A Summary of Islamic Banking and Finance

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AAOIFI reporting standards: Measuring compliance
Thea Vinnicombe[pic], a, [pic]
a Faculty of Business (Fachberreich Wirtschaft), Fulda University of Applied Sciences (Hochschule Fulda), Marquardstraße 35 36039 Fulda, Germany

Available online 4 March 2010.

Islamic banking and finance have grown rapidly in recent decades. Islamic banks offer a range of products, which, in complying with Islamic law, often differ from traditional Western financial products. Consequently, developing accounting standards to guide Islamic financial reporting is now an important issue. To this end, the Accounting and Auditing Organization for Islamic Financial Organizations (AAOIFI), was established in Bahrain in 1991. While the AAOIFI has published a substantial body of accounting and governance standards empirical research into compliance with these standards is lacking. This article addresses that gap. A benchmark index is constructed to measure the compliance of Islamic banks licensed and domiciled in Bahrain. The findings of the study show compliance to be very high with respect to the governance standard relating to the in-house supervisory boards of Islamic banks, and reporting the Islamic murabaha contract. In contrast, compliance with the AAOIFI's requirements regarding the zakah religious tax and the mudaraba contract is relatively low. Keywords: Shari'a law; Riba; Mudaraba; Islamic accounting standards; Murabaha; Zakah Article Outline



Measuring compliance

Determinants of the compliance index
4.1. The importance of Shari'a compliance
4.2. The importance of the Islamic community
4.3. Mudaraba and musharaka financing
4.3.1. Mudaraba financing
4.3.2. Murabaha financing
4.4. Zakah
4.5. The Shari'a Supervisory Board

Empirical investigation and conclusions
5.1. Sample
5.2. Data

6.1. Problems with the methodology

Concluding comments

Appendix A.
Compliance Items

Appendix B.
Islamic banks in Bahrain as of March 2009

1. Introduction
The study of Islamic accounting has grown in recent years with substantive contributions from scholars such as (Baydoun and Willet, 1995), (Baydoun and Willet, 1997), (Gambling and Karim, 1986) and (Lewis and Algaoud, 2001). It is notable, however, that the focus of most of these studies is descriptive or analytical in nature, emphasizing in particular, the implications of Islam for accounting principles and practices, and the theoretical framework from which accounting standards for Islamic entities could potentially be derived ([Baydoun and Willett, 2000], [Lewis, 2001] and [Perera, 1989]). There is little recognition that a practical response to the need for Islamic accounting standards has emerged in the form of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). This body was established in Bahrain in 1991 to develop and disseminate accounting and auditing standards for implementation by Islamic financial institutions worldwide (AAOIFI, 2003/1421H1 p. ix; Lewis and Algaoud, 2001, p. 171). Over almost two decades the AAOIFI has promulgated a body of Islamic accounting standards to inform the reports of Islamic financial institutions. To date no empirical investigation into compliance with these accounting standards has been undertaken. This article is intended to address that gap. An index is developed to measure the compliance of Islamic banks with the accounting and governance standards issued by the AAOIFI. The index items included do not encompass the full set of standards. Instead, they are limited to those standards and statements which relate to issues dominating the theoretical literature on Islamic...
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