Islamic Accounting: The Emergence of a Research Programme

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Islamic AccountingThe Emergence of a Research
Programme

• Bassam Maali Christopher Napier

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What could Islamic accounting be? - 1

• Specific form of accounting dictated by religious
  precepts of Islam
• Sources
• Quran
• Sunnah
• Likely to be normative-deductive
• Shariah
• Can we contrast Islamic accounting with e.g.
  Christian accounting?

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What could Islamic accounting be? - 2

• Accounting practices in predominantly
  Islamic/Muslim countries
• Problem of wide diversity across time and space
• Pre-colonial, colonial and post-colonial
  accountings

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What could Islamic accounting be? - 3

• Accounting practices of self-described Islamic
  organisations?
• Islamic financial institutions
• Banks
• Investment companies
• Insurance companies
• Islamic not-for-profit organisations
• Waqf
• Zakah intermediaries

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Key factors - cultural

• Religion (din) permeates life no
  sacred-secular divide
• Shariah principles and law
• Prohibition of riba (usury/any interest?)
• Obligation to pay zakah (religious wealth tax)
• Importance of the ummah (Islamic community)

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Possible links to accounting - cultural

• Ummah
• Disclosure
• Social and environmental reporting
• Zakah
• Measurement and reporting
• Riba
• Shariah-compliant transactions (financial
  engineering?)
• Form and substance

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Key factors - economic

• Oil wealth in Middle East from 1970s
• Desire to mobilise wealth in Shariah-compliant
  ways
• Attempts to develop Islamic economies
• Provision of acceptable savings, investment and
  finance vehicles for Muslims
• Financial innovation
• Creation of synthetic products based on
  shariah-compliant forms that mimic conventional
  financial instruments

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Possible links to accounting - economic

• Islamic Financial Institutions
• General accounting requirements
• Audit, supervison and regulation
• Shariah-compliant transactions
• Specific accounting treatments
• Relevance of International Financial Reporting
  Standards
• Substance and form

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English-language research in Islamic accounting

• First generation
• UK key figures were Trevor Gambling, Cyril
  Tomkins, Rifaat Abdel Karim
• Australia PhD students from Middle East and
  South East Asia supervised by limited range of
  accounting professors
• Second generation
• Scholars in/from Middle East and South East Asia
  writing in English
• Hardly any contribution from US scholars

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Early normative arguments

• Role of financial reporting
• Information relevant for calculating zakah
• Social reporting to the ummah
• Valuation basis
• Current value
• No use of discounting
• Performance reporting
• Value added statement, not income statement

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Some empirical evidence

• Sulaiman
• 1998 - Questionnaire survey
• 2001 Experimental study
• No significant differences between Muslim and
  non-Muslim respondents
• Idris (1996)
• Conventional reports most important
• Islamic reports slightly important
• Maali (2005)
• Islamic influence of diminishing importance on
  accounting practices after Islamic Bank
  established

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Accounting concepts

• Accounting unit
• Are separate business entities acceptable?
• Going concern
• Is assumption of indefinite life inconsistent
  with Islamic belief that only God is eternal?
• Periodicity
• Money measurement
• Should a stable measuring unit be used?
• Conservatism
• Valuations for zakah current measures?
• No distribution of profit until realised?

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Accounting concepts

• Matching
• Unnecessary if assets/liabilities measured at
  current value?
• Required to assign responsibility for cost to
  recipient of benefit?
• Timing of recognition/accruals
• Accrual basis necessary to measure true wealth?
• Accrual basis may lead to distributions before
  cash received?
• Full disclosure
• Wide agreement disclose everything important to
  Islamic users for the purpose of serving God.

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Islamic banking

• Special contracts and transactions
• Mudaraba managed investment partnership
• Murabaha purchase financing with mark-up
• Ijara form of operating lease
• Salam forward sale contract
• Musharaka form of partnership
• Shariah consultant or supervisory board

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AAOIFI

• Established in 1990 to produce standards for
  Islamic financial institutions
• Builds on existing accounting practices where
  these are consistent with Islam
• Applies Islamic principles of Shariah, but must
  deal with wide variation in interpretation of
  Shariah
• Tensions with national regulators and IASB

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Are Islamic transactions different in substance?

• Are Mudaraba deposits actually liabilities?
• Are Murabaha sales really loans?
• Are Musharaka partnerships really joint ventures?
• Are Ijara really leases?
• If accounts are socially constructed, is there an
  Islamic substance that differs from Western
  substance?

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Conclusions is Islamic accounting worth
celebrating?

• Growing body of literature
• Beginning to spread into other fields of
  accounting research, e.g.
• Environmental reporting
• Accounting history
• Initial focus on normative studies shifting to
  more empirical research
• Some policy relevance role of AAOIFI
• Key outstanding issue do Islamic transactions
  have a distinct substance, or are they Western
  transactions in disguise?