Accounting Standards and Islamic Financial Institutions: the Malaysian Experience

More than three decades after the establishment of first Islamic bank in Malaysia, there is still debate on the need for Islamic accounting standards. Early studies on this subject demanded a separate set of standards for Islamic Financial Institutions (IFIs) due to notable differences in transactions from their conventional Western counterparts. However, as time passed, one cannot imagine how IFIs have mushroomed and become a very large industry, with Western banks also venturing into the market. Nowadays, many products and services offered by IFIs echo the ones provided by the conventional banks. Along the line, the stance on the need for a set of accounting standards specificities to IFIs has also changed. Many parties including the Malaysian Accounting Standards Board (MASB) agree that International Financial Reporting Standards (IFRS) can be applied to transactions in IFIs. While there are many similarities to conventional banking transactions, a few areas of divergence remain in IFIs. In that case, the likely option to resolve this dilemma is to have guidelines or options for IFIs within the framework of IFRSs. If these guidelines are to be enforced globally, one possible option is for Islamic organisations to work closely with the International Accounting Standards Board (IASB). This paper reviews the subject with respect to accounting standards for IFIs and finds a few areas of research that should be pursued.