Paper Title: The Economic Reality of Islamic Banks’ Transactions: A Qualitative Inquiry
Author: Bassam Mohammad Maali, Usama Adnan Fendi and Muhannad Ahmad Atmeh
Publisher: International Journal of Islamic and Middle Eastern Finance and Management, 14(2), 286 -300.
This research paper examines the need for distinct accounting standards for Islamic finance. It collects primary data through interviews of respondents who are affiliated with a bank. It provides analysis in the light of this statement by International Accounting Standards Board “In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form”.
The informants in the interview by and large look at Islamic and conventional contracts in similar ways. Based on these findings, the authors conclude that international accounting standards are also applicable in Islamic banking. Shari’ah compliance does not imply that all operations including recording keeping of material transactions need to be different in Islamic banking as compared to conventional banking.
Therefore, if Islamic banks are expected and understood to be not transferring losses to the clients and will resort to profit equalization reserves and purchasing the non-performing assets in the investment pool on the behalf of shareholders, then there is no potent reason to classify investment accounts based on Mudarabah in equity rather than in liability. Furthermore, if Murabaha and other sale based modes of financing always involve two sales in two different legs of the financing structure, then there is no compelling reason to record such purchases and sales of assets like that for manufacturing concerns.
However, in interpreting results, one must be cautious in understanding what message the authors want to convey. They are not questioning the Shari’ah basis and Shari’ah legitimacy of Islamic financing transactions. They are investigating that when it comes to financial flows and eventual economic outcome, are the Islamic finance transactions significantly distinct to merit distinct accounting standards or not.
It will also have been appropriate for the authors to caution the readers about possible misinterpretation of Islamic banking by the informants in the study. Often, the technical specialists in accounting, risk and law are unable to appreciate distinction in other aspects in Islamic finance contracts beyond price and eventual final economic outcome.
It must also be noted that Islamic banking may not require a completely distinct way of accounting, but there are certain subtleties which must not be ignored either. Islamic banks cannot record amounts received in lieu of delay in payment as their income.
In equity investments, they may also be required to pay charity to purify their dividend. In Ijarah, they cannot take the initial instalments as rental income if the asset is not yet delivered in usable condition to the client.
Therefore, in lieu of these distinctions, Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) had issued additional accounting standards to ensure that such points of distinction must not be overlooked in Islamic banking institutions even if they are not incorporated in global accounting standards for banks. It is appreciable that AAOIFI has issued a comprehensive list of standards and made them public for greater awareness and appreciation of the distinct elements in Islamic banking. At the same time, it is also a progressive development that a lot of countries are now adopting these standards.
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