The Role of Shariah Compliance in Enhancing Financial Reporting Transparency: A Comparative Study of Islamic and Conventional Financial Institutions

Abstract

This study explores the role of Shariah compliance in enhancing financial reporting transparency, focusing on a comparative analysis between Islamic and conventional financial institutions. The increasing importance of transparent financial reporting in the global financial system has driven both Islamic and conventional banks to adopt rigorous reporting practices. However, Islamic financial institutions face additional requirements due to their adherence to Shariah principles, which govern their operations in ways that may influence the transparency and accountability of financial disclosures. Through a detailed comparison, this paper examines how Shariah compliance affects the accuracy, reliability, and comprehensiveness of financial reports in Islamic banks compared to their conventional counterparts. The study reviews regulatory frameworks, internal governance structures, and reporting practices to assess their impact on financial transparency. Findings suggest that while Shariah compliance imposes certain challenges, such as the need for specific audits and the disclosure of non-financial aspects related to ethical investments, it also enhances the trustworthiness and social responsibility of financial disclosures. Additionally, the paper evaluates the role of Shariah boards and their influence on corporate governance in promoting better financial transparency. This comparative study contributes to the growing literature on Islamic finance, providing valuable insights into the unique aspects of Shariah-compliant financial reporting and offering policy recommendations for improving transparency in both Islamic and conventional banking sectors.