Agenda-E-2
Financial Reporting Issues
relating to Islamic Finance
An overview of the Paper prepared for the 2nd AOSSG Meeting
Ms Mas Sukmawati Abu Bakar
Associate Director, Islamic Research, Malaysian Accounting Standards Board
2nd Meeting of the Asian-Oceanian Standard-setters Group
Wednesday, 29th September 2010
Akihabara Convention Hall
Tokyo, Japan
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Part I: Introduction
• What is Islamic finance?
• Some statistics
• Why should it be on AOSSG’s agenda?
2
What is Islamic
finance?
Financing alternatives
that comply with Islamic
religious law
Based on trade contracts,
rather than straight
lending
May be arranged to be
economically similar to
conventional financing
[See Part I, paragraphs 112 of the Paper.]
• Conventional finance may
have Shariah-prohibited
elements
• Shariah compliant
alternatives developed
• Use of trade contracts,
that date to (or pre-date)
early Islam c. 600 AD –
Bai’, Ijarah, Shirkah
• But accompanied by other
arrangements, e.g. wa’d
• Economically, similar to
conventional financing
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Modern Islamic finance
Establishment of Mitghamir
Bank in Egypt.
Establishment of Pilgrimage
Fund for haj pilgrimages in
Malaysia.
1960s
1970s
Establishment of the first
commercial Islamic bank, Dubai
Islamic Bank.
Establishment of Islamic
Development Bank.
Pakistan, Bahrain and Malaysia
began to promote Islamic banking
system.
World’s first takaful company was
established.
Pakistan, Iran and Sudan
announce transformation of
financial systems to comply
with Shariah.
1980s
1990s
1990 - AAOIFI was established.
1999 - Dow Jones Islamic Index was
introduced.
FTSE Index of Shariah-compatible
stocks were developed.
Al-Madina Fund was the first Islamic
equity fund established in London.
2002 - Islamic Financial
Services Board (IFSB), was
established.
Islamic Bank of Britain,
Britain’s first Shariahcompliant bank opens in
London.
2000 – to date
World’s first global sukuk was
launched by Guthrie Berhad.
2010 - Germany’s first Islamic
bank, a unit of Kureyt Turk
Bank of Turkey, opens its
doors in March.
2010 – ISDA/IIFM master
agreement announced in
March.
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Statistics
Assets of the 500 largest Islamic Banks
5
4
3
2
1
0
2008
(1)
2009
(2)
June 2010
(3)
2020
expected
(4)
Sources:
(1) & (2) ‘The Banker’s Top 500 Islamic Financial Institutions Survey shows the Growth in Islamic Finance’, RIBH: Le
Journal de la Finance Islamique. Available at: http://ribh.wordpress.com/2009/10/28/top-500-islamic-financialinstitutions-2/
(3) ‘Islamic finance set to cross $1 trillion: Moody’s’, Reuters, 14 June 2010. Available at:
http://www.reuters.com/article/idUSLDE65D19720100614
(4) ‘UAE: Global Islamic Banks Assets to touch US$4 trillion by 2020’, CIBAFI, 24 May 2010. Available at:
http://www.cibafi.org/newscenter/english/Details.aspx?Id=8362&Cat=0
5
Statistics (cont’d)
Top 10 Countries by Value of Shariah-compliant Assets, 2009
Rank
Country
Shariah-compliant assets (US$bn)
1
Iran
293.2
2
Saudi Arabia
127.9
3
Malaysia
86.5
4
United Arab Emirates
84.0
5
Kuwait
67.6
6
Bahrain
46.2
7
Qatar
27.5
8
United Kingdom
19.4
9
Turkey
17.8
10
Bangladesh
7.5
Source: The Banker, Top 500 Islamic Financial Institutions, November 2009, p.4
Statistics (cont’d)
Comparison between conventional and Islamic banks
100
50
0
Assets of largest 1000 banks, USD 96.4 trillion (1)
Assets of largest 500 Islamic banks, USD 822 billion (2)
Source:
(1) Assets of the largest 1000 banks in 2009 taken from Banking 2010, IFSL Research, February 2010. Available at:
http://www.thecityuk.com/media/2372/IFSL_Banking_2010.pdf
(2) Assets of the largest 500 Islamic banks in 2009 taken from ‘The Banker’s Top 500 Islamic Financial Institutions Survey
shows the Growth in Islamic Finance’, RIBH: Le Journal de la Finance Islamique. Available at:
http://ribh.wordpress.com/2009/10/28/top-500-islamic-financial-institutions-2/
How does it
concern AOSSG?
Most Muslims are
Asians.
Asia has the biggest
sukuk market.
Key players are AOSSG
members.
• 62% of Muslims live in the
Asia-Pacific region.
(Source: Pew Forum on
Religion & Public Life,
October 2009)
• >90% of sukuk issued in
Asia: 40% in Malaysia, 50%
in West Asia. (Source:
Islamic Financial
Institutions Services, June
2009)
• Key players are AOSSG
members.
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How does it work?
Avoid prohibited elements
of riba, gharar, maisir
IF transactions based on
practices dating to, or
pre-date, 1400 years ago
Price differences – cash v.
deferred; sale v.
repurchase
Participation
Rental / fees
[See Appendix C of the
Paper.]
• Sales – Murabahah, Bai
Inah
• Fund management,
venture capital Mudarabah, Musharakah
• Deposit taking – Wadiah,
Mudarabah
• Lease, services - Ijarah
• Capital market – 14 types
of Sukuk, according to
AAOIFI
• Protection - Takaful
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Part II: Accounting
•
•
•
•
•
The working group
Accounting standards for Islamic finance
Different opinions …
… which lead to different decisions
Notes for other AOSSG WGs
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• Work done:
The Working Group
Objective:
Provide input and feedback on
adequacy and appropriateness
of proposed and existing IFRS
to Islamic financial
transactions and events.
Framework:
May refer / make reference to
other standards. However, will
undertake to make
recommendations within the
framework of IASB’s
accounting standards.
Shariah authority:
Shall not be construed as a
Shariah opinion.
– Assess the extent of use of IFRS
among member countries
– Collate issues / concerns
regarding use of IFRS to Islamic
transactions
• Findings:
– IFRS, local GAAP, AAOIFI
– Disagreement over some IFRS
principles
• Further work done: Understand
reasons for the disagreement
found
• Purpose of Paper
– Preliminary research
– To educate
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What standards
apply?
IFRS, in most jurisdictions
But in some, ‘Islamic’
accounting standards
• Shariah interpretations
differ.
• Some jurisdictions accept
IFRS, others do not.
• Why?
– Time value of money
– Substance over form
• Why?
[See Part I, paragraphs
13-33 of Paper.]
– Similar to interest, which is
riba
– Disregards contractual form
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Differences of opinion …
IFRS
‘Islamic’ standards
SoF
Substance prevails
Form important
Cash flows
Effective interest rate
‘Proportionate’
Valuation
Discounting
No discounting
Ijarah
Operating/finance
Operating lease only
Takaful
Single entity
Separate ‘entities’
Derecognition When criteria met
When ‘sale’ occurs
Revenue
When ‘sale’ occurs
When criteria met
[See Appendix E of the Paper, Comments from working group members.]
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… which lead to different decisions.
Financing Is it permissible?
effects
When is a sale a sale?
‘Fee’ or ‘financing’
income?
Shirkah
How is it classified?
Amortised cost or fair
value?
Are PER and IRR OK?
Ijarah
Is it still an operating
lease?
What do we do with
the usufruct?
Sukuk
Do we consolidate the What is the fair value
SPE?
of sukuk?
Takaful
If takaful ≠ insurance,
is it close enough?
How to measure and
present Qard
Consolidate, combine
or separate?
Misc.
Mind the derivatives
More Shariah related
disclosures needed
Terms used
[See Part II, paragraphs 34-121 of the Paper, and Appendix D: IFRS with
implications for the reporting of Islamic financial transactions.]
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Points to note for other
AOSSG WGs
FI
Revenue
Islamic
repurchase
Leases – departure for
Ijarah [?]
Consolidation
FS presentation
Takaful
Insurance
FV measurement – no
discounting [?]
• Islamic sale and buy back
– sale + wa’d to buy back
– Derecognition
– Revenue recognition
• Ijarah: Most are currently
reported as operating leases
• Takaful
– treatment of Qard
– Takaful operator + funds a/c
• FV – disapproval of
discounting
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Allowing departures
from IFRS
For
Against
IAS 1, para. 19
“In the extremely rare circumstances in which
management concludes that compliance with a
requirement in an IFRS would be so misleading
that it would conflict with the objective of
financial statements set out in the Framework,
the entity shall depart from that requirement in
the manner set out in paragraph 20 if the
regulatory framework requires, or otherwise
does not prohibit, such a departure.”
IAS 1, para 16
“An entity whose financial statements comply
with IFRSs shall make an explicit and unreserved
statement of such compliance in the notes. An
entity shall not describe financial statements as
complying with IFRSs unless they comply with all
the requirements of IFRSs.”
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Going forward…
• Working Group
– Look at impact of upcoming standards
– Communicate findings to AOSSG / IASB
• AOSSG
– Improve cross-border comparability of Islamic
financial transactions
– Education, Outreach
• Challenge: To understand and be mindful of
Shariah interpretations which are less
accepting of some IFRS requirements
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Thank you.
AOSSG Islamic Finance WG Secretariat
c/o Malaysian Accounting Standards Board
Suite 5.2, Level 5, Wisma UOA Pantai
No. 11 Jalan Pantai Jaya
59200 Kuala Lumpur
MALAYSIA
Tel:
Fax:
Website:
E-mail:
+603 2240 9200
+603 2240 9300
www.masb.org.my
masb@masb.org.my
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