Islamic Social Reporting in Shariah Banks in Indonesia

Transcription

1. ISLAMIC SOCIAL REPORTING IN SHARIAH BANKS IN INDONESIA Rafrini Amyulianthy Widyaningsih Azizah Indra Satria Presented at : SIBR Hong Kong 2018 Conference on Interdisciplinary Business and Economics Research, September 29 – 30, 2018, Hong Kong. Introduction For most investors, income is considered important information in making investment decision (Azizah, 2017). Therefore, every company focuses on generating high profit. One of way done by the company is creating a good image in the community by giving attention to the environment or social responsibility usually called as Corporate Social Responsibility (or hereby called CSR) (Kao et al, 2018). One of the company's objectives of disclosing environmental, social and financial performance in annual reports or separate reports is to reflect the degree of accountability, responsibility and transparency of the corporation to investors and stakeholders. The disclosure aim is to establish a good and effective communication relationship between the company and the public and other stakeholders about how the company integrated CSR and social environment in every aspect of its operations (Darwin, 2007) and Corporate Social Responsibility (CSR) is a reflection of firm commitment to the development of sustainable economy due regard to corporate social responsibility and focus on balance between attention to the economic aspect social and environmental issues (Rama & Meliawati, 2014). Concept of CSR thrive not only in the conventional economics, but also in Islam’s perspective (Lestari, 2013). According to Sofyani et al, (2012), company that runs its business based on shariah, basically based on the philosophy of the Qur'an and Sunnah so making the basis for the perpetrators in interacting with the environment and each other. Therefore, the relationship between company and its environment in the concept of shariah will be stronger than in conventional concept. It is based on a business institution shariah is based on religious principles. According to Othman & Thani (2010), with the resurgence of Islam, Muslim decision-makers are expecting corporations to disclose more information that would help them fulfil their spiritual needs. This is because the current corporate social reporting initiatives, although they fulfilled a wider user’s needs, lacked the most pertinent items from an Islamic perspective. This may impair the judgement of Muslim decision-makers and adversely affect their spiritual being (Haniffa & Cooke, 2002). Hassan et al (2011) show the definitive parameters of Islamic Social Responsibility must be based on the overall achieving of the objectives of the shariah company; to promote good (justice) and forbid evil (injustice), and roomates he is manifested in the concept of protecting faith, life, intellect, posterity, and wealth of mankind. So progress of CSR in Islamic economics increased public awareness to shariah based institutions. In Indonesia, shariah economy already has the concept of Corporate Social Responsibility before the issuance of Law no. 21 of 2008 about Shariah Banking. The concept is embodied in the source reportand the use of zakat funds and benefaction. Moreover, shariah financial institutions began to develop from the banking sector pioneered by Bank Muamalat Indonesia in 1992. After the enactment of Law No. 10 of 1998 which is a renewal of Law No. 7 of 1992, the term used more openly than the term "profit sharing" to "Shariah Principles" has provided a broad opportunity for banks to develop shariah networks. Furthermore, with the issuance of Law No. 21 of 2008 about Sharia Banking, as defined in Article 1 No. 7, the bank conducting its business activities based on sharia principles is called shariah bank (Sjahdeini, 2014).
2. The growth of shariah banking in Indonesia growing rapidly . Hakimah et al (2013) state that the survey conducted by Global Islamic Finance Report in 2012, the development of Islamic banking Indonesia was ranked seventh in the world. Islamic banking firm as a service company whose one of the success depend on trust of customers would have to implement corporate governance and CSR which is in accordance with the principles of Islamic teachings cause in Islam’s principles God Almighty is also on the company’s stakeholders (Indrawaty & Wardayati, 2016). The characteristics of the company greatly affect the variation of disclosures in the annual report (Lang & Lundholm, 1993). Gray et. al., (2001) find a significant relationship between company size and corporate social disclosure. The research results of the relationship between corporate social disclosure and profit are very widely. For example, Belkaoui & Karpik (1989), Hackston and Milne (1996) find that there is no association between these variables, whereas Freedman & Jaggi (1988) and O’Donovan and Gibson (2000) find a negative association of these variables . On the other hand some of the studies mentioned in Hackston and Milne (1996) such as Bowman and Haire (1976) and Preston & O’Bannon (1997) find significant associations, whereas Gray et al. (2001) find a varied association each year for both variables . The relationship between leverage and social disclosure also shows inconsistent results. Research conducted by Belkaoui & Karpik (1989) and Cormier & Magnan (2003) find a significant negative relationship between the two variables. Suda and Kokubu (1994) and Kokubu et. al., (2001) find no relationship between the two variables. This research was attempted to identify factors determining the level of ISR of Shariah banks in Indonesia cause the fact that the emergence of ISR has led into dimension of corporate reporting. These studies have mainly provided conceptual or discussion papers on the need to research ISR (Baydoun and Willet, 1997; Haniffa, 2002; Sulaiman and Willet, 2003). This research would focused on company’s characteristic of ISR reporting. Literature Review Islamic Social Reporting Many theories have been developed in the social reporting (SR) literature trying to answer the question of why firms disclose social information, where such disclosures are not enshrined in legislation (Gray et al., 1995). With the rapid development of Islamic perspective in Indonesia Capital Market, the shariah companies were expected to present a religious dimension to their financial statement disclosures for the benefit of Muslim stakeholders. The conceptual framework for Islamic accounting should be based on the shariah as it was supported by the objectives of Islamic accounting (Haniffa & Hudaib, 2006). In line with Islam concept, the main goal of Islamic business is to obtain the pleasure of God Almighty by following Al Quran and Sunnah. According to Maali et al (2006) Islam considers business as a way to worship God Almighty where the business goal for making profit and must be achieved in shariah ways. Futhermore, shariah requires transactions to be lawful (halal) and prohibits transactions involving interest and those involving speculation. For example, it also requires Muslims to pay their lawful dealings, zakat to the beneficiaries, sadaqa (charities/gifts), wages, the objective of any business ventures and initiatives to protect the environment, and others. The duty to disclose the truth is a very important issue in the Islamic context, and this duty applies to businesses as much as to individuals. This duty is emphasized in the Qur’an: ‘and cover not truth with falsehood, nor conceal the truth when you know’ (2:42). ‘Six verses of the Qur’an refer to relevance; one meaning of the relevance referred is to disclosure of all facts’ (Askary and Clarke, 1997). God does not need humans or businesses to show God what they are doing because God already knows what people have done, are doing and will do in the future. However, as accountability to God implies accountability to society, the duty to disclose the truth is owed to the Umma as well as to God. The
3. requirement for Muslims to uncover the truth is intended to help the community to know the effect of a person or a business on its wellbeing . Archer & Karim (2001) find that Islamic banks use forms of financial instruments, both in mobilizing funds for their operations and in providing finance for their clients, that comply with the principles and rules of Shariah. Associated with the need for disclosure of social performance in sharia banking, then Islamic Social Reporting (ISR) Index was created (Sofyani et al., 2012). The ISR index is an experimental benchmark the social performance of sharia banking that contains compilation of standard items of CSR specified by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) which was further developed by researchers on the CSR items that should be disclosed by an Islamic entity (Othman et al, 2009). In particular, ISR index is an extension of the social performance reporting standards that include public expectations not only of the company's role in the economy, but also in the company perspective. The ISR index also emphasizes social justice regarding the environment, minority rights, and employees. Fitria & Hartanti (2010) explain there are six dimensions in ISR index, namely: (a) Investment & Finance, (b) Products & Services, (c) Employee, (d) Social, (e) Environment and (f) Organizational Governance. Firm’s Charcteristic & Islamic Social Reporting Size The agency costs are higher for larger firms due to the higher information asymmetries between managers and shareholders. Therefore to reduce agency costs, large companies reveal more information than small companies and large companies have a greater source so they can disclose at a higher level. According to Cormier & Magnan (2003), larger firms also tend to have lower ownership costs associated with information disclosure as their activities are exposed by other sources of information. Furthermore, the political cost hypothesis states that larger firms have strong incentives to improve the company's reputation. Company size would affect company decisions to open the information in the annual report, they also attracted the attention of government agencies and increased disclosure generally reduces government intervention (Andrikopoulos & Diakidis, 2007). Given the need for greater disclosure from large firms, it is expected that larger firms will tend to adopt various disclosure methods including the disclosure of financial statements on shariah principles, allowing for large amounts of disclosure for their moslem stakeholders (Othman & Thani, 2010; Lestari, 2013). H1: Size positively affects Islamic Social Reporting Profitability According Cormier & Magnan (2003), that well-performing firms have incentive to disclose more information than low performing firms. In research on the dissemination of information, Andrikopoulos & Diakidis (2007) show a negative, but not significant relationship. With this result, it is not clear whether the relationship between firm performance is positive or negative with the dissemination of information. The larger, more profitable, and lesser credit had more specific intellectual information disclosure. Companies with good performance tend to publicize their performance. They may reveal more information than is required by regulatory agencies and regulations to connect with investors, for example, to participate in conference meetings. On the other hand, companies are also paying attention to their position in the competitive market and so will withhold some information that may benefit them. Disclosure of information can
4. also result in loss of competitive advantage position of the company because it gives too much information to the market . This is also one reason why managers will be less willing to disclose. So it still can not be determined whether the performance of the company will have a positive or negative influence on information disclosure disseminations. H2: Profitability has no affects to Islamic Social Reporting Leverage The debt–equity ratio, according to Jensen & Meckling (1976), creates agency costs. Francis & Schipper (1999) assert that explicit restrictive covenants can mitigate the potential conflicts between bondholders and shareholders. Management can voluntarily disclose for monitoring purposes and help assure debt holders about the ability of the company to pay its obligations. Almilia (2009) in her research confirmed that explicit restrictions can reduce the potential for conflict between bondholders and shareholders. Management voluntarily discloses for monitoring purposes and helps assure the lender of the company's ability to pay its obligations. In line with the increase in debt, management may use additional measures, such as providing information on debt payments, information on debtor debt amounts and other information through ISR so as to enable the lender to continue to monitor and interact with the company. Belkaoui & Karpik (1989) show that leverage has a negative and significant relationship with social reporting, this is based on agency theory where management with high leverage will reduce its social activities to avoid creditor scrutiny. H3: Leverage negatively affects Islamic Social Reporting Methodology Samples There were 11 (eleven) Syariah Bank in Indonesia from 2014 to 2016 that published annual report for consecutive 3 (three) years. Data was collected by documentation technique from Indonesia Stock Exchange directory. Variables Measurement Islamic Social Reporting Index Islamic Social Reporting Index consisted of 38 items grouped into 6 (six) topics that was adopted from Othman & Thani (2010). The content analysis, each item had the value of 1 if the items was disclosed by the company, otherwise it was 0. Scoring of ISR index had been done was calculated as follows: Size Islamic Social Reporting Index = Number of items disclosed Number expected to disclosed Size was measured by using Ln of Total Assets that obtained from end year financial report of the company. Ln of Total Assets was frequently being used to determine company’s size (Botosan & Plumlee, 2002 ; Francis & Schipper, 1999 ; Siregar & Bachtiar, 2010) Profitability Profitability in this research was measured by ROE (Return On Equty) which ratio between net income after taxes and the total equity (Lundholm & Myers, 2002 ; Leuz & Verrecchia, 2000)
5. Leverage Levarage was measured by using DAR (Debt to Asset) which ratio between total debt to total asset (Lundholm & Myers, 2002) Research Model After assumption test, multiple linear regression analysis was conducted to test the hypothesis in this research. Model of the regression in this research was as follows: Islamic Social Reporting Index = α + β1Size + β2Profit + β3Leverage + e (1) Data Analysis Data Analysis Procedures used in the multiple regression analyzes were conducted research model with Ordinary Least Square (OLS) using panel data approachment. In the use of panel data, there are three types of approaches that can be used are: Common Effect, Fixed Effect, and Random Effects. This research conduct with Random effect. Results & Discussion Descriptive Statistic Table I Panel A shows descriptive statistics of Islamic Social Reporting. Mean ISR disclosure is 19.5. Most disclosed item is finance & investment. It indicates that firms considered disclosure about finance and investment as the most important issue to be disclosed. This is not surprising, because finance and investment signify that whether firm were interest-free (riba) and speculative-free (gharar) as these were strongly forbidden (haram) in Islam as mentioned in the Quran and shariah principle must be obeyed and has a direct relationship with was the economic benefit that a firm will receive, which is increasing in customers and credits borrowers. Descriptive statistics of other variables used in this study are presented in Table I Panel B. Mean leverage is 0,158, and there is only a small variation within samples. Profitability and firm size is 7,533 and 30,215 repectively, with not show much variation of sample. On average, our samples are profitable firms, hence our results may not be generalized to losing firms and also produce positive returns. Tabel I Statistic Descriptive Panel A : Islamic Social Reporting Item Disclose A. FINANCE AND INVESTMENT 1. Riba activities 2. Gharar 3. Zakat: method used, zakatable amount, beneficiaries 4. Policy on late repayment and insolvent clients/ bad debts written-off Mean Max. Min. 1,000 1,000 1,000 1,000 1,000 1,000 0,879 1,000 0,000 0,848 1,000 0,000 St.Dev
6. 5 . Current value balance sheet 6. Value added statement Total B. PRODUCTS AND SERVICES THEME 7. Halal status of the product 8. Product safety and quality 9. Customer complaints/ incidents of non complience with regulation and voluntary codes (if any) Total C. EMPLOYEES THEME 10. Nature of work: working hours, holidays, other benefit 11. Education and training 12. Equal opportunities 13. Employee involvement 14. Health and safety 15. Working environment 16. Employment of other special interest group (i.e handicapped, ex-convicts, former drug-addicts) 17. Higher echelons in the company perform the congregational prayers with lower & middle level managers 18. Muslim employees are allowed to perform their obligatory prayers during specific times & fasting during Ramadhan on their working day 19. Proper place of worship for the employees Total D. SOCIETY THEME 20. Shadaqah / donation 21. Wakaf 22. Qard hassan 23. Employee volunteerism 24. Education school adoption scheme scoholarships 25. Graduate employment 26. Youth development 27. Underprivileged community 28. Children care 29. Charities / gifts / social activities 30. Sponsoring public health / recreational project/ sports/ cultural events Total E. ENVIRONMENT 31. Conservation of environment 32. Endangered wildlife 33. Environmental education Total F. CORPORATE GOVERNANCE 34. Shariah complience status 0,848 0,424 0,833 1,000 1,000 1,000 0,000 0,000 0,000 0,879 0,879 1,000 1,000 0,000 0,000 0,727 1,000 0,000 0,828 1,000 0,333 0,636 1,000 0,000 1,000 0,818 0,818 0,818 0,788 1,000 1,000 1,000 1,000 1,000 1,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,488 0,000 0,600 0,000 0,100 0,879 0,242 1,000 0,182 1,000 1,000 1,000 1,000 0,000 0,000 1,000 0,000 0,515 1,000 0,000 0,788 0,697 0,758 0,758 0,758 1,000 1,000 1,000 1,000 1,000 0,000 0,000 0,000 0,000 0,000 0,758 1,000 0,000 0,667 1,000 0,091 0,303 0,000 0,212 0,172 1,000 0,000 1,000 0,667 0,000 0,000 0,000 0,000 0,879 1,000 0,000
7. 35 . Ownership structure: number of muslim shareholders and its shareholdings 36. Board structure muslim vs non muslim 37. Forbidden activities: monopolistic practice, hoarding necessary goods, price manipulation, fraudulent business practice, gambling. 38. Anti corruption policies Total Total Islamic Corporate Index Panel B : Variable Used Islamic Corporate Reporting Index Size (Total Assets) Profitability (Return on Equity) Leverage (Debt to Asset Ratio) 0,000 0,000 0,000 0,000 0,000 0,000 0,939 1,000 0,000 0,424 0,448 19,50 1,000 0,600 0,816 0,000 0,000 0,105 19,50 30,215 7,533 0,158 0,816 31,765 49,050 0,306 0,105 28,728 0,440 0,082 0,290 28,980 9,082 0,066 Normality Normality test was performed to determine the normality of the data based on principal assumptions the residuals have a normal distribution if all points are lie on line. The results show that the residuals are normally distributed to meet. Therefore, all assumption is met for all the three years of study. After satisfying all two assumptions, this study concludes the data is normally distributed and regression analysis can be performed (refer appendix). The correlation analysis among the independent variables was computed to determine whether there is a multicollinearity problem by using variance inflation factor (VIF) and tolerance statistic. The test results show that none of the tolerances are less than 0.2 and none of the VIF was greater than 10. Such results indicate that there is no problem of multicollinearity between size of company, profitability and leverage (refer appendix). Factors determining Islamic Social Reporting Regression result is presented in Table II (shows ISR as dependent variable). F-statistic of panels shows that it is significant means all of the independent variables affecting ISR and able to explain significantly the variation of dependent variables. Panels show relatively consistent results. Firm size, measured by total asset, has a positive and significant effect on ISR (H1 is not rejected). This suggests that larger firms have more resources to devote to shariah social activities and a larger asset base over which to spread the costs of social responsibility (Lerner, 1991). Larger shariah firms also face more pressure to disclose their shariah social activities from various groups in society. This result is consistent with Hackston & Milne (1996), Gray et al. (2001) and Sembiring (2005). As well as profitability, measured by return on equity, has a positive and significant effect on ISR (H2 is not rejected). Means that that well-performing firms have an incentive to disclose more information The larger, more profitable, and lesser credit had more specific intellectual information disclosure. Companies with good performance tend to publicize their performance to connect with investors. This evidence is consistent to Edwards (1999) who find a positive link relationship between environmental and financial performance Meanwhile leverage, measured by debt to assets ratio, has negative sign and significant effect on ISR (H3 are not rejected). These results confirm our prediction that too much debt will make higher scrutiny from creditors hence reduce information to disclose and DAR is a good measure of the power
8. of creditors to exercise monitoring of management where this result is in line with Belkaoui & Karpik (1989) who find leverage has a negative and significant relationship with social disclosure. Table 2 Factors Determining Islamic Social Reporting Variables C TASSETS ROE DAR Adjusted R-squared F-statistic Prob(F-statistic) Hypothesis + n.a 0.3401 6.8254 0.0010 Coefficient -0.325200 0.025080 0.020187 0.008391 t-statistic -0.390104 4.002.998 5.854.942 -2.520.643 p-value 0.2324 0.0002*** 0.0246** 0.1002* Notes: Significance at *10, **5, and ***1 percent, respectively; see equation (1); ISRI, Islamic Social Reporting Index; TASSETS, natural logarithm of total asset; ROE, return on equity; DAR, debt-to-assets ratio Conclusion Recently, the awareness to put more pressures on firms to engage in social reporting. By giving attention to the environment or social responsibility then firm will build a good image in the community. Eventually, this pressure will result in firms doing social activities which they disclose in the annual report. Islamic banks have grown in size and significance in the past decades. In line with Islamic principles, islamic bank should fulfil an ethical role inherent in their character. Since the social reporting is still based on voluntary disclosure, it is interesting to observe factors that determine the level of social reporting within shariah firms. This paper is intended to investigate the effect of firm size, profitability, and leverage on islamic social reporting. We find consistent evidence that firms size has a positive significant relationship with Islamic Social Reporting. These results confirm our prediction that larger firms have more resources to devote to social activities and a larger asset base over which to spread the costs of social responsibility. Larger firms also face more pressure to disclose their social activities from various groups in society. As well as profitability, also has a positive significant relationship with Islamic Social Reporting. Wellperforming firms have an incentive to disclose more information because firm with good performance tend to publicize their performance to connect with investors. However, leverage has negative sign and significant effect on Islamic Social Reporting. These results confirm our prediction that too much debt will make higher scrutiny from creditors hence reduce information to disclose. There are several limitations of this study. First, we only examined the factors affecting Islamic Social Reporting limited to firm size, profitability, and leverage. Second, very limited period to be observed. Third, this study only uses Islamic banks’ annual reports to measure Islamic Social Reporting disclosure. It is likely that Islamic banks also use other forms of media to communicate with investors and greater society such as company websites, press releases, annual general meetings, special booklets and pamphlets detailing their contribution to society. Using a larger sample and a larger set of information or variables about the operating environment and individual characteristics of Islamic banks, future research can attempt to further generalise these results and enhance knowledge about the
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12. Normality test – P-Plot test Multicollinearity Test Variabel Collinearity Statistics Tolerance VIF SIZE 0,430 2,326 PROFIT 0,455 2,199 LEVERAGE 0,950 1,052 View publication stats