Takaful Reporting on IFSB Requirements in Malaysia: Users and Preparers Perspective

Vol. 13, No. 2, 2023


Introduction
Conventional insurance differs from takaful primarily because of its inconsistency with Islamic law (Shariah) in terms of uncertainty in the transactions (gharar), interest income, interest expense (riba') and gambling elements (maisir) applied in the conventional insurance. Unlike insurance which transfers risk, takaful is based on the principle of tabarru' (donation) and the concept of risk sharing. This would indirectly eliminate uncertainty (gharar). More importantly, the investments made by takaful operators accord with Shariah requirements. In Malaysia, takaful operators are required to adhere to the Malaysian Financial Reporting Standards (MFRS) to the extent that the standards in preparing their financial statements are consistent with Shariah principles. To further enhance the growth of the takaful industry in Malaysia, Bank Negara Malaysia (BNM), has issued guidelines on the takaful operational framework for takaful operators (TOs). There are several guidelines and framework for takaful including the Takaful  An international standard-setting body of regulatory and supervisory agencies, the Islamic Financial Services Board (IFSB) was officially established on 3rd November 2002 and started its operations on 10th March 2003. The board ensures the reliability and stability of the Islamic financial services industry including banking, capital market and insurance. The board is also responsible to conduct research, coordinating initiatives on industry related issues, organising discussions, seminars as well as conferences for authorities and industry stakeholders. As in April 2014, IFSB has 184 members which comprise of 59 regulatory and supervisory authorities, 8 international inter-governmental organisations, 111 financial institutions and professional firms as well as 6 self-regulatory organisations (Industry Associations and Stock Exchanges) operating in 45 jurisdictions. The IFSB has enacted a law known as the Islamic Financial Services Board Act 2002 and has issued 15 Standards, 6 Guiding Notes and 1 Technical Note for the Islamic financial services industry. There are five IFSB standards and two guiding notes related to takaful. Three IFSB standards are specifically on takaful . Unlike BNM guidelines on takaful operational framework, IFSB requirements is not mandatory in Malaysia. This study aims to examine the takaful reporting of IFSB requirements in Malaysian takaful industry.

Literature Review Previous Research on Takaful
Previous studies can be classified into three main areas; research on knowledge and perception of takaful products, the basic concepts of takaful and consumer behaviour and preferences of takaful products. Several studies examined the level of awareness , knowledge and perception on takaful products and services (Maysami & Williams, 2006;Abdul Wahab et al., 2007;Hamid et al., 2009;Bashir & Mail, 2011;Ismail et al., 2011;Akhter & Hussain, 2012;Ayinde & Echchabi, 2012;Salleh et al., 2013;Arofah et al., 2019;Rahman et al., 2019). Other studies explore and clarify the basic concepts and products of takaful (Maysami & Kwon, 1999;Bekkin, 2007;Altuntas et al., 2011;Muhamat@Kawangit et al., 2012;Amuda and Hassan, 2019;Ismail et al., 2021). Among the focused areas of studies by the researchers are consumer behaviour and preferences in takaful (Ab Rahman et al., 2008;Redzuan et al., 2009;Matsawali et al., 2012;Sherif & Shaairi, 2013;Yakob et al., 2019;Ishak andSaraih, 2021, Akhter et al., 2021). Research on takaful reporting is indeed limited. This study intends to add to existing literature by considering the reporting of takaful in the perspective of two group of stakeholders namely, takaful participants (users) and takaful operators (preparers). The desired disclosure from user's perspective is based on the usefulness of information for them to make sound takaful purchase decisions. As for the preparers, the actual disclosures that they made in their annual reports and websites reflect their perceptions of the useful information needed by users.

Desirable, Desired and Actual Level of Disclosure
This study adopts the framework outlined by Sulaiman (2005) for the model of corporate reporting based on what is desirable by Muslims or what they ought to desire. Central to this discussion is what is ethically right. Individuals may act differently to what they desire and what they desire may not be the "desirable" and consequently, "what is actually desired" may not be the same as "the actual" practice. Although, Takaful is being offered in Malaysia since 1984, its awareness seems to be low ( Hassan et al., 2018). Takaful operators have better operational understanding than participants; therefore, there is a gap in term of knowledge and understanding between takaful operators and participants. Supposed, takaful operators should not take advantage on the Shariah knowledge and variation. Authorities are expected to work together to coordinate all possible variations for the benefit of the entire industry (Salman, 2014). As for this study, the gaps on IFSB requirements disclosure in the perspective of users (the desired) and preparers (the actual) were analysed based on framework initially developed by (Sulaiman, 2005).

Research Objectives and Questions
This study focuses at two different perspectives of disclosure: from users' perspective, and preparers' perspective. In this study, users' perspectives represent the desired level of disclosure and the preparers' perspective represent the actual level of disclosure.  Table 1, the first objective of the study is to examine the perception of the users on what they perceive as meaningful disclosure level. This constitutes the desired level of disclosure. Data on the desired level of meaningful disclosure is gathered through a questionnaire survey and using disclosure index. The second objective of the study is to examine what preparers regard as meaningful disclosure. The assumption here is that what is being reported in the annual reports and websites of takaful operators (preparers) would constitute what preparers regard as meaningful disclosure. Using the disclosure index, the actual level of disclosure was measured through a content analysis of items TOs reported in their annual reports and websites. Given that each stakeholder's focus differs, their perception of usefulness may also differ.
What users perceive as meaningful information may differ from what preparers reveal. This suggests that there may be a gap between the "desired" and the "actual." As a result, the third goal of the study is to investigate the difference in meaningful disclosure between users and preparers. The research examines the possible reasons for the difference in perceptions of usefulness between the two stakeholders. Two theories are used to support the study's objectives. From the user's perspective, decision usefulness theory is employed to support and explain the users' perception of meaningful disclosure. From the preparers' point of view, institutional theory, specifically on mimetic isomorphism is employed to support and explain on actual meaningful disclosure.

Theoretical Framework Decision Usefulness Theory
According to the decision-makers paradigm, the users know best the type of information that they desire and that such information should be made available to them (Laughlin & Gray, 1988;Bebbington et al., 2001). This paradigm employs two approaches to discover information that are required by the decision makers namely; Security Price Research (SPR) Approach and Behavioural Accounting Research (BAR) approach (Laughlin & Gray, 1988). The Behavioural Accounting Research (BAR) Approach was developed based on Bruns (1968) works. The approach emphasises the relevance to decision making of the communicated information and the individual or group behaviour caused by the communication of that information. In the BAR approach, it assumes that the user is in the best position to ascertain the information that will affect their decision or behaviour. The best way to know the information needs of the user is by asking them directly on the type of information that they want. If the information is wanted by the users, it must be delivered (Wolk et al., 2001). This study adopts the BAR approach on the basis of its fundamental assumption that users themselves are in the best position to ascertain the information that will affect their decision or behaviour.

Institutional Theory
Institutional theory explains that firms within an industry are likely to evolve and become similar in form and practice because of the institutional pressures they face. Scott (1995) indicates that, in order to survive, firms must adhere to the rules and belief systems in the surrounding environment (Meyer & Rowan, 1977;DiMaggio & Powell, 1983). More importantly, institutional isomorphism, both structural and technical, will enable the firms to gain legitimacy (Suchman, 1995;Deephouse, 1996). Firms within the same industry might adopt similar structures and practices through the isomorphism process. DiMaggio and Powell (1983) state that coercive, mimetic or normative isomorphism will lead to firms' action to adapt their processes to correspond with their institutional environment.
Mimetic isomorphism occurs when a company compares other successful firms in addressing external uncertainties (Qu et al., 2012). In addition, literature suggests that businesses or an industry may recognize the need for voluntary disclosure in a competitive market as a means of addressing information asymmetry issues (Barnett & King, 2008). Mimetic was hypothesized to measure the degree of disclosure practices by benchmarking industry leaders, competitors, industrial best practices and peer firms (Nyahas et al., 2017). As for this study, mimetic isomorphism refers to the tendency of one takaful operator to imitate another takaful operator's reporting trend because of the belief that the reporting structure of that takaful operator is beneficial.  The checklist of this study is grouped into seven (7) Table 2 and table 3 shows the summary of disclosure items.: Phase 2: Using Questionnaires to Know the Desired Level of Disclosure For this study, a questionnaire based on IFSB requirements (44 items) was distributed to a selected group of users (represented by takaful agents) to ascertain their preferences for desired disclosure level. Checklist items were distributed via social media and emails to 801 takaful agents in order to gather their opinions and perceptions on meaningful disclosure. The questionnaires were designed to ascertain how users ranked the disclosure items based on their preferences. The questionnaires are built around 44 voluntary disclosure items organised into seven (7) themes (Table 3). This study focuses on participants who have takaful experience and knowledge so that they can provide feedback on the disclosure items developed in this study. Takaful agents were chosen as a sample due to their knowledge and extensive experience in insurance and takaful.

Data analysis (Questionnaires)
The respondents were asked to rate the importance of 44 voluntary disclosure items. The checklist was evaluated using a five-point Likert scale. Respondents were given the option of ranking each statement from least to most important using code 1 (least important) and code 5 (most important). For clarity and conciseness, the percentages of more important and most important (4 and 5 on the Likert scale) were added together and reported as "percentage that perceive statement to be important" in the last column of the table 11 to 12. Those who are uncertain (3 on the Likert scale) were classified as perceiving the statement not to be important as the middle point of the Likert scale (3) suggest neutrality in the perception of the importance of the statement. The statement was ranked according to the percentage of users that perceive statement to be important which was adopted from the previous studies (De Villiers & Van Staden, 2010;Kamala, 2014). The data from the questionnaires were analysed using Statistical Package for Social Sciences (SPSS). The views of users and preparers were then be compared to determine any significant gap.

Phase 3: Using Content Analysis to Measure the Actual Level of Disclosure in Annual Reports and Websites
The second objective of this research is to investigate what constitutes meaningful disclosure to preparers. The disclosure index is used to assess the level of actual disclosure. All eleven (11) takaful operators' annual reports, director's reports, audited financial statements, and websites were evaluated. The index used in this study were weighted in order to measure the meaningful disclosure of annual reports, director's reports, audited financial statements, online brochures, and other online documents published on websites. It is selected based on previous works (Wiseman, 1982;Botosan, 1997;Al-Tuwaijri et al., 20045;Hassan & Kouhy, 2014) which assessed quality by assigning categories for the importance of each item among the sub-elements related to its disclosure. This study employs ordinal scale index as it suits the purpose of the study to examine meaningful disclosure annual reports and websites of takaful operators. Categories for each item based on the following scoring system: 0 -Non-disclosure 1 -Simple narrative disclosure 2 -Details qualitative or quantitative disclosure Details and quantified information are given more weight (2) than simple narrative disclosures (1) because they are more accurate, comparable, and have a higher potential value in decision-making by various stakeholders (Kamal, 2012;Kamala, 2014). The assigned categories reflect the level of information provided in annual reports and websites. The index indicates any variances in the reporting quality of each item. In order to analyse the results, the disclosure index's category for each item were evaluated. The websites and annual reports of all eleven (11) takaful operators were evaluated using the weighted disclosure index. The evaluation process was conducted between July 8, 2019 and July 31, 2019. The second round of content analysis was conducted between the 1st and 19th of August 2019 to ensure the stability and reliability of the collected data.

Data Analysis (Content Analysis)
The contents of the seven themes were entered into a spreadsheet and computed based on the sub-quality index for each qualitative characteristic of each takaful operator. For each theme, a total score was calculated for each company. Utilizing the total score, the takaful operators are ranked in descending order (from highest scorer to the lowest scorer). The overall disclosure score for each company were determine by the arithmetic mean of each theme.

Disclosure sub-quality Indices
To compute a sub-quality index for each of the theme, an aggregate score for each characteristic was computed for each takaful operators. The aggregate score was then divided by the maximum applicable total sub-quality score which the takaful operator could earn for the highest disclosure. The maximum applicable total sub-quality sores were 10 points for Shariah compliance and governance, 4 points for corporate governance, 22 points for takaful policy requirements, 10 points for family takaful, 14 points for solvency requirements, 14 points for risks and 14 points for enterprise risk management. Each takaful operator's disclosure sub-quality index was computed according to the following formula. The above formula is employed to calculate the disclosure index for each of the eight sub-qualities of financial reporting, Shariah compliance and governance, corporate governance, takaful policy requirements, family takaful, solvency requirements, risks and enterprise risk management.

Overall Disclosure Index
The overall disclosure index for each takaful operator was then computed as an arithmetic mean of the eight sub-indices in percentages. The takaful operators were ranked from high to low based on the overall disclosure index. The overall disclosure index (Disc Index) of each takaful operator was computed using the following formula:

Phase 4: Gap Analysis on the Desired Level of Disclosure and Actual Level of Disclosure
The third objective of this study is to examine the difference in disclosure between users (desired) and preparers (actual). What is desirable may not coincide with "what is actually desired". Subsequently, "what is actually desired" may not be the same as the actual practice. (Sulaiman, 2005). Furthermore, Hassan and Rohayem (2011) mentioned that operator's interest (preparers) is not always aligned to that of the policyholders (participants). In term of knowledge, according to Salman (2014), there is a knowledge and understanding gap between takaful operators and participants due to the fact that takaful operators have a better operational understanding than participants. Supposedly, takaful operators should not take advantage of Shariah knowledge and variation, and authorities should coordinate all possible variations for the good of the entire industry. A gap between users (the desired) and preparers (the actual) were analysed using the Independent-Samples Mann-Whitney U Test based on the proportion of users who perceive a statement to be important and the average disclosure on each theme.

Demographics
The respondents were asked to provide background information in question 1 to question 4 on gender, age group, religion and educational qualification.    Table 6. Further analysis shows that respondents have different perceptions on the importance of the disclosure items based on themes. More than 80% of the respondents agrees that all items classified under Shariah compliance theme (5 items), 2 items of corporate governance theme, 7 items of takaful policy requirements theme, 5 items of risks theme are important and 1 item of enterprise risk management. Less than 80% of the respondents perceives that all items classified under Family Takaful theme (5 items), all items of solvency requirements theme (7 items) and 6 items of enterprise risk management theme are either more important or most important. Most probably, the respondents (takaful agents) are more familiar and exposed to Bank Negara (regulator or authority) requirements compared to IFSB standards which is not mandatory in Malaysia.  Table 7 shows the top 5 ranking by the users based on mean. The first rank is from Shariah Compliance (SC) theme on information on Shariah awareness training for employees followed by information on obligations of participants and statement of assurance from Takaful Policy Requirements (TPR) theme. Code of ethics from Corporate Governance (CG) theme is at the fourth rank and obligations of takaful operators from Takaful Policy Requirements (TPR) theme is at the fifth rank. Only training on Shariah awareness is from TOF requirements. Another four items are from IFSB requirements. From the users' point of view, information on training on Shariah awareness leaves a hint that, employees in the organisation are aware on Shariah requirements and possessed a certain level of skills. Explanation on obligations of participants is important to ensure participants are aware of their responsibility to make full disclosure of material facts before signing takaful contract. This is to prevent any conflicts in the future. Another important information is the statement of assurance by takaful operators on providing accurate, fair, and non-misleading information to the potential participants. Information on code of ethics requiring employees and agents of TOs to observe high standards of integrity, honesty and fair dealing. Explanation on obligations of takaful operators is to ensure takaful funds are managed and invested on sound basis and in accordance with Shariah rules and principles. All this information increases the confidence level of the users (takaful agents) in the takaful operators. . It is the policy to reserving and distribution of underwriting and/or investment profit. It seems that users (takaful agents) are less interested in this information. The respondents (takaful agents) are more concerned of takaful process and governance. At rank 43 is information on actual and historical fees and four items with the same means at rank 40 (own risk and solvency assessment (ORSA) report, commissions and agency fees of takaful products and allowable expenses charged to takaful funds). As respondents are takaful agents, they might prefer to reserve information related to agency fees, commission fees and allowable expenses (Wakalah fees is part of allowable expenses). Most probably, that is why these three items are less preferable by the respondents and ranked at 40 to 42 of overall ranking. Another item at 40 th overall ranking is information on own risk and solvency assessment (ORSA) process and report. ORSA is not mandatory in Malaysia. Most likely, respondents are not familiar with such information and opt for lower weightage. Perhaps a detailed discussion of each theme such as listed below may shed further light on this. Table 9 shows that average disclosure (for each theme) is between 0% and 68% while total disclosure for all items (for each takaful operator) is between 26% and 59%. Based on theme, Enterprise Risk Management (ERM) hold the highest disclosure level (68%) while none of the takaful operators disclose any information on Solvency Requirements. The highest voluntary disclosure was TO5, with 59% disclosure level and the lowest was TO7, with 26% disclosure level. Table 9 Overall disclosure of IFSB requirements by takaful operators   TO1  TO2  TO3  TO4  TO5  TO6  TO7  TO8  TO9  TO10  TO11  Average  Disclosure Higher non-disclosure items on IFSB requirements are because it is just a guideline and best practice, not mandatory. No penalty imposed on non-disclosure and IFSB is not one of the regulators in takaful industry in Malaysia. The findings show that the average disclosure level is 44%, which is considered as at moderately low level. Mimetic isomorphism explains the voluntary disclosure made by takaful operators. One takaful operators might imitate another takaful operator's reporting structure which is perceived as legitimate and becomes a "safe" way to proceed.

Between the Desired and Actual
In Table 10, what users perceive as meaningful disclosure represent the desired level of meaningful disclosure. On average, for each theme, preparers disclosed 0% -68% information while average users' perception on the importance of the statement is between 74.41% -93.42%. More than 65.82% of the users agree that information of 44 voluntary disclosure items is important. The Mann-Whitney test is an alternative for the independent samples t-test when the assumptions required by the latter aren't met by the data. The most common scenario is testing a non-normally distributed outcome variable in a small sample. For this study, Independent-Samples Mann-Whitney U Test is conducted on average disclosure level of preparers and average percentage of users that perceive statement to be important. Asymptotic significances are displayed. The significance level is .05 1 Exact significance is displayed for this test.
In Table 11, the test found a significant difference (level of .001) between average disclosure level of preparers and average percentage of users that perceive statement to be important.
The null hypothesis of equality was rejected. Statistically, there is a significant difference between average level of disclosure by preparers and average percentage of users that perceive statement to be important which verify that there is gap between what is reported by the preparers and what users perceive as meaningful disclosure. The preparers disclose less than what is expected by the users. Preparers are more concerned with company's profits and place a lesser focus on good relations with the firms' stakeholders, while users expect preparers to be more transparent on corporate social responsibility issues (Nani, 2019). Based on the findings, it seems that preparers put less attention on IFSB requirements.

Conclusion
From the users' perspective, out of 44 disclosure items, information on Shariah awareness is ranked first followed by the explanation on obligations of participants, information on the statement of assurance by takaful operators, information on code of ethics and explanation on obligations of takaful operators. Two of the items are closely related with Shariah matters (information on Shariah awareness and obligations of takaful operators to manage and invest takaful funds according to Shariah). This may imply that; users need assurance on the adherence of takaful operators to Shariah matters to increase their confidence level in the operation of takaful operators. As shown in table 10, although the items are classified as voluntary by the authorities, based on Decision Usefulness theory under BAR approach, users find them meaningful to be reported. Therefore, from the user's perspective, all these items are essential. Mimetic isomorphism under institutional theory explains the voluntary disclosure of takaful operators. One takaful operator might imitate another takaful operator's reporting structure which is perceived as legitimate and thus it becomes a "safe" way to proceed. Takaful operator's voluntary disclosure is between 0% -68% of total voluntary disclosure.

Contributions of the Study
This is the first study in Malaysia to evaluate the disclosure of IFSB requirements on takaful reporting. The findings of the study provide significant insights to Bank Negara Malaysia as a regulator to undertake the task of formulating new legislation and standards. With input from the users and preparers, Bank Negara can improve the existing regulation by revising the existing guidelines. Secondly, this research identified gaps existing between the desired and the actual disclosure Thus, addressing the gaps will enable the regulator or authority to develop guidelines or standards on meaningful disclosure that is more comprehensive.