Compliance of AAOIFI Standards in Islamic Banks in Bangladesh

CPS Journals International Journal of Social Science Research
Centre for Postgraduate Studies ISSN: 2289-3318

Universiti Malaysia Kelantan Vol. 1, Issue 2, pp: 111-123 (2013)
CPS Journals

Compliance of AAOIFI Guidelines in General Presentation and
Disclosure in the Financial Statements of Islamic Banks in
Bangladesh
Md. Hafij Ullah
Department of Business Administration, International Islamic University Chittagong, Bangladesh
Email: hafij_1980@yahoo.com

Abstract
Islamic banking companies in Bangladesh mandatorily required following different rules,
regulations, ordinance, guidelines in accounting and reporting practices but AAOIFI
standards are not mandatory for them. But as Islamic organizations, they are supposed to
comply with AAOIFI standards. The objective of this study is to reveal the level of
Compliance of AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions) guidelines regarding General Presentation and Disclosure in the Financial
Statements of Islamic Banks listed in Bangladesh. The study considered the annual report
of 7 listed Islamic banking companies of 2011. The study found that these banks comply on
an average 44.68 percent (90.71 items of 203) of AAOIFI Guidelines regarding General
Presentation and Disclosure in the Financial Statements. Standard deviation of total
compliance score is 3.14 indicate that there is very poor difference among the Islamic banks
in this regard. The study recommended increasing the level of compliance to make their
report more informative and to inform their stakeholder that they are doing their business
complying the rules and regulation of regulatory bodies.

Keywords: Disclosure, Financial Statements, Islamic Banks, Bangladesh
JEL Codes: G14, G21

Received: June, 2013 Approved: July 2013 doi: 10.14239/IJSSR.2013.01205
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1. INTRODUCTION

Islamic banking companies in Bangladesh mandatorily required following different rules, regulations,
ordinance, guidelines in accounting and reporting practices but AAOIFI standards are not mandatory for
them. Ullah (2013) stated that compared to other general or banking companies, Islamic banking
companies are required complying more legal requirements such as AAOIFI standards, IFSB standards,
etc. Hossain (2012) also stated that the Islamic banks are to abide by more rules and regulations than
conventional banks, that is, AAOIFI standards, IFSB standards, Shariàh requirements, etc. are not
complied by conventional banks. As the activities of Islamic banks are different that of their counter parts,
therefore, their accounting and reporting is also different. For these Islamic banks need to disclose some
information which is not required to disclose by conventional banks, but for regulating their activities and
disclosure, there is no separate regulatory authority in Bangladesh. Islamic banks are operating their
activities under secular law, environment, and control. AAOIFI was established for development of
different standards for Islamic organizations throughout the world. Islamic banks in Bangladesh should
follow the guidelines of AAOIFI regarding general presentation and disclosure in the financial statements
of Islamic banks. The objective of the study is to evaluate the level of compliance with general
presentation and disclosure in the financial statements of Islamic banks in Bangladesh.

Ullah, H. M.
International Journal of Social Science Research 112

2. LITERATURE REVIEW

Sarea (2012), in his research on The Level of Compliance with AAOIFI Accounting Standards: Evidence
from Bahrain evaluated perceptions concerning the level of compliance with AAOIFI Accounting
standards. The findings of the paper, therefore, indicated that, Islamic banks of Bahrain have fully adopted
the AAOIFI accounting standards. In reference to data analysis, the results further show high level of
compliance with AAOIFI accounting standards in the kingdom of Bahrain according to accountants'
perceptions. This is due to their consistency with the regulation imposed by the regulatory bodies in
Bahrain, such as Central Bank of Bahrain (CBB). Generally, most of AAOIFI accounting standards have
similar mean scores and a high level of compliance with the AAOIFI accounting standards. Research
findings revealed that 85% of the respondents agree with the AAOIFI accounting standards with high
level of compliance, while only 5% of the respondents agree with moderate level of compliance with the
AAOIFI accounting standards and 10 % of the respondents agree with low level of compliance with the
AAOIFI accounting standards.

Al-Baluchi (2006), in his thesis on The Impact of AAOIFI Standards and other Bank Characteristics on
the Level of Voluntary Disclosure in the Annual Reports of Islamic Banks evaluated a sample of 34
banks of which 14 banks from Bahrain, 26 banks from Sudan, 2 banks from Qatar, 2 banks from Jordan to
extend the knowledge to the overall level of disclosure in the annual report of Islamic banks. He found
that the level of voluntary disclosure increased after the implementation of AAOIFI standards. The level
of voluntary disclosure among Islamic banks in Sudan was less than Islamic banks operating in Bahrain,
Qatar and Jordan.

AI-Abdullatif, Sultan Abdullah (2007), in his study on The application of the AAOIFI accounting
standards by the Islamic banking sector in Saudi Arabia attempted to investigate and explore the
awareness of AAOIFI accounting standards among academics, external auditors and Islamic bank's
employees in Saudi Arabia and also aimed to explore the respondents' preference of adopting AAOIFI
accounting standards for Islamic banks in Saudi Arabia. The study found that the awareness of AAOIFI
accounting standards was less than expected among those considered as knowledgeable respondents
coming from the areas related to the sector. The study also provided evidence that the more education and
experience respondent has the more he/she is aware of the AAOIFI accounting standards. The study
concluded that the vast majority of the respondents prefer AAOIFI accounting standards to be adopted in
Islamic banks in Saudi Arabia.

Nadzri (2009) in his study on Roles and impacts of accounting and auditing organization for Islamic
financial institutions (AAOIFI) in dealing with the accounting and disclosure of Zakah and interest (Riba)
intended to study the effectiveness of AAOIFI in dealing with the issues of zakah and riba for IFIs by
examining the disclosure practice of 25 IFIs worldwide. Based on the analysis conducted, it was
concluded that the extents of disclosure by the IFIs are much lower than the AAOIFI requirements. The
study also found that leverage and origin factors might contribute to the level disclosures of zakah and
financial products. In addition, the test performed also revealed that the adopters of AAOIFI do provide
more disclosure as compared to the non-adopters. However, the mean result is relatively low to suggest
full compliance with the AAOIFI standards.

Ibrahim et al., (2006), in their study on Alternative Disclosure & Performance Measures for Islamic
Banks evaluated Bank Islam Malaysia Berhad (BIMB) and Bahrain Islamic Bank (BIB) to evaluate how
they conduct their business and the measures used in order to ensure that all the activities are in line with
the requirements of Shariah. In Bahrain however, the AAOIFI standard is mandatory for Islamic
Financial Institution. Therefore, BIB in its accounting policy has stated that its financial statements are
prepared in accordance with the AAOIFI. Nevertheless, the BIB also followed the International
Accounting Standard for the harmonization practices purposes that might not be in line with the Islamic
principles. On the other hand, since the AAOIFI standards are not mandatory in Malaysia, BIMB did not
fully adopt it as the main accounting standard. BIMB in its report only stated two of the principles are in
accordance with AAOIFI which represented 15% of the total principles.

Ullah, H. M.

Harahap, (2002) in his research on The Disclosure of Islamic Values The Analysis of Bank Muamalat
Indonesia's Annual Report analyzed eight annual reports of Bank Muamalat Indonesia (BMI) to compare
with conventional accounting disclosure requirements and AAOIFI requirements to compare between
those two standards. He found that disclosure requirement of AAOIFI 97.3% and BMI 83.6% of specific
Islamic informational items over total informational items. Hossain (2010) in his study on Financial
Statements of Banks under Islamic Shariah: Status of Regulatory Compliance evaluated all of Islamic
banks are listed on stock market. The paper tries to identify the regulatory requirements in preparing the
financial statements (FSs) of banks under Islamic Shariah and tries to show the compliance status of these
banks with legislations. Considering provisions of different laws and regulations the requirements have
been classified into four categories, i.e., refereeing the legislation as complied, disclosure in the face of
financial statements, disclosure of information in the notes as a part of financial statements and other
requirements. He found that the average compliance rate is 88.11% considering all required aspects of
financial statements.

Salah (2011) in his study on Islamic Finance: The Impact of the AAOIFI Resolution on Equity-Based
Sukuk Structures explored the developments in the Islamic financial market in regard to equity-based
sukuk structures, the sukuk al-mudarabah in particular. He showed how a Resolution of the Accounting
and Auditing Organization for Islamic Financial Institutions (AAOIFI) has influenced the legal structural
features of equity-based sukuk structures and discusses recent attempts to issue equity-based sukuk
structures that are in line with the AAOIFI Resolution. Haniffa and Hudaib (2004) their study on
Disclosure Practices of Islamic Financial Institutions: An Exploratory Study found that out of five
sample companies, only two IFIs had adopted the AAOIFI standards. Interestingly, both IFIs that follow
AAOIFI standards were from Bahrain, the country of origin of AAOIFI. Although they claimed that they
had strictly followed AAOIFI in preparing their financial statements, there were a number of disclosures
required by AAOIFI missing from the financial statements. Che Pa (2006) and Zaini (2007) argued that
the level of acceptability of AAOIFI have only a moderate level of compliance among the managers in
Islamic banks in Malaysia.

3. RESEARCH METHODOLOGY

As it is a study on disclosure level, the main source of information is the secondary data provided in the
annual report. To measure the extent of Disclosure level in Islamic banks of Bangladesh 7 annual reports
of listed Islamic banking companies in Bangladesh have been analyzed. Annual Report is a common and
popular means of communication to stake holders (Guthrie and Parker, 1990; Singh and Ahuja, 1983,
Adams, 2004; Rahman, 2006).

3.1. Selection of samples

There are seven Islamic banks listed in the stock exchanges in Bangladesh. All the seven listed Islamic
banking companies were taken as the sample for the study, that is, the sample covered 100% population of
the field. The Islamic banks under study are as given below:

Name of Islamic Banks Year of Incorporation
Islami Bank Bangladesh Limited 1983
Al-Arafah Islami Bank Limited 1995
Social Islami Bank Limited 1995
Export Import Bank of Bangladesh Limited 1999
Shahjalal Islami Bank Limited 2001
ICB Islami Bank Limited 1987
First Security Islami bank Limited 1999

Ullah, H. M.

3.2. Study Period

The most recent fiscal years of disclosure have been chosen for using the updated information for the
study. The fiscal year of 2011 has been selected to review the items disclosed in the financial statements in
the annual report of the banks. Statistical tools like average, percentage, standard deviation, co-variance
etc. were used to analyze data. This paper examines general presentation and disclosure in the financial
statements of 2011 of 7 listed Islamic banks in Bangladesh. Of 13 headings, 203 items of disclosure were
considered in evaluating the Annual reports. Following the study of Hossain, et al (1994) and Ahmed and
Nicholls (1994), the study also adopted a dichotomous procedure in which an item scores 1, if complied
and 0 if did not comply with the AAOIFI guidelines.

3.3. Overview on AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic
international autonomous non-for-profit corporate body that prepares accounting, auditing, governance,
ethics and Shari'a standards for Islamic financial institutions and the industry. AAOIFI was established in
accordance with the Agreement of Association which was signed by Islamic financial institutions on 1
Safar, 1410H corresponding to 26 February, 1990 in Algiers. Then, it was registered on 11 Ramadan 1411
corresponding to 27 March, 1991 in the State of Bahrain. Professional qualification programs (notably
CIPA, the Sharia Adviser and Auditor "CSAA", and the corporate compliance program) are presented
now by AAOIFI in its efforts to enhance the industrys human resources base and governance structures.

As an independent international organization, AAOIFI is supported by institutional members (200
members from 45 countries, so far) including central banks, Islamic financial institutions, and other
participants from the international Islamic banking and finance industry, worldwide. AAOIFI has gained
assuring support for the implementation of its standards, which are now adopted in the Kingdom of
Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant
authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have
issued guidelines that are based on AAOIFIs standards and pronouncements.

a. AAOIFI Standards: Total of 88 standards issued by AAOIFI namely: 48 Sharia standards; 26
financial accounting standards; 5 auditing standards; 7 governance standards; 2 codes of ethics
and in addition, new standards are being developed and existing standards reviewed.

b. Objectives of AAOIFI: (i) To develop accounting and auditing thoughts relevant to Islamic
financial institutions, (ii) To disseminate accounting and auditing thoughts relevant to Islamic
financial institutions and its applications through training, seminars, publication of periodical
newsletters, carrying out and commissioning of research and other means, (iii) To prepare,
promulgate and interpret accounting and auditing standards for Islamic financial institutions; and
(iv) To review and amend accounting and auditing standards for Islamic financial institutions.
AAOIFI carries out these objectives in accordance with the precepts of Islamic Sharia which
represents a comprehensive system for all aspects of life, in conformity with the environment in
which Islamic financial institutions have developed. This activity is intended both to enhance the
confidence of users of the financial statements of Islamic financial institutions in the information
that is produced about these institutions, and to encourage these users to invest or deposit their
funds in Islamic financial institutions and to use their services.

c. AAOIFI Members Criteria: Membership criteria vary among institutions- joined or willing to join
AAOIFI. However, founding members stand apart, being the Islamic financial institutions which
are signatories to the agreement establishing the organization in 1989. Those members are: the
Islamic Development Bank (Saudi Arabia) www.isdb.org, Al Baraka Banking Group- ABG-
(Bahrain) www.abg.bh, Dar Al Mal Al Islami (Switzerland), Al Rajhi Banking and Investment
Corporation (Saudi Arabia), Kuwait Finance House (Kuwait) www.kfh.com and Bukhari Capital
(Malaysia). Associate members are those Islamic financial institutions and companies that
comply with Islamic Shari'a precepts and principles in their operations and transactions. In
addition, Islamic Fiqh academies and institutions that have corporate entities have their say in
Ullah, H. M.

this class. AAOIFI's membership base is not limited to founding and associate members.
Members representing regulatory and supervisory authorities - central banks, monetary agencies,
and suchlike- form a distinct category, playing vital role by supervising Islamic financial
institutions and their contribution towards the economy at large. The last class of membership is
observer members. Those members include organizations and associations responsible for
regulating the accounting and auditing profession and/or those responsible for preparing
accounting and auditing standards. Practicing certified accounting and auditing firms that have
interest in the accounting and auditing practices of Islamic financial institutions are among
observers as well. The list goes further by admitting financial institutions engaged in financial
activities of Islamic financial institutions (Islamic banking windows, for instance). Users of
financial statements of Islamic financial institutions- both individuals and corporate- belong to
the category, as well, and their observing role cannot be underestimated. Supporting members,
finally, comprise of users of financial statements of Islamic financial institutions- individuals and
corporate, in addition to local and international financial institutions that already have or intend
to have relations with Islamic financial institutions' products.

d. Certified Islamic Professional Accountants (CIPA): AAOIFI also provide training for Certified
Islamic Professional Accountants (CIPA). CIPA program covers technical subjects that are
essential to accountancy for international Islamic banks and financial institutions, including: (i)
AAOIFIs Shari'a standards on Islamic finance products and practices, and Sharia basis for those
standards, (ii) Accounting concepts and principles for international Islamic finance, (iii)
Qualitative characteristics of accounting information for international Islamic finance, (iv)
AAOIFIs Accounting standards on financial reporting for the international Islamic finance
industry, (v) AAOIFIs Shari'a standards on Islamic finance products and practices, and Sharia
basis for those standards, (vi) AAOIFIs Governance standards on Sharia compliance and review
processes.

3.4. Overview on Sample Islamic Banks

Islami Bank Bangladesh Limited (IBBL): IBBL was established as a Public limited Banking Company in
Bangladesh on the 13th March 1983 as the first interest free Sharia based Scheduled Commercial Bank in
the South East Asia. It started operation on 30
th
March, 1983. The bank conducts its business by 266
branches, 12 zone offices and the head office. The bank conducts its business on the sharia principles of
Mudaraba, Musharaka, Bia-Murabaha, Bia-Muajjal, and Hire Purchase under Shirkatul Melk, Bia-Salam,
and Bia-as-Sarf etc. There is a Sharia supervisory committee in the bank who ensures that the activities of
the bank are being conducted on the principle of Islam. 12 member Sharià supervisory committee consists
of prominent Sharis scholars, reputed Bankers, renowned lawyers and eminent Economists. The bank is
managed by 18 members Board of Directors elected by the shareholders. It is listed with Dhaka Stock
Exchange Ltd. and Chittagong Stock Exchange Ltd. Authorized Capital of the Bank is Tk. 20,000.00
Million ($ 250.47 Million) and Paid-up Capital is Tk. 12,509.64 Million ($ 156.66 Million) having 60,302
shareholders as on 31st December 2012. The banks subsidiaries are Islami Bank Securities Limited and
Islami Bank Capital Management Limited.

ICB Islami Bank Limited (ICBIBL): ICB Islamic Bank Limited is the new legal name of former The
Oriental Limited. The Bank has been incorporated on April, 1987 as a public limited company under the
Companies Act, 1913 to undertake and carry out all kinds of banking, financial and business activities,
transactions and operations in strict compliance with the principles of Islamic Law (Shariah) relating
to business activities in particular avoiding usury in credit and sales transactions and any practice which
amounts to usury. Certificate for commencement of business has been issued to the bank on April, 30,
1987. The Bank has been authorized by the Bangladesh Bank to carry on the banking business in
Bangladesh with effect from May 4, 1987. However, actual banking operations have commenced on May
20, 1987. Bangladesh bank took control of the management on 19
th
June 2006 removing the managing
director of the bank and also dissolving the board of directors. Bangladesh Bank appointed Chairman and
managing director carried out the management of the day to day affairs of the Bank since such takeover.
The authorized capital of the bank is Tk.15, 000.00 million and the paid up capital of the bank now stands
at Taka 6,647.023 million. The bank is managed by a 5-member board of Directs elected by the
Ullah, H. M.

Shareholders. The day-to-day affairs of the bank are managed by an Executive Council of 5 Directors.
Like other Islamic banks, it has a 5-Shariàh Council which makes decision to perform activities according
to Sharia.

Al-Arafah Islami Bank Limited (AIBL): Al-Arafah Islami Bank Limited was incorporated in Bangladesh
on June 18, 1995 and started operation from September 27, 1995. The bank is having an Authorized
capital of Tk. 10,000 million and paid up capital of Tk. 5,893.37 million at the end of December 31st,
2011. The shares of the bank hold by 54,267shareholders. The Bank conducts its business on the
principles of Musharaka, Bai-Murabaha, Bai-Muazzal and Hire Purchase transactions approved by
Bangladesh Bank. The Bank provides a comprehensive range of financial services including commercial
banking, consumer banking, trade finance and other related custody and clearing services to the customers
following the provisions of Bank Companies Act, 1991, Bangladesh Banks directives and the principles
of Islamic Shariah. There is a Shariah Supervisory Committee in the bank who maintains constant
vigilance to ensure that the activities of the bank are being conducted on the precepts of Islam. The
Shariah Supervisory Committee of 7 members consists of prominent Ulema, reputed Bankers, renowned
Lawyers and eminent Economists. The bank is managed by 21-member Board of Directors. Al-Arafah
Islami Bank Ltd. Opened 89 as 31
st
December, 2011 branches all within the country. Al-Arafah Islami
Bank Ltd. owned 51.75% shares of AIBL Capital Market Services Ltd. a subsidiary company of Al-
Arafah Islami Bank Limited. AIBL Capital Market Services Ltd. incorporated in Bangladesh on 20
September 2010 as a Public Limited Company. AIBL Capital Management Ltd. is another subsidiary
company of Al-Arafah Islami Bank Limited. The company has been incorporated in 2012 under the
companies act 1994 as a private limited company by shares.

Shahjalal Islami Bank Limited (SHJIBL): The Shahjalal Islami Bank Limited was established as a Public
Limited Company (Banking Company) as on the 1st day of April 2001 under the Companies Act 1994 as
interest free Islamic Shariah based commercial bank and commenced its operation on the 10th day of May
2001 with the permission of Bangladesh Bank. The authorized capital of the bank is Tk. 6,000.00 million
and paid-up capital is Tk. Tk. 4,452.66million. Presently the Bank is operating its business through head
office having 73 branches, 06 (six) SME centres, 15 (fifteen) ATM booths and 1,624 employees all over
Bangladesh as on 31
st
December, 2011. It has 23member Board of Directors and a 9-member Shariàh
council consists of Shariàh scholars, lawyers and expert in the finance and economic fields who has been
maintaining the Shariàh of the activities of the bank. The Bank has also a subsidiary company named
Shahjalal Islami Bank Securities Limited and an Off-shore Banking Unit. Shahjalal Islami Bank Limited
holds 89.49% shares of Shahjalal Islami Bank Securities Limited. The Bank is listed with both the Stock
Exchanges of the country, i.e. Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.

Social Islami Bank Limited (SIBL): The SOCIAL ISLAMI BANK LTD (SIBL), a second-generation
bank, operating since 22 November, 1995 based on Shariah Principles, has now 86 branches all over the
country with two subsidiary companies - SIBL Securities Ltd. & SIBL Investment Ltd. Targeting poverty,
SOCIAL ISLAMI BANK LTD. The authorized share capital of the bank is Taka 10,000.00 million at the
end of December 2011 the Paid-up capital of the bank stood at Taka 6,393.92 million. The bank is
managed by an 18-member Board of Directors and the bank has also a 9-member Shariàh Council
consisting of Fuquah, Islamic Economist and lawyer. The Council makes decision on Islamic issues which
are generally followed in the bank. By December 2010 Social Islami Bank has opened 64 branches where
1,252 employees are working.

EXIM Bank of Bangladesh Limited (EXIM): Export Import Bank of Bangladesh Limited was established
in the year 1999. This Bank starts functioning from 3rd August, 1999 with its name as Bengal Export
Import Bank Limited. On 16th November 1999, it was renamed as Export Import Bank of Bangladesh
Limited with Mr. Alamgir Kabir as the Founder Advisor and Mr. Mohammad Lakiotullah as the Founder
Managing Director respectively. The authorized capital of the bank is Tk. 2,000.00 Crore and paid-up
capital is 9,223.56 Million on 31
st
December, 2011. EXIM bank has 24-member Board of Directors and an
11-member Shariah supervisory committee headed by the Khatib of National Mosque-Baitul Mukarram
supervising and maintaining the Shariàh compliance of the bank.

Ullah, H. M.

First Security Islami Bank Limited (FSIBL): First Security Islami Bank Limited (FSIBL) was incorporated
in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking
business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business.
The Bank went for public issue on 20 July 2008 and its shares are listed with Dhaka Stock Exchange
(DSE) and Chittagong Stock Exchange (CSE). The authorized of the bank at the end of 31
st
December,
2010 are Tk. 4,600 million and the paid up capital is Tk. 3,400.32 million. FSIBL has 15member Board
of Directors and a 5-member Shariàh council consists of Shariàh scholars, lawyers and expert in the
finance and economic fields who has been maintaining the Shariàh of the activities of the bank. All kinds
of commercial banking services are provided by the Bank to the customers following the principles of
Islamic Shariah, the provisions of the Bank Company Act 1991 and Bangladesh Banks directives.
Presently the Bank carries banking activities through its 84 branches in the country as at December 31,
2011. The Bank converted its banking operation into Islamic Banking based on Islamic Shariah from
traditional banking operation on 01 January 2009 after obtaining approval from honourable High Court,
Ministry of Finance and Bangladesh Bank. First Security Islami Bank Ltd. holds 51% shares of First
Security Islami Capital & Investment Ltd.

4. RESEARCH FINDINGS

4.1. General Provision

General Provision on general presentation and disclosure in the financial statements require a complete set
of statements which include seven statements, notes require for these statements, how to present these
statements and specific form and classification used therein to ensure clear and adequate information
presentation for users of these statements.

Table No. 1: Showing General Provision of General Presentation and Disclosure in the Financial
Statements require in AAOIFI Financial Accounting Standard No. 1.

General
provisions
Total IBBL ICBIBL AIBL SHJIBL SIBL EXIM FSIBL Mean SD
Frequency 14 11 11 11 11 11 11 11 11 0
% 100% 78.57 78.57 78.57 78.57 78.57 78.57 78.57 78.57

In General Provision on general presentation and disclosure in the financial statements, all Islamic Banks
in Bangladesh complied 78.57 percent. But none of these banks keep the following statements: 1) A
statement of changes in restricted investment, 2) A statement of sources and uses of funds in the Zakah
and charity fund, 3) A statement of sources and uses of funds in the Qard fund. These statements are
required for informing their users that the bank is following Islamic rules in doing its business.

4.2. General Disclosure

General disclosure in the financial statements require the disclosure of information about the bank, its
activity, Shariàh board, its subsidiaries and affiliates, policies use for disclosing, effect of changes in the
policies, investment mode etc. The objective of general disclosure is to ensure that the statements are
providing enough information about itself, its activities and its policies.

Table No. 2: Showing General disclosure in the financial statements require in AAOIFI Financial
Accounting Standard No. 1.

General
disclosure
Frequency 50 24 23 19 23 22 26 22 22.71 2.14
% 100% 48 46 38 46 44 52 44 45.42

Ullah, H. M.

In General disclosure in the financial statements IBBL, ICBIBL, AIBL, SHJIBL, SIBL, EXIM, and
FSIBL respectively complied 48, 46, 38, 46, 44, 52 and 44 percent. Islamic banks on an average complied
45.42 percent with general disclosure in the financial statements. Standard Deviation is 2.14. In
Bangladesh, none of these banks complied with following: 1) the name of banks subsidiaries whose
financial statements are not consolidated and the reason for excluding their financial statements from the
consolidated financial statement of the bank, 2) The banks responsibility toward Zakah, 3) The
accounting policies that represent a choice among acceptable alternative, 4) The accounting policies which
are not consistent with the concept of financial accounting for Islamic banks, 5) The accounting policies
adopted for recognition and determination of doubtful receivable and the policies of writing off debts, 6)
The use of historical cost as a basis of determining equity of owners of unrestricted/restricted investment
accounts and their equivalent if revaluation is not mandatory, 7) Method of disclosing of significant
accounting policies, 8) Disclosure of any unusual supervisory restriction imposed by any regulatory that
are authorized by charter, 9) Disclose the amount and nature of earning that have been realized from
source or by means which are not permitted by Sharia, 10) Disclose how it intends to dispose of assets
generated by prohibited earning, 11) A customer, including another bank or a financial institution without
customers name, 12) Disclosure of concentration of sources of unrestricted investment accounts and their
equivalent and other accounts, 13) Changes in the maturity or conversion periods should be disclosed, 14)
Disclosure of compensating balance, 15) Disclosure of risk associated with assets and liabilities which are
denominated in foreign currency, 16) Disclosure of restricted assets or assets pledge as security, 17) The
effect of the change on net income for the current period and prior periods presented for a comparative
purpose and on the retained earnings as at the beginning of the first period presented for comparative
purposes, 18) Description of changes, its effect and its justification, 19) Description of changes in non-
routine accounting estimate, the reason thereof its effect, 20) The effect of change on net income or profits
(losses) from restricted investments for the current period, 21) Nature of the error and the prior period
effected by the error, 22) The effect of the error correction on the net income or profits (losses) from
restricted investment for the period and 23) Method used to allocate investment profits (losses) between
unrestricted account holders and bank. These non-compliances may reveal the weakness of non-
compliance with Islamic banking system.

4.3. Disclosure in Statement of Financial Position

Statement of Financial Position is prepared to disclose full financial position by providing information
about assets, liabilities, equities. AAOIFI classified assets, liabilities and equities to present with adding
essential Islamic values to its users. These disclosures represent sector-wise investments of the banks
which ensure banks profit orientation than interest.

Table No. 3: Showing Disclosure in Statement of Financial Position require in AAOIFI Financial

Statement of
Financial
Position
Frequency 22 13 12 13 12 12 12 12 12.29 .49
% 100% 59.1 54.6 59.1 54.6 54.6 54.6 54.6 55.86

In case of the Statement of Financial Position, IBBL, ICBIBL, AIBL, SHJIBL, SIBL, EXIM, and FSIBL
respectively complied 59.1, 54.6, 59.1, 54.6, 54.6, 54.6 and 54.6 percent. These banks on an average
complied with 55.86 percent. But none of the sample banks complied with: 1) Disclosure should be made
of the net realizable value of an asset if such value is less than the assets recorded value, 2) Disclosure for
change in the provision for doubtful accounts receivable, 3) Disclosure should be made in the statement of
financial position or note for the deposit of other banks, Salam payable, Istisna payable, 4) Disclosure
should be made in the statement of financial position or note for the Zakat and taxes payable, 5)
Unrestricted investment accounts and their equivalent should be disclose separately between liabilities and
owners equity, 6) A consolidated statement should disclose the minority interest as a separate item
between unrestricted investment accounts and owners equity and 7) Right, condition and obligation of
each type of unrestricted investment accounts should be shown.
Ullah, H. M.

4.4. Disclosure in Income Statement

Income statement required in AAOIFI Financial Accounting Standard No. 1 represents the profit or loss
with source of income and nature of expenses. From this statement users can identify the level of Halal or
Haram because all revenue and expenses are disclosed with the nature and source.

Table No. 4: Showing Disclosure in Income statement require in AAOIFI Financial Accounting Standard
No. 1.

Income
statement
Frequency 20 8 6 7 6 7 9 11 7.71 1.8
% 100% 40 30 35 30 35 45 55 37.85

In case of income statement, IBBL, ICBIBL, AIBL, SHJIBL, SIBL, EXIM, and FSIBL respectively
comply 35, 30, 35, 30, 35, 45 and 55 percent. Islamic banks on an average complied with 7.71 (37.85
percent) items of 20 items with standard deviation of 1.8. But none of these sample Islamic banks
complied with: 1) Share of unrestricted investment account holders in income (loss) from investment
before banks share as Mudarib, 2) Islamic banks share in income (loss) from investment, 3) The Islamic
banks share in unrestricted investment income as a Mudarib, 4) The Islamic banks share in restricted
investment profits as a Mudarib, 5) The Islamic banks fixed fee as an investment agent for restricted
investments, 6) Net income (loss) before Zakah and taxes, 7) Zakat and tax to be separately disclose and
8) Islamic banks share in unrestricted investment income and share of unrestricted investment accounts.

4.5. Disclosure in Statement of cash flows

Cash flows statement discloses the cash inflows and outflows. According to AAOIFI guidelines on
General Presentation and Disclosure in the Financial Statements, cash flows should be disclose activity
group wise and also disclose those transaction which do not result in cash to inform about banks
involvement activities.

Table No. 5: Showing Disclosure in Statement of cash flows require in AAOIFI Financial Accounting
Standard No. 1.

Statement of
cash flows
Frequency 5 4 4 4 4 4 4 4 4 0
% 100% 80 80 80 80 80 80 80 80

In case of Statement of cash flows, IBBL, ICBIBL, AIBL, SHJIBL, SIBL, EXIM, and FSIBL complied 80
percent of the required provisions. These banks on an average complied with 4 (80 percent) items of 5
items. All of these sample Islamic banks do not comply with Transactions and other transfer that do not
results in cash receive/payment should be disclosed.

4.6. Disclosure in Statement of Changes in Owners Equity

The purpose of Statement of Changes in Owners Equity to disclose the equity, distribution against equity,
retained earnings etc. to inform the level of owners equity.

Table No. 6: Showing Disclosure in Statement of Changes in Owners Equity require in AAOIFI
Financial Accounting Standard No. 1.

Statement of
Changes
Frequency 6 6 6 6 6 6 6 6 6 0
% 100% 100 100 100 100 100 100 100 100
Ullah, H. M.

In case of the Statement of Changes in Owners Equity, all of the Islamic banks in Bangladesh complied
100 percent which are required in AAOIFI Financial Accounting Standard No. 1. These banks on an
average complied with 6 (100 percent) items of 6 items. Islamic banks in Bangladesh do not comply with
the Statement of Changes in Restricted Investments, Statement of Sources of Uses of Funds in the Zakah
and Charity Fund, Statement of Sources and Uses of Funds in the Qard Fund, Treatment of Changes in
Accounting Policies and Treatment of Changes in non-routing Accounting estimates which are require in
AAOIFI Financial Accounting Standard. These statements specifically disclose information about some
Islamic term compliance. Islamic Banks in Bangladesh should disclose these statements to ensure that
they are doing their business as per Islamic Shariàh.

4.7. Non-compliance Classes

None of these Islamic banks complied with disclosure requirements in Statement of changes in restricted
investments, statement of sources and uses of funds in the Zakah and charity fund, statement of sources
and uses of funds in the Qard fund, treatment of changes in accounting policies, treatment of changes in
non-routine accounting estimates.

4.8. Formats of Financial Statements

AAOIFI suggested some formats as guideline for preparing financial statements to disclose general
information of Islamic banks activities and position. These formats disclose all information with Islamic
rules.

Table No. 7: Showing Formats of Financial Statements required in AAOIFI Financial Accounting
Standard No. 1.

Formats of
Financial
Statements
Frequency 7 2 2 2 2 2 2 2 2 0
% 100% 28.6 28.6 28.6 28.6 28.6 28.6 28.6 28.6

All of the Islamic banks in Bangladesh complied 28.6 percent of the formats given for disclosing in the
Financial Statements. These banks on an average complied with 2 (28.6 percent) items of 7 items. These
Islamic banks did not follow the following formats: 1) Format of the statement financial position, 2)
Format of the income statement, 3) Format of the statement of changes in restricted investments, 4)
Format of the statement of sources and uses of the Zakah and charity funds and 5) Format of the statement
of sources and uses of Qard funds.

4.9. Notes to the Financial Statements

Notes to the financial statements are required to enrich the financial statements. Notes mean detail of those
which are shortly presented in the statements. Notes serve sufficient information to the users of the
statements.

Table No. 8: Showing Notes to the Financial Statements required in AAOIFI Financial Accounting
Standard No. 1.

Notes to the
Financial
Statements
Frequency 45 27 28 25 25 24 24 23 25.14 3.71
% 100% 60 62.2 55.6 55.6 53.3 53.3 51.1 55.68

In case of disclosure of Notes to financial statements, IBBL, ICBIBL, AIBL, SHJIBL, SIBL, EXIM, and
FSIBL respectively complied with 60, 62.2, 55.6, 55.6, 53.3, 53.3 and 51.1. These banks on an average
Ullah, H. M.

compliance with 25.14 (55.68 percent) items of 45 items and standard deviation are 3.71. But none of
these banks provide notes for zakat treatment, zakat base, sales receivable, participations, inventories,
assets require for lease, Istisna contract, share of unrestricted investment in income, Concentration of
sources of unrestricted investment accounts, Earning and expenditures prohibited by Sharia,
Compensating balance, Restricted assets or assets pledge as security, Estimated cash equivalent value of
assets and liabilities compared to historical cost, Rights obligations and conditions related to unrestricted
investment and their equivalent, Relations between the bank and holders of restricted investments account
as a Mudarib or an agent and Reciprocal and non-reciprocal transaction which do not require payment or
receipt of cash. The banks which do not have sales receivable, participations, inventories, assets require
for lease, Istisna contract how it is doing business in the way of Shariah.

4.10. Total General Disclosure

General disclosure in financial statements required in AAOIFI Financial Accounting Standard No. 1
provides guideline to Islamic banks for disclosing their general information to the users. Total 203 items
of general disclosure in financial statements required in AAOIFI considered for the study. These items can
reflect the total scenario of the bank including its financial position, income and expenses and transaction
acceptability in Islam.

Table No. 9: Showing Total General Disclosure in Financial Statements required in AAOIFI Financial

Banks Total Disclosure Total Disclosure (In %)
IBBL 95 46.80
ICBIBL 92 45.32
AIBL 87 42.86
SHJIBL 88 43.35
SIBL 88 43.35
EXIM 94 46.31
FSIB 91 44.83
Mean 90.71 44.68
SD 3.15
Co-Variance 3.47%

Sample Islamic banks on an average disclosed 90.71 items of 203 (44.68 percent) in their annual report of
2011. Standard deviation of their total disclosure is 3.15, and co-variance is 3.47 percent. IBBL complied
the highest 68.80 percent of the required items followed by 68.31 percent by EXIM. The lowest 62.86
percent complied by AIBL.

5. CONCLUSION

Islamic banking has been rapidly growing in Bangladesh. For this reason, compliance with the regulatory
requirements like AAOIFI is important to know that they are doing all of their activities according to the
provision of Shariah. This paper tried to evaluate the level of compliance of the Islamic banks in
Bangladesh with general presentation and disclosure in the financial statements which are required by
AAOIFI. Islamic Banks should follow the disclosure requirements of AAOIFI though it is not mandatory
for Islamic banks in Bangladesh but important for informing their related parties about their activities.

The findings of the study noted that: (a) Islamic Banks in Bangladesh on an average complied 44.68
percent (90.71 items of 203 items) with disclosure requirements of AAOIFI standards on general
presentation and disclosure in the financial statements. Standard deviation of disclosure in financial
statement of Islamic banks is 3.15; (b) Islamic Banks in Bangladesh complied 78.57 percent on an average
with general provision on general presentation and disclosure in the financial statements; (c) Islamic banks
on an average 45.42 percent comply with general disclosure in the financial statements where EXIM bank
Ullah, H. M.

complied the highest 52 percent and AIBL complied the lowest 38 percent; (d) Islamic banks on an
average complied 55.86 percent with statement of financial position where IBBL and AIBL complied the
highest 59.1 percent and other Islamic banks complied the lowest 54.6 percent; (e) Islamic banks on an
average complied 37.85 percent with income statement where FSIBL complied the highest 55 percent and
ICBIBL and SHJIBL the lowest 30 percent; (f) All the Islamic Banks in Bangladesh complied 80 percent
with disclosure requirements of the statement of cash flows, all the Islamic Banks complied 100 percent
with disclosure requirements of the statement of changes in owners equity and all the Islamic Banks 28.6
percent comply with formats of statements required by AAOIFI; (g) Islamic banks on an average
complied 55.68 percent with notes to the financial statements where ICBIBL complied the highest 62.2
percent and FSIBL the lowest 51.1 percent; (h) Islamic banks fully complied with disclosure in statement
of changes in owners equity and 80 percent complied with disclosure in statement of cash flows and
78.57 percent complied with General Provision. But the Islamic banks did not comply with Statement of
changes in restricted investments, Statement of Sources and Uses of Funds in the Zakah and Charity Fund,
Statement of Sources and Uses of Funds in the Qard Fund, Treatment of changes in accounting policies,
Treatment of changes in non-routine accounting estimates.

Based on the findings, this study recommends (a) Islamic banks should increase the level of compliance of
the disclosure guidelines required in general presentation and disclosure in the Financial Statements; (b)
Islamic Banks should follow the formats of Financial Statements suggested by AAOIFI to make the
disclosure statements clear, easy and understandable to the users; (c) Statement of Sources of Uses of
Funds in the Zakah and Charity Fund, Statement of Sources and Uses of Funds in the Qard Fund should
be disclosed because Zakat and Quard system reflect whether the bank are doing business in the way of
Sharia or not; (d) Islamic Banks are not allowed to do business with interest that is the reason they should
provide notes or in statement regarding Istisna payable, sales receivable, prohibited earning etc. to clarify
about their involvement in activities which are allowed by Shariah; (e) Sources and nature of income and
expenditure should be disclosed in the income statement to ensure that their income and expenditure were
earned according to Shariah; (f) Zakat base and to whom zakat was paid should be revealed with
providing appropriate statement because in Islam zakat cannot be paid to anyone; (g) Treatment of change
should be disclosed and if there is no change they should have provided note that they do not have any
change. Through disclosure of Zakat, Quard treatment is not mandatory in Bangladesh according to BAS
but Islamic banks should disclose these to ensure that they comply with Islamic Shariàh.

The study is expected to be benefited for the Islamic Banks in Bangladesh to learn which information they
do not disclose and need to disclose according to AAOIFI guidelines on General Presentation and
Disclosure in the Financial Statements. It is also expected to serve information to the stakeholder of the
Islamic Banks in Bangladesh about their level of compliance with General Presentation and Disclosure in
the Financial Statements of AAOIFI.

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Centre for Postgraduate Studies ISSN: 2289-3318

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