Journal of Islamic Accounting and Business Research

A study of compliance with AAOIFI accounting standards by Islamic banks in Bahrain

Thea Vinnicombe

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Thea Vinnicombe, (2012),"A study of compliance with AAOIFI accounting standards by Islamic banks in
Bahrain", Journal of Islamic Accounting and Business Research, Vol. 3 Iss 2 pp. 78 - 98
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Adel Mohammed Sarea, Mustafa Mohd Hanefah, (2013),"Adoption of AAOIFI accounting standards by
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dx.doi.org/10.1108/JFRA-07-2012-0031
Adel Mohammed Sarea, Mustafa Mohd Hanefah, (2013),"The need of accounting standards for Islamic
financial institutions: evidence from AAOIFI", Journal of Islamic Accounting and Business Research, Vol. 4
Iss 1 pp. 64-76 http://dx.doi.org/10.1108/17590811311314294
Sivakumar Velayutham, (2014),"Conventional accounting vs Islamic accounting: the debate revisited",
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JIABR
3,2

A study of compliance with

AAOIFI accounting standards
by Islamic banks in Bahrain

78

Thea Vinnicombe
Faculty of Business, Fulda University of Applied Sciences, Fulda, Germany
Abstract

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Purpose The purpose of this paper is to provide an extension of a previous study by the author into
compliance by Islamic banks in Bahrain with accounting standards issued by the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI).
Design/methodology/approach A number of compliance indexes are constructed to better
understand compliance by the sample banks. The use of multiple indexes addresses methodological
shortcomings identified in the previous study.
Findings Compliance is found to be higher for some Islamic issues than for others. In a relative
sense, compliance is found to be similar to that for the region with standards issued by the
International Accounting Standards Board.
Research limitations/implications The sample is limited to Islamic financial institutions in
Bahrain. This is necessitated by the lack of adaptation elsewhere. The relatively high compliance
found in Bahrain suggests broader adoption would be successful and would contribute to the overall
regulation of the Islamic financial sector.
Originality/value The AAOIFI has existed for over 20 years, but little empirical research had been
conducted into compliance with the standards developed by this body. This paper, along with the
previous study by the author, helps address this gap.
Keywords AAOIFI, Accounting standards, Compliance, Islam, Banks, Banking, Bahrain
Paper type Research paper

Journal of Islamic Accounting and

Business Research
Vol. 3 No. 2, 2012
pp. 78-98
q Emerald Group Publishing Limited
1759-0817
DOI 10.1108/17590811211265902

1. Introduction
Islamic finance has experienced astounding growth in recent years, not only in terms of
assets under management, but also the in the range of products offered. This growth has
outstripped corresponding developments in a complimentary regulatory framework
necessitated by the unique characteristics of some Islamic contracts. A global regulatory
system will become increasingly important for the Islamic financial sector to facilitate
continued growth. One important aspect of such a system is accounting standards for
the preparation of financial statements by Islamic banks. An Islamic standard setting
body, the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) has existed for 20 years, but little empirical investigation into compliance with
these standards has thus far been undertaken. This paper extends a previous project by
the author (name withheld) in testing compliance by Islamic banks with the standards
issued by the AAOIFI in order to better understand this aspect of Islamic financial sector
regulation.
The authors previous study examined the degree of compliance by Islamic banks in
Bahrain with selected AAOIFI standards. A self-constructed index encompassing
issues dominating the Islamic accounting literature was used to measure compliance
with the standards. The index used four standards and found compliance to be high

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with respect to two of these standards and low with respect to the remaining two.
While there are numerous studies measuring compliance with the International
Financial Reporting Standards (IFRSs) issued by the International Accounting
Standards Board (IASB)[1], the authors study was the first to address compliance with
the AAOIFI standards. As such, it is unsurprising that a number of methodological
problems were noted. In the first instance, developing an index based on an overview
of the Islamic accounting literature resulted in a somewhat subjective and limited
selection of standards to include in the index. The current study therefore identifies a
number of issues to include in the compliance index based on the actual practices of the
sample banks as well as those areas deemed most important by the AAOIFI itself.
Second, a problem common to compliance testing was noted in the earlier study.
There are typically many matters outlined in accounting standards on which reporting
entities are silent. The researcher must therefore determine if this indicates
non-compliance or if the issue is not applicable to the entity. The present study
addresses this problem by following Tower et al. (1999) in developing two separate
indexes to gauge the extent to which this issue is problematic in the context of Islamic
financial institution reporting. The first index follows an easy rule where it is assumed
that if an item is not disclosed the item is not applicable to that entity (non-violation for
non-disclosure or NVND). The second index follows a tough rule in assuming that
non-disclosure indicates non-compliance (violation for non-disclosure or VND).
Differences in the average values of the two tests were found at a statistically
significant level. Therefore, following Taplin et al. (2002) a discernibility index (DNI)
was constructed to better understand the reliability of the compliance measures. The
DNI is intended to measure the extent to which the compliance index is really able to
discern the level of compliance of the sample. A high score means a high level of
discernment, while a low score indicates a low level of discernment. Average DNI levels
were found to be quite high, suggesting that Islamic banks are reasonably unambiguous
in their reporting, hence the compliance indexes are a reliable measure. However, some
factors limiting the discretion of the reporting banks were also noted.
The sample is similar to that of the previous study, being comprised of all Islamic
banks in Bahrain for which English language annual reports were available. (Authors
name withheld) (2010) noted the potential usefulness of a comparative analysis,
particularly across countries of the Middle East where economic, political and other
factors are sufficiently similar to control for these variables. Unfortunately possible
samples from other nations proved too small for meaningful comparisons.
The years 2006-2009 are covered by the current sample and tests were conducted to
see if reporting has increased over time. There was no evidence to suggest this is the
case. A category by category analysis of the items included in the index was then
conducted to determine first, if compliance has increased over time for some categories
relative to others, and second, if compliance is higher for some issues relative to others.
Compliance was found to be higher with respect to some issues, but there was again no
evidence of increasing compliance over time. DNI indexes were also constructed to
determine if reporting is more reliable with respect to some issues, and if this
contributes to the reliability of the aggregate indexes.
The remainder of the paper is organized as follows: Section 2 outlines the history of
modern Islamic finance and explains why regulation separate from, or in addition to
that existing for conventional financial institutions is required. In Section 3, the sample

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is explained, then Section 4 outlines the construction of the compliance index. The test
results are discussed in Section 5 which is followed by a summary of the research
findings and concluding comments.
2. Contemporary Islamic finance history and regulation
Modern Islamic banking appeared in the 1950s and 1960s and was initially associated
with small cooperative banking services intended to aid regional development[2].
Growth since that time has been phenomenal. Assets under management for the entire
sector were approximately 26 billion US dollars at the end of 2004 (Olsen and Zoubi,
2008, p. 46). By the end of 2008 this figure had increased to an estimated 28 billion dollars
(IMF, 2010, p. 5). While early growth in Islamic finance took place largely in South East
Asia, from the early 1990s the focus changed to the Gulf Cooperation Council (GCC)
countries[3]. By 2002 this region was estimated to account for 74 percent of Islamic
banking system assets, a figure that did not fully account for the flow of funds from
Western countries back to the Middle East following the events of September 11, 2001 in
the USA (Olsen and Zoubi, 2008, p. 46). The market share of Islamic banking in GCC
countries relative to conventional banks is substantial and increasing, ranging from 11 to
35 percent at the end of 2008, compared to 4-24 percent at the end of 2004 (IMF, 2010, p. 5).
Islamic finance also continues to grow elsewhere in the Middle East, on the Indian
sub-continent, in parts of Africa, and in South East Asia. In addition, Islamic banking is
now available in Western countries such as the UK, Australia and New Zealand. While it
is still something of a niche market the Islamic financial sector is one of the fastest
growing segments of the global financial industry (IMF, 2010, p. 5).
Such rapid growth poses significant regulatory issues. Islamic banking is defined by
its compliance with Sharia law (IMF, 2010, p. 7), which, among other things, prohibits
the charging of interest. As interest bearing deposits and loans form the bedrock of the
conventional financial sector Islamic banks have had to develop alternative financial
products, do so in a short period of time, and within Muslim countries which vary not
only in terms of economic, political and cultural factors, but also in their interpretation of
Islam. Like most of the worlds major religions, there are variations within Islam which
influence the interpretation of Sharia law, and therefore have implications for Islamic
finance[4]. This implies a flexibility in Sharia law, which on the one hand has facilitated
the rapid growth of Islamic finance, but on the other hand, has resulted in differences in
practice between Islamic banks (Kahn, 2007, p. 287; Olsen and Zoubi, 2008, p. 48).
Different practices arise due to the nature of the sources of Islamic law. The two primary
sources are the Holy Quran, the revealed word of God to the Prophet to Mohammad in
seventh century Arabia, and the sunnah, a written record of the sayings and doings of
the Prophet during his lifetime. Both provide mainly principles and recommendations to
guide Muslims in their daily lives, including commercial activities. Interpretation is
therefore required when applying Islamic law to changing times and circumstances,
including developing financial products suited to a modern day global economy. Not
unnaturally this results in differences of opinion so that established practices in some
Islamic banks are unacceptable in others.
In addition, the regulatory structure within which Islamic banking has evolved is
complex and poses many challenges. Apart from a small number of exceptions[5], the
Islamic financial sector within any given country typically operates within a broader
Westernized regulatory system (Napier, 2009, p. 124). Islamic banks therefore face the

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problem of complying with a dual regulatory environment, consisting of a Western

influenced regime, not especially suited to their nature, and, at the same time, the need
to comply with Sharia law (El-Hawary et al., 2007, p. 779; Kahn, 2007). Algaoud and
Lewis (1999, p. 61) note that agency problems are high with respect to the banking
sector in general as depositors in particular make use of financial services supplied by
banks due to their own lack of experience. If poorly understood Islamic contracts are
introduced in the context of an unsuitable regulatory system, the agency problem will
be magnified for this sector of the financial markets.
These issues have not gone unremarked and a number of steps have been undertaken
to establish a global regulatory system (El-Hawary et al., 2007, p. 779). In particular, the
Islamic Development Bank (IDB) has provided financial and other support to establish
the building blocks for a comprehensive regulatory framework spread across the
geographic focus of this sector (Kahn, 2007, p. 301). These include the Islamic Financial
Services Board (IFSB), located in Malaysia and working to develop global regulatory and
supervisory standards for Islamic banks. An Islamic ratings agency, the International
Islamic Ratings Agency, has been established in Bahrain, and a Liquidity Management
Centre in Malaysia. Along with the AAOIFI, these three bodies form the cornerstones of
a regulatory framework for the sector as a whole. Currently lacking is an understanding
of the effectiveness of each of these bodies and how well they work together to regulate
the global Islamic finance industry. As the AAOIFI is the oldest of the four, and as the
provision of harmonized accounting standards is fundamental to comparable financial
reporting it is important to continuously assess the AAOIFIs progress.
The need for harmonized accounting standards for Islamic banks has been evident
for some time and indeed prompted the establishment of the AAOIFI in Bahrain in 1991
(Pomeranz, 1997). This development parallels a similar need for harmonization in
accounting standards for conventional reporting entities which has been addressed
through the IASB and its issuance of International Reporting Standards (IRSs). Without
common accounting standards to guide the preparation of annual financial statements
reporting differs between countries, which creates difficulties for users in assessing and
comparing the financial performance of entities, and in the case of Islamic financial
institutions, in assessing compliance with Sharia law. While harmonization of
accounting practices and compliance with accounting standards are not the same, a high
level of compliance with the same accounting standards facilitates harmonization. More
importantly, measuring compliance provides an insight into the regulatory relevance of
the standard setting body in that compliance implies its standards are accepted by and
useful to financial statement users and preparers. The AAOIFIs goals are similar to
those of the IASB in achieving harmony of accounting practices to facilitate consistent
reporting of Islamic banks globally. The AAOIFI works with the IASB and other
international organizations so that Islamic finance is not isolated from mainstream
developments in accounting standards. To this end, its membership includes not only
representatives from mainly Muslim countries, but also from the IASB, and from most
countries within which Islamic banks operate, for example, the UK and Australia
(AAOIFI, 2011). Notwithstanding its productivity in standard development and
encouraging links with the wider global financial sector, the AAOIFI faces many
problems in the uptake of its standards. Foremost amongst these is a lack of enforcement
powers, and the cultural, economic, political and regulatory diversity in the areas of the
world for which the standards are developed.

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3. Sample
The logical starting point from which to draw the sample for this study is from those
banks which are AAOIFI members. The AAOIFI indicates a number of countries have
either fully adopted its standards or use them as guidelines for the Islamic banking
sector. These include Lebanon, Dubai, Bahrain, Qatar and Jordan (AAOIFI, 2011).
However, a perusal of the independent auditors reports show the financial statements
of Islamic banks in most of the countries listed by the AAOIFI have been prepared in
accordance with IASB standards[6]. Furthermore, most Islamic banks in these
countries offer few if any Islamic products. Only Bahrain, Qatar and Jordan clearly and
consistently apply the AAOIFIs standards. However, the number of Islamic banks in
Jordan and Qatar is very small, effectively precluding not only meaningful results for
these countries in terms of compliance, but also comparisons across countries.
The sample for this study is therefore very similar to that of the previous study. It
consists of all Islamic banks licenced by the Central Bank of Bahrain (CBB) and listed
on the CBBs web site and for which English language financial statements are
available (CBB, 2011). As of the 31 May, 2011, 409 financial institutions were registered
in Bahrain. Of these, 107 banks were registered, 80 of which were conventional banks,
and 27 Islamic banks. The Islamic banking sector therefore makes up a little over
25 percent of the total banking sector. All Islamic banks in Bahrain are required by the
CBB to apply the AAOIFI reporting standards. The independent auditors reports of all
banks in the sample were nevertheless examined to ensure that all actually conducted
their financial reporting in accordance with the AAOIFI reporting standards.
The sample covers the years 2006-2009. English language financial statements were
not available for all banks for all four years. Some banks were established only
towards the end of the sample period. Because the number of banks increases from
year to year, the sample size also increases. Appendix 1 provides a list of the banks in
each year for the four year period. The study follows the CBB in dividing the list of
sample banks into retail and wholesale banks. It is possible to see differences in
compliance between the two sectors, however, the retail bank sample is so small that
these differences cannot be substantiated at a statistically significant level.
4. Composition of the compliance index
Unlike many studies of compliance with the reporting standards of the IASB, where
compliance is largely measured on a standard by standard basis, with most if not all
standards included in the index, this study measures compliance largely in relation to a
small number of products and issues specific to Islamic finance. There are a number of
reasons for this. First, compliance by product is thought to give a better insight into
overall compliance by Islamic banks. Second, because some contracts are covered by
more than one standard and some standards cover more than one product, it is more
appropriate to delineate the index by Islamic product. Finally, a number of AAOIFI
standards relate to products that are not currently widely used by Islamic banks.
The items included in the index were determined by a combination of two factors.
First by following the AAOIFIs own determination of the contracts and issues it
considers most significant, and second by examining the products actually used by the
sample banks. In the early 1990s the AAOIFIs Executive Committee for Planning and
Follow Up commissioned field studies to identify those issues and/or financial
products which should be given priority in the development of its standards.

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Three financial instruments were identified, these were the murahbaha, mudaraba and
musharaka contracts which are recorded in the asset side of the balance sheet
(AAOIFI, 2004, p. 126). The importance of these products to the banks as well as
significant variation in their accounting treatments indicated the need for guidance in
the form of accounting standards to facilitate consistency. In addition, a general
statement relating to the presentation and disclosure in the financial statements by
Islamic banks was deemed necessary, not only by the banks themselves, but also by
the monetary and regulatory authorities in regions where the banks operated (AAOIFI,
2004, pp. 83, 134-5, 158-9 and 172).
In 1995 the AAOIFI again went to the Islamic banking sector to seek their opinion
on the standards to be given priority (AAOIFI, 2004, p. 268). This resulted in the
development of standards relating to restricted and unrestricted investment accounts,
recorded on the liabilities and equity side of the balance sheet. The index therefore
includes the following products which are covered by one or more standards:
mudarabah, mudaraba, musharaka financing contracts and restricted and unrestricted
investment accounts.
Two other issues covered by the AAOIFIs accounting and governance standards
were included in the original compliance index constructed by the author, and these are
also utilized in the revised index developed in this study. These are first, the religious
tax, zakah, and second, the in-house governance board required by Islamic banks, the
Sharia Supervisory Board (SSB). Zakah is one of the five pillars of Islam, along with
the profession of faith, prayer, fasting, and the pilgrimage to Mecca for those who are
able. It is a tax payable by all Muslims on wealth as a religious duty and intended as an
act of worship and purification rather than charity (Quran, Chapter 9, Verse 109). The
Quran specifies the amounts of zakah to be paid, what assets are liable for the levy and
eligible recipients, such as those newly converted to Islam. It is a tax levied on wealth
and on assets subject to growth, but not on assets for personal use, such as a house, or
assets used in the production of goods and services. The AAOIFI commenced work on
a standard to cover the reporting of zakah upon receiving the results of its 1995 survey
(AAOIFI, 2004, p. 284). Financial Accounting Standard (FAS) 9, zakah, was adopted in
2009 and covers measurement and disclosure requirements for zakah, and its
presentation in the financial statements.
The second additional issue included in the index is the report of the SSB. Since their
inception, and especially prior to the introduction of broader regulatory bodies,
individual Islamic banks have had recourse to the expertise provided by an SSB to
ensure their practices do not violate Sharia law. The SSB for an individual bank has
typically been comprised of a small number of scholars with expertise in Islamic
jurisprudence, and ideally also in finance. Smaller institutions might hire the services of
a Sharia consultant, rather than maintaining and in-house SSB. Individual SSBs work
within and across countries and regions facing similar issues, which each have, and to a
large extent continue to address individually. This has involved not only significant
duplication of work, but also variation in findings and hence in the permitted practices of
Islamic banks. The AAOIFI sought to work with individual SSBs to standardize
differences in practice and help address problematic issues through the issuance of
standards specifically for SSBs. These are now covered in the first governance
standards of the AAOIFI, that is Governance Standards for Islamic Financial
Institutions (GSIFI) Numbers 1-3. The compliance index for this study uses only GSIFI 1.

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This standard specifies the means by which the SSB should be appointed, the
composition and qualifications of the board, and makes it compulsory for the SSB to
provide an annual report to be published with the banks financial statements.
A number of the financial products covered in the AAOIFIs standards are not
utilized by most Islamic banks, for example, the leasing products Ijarah and Ijarah
Muntahia Bittamleek. Measuring compliance with standards related to products
largely unused by the sample banks adds little value to the study, hence only the
products utilized by a substantial proportion of the sample banks were included in the
index. The most commonly used products are shown in Table I. All products used by
less than 25 percent of the banks were excluded. The compliance index is therefore
comprised of seven categories as shown in Table II, which yield 100 data points of
compliance. Appendix 2 shows the index by data items as well as categories.
4.1 Financing and deposit contracts explained
The theoretical model for contemporary Islamic banking was developed in the 1970s
and 1980s. Islamic scholars sought to understand contractual relations in use during
the Prophets lifetime and to adapt these for modern use. Accordingly, the theoretical
model was largely based on a single product, the mudaraba contract[7]. This contract
was seen as the means by which deposits would be received by Islamic banks and
mobilized to generate returns for banks and depositors (El-Hawary et al., 2007, p. 781).
The mudaraba contract could be traced to the time of the Prophet (and before) and was
Islamic product

Table I.
Product use by sample
banks (n 66)

Murabaha
Mudaraba
Musharaka
Ijarah
Ijarah Muntahia Bittamleek
Unrestricted Investment Accounts
Restricted Investment Accounts
Istisnaa
Wakalaa
Sukuk

Use by banks percentage

65
36
18
11
14
33
35
9
10
10

98
55
27
17
21
50
53
14
15
15

Note: aWhile Wakala is a form of the mudaraba contract, because it is typically treated separately by
the banks, it is excluded from the compliance index

Category

Table II.
Compliance items by
category and data points

Use by banks number

SSB Report
Zakah Tax
Murabaha Finance
Mudaraba Finance
Musharaka Finance
Unrestricted Investment Accounts
Restricted Investment Accounts
Total

Number of items

% of total

12
10
16
15
14
18
15
100

12
10
16
15
14
18
15
100

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sanctioned for use during his lifetime. Moreover, it was thought its adaptation for
modern use would be associated with a number of advantages in terms of equity,
stability and efficiency compared to conventional Western contracts. In its early form
the mudaraba contract consisted of two parties, one with capital (the mal-al ) and the
other with a demand for entrepreneurial funds (the mudarib), such as the buying and
selling of a consignment of goods. Profits would be shared proportionately according
to a pre-determined agreement, and losses would be limited to the capital input of the
lender and the time and effort of the borrower. The contract would be liquidated at the
conclusion of a single venture.
The modern day version of the mudaraba contract is unavoidably more complex and
associated in practice with a number of problems not readily foreseeable in the early
theory. On the basis of this product, funds are deposited with an Islamic bank, the
depositors being the mal-al and the bank then acts as the mudarib as it mobilizes funds
for depositors. Early theory envisaged that the bulk of these funds would be lent out to
entrepreneurs and other borrowers, creating a two tiered mudaraba model, with the
second tier being the bank in the role of mal-al and the borrowers the mudarib. In both
tiers, profit would be distributed proportionately according to pre-specified rates, with
any losses being limited to the capital provided by the bank at the second tier of the
contract, and the funds provided by depositors at the first tier. In line with Islamic
thought, the bank would be unable to ask for any guarantee or security for the funds lent,
nor could it influence the management of a project (Algaoud and Lewis, 1999, p. 67).
In practice the two tiers of the mudaraba contract are treated separately by Islamic
banks, with the deposit side being the investment accounts specified in the compliance
index and the financing contract called the mudaraba contract. Two types of
investment accounts have been developed, restricted and unrestricted. Holders of
restricted investment accounts limit the use to which such funds may be used, for
instance, to a specific project or projects. Unrestricted account holders authorize the
bank to use their funds in whatever manner deemed appropriate (AAOIFI, 2004, p. 198).
Neither restricted nor unrestricted accounts are guaranteed, as this would not be in
keeping with the profit and loss sharing principle upon which they are based. In
consequence, their treatment in the financial statements or reporting entities has varied
between liabilities, equity and off balance sheet recording (Karim, 2001). The AAOIFI
introduced a completely new category for unrestricted investment accounts, specifying
that they be recorded on the balance sheet as a separate item between liabilities and
equity (AAOIFI, 2004). At the same time the AAOIFI standards state that restricted
investment accounts are to be treated as off balance sheet items. Restricted and
unrestricted investment accounts are covered in FAS5 and FAS6 as well as FAS1.
Mudaraba financing contracts are covered in FAS3. A problematic issue relating to
these contracts is that both investment account holders as mal-al in relation to the bank
and the bank as mal-al in relation to the mudaraba borrowers have no influence over the
use of the funds. This heightens agency problems and may predispose banks towards
low risk ventures. An alternative is musharaka financing, which is also a profit and loss
sharing contract, but in the form of a partnership agreement, so that the bank is entitled
to participate in the management of a project (Algaoud and Lewis, 1999, p. 67). In most
other respects the mudaraba and musharaka are similar. Profit is distributed according
to a pre-determined ratio, and losses are limited to the contributions of the participating
partners. Musharaka contracts are covered in FAS4.

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While profit and loss sharing best reflects the spirit of Islam, the banks limitations
as mal-al make this a potentially high risk form of financing. Most Islamic banks
therefore consider it permissible to offer mark-up instruments, the most common being
the murabaha contract (Maali et al., 2008, p. 268)[8]. Under this contract, the bank
makes a purchase on behalf of a client, who then makes scheduled repayments equal to
the cost of the good plus a mark-up over the life of the contract. This form of financing
can replace home loans and personal loans for cars, and can also be used for
commercial ventures, such as the purchase of a consignment of goods for resale.
Murabaha financing is relatively straight forward, with the main accounting issue
being the timing of revenue recognition associated with scheduled repayments. Karim
(1995) and Archer and Karim (1997) noted a number of different methods for profit
recognition utilized across Islamic banks. For instance, profit could be recognized at
the beginning of the contract, over the life of the contract or at its conclusion. A second
issue relates to the problem of dealing with and accounting for debtors who fail to
make scheduled repayments. Islamic banks are not permitted to accept a guarantee,
and moreover are bound by the Quranic injunction to deal leniently with those who
cannot meet their debts. The murabaha financing contract is addressed by the AAOIFI
in FAS2 which covers the measurement and valuation of murabaha assets, guidelines
for profit recognition, accounting for a decline in the value of assets and the issue of
clients failing to make payments.
5. Data analysis
The AAOIFI published its first set of accounting and governance standards in 2004.
These were updated in 2008 and again in 2010. The 2004 edition was considered most
appropriate for this study which covers the years 2006-2009. In part this is because it
would be unreasonable to expect banks to comply with standards not yet available at the
time their financial statements were prepared. In addition, as the subsequent
publications have focused on expanding the number of standards, rather than revisions
to existing standards, no changes of relevance to the index items have been made.
5.1 Scoring
Studies of compliance with the IFRSs of the IASB typically apply a four category
scoring when measuring the degree of compliance by their sample entities with the
compliance items. If an item clearly applies to an entity, and the financial statements
show compliance, then a score of 1 is given, while failure to comply receives a score of
0. Where the item is not applicable the symbol NA is used. When the researcher
cannot determine if a non-disclosed item is applicable the code DK for do not know is
used. The index is then constructed excluding the DK as well as the NA scores, so that
compliance is measured as a ratio of items complied with to compliance plus
non-compliance (Al-Shammari et al., 2008).
5.2 NVND and VND indexes
Excluding the DK items in constructing the index was noted as a problem in the
previous study (authors name withheld), and has likwise been identified as an issue in
studies of compliance with IASB standards. Tower et al. (1999) and Taplin et al. (2002)
address this problem by developing a number of indexes to better understand not only
the degree of compliance by firms in their studies, but also the reliability of the indexes.

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The same approach is applied here to compliance by Islamic banks with AAOIFI
standards. Following Tower et al., two separate indexes are initially developed. The first
applies an easy rule so that do not knows are treated as non-applicable items. The
resulting index is termed the Non-violation for non-disclosure index or NVND.
A second index is constructed using a tough rule, where the DKs are treated as
non-disclosure. This is the Violation for non-disclosure index or VND. The mean levels
of compliance for both indexes over the four years of the study are shown in Table III.
Comparing the NVND and VND index results suggests the former yields a higher
level of compliance than the latter, which in turn indicates the DK category
influences the outcome. Wilcoxon rank sum tests were therefore used to determine if
the median values were higher for the NVND indexes at a statistically significant level.
Tests were conducted on a year by year basis, according to divisions into wholesale
and retail banks as well as for all banks combined, and finally for all banks and all
years combined. It is only when the samples for the four years were pooled, giving total
samples of 66 banks, that statistically significant differences were found. A DNI index
was constructed to better understand these differences.

Compliance
with AAOIFI
standards
87

5.3 Discernability indexes

Taplin et al. (2002) specify four scoring categories in the development of their DNI
index as follows:
Category 1: non-compliance score 0.
Category 2: compliance score 1.
Category 3: compliance not disclosed and not readily discernable score DK.
Category 4: not applicable score N/A.
The DNI index is the ratio of categories one plus two divided by categories one plus
two plus three. When an entity is clear in its compliance, the number of DKs will be
low, and the DNI score will be close to one.
Table IV shows the DNI results for the current study on a year by year bases, with
divisions into retail and wholesale banks, as well as all banks combined. The results
are quite high, which initially suggests a low degree of ambiguity in reporting on the
part of Bahrain Islamic banks. To some extent, however, these high results can be
explained by some components of the index. The zakah data items, in particular, apply
to all banks, meaning there are virtually no dont knows in this category.
Reporting entities either comply or fail to comply. Similarly, the items in the restricted

Retail banks
NVND
VND
Wholesale banks
NVND
VND
All banks
NVND
VND

2006

2007

2008

2009

0.71
0.61

0.75
0.66

0.74
0.62

0.73
0.64

0.69
0.58

0.66
0.59

0.71
0.62

0.71
0.60

0.70
0.59

0.69
0.60

0.72
0.62

0.71
0.61

Table III.
Mean compliance for
retail, wholesale and
all banks

JIABR
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88

investment account category relate to required items in the statement of changes in

restricted investment accounts which must accompany the financial statements.
Where restricted investment accounts are offered, there is little room for ambiguity in
compliance with these disclosure requirements. DNI indexes are calculated on a
category by category basis to better understand this effect and shown in Table V. The
high scores for the zakah and restricted investment account categories indicate that the
lack of options for DK responses have contributed to the high overall DNI scores.
5.4 Compliance over time
There was no evidence of an increase in compliance with AAOIFI accounting
standards over the four years of the sample. The Kruskall-Wallis rank sum test for
differences between medians was used to test for differences in average compliance
over time. Tests were conducted by retail and wholesale banks and the two categories
combined, as well as for each individual category in the index. Testing by category
would indicate if compliance in relation to any one contract or issue had increased. In
all cases no differences were found at a statistically significant level. A perusal of mean
compliance over time (Table III) and by standard (Table VI) also show no evidence of
an increase in compliance over the four years.
5.5 Category by category analysis
A category by category overview shows some interesting results in terms of compliance
by issue and product. Compliance is particularly low with respect to the zakah religious
tax. Because the Quranic requirement to pay this tax relates to individuals rather than
independent entities there has been much debate amongst Islamic scholars as to whether
or not a firm should be subject to zakah (Haniffa and Hudaib, 2007, p. 101). The result is
that only banks required by national law, company by-laws or a shareholders resolution
must pay the tax. Nevertheless, the AAOIFIs standard relating to this tax (FAS9)is quite
clear in a number of requirements applying to all banks. These include disclosure of the
amount of zakah due per share when the bank is not required to pay the tax, and disclosure
of the method use to calculate the zakah base. That is, the method used by a bank

Table IV.
Mean DNI scores

Table V.
Mean DNI scores
by category

Retail banks
Wholesale banks
All banks

2006

2007

2008

2009

0.87
0.88
0.83

0.84
0.90
0.88

0.84
0.87
0.86

0.88
0.83
0.84

DNI

2006

2007

2008

2009

SSB
Zakah
Murahaba
Mudaraba
Musharaka
Restricted Investment Account
Unrestricted Investment Accounts

0.86
1.00
0.78
0.62
0.78
0.86
1.00

0.93
1.00
0.73
0.66
0.82
0.94
0.95

0.96
1.00
0.63
0.66
0.93
0.89
0.93

0.93
1.00
0.65
0.61
0.85
0.90
0.99

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NVND VND NVND VND NVND VND NVND VND

2006
2007
2008
2009
Retail banks
SSB Report
Zakah Tax
Murabaha Finance
Mudaraba Finance
Musharaka Finance
Unrestricted Investment Accounts
Restricted Investment Accounts
Wholesale banks
SSB Report
Zakah Tax
Murabaha Finance
Mudaraba Finance
Musharaka Finance
Unrestricted Investment Accounts
Restricted Investment Accounts

0.910
0.190
0.857
0.783

0.625

0.833
0.300
0.664
0.523

0.572

0.792
0.426
0.888
0.880
0.822
0.749
0.655

0.696
0.282
0.629
0.554
0.650
0.713
0.590

0.806
0.460
0.850
0.830
0.830
0.802
0.678

0.764
0.325
0.468
0.628
0.800
0.705
0.548

0.780
0.400
0.850
0.817
0.915
0.694
0.640

0.748
0.278
0.545
0.598
0.850
0.646
0.616

0.670
0.190
0.772
0.773
0.917
0.688
0.796

0.635
0.300
0.620
0.454
0.689
0.557
0.797

0.640
0.426
0.810
0.752

0.626
0.722

0.658
0.282
0.614
0.556

0.576
0.706

0.794
0.460
0.846
0.760

0.628
0.821

0.731
0.325
0.584
0.483

0.523
0.821

0.758
0.400
0.812
0.663

0.721
0.813

0.718
0.278
0.538
0.426

0.656
0.813

in identifying and calculating the value of assets and other items subject to the religious
tax. FAS9 permits two valuation methods and shows clear examples of both. Few entities
complied with these requirements. In most cases the banks stated only that they were not
required to pay the zakah tax. This suggests some banks either do not understand or
ignore their obligations in this area. The fact that there is no evidence of an increase in
compliance over time indicates that better enforcement of compliance is needed with
respect to this issue. As one of the five pillars of Islam zakah is an important issue for
financial statement users. Overall compliance would also be substantially improved by
better results in this area.
In contrast, the second Islamic issue category, the report of the SSB board, shows
much better results, especially with respect to retail banks. These show a high of just
over 90 percent compliance by retail banks with SSB requirements in 2006. The results
for wholesale banks, however, are less impressive. It is in this category that wholesale
banks demonstrate particularly low results relative to retail banks.
Compliance relating to the three Islamic financing products, murabaha, mudaraba
and musharaka are very similar and quite high especially for the NVND figures. For
example, the NVND figures for retails banks in 2009 were 0.85, 0.817 and 0.915 for
murabaha, mudaraba and musharaka, respectively. VND results are lower and show
more variation. Again, using 2009 figures for retail banks, the results were 0.545, 0.598
and 0.850 for the three products. In 2008, VND figures were 0.468, 0.628 and 0.80. The
VND results suggest compliance is higher with respect to the musharaka product
relative to the murabaha and mudaraba. However, Table II shows that while 98 percent
of banks offered murabaha financing, only 27 percent offered musharaka. It is therefore
possible that banks offering a wider range of Islamic products are also more diligent in
their reporting. DNI scores are also higher for this product, supporting the findings of the
first two indexes.
Compliance with the reporting requirements for unrestricted investment accounts
are somewhat lower than for restricted investment accounts, and quite low overall.

Compliance
with AAOIFI
standards
89

Table VI.
Mean compliance
by standard
(NVND and VND)

JIABR
3,2

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90

For example, mean compliance by wholesale banks for the years 2006-2009 was 0.6288,
0.626, 0.628 and 0.721 using the NVND figures. The VND figures were even lower;
0.557, 0.576, 0.523 and 0.656. In contrast, NVND figures for wholesale banks were
0.796, 0.722, 0.821 and 0.813, with VND figures almost the same. Around 50 percent of
banks offered both products (Table II). The higher compliance for restricted
investment may be related to the relatively straight forward requirements for this
product. Banks must produce a statement of changes in restricted investment accounts
as an off balance sheet item, following clear directions in FAS5 and FAS6 and an
example statement provided in FAS1. In addition, there are typically only a small
number of restricted investment accounts held by each bank, with clear and limited
investment strategies. Reporting for unrestricted investment accounts is more complex
because funds can be commingled and spread across a range of investment options.
There appears to be a pattern in the required items which banks fail to comply with.
These involve disclosure items relating to specifically Islamic issues such as allocation
of profits between unrestricted investment accounts and shareholders and any changes
in the banks share of profits as mudarib. It may be that financial statement preparers
either lack expertise in this area, or fail to see its importance.
5.6 Compliance with AAOIFI relative to IASB standards
The lack of studies of compliance with AAOIFI standards means compliance by the
sample banks from Bahrain cannot be judged as high or low in a relative sense. Hence
a comparison is made with the results of a study measuring compliance with IASB
standards by reporting entities in all GCC countries, including Bahrain. The
comparative study by Al-Shammari et al. (2008), was conducted over a slightly earlier
period, using a larger sample and including all entities, not just financial institutions.
Nevertheless, it provides a reference points and suggests compliance by Bahraini
entities with AAOIFI standards is similar to compliance with IASB standards both in
Bahrain and across the GCC countries. Table VII shows mean compliance over all
years with AAOIFI standards to be 0.71 for all banks in Bahrain and with IASB
standards to be 0.74 both for all GCC countries and for Bahrain. Because the study by
Al-Shammari et al. measured compliance as a ratio of compliance to compliance plus
non-compliance, the NVND ratio was used for the comparison.
6. Concluding comments
This study, like that of (authors name wittheld), is limited to compliance with
accounting standards by Islamic banks in Bahrain. The earlier study was restricted to
one country to control for external factors influencing accounting standards compliance,
such as differences in the economic, political and regulatory environment. The original

Table VII.
Compliance with AAOIFI
and IASB standards

AAOIFI compliance
Retail banks
Wholesale banks
All banks
IASB compliance
GCC countries (n 436)
Bahrain (n 100)

2006
0.71
0.69
0.70
1996
0.68
0.69

2007
0.75
0.66
0.69
1997
0.71
0.71

2008
0.74
0.71
0.72
1999
0.74
0.74

Source: IASB figures: Al-Shammari et al. (2008, p. 439)

2009
0.73
0.71
0.71
2000
0.76
Not given

All years
0.73
0.69
0.71
2002
0.82
0.80

All years
0.74
0.74

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aim of the present study was to broaden the number of countries included in the sample.
This would not only have increased the sample size but also enabled comparisons of
compliance across countries. The actual sample included only banks from Bahrain
simply because this is currently the only country where a substantial proportion of
banks have actually adopted the AAOIFI standards. In most countries listed on the
AAOIFI web site as AAOIFI adopters, banks were found in practice to be complying
with IASB standards and offered few if any Islamic financial products. This is an
interesting result in itself, signifying that AAOIFI standards have not yet been broadly
adopted. While some countries claim to use the AAOIFI standards as guidelines in
reporting regulations for Islamic banks, evidence of this is not clear in the financial
statements. The organization therefore continues to face challenges in the adoption of its
standards, meaning also that this aspect of Islamic financial regulation is not yet
globally effective.
Despite this significant limitation, some important results were evident from the
sample banks in Bahrain. First, compliance with AAOIFI standards did not appear to
differ substantially to compliance with IASB standards, although it should be noted this
conclusion is based on a very simple comparison. A more comprehensive comparative
analysis could be conducted to verify this initial observation. Second, similar to studies
testing compliance with IASB standards, some ambiguity in the reporting of Islamic
banks was evident. This was demonstrated through the development of two compliance
indexes, one using an easy rule and the other a tough rule. Because average
compliance was found to be higher with respect to the first index, a discernability index
was constructed to measure the reliability of the compliance tests. High results from this
index suggest Bahrain Islamic banks are quite straight forward in their reporting.
However, this finding must be viewed in the context of the zakah items, where there was
no possibility for ambiguity.
An important finding with respect to the zakah tax was the low level of compliance.
Better enforcement of compliance in this area is required. In contrast, reporting of
Islamic financing products recorded on the asset side of the balance sheet was quite
high, and likewise with in relation to restricted investment counts, an off balance sheet
item. Unrestricted investment accounts showed the lowest level of compliance of the
Islamic products included in the index.
Finally, it should again be emphasised that the findings relate to the Bahrain
Islamic banking sector alone. These results, however, show that compliance with the
standards developed by the AAOIFI is possible, and suggest the standards are
relevant and useful. This is an important outcome in terms of this aspect of the existing
regulatory framework for Islamic banks. More work is clearly needed in encouraging
adoption of the standards, perhaps by the AAOIFI alongside central banks and other
regulatory authorities in countries where Islamic banks exist.
Notes
1. See for example Nobes (1990), Purvis et al. (1991), Tower et al. (1998) and Taplin et al. (2002).
2. For example, the Farmers Credit Union, established in Pakistan in the late 1950s (Maali et al.,
2006, p. 269).
3. The GCC countries are Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab
Emirates.

Compliance
with AAOIFI
standards
91

JIABR
3,2

92

4. El-Hawary et al. (2007, p. 779) list five different schools of thought in Islam as follows: Hanifi,
Shafei, Hanbali, Maliki and Jaafari.
5. Pakistan, Iran and the Sudan have Islamised their entire legislative systems.
6. These findings refer only to banks which have English language financial statements
available on their web sites. It is therefore possible that a study which could encompass
other language web sites, such as Arabic would provide a more representative picture.
7. The modern form of this contract was developed in the late 1960s and early 1970s by two
Islamic scholars, Mohammed Al-Arabia and Sami Hmoud (Napier, 2009, p. 17).

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8. Maali et al. (2008, p. 268), note a significant degree of objection amongst some Muslim
scholars to this form of contract claiming it is too close to an interest bearing product.
References
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Institutions (2004-5/1425-6H), Accounting and Auditing Organisation for Islamic Financial
Institutions, Bahrain.
AAOIFI (2011), Homepage, Accounting and Auditing Organisation for Islamic Financial
Institutions (2003/1424H), available at: www.aaoifi.com/aaoifi/Home/tabid/36/language/
en-US/Default.aspx (accessed January 2011).
Algaoud, L.M. and Lewis, M.K. (1999), Corporate governance in Islamic banking: the case of
Bahrain, The International Journal of Business Studies, Vol. 7 No. 1, pp. 56-86.
Al-Shammari, B., Brown, P. and Tarca, A. (2008), An investigation of compliance with
international accounting standards by listed companies in the gulf co-operation council
member states, The International Journal of Accounting, Vol. 43, pp. 425-47.
Archer, S. and Karim, R.A.A. (1997), Agency theory, corporate governance and the accounting
regulation of Islamic banks, Research in Accounting Regulation, Supplement, Vol. 1,
pp. 97-114.
CBB (2011), List of banks and financial institutions, Licensing and Policy Directorate, Central
Bank of Bahrain, available at: www.cbb.gov.bh/pagephp?pcbb_register (accessed June
2011).
El-Hawary, D., Grais, W. and Iqbal, Z. (2007), Diversity in the regulation of Islamic financial
institutions, The Quarterly Review of Economics and Finance, Vol. 46, pp. 778-800.
Haniffa, R. and Hudaib, M. (2007), Exploring the ethical identity of Islamic banks via
communication in annual reports, Journal of Business Ethics, Vol. 76, pp. 97-116.
International Monetary Fund (2010), The effects of the global crisis on Islamic and conventional
banks: a comparative study, Working Paper No. 10/201, available at: www.imf.org/
external/pubs/ft/wp/2010/wp10201.pdf (accessed January 2010).
Kahn, M.F. (2007), Setting standards for Shariah application in the Islamic financial industry,
Thunderbird International Business Review, Vol. 49 No. 3, pp. 285-307.
Karim, R.A.A. (1995), The nature and rational of a conceptual framework for financial reporting
by Islamic banks, Accounting & Business Research, Vol. 25 No. 100, pp. 285-300.
Karim, R.A.A. (2001), International accounting harmonization, banking regulation, and Islamic
banks, The International Journal of Accounting, Vol. 6 No. 2, pp. 169-93.
Maali, B., Casson, P. and Napier, C. (2006), Social reporting by Islamic banks, Abacus, Vol. 42
No. 2, pp. 266-90.
Napier, C. (2009), Defining Islamic accounting: current issues, past roots, Accounting History,
Vol. 14 Nos 1/2, pp. 121-44.

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Nobes, C.W. (1990), Compliance by US corporations with IASC standards, British Accounting
Review, Vol. 22 No. 1, pp. 41-9.
Olsen, D. and Zoubi, T.A. (2008), Using accounting rations to distinguish between Islamic and
conventional banks in the GCC region, The International Journal of Accounting, Vol. 43,
pp. 45-65.
Pomeranz, F. (1997), The accounting and auditing organization for Islamic financial institutions:
an important regulatory debut, Journal of International Accounting, Auditing & Taxation,
Vol. 6 No. 1, pp. 123-30.
Purvis, S.E.C., Gernon, H. and Diamond, M.A. (1991), The IASC and its comparability project:
prerequisites for success, Accounting Horizons, Vol. 5 No. 2, pp. 25-44.
Taplin, R., Tower, G. and Hancock, P. (2002), Disclosure (discernibility) and compliance of
accounting policies: Asia-Pacific evidence, Accounting Forum, Vol. 26 No. 2, pp. 172-90.
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compliance with international accounting standards, Accounting Forum, Vol. 23 No. 3,
pp. 293-305.
(The Appendices follow overleaf.)

Corresponding author
Thea Vinnicombe can be contacted at: thea@ift.edu.mo

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Compliance
with AAOIFI
standards
93

Table AI.
Sample banks

Retail banks
Al Salam Bank
Bahrain Islamic Bank
Khaleeji Finance House
Kuwait Finance House
Shamil Bank
Total retail banks
Wholesale banks
Al Baraka Islamic Bank
Arcapita Bank
Capinnova Bank
Capital Management House
Capivest Bank
Citi Islamic Bank
Elaf Bank
First Energy Bank
First Investment Bank
Global Banking Corporation
Gulf Finance House
International Investment Bank
Investors Bank
Seera Investment Bank
Unicorn Bank
Venture Capital Bank
Total Wholesale Banks
Total all banks

Availability of financial statements by year

Yes
Yes
Yes
Yes
Yes
5
Yes
Yes
No
Yes
Yes
Yes
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
11
16

Yes
Yes
No
Yes
No
3
Yes
Yes
No
No
Yes
Yes
No
No
No
No
Yes
Yes
Yes
No
Yes
No
8
11

2006

Yes
Yes
No
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
15
20

Yes
Yes
Yes
Yes
Yes
5

Year
Financial statements available
2007
2008

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Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
16
20

Yes
Yes
Yes
Yes
No
4

2009

JIABR
3,2
Appendix 1

94

SSB
GSF1b
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
GSF1
Number of items in this category: 12
Zakah Tax
FAS9c
Where the bank is obliged to pay Zakah
FAS9
FAS9
FAS9
FAS9
FAS9
FAS9
FAS9
FAS9
FAS9 3/3/7 and FAS1e 4/6
Number of items in this category: ten
Murabaha Finance
FAS2d
FAS2
FAS2
FAS2
FAS2

Standard
Existence of an SSB
Composition of the SSB (number)
Composition of the SSB (qualifications)
Method of appointment
Inclusion of SSB Report with annual report
Title
Addressee
Introductory paragraph
Scope paragraph
Opinion paragraph
Period covered
Signature
Determination of the Zakah base
Treatment as a non-operating expense
Treatment of unpaid Zakah
Treatment where bank is not obliged to pay Zakah
Relevant SSB rulings
Zakah obligations of subsidiaries
Zakah obligations of investment account holders
Banks payment on behalf of account holders
Restrictions imposed by the SSB
Statement of sources and uses of Zakah funds
Use of historical in measuring asset value at acquisition
Valuation after acquisition: case 1
Valuation after acquisition: case 2
Treatment of discount after acquisition
Murabaha receivables recorded at cash equivalent

1
7
7
3
25
10
11
12
13-19
20
22 and 23
24
2/1
2/2/1
2/2/1
2/2/2
3/3/2
3/3/3
3/3/5
3/3/6
3/3/7

2/1
2/2/1
2/2/2
2/2/3
2/3

Compliance index
Paragraph Brief description

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Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
(continued)

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA

Yes, No, DK

Yes, No, DK
Yes, No, DK
Yes, No, DK
Yes, No, DK
Yes, No
Yes, No
Yes, No
Yes, No
Yes, No
Yes, No
Yes, No
Yes, No

Scoring possibilitiesa

Appendix 2

Compliance
with AAOIFI
standards
95

Table AII.
Compliance index

Table AII.

FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
FAS2
Number of items in this category: 16
Mudaraba Financing
FAS3e
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
FAS3
Number of items in this category: 15
Musharaka Finance
FAS4f
FAS4
FAS4

Murabaha receivables shown in the balance sheet

Profit recognition: short-term murabaha
Profit recognition: long-term murabaha
Deferred profits
Early settlement, deduction of part profit possibility 1
Early settlement, deduction of part profit possibility 2
Failure to fulfill promise
Failure to fulfill promise when the promise is binding
Treatment when the promise is non-binding
Disclosure as to whether the promise is binding
Presentation
Presentation in the financial statements
Non-monetary assets should be reported as such
Measurement of capital paid in cash
Measurement of capital paid in kind (fair value)
Expenses generally not to be recognized as part of capital
Capital should be stated net of repayments
Treatment of partial loss of capital
Treatment of full loss of capital without negligence
Treatment of non-received capital on termination of contract
Recognition: short-term contracts profits or losses
Recognition: long-term profits as distributed
Recognition: long-term losses as deducted
Recognition: long-term losses at liquidation
Recognition: long-term losses due to misconduct
Disclosure requirements
Recognition of Islamic Banks share in the Musharaka Capital
Measurement of the banks capital share when paid in cash
Measurement of the banks capital share when paid in kind

2/3
2/4/1
2/4/2
2/5
2/6/1
2/6/2
2/8
2/8/1
2/8/2
2/9
2/9/2
2/1/4
2/1/4
2/2/1
2/2/2
2/2/3
2/3/1
2/3/2
2/3/3
2/3/4
2/4/1
2/4/2
2/4/3
2/4/4
2/4/5
2/5
2/1
2/2/1
2/2/2

Compliance index
Paragraph Brief description

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
(continued)

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA

Scoring possibilitiesa

96

Standard

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JIABR
3,2

Expenses generally not to be recognized as part of capital

Historical to measure the banks share in constant capital
Historical cost to measure the banks share in diminishing capital
Treatment where liquidation occurs before complete transfer
Treatment where liquidation occurs and the banks share is unpaid
Recognition: short-term contracts profits or losses at liquidation
Recognition: long-term diminishing contracts profits and losses
Recognition: long-term constant contracts profits and losses
Recognition of losses due to partners negligence or misconduct
Provision should be made for doubtful receivables
Musharaka Finance contracts should be recorded in the balance sheet
Separate item between liabilities and equity in the balance sheet
Return before banks share as Mudarib
Banks share as Mudarib
Administrative expenses
Equity to be measured at book value when received
Equity to be measured at book value at end of financial year
Allocation of profit
Treatment of losses
Treatment of losses due to the negligence of the bank
Disclosure of the basis of allocating profit/losses
Disclosure of the basis for charging expenses
Disclosure of policies for charging provisions
Disclosure administrative expenses charged to account holders
Disclosure profit/loss allocation between equity and investment
accounts
Any increase in banks share as Mudarib
Disclose profit sharing to investment accounts where the bank is not
Mudarib
Disclosure relating to unused funds
Allocation of incentive profits if any

2/2/3
2/3/1
2/3/2
2/3/3
2/3/4
2/4/1
2/4/2
2/4/3
2/4/5
2/4/6

3/2
4/2/50/d
4/2/50/g
4/2/50.k
2/1/2
2/1/3
2/1/4
2/1/5
2/1/5/2
2/1/1
2/1/2
2/1/3
2/1/4
2/1/5
2/1/6
2/1/6
2/1/6
2/1/6

FAS5
FAS5

FAS5
FAS5

Compliance index
Paragraph Brief description

FAS4
FAS4
FAS4
FAS4
FAS4
FAS4
FAS4
FAS4
FAS4
FAS4
FAS4 2/5/1 and FAS4 1/18
Number of items in this category: 14
Unrestricted Investment Accounts
FAS6h
FAS1
FAS1
FAS1
FAS6
FAS6
FAS6
FAS6
FAS6
FAS5
FAS5
FAS5
FAS5
FAS5

Standard

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Yes, No, DK, NA

Yes, No, DK, NA
(continued)

Yes, No, DK, NA

Yes, No, DK, NA

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA

Yes, No, DK, NA

Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA
Yes, No, DK, NA

Scoring possibilitiesa

Compliance
with AAOIFI
standards
97

Table AII.

Table AII.
Balance of the accounts at the beginning of the period
Number of units in each investment portfolio and value at period
beginning
Deposits received or investment units issued during the period
Withdrawals or repurchase of units during the period
Banks fee or share in profits as Mudarib
Banks allocated overhead expenses if any
Profits/losses during the period
Balance at end of period
Number of units in each investment portfolio and value at period end
Nature of the relationship between the bank and account holders
Rights and obligations associated with each investment account

4/5.a
4/5.b
4/5.c
4/5.d
4/5.e
4/5.f
4/5.g
4/5.h
4/5.i
4/5.a
4/5.b

Statement of changes in restricted investment account included

Period covered
Restricted investment accounts segregated by source of financing
Restricted investment portfolios segregated by type

3/3
4/5
4/5
4/5

Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA

Yes, No, NA
Yes, No, NA

Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA
Yes, No, NA

Scoring possibilitiesa

Notes: aYes 1, No 0, DK not known, NA not applicable; bGovernance Standard for Islamic Financial Institutions 1; cFinancial Accounting
Standard No. 9; dFinancial Accounting Standard No. 1; eFinancial Accounting Standard No. 2; fFinancial Accounting Standard No. 3; gFinancial
Accounting Standard No. 4; hFinancial Accounting Standard No. 5; iFinancial Accounting Standard No. 6

FAS1
FAS1
FAS1
FAS1
FAS1
FAS1
FAS1
FAS1
FAS1
Number of items in this category: 15

Number of items in this category: 18

Restricted Investment Accounts
FAS5
FAS1
FAS1
FAS1
The following should be included in the
statement
FAS1
FAS1

Compliance index
Paragraph Brief description

98

Standard

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JIABR
3,2

This article has been cited by:

Downloaded by Florida Atlantic University At 17:44 31 January 2016 (PT)

1. Nassr Saleh Mohamad Ahmad, Abdu Samia Daw Ben Daw. 2015. Compliance with AAOIFI guidelines
in general presentation and disclosure by Libyan Islamic banks. World Journal of Entrepreneurship,
Management and Sustainable Development 11:2, 90-99. [Abstract] [Full Text] [PDF]
2. Abang Salihin, A.H. Fatima, Abdulrahman Anam Ousama. 2014. An Islamic perspective on the true and
fair view override principle. Journal of Islamic Accounting and Business Research 5:2, 142-157. [Abstract]
[Full Text] [PDF]