Background of Study INTRODUCTION

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CHAPTER I INTRODUCTION

A. Background of Study

Islamic banking is a worldwide phenomenon involving a variety of institutions instruments rather than one “project” or institution Timberg, 2000: 2. In Indonesia, the development of Islamic bank is a phenomenon and has a significant role in the economy. According to Alfi wijaya, the head of research and management project division in Karim Business Consultant, Islamic Bank shows quick development from year to year although it is new in the banking business and year of 2008 is predicted as a successful Islamic bank development year in Indonesia. The fast development of islamic bank in indonesia has begun since the legalize UU no 10 1998. This recognizes the practice explains the law and kind of business that can be operated and implemented by islamic bank. Beside that, this UU gives a direction for conventional banks to provide shari’ah bankin services by establishing an independent islamic branch. This opportunity has been responsed with high antusiasm by the banking community in Indonesia. It can be seen from the establishment of shari’ah bank that is a convertion from conventional bank such as Bank Syariah Mandiri convertion from Bank Susila Bakti, and the establishment of conventinal bank that has Shari’ah Business Unit such as Bank Bukopin, Bank BNI, Bank BRI, Bank IFI, Bank Niaga, Bank BTN. Beside that, the 16 development of Shari’ah Bank is supported by the addition of office channeling of Shari’ah Bank and Shari’ah Business Unit Antonio, 2005:25. Islamic Bank is a business unit that is focus in finance to mobilize society fund and give services to other banks based on islamic principle shari’ah from Al-Qur’an and Al-Hadist. Shari’ah is concerned with promoting justice and welfare in society Al-adl and Al-ihsan and seeking God’s blessings Barakah, with the ultimate aim of achieving success in this world and hereafter Al-falah Haniffa and Hudaib, 2007:99. This statement is supported by Alwosabi who says that the purpose of Shari’ah is to promote and protect the interest of individuals and societies by bringing benefits and preventing harm in relation to their necessities, needs and wants. The differential principle and operation between Islamic bank and conventional bank gives a difference implication in the accounting principles on both disclosure and reporting. While conventional financial institution follows the accounting standards of the International Accounting Standards, American Financial accounting Standards, and British Accounting Practices, the AAOIFI was created in 1990 to design and disseminate accounting and auditing standards that can be applied internationally by all Islamic institutions. According to AAOIFI 2004: 65 the financial statement should disclose all material information that is necessary to make those financial statements adequate, relevant and reliable for their users. The duty to disclose the truth is a very important issue in the Islamic context. In Islamic context, the main 17 objective of corporate reporting is to allow Islamic enterprises to show their compliance with Shari’ah Baydoun and Willett, 1997: 6. According to Farook and Lanis 2005: 356 the social role of Islamic Banks that entails social justice and accountability, requiring the banks to disclose corporate social responsibility CSR information. It is appropriate with shari’ah principle that business transactions can never be separated from the moral objectives of society. According to Farook and Lanis 2005: 356 a number of scholars have developed a normative standard for reporting and indeed social reporting for Islamic businesses based on Islamic principles Haniffa 2001; Maali et al, 2003. Governments in Muslim populated countries such as Malaysia and AAOIFI have also voiced their support for the development and adoption of such CSR reporting standards encouraged and propagated by Islam Sharani and Yunus, 2004. The objective of this study is to measure the annual report social disclosure levels of Islamic banks based on a benchmark derived from Islamic principles. Second objective is to know whether there is an influence of Islamic value to social reporting in Islamic bank. This study will discuss the role of Islamic bank and the Islamic value that imply in Islamic bank. Besides that, this study will explain the disclosure from the Islamic perspective. The scope of this study is Bank Muamalat and Bank Syariah Mandiri. These two banks have a significant role in shari’ah banking. 18

B. Problem identification