International accounting harmonization, banking regulation, and Islamic banks

Islamic banks perform both commercial and investment banking services but do not establish firewalls to separate these two services legally, financially, and managerially. Unlike conventional commercial banks, Islamic banks are prohibited from charging or paying of interest. Instead, Islamic banks offer profit-sharing investment accounts, such that investors' return depends on the return on the assets financed by the investors' funds. Supervisory authorities in countries in which Islamic banks operate have taken various approaches to regulate Islamic banking. Such variations appear to have resulted in Islamic banks adopting different accounting treatments for investment accounts, although most of the countries in which Islamic banks operate either look directly to international accounting standards as their national standards or develop national standards based primarily on international accounting standards. This rendered the financial statements of Islamic banks noncomparable. It also implies that the calls for worldwide adherence to international accounting standards to achieve harmonization in financial reporting, regardless of cultural differences that affect the way in which business transactions are carried out (in substance as well as in form), should not go unchallenged. The paper also casts light on the need to implement the accounting standards promulgated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), because these standards specifically cater for the unique characteristics of the contracts that govern the operations of Islamic banks.