THE BALANCED SCORECARD : STRUCTURE AND POTENTIAL USE IN MALAYSIAN ISLAMIC BANKS

Area on assessment of Islamic banks is still underexplored and it limits a better perspective of performance evaluation thus affect the level of Islamic banking performance which are still arguable. This study conceptualized Kaplan and Norton’s (1996, 2001) Balanced Scorecard and compared this to the performance measurement system of Malaysian Islamic banks. This study will then try to introduce a guideline of Shariah Compliance and Balanced Scorecard measures to be used by Islamic banks in order to improve their performance. Based on the findings, there is a positive relationship between Balanced Scorecard measures, Shariah Compliance attributes and Islamic banking performance. Banks which used all the BSC and Shariah measures in the study (Exemplar) improved their performance tremendously. Limitations will be in implementing the Kaplan & Norton (1992) Balanced Scorecard theory used in this research on a relatively new setting that is the Islamic banking in Malaysia and the applicability of this theory. It can also be an aspiration and a basis for future research by improving this study and establishing a more coherent model. Icfc016 The 5 th International Conference on Financial Criminology (ICFC) 2013 “Global Trends in Financial Crimes in the New Economies” 162 INTRODUCTION Islamic banking in Malaysia traces its root back to 1963, with the establishment of the Pilgrims Fund Board or 'Lembaga Tabung Haji' (LTH), aimed at yielding returns uncontaminated by ‘Riba’ (Sufian, 2007). The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April, 1983. The IBA provides Bank Negara Malaysia (BNM) with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The first Islamic bank established in the country is Bank Islam Malaysia Berhad (BIMB) which commenced operations on 1 July 1983, with an initial paid up capital of RM80 million (Sufian, 2007). Islamic banking has become a force to be reckoned with in the global economy and has been growing rapidly over the years. The international banking community has seen the Malaysian Islamic banking sector as one of the most progressive and attractive in the world given the numerous incentives planned and strategic direction in developing and nurturing Islamic banking. With this, they have acknowledged Malaysia as the leading Islamic banking centre. The development of indices to gauge the performance of Islamic financial institutions nowadays is seen important as there is a growing awareness among the Muslim community to assess how far these institutions have successfully achieved their objectives. Most Muslims are not only concern about how much of returns they can get at the end of the day, but what is more important is where their money has been invested. Meanwhile, as for non-Muslims community such indices are beneficial to them in order to compare which bank has performed better, perhaps in terms of returns as well as social responsibilities (Ibrahim et. al. 2004). Intangible assets are deemed more important than tangible assets in a knowledge based environment. Even some organizations consist of totally intangible assets especially new product innovation which will be difficult to be measured using traditional financial accounting. The rising significance of intangible assets forms a necessity for a new and different type of performance measurement system in today's business environment. Researchers and practitioners stated their concerns regarding the traditional management accounting systems (MAS), traditional management control systems (MCS) and traditional performance measurement systems (PMS). Johnson and Kaplan (1987) argued in their book 'Relevance Lost Rise and Fall of Management Accounting' that the traditional management accounting system which started during the industrial age is insufficient, untimely and inadequate to provide information for management planning, controlling and decision making in today's fast changing and competitive environment. In particular, traditional performance measurement system overlooked the components of nonfinancial measures, strategies and operations that are vital in a sound control system. The focus now is on management of intangible assets for example customer relations, innovative products and services Icfc016 The 5 th International Conference on Financial Criminology (ICFC) 2013 “Global Trends in Financial Crimes in the New Economies” 163 which are non-financial in nature. The nature change of value creation from tangible to intangible assets and from financial to non-financial nature complicates the performance measurement process which is based on traditional system. There have been substantial innovations in this area to overcome the criticisms of traditional performance measurement system Due to weaknesses and limitations in relying totally on traditional financial performance measure, a performance measurement system that incorporates financial and non-financial measures is required. In response, models such as the Integrated Performance Measurement System (Nanni et. al., 1992), Balanced Scorecard (Kaplan & Norton, 1992; 1996b; 2001a) and performance prism (Neely et. al., 2002) have been developed. This study focused on the Balanced Scorecard developed by Kaplan and Norton (1992, 1996b, 2001a). The BSC was introduced by Kaplan and Norton (1992) to overcome the shortcomings of traditional financial performance measures in today's business environment. The BSC which comprises of both financial and non-financial measures is a multi-dimensional performance measurement system. The measures are obtained from the organization's strategy and are linked together in a series of cause-and-effect relationships. The BSC consists of four performance dimensions as proposed by Kaplan and Norton (1992, 1996b, 2001a) which include Financial Perspective, Customer Perspective, Internal Business Perspective and Learning and Growth Perspective. The main objective of applying the BSC is to achieve an improved and enhanced longterm financial result. The BSC has become a broadly recognized management tool. Most research on the BSC were carried by organizations mainly in the United States and Europe (Ittner, Larker & Randel, 2003; Speckbacher et. al. 2003). Not much is known about the use of BSC in Malaysia especially in Islamic banks. There is a lack of uniformity among organizations in their understanding of the term BSC (CMA Canada 1999). A desire to address these two issues motivates this study. Islamic banking products and services are gaining popularity around the world. Although many Muslims want to practice their faith in fundamental concepts of Islamic banking, there have been concerns with the level of Islamic banking performance which is still arguable. Area on assessment of Islamic banks is still underexplored and it limits a better perspective of performance evaluation. Problems such as lack of knowledge on the Islamic banking system and non-compliance with Shariah governance will jeopardize the accountability of the sector and leads to poor performance of the Islamic banking sector. Poor performance of the products and services will result in poor performance of the bank and vice versa. The executive and senior management team must support and involve actively in the performance improvement process. It has to be driven from the top. Both Muslim and non-Muslim customers placed full faith on the banks to handle their funds and to make sure their funds are free from undesirable activities. It is therefore of utmost importance Icfc016 The 5 th International Conference on Financial Criminology (ICFC) 2013 “Global Trends in Financial Crimes in the New Economies” 164 to ensure the performance of Islamic banks is maintained and remain competitive against the conventional banks. The recent progress towards resolving these issues is encouraging to improve this sector which is still underexplored. The general objective of this research is to provide empirical evidence on multiple performance measures usage or BSC approach within Islamic banks and on the nature of relationships between the BSC measures with Shariah compliance. More specifically, it investigated the impact of Shariah Compliance and BSC measures on Islamic banks performance. REVIEW OF LITERATURE In Malaysia the use of new management techniques and new management accounting methods such as Activity Based Costing (ABC), target costing, throughput accounting and Strategic Management Accounting (SMA) has slowly gained acceptance. However, more information is required on the way companies measure their performances under these new environments. According to Kaplan and Norton (1996b) the BSC can help the organization to clarify its corporate vision and strategy; communicate and link strategic objectives and measures to plan; set targets and align strategic initiatives; and to enhance strategic feedback and learning. Within the BSC framework, four perspectives namely financial, customer, processes and learning and growth represent the views of four essential stakeholders in any business. A financial institution can ignore the expectations of one of its stakeholders and still succeed in the short run. However, in the long run, the business cannot ignore any of these stakeholders because they are interrelated. Employee attitude and behaviour affect the level of customer satisfaction and retention, while customer attitude and behaviour influence shareholder's satisfaction and retention. Finally, shareholder satisfaction affects employee satisfaction through bonuses, stock options, or further investment in employee growth and development. The Balanced Scorecard (BSC) Framework The BSC provides a framework which recommends the use of both financial and nonfinancial measures of performance, allowing the organization to focus its strategic objectives via balancing the four perspectives as stat