An appraisal of the financial reporting practices of Islamic banks: the case of Murabahah contract

Abstract

The purpose of this study is to highlight whether there is a need for separate accounting for Islamic banks, focusing on Murabahah arrangement. This paper is based on library research, content analysis, and interview, whereby, the recent annual reports for Bank Muamalat Malaysia Berhad (BMMB) and Al Baraka Banking Group (ABG) are evaluated. The paper discourses the concept of International Financial Reporting Standards (IFRS) and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards, worldviews of IFRS principles, and Shari’ah issues in adopting IFRS for Islamic financial transactions. This research finds that IFRS tends to deviate what is ought to be the financial reporting practices for Murabahah facility as a sale-based trading contract. Hence, the standards set by IFRS for financial institutions cannot accommodate some of the distinctive nature, transactions, and practices of Islamic banks, which Murabahah is one. This paper adds to the global response to the need for separate accounting standards for Islamic Financial Institutions. Nevertheless, the paper is only focusing on Murabahah contract, thus, hindering the ability to provide the broader scope for the recommendation. This study suggests both exclusivity approach of financial reporting for the long-run, and practically harmonization approach for the mean time should be adopted in addressing the need for separate accounting standards for Islamic banks.