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Need For Accounting Standards For Islamic Banks
Journal of Isamic Banking and Finance -- Vol. 5 Issue 1; Jan-Mar 1988
- By Irtiza Husain

There are twenty-nine Islamic Banks which do not include Pakistani Banks who have been, working on an interest free basis for the last three years or so. These banks work with new financial instruments developed under Islamic principles hitherto unknown to the western world. There is no literature available on the subject of Islamic financial instruments and for various reasons, these cannot receive the desired attention from the professionals; wedded to the non-Islamic well-established financial system. It will indeed be a service to the cause of Islam and the financial world at large if we were to set accounting standards for Islamic Banks. Western financial world is watching us closely as to how do we deal with Islamic financial instruments for the purposes of recording and reporting of transactions arising from the "newly" developed financial instruments.

The concept of "accountability" and "trusteeship" is supreme in Islamic jurisprudence. Credibility of financial statements cannot be over-emphasised. Financial statements of Islamic Banks need to contain information which is relevant, reliable and comparable prepared on a consistent and uniform basis. Hence the need for accounting standards for Islamic Banks. Standards should be a brief and simple statement setting out -

a) how certain items within the financial statements should be measured; and

b) what information should be disclosed as a minimum.

Standard setting in the sphere of the rapidly advancing accountancy techniques is admittedly a time consuming, costly and laborious process. The development of; internationally acceptable standards, difficult as it is in the face of differing environments and objectives for accounting in various countries, requires concerted efforts backed by indepth research, extensive consultations and post-exposure debates. The task is challenging indeed — more so in regions faced with professional limitations, resource constraints and, above all, peculiar conditions arising out of innovative Islamisation of economic and financial systems. The challenge has to be accepted and the task accomplished in the larger public interest, especially for protection of investors and financiers; so as to bring about qualitative improvement in professional approach, harmonisation of recognised accounting principles and financial discipline.

As a matter of enlightened public policy, the application and observance of standards needs to be ensured on a "self-regulatory" basis though initially it might be necessary to have guidance and involvement of official regulatory organs. The long range aim must of course be on self-regulation. Unfortunately, experience in the UK on self-regulation has not been entirely satisfactory.

Funding of the project may "have to be done by the Islamic Banks and Financial Institutions as a pioneering contribution in view of their vital interest in the quality of financial statements. They should rise to the occasion.

Realizing the importance of the subject Islamic Development Bank and the Islamic Research and Training Institute arranged for a workshop in Jeddah in early September this year. The Workshop was attended by leading professional Accountants who commanded vast experience in working for Islamic Banks primarily in the Member countries of the Bank. Others included Senior Executives of Islamic Banks and Accountants from: International Accounting Standards Organisations.

The objective of the Workshop was to:

a) Provide an experts forum consisting of Islamic Scholars and Accountants with the opportunity of exchanging in depth the ideas and views regarding the need and rationale for having an accounting standards for the Islamic Banks.

b) Analyse the various steps that need to be undertaken in order to set up the infrastructure for providing accounting standards for Islamic Banks.                

c) Explore the organisational and financial implications of creating an accounting standards Board dealing exclusively with the modes of finance undertaken by the Islamic Banks.

As a result of deliberation at the Workshop a Steering Committee was formed consisting eleven members representing Professional accountants, bankers, academicians, Government regulatory agencies and Shariah Scholars (Fuqaha). Their nationalities are Saudi, Jordanian, Egyptian, Kuwaities, Malaysian, Sudanese and Pakistani. The Steering Committee is required to prepare instruments for setting up a body to draft the accounting standards for Islamic Banks. The main characteristics of such a body was agreed to be as follows:

a) The body must be independent.

b) The constituent affected by the promulgated standards should be represented. This should include —

i) Participating banks and financial institutions;

ii) Professional Accountants Bodies;

iii) Academicians;

iv) Fuqaha;

v) Capital Market Organization;

vi) Government regulatory agencies;

c) Due process to be fair and is perceived as being fair.

d) It must be adequately funded.       

e) Its authority from inception should be recognized by those who have to comply with the promulgated standards.

It was also agreed that the following methodology for development of a conceptual framework for financial accounting and promulgation of standards shall be adopted in conformity with Shariah;

a) The objectives of financial statements of Islamic Banks should be defined. This should take into account the decision makers who rely on financial statements of Islamic Banks, the common attributes of information needed to make decision and the types of financial accounting information that can be produced.

b) Defining the basic concepts, principles and assumptions of financial accounting for Islamic Banks, Establish the basic features of financial accounting for those Banks.

c) Establishing the due process for the promulgation of financial accounting standards for Islamic Banks.

I am glad to inform you that satisfactory progress is being made by the members of the Steering Committee resident in the Saudi Kingdom. A meeting of all members of the Steering Committee is scheduled to meet in Jeddah in January 1988 to review the progress and decide about the timetable and other details. We are hopeful to receive a reasonable amount of donation for meeting initial expense from the Islamic Development Bank.

Certain statistics relating to Financial Accounting Standards Board (USA), International Accounting Standards Committee (UK) and Accounting Standards Committee (UK) about their respective annual budget and personnel are as follows:

Year FormedStandards IssuedBudgetStaff
FASBUSA19739312/13 Million US dollars60
IASCUK197326Not available4
ACSUK197123Sterling Pound 231,0003

ASC Chairman feels that their budget requires to be increased by at least 2 to 3 times to enable the ASC to have adequate number of staff and related facilities.                

During its fourteen year's existence FASB has issued 93 statements of financial accounting standards and 6 statements of financial accounting concepts. They have 7 full time members of the Board consisting of Government officials (1), Academicians (1), Private business (1), Financial analysts (1), CPA (3) and a large number of technical hands. The size of the Board is justified by its output.

An important point to consider is who should do the ground work to set standards? it is felt that the UK ASC's reliance on part time auditors and accountants to staff its projects did not produce effective rules, leading too often to compromises and lax in drafting There is also a question about the independence of the people making decisions. Should be job of drafting standards be entrusted to the full time members of the Board on US's FASB model or a blend of part time members and full time professionals evolved? Ways and means position will obviously be the determining factor.

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The author is the chairman of Corporate Law Authority.

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