Financial Reporting Assignment: Islamic Finance in Malaysia
Task: With references to relevant journals, articles and official websites, write a detailed financial reporting assignment providing a literature review and analysis on the development of financial reporting within the scope of Islamic Finance in Malaysia. Report should include how various bodies (local and international) influences the development and progress of financial reporting and accounting practices of Islamic Finance in our country.
It is evident herein financial reporting assignment that Malaysia has strived to be a leading figure in the Islamic financial segment in terms of Islamic banking, Sukuk, or takaful. According to the Global Islamic Finance Report 2015, Malaysia holds the 2nd place in the global ranking of the Islamic Finance Country Index (IFCI) after Iran. As of 2014, the Islamic financial resources are worth $249 billion in Malaysia experiencing growth of over 20% annually from 2007 to 2014(Kassim, 2016). The central bank of the country,Bank Negara Malaysia strives to enhance the market share of Islamic banking in the local economy to 40% by 2020at a worth over $650 billion. The Malaysian takaful sector also experiences vivid growth having a 21.55% market share on the global platform and is forecasted for steady growth in the upcoming future. In the Sukuksegment as well, the country attains a unique achievement by issuing such an instrument over 60% steadily over the years. So the extraordinary growth of the Islamic financial segment ought to be governed by the effective, legal, and Shari’a guidelines.
Enactment of Islamic Banking Regulations
Malaysia conceived the Islamic Financial Services Act 2013 (IFSA)as an effective measure to control the various activities of the Islamic financial segment in the country(Al Rahahleh, Ishaq Bhatti, & Najuna Misman, 2019). It is a bold measure of Malaysia to tame the unprecedented growth of the Islamic finance industry and curtail it legitimately by facilitating it as the national program. Malaysia is gradually tending to be the leading Islamic finance player on the global platform and periodically hosts international conferences of the Shari’a scholars and industry practices. The country to provide a definite direction to the Islamic financial practices established the Islamic Financial Services Board (IFSB).The institution sets forth international standards and frameworks to promote the soundness and stability of the Islamic financial services segment.
Uniqueness of the Islamic financial industry
Despite these initiatives, the financial reporting standards run the risk of challenging propositions in alignment with the specified characteristics of the Islamic financial tools. The Islamic financial instruments are designed in accordance with the Shari’a or Islamic rules which are quite different from the conventional financial instruments(Hassan, Aliyu, Huda, & Rashid, 2019). There are philosophical differences between the conventional and the Islamic financial instruments wherein the latter does not uphold interests rather arranges profit-sharing among the capital providers and users of the capital.So there are doubts about whether the prevailing international accounting standards would serve the purpose as a requirement of the Islamic banking and financial measures are different. The International Accounting Standards Board (IASB) is working steadfastly to accommodate the implications of Islamic finance in the International Financial Reporting Standards (IFRS)(Visser, 2019).Therefore, since 2012, the Malaysian public entities are required to abide by the Malaysian Financial Reporting Standards (MFRS) to prepare its financial statements considering the IFRS provisions.
MFRS is applicable in the financial reporting process of the Islamic financial institutions in the country abiding the Malaysian Accounting Standards Board (MASB). MFRS keeps a balancing stride by giving space to the Shari’a implications rather than opposing it. But certain challenging propositions erupts jeopardising the equations like the traditionalists viewed that the Islamic banks were established to align the temporal and the religious aspects. But this sort of concept is not endorsed by the traditional banking system as they uphold Allah and Shari’aas the yardstick in the financial dealings(Ibrahim & Alam, 2018). So the approach is quite different from the traditional banking system which often disagreesin accounting scopes like the substance over form and the aspect of the time value of money.
Substance over form
The financial reports and transactions as per the IFRS guideline are prepared based on the economic scope. As per the IASB regulations, the financial regulations ought to have an underlying substance over its legal form.But the Islamic finance does not abide by the aspect of substance while evaluating its financial nature(Alandejani & Asutay, 2017). So there are doubts about whether IFRS treatment could truly reflect the financial reporting characteristics of the Islamic financial segment.
Time value of money
This particular concept of time value raises two significant issues with regard to Islamic financial institutions. The undoing of receivables discounting represents the conventional interest-oriented financial measuresleading to the appreciation of the notional interest revenue(Zainal Abidin & Haseeb, 2018). Contrarily, the Shari’a law does not recognise the time value aspect of its finances paving scope for the notional time value against the deferred cash flows contradicting the implications of IFRS.
To appease the Islamic banking supporters, MASB decided to formulate a distinct setofstandardsforthe Islamic financial institutions(Hassan, Aliyu, Huda, & Rashid, 2019). But such efforts distanced the Malaysian financial reporting from the established financial yardsticks. Therefore to have a middle ground, initiatives like the Bahrain model of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) are helpful. It came up with 26 accounting standards appeasing the implications of the Islamic financial instruments and institutions(Kassim, 2016). Those are the Shari’a-oriented principles but not adequate to tackle the international challenges. So the Malaysian institutions while preparing its financial reports abide by the AAOIFI and IFRS as well wherein the former has no specified solution.
The Islamic accounting standards as evolved in the contemporary accounting scope set forth an equilibrium to have the implications of both AAOIFI and IFRS. The Islamic countries across the world like Pakistan, Iran, Indonesia, Bahrain, and others had modified the accounting standards as per their suitability and there is scope for Malaysia as well to have a fairground. It is due to apply the international accounting standards like IFRS and the Islamic laws like Shari’a by creating a balance to appease both the parties and not diluting the financial fundamentals(Alandejani & Asutay, 2017). So responsible countries like Malaysia ought to continue its quest to have a better, sustainable financial disclosure for its corporate entities.This could be by having implications of the Islamic regulations and IFRS to stay relevant and competitive in the global scenario.
The Malaysian administration is working to have a unique and sustainable ground to have its economic growth and for this due attention of the multinationalsis necessary. Therefore, the authorities are trying to have the equilibrium by taking care of the Shari’a laws through AAOIFI and the international disclosures by IFRS. The latter is necessary to lay forthan attractive ground for the international business houses to establish their roots in the country. This would be possible if the enterprises vouch to have a proper disclosure and for that the IFRS implications are necessary. So the Malaysian authoritiesmustcreate an equilibrium to have the growth of the Islamic financial industry while considering the demands of the multinational companies. Currently, Malaysia is atthe crossroads which need to be handled efficiently to extend its authority in the Islamic financial segment and getting the attention of the global finances as well.
Al Rahahleh, N., Ishaq Bhatti, M., & Najuna Misman, F. (2019). Developments in risk management in Islamic finance: A review. Journal of Risk and Financial Management, 12(1), 37.
https://doi.org/10.3390/jrfm12010037 Alandejani, M., & Asutay, M. (2017). Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter Research in International Business and Finance, 42, 832-854.
https://dro.dur.ac.uk/22777/1/22777.pdf Hassan, M., Aliyu, S., Huda, M., & Rashid, M. (2019). A survey on Islamic finance and accounting standards. Financial reporting assignmentBorsa Istanbul Review, 19, S1-S13.
https://doi.org/10.1016/j.bir.2019.07.006 Ibrahim, M., & Alam, N. (2018). Islamic economics and Islamic finance in the world economy. The World Economy, 41(3), 668-673. DOI: 10.1111/twec.12506
Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30, 66-76. https://doi.org/10.1016/j.gfj.2015.11.007
Visser, H. (2019). Islamic finance: Principles and practice. Sydney: Edward Elgar Publishing. http://islamicbanking.asia/wp-content/uploads/2020/01/Oct-Dec-2019-2-Final.pdf#page=106
Zainal Abidin, I., & Haseeb, M. (2018). Malaysia-Gcc bilateral trade, macroeconomic indicators and islamic finance linkages: A gravity model approach. Academy of Accounting and Financial Studies Journal, 22(S1), 1-7.