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Information asymmetry and regulatory shortcomings in profit sharing investment accounts

Information asymmetry and regulatory shortcomings in profit sharing investment accounts Purpose – The purpose of this paper is to explore the shortcomings in the compliance of the full‐fledged Islamic banks with the Bank Negara Malaysia (BNM) disclosure guidelines related to the profit sharing investment accounts (PSIAs). Design/methodology/approach – This study uses interviews and a survey. Findings – It was found that only two out five full‐fledged Islamic banks followed BNM guidelines which are based on the idea of self‐regulation. The authors developed a checklist of disclosure items, and probed whether the sample banks would adopt these new disclosure items. As it transpired, some banks have been disclosing these items selectively, and/or recording them for internal control and management purposes. The findings show these banks do not disclose: policies, procedures, product design and structure; profit allocation basis, methodology of calculating profit attributable to investment account holders (IAHs). Nevertheless, disclosure related to Shari'ah compliance was given to a reasonable extent. It is intriguing that full‐fledged Islamic banks do not provide comprehensive disclosure related to PSIAs because such disclosure is not mandatory; while foreign full‐fledged Islamic banks provided such disclosure voluntarily. Research limitations/implications – The banking sector regulator is not sure of whether individual Islamic banks have actually complied with all of its guidelines. The shortcomings in the disclosure are due to lack of expertise, outdated information system structure, and shortage of support and highly trained staff. The authors propose that the Islamic jurists should use Istiqra – which is a comprehensive examination of contracting environment before a new definite ruling is made on the issue of accountability to the IAHs. This would involve exploratory study of how the securities regulator (not banking regulator) perceives the information risks faced by the IAHs and enforce new disclosure guidelines. Originality/value – This paper proposes new disclosure guidelines which incorporate transparency, appropriateness, and timeliness to reduce information asymmetry and enhance governance disclosure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

Information asymmetry and regulatory shortcomings in profit sharing investment accounts

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-8394
DOI
10.1108/17538391211282854
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to explore the shortcomings in the compliance of the full‐fledged Islamic banks with the Bank Negara Malaysia (BNM) disclosure guidelines related to the profit sharing investment accounts (PSIAs). Design/methodology/approach – This study uses interviews and a survey. Findings – It was found that only two out five full‐fledged Islamic banks followed BNM guidelines which are based on the idea of self‐regulation. The authors developed a checklist of disclosure items, and probed whether the sample banks would adopt these new disclosure items. As it transpired, some banks have been disclosing these items selectively, and/or recording them for internal control and management purposes. The findings show these banks do not disclose: policies, procedures, product design and structure; profit allocation basis, methodology of calculating profit attributable to investment account holders (IAHs). Nevertheless, disclosure related to Shari'ah compliance was given to a reasonable extent. It is intriguing that full‐fledged Islamic banks do not provide comprehensive disclosure related to PSIAs because such disclosure is not mandatory; while foreign full‐fledged Islamic banks provided such disclosure voluntarily. Research limitations/implications – The banking sector regulator is not sure of whether individual Islamic banks have actually complied with all of its guidelines. The shortcomings in the disclosure are due to lack of expertise, outdated information system structure, and shortage of support and highly trained staff. The authors propose that the Islamic jurists should use Istiqra – which is a comprehensive examination of contracting environment before a new definite ruling is made on the issue of accountability to the IAHs. This would involve exploratory study of how the securities regulator (not banking regulator) perceives the information risks faced by the IAHs and enforce new disclosure guidelines. Originality/value – This paper proposes new disclosure guidelines which incorporate transparency, appropriateness, and timeliness to reduce information asymmetry and enhance governance disclosure.

Journal

International Journal of Islamic and Middle Eastern Finance and ManagementEmerald Publishing

Published: Nov 23, 2012

Keywords: Information asymmetry; Profit sharing investment accounts; Mudarabah; Islamic banks; Malaysia; Company profit sharing schemes; Islam; Banking

References