Comparative Analysis of Financial Reporting Practices in Conventional and Islamic Banks in Malaysia

Abstract

The financial position and performance for any company are translated into the financial statements which form part of the Annual Report of the company. Information in the financial statements of Islamic financial institutions (IFIs) is important for stakeholders to make economic and investment decisions as well as to assess the IFIs’ extent of compliance with the Shariah principles and whether or not they have completed their duty in contributing to socioeconomic justice and stability. This paper aims to examine the differences between the financial statements of Islamic and conventional banks in order to highlight the differences of operations of both types. Although both types of banks are using the same accounting standards, there are issues unique to Islamic banks that require the management to provide different types of information in addition to the standard information found in conventional banks’annual reports. In this study, we have conducted a comparative analysis using qualitative method by the way of content analysis to examine the differences between financial statements of Islamic banks and their conventional counterparts. The study found that the difference of disclosure of financial information in the two types of banks is due to the different nature of Islamic banks’ operation as compared to the conventional banks especially in investment management and the use of its Islamic financial contracts. As for the components of annual report, little differences were found from the content analysis of the banks underanalysis. This study recommends some improvements for the Islamic bank’s financial reporting so that they would provide more transparency in a fair and equitable manner to the users view of observing Islamic principles and making economic decisions. Detailed future work could be done to study the usefulness of additional information on financial statements of Islamic banks from the perspectives of stakeholders.