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MAS in
Management accounting systems Malaysia
in Islamic and conventional
financial institutions in Malaysia
153
Siti Zaleha Abdul Rasid
International Business School, Kuala Lumpur, Malaysia
Abdul Rahim Abdul Rahman
Department of Accounting, Kuliyyah of Economy and Management Science,
International Islamic University, Malaysia, Kuala Lumpur, Malaysia, and
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Abstract
Purpose – The purpose of this paper is to explore whether there is any difference in the management
accounting systems (MAS) of conventional and Islamic Financial Institutions (IFIs) in Malaysia.
Design/methodology/approach – The paper was based on a survey of 45 conventional and IFIs
listed on the Malaysian Central Bank’s web site. The respondents were the chief financial officers
(CFO). Post-survey semi-structured interviews were also conducted with eight respondents to gain
further insights into the survey findings.
Findings – The survey results indicate that IFIs use MAS information that is broader in scope, more
timely, more integrated and more aggregated than conventional financial institutions. The post-survey
interviews provide deeper and contextualised insights into this issue. The interview findings illustrate
that IFIs normally develop and adopt an integrated accounting and enterprise system. Within this
comprehensive enterprise system, the management accounting function is integrated with other
functions of the organization.
Research limitations/implications – Since this study was conducted in the context of Malaysian
financial institutions, the results may not be generalizable to other organizations. The findings of this
study highlight the importance for IFIs to have integrated enterprise systems. Besides assisting in
complying with Shari’ah and regulatory requirements, the integrated systems also support better
decision making.
Originality/value – The paper fills a gap in the literature, as very few studies have examined the
issue of management accounting in financial institutions. The paper is also one of the limited studies
that explore the issue of MAS in IFIs.
Keywords Malaysia, Islam, Financial institutions, Accounting systems,
Management accounting systems, Shari’ah
Paper type Research paper
1. Introduction
Management accounting systems (MAS) refers to the systematic use of management
accounting techniques to achieve organizational goals. The International Federation of Journal of Islamic Accounting and
Accountants (IFAC, 1998) defines management accounting as the process of Business Research
Vol. 2 No. 2, 2011
identification, measurement, accumulation, analysis, preparation, interpretation, and pp. 153-176
communication of information (financial and operational) used for the planning, control q Emerald Group Publishing Limited
1759-0817
and effective use of resources by an institution’s management. Thus, management DOI 10.1108/17590811111170557
JIABR accounting becomes an integral part of the management process in an organization
2,2 providing information essential for:
.
controlling the current activities of an organization;
.
planning its future strategies, tactics and operations;
.
optimizing the use of its resources;
154 .
measuring and evaluating performance;
.
reducing subjectivity in the decision-making process; and
.
improving internal and external communication (IFAC, 1998).
In short, the use of MAS can be expected to satisfy a manager’s information needs
(Govindarajan, 1984; Mia and Chenhall, 1994).
In the past, financial services were highly regulated with many of the
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products offered and the rates charged controlled. There were also strict regulation
and control of geographic expansion. In a highly regulated industry, there was less need
of management accounting information for performing day-to-day and longer term
tasks. However, deregulation, rapidly advancing technology, competitive forces and
globalization have all put an end to this complacent approach (Kafafian, 2001).
In addition, emphasis on financial innovation and shareholder value as well as mergers
and acquisitions activities between insurers, banks and asset management companies,
have resulted in the emergence of financial conglomerates that further exacerbates the
competitive environment, especially for stand-alone entities. To function effectively in a
dynamic environment undergoing rapid transformation, financial institutions have to
enhance their competitive advantage. A manager’s ability to make informed decisions is
closely linked to the quality of management accounting information available (Kafafian,
2001; Rezaee, 2005). A good management accounting programme serves as an important
tool for providing good decision-making information (Cole, 1988) and this is particularly
important in the case of financial institutions as their collapse would affect the stability
of the whole economy. Hence, it is critical for all financial institutions to have efficient
MAS for internal decision making, planning and control (Siti Zaleha and Abdul Rahim,
2009) in order to maintain their stability.
The Malaysian financial system is based on the dual banking system in which
the conventional financial system operates alongside the Islamic financial system.
The development of the Islamic Financial Institutions (IFIs) has contributed to the
strengthening of Malaysia as an International Islamic Financial Centre (MIFC). IFIs
are different from conventional financial institutions as their objectives, operations,
principles and practices must conform to the principles of Islamic Shari’ah
( Jurisprudence) and Islamic ethics as enunciated by Shari’ah. The IFIs have to adhere
to the Shari’ah compliance framework and they are also exposed to certain risks that are
specific only to them. The complex nature of the IFIs requires a governance structure
that is more comprehensive. Besides adhering to Shari’ah, they are also required to
remain competitive in order to survive in the changing business environment. MAS,
which has a wider scope covering internal, external, past, future, financial and
non-financial information and able to be provided in an integrated, aggregated and
timely manner, are ideal for providing the necessary information to aid decision making,
planning and control. However, MAS for IFIs has received limited attention as most
prior literature on accounting for IFIs focuses mainly on financial accounting related
to measurement and reporting issues (Abdul Rahim, 2003; Abdel Karem, 1990; Talib, MAS in
2000). Hence, the purpose of this paper is to explore whether there is any difference in the Malaysia
MAS of conventional and IFIs in Malaysia. The current study is intended to fill the void
in the literature on management accounting in IFIs.
The remainder of the paper is structured as follows. The next section reviews the
relevant literature and develops the hypotheses, followed by the research method in
Section 3. Results and discussion are presented in Section 4 and finally, Section 5 155
presents the conclusions.
2. Literature review
A well-designed MAS will assist managers to be more effective in decision making.
Traditionally, management accounting information has been delineated in financial
terms, but recently it has been expanded to include non-financial (operational or
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physical) information, including quality and process times, as well as more subjective
measurements such as customer satisfaction, employee capabilities and new product
performance (Atkinson et al., 2001). The enhanced role of MAS to assist managers in
attention directing and problem solving has resulted in the evolution of MAS to
incorporate external and non-financial data focusing on marketing concerns, product
innovation, strategic planning and predictive information related to these areas (Mia
and Chenhall, 1994). Hence, MAS are now viewed in a broader aspect (Mia, 2000;
Hussain, 2000). Besides fulfilling the traditional function of providing quantitative and
financial information, MAS have expanded to include information relevant for
innovation, marketing and organizational design. In fact, there is little difference today
between the information provided by MAS and that provided by a management
information system (MIS) (Mia, 2000).
The challenge faced by financial institutions is in sustaining their competitive edge
by being cost efficient without compromising the quality of their services. In fact,
financial problems and failures in financial institutions are no longer considered unique
(Hussain, 2000). The key to survival is to have an internal management reporting system
that can signal problem areas and allow management to react swiftly and assuredly.
Following the deregulation of the financial sector and the rapid advances in technology,
information on pricing, product mix and market share strategies have become more
important to the financial services sector (Rezaee, 2005; Kafafian, 2001) and such
information will be available through the MAS within an organization.
The current pace of technological and economic innovation in the financial
markets illustrates the critical need for information as an aid to sound decision making by
financial institutions (Hussain, 2000). By providing financial and non-financial
information, MAS facilitates the decision-making process, as the scope has expanded
to include effectiveness, control, market analysis, quality assessment, customer
satisfaction, empowerment and competitive status management (Ostinelli and Toscano,
1994 as cited in Hussain, 2000). MAS in a financial institution can play an important role
by providing information on the effectiveness of a sales promotion programme, revenue
by business units, product lines and customer category (Rezaee, 2005; Kafafian, 2001; Mia
and Patiar, 2001). By having MAS as an internal information system, the investments
required for a programme and their outcomes can be monitored closely. Managers can
use MAS information to benchmark the organization’s performance against competitors
to determine whether they are offering products and service attributes to customers
JIABR at a competitive price. This is possible since MAS provides information on performance
2,2 of each business unit, each product and even each customer. With an integrated system,
performance can be monitored to every possible detail, as performance management is
seen as the main task of the management accounting function (Otley, 2001).
The management of financial institutions depends on concise and relevant
information to help them carry out their daily duties. Well-managed firms should have
156 good information structures and MAS can be seen as a tool for managing resources,
measuring performance, warning of risks, aiding decisions, and providing data for
planning. Cole (1988) specifically argues that a good MAS does the following:
.
tells the cost and profitability of doing business by organization, product, and
major customers;
.
avoids surprises;
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.
allows all managers to explain their performance as it is reported;
. allows everyone to participate in planning via plan-to-actual reporting used as a
management tool;
.
provides timely, accurate, relevant, and understandable reporting;
.
ensures that only one set of numbers is circulating within the organization; and
.
reduces or eliminates complaints about information non-availability.
Some financial institutions have turned to activity-based costing (ABC) as a way to
measure accurately the consumption of shared resources by a particular customer or
product (Max, 2004; McDonald, 2004; Robinson and Chappelear, 2002; Kafafian, 2001).
In fact, Max (2004) asserts that the application of ABC in the financial services sector
today identifies new and unique ways to leverage cost and profitability information,
including:
. activity-based pricing, particularly for business-to-business services;
.
linking ABC information to performance management scorecards and processes;
.
providing information on a process view of costs, both to support cost
improvement needs and to enable ongoing accountability for management by the
business process; and
.
information on the profitability of discrete customer relationships.
Data warehousing
Marketing customer information file Table I.
Data mining/data mapping Types of management
information utilized by
Source: Kafafian (2001) financial institutions
Moores and Yuen, 2001; Tillema, 2005; Agbejule, 2005). MAS is considered sophisticated
when it produces information that is broad in scope, timely, integrated and aggregated.
The balance scorecard (BSC) is an example of a MAS tool having all the four
information characteristics (Tillema, 2005) while ABC systems provide information that
is only integrated and aggregated (Choe, 2004). Owing to the challenges of deregulation,
diversification and competition, the financial services sector needs to use sophisticated
MAS. The development of management accounting and information functions should
move in tandem with the changing environment of the financial services sector.
operations and prospects of their clients. A broad scope of information is also required in
musharakah activities as they involve direct participation of the banks. In contrast,
non-Islamic bank managers place more emphasis on securing collateral from business
clients instead of entering into venture capital with their clients, and consequently they
require a narrower scope of information (Islam et al., 2000).
The results of Islam et al. (2000) show that managers of Islamic banks in Bangladesh, in
contrast to those in non-Islamic banks, believe that they have better designed MAS in
terms of scope and integration. Their findings support the argument that profit-sharing
systems in the financing activities of mudarabah and musharakah in Islamic banks require
broad scoped and integrated MAS information (Islam et al., 2000). However, more research
is needed to confirm their conclusion as the study only considers the profit-loss sharing
mode of financing, which is not widely practiced by Islamic banks. This issue should be
argued from a broader Shari’ah compliance perspective that includes information required
in managing the various types of products that need a variety of contracts. In addition,
similar issues should be considered for other IFIs, such as Islamic insurance organizations.
and sells the product to the buyer. Therefore, it is a trading contract which is permissible
by Shari’ah. In ensuring compliance with Shari’ah, a regulatory body called the SSB is
set up (Abdul Rahim, 2006; AAOIFI, 2001; Haron and Shanmugam, 2001). The Islamic
insurance operators are also answerable to their SSBs. They are only allowed to invest
their funds in Shari’ah-approved avenues. In order to comply with Shari’ah, the extent
and nature of MAS information needed by IFI managers for day-to-day monitoring and
decision making will be more complex than that required by managers in conventional
financial institutions (Islam et al., 2000). The presence of SSB requires MAS to be more
integrated since this board has the power to examine all information about an IFI’s
transactions to ensure adherence to Shari’ah principles (Islam et al., 2000). The study by
Islam et al. (2000) found evidence that the extent of integration of information is greater
in Islamic banks than in non-Islamic banks. Hence, it is proposed that:
H3. There is a significant difference in the use of integrated MAS between IFIs
and conventional financial institutions.
Information aggregation deals with a variety of ways to collect and summarize the data
within periods of time or area of interest, such as responsibility centers or functional
areas (Choe, 1998). Aggregate information represents summarized information that
covers periods of time or diverse management area while disaggregated information
represents excessively detailed information that may include only one period or one
functional area (Choe, 1998). Owing to the unique nature of the IFIs, they are also
exposed to specific risks in addition to the normal credit, market and operational risks
faced by conventional FIs. These specific risks include equity investment risks,
displacement risks, liquidity risks and Shari’ah risks. Contrary to conventional FIs, IFIs
invest on the basis of equity-based assets (including partnership based Mudarabah and
Musharakah investments) that expose the IFIs to volatility in earnings due to liquidity,
credit and market risks associated with equity holdings (Iqbal and Mirakhor, 2007). Loss
of capital is also possible in Mudarabah and Musharakah contracts despite proper
monitoring. Therefore, aggregated information by product is required by IFIs to
determine the capital charge for each type of product. Thus, we offer the following
proposition:
H4. There is a significant difference in the use of aggregated MAS between IFIs
and conventional financial institutions.
3. Research method MAS in
Data were collected using postal questionnaires and semi-structured interviews. This Malaysia
study considered the whole population of finance and insurance companies listed on the
Malaysian Central Bank web site. The population was 106 financial institutions with
45 FIs randomly selected for this study. The choice of single industry will minimize
environmental heterogeneity (Moores and Yuen, 2001). The environment is further
controlled by selecting institutions that provide banking and insurance services only. 161
Although restricting the sample will limit the ability to generalize the results, it is
believed that specific industry analysis will substantially raise the internal validity over
a multi-industry analysis (Ittner et al., 2003).
the MAS in the surveyed organizations for decision making, planning and control.
The characteristics of the information were divided into four main dimensions, namely,
scope, timeliness, levels of integration and levels of aggregation. The characteristics of
the MAS information were measured based on Bouwens and Abernethy (2000), Chong
and Chong (1997) and Chenhall and Morris (1986). The measurement developed by
Chenhall and Morris (1986) has been shown to be robust across a variety of settings
(Chenhall, 2003). The extent of use of these MAS information characteristics were also
used by other studies (Mia and Chenhall, 1994; Chong and Chong, 1997; Agbejule, 2005).
The dimensions of scope (six items), timeliness (four items), integration (four items) and
aggregation (six items) were measured based on Bouwens and Abernethy (2000) and
Chenhall and Morris’s (1986). Following Bouwens and Abernethy (2000), the wording of the
items were changed slightly to ensure that the instrument was applicable to the context of
this study. Likert scales of 1 (not at all) to 5 (to a very great extent) were used for this section.
The questionnaire was first pre-tested on seven academics from the local universities.
They were either experts in management accounting and financial systems or experts in
research methodology. Pilot testing is important to ensure validity and reliability of
research instruments (Sekaran, 2000). Pilot testing was also conducted with two senior
finance managers and six managers from the financial institutions. A revised version of
the questionnaire was prepared accordingly.
(24.4 per cent), senior manager finance/assistant vice president finance (17.8 per cent),
CFO/Director of Finance (15.6 per cent), and others (6.7 per cent). A total of
25 (55.6 per cent) respondents have been holding their current position between one and
three years, 14 (31.1 per cent) between three and ten years, and 4 (8.9 per cent) for more
than ten years.
Table III summarizes the profile of the organizations involved in the survey. About
27 (60 per cent) organizations offer only conventional financial services, while
18 (40 per cent) offer only Islamic financial services. The majority of the organizations
(conventional 85.1 per cent and Islamic 55.7 per cent) had more than 100 employees. This
indicates that the majority of the organizations involved in this survey may be
considered large in size. In terms of total annual revenue, 70.3 per cent of the
conventional FIs and 44.5 per cent of the IFIs had a total annual revenue of more than
RM100 million. In terms of total assets, 51.8 per cent of the conventional FIs and
61.2 per cent of the IFIs had more than RM1 billion worth which further suggest that
most of the firms surveyed were large in size. The majority of the conventional FIs
(71.1 per cent) had been in operation for more than five years. However, most of the IFIs
(66.7 per cent) had been in operation for less than five years. It has been only in the last
five years that the growth of IFIs has contributed to the strengthening of Malaysia as an
International Islamic Financial Center (MIFC). Most of the IFIs (88.9 per cent) were
locally owned while only 51.9 per cent of the conventional FIs were locally owned.
Scope
Information relates to future events 3.89 1.183 2.85 1.099
Quantification of the likelihood of future events 3.94 1.110 2.52 0.893
Non-economic information 3.89 0.832 2.59 1.047
Broad factors external to organization 3.94 0.802 2.93 1.107
Non-financial relates to productivity 3.67 0.767 2.63 0.967
Non-financial relates to market information 3.89 0.832 3.19 0.962
Timeliness
Immediately upon request 3.89 0.900 3.52 0.935
Given automatically 3.89 0.758 3.26 0.944
Provided frequently 4.28 0.575 4.04 0.808
Reported without delay 4.00 0.907 3.44 0.751
Integration
Precise targets activities of all departments 3.89 0.758 3.26 0.859
Impact on different departments’ decision 3.72 0.895 3.11 0.892
Cost and price information of the departments 3.67 0.840 3.11 0.934
Impact of your decision and influence of others 3.78 0.647 2.93 0.917
Aggregation
Different sections or functional areas 3.83 0.924 3.44 0.801
Effect of events on particular time periods 4.11 0.758 3.74 0.764
Influence of events on different functions 3.61 0.916 3.00 0.832
Table V. Effect of different departments’ activities 3.83 0.985 3.56 0.801
Descriptive statistics Input into decision models 3.61 0.850 2.74 0.903
of MAS items What-if analysis 3.67 0.840 2.85 0.864
objectives, IFIs use MAS information that is broader in scope, more timely, more
integrated and more aggregated than conventional financial institutions. The results
can be summarized as follows (Table VII).
Interviews were conducted with eight interviewees from IFIs to further examine the
possible reasons for IFIs to use more sophisticated MAS than their conventional
counterparts. Four interviews were conducted with Islamic banks, one interview with a MAS in
bank that offers Islamic financial services only and three with Islamic insurance companies. Malaysia
Most of the interviewees stated that there was not much difference in the overall
financial accounting systems for recording and reporting purposes between IFIs and
conventional FIs, as both are subject to the Malaysian Accounting Standards Board
(MASB) and International Accounting Standards (IAS). However, since IFIs and
conventional business transactions are based on totally different concepts they have to 165
do a great deal of customization to the support or the application systems (i.e. the
system used to process the transaction inputs into outputs). In expressing his views,
the Head of Finance for a local Islamic bank said:
We ride on the parent’s accounting system. They create a separate GL book [. . .]. so funds are
managed separately. But the terms are all based on the conventional system and we have to
make some adjustments [. . .]. We try to modify the system to suit the Islamic products,
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but there will still be some problems because it was not designed for Islamic products. Islamic
and conventional system is totally different. Recording and reporting is not an issue [. . .] the
major issue is actually the support system.
Similarly, the Senior Finance Manager of another Islamic bank said:
The present conventional accounting system is sufficient. However, adjustments have to be
made for Islamic products. A simple example is the fixed rate for BBA house. The current
conventional application system does not recognize selling price and purchase price. When
the application system does not recognize both prices, the same will occur in the GL system
because of the interface between GL and application systems [. . .]. So at the end we have to do
further enhancement to both systems.
Hypotheses Results
H1. There is a significant difference in the use of broad scope MAS between IFIs and Supported
conventional financial institutions
H2. There is a significant difference in the use of timely MAS between IFIs and Supported
conventional financial institutions
H3. There is a significant difference in the use of integrated MAS between IFIs and Supported
conventional financial institutions
H4. There is a significant difference in the use of aggregated MAS between IFIs and Supported
conventional financial institutions Table VII.
JIABR The interviews above reveal that although there is little difference in terms of overall
2,2 financial accounting system, additional fields or features of the systems are required to
cope with the various Islamic products that require different contracts and different
relationships. Thus, to address the issues of Shari’ah, IFIs require more information
than conventional FIs.
business. Now we are an entity by itself. We have to work on the bottom-line but at the same
time we have to ensure that all the Shari’ah compliance issues are addressed.
Besides looking at business operations, other aspects of the organization also have to
be Shari’ah compliant. For instance, the Senior Vice President Finance and
Administration of an Islamic Insurance Company said:
We have four Shari’ah committee members from outside and we have a Shari’ah compliance
department. They liaise with the Shari’ah committee. We need their approvals from the
introduction of the products to the delivery of the products and other things related to
Shari’ah have to be endorsed by the Shari’ah committee [. . .]. Our Shari’ah compliance
department looks at Shari’ah compliance for the company as a whole. Not just on the
products, but also looks at the ethics of the staff.
The findings from the survey (Table VI) and the interviews are consistent with Islam et al.
(2000) who find that managers of Islamic banks need a relatively broader scope of
information about their business operations and the prospects of their clients. IFIs require
more non-financial information especially those related to the issue of Shari’ah compliance.
As managers of customer funds, IFIs have to make sure that the funds are managed in
accordance with the principles of Shari’ah. Hence, more non-financial information related
to Shari’ah compliance is required by them. For example, IFIs have to make sure that
revenues come from activities permitted by Shari’ah. “Cleansing” activities will be carried
out if there is any doubt as to the source of the income. To do this, IFIs have to check the
sources of the income. For instance, the Head of Finance for an Islamic bank stated:
We closely monitor our source of income. Normally we will quantify the non-halal income and
we will not record it as income in our income statement. It will be recorded in one account to
become a special fund to be distributed to the public under maslahah ummah [. . .]. Example
would be the interest received that was not contracted before, and this normally happens
when we deal with non-muslim or conventional banks.
In addition, in conventional commercial banking systems, there is a lender and borrower
relationship where each transaction is subjected to interest payments. However, in the
Islamic banking system, a different relationship exists depending on the nature
of the product. For example, murabahah financing is a trading contract, while mudarabah
and musharakah involve participatory contracts that are founded on equity-based
financing contracts. Thus, to ensure that the contracts associated with the transactions
are not against Shari’ah, the process of product innovation in IFIs is more rigorous.
Various underlying Shari’ah principles are used. This again requires a huge amount of MAS in
non-financial information related to Shari’ah issues. IFIs have to go through more Malaysia
processes than conventional in order to get approval for product introduction. In expressing
his view related to product innovation, a senior finance manager for an Islamic bank said:
Whenever we want to introduce a new product we cannot just show one piece of paper to the
Shari’ah committee saying this and that with modus operandi that is very skeleton [. . .].
Now it is going to be a thick document, to the extent that the operation manual also has to be 167
vetted through by the Shari’ah committee.
In equity-based financing, Islamic banks need to be selective in choosing their clients
as the returns are not guaranteed. In dealing with mudarabah financing, the Head of
Finance for an Islamic bank stated:
We analyze documents closely at the application stage [. . .]. Once financing is approved, we
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review their business performance yearly [. . .]. It is purely business and indirectly on
Shari’ah [. . .]. When non-compliance issue arise, then we will report.
Furthermore, in musharakah financing, once a partnership has been established with
the client, Islamic banks have to participate directly in the business. Aside from the
constant monitoring conducted to ensure that business activities are in accordance
with Shari’ah, IFIs must ensure that the business activities provide the expected return
to both parties. In making business decisions both parties have to consider market,
economic and technological factors, which are all external information. Business
decisions are also made based on the forecasting of information.
As for the Islamic insurance business, management has to monitor funds collected
from customers and certify that they are invested in Shari’ah compliant businesses.
Thus, more external and future information is required to ensure that operation and
day-to-day activities of the IFIs are in accordance with Shari’ah. When talking about
investing their funds, the Senior Vice President for Finance and Administration for
an Islamic Insurance company stated:
If we want to invest in the stock market, we only invest in the Shari’ah approved counters.
Like in the money market, if we want to invest in banks, then we have to go to Islamic banks.
We cannot invest in the conventional banks. And for bonds, we have to buy sukūk.
Investments must be Shari’ah certified.
4.2 Timeliness
The empirical findings from the survey reveal that IFIs use more timely information
than their conventional counterparts. A possible explanation for this is quite possibly
that IFIs take a partnership position (Greuning and Iqbal, 2007). Furthermore, in
Islamic banks, deposits are not based on guaranteed return but based on profit sharing,
with a fixed amount on the asset side and a varied amount on the liability side.
If profits are overly distributed, then banks may have insufficient funds to meet their
obligations. Thus, calculation on profit distribution has to be prepared and submitted
monthly to the Central Bank. According to the Head of Finance for an Islamic bank:
We have to submit our profit distribution report to Bank Negara every month. This is the
biggest and the most comprehensive information that we have to gather but conventional
banks are not required to do this.
JIABR The same view was echoed by the Assistant General Manager Finance of a bank
2,2 offering Islamic financial products only:
Deposits are taken under murabahah and the rates are not fixed unlike the loan. So the
income side is fixed. What happens if next year there is an economic crisis? The rate of return
on deposits increases, but income is fixed. Then margin will be reduced. Thus, we must have
sophisticated information to simulate all these scenarios.
168
With timely information, decisions on profit distribution can be made effectively and the
possible mismatch of assets and liabilities can be monitored closely. Another possible
reason for this is the size of the IFIs themselves. The IFIs in this study are mostly smaller
than conventional FIs and in smaller organizations, bureaucracy can be expected to be
lower. With advances in information technology, information can be stored and
retrieved quite efficiently.
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4.3 Integration
Consistent with Islam et al. (2000), the findings of this study suggest that IFIs use more
integrated information than conventional IFIs. IFIs use information about the activities
of the various departments within the firm alongside information on the impact of
decisions on them (Chang et al., 2003; Bouwens and Abernethy, 2000; Chia, 1995). The
issue of Shari’ah compliance in product innovation gives a possible explanation for
these findings. Product innovation requires the integrated effort of various departments;
including the SSB, product development, legal, marketing and finance. IFIs have to
make sure that the contracts associated with the new products conform to Shari’ah.
The need for more integrated MAS in IFIs is increased because all transactions are
monitored by SSB to ensure Shari’ah compliance (Islam et al., 2000). In fact, with Shari’ah
audit coming into practice, highly integrated MAS will be required so that compliance
throughout the value chain can be easily tracked. When describing their information
system, the Senior Vice President of a new Islamic insurance company remarked:
Ours is a full package system starting from the point of sale. We have the package which I think
other insurance companies do not have [. . .]. The advantage of our system is that when they
key-in at the front line, it will be updated automatically in the General Ledger system.
4.4 Aggregation
The findings of this study also suggest that IFIs use more aggregated information than
conventional FIs. The aggregation of information by product is required by IFIs in
calculating their capital charge for risk management. Under the capital adequacy ratio
(CAR) requirements, IFIs have to identify the Shari’ah concept of each product because
the weight ratio for each product varies according to whether the products have
collateral or not. In explaining this new development, the Senior Finance Manager for
an Islamic bank stated:
Our system must now have new features regarding our products. Previously we disregarded
the Shari’ah concept. We did not put any indication as whether it is BBA, murabahah, etc.
[. . .]. Now, if you have a housing loan under BBA and musharakah, you cannot join them
together because they are based on different concept.
For Islamic insurance operators, aggregated information is very important in
evaluating potential investment and also in monitoring the performance of the
companies where the funds are invested. On this issue, the Chief Financial Controller MAS in
for a foreign Islamic Insurance company noted: Malaysia
When we invest, we have a system in place to monitor the performance of the investment.
If we go to the equity market, we have to make sure that we can manage them [. . .]. Now it is
very difficult to follow each company individually. So we make use of those indices available
such as the Dow Jones [. . .]. We also rely on the Securities Commission’s lists of Shari’ah
approved counters. 169
The empirical findings from the survey was supported in the interviews, which revealed
that in order to be Shari’ah compliant, IFIs rely on a broader scope of information in
addition to the traditional financial and quantitative nature of accounting information.
The empirical findings from both the survey and the interviews also reveal that IFIs use
more integrated and aggregated information than conventional FIs. In addition, IFIs are
expected to be more transparent in reporting and consequently require more integrated
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Hence, iMAL fits the criteria of a sophisticated MAS. Besides complying with the
Shari’ah and other regulatory requirements, the system can bring a competitive
advantage to the IFIs. The availability and use of sophisticated information allows
managers of the IFIs to make more effective decisions, which in turn improves
organizational performance.
The above findings are to be expected, as MAS is part of a wider MIS (Upchurch,
2002; Bouwens and Abernethy, 2000). MAS can also be viewed more broadly (Mia, 2000;
Hussain, 2000) and there is not much difference between the information provided
by a specific MAS and that provided by other MISs. With the advancement in IT,
many organizations are adopting strategic enterprise management systems in which
management information across all functions and disciplines is integrated into a
common database (Brignall and Ballantine, 2004). Hence, MAS has become part of the
enterprise management system. Thus, as found in this study, MAS may not be the only
major factor that contributes to the difference between the MAS of IFIs and those of
conventional financial institutions. The difference might be due to the difference in the
overall MIS of the organization. The MIS for IFIs might be broader in scope and more
integrated to cover Shari’ah compliance issues (Islam et al., 2000).
5. Conclusion
The aim of this study has been to determine whether there is any difference between
the MAS of conventional and IFIs. A survey on financial institutions in Malaysia was
conducted and semi-structured interviews were carried out to gain further insights into
the survey findings. The study shows that IFIs use MAS information that is broader in
scope, more timely, more integrated and more aggregated than conventional financial
institutions. In order to meet both religious and business objectives, IFIs require
sophisticated MAS information, which is available through the use of strategic
management accounting (SMA) tools and techniques such as the BSC and ABC. The
use of these techniques brings a competitive advantage to IFIs, as SMA places
customer needs at its top of priority. The study has illustrated that IFIs normally
develop and adopt an integrated accounting and overall enterprise system. With this
comprehensive enterprise system, the management accounting function is integrated
with other functions in the organization.
This study is subjected to the usual limitations associated with questionnaire-based
survey research. It is important to interpret the results in the light of the study’s limitations.
This study covers only financial institutions in Malaysia, thus the findings cannot be MAS in
generalized to other enterprises or to other countries. As for the respondents, this study Malaysia
involved top management as the sole respondents and representatives of their respective
organizations. Nonetheless, the information sought is not beyond their knowledge as top
management are normally well-versed in the diverse aspects of the organization. Future
research can consider collecting data from individuals at various levels of the organization.
This study has provided an avenue for further investigation on issues of MAS for 171
IFIs. A future focus might be on how MAS helps in strategic and operational decision
making by considering the need for Shari’ah compliance. Researchers might also focus
on the role of MAS in promoting transparency and accountability in IFIs. A case study
approach would be able to provide a deeper and richer understanding of this issue.
In addition, future studies might examine the significance of supporting activities
(departments) in the delivery of Islamic financial products. It is also worth including
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for further study the need to explore value chain components in IFIs, and how they
help contribute to the value of the products they offer.
Note
1. Conventional bank that offers Islamic financial services under the interest-free banking system.
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Not at To a very
All great extent
SCOPE
(a) Information which relates to possible future events (e.g possible 1 2 3 4 5
changes in government regulations).
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Not at To a very
All great extent
TIMELINESS
(a) Information that is provided immediately upon request. 1 2 3 4 5
Not at To a very
All great extent
INTEGRATION
(a) Information on precise targets for the activities of all 1 2 3 4 5
departments within your organization.
(b) Information that relates to the impact of different departments’ 1 2 3 4 5
decisions on performance of overall organization.
(c) Cost and price information of the departments in your 1 2 3 4 5
organization.
(d) Information on the impact of your decisions throughout your 1 2 3 4 5
organization, and the influence of other departments’ decisions
on your area of responsibility.
JIABR Not at To a very
All great extent
2,2 AGGREGATION
(a) Information provided on the different sections or functional areas 1 2 3 4 5
in your organization, such as marketing and production, or sales,
cost, or profit centers.
(b) Information on the effect of events on particular time periods (e.g. 1 2 3 4 5
176 monthly/ quarterly/annual summaries, trends, comparisons, etc.).
(c) Information which has been processed to show the influence of 1 2 3 4 5
events on different functions, such as marketing or services
associated with particular activities or tasks.
(d) Information on the effect of different departments’ activities on 1 2 3 4 5
summary reports such as profit, cost, revenue reports for the
overall organization.
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Corresponding author
Siti Zaleha Abdul Rasid can be contacted at: szaleha@ic.utm.my