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.
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
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.
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:
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
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;
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.
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;
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.
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
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 Formed||Standards Issued||Budget||Staff|
|FASB||USA||1973||93||12/13 Million US dollars||60|
|ACS||UK||1971||23||Sterling Pound 231,000||3|
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
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.
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.
The author is the chairman of Corporate Law Authority.