Strengthening Islamic Social Finance Through Integrated Waqf Reporting System

Transcription

1. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia STRENGTHENING ISLAMIC SOCIAL FINANCE THROUGH INTEGRATED WAQF REPORTING SYSTEM Noorhayati Mansor1 Amira Jamil2 Asniati Bahari3 1 Faculty of Economics and Management Sciences, Universiti Sultan Zainal Abidin,Terengganu, Malaysia. nhayatimansor@unisza.edu.my 2 Faculty Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan, Malaysia. amira@umk.edu.my 3 Faculty Faculty of Economics, Universitas Andalas, Padang, Indonesia. asniati.bahari@gmail.com __________________________________________________________________________________________ Abstract: Introduced in 2013, integrated reporting is still at a preliminary stage of implementation in most of the world except South Africa. The new method recommends the reporting of six business capitals which are manufactured capital, human capital, social capital, intellectual capital, natural capital and financial capital. Under the current financial reporting framework the main emphasis is to provide a summary of past annual performance focussing mainly on the financial component. This conventional or rules-based framework, however, is inefficient to serve the reporting purpose for waqf administration whose perspective should be future oriented. This research contributes to the existing body of literature by summarizing a review of the current reporting practice for waqf institutions in Malaysia and discussing the weaknesses related to the conventional reporting system. The study then discusses the new model for waqf reporting which is based on the Islamic reporting, accountability and integrated framework. Termed as IWRS the reporting should be prepared in a long-term perspective showing organizational performance against strategy and providing information on how various organizational capitals are used to protect and generate values for waqf assets. The new IWRS would allow stakeholders to assess the prospect of waqf institutions and provides insight into the nature and quality of the relationships with its key stakeholders to enhance the sustainability of Islamic social finance. Keywords: Integrated Reporting; integrated waqf reporting system; Islamic social finance; Islamic social responsibility. ___________________________________________________________________________ 1
2. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia Introduction Waqf is a religious practice and could be viewed within the framework of Islamic social finance. Among the Muslim community the role of waqf is commonly understood as a voluntary way to donate assets for the benefits of the public and thus, can be termed as Islamic social responsibility. Waqf involves permanent or temporary transfers of specific physical assets (mawquf) including cash from a Muslim donor or settlor (waqif) to a Muslim recipient or administrator/trustee (mutawalli) through a legal instrument (waqfiyyah). Waqf is now common among corporate entities including universities as an instrument to provide continuous support for social financing and economic development. Any income or usufruct generated from the asset is distributed to the stated beneficiaries (mawquf alaih) or utilized according to the instruction of the waqif (Malaysian Accounting Standards Board, 2014). Administration of waqf is an infinite-term affair and its accountability is not limited to the lifetime of the donors. Waqf involves the relationship between the donor and Allah (hablun min Allah), as well as the relationships among individuals in society (hablun min Annas) (Dahlan, Yaa’kub, Hamid, & Palil, 2014). The accountability and responsibilities of the waqf trustees include preserving of and adding to the value of the asset (Siraj, 2012) in addition to collecting and distributing waqf income (Shafii, Yunanda, & Rahman, 2014). Previously, only individuals were appointed as trustees but in the current practice, organizations including public and private corporations, government agencies or non-profit organizations can also act as trustees (Osman, 2010). Potential donors should understand procedural matters, religious benefits and economic impact of the waqf (Ab Fatah, Mansor, Ripain and Endut, 2017) in order to waqf their assets. The society also needs to be informed of the value of the waqf assets through proper accounting and reporting. However, the current reporting practice under the conventional system is inefficient due to several reasons. Firstly, the reporting recognizes and reports only monetary value of measurable economic events based on historical costs (Ibrahim, 2000). Secondly, it focuses on reporting past transactions and thus, makes it less useful for planning purposes (Mansor & Mamat, 2017). Thirdly, it stresses only on financial information and lacks a comprehensive view of the potential value of assets. The reporting also excludes information on socioeconomic transactions and environmental effects (Ibrahim, 2000). The emphasis on financial information makes it challenging for the public with limited knowledge of accounting and reporting standard. Therefore, it is proposed that a new form of Islamic accounting and reporting be introduced for sustainable waqf management. In 2013 the International Integrated Reporting Council (IIRC) had introduced integrated reporting but in Malaysia, it is still at a preliminary implementation stage. As of March 2017 only 30 leading organizations have pledged to adopt it. In order to promote the adoption, the Malaysian Institute of Accountants (MIA) has established an Integrated Reporting Steering Committee to oversee the implementation by 2019. The Malaysian Code on Corporate Governance also encouraged the adoption of integrated reporting to improve information quality, transparency and accountability (Securities Commission Malaysia, 2017). This research proposes a new Waqf Integrated Reporting System (WIRS) and contributes to existing literature by addressing issues related to variations in waqf reporting practices and proposes an integrated waqf reporting by taking into account the Islamic perspective of waqf and the direction of global accounting practice. 2
3. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia Literature review Current Practice of Waqf Reporting Every state in Malaysia has its own State Islamic Religious Council (SIRC). This is a government agency authorized to administer waqf properties based on state’s own legislations and procedure. Selangor was the first state to have a waqf enactment. To accommodate for the rapid growth in waqf today, a number of registered companies and notfor-profit entities have been appointed by SIRCs to independently manage waqf properties (Malaysian Accounting Standards Board, 2014). Examples of these entities include Waqaf An-Nur Corporation (WANCorp) by Johor SIRC and Awqaf Holdings Berhad (AWQAF) by Negeri Sembilan’s SIRC. In order to coordinate the administration of all waqf insitutions in Malaysia, the federal government has established Waqf, Zakat and Hajj Department (JAWHAR) in 2004. Variations in waqf reporting practice are due mainly to differences in entities’ legal forms. For example, for a registered company a mutawalli shall comply with approved accounting standards issued by Malaysians Accounting Standard Board (MASB). On the other hand, a waqf entity managed by the public sector entity would comply with the directives issued by federal and/or state reporting procedure. However, SIRCs which fall under the public sector entity would prefer to apply the Malaysian Private Entity Reporting Standards (MPERS) instead of the Malaysian Public Sector Accounting Standards (MPSAS) for waqf reporting (Malaysian Accounting Standards Board, 2014). Furthermore, at present there are no specific standards for waqf reporting for not-for-profit entities (Malaysian Accounting Standards Board, 2014). Thus, the quality and comparability of information provided by waqf organizations may be compromised due to variations in reporting practices. According to Ihsan & Ibrahim (2011) and Zain, Samad, & Yusof (2012) waqf reporting is out-dated, he extent of reporting is limited and lack detailed (Yunanda, Shafii, & Tareq, 2016). The reports are also inconsistent (Masruki & Shafii, 2013). In addition, most SIRCs never publish their annual reports or accessible through their websites. Many studies state that waqf accounting and reporting system is crucial to improve the accountability because the current focus of the report is on financial aspects only. Neglecting the non-financial element and disclosures of information do not satisfy the needs of users and potential donors who would also like to know other aspects including investment risks, external environment and social impact, governance and strategy of the waqf administration. The Conventional Financial Reporting The conventional reporting is governed by a rules-based system and adopts a shortterm perspective. The system provides detailed and strict rules to be followed for financial statements preparations. Its main advantage is that it reduces ambiguity and increases reporting accuracy. As for waqf reporting, the system creates unnecessary complexity and does not allow for flexibility in reporting. The conventional method is ineffective for waqf purposes due to the following reasons. First, it is based on the perspective of capitalism and individualism which emphasizes maximizing profit, ignores the social and environmental aspects and disregards the main purpose of reporting in Islam that is to discharge one’s accountability to Allah (Adnan, 1996; Hameed, 2000). Second, the system stresses on short3
4. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia term profits and thus, inappropriate in the case of waqf administration whose perspective is infinite. At the same time waqifs are concerned with value preservation and creation to benefit the society rather than profits (Cordery & Morley, 2005). The conventional reporting also focuses on the disclosures of financial information that is mainly retrospective and based on current and past performance (Perrini, 2006). Thus, it is challenging for the general public and various stakeholders to use the report in planning (Mansor & Mamat, 2017). Besides, it focuses on the financial information and disregards the need for a comprehensive view of the potential value of waqf assets. The report does not reflect the economic reality of waqf operations or convey the management’s strategic vision and projections in creating value (Hutton, 2004). Besides, the activities of waqf organization do not involve economic events only but also social and environmental aspects such as the use of natural resources and human labour (Hameed & Yaya, 2003). Hence, a new waqf reporting system is timely. In addition, the enhancement of waqf reporting could promote greater contribution from the society towards waqf activities. The Islamic Reporting This study compares the conventional rules-based financial reporting with the Islamic perspective to enhance the sustainability of Islamic social finance. The Islamic reporting comprises of two interrelated principles namely, full disclosure and social accountability (Baydoun & Willet, 2000). Table 1 provides a comparison between the objectives of integrated reporting and Islamic reporting. 1. 2. 3. Table 1: Comparison of Integrated Reporting and Islamic Reporting Objectives Integrated Reporting Islamic Reporting To improve the quality of information available Decision usefulness: To provide useful to providers of financial capital and promote information for users including the compliance efficient and productive capital allocation. with Shariah principles, the effects of economic resources and obligations, To provide for a cohesive and efficient approach evaluation of how organizations discharge to reporting drawing on different reporting their fiduciary responsibilities in investing and strands and communicates the full range of safeguarding of funds, and information of how factors that materially affect organization’s the organizations discharge their social ability to create value over time. responsibility. To enhance accountability and stewardship for Stewardship: To assist in safeguarding of the the broad base of capitals (financial, organizational assets and enhancing manufactured, intellectual, human, social and managerial and productive capabilities while relationship, and natural) and promote encouraging compliance with its established understanding of their interdependencies. goals and policies Support integrated thinking, decision-making Accountability: To provide an account or and actions that focus on the creation of value reckoning of those actions for which one is over the short, medium and long term. held responsible. According to Ibrahim & Yaya (2005) Islamic reporting has three objectives which are: (i) to provide the information which is useful for users; (ii) to safeguard assets and enhance managerial and productive capabilities by complying with established goals; and (iii) to undertake certain actions and provide appropriate accounts. The Islamic reporting adds the religious dimension consistent with the nature of waqf organizations to be accountable to Allah. For that reason, the combination of both integrated and Islamic reporting is very appropriate as the basis for Integrated Waqf Reporting System (IWRS). 4
5. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia According to the conventional perspective, accountability represents the requirement to those with delegated authority to be answerable for the outcomes or the use of resources to achieve certain ends (Sinclair, 1995). Gray, Dey, Owen, Evans, & Zadek (1997), on the other hand, define accountability as “the duty to provide an account of the actions for which one is held responsible”. Nonetheless, these definitions fail to demonstrate accountability from the Islamic perspective because, in Islam, the ultimate accountability (taklif) is to Allah since all actions will be counted on the Hereafter. This is demonstrated in the verse of the Al-Quran: “To Allah belongs all that is in the heavens and on earth. Whether you show what is in your minds or conceal it, Allah will call you to account for it” (Quran, Al-Baqarah 2:284) Accountability from the Islamic perspective refers to the relationship between individuals and organization, with Allah (Othman & Thani, 2010) which extends the Islamic concept of Unity of God (tawhid). A dual accountability or Islamic accountability that includes accountability to Allah (hablun min Allah) and to individuals (hablun min An-nas) was proposed by Ihsan (2007) and shown in Figure 1. Figure 1: The waqf accountability model Figure 1: Islamic Accountability in Waqf Reporting Integrated Waqf Reporting System The conventional financial statements are designed for compliance purpose but lacking information on how organizations create value in their operations. Integrated reporting, on the other hand, stresses on aligning organizational strategies with financial information to explain how resources are used by aligning them with strategies to create value in the short, medium and long term (KPMG International, 2011). It presents how 5
6. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia organisation’s strategy, governance, performance and prospects together, generate value to stakeholders (The International Integrated Reporting Council, 2013). It could either be a standalone report or presented together with other reports or financial statements. The new reporting is intended to improve the quality of information and benefits all stakeholders including employees, suppliers, customers, local communities, business partners and the government as policy makers and regulators. The framework is suitable for waqf institutions since these organizations are socially financed. The institutions administer assets which were donated by the public for the benefits of the society. The accountability is based on purely on trust. Even though waqif do not anticipate any worldly reward they would be pleased to know how their contributions were utilized and the outcome or benefits acquired. Thus, in addition to improving information quality integrated reporting also enhances accountability and stewardship of the trustees in administering the waqf assets by providing comprehensive and holistic reporting. Administering waqf involves multi-dimensional capitals and the adoption of integrated reporting and Islamic reporting into WIRS can further improve waqf reporting of publicly-owned assets. Similar to integrated reporting the IWRS shall adopt the principlesbased framework instead of detailing the reporting and disclosure standards as required under the rules-based approach. Using the principle based allows for increased flexibility for the waqf institutions to design their own unique reports with meaningful and relevant information for users. This reporting approach requires preparers of the reports to gather all relevant information and link them to key drivers which generate value for the organizations. IWRS only reports material information for users to assess the performance and potential achievements of the institutions. The built-in flexibility in IWRS does not imply a lack of comparability. The reports should be consistent over time to enable trend analysis over time for each institution and to allow for healthy comparison with other entities. The basis of presentation has to be determined from the beginning including specific matters to be reported and the non-financial capitals are quantified and evaluated. At the minimum IWRS should include the following information: i. An overview of the organisation and its external environment; ii. A governance structure, strategy and business model; iii. Business resources, risks and opportunities, how they are managed and influence value creation; resource allocation iv. Performance and achievement of strategic objectives; v. Trend and challenges and their implications Through IWRS, every waqf organization should identify its sustainable business model to achieve to specific objectives of the waqf. This model acts as the driver of activities of the waqf organizations and forms the foundation for its strategies. Every strategy that involves significant short term and long term risks should be disclosed in the IWRS for the benefits of the stakeholders. Value added activities also need to be balanced and driven by effective and efficient governance system. Therefore, the implementation of IWRS will ensure that waqf organizations pay serious attention to their governance matter since the structure and performance of governance would also be reported together with other main capitals and performance indicators. The development and implementation of IWRS is a proactive and best attempt to enhance the accountability of the waqf to Allah and the society. As Islamic-based and 6
7. Proceeding : International Conference on Social Sciences, Humanities and Technology (ICSHT, 2017) (ISBN:XXX.XXX.XXX) Hotel Perdana, Kota Baharu Kelantan, Malaysia socially funded organizations waqf institutions should strive for optimum transparency and accountability in reporting to fairly inform the society. According to Aman (2016) Islamic entities should report significant information about their operations even if the information would have an adverse effect on their own operation The fundamental goal of the development of IWRS is not only to increase disclosure but to convey useful information and allow for greater understanding of the entity’s operations for the benefits of users and stakeholders. Conclusion and Recommendation This paper provides a recommendation for the adoption of IWRS for waqf institutions. It starts by providing an overview of the current practice of waqf reporting and highlighting the weaknesses of using the conventional financial reporting for waqf organizations. Waqf entities were established mainly to serve the Islamic social responsibility. The emphasis of reporting, thus, should be on the future activities to preserve and generate values guided by the organizational strategy and business model. The concept of Islamic or dual accountability is used to elaborate the need of waqf organizations to be accountable for the administration of waqf assets. The combination of integrated and Islamic reporting as proposed strengthens IWRS to overcome the flaws of conventional financial reporting. Integrated reporting suggests the disclosure of comprehensive and interconnected information of the capitals with the performance of the organizations to explain value creation. It does not only focus on the reporting of financial information but also emphasis on other non-financial information to increase its usefulness. Besides, it reduces the technicality of a report so that it becomes user-friendly. The Islamic approach to IWRS reverses the profit-maximization goals of the conventional reporting to the achievement of socio-economic objectives which is parallel to those of waqf institutions. IWRS could provide support for improving financial growth, waqf management efficiency, stakeholders’ satisfaction, quality improvement and trustworthiness and needs further research and studies. The background of both integrated reporting and Islamic reporting is a prerequisite to the development of WIRS. The report preparers from the waqf organizations must have sufficient understanding and exposure to integrated reporting and Islamic reporting in order to implement WIRS. Thus, it is beneficial for all Muslim countries to joint efforts in establishing an International Waqf Reporting Board (IWRB) to lead and oversee the global reporting practice for waqf institutions for the benefits of the world community. 7
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