www.islamicfi nancenews.comSECTOR REPORT

Page 20© 4th August 2010

Islamic fi nance began as a tiny component in the world’s fi nancial market and has now grown into a strong and steady fi nancial alternative for all who want to escape from the burden of riba (interest). Having weathered the recent economic crisis, many Muslim and non-Muslim investors now look at Islamic fi nance positively, as an attractive pathway to achieve the optimum balance between yield and liquidity within the boundary of Shariah. As such, the Islamic fi nance industry is gaining wider market share and entering into a new territory day by day. Some countries are even contemplating becoming a hub for Islamic fi nance, as they now consider it a golden opportunity to build their own economies.

“...Never get bored with recording it, however small or large, up to its maturity date, for this is seen by Allah closer to justice, more supportive to testimony, and more resolving to doubt...” (Al Quran)

The above verse emphasizes the recording of all fi nancial transactions not only for individuals, rather for all institutions too. There are several Quranic verses which are related to accounting, even on the method of dealing with debtors and creditors, which appeared 1400 years ago. Accounting itself can be described in simple terms as the science of recording, measuring and reporting of economic events or activities for interested parties (internal or external).

Over a period of time, radical changes in the business environment and more complex business transactions have led international bodies to develop various standards. These standards will improve the comparability and understandability of fi nancial statements as it will facilitate the ease of interpretation and comparison of fi nancial accounts from different jurisdictions. It will also facilitate the credibility of fi nancial institutions.

But Islamic fi nancial institutions (IFIs) cannot adopt International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) as their sole accounting standards to follow and implement since these standards have been developed based on conventional fi nancial products which involves riba (interest), gharar (uncertainty), maysir (speculation) and other prohibited activities such as dealing or investing in alcohol, pork, pornography linked business and transactions. Moreover, the term ‘bottom line’ in a conventional fi nancial institution is to maximize fi nancial returns and minimize loss. In contrast, IFIs aim to maximize the performance of the underlying asset or project of the Islamic contract in order to ‘share’ the profi t and loss between equity holders and investors.

There was an era where IFIs were compelled to prepare two sets of accounts. One was to satisfy country’s law (regulatory requirement) and the other one was as per Shariah principles.

This requisite has been replaced with the existence of Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) stand-ards for accounting, auditing, Shariah, governance and ethics for IFIs. Currently AAOIFI standards are mandatory in more than 10 jurisdic-tions, and it also has been adopted as guidelines or basis for national standards in some other jurisdictions. This clearly indicates the in-creasing acceptance and recognition by countries of global standard setting bodies.

Islamic fi nance — Accounting conceptual framework

Qualitative characteristics• Relevance• Reliability• Comparability• Consistency• Understandability

Basic assumptions• Accounting unit concept• Going concern concept• Periodicity concept• Purchasing power of the monetary

unit

Islamic fi nance — Users of fi nancial statements

• Equity holders / Shareholders

• Investment account holders

• Government authorities

• Rating agencies• Zakat agencies• Employees• and such

IFIs require separate accounting standards because theirs are different in the following manner:

• Islamic banking is trade based while conventional banking is based on the loan contract

• The main Islamic income base is profi t and conventional income is based on interest

• Determines the rights and obligations of all interested parties in accordance with the principles of Shariah

• Reports useful information to users, thus enabling them to make legitimate decisions in their dealings with Islamic banks

• Additional ethical dimensions• Honesty and transparency (not merely based on business

ethics rather based on the religion)• Adopt social responsible business policies and practices as

per Islam• Separate reporting required on Shariah compliance from

Shariah supervisory boards

Although Islamic fi nance has proven to be groundbreaking, with worldwide impact, there are issues and critical challenges to be sought which go beyond traditional accounting. For example, there is a dearth of Shariah scholars with in-depth knowledge of fi nancial products, technology, banking and fi nance.

In order to prove that Islamic fi nance is a solutions provider for economic ills, some we have recently experienced during the global fi nancial crisis, the entire industry should look beyond accounting and recording for solutions. But, from a global fi nancial market perspective, integration with the global norms, standards, and best practices of conventional fi nance can still be Shariah compliant to follow and adopt.

Muath MubarakCoordinator - Financial Control & Strategic PlanningBarwa Bank, QatarEmail: muath.2009@gmail.com Muath lectures on various Islamic banking and fi nance topics at First Global Knowledge Centre, Colombo, Sri Lanka.

Beyond Traditional AccountingBy Muath Mubarak