Accounting in Islamic banks: evidence for IAS-IFRS/FAS convergence in an
exploratory study of Islamic banks in the Gulf region
Aldo LEVY[1]; Hichem
Rezgui[2]
ABSTRACT. In spite of the AAOIFI's own FASs, which are designed for
Islamic finance and its need to comply with Sharia law, the IAS-IFRS
standards are still applied by many Islamic banks. Our research addresses
the degree of agreement between the IAS-IFRS and the FAS through an
exploratory study which provides a comparative analysis of the financial
statements of Islamic banks in the Gulf region, using these two different
systems. The results of our research show a genuine technical convergence,
but at the same time a number of significant divergences regarding the
structure of the balance sheet and the cash-flow analysis.
JEL Classification: G21; M41; M48; M49
Keywords: Islamic finance - International standards for financial reporting
- Accounting convergence and financial divergence.
Introduction
Islamic banks are relatively recent actors on the economic stage[3]. Their
outstanding debt is "on the order of $1 trillion, with two-figure growth in
recent years. Saudi Arabia and Bahrain are the Gulf's leaders in Islamic
finance, but Malaysia is apparently becoming the perfect example of modern
Islamic finance, with: fourteen Islamic banks and eight takaful mutual
guaranty funds; the leading market for the trading and issuing of sukuks
(bonds), 86% of the companies listed being guaranteed Sharia or sharia-
compliant; and a market capital of $213 billion.[4] Islamic finance
accounts for only 1% of traditional finance ($100 trillion)" (Levy, 2012).
Islamic finance is classified as one of the forms of ethical finance
(Forget, 2009). It makes no distinction between the verses of the Koran
devoted to it (less than 0.2%) and lay precepts. This asserts a strong
ethical component in economic activities, because in Islamic finance all
human behavior, whatever its purpose, incorporates a spiritual dimension
which must comply with Muslim law.
The prohibition against Riba interest in financial flows is the fundamental
constraint on Islamic banks. This ban requires them to employ financing
arrangements for real flows that are either participatory, based on the
sharing of profits and losses, or real sales with a margin for the bank.
The IAS/IFRS standards act to contain the informational risks of
international entities and banking institutions. Many Islamic banks take
part in international markets and use these standards, while the AAOIFI[5]
and the IFSB[6] have promulgated standards specifically designed for
themselves.
In order to study the application of international standards in Islamic
financial institutions we undertook a comparative analysis of the financial
statements of Islamic banks in the Gulf region, some of which were
established under the IAS/IFRS rules (Abu Dhabi Islamic Bank: ADIB) and
others under the accounting standards of the AAOIFI (Bahrain Islamic Bank:
BIB).
The differences in the presentation and handling of their financial
statements provided us with information on the ability of the IAS/IFRS
standards to meet the specific needs imposed by Islamic finance. The
results of this inquiry reveal two things. On the one hand, some of the
treatments recommended by the IAS/IFRS depart from certain ethical
principles of Islamic finance but nevertheless remain applicable, as long
as the proceeds of the financial activities are approached in terms of
their economic nature. On the other hand, although the two accounting
systems (the IAS/IFRS and the FAS)[7] have many similarities, their
presentations of financial statements differ significantly in terms of
account structure and cash flow.
This research enables us to answer two questions: whether the convergence
between the FAS and IAS/IFRS accounting standards is a partial one, and
whether it in any way threatens the objective of international standards.
According to R. Obert (2008), the harmonization of international accounting
is an institutional process whose goal is to bring about a convergence of
national accounting norms and practices, so as to ensure the comparability
of financial statements from different countries. With this in mind the
article is organized as follows: the first section presents a review of the
literature dealing with the processes of convergence between accounting
systems, in order to define the research hypothesis; the second section
comprises an empirical comparative analysis of the financial statements of
Islamic banks under the two systems: FAS and IAS-IFRS; and the last section
summarizes the results and interprets them in terms of neoinstitutional
theory.
1. Previous research, theoretical background, and research hypothesis
1.1. Previous research
There is a rather extensive literature on international accounting
harmonization, which analyzes the processes of convergence that are moving
national and regional accounting systems towards the IAS/IFRS or the
American FASB standards. It appears from R. Obert's definition that
harmonization may involve both the standards (formal convergence) and the
practices (informal convergence). This dichotomy of the effects of
accounting convergence has been confirmed by a number of studies (Rahman et
al, 2002; Haverty, 2006). We may then divide the literature into two parts.
The first part examines the convergence of practices, focusing on the
processes and the decisive factors which push firms to adopt an
international accounting system (US GAAP, IAS/IFRS, etc.: Street and Gray,
2002; Touron, 2004; Ortiz, 2005; Ding et al, 2005). Beyond the legal
determinants of this adoption, the majority of these studies have focused
on variables connected to the internal characteristics of organizations to
explain the progress of convergence towards international accounting
standards: debt (El Gazzar et al. 1999), capital structure (Barret, 1976),
auditors (Street and Gray 2002), etc. In addition, Touron (2004) has
identified certain sociological factors (institutional isomorphisms) which
explain why a French firm (Saint-Gobain-Pont-à-Mousson) might align itself
with the American accounting system. Thus Barbu (2004) states that
"standard shopping", i.e., choosing an accounting system according to the
needs or the markets involved, works to reinforce the informal convergence
movement.
The second part emphasizes the processes of standardization and the
standards themselves, and attempts to compare or to measure the convergence
of the various accounting systems with international accounting systems
(Emenyonu and Gray, 1996; Colasse, 1997; Stolowy et al, 2001). Some of
these studies have tried to establish quantitative measurements for
assessing the degree of convergence of accounting systems (Garrido et al.
2002; Haverty, 2006)
Most of this work, on both formal and informal harmonization, likens
convergence to a proactive process, i.e., a deliberate choice by the firms
and the standardizers to steer their practices and standards towards the
IASB system. However, none of the previous research has dealt with the
convergence of the AAOIFI's accounting standards with the standards of the
IASB.
We will attempt to fill these two gaps by studying the FAS/IAS-IFRS
convergence as illuminated by neoinstitutional theory.
1.2. Theoretical background
1.2.1. Key theoretical concepts
Neoinstitutional theory derives from sociological studies initiated by
Meyer and Rowan (1977) and DiMaggio and Powell (1983), who are considered
to be its founding fathers. In this theory, organizational behavior is
linked to its social context. This relationship is useful in understanding
the persistence of or changes in the behavior of organizations, and the
reasons for the success of certain management models and their widespread
acceptance.
Neoinstitutional theory suggests that organizations do not adopt their
management models solely in order to make profits, but to meet external
expectations and to establish their legitimacy within their social context.
This theory thus becomes an ideal type in the Weberian sense, for
explaining tendencies towards the homogenization of organizational
practices within the same institutional field (Le Manh-Bena, 2009).
The concept of institutional isomorphism, which is central to the work of
Meyer and Rowan (1977) and DiMaggio and Powell (1983), explains the
homogenization of organizational practices as representing not a search for
the most efficient practices, but rather for an effective institutional
legitimacy.
This institutional isomorphism may be coercive, mimetic, or normative
(DiMaggio and Powell, 1983). While normative isomorphisms refer to the
cultural insertion of the organization into its environment, mimetic ones
are connected to the fact that organizations tend to copy models which have
been successful in similar situations within other organizations in the
same institutional field, and coercive ones establish their processes where
external actors impose their practices upon organizations.
This neoinstitutional theory has been applied in the accounting literature
to explain certain organizational choices, to study the development of the
accounting profession, and to analyze the behaviors of standardization
bodies. Our study involves the third of these themes, and examines how
institutional effects influence the AAOIFI's standardization program.
1.2.2. The AAOIFI, a body in search of legitimacy
The AAOIFI, founded in Bahrain in 1991 by six Islamic financial
institutions, had published 26 accounting standards for Islamic finance by
2011. However, 20 years after its creation, the AAOIFI has still not
succeeded in imposing its system upon Islamic banks. A number of countries
and supranational entities[8] have officially adopted the FAS standards,
but only one has made them mandatory for Islamic financial institutions.
The AAOIFI's standardization process is thus still looking for
legitimacy,[9] and may reasonably be taken as a subject for study in the
context of neoinstitutional sociology. In this regard, two kinds of
isomorphism can be recognized in the AAOIFI's standardization process:
mimetic isomorphism and normative isomorphism.
1. The IASB has been able to create a worldwide legitimacy. In mimetic
isomorphism, organizations facing situations of uncertainty are
encouraged to imitate models that have proved their worth in similar
situations. In parallel with this, the AAOIFI is prompted by mimetism
to be consubstantial with the IASB in its standardization processes.
This mimetism can even be seen in its organizational structure, with a
central Board responsible for drafting, adopting, and interpreting
accounting and auditing standards for Islamic financial institutions
(IFIs).
The AAOIFI has a standardization strategy which reflects the influence of
the IASB (TABLE 1). The AAOIFI has not even developed accounting standards
when the international equivalent is Sharia-compliant. This is the case
with IAS 10 (Events after the reporting period) and IAS 24 (Related-party
disclosures). Mimetic effects of the IASB on the AAOIFI's standardization
process.
Table 1 - Accounting standardization approach adopted by the AAOIFI
"Accept the "Reject the standards "Develop standards "
"standards " " "
"IAS-IFRS which do "IAS-IFRS which "Specific to Islamic banks "
"not conflict with "conflict with Sharia " "
"Sharia " " "
2. Normative isomorphism refers to a professionalization of the
institutional field. Professions grouped into lobbies or multiple-
interest groups pressure the organization's behaviors towards
practices favorable to themselves.
Studies suggest that the establishment of the AAOIFI follows the logic of
all institutional arrangements. Thus according to Karim (1990), the
formation of the AAOIFI reflects the desire of the IFIs to avoid
interference in their management from financial-regulation authorities:
central banks, financial market authorities, and the like.
Having founded the AAOIFI, the IFIs have the power to adjust the processes
of standardization in their own interests.
Since the application of the IAS-IFRS standards by Islamic banks enables
them to increase their credibility on international financial markets, the
IFIs have an interest in making the AAOIFI standards converge with those of
the IASB.
The 2008 change in FAS 17 ("Investments"), provides an example, since it
allowed the inclusion of losses on the revaluation of saleable financial
assets in stockholders' equity, as IAS 39 proposed. The amending text made
direct reference to the IAS-IFRS, and the changes in FAS 17 were subjected
to an emergency procedure, responding to pressures from Islamic banks that
were then dealing with the effects of the financial crisis.[10]
1.3. Research hypotheses
A fairly extensive literature has employed neoinstitutional theory to
explain the behavior and structural transformations of the standardization
bodies. For example, Colasse and Pochet (2008) study the institutional
influence of the FASB[11] on the new structuring of the ANC[12]. However,
few studies have gone so far as to analyze institutional effects on the
process of standardization itself. Among such studies, Forgaty (1992) shows
that due process and some of the FASB's standardization choices have been
shaped by mimetic and coercive pressures arising from the American
institutional environment.
We have shown that the AAOIFI, in its quest for legitimacy, faces pressures
from institutional isomorphism which may force it to produce accounting
standards similar to those of the IASB. However, the AAOIFI's
standardization strategy shows that it is positioning itself as a
supplement and not in opposition to the IASB.
Based on the literature of neoinstitutional theory and on the AAOIFI's
current practices, we can now formulate our research hypothesis: the
Islamic FASs (Financial Accounting Standards) of the AAOIFI are converging
with the international standards for financial reporting (IAS-IFRS)
produced by the IASB, which are consubstantial with the FASB's American
ones, with significant consequences for the financial analysis of financial
statements from Islamic banks.
1.4. Methodology
To test our research hypothesis we conducted a comparative analysis of
financial statements from Islamic banks prepared under the IAS-IFRS
standards (Abu Dhabi Islamic Bank, ADIB) and under the FAS standards of the
AAOIFI (Bahrain Islamic Bank, BIB).
The Bank of Bahrain was selected because the AAOIFI's head office is
located there. Bahrain is the only Gulf state that mandates the application
of the FAS. Similarly, we chose the ADIB because it has not changed the
names of Islamic financial products, as is often the case with Islamic
banks which employ the IAS/IFRS. This makes it easier to make comparisons
between the two banks.
This study aims firstly to establish the differences and convergences in
accounting and financial treatments between the two systems (FAS and IAS-
IFRS), and then to determine whether the IAS-IFRS system meets the ethical
standards of Islamic finance.
In a first stage, the analysis seeks to define the differences in the
handling of Islamic products under the two systems, through an examination
of the financial statements of the ADIB and the BIB. We then study the
structural differences in balance sheets under the two accounting systems,
using the BIB balance sheet for the accounting year ending on 12/31/10.
2. Comparative Analysis
We compare the accounting treatments of a number of Islamic products, and
analyze the financial information obtained from the annual reports of the
BIB, which uses the FAS, and the Abu Dhabi Islamic Bank (ADIB), which uses
the IAS-IFRS.
2.1. Islamic financial law
In Islamic finance, analogy is an acknowledged source of legitimacy in
arguments, because it allows isomorphisms to be established via
associations, correspondences, connections, relationships, etc. Thus the
analysis of correspondences and the contributions of neoinstitutional
theory are consistent with a search for clashes between parallel
applications of the IAS-IFRS and the FAS at a time when the international
paradigm is in crisis.
The few verses of the Koran that are devoted to finance mostly state what
is specifically forbidden, and as in the law of obligations "any contrary
clause is deemed not to exist". Accordingly, there are operations that are
specifically prohibited, and the rest are subject to interpretation by the
Sharia Board. (Lévy, 2012).
– Prohibited:
Interest levied on a financial operation with no underlying economic
Riba, because making money without effort or risk (by a predetermined
interest) is unjust. However, traditional bankers retort that their
work is both difficult and risky, hence the idea that excessive
interest, or usury, is proscribed.
Hoarding. Sharia encourages saving to provide for one's moral
obligations: social needs and the repayment of debts. Thus the role
of currency is acknowledged for the purposes of trading and
precautionary measures, but not for speculation in the Keynesian
sense.
Garar. This is a gray area, uncertainty, a lack of transparency: on
price, quality, quantity, delivery date, etc. It relates to the null-
and-void provision in contracts under traditional business law.
Maysir. This concerns the economy of illusion, hence all the profits
from activities that are essentially probabilistic, such as games of
chance with risks of social isolation, ruin,[13] and the diversion of
individuals from their economic and social duties. This principle
bans futures, interest rate swaps, options, and the like from Islamic
finance, but a carefully crafted arrangement enables compromises with
certain prohibited items.
Amorality. Investing directly or indirectly in activities associated
with degrading products such as alcohol, pornography, etc. is
forbidden. For this reason Islamic financial products represent
assets specifically for ethical funds.
– Totally forbidden: the redistribution of assets.
The zakat is a 2.5% tax on assets. It is comparable to a Wealth Tax,
and must be paid by every Muslim whose assets exceed a threshold level
(nissab). It may be assigned by mutual agreement to qualified
charitable associations or paid to a department or an Islamic bank.
In light of these principles, the operations offered by Islamic banks are
either joint undertakings, or based on the principle of cost plus or mark-
up.
2.2. Accounting entries
Financings:
– Without contributions are based on an underlying asset, hence the
creation of products such as: ijara, mourabaha, istisna, salam, card
hassan, etc.
– With contributions are based on a Sharing of Profits and Losses (Partage
des Pertes et Profits, or 3P), hence the creation of joint ventures:
moudaraba (profit sharing) and musharaka (equity participation and profit
sharing).
2.3. Differences in accounting treatment
2.3.1. Treatment of Ijara et Ijara wa Ictina[14]:
An Ijara is a simple leasing contract in which the bank acquires a good for
a user and leases it to him/her against payments spread out over the
contract period.
An Ijara wa Ictina means an ijara contract, but with a promise to transfer,
or just an option that the client may exercise or not at the end of the
contract.
The Ijara resembles a simple lease whereas the Ijara wa Ictina is closer to
a direct-financing lease, both covered by IAS 17.
In its financial statements the BIB separates the treatment of Ijaras and
Ijara wa Ictinas:
– In the balance sheet:
BIB, which is subject to the FAS, states Ijara wa Ictina assets at
their historic costs and bears the annual amortization charges in the
operating account. If it were applying the IAS-IFRS it would not show
the Ijara wa Ictina in its assets, thereby cutting down the assets
and the liabilities, and their amortization charges would be
substantially reduced.
ADIB, which is subject to the IAS-IFRS, sees Ijara wa Ictinas as
direct-financing (leasing) operations, which are treated under IAS
17. Thus the transfer to the risk-taker of the risks and costs
connected to the underlying asset enables the ADIB as lessor to omit
them from its listed assets[15]. Nevertheless, ADIB shows a debt for
an amount equal to the investment, net of the leasing contract
(25,270 AED[16] in 2010), recorded as an asset in the Ijara
financing. It is the bank's client which capitalizes the leased good,
since it received the (implicit) transfer of ownership and bears the
amortization charges like an owner.
In practice the financial statements of the Emirate bank, ADIB, show
substantially fewer tangible assets and amortization charges as
compared to the way they are treated by the BIB[17].
– In the income:
BIB records the income from Ijara wa Ictina contracts when they are
collected (11,278 BHD[18] for 2010, reduced by 4,321 BHD in
amortization).
Applying IAS 17, ADIB records a portion of the fees from the Ijara as
repayment of the debt (6,251 AED in 2010, which reduces the gross
amount of the Ijara wa Ictina debts) and a portion as regular banking
proceeds.
Comments
The ADIB treatment is not consistent with Muslim law as regards its legal
form or its recording.
The legal form of Ijara wa ictina contracts requires that the transaction
be attached to an underlying asset. In this regard the lessor must bear all
of the charges involved in holding the good (depreciation, maintenance,
repair costs, etc.). However, under the IAS-IFRS the accounting transfer of
ownership of the underlying asset to the lessee departs from this rule. In
order for the operation to comply with Sharia there must be a separation
between the property right and the usufruct, which prevents any transfer of
property or recording in the accounts before all the lease payments have
been made. An Ijara wa ictina may be compared to an operational leasing,
whereas IAS 17 likens all leasing contracts to finance leasing.
As concerns the recording of income from Ijara wa ictinas, a portion of the
money received may be compared to banking proceeds recorded on the basis of
a formula expressing a constant periodic rate of return on the net
outstanding investment debt, while the other portion is used to repay the
debt recorded to offset the outgoing leased asset. As a result, on the one
hand a portion of the fees from the Ijara is comparable to Riba interest,
forbidden in Islamic finance, and on the other hand the valuation of the
debt recorded in the ADIB assets is based on calculations employing
discounting techniques to measure the fair value of the leased good.[19]
2.3.2. Treatment of Sukuks
Sukuks are a sort of bond product which, for their holder, represent a debt
or loan security whose capital and interest payments are indexed to the
performance of an asset held by the issuer. Any bank may contract or issue
sukuks.
The amount of the sukuks contracted by the BIB, which appear in its assets
under "Investments", is 62,863. They are held to maturity like long-term
investments, and valued at their amortized cost (reduced by any provisions
for depreciation[20]). Their income of 4,064 BHD appears in the operating
account as "Income from sukuks." BIB holds but does not issue sukuks,
unlike ADIB.
ADIB records sukuks under three different headings in its balance sheet:
– In the assets, the sukuks held are included in three IAS 39 categories
of financial instruments: securities held to maturity (135,450 AED),
saleable securities (604,280 AED), and short-term securities held for
trading (329,353 AED). According to IAS 39, although sukuks held to
maturity (long-term) are valued at their amortized cost, sukuks held for
sale or for trading are assessed at their fair (market) value.
– In the liabilities, under
Debts: in 2010 ADIB had issued medium-term sukuks which were added to
the sukuks previously issued in 2006. All of these were recorded
under sukuk financing instruments,
Stockholders' equity: another portion of the sukuks issued is
recorded as "stockholders' equity" (Tier 1 sukuk). These sukuks,
contracted by the Abu Dhabi Government, are like irredeemable bonds
because they have no predetermined maturity date. In 2009 ADIB held a
GAB which decided to convert its sukuks into Tier 1 capital in order
to improve its solvency ratio, as calculated under the Basel II
recommendations.
Comments
For long-term holdings of sukuks, the BIB using the FAS and the ADIB using
the IAS-IFRS apply the same treatment. For sukuks:
– Held for trading or available for sale, i.e., short- and medium-term
ones, these are assessed at their fair value. The change in fair value
of sukuks held for the purpose of speculation is directly recorded in
the operating account, which implies that unrealized profits and losses
can be included in annual earnings. However, this treatment is not
consistent with Sharia, because the distribution of profits and the
charging of losses that have not been unrealized is contrary to the
ethical precepts of Islamic finance (Napier, 2007).
– That are issued, their treatment is problematic. ADIB provides that the
yield from these securities be partially indexed against a reference
interest rate: the Emirates Interbank Offered Rate or EIBOR. Although
the practice of indexing yields against traditional benchmarks is both
legitimate and common in Islamic banks, it is at variance with the
essence of Islamic financial products. Sukuks should, in principle, be
structured in a way that enables their holders to receive a share of the
profit on the usufruct of the underlying asset, not an interest that is
fixed and known in advance as with conventional bond products.
2.3.3. Treatment of deposits based on the 3P principle
In their activities Islamic banks have four main resources to work with:
stockholders' equity, current accounts, investment deposits, and savings
accounts. The last two are based on the principle of sharing profits and
losses, and thus on moudaraba and musharaka instruments.
A moudaraba is a passive partnership because it is carried out between at
least two associates: a rab-el-mal investor and a moudarib entrepreneur who
will be working to make the most profitable use of this capital. The
Islamic bank may take part either as an entrepreneur by putting the capital
deposited by its customers to work, or as an investor by participating in
an economic project with another bank. A moudaraba may thus be compared to
a limited partnership in traditional finance, where the associated lenders
do not participate in the management.
A musharaka is an active partnership. It is a joint-venture, a form of
economic association in which the partners share the risks and the costs.
Involvement by the Islamic bank is noteworthy.
In principle Islamic banks do not guarantee either the repayment of the
initial deposit or a fixed yield for these accounts, unless the bank
commits an error. Sharing of the profits generated by the investment (the
underlying asset) is made according to a quota set in advance between the
bank and its depositors. The BIB claims a maximum rate of 65% on investment
profits financed by Profit Sharing Investment Accounts (PSIAs).
The BIB classifies deposits based on the participatory principle under an
intermediate heading in the balance sheet: unrestricted joint investment
pools, between external liabilities and stockholder's equity owing to their
hybrid nature. The profits generated by these PSIAs were 28,188 BHD
distributed as to 17,721 for the providers of capital (rab-al-mal) and
10,467 for the bank in return for its activities as entrepreneur
(moudarib). In the sharing of profits the bank separates investments
financed jointly by stockholders' equity and PSIAs from investments
financed by stockholders' equity only. The sharing ratio is applied only to
income derived from joint financings. In contrast, the PSIAs bear none of
the operational charges, even on joint financings[21]:
Table 2 – Method of sharing profit and loses in BIB
"+ Income from joint financings net of provisions for depreciation "
"- Share of profits attributable to stockholders' equity "
"- Share of profit attributable to PSIAs "
"=========================================================== "
"= Bank income as a moudarib "
"+ Income from financings with stockholder equity "
"- Total operational and administrative charges "
"+ Share of profits attributable to stockholder equity in joint "
"financings "
"============================================================ "
"= Bank income before the zakat "
For the processing of PSIAs the BIB employs prudential reserves, namely the
PER (Profit Equalization Reserve) and the IRR (Investment Risk
Reserve)[22]. These are designed to provide a stable return for holders of
PSIAs and are similar to the techniques used to smooth the bottom line.
Smoothing practices are common in Islamic banks and are regulated by the
AAOIFI, which authorizes the banks to use these reserves (Archer and Karim,
2009). However, not all of the smoothing techniques are apparent in the
financial statements, e.g., investments in assets which offer short-term
profits and low risks, which may provide a stable income over the short
term for PSIA holders.
In the Emirate bank, ADIB, the accounting treatment of profit-sharing
investment accounts under the IAS-IFRS rules has certain features in common
with the BIB's practices under the FAS rules. ADIB also employs smoothing
practices for PSIA yields, via the PER. However, the IAS-IFRS do not
provide a special classification for sharing accounts, and they are placed
among the short- or long-term accounts depending on the date of maturity.
The method for sharing profits and losses is also different. The ADIB uses
the so-called pooling method, which means that PSIA holders share the
profits and losses from all the incomes and bank charges, the manager's
salary, and the costs of external audits[23] (Al-Deehani et al, 1999).
Table 3 – Method of sharing profit and loses in ADIB
"+ Income on investments and other operational incomes "
"- Operational and administrative charges "
"================================================= "
"= Income to be shared "
"- PSIA's share of profit "
"= Bank share as moudarib "
"+ Income from subsidiaries "
"- Charges for manager's salary and cost of external audit. "
"================================================== "
"= Bank income before tax[24]. "
Comments:
– The practice of smoothing the bottom line via prudential reserves is
supported by the Islamic standardization bodies (AAOIFI and IFSB)
because it mainly arises from the transfer of commercial risk. This risk
is the probability that an Islamic bank will be unable to compete with
traditional banks because of its low yield (AAOIFI, 2010). These banks
then index the yields of the PSIAs to the rates offered by the
traditional banks and establish reserves so that these yields will match
the forecasts. The principle applied in Islamic finance is that the
sharing of profits and losses is based on the actual incomes generated
by the investments. The creation of reserves to adjust this sharing
prevents the true profitability of the underlying asset from being
recorded.
In calculating the sharing of profits and losses BIB and ADIB use
different methods. ADIB uses the method called "grouping" and assumes
that all funds, whatever their source, are mingled and invested in the
same investment portfolio. BIB also uses the grouping method (funds from
diverse sources may be invested in the same portfolio) but it maintains
a continuous monitoring on the provenance of the resources. PSIAs share
in profits and losses only from investments in which they have
participated, and cannot claim any share of the profits arising from
investments made with private funds. The BIB's second method of
accounting is more in line with the 3P principles, but requires a more
rigid management, and the establishment of strict systems for monitoring
the sources of funds.
– In traditional finance certain financial instruments exist that are
comparable to PSIAs, in that they blend the features of stockholders'
equity and debt. These hybrid forms of capital are:
1. Subordinated debts, which resemble stockholders' equity because they
are repaid only after all the other creditors (except for
shareholders). From a prudential (Basel II) standpoint, this
subordinated debt is included in the stockholders' equity when the
solvency ratio is calculated, but in the balance sheet it appears as
traditional debt. PSIAs are comparable to subordinated debts because
the capital is not guaranteed.
2. Preferred shares, which are shares which have no voting rights but
which offer a higher dividend. Like PSIAs, preferred shares enable
capital to appreciate without altering the power structure.
3. Investment certificates, which are also senior shares, result from the
counting of an ordinary share on the one hand among the investment
certificates (with no voting rights) and on the other hand among the
voting rights certificates.
4. Convertible bonds, which are bonds that give their holder the right,
during the conversion period, to exchange them for shares in the
issuing company.
However, unlike the FAS, the IAS-IFRS do not provide an intermediate
heading for these hybrid instruments. Each instrument must be classified
among the debts or the stockholder-equity instruments (IAS 32).
Nevertheless, from a prudential viewpoint these hybrids may be included in
stockholders' equity. An Islamic bank which applies the IAS-IFRS standards
may then deem that these PSIAs can be included in the stockholders' equity
during prudential calculations, even though the capital is not guaranteed
(Karim, 1996).
2.3.4 Treatment of Mourabahas and Moudarabas
In a mourabaha contract a seller agrees with a buyer to provide it with a
good at a specific cost and profit margin. A moudaraba is a passive
partnership between the bank and an entrepreneur, and although the profits
are to be shared according to a quota established in the contract, losses
are borne by the bank alone.
In the BIB's accounts, mourabaha debts are assessed at their fair value
(recoverable value) reduced by the provisions for depreciation and deferred
profits. Income from mourabahas is recorded on the basis of reporting dates
spread out over the contract period.
The financial assets of a moudaraba are recorded at their fair values,
reduced by provisions for depreciation. IAS 39 requires that loans and
debts initiated by the bank be recorded at their amortized costs. Since the
financial assets of mourabahas and moudarabas are classified as loans in
traditional banking terminology, ADIB records them at their amortized cost
reduced by provisions for depreciation and deferred profits. The income
from mourabahas is stated at maturity. Income from moudarabas is also
stated at maturity if it can be reliably estimated; if not, it is recorded
when it is distributed by the entrepreneur. Losses from moudarabas are
charged when they are declared by the entrepreneur. In this regard the
treatments applied by the two banks are convergent.
2.4. Differences in presentation
In order to make a comparison of the presentation of Islamic financial
products on the consolidated balance sheet more meaningful, we compare the
BIB's balance sheet, but structured first as in the original version
published in the annual report, in compliance with the instructions for
AAOIFI presentations, and then after a restatement[25] of the original
balance sheet according to the IAS-IFRS standards. The structure of the
balance sheet under the AAOIFI's FASs differs noticeably from that prepared
under the IAS-IFRS rules (see Appendix).
Figure 1 - Structure of an Islamic bank's balance sheet under the FAS and
IFRS standards
"Structure of an Islamic bank balance sheet according to the standards of "
"the "
"FAS (AAOIFI) "IAS-IFRS (IASB) "
"Assets classified by kind "Assets classified by liquidity "
" "order "
"Cash, Central bank "Cash, Central bank "
"Debts from mourabahas, net of "Financial assets "
"deferred profits "-at fair value in the results "
"Moudaraba "-held for trading "
"Musharaka "-available for sale "
"Sukuk "Loans and debts "
"Ijara assets "Financial-leasing operations "
"Ijara wa ictina assets "Financial assets held to maturity "
"Real-estate investments " "
"Liabilities "Liabilities "
"Liabilities classified by kind "Liabilities by order of payability "
"Central banks "Central banks "
"Current deposits (wadia) "Current deposits "
"Wakala[26] "Medium- and long-term deposits. "
"Sukuks issued. "Securities issued "
" " "
"Unrestricted Profit Sharing " "
"Investment Accounts (PSIAs) (open) " "
" " "
"- PSIA " "
"- on credit institutions " "
"- on the clientele. " "
"- PER (Profit equalization reserve) " "
"- IRR (Investment Risk Reserve) " "
" " "
" " "
"Stockholders' equity "Stockholders' equity "
"Social capital "Social capital "
"Reserves "Reserves "
"Profit/Loss "Profit/Loss "
"Profit/Loss pending allocation to " "
"charity " "
In the traditional financial system a bank collects current and time
deposits and invests them in loans. It plays the role of intermediate
financier by bringing providers and seekers of capital together.
In the Islamic financial system the intermediation operates in a different
way, since all financial operations are absolutely subordinated to an
underlying asset. The bank plays the role of financial intermediary in
commercial operations between sellers and buyers, as in the operations of
mourabahas or ijara wa Ictinas. An Islamic bank can also play the role of
commercial partner, as in moudaraba and musharaka contracts. On this point
the traditional approach of banking intermediation is inappropriate,
because in Islamic financial institutions the asset does not consist of
credits with predetermined incomes, but of the bank's interests in
financings (musharaka and moudaraba) or in sales with margins (mourabaha,
ijara, etc.).
Thus in the BIB's balance sheet (FAS) 47% of the asset value comes from
mourabaha debts. In the ADIB's balance sheet (IAS-IFRS), the various types
of Islamic financings that are practiced are grouped under "Loans and
Debts" (TABLE 4)
Table 4 – Assets presentation in the Balance sheet of BIB
"+ 431.692 in mourabaha debts "
"+ 80.246 in musharaka investments "
"+ 37.36 in moudaraba investments "
"+ 105.3 Ijara wa Iqtina "
"+ 7.56 ijara debts "
"+ 9.635 ijara "
"================================ "
"= 671.7[27] "
This 671.7 figure mingles tangible assets valued at their historic costs
(Ijara wa Iqtina assets) and debts assessed at their fair values (mourabaha
and moudaraba). The generic name "Loans and Debts" does not take into
account the participatory nature of certain financial assets and does not
display transparency.
The main difference in presentation lies in the introduction of a special
heading inserted between the liabilities (debts) and the stockholders'
equity. These are the unrestricted profit sharing investment accounts
(PSIAs). These accounts bring together the funds raised by means of
moudaraba and musharaka instruments, based on the principle of sharing
profits and losses.
The AAOIFI recommends that PSIAs be recorded in a special account, between
the liabilities and the stockholders' equity. PSIAs are actually hybrid
items. They cannot be considered to be debts in the traditional sense
because repayment of the capital is not guaranteed. Similarly, PSIAs
cannot be recorded as part of stockholders' equity because the holders of
these accounts do not enjoy the same rights as the holders of capital
shares. Moreover, the capital must be repaid at maturity if it has not been
affected by losses (Hameed, 2007).
Consequently, the AAOIFI's recommendations provide a better picture of the
legal structure of this way of mobilizing resources.
In contrast the IAS-IFRS standards do not establish this distinction. Funds
mobilized according to the 3P principle are recorded in the savings
accounts or any other time-deposit account. This solution may distort
perceptions of the financial soundness of Islamic banks by
disproportionately increasing the debts.
Comments
BIB applies the 3P principles to both sides of the balance sheet. Contracts
based on this principle are heavily weighted towards liabilities, with a
minority of financial assets:
– On the liability side BIB collects funds mainly from profit sharing
investment accounts (PSIAs) based on moudaraba. These accounts represent
80% of BIB's funds. Islamic banks favor deposits based on moudaraba,
which are in principle less risky and less restrictive since they are
not required to guarantee their capital or to provide a predetermined
yield.
– On the asset side the bank can also employ contracts based on 3P
(moudaraba, musharaka, and sukuk) as an investor in capital. These
contracts involve little in the way of financial assets (4%, 8.5%, and
6.71% respectively).
In fact, although the principle of sharing profits and losses is at the
very core of the Islamic financial system, the banks are reluctant to
use moudaraba and musharaka contracts to finance investments because
such contracts require them to bear most of the investment risks: loss
of capital, and uncertain and unstable yields.
Islamic banks therefore encourage less risky and "more traditional"
investments based on a cost plus margin (mourabaha and ijara wa Ictina).
Their respective weights in the BIB's financial assets are 46% and 11%.
2.5. Consequences:
2.5.1. Convergence of standards:
The table 5 summarizes the accounting treatments for the principal banking
products
Table 5 - Comparison of BIB and ADIB accounting practices
"Comparison of accounting practices: BIB vs ADIB "
"Financial "BIB treatment (AAOIFI) "ADIB treatment (IFRS) "AAOIFI/"
"operation " " "IFRS "
" " " "converg"
" " " "ence "
" "- The underlying asset is "- The tangible asset is not " "
" "held in BIB's assets at "shown in the balance sheet. " "
" "its amortized historic "Instead, a debt is recorded " "
" "cost. "for an amount equal to the " "
"Ijara " "investment, net of the " "
"Muntahia " "leasing contract. "No "
"Bitamleek " " " "
" "- The ijara income is "- A portion of the income " "
" "reduced by the "serves to cover the debt. " "
" "amortization charges "Another portion is recorded " "
" " "in the banking proceeds. " "
"Securities"- Valued at historic "- Valued at their historic " "
"held to "amortized cost reduced by "amortized cost, reduced by " "
"maturity "provisions for "provisions for depreciation. "Yes "
" "depreciation. "If the bank is doubtful of " "
" " "its ability to hold them to " "
" " "maturity, it must reclassify " "
" " "them as "saleable securities"" "
" " "and assess them at their fair" "
" " "value. " "
"Securities" " " "
"available "- Recorded at fair value. " " "
"for sale. "Unrealized gains and "- Recorded at fair value. " "
" "losses are deferred in the"Unrealized gains and losses "Yes "
" "cash credits and recorded "are deferred in the cash " "
" "in the operating account "credits and recorded in the " "
"Securities"when the asset is sold or "operating account when the " "
"held for "depreciated. "asset is sold or depreciated." "
"trading. " " "Yes "
" "- Recorded at fair value. " " "
" "Gains and losses (realized"- Recorded at fair value. " "
" "as the result of a sale, "Gains and losses (realized as" "
" "or unrealized following a "the result of a sale, or " "
" "revaluation) are shown in "unrealized following a " "
" "the operating account. "revaluation) are shown in the" "
" " "operating account. " "
"Mourabaha "- Assessed at their fair "- Similar to traditional " "
"debt "value, which is the value "loans and therefore valued at" "
" "to be recovered reduced by"their amortized cost reduced "Yes "
" "the provisions for "by provisions for " "
" "depreciation and deferred "depreciation and deferred " "
" "profits. "(unrealized) profits. " "
" "- The income is stated at "- The income is stated at " "
" "maturity "maturity " "
"Moudaraba "- Assessed at their fair "- Similar to traditional " "
" "value reduced by "loans and therefore valued at" "
" "provisions for "their amortized cost reduced " "
" "depreciation. "by provisions for " "
" " "depreciation. " "
" " " "Yes "
" "- Profits are recorded at "- Profits are recorded at " "
" "maturity or when they are "maturity or when they are " "
" "distributed by the "distributed by the moudarib. " "
" "moudarib. Losses from "Losses from moudarabas are " "
" "moudarabas are charged in "charged in the results when " "
" "the results when they are "they are declared by the " "
" "declared by the moudarib. "moudarib. " "
" " " " "
"Wakala "Not practiced "Recorded at amortized cost " "
"deposits " "reduced by the amounts repaid" "
" " "and provisions for " "
" " "depreciation. " "
"Investment"Valued according to the "Valued according to the " "
"in related"equity method[28]. "equity method. "Yes "
"companies " " " "
"Real-estat"Initially recorded at "Recorded at the amortized " "
"e "cost, i.e., the fair value"cost and reduced by losses in" "
"investment"of the compensation given "value which are recorded as "Yes "
"s "and the acquisition costs "charges (IAS 36) " "
" "connected to the property." " "
" "Real-estate investments " "(IAS 40"
" "are then revalued at the " "authori"
" "end of each period at " "zes "
" "their fair value (FAS 17)." "both "
" "The gains and losses from " "procedu"
" "revaluations are shown in " "res.) "
" "stockholders' equity, and " " "
" "then in the operating " " "
" "account when they are " " "
" "realized. " " "
"Zakat "- Disclosure of a special "- The bank does not directly "Both "
" "financial statement for "pay the Zakat. This is the "banks "
" "the sources and "responsibility of the "use the"
" "applications of Zakat "shareholders. The bank simply"AAOIFI'"
" "funds. "announces the amount of Zakat"s "
" "- Calculation based on the"per share. "recomme"
" "method of net invested "- The method for calculating "ndation"
" "funds[29]. "the zakat per share is based "s when "
" "- Payment on the PSIAs, at"on the AAOIFI's "calcula"
" "the responsibility of the "recommendations. "ting "
" "holders of these accounts." "the "
" " " "base "
" " " "subject"
" " " "to the "
" " " "Zakat. "
A comparative analysis has identified the divergences and convergences in
the accounting treatments applied by banks under the IAS-IFRS and FAS
standards:
– The major divergences concern the presentation of Islamic banking
transactions in financial statements. The structure of a financial
statement under the FAS differs in having a special heading for joint
investment accounts in quasi-stockholders' equity or hybrid capital,
which have disappeared from the IAS-IFRS.
– The convergences involve the recording and valuation of banking
proceeds. The results of this investigation show that there is indeed a
convergence between the two accounting systems (IAS-IFRS and FAS), which
validates our hypothesis. This convergence must be analyzed in parallel
with the standardization strategy adopted by the AAOIFI. The AAOIFI did
not consider it worthwhile to develop accounting standards when the
equivalent already existed in the form of international standards and
were not inconsistent with Sharia. It follows that:
Convergences in the handling of certain operations provided by the
IASB (such as investments in related companies) and direct copying by
the AAOIFI are predictable, and arise from an institutional
isomorphism which is actually formalized, being set forth in the
AAOIFI's standardization strategy,
The accounting treatments of transactions that are specific to Islamic
banks (mourabaha, musharaka, moudaraba, ijara, etc.) are assumed to be
original. The convergence of these procedures with those of the IASB
is the result of non-formalized institutional effects (pressure from
stakeholders, for example) which have been able to push the AAOIFI
into adopting behaviors that are contrary to its strategy, or to
promulgate standards which are at variance with some of the ethical
principles of Islamic finance.
In fact, neoinstitutional theory states that organizations are
encouraged to adopt practices which are not necessarily the best, or
the most suitable, but which may increase their legitimacy. By causing
its standards to converge on those of the IASB, the AAOIFI seeks to
increase its legitimacy but risks adopting standards which are
contrary to certain ethical principles of Islamic finance. For
example, treating items at their fair value contravenes the principle
of equitable sharing, which forbids the distribution of unrealized
gains and losses. Similarly, the AAOIFI's validation of practices for
smoothing the bottom line by regularizing the creation of prudential
reserves is a product of international considerations that are more
pragmatic than ethical.
The table 6 summarizes the ADIB's accounting practices which could be at
variance with some of the ethical principles of Islamic finance.
Table 6 - Divergences between the accounting practices and ethical
principles of Islamic finance.
"ADIB accounting practices "Ethical principles not obeyed "
"Treatment of Ijara wa Ictinas under the "Linking the financial "
"system for direct financing (IAS 17) "transaction to a real asset "
" "Ban on riba. "
"Presentation of joint investment "Sharing of profits and losses "
"accounts under a debt heading. (IA 30) " "
"Creation of prudential reserves to "Linking the financial "
"ensure a stable yield for holders of "transaction to a real asset "
"PSIAs (also practiced by the BIB). "- Sharing of profits and losses "
"Assessment at fair (market) value of "Sharing of profits and losses "
"sukuks available for sale or held for "(enables sharing of as-yet "
"trading. (IAS 39) "unrealized gains and losses) "
"Holding of a sukuk for trading "Ban on gharar and maysar. "
"(speculation) " "
"Income from mourabahas is recorded at " Ban on riba. "
"maturity according to the effective " "
"interest rate method. (IAS 18) " "
This analysis suggest that the differences in presentation (FAS vs IFRS),
which are themselves produced by differences in the interpretation of the
position of hybrid instruments in financial statements, have consequences
for the calculation of the financial ratios of Islamic banks.
Conclusion
The functioning of Islamic banks obeys the ethical principles of Muslim law
(Sharia). Accordingly, the AAOIFI has published accounting standards
specifically designed for such banks. This article seeks to confirm the
hypothesis that there is a convergence between these standards and
international accounting standards. Neoinstitutional theory suggests that
the AAOIFI is subject to mimetic and prescriptive pressures to steer its
standardization process towards a harmonization with international
accounting. Our results confirm a partial convergence, although a number of
divergences remain as regards the presentation of financial statements and
the treatment of certain proceeds.
These results are in line with the stipulations of neoinstitutional theory:
we have shown that the IAS/IFRS involve a number of contraventions of the
ethical principles of Sharia (Table 3) and are therefore ethically
unacceptable in Islamic banks, even though they may be technically
applicable. By making its standards converge with the IASB system, the
AAOIFI has opted to increase its legitimacy while taking the risk of
reducing the effectiveness of the standards which it publishes. This
legitimacy/effectiveness conflict can already be detected in some of the
resolutions recently adopted by the AAOIFI, such as the acceptance of
recordings based on fair value.
The main shortcoming of the paper is the confusion between formal and
informal harmonization. Analysis of accounting practices as exhibited in
financial statements enables the study of informal harmonization
(harmonization of accounting practices), which is not necessarily linked to
the harmonization of standards. Our inquiry was in fact directed toward the
harmonization of standards, and a comparison of the conceptual frameworks
of the two systems would have been more appropriate. Moreover, it is
difficult to derive general conclusions regarding the convergence of
standards by simply comparing a number of accounting entries: that can do
no more than suggest an overall trend.
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Appendix
- BIB Consolidated balance sheet under the AAOIFI standards, at 12/31/10
"Assets "2010 "Proportion"
" "(BHD) " "
"Cash and balances with the Bahrain Central Bank and"45,831 "4.9% "
"other banks " " "
"Mourabaha debts "431,692 "46.137% "
"Moudaraba investments "37,360 "4% "
"Musharaka investments "80,246 "8.576% "
"Investments in real-estate securities "94,667 "10.117% "
"Interests in related companies "6,778 "0.724% "
"Investments in Ijara assets "9,635 "1.0297% "
"Ijarah wa Ictina "105,386 "11.263% "
"Real-estate investments "105,192 "11.242% "
"Ijara leasing debts "7,569 "0.809% "
"Other assets "11,318 "1.21% "
"Total assets "935,674 "100% "
"Liabilities, unrestricted joint investment "2010 "Proportion"
"accounts, and stockholders' equity. " " "
"Liabilities " " "
"Current deposits "81,660 "8.74% "
"Other liabilities "12,571 "1.34% "
"Total liabilities. "94,231 " "
"Unrestricted joint investment accounts " " "
"Investment accounts of other financial institutions"141,358 "15.1% "
"Client investment accounts "600,024 "64.1% "
"Total joint investment accounts. "741,382 " "
"Stockholders' equity " " "
"Social capital "72,859 "7.78% "
"Own shares "(0,307) "-0.03% "
"Bond premium "43,936. "4.7% "
"Reserves "(16,594) "- 1.77% "
"Planned appropriations "0,167 "0.01% "
"Total stockholders' equity "100,061 " "
"Total liabilities, unrestricted PSIAs, and "935,674 "100% "
"stockholders' equity " " "
Source: BIB 2010 Annual Report.
- BIB Balance sheet under the IFRS standards, at 12/31/10
"Assets "2010 "
" "(BHD) "
"Cash, Central bank "45.8 "
"Derivative instruments "0 "
"Financial assets held for trading "1,191 "
"Saleable financial assets "30,613 "
"Loan and debt "671.9 "
"Financial assets held until maturity "62,863 "
"Interest in related companies "6.778 "
"Real-estate investments "105.2 "
"Other assets "11.3 "
"Total assets "935.6 "
"Liabilities and stockholders' equity " "
"Clients' current deposits "81.7 "
"Clients' savings deposits "600 "
"Deposits of other credit institutions "141.4 "
"Other liabilities "12.5 "
"Social capital "101.4 "
"Reserves and revaluations "- 1.3 "
"Total Liabilities and Cash Credits "935.6 "
Source: Bankscope (with retreatments)
- Income Statement - Abu Dhabi Islamic Bank:
" "2010 (AED) "
"OPERATING INCOME " "
"Income from murabaha, mudaraba, and wakala with financial"187,719 "
"institutions " "
"Income from murabaha, mudaraba, ijara, and other Islamic "3,453,005 "
"financing " "
"Investment income "75,699 "
"Share of income from related companies "14,798 "
"Fees and commission income, net "343,325 "
"Foreign exchange income "29,071 "
"Income from investment properties "5,265 "
"Income from development properties "(4,300) "
"Other income "14,441 "
" "4,119,023 "
"OPERATING EXPENSES " "
"Employees' costs "(792,815) "
"General and administrative expenses "(431,210) "
"Depreciation "(77,215) "
"Provision for impairment, net "(749,212) "
" "(2,050,452) "
"PROFIT FROM OPERATIONS, BEFORE DISTRIBUTION TO DEPOSITORS"2,068,571 "
"AND SUKUK HOLDERS " "
"Distribution to depositors and sukuk holders "(1,045,006) "
"PROFIT FOR THE YEAR "1,023,565 "
"Attributable to: " "
"Equity holders of the Bank "1,023,345 "
"Non-controlling interest "220 "
" "1,023,565 "
"Basic and diluted earnings per share attributable to "0.382 "
"ordinary shares (AED) " "
Source: ADIB 2010 Annual Report
-----------------------
[1] Corresponding author : Aldo Levy, ISC School of Management, 22, bd du
Fort de Vaux 75017 Paris, Email:
[email protected]
[2] University Of Rouen, 4 Av Pasteur, 76186 Rouen, France, Email:
[email protected]
[3] The first Islamic bank was established only in 1962, in Egypt.
[4] Échanges, June 2009, Islamic finance issue, p. 33 et seq.
[5] Accounting and Auditing Organization for Islamic Financial Institutions
[6] The Islamic Financial Services Board, based in Malaysia (2000), is a
body which enacts standards for the regulation and standardization of the
practices of Islamic financial institutions.
[7] Financial Accounting Standards (FAS) is the acronym used to identify
the rules established by the AAOIFI.
[8] Bahrain, Dubai, Jordan, Qatar, the Qatar Financial Center, Sudan,
South Africa, Syria, and the Islamic development Bank.
[9] We are seeing the emergence of new local accounting standards, e.g., in
Malaysia and Sudan, designed for Islamic banking activities and liable to
compete with the AAOIFI's standards.
[10] "In usual course of work, AAOIFI only revises Standards after issuance
of exposure draft and considering comments from all stakeholders in a
public hearing context. However, given the requests received from the
stakeholders of Islamic financial industry requesting a revision of this
Standard or issuance of a guiding statement on an immediate basis on
account of recent turmoil in financial markets around the world, AAOIFI has
decided, on an exceptional basis, to proceed directly for issuance of this
guiding statement and amendment in Para 7 of the Financial Accounting
Standard (FAS) No. 17." (AAOIFI, 2008)
[11] The Financial Accounting Standards Board develops the American
accounting standards known as the Generally Accepted Accounting Principles
(GAAP)
[12] Autorité des Normes Comptables (Accounting Standards Authority)
[13] Compulsory registration in advertising for online games and alcoholic
beverages.
[14] Identified in the BIB financial statements as Ijara Muntahia Bitamleek
(literally, a lease leading to a transfer of ownership)
[15] "The Ijara is classified as a finance lease, when the Bank undertakes
to sell the leased assets to the lessee using an independent agreement upon
the maturity of the lease and the sale results in transferring all the
risks and rewards incident to an ownership of the leased assets to the
lessee" (ADIB Annual Report, 2010, p.15).
[16] United Arab Emirates Dirham
[17] On the other hand, the ADIB can show the provisions for write-downs of
accounts receivable as charges.
[18] Bahrain Dinar.
[19] This debt is recorded at an amount equal to the net investment. This
is equal to the value discounted at the rate of interest implicit in the
contract (IAS 17).
[20] "Investments which have fixed or determinable payments and where the
Group has both the intent and ability to hold to maturity are classified as
held to maturity. Such investments are carried at amortized cost, less
provision for impairment in value" (BIB 2010 Annual Report, p. 47)
[21] "Profits of an investment jointly financed by the Bank and the URIA
holders shall be allocated between them according to the contribution of
each of the Bank and the IAH in the jointly financed investment separately
for each Joint pool A and B. Operating expenses incurred by the Bank are
not charged to investment account". (BIB Annual Report, p.112)
[22] The PER (Profit Equalization Reserve) is deducted from the bank's
gross income before sharing profits between the PSIA holders and its
shareholders. The IRR (Investment Risk Reserve) is a deduction applied only
to the PSIA holders' share. (IFSB, 2005)
[23] "Profits or losses of Mudaraba based accounts are calculated and
distributed in accordance with the Banking Service Agreement between the
Bank and the investment account holders. Investment in subsidiaries is
funded from the shareholders' funds, hence profit or losses from the
subsidiaries are not distributed to the investment account holders.
Investment in associates is funded jointly from the shareholders and
investment account holders' funds, therefore, profits and losses of the
associates are distributed among the shareholders and investment account
holders." (ADIB Annual Report, p.20)
[24] This retreatment, based on Bankscop banking data, was limited to a
restructuring of the balance sheet according to IFRS recommendations, which
explains why the totals on the two balance sheets are the same.
[25] A Wakala is an agency contract in which the bank, Wakil for example,
is a depositary of securities, has a department for cash inflows and
outflows, carries out transfers of funds, act as the client's
administrator, etc. It may be included among the unrestricted joint
investment pools. It all depends on the terms of the deposit contract.
[26] All amounts are shown in Bahraini currency (BHD).
[27] This method means that an interest in a related company is initially
recorded at cost, and the book value is increased or reduced to record the
investor's share in the firm's results held after the acquisition date.
[28] AAOIFI (2010), FAS 09 "Zakah"
