Reporting Issues in Islamic Financial Institutions, Nissar Yatoo
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The document discusses key differences between Islamic and conventional financial institutions, emphasizing interest-free transactions, ethical investments, and risk-sharing principles that align with Sharia laws. It details the unique aspects of Islamic accounting standards, especially in relation to financial transparency and accountability to stakeholders, along with the establishment and role of the AAOIFI in developing standards for Islamic financial institutions. Recent advancements and challenges in applying international accounting standards to Islamic finance and the necessity for ethical transparency are highlighted.
Reporting Issues in Islamic Financial Institutions, Nissar Yatoo
- 1. Reporting Issues in Islamic Financial Institutions Dr. Nissar AhmadYatoo Islamic Online University 4th Annual East Africa Finance Summit Ethiopia 4-5 December 2019
- 2. Islamic Financial Institutions 1. Interest FreeTransactions 2.Sharing of associated risks and profits 3. No scope for uncertainty 4.Emphasis on Ethical Investment 5. Tangible and identifiable underlying assets to back-up financial transactions
- 3. IslamicVs. Conventional Islamic Conventional Promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur) The investor is assured of a predetermined rate of interest Aims at maximizing profit but subject to Sharia restrictions Aims at maximizing profit without any restriction Participation in partnership business is the fundamental function Lending money and getting it back with compounding interest is the fundamental function No provision to charge any extra money from the defaulters. Only small amount of late payment penalty and these proceeds are given to charity Can charge additional money (penalty and compounded interest) in case of default Greater emphasis on the viability of the projects Greater emphasis on credit-worthiness of the clients Relation to its clients is that of partners, investors and trader, buyer and seller Relation to its clients, is that of creditor and debtors All the deposits are not guaranteed All deposits are guaranteed
- 4. Islamic Accounting • Accountability to God • Full disclosure and social accountability- against the ideas of creative accounting, window dressing and reporting legalities over substance • The process of identifying, recording, and communicating economic and other relevant information inspired by IslamicWorldview and complied with Sharia • Not different from conventional accounting in terms of recording, different in terms of Islamic contractual relationships • Determination of Zakah, current value of assets for determination of Zakah
- 5. Three Main Differences • The objectives of providing the information • In conventional accounting it is to provide information about the performance • In Islamic accounting it is information about adhering to Sharia principles • What type of Information is identified • In conventional accounting it is about economic transactions and events at historical cost • In Islamic accounting it is at current value • To whom the information is communicated • Mainly to share holders and creditors • All stakeholders (believers)
- 6. Islamic Accounting Standards • Accounting and auditing organization of Islamic financial institutions AAOIFI • AAOIFI’s Islamic accounting standards are meant to fill gaps in the International Accounting Standards (IAS) and are not meant to compete with or replace them • Approaches to arrive at Islamic accounting • Accept conventional accounting concepts that are consistent with sharia • Reject concepts that are Contrary to Sharia • Develop new concepts that are unique to Islamic way of business transactions
- 7. AAOIFI • Established in 1991 – agreement of association by IFIs worldwide, supported by IDB • Head office is in Bahrain • Organizational Structure • Supervisory Committee • FinancialAccounting Standard Board • Executive Committee • ShariaCommittee • Funded by founding members of IFIs, establishment of waqaf etc.
- 8. Accounting, Auditing and Governance Standards • Statements of Financial Accounting (SFA ) • Objectives and concepts • Financial Accounting Standards (FSA) • Recording and presentation of different kinds of contracts • Auditing standards • Objectives and Principles of Auditing • The Auditor’s Report • Terms of Audit Engagement
- 9. • Governance standards • Sharia Supervisory Board • Sharia Review • Code of Ethics • Code of Ethics for Accountants and Auditors of IFI • New Financial Accounting Standards • Investment Fund • Disclosure Bases for Determining andAllocating Insurance Surplus (and deficit) • New Auditing Standards • AuditTests for ShariaCompliance
- 10. Benefits and Issues of applying IAS/IFRS • Benefits • International recognition and usage • Enhance the transparency and international comparability • Issues • Differences in Objectives of the users ofAccounting Information • Differences in Contractual relationship between the financial Institutions and their stakeholders • IASs do not address • Income incidentally generated from transactions or relationships, which contradict Sharia. (e.g: late Penalty) • Funds paid out as Zakat and /or charity • Restricted Investment Accounts: Islamic banks raise deposits through restricted Mudaraba profit sharing contract- and/orWakala-agency contract for a fee. • The socially responsible financing (i.e. Qard Hasan) is not catered for by conventional accounting standards.
- 11. Applying IASs to IFIs Conventional Islamic Deposits Contractual liability plus interest for their deposit contract Treated as liability Mudaraba (profit sharing) and wakala contracts (agency contract) Unrestricted investment accounts’ funds Restricted investment accounts’ funds LeaseVs Ijarah Inherent risks and rewards associated with the asset are transferred to the lessee, who in substance is deemed to be the owner. Reported as receivables on the bank’s book Reported in the lessor’s (bank) books. Maintenance costs are borne by the lessor. Asset ownership rests with lessor. Sale of good Recorded as financing transaction Difference between the nominal and fair value is treated as interest revenue Sale transaction Deferred profit Takaful Premium received is part of the insurance company’s revenues Segregation between shareholders’ funds and policyholders’ funds