Related party disclosures in financial reporting for Islamic banks

Abstract

PurposeThe purpose of this study is to determine the impacts of related party transactions on the performance of Islamic banks in Pakistan. In addition, this study aims to determine whether corporate governance mechanisms enhance company performance and mitigate agency problems associated with related party transactions in the Islamic banks.Design/methodology/approachSample includes all Islamic banks domiciled in Pakistan from 2017 to 2021. To run the regression models, the regression assumptions about normality, heteroskedasticity, autocorrelation and multicollinearity are determined.FindingsThis study finds that institutional ownership has a significant impact on mitigating agency problems associated with tunneling. Related party borrowings indicate expropriation and conflict of interest, whereas related party revenues indicate propping and efficient transactions.Research limitations/implicationsThis study uses data from all Islamic banks and specialized Islamic branches working in Pakistan. In the future, data of other institutions offering Islamic finance in Pakistan and in other emerging economies can be used to determine the role of related party transactions.Practical implicationsA thorough understanding of related party interrelationships in the Islamic banking system is essential, as these transactions can result in either the creation of wealth or the destruction of wealth. It is also necessary to determine the type of transactions that ultimately benefit Islamic investors.Originality/valueThe impacts of different related party transactions (in terms of cash inflows and outflows) of Islamic banks are investigated. Prior studies generally look at the impact of related party transactions on firm performance in totality.