) which states that SSB having expertise in sharia law, sharia finance and contemporary finance will result in better decision-making policies and subsequently will lead to improved bank financial performance. Farook, Hassan, andLanis (2011) also stated that the sharia supervisory board also has an audit task. The auditor's education level (SSB) will affect knowledge, skills and auditor expertise. The educational background will have a positive impact on auditor effectiveness in carrying out their duties.
At the Practical Level, the role of the sharia supervisory board seems to only oversee sharia banking products. There are indications that some Sharia Supervisory Councils do not know directly about the application of sharia in Islamic financial institutions. The Sharia Supervisory Board cannot ascertain whether the sharia financial institution complies with sharia law rules or not. The role of DPS is questionable if the facts in Islamic financial institutions indicate that the mechanism implemented by Islamic banking is not following the provisions stipulated in sharia. Many Islamic banks have replaced all their Caffeine because members of the board have experience and knowledge that is bound to the values of sharia and product knowledge. SSB does not work as intended for this drawback.
In the Cambodian sense, only about 25% of Indonesia's SSBs have a doctoral background in Islamic law, economics, finance and accounting, and only about 10% of Indonesia's SSBs have a doctoral background in economics, finance and accounting. Members of that same SSB should have qualifications and expertise in both muamalahfiqh physics and modern Islamic finance economics.In action, the members of the SSB being raised by many Islamic financial institutions only because of their influence as saints, not because of their knowledge of the procedures they owned. This is what doesn't always make SSB supervision optimal, because they really do not know the technicalities of Islamic financial institutions. Therefore, graduates the with power to regulate economics and Islamic finance must be promoted by the National Board of Trustees (DSN, in the Indonesian context). Optimizing the involvement of SSB in supervision will be discovered with integral knowledge, and the better. Many Islamic banks have replaced all their SSBs because members of the board have experience and expertise that is related to the teachings of sharia and product knowledge. SSB does not function correctly because of this drawback. SSB Limited knowledge of accounting and Islamic finance may have a negative impact on the achievement of Banking institutions (Bakar, 2016). The previous study revealed that better education levels of SSB members will strengthen the disclosure of CSR by Islamic banks (Farook, 2008).
Experience is an important factor in the practice of information disclosure. Experience can be used as a measure to determine the level of professionalism (Rahman &Bukair, 2013). SSB must understand information, especially in the areas of accounting, financial, economic, Islamic law, and other practices. These disciplines may find not only Shari'ah issues, but also policy and economic issues. These problems are caused by how they interpret the problems in various situations. SSB Members with more experience are better-versed present implications for Islamic banks, particularly related to CSR disclosure. Rahman and Bukair (2013) research found a positive effect of SSBSCORE on CSR disclosure at a significance level of five percent.
The result of this study indicates that SSB's experience has a positive significant effect on the shari‟ah compliance disclosure.This implies that more experienced SSB has effective in monitoring and supervision of Islamic banks' activities related to social difficulties, observing Shari'ah values and beliefs rules. SSB experience without being supported by a broad understanding of Shari‟ah governance has been able to increase the disclosure related to SSB information. Fakhruddin and Jusoh (2018), Ahmed and Khatun (2013) revealed that SSB is one independent body consisting of fiqh scholars helping themselves in fiqh muammalah or those experts in the field of Islamic financial institutions and have a complete understanding of fiqh muammalah.SSB does have experiences to test integrity and credibility similarly as the other financial professionals, including bankers, lawyers, and accountants regulated by professional bodies that certain professional ethics impose(Onagun, 2013).The finding this study does not support to Fakhruddin and Jusoh (2018) research that SSB experience does not significantly influence Shari‟ah compliance.
5. Conclusion
Based on stakeholder theory, the company will fulfill its interests all stakeholders to displayits existence. The company will have a high level of business continuity if the company can be accepted by the Public. This studyhas aimedTo test the influence of AOIFI Shari'ah Disclosures on Shari'ah Supervisory Board Qualification and Shari'ah Supervisory Board Experience. This paper finds that the SSB Qualification has a strong positive effect on Working characteristics sharia disclosure. After all, this paper finds that experience has a major positive
impact on AAOIFII-based sharia disclosure.These study also suggest that more attention should be paid to variables that could bridge the gap in the concern of Shari'ah with SSB software. These research indicates that bank reporting formally introducing an AAOIFI standard significantly improves the level of transparency for Shari'ah disclosure. The finding provides useful insight, particularly among the Islamic Financial Institution in Indonesia, in formulating shari'ah compliance disclosure.
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