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SECTOR REPORT

Beyond Traditional Accounting

By Muath Mubarak
Islamic nance began as a tiny component in the worlds nancial market and has now grown into a strong and steady 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 nance positively, as an attractive pathway to achieve the optimum balance between yield and liquidity within the boundary of Shariah. As such, the Islamic 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 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 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 nancial statements as it will facilitate the ease of interpretation and comparison of nancial accounts from different jurisdictions. It will also facilitate the credibility of nancial institutions. But Islamic 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 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 nancial institution is to maximize 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 prot 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 countrys 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) standards for accounting, auditing, Shariah, governance and ethics for IFIs. Currently AAOIFI standards are mandatory in more than 10 jurisdictions, and it also has been adopted as guidelines or basis for national standards in some other jurisdictions. This clearly indicates the increasing acceptance and recognition by countries of global standard setting bodies.

Islamic 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 nance Users of 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 prot 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 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 nancial products, technology, banking and nance. In order to prove that Islamic nance is a solutions provider for economic ills, some we have recently experienced during the global nancial crisis, the entire industry should look beyond accounting and recording for solutions. But, from a global nancial market perspective, integration with the global norms, standards, and best practices of conventional nance can still be Shariah compliant to follow and adopt. Muath Mubarak Coordinator - Financial Control & Strategic Planning Barwa Bank, Qatar Email: muath.2009@gmail.com Muath lectures on various Islamic banking and nance topics at First Global Knowledge Centre, Colombo, Sri Lanka.

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4th August 2010