Islamic Accounting: The Emergence of a Research Programme

Bassam Maali & Christopher Napier

What could Islamic accounting be? - 1

Specific form of accounting dictated by religious precepts of Islam Sources:
Quran Sunnah

Likely to be normative-deductive:
Shariah

Can we contrast Islamic accounting with e.g. Christian accounting?

What could Islamic accounting be? - 2

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

What could Islamic accounting be? - 3

Accounting practices of self-described Islamic organisations?
Islamic financial institutions
Banks Investment companies Insurance companies

Islamic not-for-profit organisations

Waqf Zakah intermediaries

Key factors - cultural

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

Possible links to accounting - cultural

Ummah:
Disclosure Social and environmental reporting

Zakah:
Measurement and reporting

Riba:
Shariah-compliant transactions (financial engineering?) Form and substance

Key factors - economic

Oil wealth in Middle East from 1970s:
Desire to mobilise wealth in Shariah-compliant ways

Attempts to develop Islamic economies Provision of acceptable savings, investment and finance vehicles for Muslims Financial innovation:
Creation of synthetic products based on shariahcompliant forms that mimic conventional financial instruments

Possible links to accounting - economic

Islamic Financial Institutions:
General accounting requirements Audit, supervison and regulation

Shariah-compliant transactions:
Specific accounting treatments Relevance of International Financial Reporting Standards Substance and form

English-language research in Islamic accounting

First generation:
UK key figures were Trevor Gambling, Cyril Tomkins, Rifaat Abdel Karim Australia PhD students from Middle East and South East Asia supervised by limited range of accounting professors

Second generation:
Scholars in/from Middle East and South East Asia writing in English

Hardly any contribution from US scholars

Early normative arguments

Role of financial reporting:
Information relevant for calculating zakah Social reporting to the ummah

Valuation basis:
Current value No use of discounting

Performance reporting:
Value added statement, not income statement

Some empirical evidence

Sulaiman:
1998 - Questionnaire survey 2001 Experimental study No significant differences between Muslim and nonMuslim respondents

Idris (1996):
Conventional reports most important Islamic reports slightly important

Maali (2005):
Islamic influence of diminishing importance on accounting practices after Islamic Bank established

Accounting concepts
Accounting unit:
Are separate business entities acceptable?

Going concern:
Is assumption of indefinite life inconsistent with Islamic belief that only God is eternal?

Periodicity Money measurement:

Should a stable measuring unit be used?

Conservatism:
Valuations for zakah current measures? No distribution of profit until realised?

Accounting concepts
Matching:
Unnecessary if assets/liabilities measured at current value? Required to assign responsibility for cost to recipient of benefit?

Timing of recognition/accruals:
Accrual basis necessary to measure true wealth? Accrual basis may lead to distributions before cash received?

Full disclosure:
Wide agreement disclose everything important to Islamic users for the purpose of serving God.

Islamic banking
Special contracts and transactions:
Mudaraba managed investment partnership Murabaha purchase financing with markup Ijara form of operating lease Salam forward sale contract Musharaka form of partnership

Shariah consultant or supervisory board

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

Are Islamic transactions different in substance?

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

Conclusions is Islamic accounting worth celebrating?

Growing body of literature:
Beginning to spread into other fields of accounting research, e.g.
Environmental reporting Accounting history

Initial focus on normative studies shifting to more empirical research Some policy relevance role of AAOIFI Key outstanding issue: do Islamic transactions have a distinct substance, or are they Western transactions in disguise?