Ijarah

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  • Topic: Islamic banking, Sharia, Lease
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  • Published : May 2, 2013
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International Journal of Islamic Financial Services, Vol. 5, No. 3

AN EXPLORATORY STUDY OF IJARAH ACCOUNTING PRACTICES IN MALAYSIAN FINANCIAL INSTITUTIONS Ros Aniza Mohd. Shariff Abdul Rahim Abdul Rahman

Prior studies on Ijarah were mainly focusing on the economics, legal and financial aspects, there was, however, so far no in-depth study on accounting for Ijarah. The main objective of this study is to explore the nature of accounting for Ijarah financial instruments as practiced by Malaysian financial institutions. First, the study makes a comparison between the International Accounting Standard on leasing (IAS 17); the accounting standard for Ijarah (FAS 8) as developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); and the Malaysian Accounting Standard on leasing (MASB 10). The study found that there are major differences as to the nature of leasing and Ijarah, and as a result accounting principles that have driven all the three standards as well as accounting techniques developed for leasing and Ijarah are significantly different. Secondly, the study examines the level of acceptability of the AAOIFI’s FAS 8 among the Malaysian financial institutions. The result of the questionnaire survey shows a low level of acceptability of FAS 8 and thus, it indicates that, first, the effort to harmonise the accounting practices on Islamic financing practices by financial institutions internationally may be a difficult task. Secondly, until and unless the AAOIFI standard is adopted by the regulatory agency as in the case of Malaysia, Bank Negara Malaysia, AAOIFI standards will remain only as a reference but do not have the legal authority. Consequently, the quality and comparability of accounting information of Islamic financing such as Ijarah will be seriously at a stake. Introduction Ijarah has been conceptually understood as a contract of exchange where one party enjoys the benefit arising from employment by another party in return for a consideration for the services rendered and from the use of an asset. Scholars of the four schools of Islamic jurisprudence (Shafi’ie, Maliki, Hanbali and Hanafi) have cited various definitions of the contract of Ijarah. In brief, these definitions agree on the fact that the contract of Ijarah is a contract on using the benefits or services in return for compensation (Kharofa, 1997). There is a considerable body of research on the Islamic financial system in general. However, literature that specifically discusses the Ijarah contract is limited. The study is motivated to explore accounting issues in Ijarah due to the lack of studies on Ijarah. The scarce availability of literature written on the topic of Ijarah is due to several possible reasons. The most fundamental reason is the infancy stage of Islamic banking and finance as compared to conventional finance. The idea of Islamic finance was inspired by the first conference on Islamic economics in 1976. Obviously, Ijarah, which is part of Islamic finance, is very much in its early stages of development. The first objective of this study is to examine the nature of Ijarah financing and its differences with conventional lease financing from the legal and accounting perspectives.

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International Journal of Islamic Financial Services, Vol. 5, No. 3

This is considered as important because without a proper understanding on the nature of Ijarah and the differences compared to conventional leasing, the conceptualization of the accounting implications for Ijarah may not be complete. Consequently, the second objective of this study is to determine the level of acceptability of Accounting and Auditing Organization of Islamic Financial Institution’s (AAOIFI) accounting standard on Ijarah in Malaysia using questionnaire and interview survey among Malaysian’s commercial banks. This is important to explore the current practices in...
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