The rapid global growth in Islamic finance means that action must be taken to ensure the way in which it is reported financially is harmonised and made more consistent, a report, based on a series of high level international roundtables, by KPMG and the Association of Chartered Certified Accountants (ACCA) has concluded.
The report calls on the International Accounting Standards Board (IASB) and the Islamic Finance industry to work together to develop guidance, standards and educate the investor community on key issues.
The roundtables in Kuala Lumpur, Dubai and London, which brought together experts in Islamic Finance, bankers and finance professionals working in the sector, along with regulatory authorities, academics and ratings agencies, made a number of recommendations to both the IASB and Islamic Finance Institutes (IFIs), which are highlighted in the new report published by KPMG and ACCA.
According to the report, the IASB should consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products which are offered by Islamic financial institutions and conventional banks.
The IASB should also consider issuing guidance on additional disclosures that could be made for stakeholders who are seeking information on the entity’s Sharia-compliant operations.
It is also recommended that the IASB work with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and other leading Islamic finance standard-setters and regulators globally to establish the gaps between IFRS and Islamic accounting standards and to review the needs of users. This should also include a review of terminology used in IFRS, and consider whether such sensitive terms as ‘interest’ – forbidden in all forms in Islamic banking- can be amended or added to.
The report also notes that if Islamic finance is to be part of the IASB agenda, the IFIs should support IASB by forming an expert advisory group, including Islamic scholars from various jurisdictions, which could contribute to the development of new standards and help with the overall review or provide advice on an ad hoc basis.
Another recommendation is for the IFIs to conduct further outreach and education, particularly with the investor community, while providers of professional qualifications should look into the relevance of Islamic Finance to their syllabuses and the members.
According to the report, the industry needs to engage more with local regulators to understand their expectations of financial reporting and the disclosure of Islamic financial instruments.
"The Islamic finance industry has reached a new stage of maturity," says Samer Hijazi, a director in KPMG’s Financial Services Audit practice, and co-author of the report. "It has a wider variety of customers and stakeholders and a presence in more countries around the world than ever before."
Hijazi adds that as the IASB seeks to establish IFRS as a single high quality set of global financial reporting standards now is the right time to consider how Islamic finance fits into this global framework. "Greater comparability and consistency in financial reporting will benefit not only the IFIs but also the international banks which offer Islamic financial services around the world."
According to Aziz Tayyebi, head of international development at ACCA and its expert in Islamic Finance, and report co-author said, one of the key challenges facing Islamic finance and global standards setters is how to resolve the fact that IFIs in different countries can report transactions in different ways, which creates uncertainty for organisations which are trying to assess and compare them not only with each other, but with conventional counterparts.
"If they are to remain competitive with conventional counterparts, their financial reports need to be comparable. This will involve a great deal of work and education, but should be beneficial for IFIs and those who rely on their reports," says Tayyebi.