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The research analyses and compares the International Financial Reporting Standards (IFRS) and Auditing Organization for Islamic Financial Institutions (AAOIFI) accounting standards within the IFIs on Sharia issues. This study makes it possible to explore the topics related to the AAOIFI accounting standard and compare it with the international accounting standard proposed by IFRS. The dissertation comprises introduction, literature review, methodology, findings and discussion, and conclusion and recommendations. The introduction chapter establishes the background of the study, research aim and objectives, rationale and future scope of this research. The Islamic banks try to follow the Shariah rules. AAOIFI has been established to support the accounting system in Islamic financial institutions, which are based on the regulations of the Quran and Shariah.
IFRS is, on the other hand, is an integrated accounting framework for international corporations to develop accounting processes, reporting and auditing in order to run the companies strategically. The study aims to compare the IFRS and AAOIFI standards in accounting. The literature reviews will be effective to examine the accounting standard of IFRS and the AAOIFI. In the methodology, the researcher selects a qualitative study by collecting secondary information to analyse the IFRS and the AAOIFI accounting standard about Islamic finance and banking. The discussion reveals that the financial institutions follow the IFRS principles to maintain accounting standards and run their operations internationally by keeping annual reports, income statements and balance sheets. The recommended suggestions are that the Islamic banks need to follow IFRS principles to internationalise their banking and finance institutions and maintain an ethical standard for operating successfully.
This research has been the most significant learning opportunity for me throughout the entire course. It would have been difficult for me to progress in the study without my lecturer's supportive team members and guidance. I wish to thank my fellow members and colleagues for making each and every day a challenge and their support and encouragement during this study, which are also fruitful for me to get motivation. I am also blessed with supportive family members. His/her commitment and passion for teaching further inspired me when I felt a lack of confidence. I feel confident to complete my course with adequate support and advice from my peers. I would like to thank various people for their contribution to this research project. Without their cooperation, I would not be able to collect relevant and valid information related to the research topic about the IFRS and the AAOIFI accounting standard about Islamic finance and banking. This study results from this beneficial for me to gather a vast range of information about accounting standards in the IFRS and AAOIFI to explore the differences and critically compare the accounting standard.
Background of the study
Accounting is the measurement, processing of data, and communicating financial and non-financial information about economic entities such as corporations and businesses. Accounting is now one of the crucial tools for ensuring the business entity's results over a specific period. It describes all the financial and non-financial data and information in a recording frame. The organisations try to maintain their financial status by managing the transaction details using suitable international standards (Alazzawi and Nișulescu-Ashrafzadeha, 2018). It is also helpful to develop a good summary of the financial situation about their accounting standards. Financial accounting is beneficial to create a financial statement and annual report of the company to share important information with the internal and external stakeholders, engage with the corporations and the customers, and review the data and information to check the strategic decision taken by the firm (Alazzawi and Nișulescu-Ashrafzadeha, 2018). Through management invoices, it is also essential to maintain the accounting method and create reporting by including all the critical financial and non-financial data so that the transactions of the brand can be evaluated systematically (Haniffa and Hudaib, 2010). This includes all exercises for recording evaluation forms and determining cost obligations. In 1973, IASB was created to cover the accounting by delivering IASB called International Financial Reporting Standards (IFRS), and then adopted throughout the world. The developed nations use the accounting regulators and standards to follow the guidelines and create reporting style for systematically running their business.
Since establishing the Islamic Financial institution (IFI), the organisation has expanded its services across different international markets rather than focusing on Muslim majority countries. It is helpful for the institution to expand its operations even in western countries. For reporting practice and running the organisation ethically, it is now mandatory for the financial institutions to follow the accounting standard and ensure transparency and accountability in reporting the transactions (El-Halaby, Albarrak and Grassa, 2020). The IFI’s main emphasis is on ethical and moral values, as IFI principles are based on the Islamic Sharia Law supported by the explanations of the Quran and Sunna (El-Halaby, Albarrak and Grassa, 2020). There are differences between the IFIs and conventional banking activities. The objectives of the conventional banks across the international countries are to maximise their profitability through more investment financial security and banking services. On the other hand, the IFI’s principles are to share their profitability with their customers under the religious principle of prohibiting interest. In 1990, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) non-profit organisation was established in Algiers. It was registered in 1991 in Bahrain by the Islamic financial institutions. It provides guidelines and shares the accounting, auditing, governance, ethics and Shariah standards for the IFIs. It mainly supervises the existing accounting standard and observes the Islamic principles of setting up the accounting system in the institutions. The purpose of its creation is to advance and spread Islamic accounting standards, rather than following the IFRS. This study makes it possible to compare and contrast the IFRS and AAOIFI standards in accounting, auditing and reporting.
Aims and objectives of the research
The research aims to analyse and compare the IFRS and AAOIFI accounting standards within the IFIs on Sharia issues to develop a depth analysis and evaluation of IFRS and AAOIFI
The research objectives are:
To evaluate whether Islamic finance and Banking offer instant financial service in conformity with Islamic Shariah.
To explore why the Muslim majority countries is not adopting the AAOIFI standard since all Islamic financial institutions are supposed to use it.
To analyse the differences in accounting standards between IFRS and AAOIFI
To recommend suitable suggestions for adopting best accounting standards to improve the ethical practice in accounting and maximise accounting and reporting standard
What is the issue?
The primary issue is related to IFRS and AAOIFI accounting standards within the IFIs on Sharia issues. There are diversities in the accounting standards proposed by the IFRS and AAOIFI. Some of the Islamic banking institutions adopt the AAOIFI accounting standards, as it is based on the regulations and beliefs of the Quran and Sunna (El-Halaby, Albarrak and Grassa, 2020). On the other hand, some financial institutions did not adopt AAOIFI; instead, their accounting system is based on the IFRS accounting standard, as it is internationally proposed and developed for the banks across the globe.
Why is it an issue?
The objectives of the conventional banks and Islamic banks are different, as per their values and beliefs. Traditional banks are trying to maximise their profitability as a corporate organisation to provide a high return on the investment of the investors and shareholders (Haniffa and Hudaib, 2010). Conventional banks also renovate their services and develop a good accounting process as per the IFRS standard to maintain transparency and create values for the stakeholders. However, Islamic banks focus on sharing their profitability with the customers to maximise their values. As per the AAOIFI standard, the Islamic banks try to create values for all the stakeholders, including the employees, customers and others, by providing them with profit sharing. Hence, there is diversity in following the accounting standard according to IFRS and AAOIFI standards.
Why is it an issue now?
Maintaining right accounting standard becomes a serious issue, as some Islamic banking institutions already adopted the AAOIFI standard in accounting, auditing and reporting their financial and non-financial data and information. They focus on the values and beliefs of the Quran and Sunna. On the other hand, some Islamic banks follow the international standard proposed by IFRS to maintain an accounting system and efficiently develop the institution's annual report. Hence, it is mandatory to identify the problems of the Islamic banks that follow the IFRS standard.
How does the research shed light on the topic under consideration?
The research sheds light on comparative analysis between the IFRS and the AAOIFI accounting standard in Islamic finance and banking. It evaluates the accounting standard of IFRS and AAOIFI and identifies the best solutions for the Islamic banks.
1.4 Scope of the study
The research is beneficial to develop a comparative analysis between the IFRS and the AAOIFI accounting standard in Islamic finance and banking. It provides a scope for a critical understanding of the accounting standards proposed by the IFRS and AAOIFI. There are several views about different accounting standards in the Islamic banking institutions. Some banks adopt AAOIFI and many other banking institutions follow the international standard to run their operations by accounting, auditing and reporting. Through this study, it is now possible to demonstrate the practice of accounting as per IFRS and AAOIFI. This will help future researchers analyse banking practices in accounting, auditing, and reporting their financial and non-financial data and information. The study explores different accounting standards adopted by Islamic banking institutions.
Structure of the dissertation
The study comparatively analyses the IFRS and the AAOIFI accounting standards in Islamic finance and banking. The dissertation contains an introduction, literature review, research methodology, data findings and analysis, and conclusion and recommendations. The first chapter introduces the research and rationale of the study. A literature review is the second chapter. In which the researcher will review the existing secondary sources of information related to the accounting standard. Reviewing the theories and concepts of IFRS and the AAOIFI accounting standard in Islamic finance and banking will allow in-depth evaluation and data analysis.
The third chapter of research methodology is vital for the researcher to choose the proper method for critically gathering and analysing the information. The methodology of the study and the ethical consideration in this chapter are helpful for the researcher to progress in the dissertation ethically and collect accurate data and information related to IFRS and the AAOIFI accounting standards in Islamic finance and banking The next chapter is data findings and analysis to understand the IFRS and the AAOIFI accounting standards in Islamic finance and banking. The fifth chapter will be conclusion and recommendations about suitable accounting standards for IFIs to run their operations ethically and maintain the best accounting standard to meet their commitment towards the stakeholders.
Chapter 2: Literature review
This literature review introduces the two standards followed by the IFRS and AAOIFI and provides their primary creation objectives. The fundamental principles and accounting standards will be evaluated to better understand the practices proposed by the IFRS and AAOIFI. Even though IFRS standards are acceptable in IFIs, others believe they should be accounted for differently because of dissimilarity in their objectives and operations. Hence, the literature review effectively develops understanding about the IFIs and AAOIFI, to support the Islamic banking institutions across the countries like Pakistan, Malaysia, Bahrain, Qatar, UAE, Saudi Arabia, Indonesia, Algeria, and the UK. AAOIFI and IFRS differ on lease restricted contracts and speciality investment accounts. By reviewing the practices in IFRS and AAOIFI, the researcher can develop a comparative analysis between IFRS and AAOIFI accounting standards about Islamic finance and banking.
2.2 International Financial Reporting Standards (IFRS)
IFRS develops standard rules so that the financial statement can be consistent, comparable, and transparent worldwide. The International Accounting Standards Board issues it. It provides clear guidelines to maintain reporting activities and develop accounts defining types of transactions and other events that have crucial impacts on the business's financial activities (Alazzawi and Nișulescu-Ashrafzadeha, 2018). It is beneficial for the home countries and foreign countries to adopt the international standard for accounting and reporting the financial and non-financial data of the banking institutions. It brings consistency in the accounting standard and practices regardless of the company and the country (Alam, 2020). As a result, the international standard of accounting enhances trust, growth, and long-term financial stability in the global economy. The investors can also review the business performance and make a sound investment decision into the company. The mandatory rules of IFRS are to develop a statement of financial position and comprehensive income, the balance sheet provides information on income and expenditure to maintain consistency in accounting.
Additionally, the profit and loss statement must be declared after one financial year with the income statement including the property and equipment (Alazzawi and Nișulescu-Ashrafzadeha, 2018). The report summarises the cash flows related to operations, investing and financing. Statement of changes in equity is also essential as per the IFRS standard, where the retained earnings and documentation related to the company's change in earning are necessary to be disclosed for the given financial period. IFRS is now essential for exploring cash flows and accessing the company's income statement in a given period so that a transparent and consistent accounting system can be developed (https://www.accaglobal.com, 2021).
Financial institutions across the globe must follow the adoption of international accounting standards in preparing their accounting, income statement and annual report by including all the financial and non-financial data of the organisation (Haniffa and Hudaib, 2010). Shared based payment is another principle in which the payment transactions, for example, granted shares share options and share appreciation rights, must be declared, including the dealings with the employees and other parties to be settled in cash, asset or equity. In business combinations such as mergers and acquisitions, it is essential to measure their financial activities in fair value at the acquisition date (Alazzawi and Nișulescu-Ashrafzadeha, 2018). The international accounting standard board focuses on insurance contracts to provide a temporary exemption from the requirements of some other IFRSs, including the changes in accounting estimates and errors when selecting the policies (Ahmed, 2020). The noncurrent assets held for sale and discounted operations must be declared as the assets held for sale are not depreciated and are measured at the fair values to maintain financial position. It is also important to disclose the operating segments, products and services, and the geographical areas that they operate and their major customers (Sellami and Tahari, 2017). The information is based on the international management reports in identifying operational segments and measuring disclosed segment information. Disclosing the interest in other entities and fair values measurement is essential with specific dates and interest rates in the market (El-Halaby, Albarrak and Grassa, 2020). Revenue from the contract, lease accounting, reporting period, auditing for supervision and income taxes are also important information required to be disclosed under transparency and accountability.
2.3 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
AAOIFI is a not for profit organisation, and it has been established to maintain and promote Shariah standards for the Islamic financial institutions, participants and the overall industry. It was created in 1990, ensuring that the participants conform to the regulations set out in Islamic finance (Ahmed, 2020). It is considered the regulatory and supervisory authority of the accounting and auditing organisation for the Islamic financial institutions, including accounting, governance, transactions, investment, and ethics. The Shariah law is mandatory for all the participants and the banking executives in the Islamic banks. Riba or collection of interest is forbidden, and sharing profit and losses among the communities is also necessary (AAOIFI, 2010). Hence, the purpose of AAOIFI is to create values for the social communities by sharing organisational profit and losses. As there is an increasing importance of the Arabic and Muslim regions worldwide, AAOIFI constantly updates its best practices by providing guidelines for adjusting innovations, including derivatives and hedging instruments.
The important principles of AAOIFI are the prohibition of the collection and payment of interest by the lenders and investors, and sharing profit and loss with the social communities is mandatory (El-Halaby, Albarrak and Grassa, 2020). Hence, the aim of AAOIFI and Islamic banks differ from the practice of IFRS and other conventional banks. This process was driven by the tremendous oil wealth that fuelled renewed interest in and demand for Sharia-compliant products and practices. The Islamic banks adopt AAOIFI principles by following the Shariah, and their aim of running the banking institutions is also different from the commercial and conventional banking system (Ajili and Bouri, 2017). For example, the bank provides loan money to a business; the business will pay the money to the bank without any interest, and in this case, the business will share the percentage of profit with the bank. If the business is running with loss, the bank does not benefit. Hence, the Islamic banks use equity participating and shares system to earn a profit on lending money (Alkali, Alkali and Aliyu, 2017). Therefore, the accounting system is different from the IFRS. In these AAOIFI principles, the Islamic banks adopt a profit-sharing model to run their business and profit through equity participation.
Comparing IFRS and AAOIFI
IFRS is based on economic and social activities, including the Islamic finance industry; however, the AAOIFI is based on Islamic principles, not covered by IFRS. IFRS is not an industry-specific standard. It is a generic accounting system applicable for all the organisations. The AAOIFI is only for the Islamic financial practice with Shariah guidelines (Alkali, Alkali and Aliyu, 2017). The accounting standard is clear and consistent under IFRS, but AAOIFI follows the Shariah laws, ethics and governance for developing organisational practices in the Islamic banks. AAOIFI focuses on general presentation and disclosure in the financial statement of Islamic banking institutions (Haniffa and Hudaib, 2010). There are different reporting standards under IFRS, balance sheet, income statement, share values and others where the shareholdings are one of the major sources of funds in investment accounts (Ajili and Bouri, 2017). Mudaraba investment profit-sharing agreement is being developed under AAOIFI, and there is dividend and shares in the conventional bank as per the IFRS guidelines. The conventional accounting system would face a challenge with the compliance of Shariah, and thus the Islamic accepting standard AAOIFI is developed to mitigate the existing problem. The major problem with IFRS in Islamic countries is driven by the different treatment of interest under the conventional accounting system (El-Halaby, Albarrak and Grassa, 2020).
Interest is being charged commonly as compensation to the lender. However, referring to interest rate, Riba is forbidden and considered a major sin under the Shariah principles. Prohibition on charging interest gives rise to several different treatments in Shariah-compliant companies. The Islamic banks may ask for strict collateral called Murabahah to prevent any defaults in returning the money, without any interest as the interest is forbidden with lending or deposition of the capital (Alkali, Alkali and Aliyu, 2017). The Shariah-compliant companies conduct risk-sharing principles, where the banking institutions follow a profit-sharing model with the customers and other stakeholders. In the conventional banking system under IFRS, the companies can issue shares, dividends or bonds for paying the interest and taking a loan from the bank with a specific interest rate and date. However, in Islamic banks, the companies are prevented from raising funds by taking loans from the banking institutions (Ajili and Bouri, 2017). In this context, Mudaraba is widely applied in the Islamic countries, mainly a partnership practice where one party provides money to other commercial enterprises based on the Mudaraba investment management agreement (Haniffa and Hudaib, 2010). The depositors authorise the Islamic bank to manage their funds and profit from the investment return. Hence, there are differences in the perspectives of the banking activities, and the Islamic banks try to follow the guidelines of AAOIFI as per the Shariah law.
Chapter 3: Research methodology
Methods of the study
Multiple approaches and research methods are applied in the study for developing suitable process of conducting the dissertation successfully through in depth data analysis and evaluation. The research is about comparative analysis between the IFRS and the AAOIFI accounting standard in Islamic finance and banking. The researcher would like to choose appropriate research methods for collecting the data and information in order to develop comparative analysis between the accounting standards of the IFRS and AAOIFI.
Deductive and inductive approaches are generally two kinds of approaches that help the researcher to choose the way of conducting the research with comparative analysis (Brannen, 2017). The theories and concepts related to the research are gathered and after that the researcher tries to create observation and collect the authentic data and information for further critical analysis (Basias, and Pollalis, 2018). On the other hand, the inductive approach indicates that, the researcher is able to collect and analyse the data and information efficiently in order to develop appropriate theory and concepts related to the research topic. In this study, the researcher will choose the deductive approach, for gathering valid information and analysis the data efficiently. The gathered data and information related to accounting standard will be analysed in the research to conclude the dissertation successfully by meeting the above mentioned study objectives.
3.3 Data collection method
There are two types of data collection method, primary and secondary and these are beneficial for managing the research activities through collecting the relevant data and information related to the study topic (Basias, and Pollalis, 2018). The primary data collection method refers to the collection of data from the first hand sources like survey, questionnaire, case study analysis and interview (Basias, and Pollalis, 2018). On the other hand, secondary data collection method is about gathering the information from the journals, books, articles and online published articles, which are considered to be the authentic secondary sources for the research. In this particular study, the researcher selects secondary data collection method, in order to review the annual reports of five years collecting from Bank’s websites as well as relevant pieces of literature collecting from different type of journals, standards, websites, magazines, academic articles and other information of AAOIFI and IFRS from their websites. Hence, the secondary data collection method is suitable as per the research topic of developing comparative analysis between the accounting standards of IFRS and AAOIFI, mainly in the context of Islamic banking institutions.
3.4 Data analysis technique
The data analysis method is of two types which are quantitative and qualitative data analysis. The quantitative analysis method refers to the practice of analysing the gathered data and information on the basis of the charts, graphs and statistical tools, where mainly the numeric data is being collected and analysed (Brannen, 2017). On the other hand, the qualitative data analysis method is conducted through in-depth evaluation, thematic analysis, by applying the secondary sources of information (Basias, and Pollalis, 2018). In this study, the researcher chooses the qualitative data analyses method for developing comparative analysis between the accounting standards of IFRS and AAOIFI, mainly in the Islamic banking institutions. Thematic analysis will be suitable for this dissertation, where the researcher will be able to develop different themes related to the study topic and evaluate the information critically to draw final conclusion.
Maintaining anonymity and confidentiality in the research is an integral ethical consideration in this particular study where the researcher focuses on managing the research activities ethically. The researcher also ensures that, the gathered data and information are utilised only for this particular study. In order to avoid the unethical practice of data breach and misinterpretation of information, the researcher implements the Data Protection Act 1998 for progressing in the research successfully by maintaining data safety and security. In this particular study, the information and data are gathered from books, journals, organisational website and articles, and it is the responsibility of the researcher to maintain the validity of the information by referencing the information with authentic citation as well as protect the data under general data protection legislations. Authenticity of the study is also maintained by using valid sources of secondary information, where the researcher focuses on gathering authentic information and its author’s name in order to maintain validly of the information. The authors name and years are utilised to cite the information for maintaining data relevancy.
Chapter 4: Data findings and analysis
Data findings and analysis helps the researcher to represent the collected information in a systematic way. The research is about developing comparative analysis between the accounting standards of IFRS and AAOIFI, mainly in the Islamic banking institutions. The researcher has chosen qualitative research rather than quantitative research. As per the study topic, the qualitative research is suitable, in which the researcher is able to gather secondary data and information by reviewing the journals, books and articles related to the accounting standards of the IFRS and AAOIFI. The discussions are evaluated through thematic analysis, where the researcher will develop different themes to compare and contrast the IFRS and AAOIFI standard in accounting, auditing and reporting in the Islamic banks.
The Islamic banks are trying to adopt Shariah law and the AAOIFI standard in order follow the rules in Islamic community and develop different standard to accounting, auditing and reporting. The Islamic banks focus on following the AAOIFI standard with the practice of Shariah law, and the guidelines by Quran (Nurleli and Wibisono, 2021). The major guidelines of the Islamic banks are unity of God, Trusteeship referring that the people are given a special role in relation to the environment, community principles, and importance of knowledge in connection to the sustainable community development and the holistic approach to life having influence on economics. It is important for the banking executives to have in depth knowledge about creating values for the social communities with the connection to the notion of developing sustainable community in future by value creation for the social communities (Herath and Alsulmi, 2017). The holistic approach of community development is related to fair distribution of wealth through Zakat where small percentage of ones possessions will be provided to charity and the Muslim have the duty of collecting Zakat for fair distribution of income and wealth across the social communities for ensuring social community development. The purpose of Shariah is “to promote the welfare of the people, which lies in safeguarding their faith, their life, their intellect, their prosperity and their wealth” (Sharairi, 2020).
The countries following the AAOIFI Shariah standard partially and fully are such as Pakistan, Dubai International Financial Centre (DIFC), Sudan, UAE, Nigeria, Jordan, Iraq, Oman, Syria and other Muslim countries. The mission of AAOIFI is to standardise and harmonise the international Islamic finance practices and financial reporting in accordance to Shariah. The vision of the AAOIFI is to guide the financial market operation and financial reporting on the basis of Shariah principles and rules for supporting the social community development by profit sharing model. For example, the famous international Islamic bank Al Rajhi Bank is one of the largest banks in the work with the total asset of SR 343 billion or US$ 80 billion, US$ 6.67 billion capital and more than 9,600 employees. The organisation tries to follow ethical standard to develop accounting, auditing and reporting to support the international finance operations and activities across the international markets. The organisation is able to develop vast network of over 570 branches, more than 4,794 ATM's, 74,612 POS terminals installed with merchants as well as Al Rajhi Bank has the largest customer base of any bank in the United Kingdom. With the expansion of the western culture across the globe, the organisation follows the principles of IFRS rather than AAOIFI, even if it is operating in the Muslim countries (Al Rajhi bank, 2021).
For developing good compliance and following the ethical practice of accounting and reporting, the international standard is being adopted by the organisation Al Rajhi Bank, which further provides a scope to the banking institution to run their operations with the international standard and ensure balancing heir financial transactions efficiently across the global markets. The profit volume and revenue generation of the firm are calculated through the accounting system with balance sheet and income statement and it is developed with the IFRS guidelines, rather than AAOIFI standard (Zaleha Abdul Rasid, Rahim Abdul Rahman and Khairuzzaman Wan Ismail, 2011). In addition to this, Qatar international Islamic bank is also successful to run their operations internally with the three pillars of trust, family and commitment. The organisational vision is to provide Shariah complaint financial services products that meet the needs of the customers by ensuring contribution in the national economy through developing strong relationship with the stakeholders. Hence, the Qatar international Islamic bank is influence by the Shariah principles and follows the AAOIFI guidelines to embrace their identity as a modern bank with the traditional values (QIIB, 2021). They demonstrates the commitment towards their customers and country by striving excellence in everything, increasing interactions and enhancing team work for promoting open and honest banking environment. Hereby, some of the Islamic banks adopt AAOIFI guidelines, but most of the banks even in the Muslim countries follow international standard to maximise banking compliance and run the financial activities efficiently by accounting, auditing and reporting.
4.3 Data evaluation through thematic analysis
The above mentioned data are evaluated through thematic analysis, where different themes related to the research topic will be develop for critical analyses. The themes are such as,
Comparison between the IFRS and AAOIFI standard
The IFRS standard is mainly the international accounting standard, under which the organisations try to follow ethical practices, guidelines to develop auditing and reporting in publishing the annual report (Albarrak and El-Halaby, 2019). As per the findings, the financial banking institution including the Islamic banks follow the IFRS in order to run their financial operations across the international markets in order to keep balancing in generating profitability, serving the customers through financial products and continuous services. On the other hand, the principles of AAOIFI are different, as it is based on the Shariah guidelines, under which the financial institutions in the Islamic countries follow the profit sharing model. Their focus is to maximise social community development, rather than profit generation. Hereby, the Islamic banks follow the AAOIFI guidelines to maintain Shariah rules and create values for the social communities through sharing profit with the customers and other stakeholders.
In the recent era of globalisation, majority of the Islamic banks are not adopting the AAOIFI standard to run their services across the international markets
As per the discussion, the international bank such as Al Rajhi Bank follow the IFRS rather than AAOIFI standard, as it becomes difficult for them to maintain the international standard through the Shariah principles and it further hampers balancing the financial operations. As per the finding, the AAOIFI standard could not be required by the Islamic financial institutions, as the IFRS standard is well organised and developed for the benefits of all the institutions on fair values. The Islamic banks cannot apply the AAOIFI standard globally when they run their operations globally. Hence, adopting AAOIFI standard becomes difficult for them to operate internationally (Zaleha Abdul Rasid, Rahim Abdul Rahman and Khairuzzaman Wan Ismail, 2011). As per the IMF report in Qatar 11 out of 31 nations applied a single integrated regulatory framework to all banks as per the IFRS guidelines, and ten countries including Qatar adopt the single integrated framework in the banking institutions with the addition of specific reference to the Islamic banks (Ehsan, Khan and Saeed, 2021). The model is hereby beneficial for the banks to follow the integrated framework and also create values for the social communities with the consideration of Islamic banks and Shariah principles. Hence, mixed method is adopted by most of countries due to influence of western culture and international expansion of the Islamic banks.
The issues related to the AAOIFI standard further prohibit the Islamic banks to adopt the AAOIFI standard.
Due to Shariah compliance issues, the Islamic banks are not willing to adopt AAOIFI standard and rather follow the integrated accounting standard for publishing the annual report within specific time interval. The financial banking institutions also face the issue of contributing in the society and adopt profit sharing model, as the banks cannot maximise their profitability under the Shariah principles. It becomes difficult for them to expand their services across the international markets without arranging capital (Vinnicombe, 2010). Hence, the Islamic banks try to follow the integrated framework of accounting, auditing and reporting, in order to run their international operations and provide the best financial services to the customers. The issue of comparability and lack of balancing method in adopting the AAOIFI standard further influence the Islamic banks to follow the integrated framework of accounting and reporting (Ullah, Khanam and Tasnim, 2018). The IFRS standard is hereby adopted by most of the international banking institutions in the Islamic countries due the existing issues related to AAOIFI.
The famous banking corporations prefer to have IFRS standard in order to run their international operations.
In near future, it becomes challenging for the Islamic financial institution to structure the conventional finance in order to arrange capital through profit maximisation principles. As per the findings, the products and financial services at the Islamic banks are same as the conventional banking practices, where the IFRS reported that, the product similarities may lead to controversy in following the Shariah principles and AAOIFI guidelines (Shafii, and Zakaria, 2013). It becomes difficult for the organisation in the Islamic countries to follow the Shariah guidelines in long run to maximise their principles of creating values for the social communities by profit sharing model. There is also the issue of comparability when the Islamic banks follow AAOIFI standard rather than integrated framework of accounting and reporting. When the Islamic banks are operating across the international countries, they cannot maintain balancing in their financial activities without balance sheet and income statement (AAOIFI, 2021). Hence, most of the Islamic banks in the recent years prefer to adopt the IFRS accounting standard in order to publish annual report and maintain balance of payment, income statement and cash flow account efficiently over the period of time. The Islamic banking industry is dominated by the western industry and the Islamic banks prefer to follow IFRS guidelines in order to operate in the competitive industry. Without having annual report and effective balance sheet, it is difficult for the organisations to maintain comparability as well as maintain international standard to run their operations globally.
Chapter 5: Conclusions and recommendations
Through the analysis, it is possible to evaluate the above mentioned research topic, where there are differences in the accounting standards as per the guidelines of IFRS and AAOIFI. It has been investigated that, the Islamic banks prefer to follow the guidelines of AAOIFI as it is based on the Shariah law and Quran. Most of the Islamic banks across the countries including Pakistan, Malaysia, Bahrain, Qatar, UAE, Saudi Arabia, Indonesia, Algeria, and the UK follow the guidelines of the AAOIFI in order to maintain the Islamic rules and make the accounting system simple. The Islamic banks try to follow the rules of Shariah and focus on the principles of the AAOIFI, which is developed for social community development. Charging interest on money lending is not accepted as per the rules of AAOIFI. However, the conventional banks try to maximise their profitability by money lending and charging interest on it. It becomes difficult for the Islamic banks to maintain the international accounting standard as per the AAOIFI principles that raise the issues for the Islamic banks to operate across the international markets. On the recent era of globalisation and digitalisation, there is great influence of western countries, for which the Islamic countries are also trying to nationalise their banking and financial system by following the IFRS principles, in order to maintain balancing in operating across the globe. As per the findings, the Al Rajhi Bank focuses on develop integrated accounting framework in order to maintain their international operations. Profit maximisation technique as well as the international activities is beneficial for the banking institutions to expand their services and serve the huge numbers of customers across international markets.
To evaluate if Islamic finance and Banking offer instant financial service in conformity with Islamic Shariah
The first objective is being met through critical analysis and evaluation. There are Shariah rules in the Islamic banks, where the Islamic countries follow the rules in order to create values for the social communities. AAOIFI has been established on the basis of the Quran and Shariah principles, to support the Muslim communities and their beliefs. Hence, the Islamic finance and banking institutions adopt AAOIFI principles for accounting and reporting. They mainly follow the profit sharing model to invest on the social developmental activities and provide the share of the profit to the stakeholders, including the customers and shareholders.
To explore the reason that the Muslim majority country are not adopting to AAOIFI standard since all Islamic financial institutions are supposed to use it
As per the analysis, the AAOIFI has been established to support the Islamic banks with Shariah rules and the value of Quran. In AAOIFI, charging interest rate on the investment of the customers as well as lending money on high rate of interest on return of loan is prohibited by the law. Most of the Islamic banks did not adopt such principles, as the AAOIFI standard is based on the profit sharing model, which is not beneficial for the banks to run their international operations. Moreover, due to lack of comparability and difficulties to maintain balance in accounting, the Islamic banks are not willing to adopt the AAOIFI standard rather they adopt IFRS principles to run their international operations.
To analyse the differences on accounting standard between IFRS and AAOIFI
The study is effective to meet the third objective, where there are differences between the accounting standards between IFRS and AAOIFI. The conventional banks follow IFRS principles to maximise profitability and publish annual report through systematic cash flows, income statement, revenue generation and share price activities so that the stakeholders can acknowledge the financial information and make the investment decision. On the other hand, the AAOIFI principles refer to maximise the values of the customers and social communities through profit sharing model which is developed on Shariah rules.
To recommend suitable suggestions for adopting best accounting standard in order to improve the ethical practice in accounting and maximise accounting and reporting standard
With the western industry influence, most of the Islamic banks adopt IFRS standard and it would be beneficial for all other banks to follow the same, in order to maintain integrated framework for accounting, auditing and reporting. The study is beneficial to develop critical analysis and draw ultimate solution of the Islamic banking and financial institutions in order to maintain international standard and generate profitability to provide high return on the investment of the stakeholders.
The Islamic banks must design the products and financial services to support the customers and business entrepreneurs for taking loan in investment purpose. Through developing suitable products with benefits, the Islamic banks can create values for the social communities as a whole.
It is important to develop cash flows and income statement in the banking institution in order to maintain international standard and publish the annual report. The stakeholders can access the annual report of the institution and acknowledge the cash flows, income status, profit, and investment activities of the organisation.
Following the IFRS will not create any harmful situation for the Islamic banks, rather it would be beneficial for the Islamic banks to maintain comparability as well as balance their accounts and international operations strategically. Hence, the Islamic banks must follow the accounting standard propose by the IFRS in order to maintain their international operations and provide high return on investment to the stakeholders.
The aim of the Islamic banks is to maximise values for all the social communities, and in this regard the banks must develop good financial products and services to support the customers and other shareholders so that they can get higher return on their investment. This strategic planning can also be performed by following the IFRS principles, where the banks would be able to run their operations strategically and also create values for the stakeholders, engaged with the institution.
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