Challenges in applying conventional international accounting standards for Islamic finance

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04 Nov 2011

On 23 and 24 October 2011, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was hosting the World Bank Annual Conference on Islamic Banking and Finance. One of the sessions of the meeting was dedicated to 'Challenges in applying conventional international accounting standards for Islamic finance'.

A speech given by Sutan Emir Hidayat, Senior Lecturer at the Islamic Finance University College of Bahrain, outlined the benefits of applying IASs / IFRSs but also showed that full application of international accounting standards by Islamic Financial Institutions (IFIs) can run counter to the objectives of Shariah-compliant banking.

The conclusions from his very detailed analysis are:

  • Despite the benefits that International accounting standards offer, applying their standards to IFIs towards some extent will eliminate the essence of shariah principle. In other words, shariah compliance cannot be adequately reflected by financial statements and notes. While, in fact, compliancy to Shariah is the main reason for IFIs' existence.
  • The full application of IAS also will hold back / hinder our steps in developing accounting standards that adequately cater for shariah compliant transactions thus ignoring the significant contributions made by AAOIFI.
  • IAS / IFRS were written with conventional products and operations in mind. When they are applied to Islamic products, typically they will treat the products, in economic substance, as equivalent to their conventional counterparts.
  • Therefore, obviously, there are huge impediments on fully applying IAS for IFIs. But, a broad harmonization can be reached by the application of the relevant aspects of IAS.

The full deck of slides for this speech is available on the AAOIFI website (PDF 692k). This AAOIFI page offers an overview of the whole programme of the conference with many links to speeches given.

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