A Comparative Analysis of Indonesian and Malaysian Islamic Banks 41

DLSU Business & Economics Review 26(2) 2017: 41–52

RESEARCH ARTICLE

Financial Performance and Sharia Compliance:

A Comparative Analysis of Indonesian and Malaysian
Islamic Banks
Heru Fahlevi, Irsyadillah and Putra Randa
Syiah Kuala University, Banda Aceh - Indonesia
[email protected]

Abstracts: The purpose of this paper is to evaluate the financial performance and the sharia conformity of Indonesian and
Malaysian Islamic banks. In particular, the study aims to expand the approach of Islamic banks performance assessment
by adding two models of sharia conformity measurements, that is, Sharia Conformity and Profitability (SCnP) and Sharia-
Compliant Indicator (SCI). The SCnP model unveiled that the studied Islamic banks generally conform with the sharia
principles, although they were relatively less profitable. The Malaysian banks performed financially better during the period
of study, but the Indonesian Islamic banks conformed more to the Islamic principles. In addition, the SCI Index uncovered
different level of disclosure among the Islamic banks.

Keywords: CAMEL rating, Financial reports, Islamic Banks, Sharia compliance, profitability, financial performance

JEL Classifications: E42, G21

In recent years, Islamic financial institutions have such as Indonesia and Malaysia. For example, the
grown substantially not only in Muslim majority Indonesian Central Bank or Bank Indonesia (2013a)
countries but also in non-Muslim majority countries reported that Islamic financial industry in Indonesia
(Awan & Bukhari, 2011). Even, the European grew 35% in 2012. This was higher than the growth
financiers and businessmen have adopted the concept, of Islamic financial industry in other countries such as
instruments, and techniques of Islamic finance (Jaffar Pakistan, Malaysia, and Middle East countries (Bank
& Manarvi, 2011). In 2013, there were 500 Islamic Indonesia, 2013a). It indicates a higher acceptance
banks and financial institutions operating around the of Islamic bank products in Indonesia and, of course,
world with controlled assets not less than US$1.7 throughout the world.
trillion (Wulandari, Putri, Kassim, & Sulung, 2016). Unlike conventional banks, Islamic banks are
With an estimated rate of 15% annual growth, the role bounded by double regulations that is commonly
of Islamic banking in financial industry has increased applied banking regulations and sharia jurisprudences,
rapidly (Mukhlisin, Hudaib, & Azid, 2015). The and more importantly, encourage real economic
popularity of Islamic banks can be seen not only in activity as well as profit and loss sharing scheme, rather
developed countries but also in developing countries than financial speculation (Ayub & Paldi, 2015; Azmat,

Copyright © 2017 by De La Salle University

42 H. Fahlevi, et al

Skully, & Brown, 2014). Islamic banks have more

restrictions in term of financial operations and profit High Profitability
generations than their counter-parts, the conventional
banks. For example, Islamic banks cannot fund or Upper Left Upper Right
Quadrant Quadrant
invest in non-halal (illegal from Islamic point of view)
industries like gambling, pornography, non-halal meat
(pork and non-halal slaughtered meat), and liquor Weak Sharia Conformity Good Sharia Conformity
(Lewis, 2001; Mukhlisin et al., 2015). They are also
not allowed to generate profit from interest (Riba) and Lower Left Lower Right
Quadrant Quadrant
additional charges from their customers.
Based on the above unique character of Islamic Source: Kuppusamy et al.
Low(2010, p.38).
Profitability
banking system, performance measurement of Islamic
banks should be different from conventional ones. The
stakeholders are not only concerned with financial Figure 1: Quadrants of Sharia Conformity and
returns but also how the banks generate their profits. Profitability (SCnP) model.
In other words, the evaluation of financial performance
of Islamic banks should include both financial and
sharia principle dimensions. Thus, a more complex Furthermore, AAOIFI (Accounting and Auditing
and complicated performance evaluation need to be Organization for Islamic Financial Institutions) has
adopted (Kuppusamy, Saleh, & Samudhra, 2010). already proposed Sharia Compliant Index to measure
More importantly, CAMEL ratio (Capital, Assets how consistent Islamic banks implement the Islamic
Quality, Management, Earning, and Liquidity) and principles (Ibrahim, Wirman, Nor, & Pramono, 2004).
EVA (Economics Value Added), which are the most However, far too little attention has been paid to assess
common measures of bank financial performance, the financial performance/condition of Islamic banks
cannot be used solely to examine Islamic bank regarding their level of sharia adherence. Therefore,
performance (Antonio, Sanrego, & Taufiq (2012). this research attempts to fill this gap. In particular,
However, such an incomplete measurement system this paper attempts to answer the question, “How
is applied in many countries including in Indonesia different are the level of financial performance and
and Malaysia. The call for the combined financial and sharia compliance of Islamic banks in Indonesia and
shariah compliance performance measurement is a way Malaysia?” Having this assessment, further policy
forward as Islamic banks are in competitive banking and standard could be made to improve the evaluation
business environment. It could also motivate financial mechanism of Islamic bank performance in which
engineers of Islamic banks to replicate the conventional sharia compliance is taken into account and be the
bank products (Ayub & Paldi, 2015). main part of the evaluation framework.
With exception of Kuppusamy et al. (2010), there
has been very limited studies that were conducted to
evaluate the financial performance of Islamic banks Literature Review
by considering the level of banks’ compliance to
Islamic principles. Kuppusamy et al. (2010) proposed In many aspects, Islamic banks have a lot of
the Sharia Conformity and Profitability (SCnP) model similarities with conventional banks, except the
as a framework to evaluate both financial performance obligation to follow social equity and sharia principles
and the level of sharia conformity of Islamic banks. (Kuppusamy et al., 2010). This section discusses the
Those two aspects are evaluated simultaneously. The features or concepts of CAMEL ratio (financial ratio),
model classifies Islamic banks into four quadrants SCnP, and SCI.
according to the level of their profitability and sharia
compliance: CAMEL Ratio
CAMEL(S) ratio is a traditional financial
performance measurement that is widely used to
analyze banks’ financial performance and health
A Comparative Analysis of Indonesian and Malaysian Islamic Banks 43

of banking institutions, including Islamic banks funds (Kuppusamy et al., 2010). These ratios are used
(Rozzani & Rahman, 2013). It has five dimensions of to measure the profitability or the ability of a bank to
financial measurements – Capital (Capital Adequacy generate income from its assets.
Ratio), Assets Quality (Return on Risk Assets),
Management (Net Profit Margin), Earning Capacity e. Liquidity. Pandrid (2011 as cited in Jacob, 2013)
(Return on Total Assets), and Liquidity (Loan on defined liquidity as the bank’s ability to pay their short-
Deposit Ratio). CAMEL has been used widely to term debt. Loan on Deposit Ratio (LDR) is used to
evaluate the financial performance of banks, including evaluate the liquidity of banks. This credit ratio can
by central banks. indicate the bank ability to pay all of its matured loans
to the debtors.
a. Capital. Capital is one of the most important
indicators of the financial health in banking system. According to Rozzani & Rohman (2013), see
Capital could be said as the most important element of Table 1. After the ratios for all indicator components
bank financing. Meanwhile, capital adequacy measures have been calculated, they would be put on average
the ability of a bank’s capital resources to pay its weightage and banks would be classified based on their
current liabilities and mitigate unintended implication financial performance as follows Rozzani & Rohman
of risks associated with its assets. According to Misra (2013):
and Aspal (2013), the value of capital can reflect the
ability of banks to cover unexpected losses in the future. 1. Rating 1 – the value of CAMEL is between
The proxy of capital is CAR (Capital Adequacy Ratio) 1.0 and 1.4, indicates a sound financial
which is indicated by capital to risk weighted assets. performance
This ratio can reflect ability of a bank to anticipate 2. Rating 2 – the value of CAMEL is between
reasonable level of losses in the future. According to 1.6 and 2.4, indicates satisfying financial
Rozzani & Rohman (2013), the appropriate CAR of performance
a bank is less than 11%. It means, that a bank with 3. Rating 3 – the value of CAMEL is between
more than 11% CAR has sufficient capital to support 2.5 and 3.4, indicates a fair financial
its activities and mitigate insolvency. Meanwhile, the performance with some categories of
Indonesian Central Bank proposed an 8% CAR as the concern
minimum standard (Ratnaputri, 2013). 4. Rating 4 – the value of CAMEL is between
3.5 and 4.4, indicates marginal financial
b. Assets quality. The second variable of CAMEL performance with a relatively low risk of
is asset quality. The proxy of asset quality is RORA failure
(Return on Risk Assets). This ratio assesses the 5. Rating 5 – the value of CAMEL is between
capability of bank to optimize the utilization of its 4.5 and 5.0, indicates unsatisfying financial
risky assets to gain (gross) profits. performance with a high degree of failure

c. Management efficiency. This variable mirrors SCnP Model

the growth and survival of banks. This aspect is useful SCnP Model was founded by Kuppusamy et al.
to indicate management ability in controlling risk. In (2010). This model combines both conventional ratio
management efficiency, Net Profit Margin is the proxy and Islamic financial ratio. The basic idea of this
which reflects the ability of a bank to generate income model is that both conventional and Islamic financial
from its all economical activities. indicators can evaluate the financial performance of
Islamic banks as they have a lot of similarities with
d. Earnings. Earnings ratio is used to measure conventional banks (Kuppusamy et al., 2010).
banks’ profitability. ROA (Return on Assets) and ROE
(Return on Equity) ratio are widely used. The former a. Sharia conformity. The Sharia conformity
examines the ability of a bank to generate income measurement evaluates the conformity of banks’
relative to average total assets while the latter examines operation to sharia principles (Kuppusamy et al.,
the effectiveness of a bank to use its shareholders’ 2010). It has three dimensions, namely Islamic
44 H. Fahlevi, et al

Table 1: Classified Items of CAMEL

Rank
Items Ratio
1 2 3 4 5
CAR = Capital x 100%
Capital Above 11% 8%-11% 4%-8% 1%-4% Below 1%
Risk Weighted Asset
Asset Quality = Non – Performing Loans 1.5%- Above
Assets Below 1.5% 3.5%-7% 7%-9.5%
Total Loans 3.5% 9.5%
Management Quality = Personnel Expenses 1.5%- Above
Management Below 25% 3.5%-7% 7%-9.5%
Average Assets 3.5% 9.5%
ROA = Income Before Tax X 100% 1.25%- 1.01%- Below
0.75%-
Total Assets Above 1.5% 1.50% 1.25% 0.75%
1.00%
Earnings
ROE = Income Before Tax X 100% Above 22% 17%- 10%- Below
7%-9.99%
Total Equity 21.99% 16.99% 6.99%
Liquidity = Liquid Assets
Liquidity Below 60% 60%-65% 65%-70% 70%-80% Above 80%
Deposit and Short Term Funding

Source: Rozzani & Rohman (2013).

Investment, Islamic Income, and Profit Sharing Ratio. sharing is the uniqueness of Islamic bank that might be
Firstly, Islamic Investment measures the portion of difficult to be implemented in practices. It can be seen
investment invested in halal products, that is, free from the number of Mudarabah (silent partnership) and
from riba, gharar, and gambling (maysir). In this Musharakah (partnership) products and their portion
term of halal products, Islamic banks are obliged to in the Islamic bank that reflects the practice of profit
disclose truthfully investments that are considered halal sharing in the banks. These financing products are
(Kuppusamy et al., 2010). The Islamic investment is supposed to be the main instruments of the Islamic
calculated as follows: banks to distribute the wealth to the society (Ibrahim et
al., 2004). Therefore, the ratio is computed as follows:
(1)
(3)
Secondly, the Islamic income ratio examines
the portion of Islamic income over total income. b. Profitability. SCnP model also uses profitability
Kuppusamy et al. (2010) defined the Islamic income to measure bank’s financial performance. In SCnP,
as bank income generated from investments that profitability of banks is measured by ROA, ROE, and
comply with sharia principles. It means that Islamic Profit Margin. Later on, the average values of these
banks have also haram income (derived from ratios are used to measure the banks’ profitability
prohibited sources) that could be generated from in this model (SCnP). Following are the formula to
interest of saving in other banks, for example, the compute the ratios:
central bank. The value of this income needs to
be provided as well as how the banks deal with it
(Kuppusamy et al., 2010). Thus, Islamic income ratio (4)
can be calculated as follows:

(5)
(2)

Thirdly, profit-sharing ratio reflects how far Islamic (6)

banks have successfully met the objective of sharing
not only profit but also loss with investors. Profit
A Comparative Analysis of Indonesian and Malaysian Islamic Banks 45

Finally, the data generated from sharia conformity According to Ibrahim et al. (2004), there are three
and profitability measurements are categorized into a dimensions of SCI as follows:
graph based on following procedure (Kuppusamy et
al., 2010): a. Sharia Supervision Boards (SSB)

1. If the banks have a high profitability (>0) but SSB is a religious supervisory council, which
low sharia conformity level (<0), locate them is responsible for ensuring that the Islamic banks’
at quadrant I (Upper Left Quadrant), activities do not contradict the Islamic ethical standards
2. If the banks have a small profitability and a (Ibrahim et al., 2004). It monitors the banks’ adherence
sharia conformity level (<0), locate them at to Islamic principles. This council has a crucial role so
quadrant II (Lower Left Quadrant), that its existence in Islamic banks is mandatory (Ibrahim
3. If the banks have a high score in both profitability et al., 2004). In fact, AAOIFI has obligated Islamic
and the sharia conformity level (>0), locate banks to disclose procedures of the SSB appointment,
them at quadrant III (Upper Right Quadrant), its composition, selection and dismissal, SSB report
4. If the banks have a high score in sharia and identification of actual activity conducted of the
conformity level (>0), but not in profitability SSB (as cited in Ibrahim et al., 2004). In addition,
(<0), locate them at quadrant IV (Lower Right Ibrahim et al. (2004) have added other requirements,
Quadrant). that is, the name, educational background, and the
experiences of the SSB members that should be
Sharia Compliance Indicator disclosed in annual reports of an Islamic Bank.
Nowadays, there is a call for the development
of indices to evaluate the performance of Islamic b. Basic information on banks mission statements
banks as well as their ability to meet their objectives
(Ibrahim et al., 2004). Moreover, AAOIFI (Accounting As mentioned before, Islamic banks have a different
and Auditing for Islamic Financial Institutions) in objective than conventional banks, that is, Islamic
Accounting, Auditing and Governance Standards code of ethics (Ibrahim et al., 2004). Thus, Ibrahim
for Islamic Financial Institutions (AAGSIFI) has et al. (2004) believed that each Islamic bank has to
demanded all Islamic financial institutions to provide provide clear information about its objective vision,
information related to the compliance of their activities and mission in the annual report.
with Islamic principles (Asrori, 2011).
Ibrahim et al. (2004) have proposed Islamicity c. Financial statement
indices that consist of two elements, namely Islamicity
Disclosure Index and Islamicity Performance Index. As Islamic banks are different with conventional
The former assesses how well Islamic banks disclose banks in terms of their objective, financial report of
the information to help their stakeholders in evaluating Islamic banks should provide more information than
the sharia compliance, corporate governance, and conventional banks (Ibrahim et al., 2004). Ibrahim et al.
social/environment of the Islamic banks. Meanwhile, (2004) argued that financial statement of Islamic banks
the latter emphasizes on the product performance of should not focus on the needs of certain group only, but
Islamic banks that includes profit-sharing performance, it should cover the demand of all users: stakeholders,
zakat performance, and equitable distribution creditors, government and social as a whole. In fact,
performance (Ibrahim et al., 2004). This study used Islamic banks’ financial reporting should include
Islamicity Disclosure Index because it focused on several principles elements to attain the ultimate
examining the disclosure practices of Islamic banks. objectives of Islamic banks (Ibrahim et al., 2004). In
In particular, the SCI is used as this study aimed to this context, Islamic banks should report information
assess how well the studied Islamic banks provide that helps the users to assess how far their operations
information about the compliance/adoption of Islamic adhere to Islamic principles. Based on this assumption,
values and practices in their financial reports. The Ibrahim et al. (2004) proposed nine items/features
following sections will elaborate further how SCI is that should be disclosed in financial report of Islamic
used in this study. banks and can be used to examine the level of sharia
46 H. Fahlevi, et al

principle implementation in the bank operations. These Research Method

required information are collected and developed based
on AAOIFI standards (2002) on Governance Standard This study aims to evaluate the financial performance
for Islamic Financial Institution (GSIFI) as follows: and sharia compliance of Indonesian and Malaysian
Islamic banks as well as to find the potential pattern
1. Identification of Islamic investment amongst them. In this study, the data has been collected
2. Identification of non-Islamic investment from financial reports/-annual reports of the selected
3. Identification of Islamic revenue Islamic banks.
4. Identification of non-Islamic revenue The population in this research is all of Islamic
5. Provide the statement of sources and uses of Banks in Indonesia and Malaysia. In 2014, there were
funds in Zakat and charity 11 Islamic banks registered in the Indonesian Central
6. Provide the statement of sources and uses of Bank, whereas 16 Islamic banks in total operated in
funds in the qardh funds Malaysia. Unfortunately, not all banks can be studied
7. Identification sources of revenue as the accesses to their online financial reports were not
• excluded revenue attributable to depositors obtained. Most of the financial reports of the studied
• excluded revenue attributable to Murabaha Islamic banks were obtained from the Central Banks
financing —Indonesian Bank (BI) and State Bank of Malaysia
8. The adoption of current value whenever it is (BNM)—during the period 2011–2013 and the rest
possible from their websites.
9. Value Added Statement This study used annual reports (financial reports)
of seven Indonesian Islamic banks (or 72.72% of total
The SCI is computed based on how much the Islamic banks in Indonesia) and 11 Malaysian Islamic
information provided in annual report of the Islamic banks (accounted for 68.75% of total Islamic banks
banks. If the required information is provided, the bank in Malaysia). The following is the list of the studied
will be given score of 1, and 0 if they do not publish. Islamic bank:
Following is the formula to calculate the SCI:
Table 3. List of Studied Islamic Banks

No Malaysian Banks Indonesian Bank

(7) Asian Finance Bank
1. Bank BNI Syariah
Berhad
X = 1 if it is published, and 0 if it is not published 2.
Bank Muamalat Bank Muamalat
(0≤SCI≤1) Malaysia Berhad Indonesia
n = amount of all items Bank Islam Malaysia Bank Syariah
3.
Berhad Mandiri
Lastly, the total score is used to classify the banks CIMB Islamic Bank
4. Bank Mega Syariah
based on their SCI as follow: Berhad
HSBC Amanah
5. Bank BCA Syariah
Malaysia Berhad
Table 2. Sharia-Compliant Indicator
Hong Leong Islamic
6. Bank BRI Syariah
Bank Berhad
Score Rank Kuwait Finance House
0 – 25 % Very Low 7. Bank Panin Syariah
(Malaysia) Berhad
26 – 55 % Low Public Islamic Bank
8.
56 – 80 % Middle Berhad
81 – 90 % High RHB Islamic Bank
9.
91 – 100 % Very High Berhad
Source: Murtiyani (2008)
Standard Chartered
10.
Saadiq Berhad
OCBC Al-Amin Bank
11.
Berhad
A Comparative Analysis of Indonesian and Malaysian Islamic Banks 47

Result and Discussion Table 5. Average SCnP Results of Indonesian and

Malaysian Banks
This part provides the results of CAMEL Rating,
SCnP, and SCI. Later on, comparative descriptive Sharia Conformity Profitability
analysis is employed to discuss the results from Indonesia
Indonesian and Malaysian Islamic banks. 2011 75.96% 6.57
2012 77.29% 11.28
Comparative Performance of Islamic Banks in 2013 78.23% 8.62
Indonesia and Malaysia Malaysia
2011 68.19% 10.68
The analysis of CAMEL Rating. The computation 2012 68.90% 10.46
of CAMEL rating of the studied banks found that 2013 69.26% 16.21
the Indonesian and Malaysian Islamic banks have
similar financial performance and condition. The From Table 5, it can be seen that the adherence to
CAMEL rating of the Indonesian banks have gradually sharia’s level of Islamic banks in Indonesia is better
decreased from 2.57 to 2.86 between 2011 and 2013. than Malaysia. The Indonesia banks have more than
This indicates that the financial performance of the 75% of sharia compliance and it increases every year,
Indonesian banks has declined. Based on the CAMEL while Islamic banks in Malaysia only comply for no
computation, a declining liquidity of the Indonesian more than 69.26%. This can be associated with the lack
banks between 2011 and 2013 could be the main of distribution of Mudaraba and Musharaka financing
reason. In contrast, the CAMEL rating of the Malaysian in the Malaysian banks compared to the Indonesian
bank has grown between 2011 and 2013 from 3.18 banks. In fact, there are some Malaysian Islamic banks
to 2.64. In fact, there were some banks which have which do not report this type of financing. Moreover,
received a rating of 2nd, for example, Bank Islam the Malaysian Islamic banks have not reported their
Malaysia Berhad and HSBC Amanah Malaysia Berhad. non-halal income in revenue element within the
This is can be associated with the recovery of the world research period. Regarding the non-halal income
economy from the financial crisis and the offer of new and investment in the Malaysian Islamic banks, for
Islamic banking products. example, Jan and Marimthu (2015) indicated that there
are some concepts that are not in line with sharia law
Table 4. Average CAMEL Rating practiced by Malaysian Islamic banks, such as Bay-
al-Dayn and Dawat to ajjal, in which many Islamic
scholar disagree with.
Average CAMEL Rating
Year Based on the SCnP 2011 chart, it can be clearly
Indonesian Banks Malaysian Banks seen that most of the Islamic banks are in the third
2011 2.57 3.18 quadrant (Upper Right Quadrant). It means that all the
2012 2.67 2.91 banks have both high profitability and high level of
2013 2.86 2.64 sharia compliance, except for Kuwait Finance House
Average 2.70 2.91 (Malaysia) Berhad which has negative profitability
ratio but high level of sharia compliance. In 2012, there
The analysis of SCnP. In this regards, both Islamic seems to be slight changes in the position of the SCnP
banks in Indonesia and Malaysia have high level of chart of the Indonesian Islamic banks and vice-versa
sharia conformity. This judgement is made according for the Malaysian banks. This shift can be associated
to their position in the SCnP quadrants. They are with the fall of profitability of some Malaysian banks
generally in the right quadrant, which indicate that the that declined the X axis. In the SCnP 2013 chart, the
banks have good level sharia compliance. However, increase of profitability is seen from the Malaysian
the financial performances of the studied banks have Banks (Wasiuzzaman & Gunasegavan, 2013; Ashraful
a relatively smaller profitability ratio. In this context, & Chowdhury, 2015). This can be associated with
the Malaysian banks have higher profitability ratios the recovery of world economy from financial crisis
but smaller sharia conformity level as compared to the and the offer of new Islamic banking products.
Indonesian banks. Consequently, it changed the SCnP chart where all
48 H. Fahlevi, et al

Figure 2. SCnP Quadrants.

Indonesian banks move to the fourth quadrant (Upper house buyer imposed by Islamic banks today is
Right Quadrant). In contrast, six Malaysian banks are questioned (Waemustafa & Sukri 2013). Meanwhile,
in the third quadrant (Upper Right Quadrant). the replication of synthetic products, namely, financial
In short, the movement of the banks in SCnP derivatives and structured products based on sale of
quadrants between 2011 and 2013 is stimulated by debts, receivables, and currency exchanges, in Islamic
the fluctuation of the Islamic banks’ profitability banks potentially diminish the core values of Islamic
particularly the profitability of the Malaysian banks. finance (Ayub & Paldi, 2015).
Meanwhile, the level of sharia compliance of each
Islamic bank involved in this study is relatively The analysis of SCI. The SCI is one element of the
unchanged. Lastly, the Indonesian banks have a Islamicity Disclosure Index that is proposed by Ibrahim
little higher level of sharia compliance but smaller et al. (2004). By using this indicator, this study found
profitability than the Malaysian banks. that each Islamic bank has different compliant score,
Several studies have inquired the indication of but it does not change much between 2011 and 2013.
a trade-off between profit and sharia compliance of It means that the information about sharia compliance
Islamic banks. Waemustafa & Sukri (2013) reported level in their financial reports seem to be unchanged.
a dilemma in Malaysian Banks in terms of gaining Furthermore, Islamic banking in Indonesia has
profit and adhering sharia principles. For example, a relatively higher SCI than the Malaysian Islamic
the conformability of advance penalty charges on bank in average. On average, the Indonesian Islamic
A Comparative Analysis of Indonesian and Malaysian Islamic Banks 49

Table 6. The Average Result of Sharia-Compliant Indicator (SCI)

Item The Indonesian Banks The Malaysian Banks

I. Sharia Supervisory Board (SSB)
1. The Appointment of SSB 0.57 0.00
2. The Report of SSB 1.00 1.00
3. Identification of actual activity conducted 0.86 1,00
4. The SSB members’ background and profile 1.00 0.36
II. Basic Information
1. The Vision, Mission, and Objectives 1.00 0.18
2. Principal activity 1.00 1.00
3. Financial Statement
4. Identification of Islamic Investment 1.00 1.00
5. Identification of non-Islamic Investment 0,00 0,00
6. Identification of Islamic Revenue 1.00 1.00
7. Identification of non-Islamic Revenue 1.00 0.00
8. Provide the statement of sources and uses of funds in
0.71 0.00
Zakat and charity
9. Provide the statement of sources and uses of funds in
0.71 0.18
the qard funds
10. Identification sources of revenue:
a. excluded revenue attributable to depositors 1.00 1.00
b. excluded revenue attributable to Murabaha financing 0.86 1.00

11. The adoption of current value whenever it is possible 0.29 0.82

12. Value added statement 0.00 0.00

Average 80% 56.97%
The highest value 93% 67%
The smallest value 73% 53%
Source: Research Data (2014).

banks have reported 80% of items in SCI. The Bank Chartered Saadiq Berhad. Thus, the Indonesian Islamic
Muamalat Indonesia and BRI Sharia have disclosed Banks could be said to disclose much more information
almost all Islamic value required by the SCI (93%), on Islamic principles’ implementation than the Islamic
while Bank Syariah Mandiri, BCA Syariah, Bank Mega banks in the neighbourhood country, Malaysia.
Syariah, and Bank Bukopin Syariah have the smallest Moreover, the SCI computation has unveiled
SCI (73%). Meanwhile, the Malaysian Islamic banks also some important findings. Firstly, similarities or
provided less information related to the implementation common practices can be found between the Indonesian
of Islamic principles. On average, the SCI value of and Malaysian banks. Their 2013 annual/financial
Malaysian Islamic banks in 2013 is 56.97%. The report provided information SSB report, principal
highest SCI (67%) is from Bank Islam Malaysia activity, Islamic investments, Islamic revenues, and
Berhad, whereas the lowest SCI (53%) can be seen in separated reports in revenue attributable to depositors
Asian Finance Bank Berhad, HSBC Amanah Malaysia sufficiently. In contrast, both groups of Islamic banks
Berhad, Maybank Islamic Berhad, OCBC Al-Amin have not provided (adequately) information about their
Bank Berhad, Public Islamic Berhad and Standard non-Islamic investments and value added statement,
50 H. Fahlevi, et al

although these information required by the AAOIFI needs of different stakeholders and more importantly,
(Ibrahim et al., 2004). to ensure that their activities are not contradicted
Secondly, the financial reports of Indonesian with Islamic principles (Ibrahim et al., 2004). Thus,
Islamic banks provided relatively much more this study examined and compared both financial
information about their SSB compared to the financial performance and Sharia compliance the Indonesian
reports of Malaysian Islamic banks. For example, only and Malaysian Islamic banks.
few Malaysian banks disclosed information about their Firstly, the CAMEL computation indicated that both
SSB profiles and, in fact, no information provided Indonesian and Malaysian Islamic banks have financial
about how the SSB is appointed. problem as their rating is 3 in average. Some banks
Thirdly, it seems that the information related to have a good performance, whereas the others perform
vision, mission, and objectives, Zakat and charity and poorly. This unexpected CAMEL rating is mostly
qardh funds of the Islamic banks are not common attributed with a low earnings ratio (profitability)
to be published in the financial reports of Malaysian among the Islamic banks. This finding is consistent
Islamic banks. In contrast, this information seems to be with Jaffar and Manarvi (2011) and Kamaruddin and
customary in the financial reports of Indonesian Islamic Mohd (2013) studies who found that Islamic banks
banks. Therefore, the differences and similarities of the have lower profitability and efficiency compared to
financial reports between both groups of Islamic banks the conventional banks.
are easily noticed. Secondly, the SCnP model showed different
Furthermore, the non-disclosure of the sources performance between the Indonesian and Malaysian
and uses of zakah and sources and uses of funds Islamic banks. The former have a higher sharia
qardh is because Islamic banking in Malaysia is compliance level but a smaller profitability than the
not instructed to report both items. In Financial latter in average. However, to examine whether a
Reporting for Islamic Banking Institutions Part D trade-off between profitability and Sharia compliance
No. 15 (2) of the Publication Requirement (Bank existed in Islamic banks, a quantitative based research
Negara Malaysia, 2013), the items that are ordered that involved much more Islamic banks is imperative.
to be reported by the Islamic banks in Malaysia is Thirdly, the Indonesian Islamic banks have
the statement of financial position, comprehensive relatively higher SCI than the Malaysian banks. This
income statement, statement of changes in equity, result reflects that the Indonesian Islamic banks are
cash flows report, and Sharia Committee report (the more concerned on the disclosure of sharia principle
Sharia Supervisory Board). implementation in their financial reports than the
On the contrary, the Indonesian Islamic banks Malaysian banks. The rapid and comprehensive
have to follow PAPSI 2013 (Pedoman Akuntansi financial reporting standards for Islamic banks in
Perbankan Syariah Indonesia or Indonesian Islamic Indonesia could be the reason behind the higher level
Bank Accounting Guidelines) that require them to of Indonesian banks’ SCI.
participate reporting sources and uses of zakah and Profit maximization could be the rationale behind
sources and uses of funds qardh/charity fund. These why Islamic banks engage in sharia non-compliance
requirements are stated in PAPSI No. 2 of the Financial activities (Waemustafa & Sukri, 2013). Operating in a
Statements of Islamic Bank, in Section II.1 Points C fierce completion, Islamic banks are demanded to offer
in General Provisions Financial Statements (Bank innovative products that might be not fully consistent
Indonesia, 2013b). with Sharia principles. Thus, the implication of this
study is that the stakeholders are urged to use both
financial performance and Sharia compliance indicator
Conclusion to evaluate Islamic banks.
Due to the type of research design, especially the
As the Islamic banks have growth rapidly, a more number of data, this study has some limitations. Firstly,
comprehensive performance is required. Unlike data is collected fully from financial reports or annual
conventional banks, the Islamic banks have more reports. Thus, the results are limited and explanations
complex financial performance and principles to behind about the results cannot be prevailed. For
follow. Indeed, the banks are required both to serve the example, the reasons behind why Indonesian banks
A Comparative Analysis of Indonesian and Malaysian Islamic Banks 51

have low profitability ratios or why the Malaysian syariah Indonesia 2013 [Indonesian Islamic Bank
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cannot be uncovered. Secondly, the sample is very Bank
small and period of study is short. Thus, a generable Bank Negara Malaysia (2013). Financial reporting for
Islamic banking instiutions. Kuala Lumpur: Islamic
finding could not be justified from this study. Accurate
Banking and Takaful Department.
picture of Islamic banking in both countries perhaps Ibrahim, S. H. B. M., Wirman A., Alrazi, B., Nor, M. N.
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performance and sharia compliance in Islamic banks. Sciences: Meeting the Challenges of the Globalization
Moreover, a more qualitative research could be done Age, held at King Fadh University of Petroleum &
in the future to understand why there are differences Minerals, in Dhahran, Saudi Arabia, on 19–21 April
of financial reports’ content particularly in Islamic 2004.
principles implementation in the Islamic banks. Lastly, Jacob, J. K. D. (2013). Analisis laporan keuangan gengan
metode CAMEL untuk menilai tingkat kesehatan
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