Posts Tagged ‘Statements’
Islamic Banking in Malaysia – Presentation of Financial Statements
Posted by admin in Financial Management on January 12th, 2010
Since accounting is very much to do with providing information to assist users of financial information to make sound decisions, financial reporting needs to be different in order to serve the different users.
Major groups of financial report users for a financial institution are:-
Shareholders Account holders and depositors (Clients of the bank) Borrowers and others who transact with the bank Regulatory bodies.
Now that Islamic banking uses a different set of accounting principles, mainly due to their different product characteristics and participation levels, it is just natural to expect different disclosure requirements within the financial statements for Islamic banks. This does not mean a reject of conventional accounting and reporting standards but rather requiring disclosure of additional information for the different sets of users.
In addition to the many user groups mentioned above, there are 2 additional distinct groups of users who are specific to Islamic banking, namely (i) Holders of investment accounts and (ii) Zakat agencies.
Given the many user groups, reports within the financial statement of an Islamic bank need to be broad enough to address the different requirements of these groups. They can be summarized to 7 sets of reports:-
Income Statement Statement of Financial Position (Balance Sheet) Statement of Changes in Shareholders’ Equity Cash Flow Statement Statement in Changes in Restricted Investments and their Equivalent Statement of Sources and Uses of Zakat and Charity Fund Statement of Sources and Uses of Qard Fund
While the first 4 reports seemed the same as conventional banking, presentations are rather different mainly because of certain distinct definitions of items within Islamic banking environment. The last 3 reports are unique to Islamic banking.
Islamic Banking – Key Differences of Components Within a Financial Statements of an Islamic Bank
Posted by admin in Financial Management on January 6th, 2010
Let us look at the key differences in presentation of financial statements between conventional an Islamic banking.
Statement of Financial Position (Balance Sheet)
In conventional accounting, the balance sheet has these few components, namely assets, liabilities and owners’ equity. In Islamic banking, there is one additional component called “equity of unrestricted investment account holders”.
In conventional banking, an asset is defined as an item with future economic benefit attached to it regardless whether there is legal control by the reporting bank. For Islamic banking, however, an item can be taken as an asset only when the Islamic bank has legal right to hold, use or dispose of the item.
The other unique feature is the “equity of unrestricted investment account holders”. This additional component is to satisfy the set of customers who invest on the basis of mudarabah which calls for any losses to be borne by the investors (the customers themselves). It is therefore, important to disclose sufficient information to demonstrate the measures taken by the bank to ensure that the interests of this set of customers are considered as part of the strategy of the bank. In conventional banking, they will be treated as liabilities instead.
There are 2 forms of mudarabah contracts:-
Mudarabah Mutlaqah – This is the “unrestricted” mudarabah contract whereby the capital provider/owner allows total freedom to the bank to use the capital for its projects without conditions, specifications, restrictions or limits. The bank is free to enter into any trade agreements, whether normal or deferred or leasing basis, using the owners’ capital. This form of mudarabah is typically used in replacement of the conventional fixed deposit product for retail customers. Mudarabah Muqqayadah – This is the “restricted” mudarabah contract. The bank is given certain parameters (restrictions and conditions) on how to use the capital provided by the owners.
Statement of Changes in Restricted Investments and Their Equivalent
This is the statement to report the use of mudarabah muqqayadah investments whereby the bank is to undertake to use the funds for specific investments. This pool of fund must be separated from other funds as the returns from this fund will be shared among this particular group of investors.
Apart from the returns or losses for the group of restricted investors, the statement should also report profits or losses before deducting the investment manager’s share of investment profits/losses. The bank’s share of compensation as the investment agent is also known as mudarib.
Statement of Sources and Uses of Zakat and Charity Fund
This is required only when the bank established a zakat and charity fund whereby the bank acts as a fiduciary of that fund. The bank is responsible for collection and distribution of all or part of zakat and charity funds.