Presented by Dr. Nissar Ahmed Yatoo at the 4th Annual East Africa Finance Summit 1.Interest Free Transactions 2.Sharing of associated risks and profits 3.No scope for uncertainty 4.Emphasis on Ethical Investment 5.Tangible and identifiable underlying assets to back-up financial transactions

1. Reporting Issues in Islamic Financial
Institutions
Dr. Nissar AhmadYatoo
Islamic Online University
4th Annual East Africa Finance Summit
Ethiopia
4-5 December 2019

2. Islamic Financial Institutions
1. Interest FreeTransactions
2.Sharing of associated risks and profits
3. No scope for uncertainty
4.Emphasis on Ethical Investment
5. Tangible and identifiable underlying assets to back-up
financial transactions

3. IslamicVs. Conventional
Islamic Conventional
Promotes risk sharing between provider of capital
(investor) and the user of funds (entrepreneur)
The investor is assured of a predetermined
rate of interest
Aims at maximizing profit but subject to Sharia
restrictions
Aims at maximizing profit without any
restriction
Participation in partnership business is the
fundamental function
Lending money and getting it back with
compounding interest is the fundamental
function
No provision to charge any extra money from the
defaulters. Only small amount of late payment
penalty and these proceeds are given to charity
Can charge additional money (penalty and
compounded interest) in case of default
Greater emphasis on the viability of the projects Greater emphasis on credit-worthiness of the
clients
Relation to its clients is that of partners, investors
and trader, buyer and seller
Relation to its clients, is that of creditor and
debtors
All the deposits are not guaranteed All deposits are guaranteed

4. Islamic Accounting
• Accountability to God
• Full disclosure and social accountability- against the ideas of creative
accounting, window dressing and reporting legalities over substance
• The process of identifying, recording, and communicating economic and
other relevant information inspired by IslamicWorldview and complied with
Sharia
• Not different from conventional accounting in terms of recording, different
in terms of Islamic contractual relationships
• Determination of Zakah, current value of assets for determination of Zakah

5. Three Main Differences
• The objectives of providing the information
• In conventional accounting it is to provide information about the performance
• In Islamic accounting it is information about adhering to Sharia principles
• What type of Information is identified
• In conventional accounting it is about economic transactions and events at
historical cost
• In Islamic accounting it is at current value
• To whom the information is communicated
• Mainly to share holders and creditors
• All stakeholders (believers)

6. Islamic Accounting Standards
• Accounting and auditing organization of Islamic financial institutions AAOIFI
• AAOIFI’s Islamic accounting standards are meant to fill gaps in the
International Accounting Standards (IAS) and are not meant to compete
with or replace them
• Approaches to arrive at Islamic accounting
• Accept conventional accounting concepts that are consistent with sharia
• Reject concepts that are Contrary to Sharia
• Develop new concepts that are unique to Islamic way of business transactions

7. AAOIFI
• Established in 1991 – agreement of association by IFIs worldwide, supported
by IDB
• Head office is in Bahrain
• Organizational Structure
• Supervisory Committee
• FinancialAccounting Standard Board
• Executive Committee
• ShariaCommittee
• Funded by founding members of IFIs, establishment of waqaf etc.

8. Accounting, Auditing and Governance
Standards
• Statements of Financial Accounting (SFA )
• Objectives and concepts
• Financial Accounting Standards (FSA)
• Recording and presentation of different kinds of contracts
• Auditing standards
• Objectives and Principles of Auditing
• The Auditor’s Report
• Terms of Audit Engagement

9. • Governance standards
• Sharia Supervisory Board
• Sharia Review
• Code of Ethics
• Code of Ethics for Accountants and Auditors of IFI
• New Financial Accounting Standards
• Investment Fund
• Disclosure Bases for Determining andAllocating Insurance Surplus (and deficit)
• New Auditing Standards
• AuditTests for ShariaCompliance

10. Benefits and Issues of applying IAS/IFRS
• Benefits
• International recognition and usage
• Enhance the transparency and international comparability
• Issues
• Differences in Objectives of the users ofAccounting Information
• Differences in Contractual relationship between the financial Institutions and their stakeholders
• IASs do not address
• Income incidentally generated from transactions or relationships, which contradict Sharia. (e.g:
late Penalty)
• Funds paid out as Zakat and /or charity
• Restricted Investment Accounts: Islamic banks raise deposits through restricted Mudaraba profit
sharing contract- and/orWakala-agency contract for a fee.
• The socially responsible financing (i.e. Qard Hasan) is not catered for by conventional accounting
standards.

11. Applying IASs to IFIs
Conventional Islamic
Deposits Contractual liability plus interest for their deposit
contract
Treated as liability
Mudaraba (profit sharing) and wakala contracts
(agency contract)
Unrestricted investment accounts’ funds
Restricted investment accounts’ funds
LeaseVs
Ijarah
Inherent risks and rewards associated with the asset
are transferred to the lessee, who in substance is
deemed to be the owner.
Reported as receivables on the bank’s book
Reported in the lessor’s (bank) books.
Maintenance costs are borne by the lessor.
Asset ownership rests with lessor.
Sale of
good
Recorded as financing transaction
Difference between the nominal and fair value is
treated as interest revenue
Sale transaction
Deferred profit
Takaful Premium received is part of the
insurance company’s revenues
Segregation between shareholders’ funds and
policyholders’ funds