The need for an accounting standard is not very different from the need for any other kind of standards, whether they are standards for weights and measures, or standards for clothing sizes, grades of beef, or baseball statistics⁶. The goal or objective of an Islamic accounting standard is to facilitate comparisons and thereby minimize the social and economic costs of assessing the alternatives with which one is faced in making rational decisions. The need for developing Islamic accounting and reporting standards becomes urgent for firms in Islamic societies as the Islamic world attempts to revive Islamic ideology. Thus, it is important to develop Islamic accounting standards, which are specially adapted to Islamic needs.

Unless a proper disclosure with regard to the financial reporting, the underlying Shari’ah principles and the accounting methods adopted is made, the information contained in the financial statement will not be useful for a comparison of the performance of different Islamic banks⁷. Inadequate disclosure of the underlying Shari’ah principles will subject the Islamic banks’ activities to a lot of questions with regard to their Islamicity. Thus, the need for standard accounting practices in the reporting of Islamic banks’ operations is very clear.

The structure and processes of Islamic banks do not readily fit in with those of conventional universal banking, which combines both commercial and investment businesses. This seems to have resulted in supervisory bodies adopting different approaches to regulate Islamic banking. Such variations in the regulation of Islamic banking appear, in turn, to have resulted in Islamic banks adopting different accounting treatments for the same transaction. This rendered the financial statements of Islamic banks non-comparable⁸.

However, even though the need for Islamic accounting standards for the reporting of Islamic banks’ operations is very obvious, this does not mean that Islamic banks must come up with complete sets of new accounting standards⁹. The existing standards can continue to be applicable, as long as they do not go against the requirements of the Shari’ah. For example, there is no Shari’ah complication as far as the straight forward leasing arrangement is concerned. However, in cases where the profit margin is tied up to interest rates, the arrangement is not permitted by the Shari’ah as it creates gharar (uncertainties).

Conclusion

Similar to the conventional banking system, the major goals of regulation in Islamic banks are to ensure a safe and secure banking system. Without regulation, there will be chaos in the Islamic banking system. Another goal is to provide competition among the Islamic financial institutions. Consequently, this competition will lead to the growth of the Islamic banking system. In addition to that, regulation also provides customer protection. This is important because it assures the Islamic financial institutions are treating their customers, especially Muslims, in a just and truthful way¹⁰.

In regulating the financial reporting of Islamic banks, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) claims that financial accounting plays an important role in providing the information which the users of the financial statements of Islamic banks depend on in assessing the bank’s compliance with the precepts of the Shari’ah. However, to perform this role effectively, accounting standards need to be developed and complied with by Islamic banks. The development of such standards must be based on clear objectives of financial accounting and agreed upon definitions of its concepts¹¹.

The growing need for accounting standards and the AAOIFI’s regulatory effort have been focusing on certain of the Islamic investment vehicles¹². The AAOIFI also expected to strengthen the effectiveness of Shari’ah committees by facilitating the evaluation of emerging financing instruments and by aiding in the implementation of Islamic ethics. Nonetheless, the AAOIFI seeks the implementation of its rules partly by getting central banks to adopt them and partly by trying to persuade Islamic institutions of their usefulness.