● Corporate AAOIFI

The emergence of Islamic banks and financial institutions as relatively new organizations and the great challenge they face to successfully serve the societies in which they operate, have led them, together with specialists in Islamic Shari’a and in accounting, to seek the most appropriate means through which accounting standards could be developed and implemented in order to present adequate, reliable, and relevant information to users of the financial statements of such organizations. The presentation of such information is critical to the economic decision making process by parties who deal with Islamic banks and would also have a significant effect on the distribution of economic resources for the benefit of society.

The principles of Islamic Shari’a strike a balance between the interests of the individual and society. It is known that investment is the foundation of economic activities in any society. However, not every individual is capable of directly investing his own savings. Accordingly, Islamic banks play an important role by acting as a vehicle to attract the savings of individuals and investing those savings for the benefit of the individual and society.

Islam clearly encourages investment and spending. Indeed, when Islam imposed Zakah, it required that wealth should be invested, otherwise it would be exhausted by Zakah over a period of time. It has been reported that the Prophet (may the blessing and peace of Allah be upon him) said “Trade in orphans wealth (property) lest it would be exhausted by Zakah”.

However, to induce individuals to invest through savings with their Islamic banks, it is essential that such individuals develop a trust in the ability of Islamic banks to realize their investment objectives. In the absence of trust in the ability of Islamic banks to invest efficiently and in full compliance with Islamic Shari’a, many individuals may refrain from investing through Islamic banks. One of the pre-requisites for the development of such trust is the availability of information that assures the investing public of the ability of Islamic banks to achieve their objectives. Among the important sources of such information are the financial reports of Islamic banks which are prepared in accordance with standards that are applicable to Islamic banks. However, in order to develop such standards it is essential to define the objectives and concepts of financial accounting for Islamic banks. In this respect, it is not harmful to begin where others have ended, if what has been developed by others is beneficial and does not contradict the Islamic Shari’a.

The interest in developing financial accounting standards for Islamic banks started in 1987. In this respect, several studies have been prepared. These studies have been compiled in five volumes and deposited in the Library of the Islamic Research and Training Institute of the Islamic Development Bank.

The outcome of these studies has been the formation of the Financial Accounting Organization for Islamic Banks and Financial Institutions (the Organization) which was registered as a not-for-profit organization in the State of Bahrain in 12/9/1411H corresponding to 27/3/1991. Since its inception the Organization has continued the efforts to develop accounting standards. Periodic meetings of the Executive Committee for Planning and Follow Up (the Committee) have been held with the aim of implementing the plan approved by both the Supervisory Committee (the supreme authority of the Organization) and by the Financial Accounting Standards Board for Islamic Banks and Financial Institutions. In this respect, the Committee has retained the service of several consultants on Shari’a, experts and practitioners of accounting, and bankers.

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