Do Islamic Banking standards convey more financial transparency than conventional banking ones?

Year 2018, Volume: 5 Issue: 1, 109 - 132, 15.02.2018

Khoutem Ben Jedidia

Abstract

This study examines
the criteria of transparency and disclosure in Islamic banking and compares
them to conventional banking.

By examining the
traditional accounting standards for transparency, namely IAS 1, IAS 24, IFRS   along
with the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) standards, we highlighted that despite
the fact that the conventional banking strives to achieve transparency; there
is a lack of optimal transparency in conventional banking products. This
deficiency is caused by the lack of the determination of the rate of change of
interest and the variable interest loans, the securitization and the sale of
debt. This leads to a lack of transparency of all important financial and
non-financial information, lack of disclosure in the balance sheet such as
bankruptcy and the real characteristics of traded financial instruments.

Nevertheless, the
principles of Islamic finance, such as the prohibition of riba and gharar
as well as the link to the real economy emphasize transparency in Islamic
banking transactions. So, the AAOIFI advocated the high transparency. Besides
to the conventional disclosure, there is a disclosure of the basis of the
distribution of revenues, the determination of selling prices and the statement
of the illegitimate part of bank activity.  Furthermore, by considering a sample of AAOIFI accounting standards 2 related Murabaha to the
Purchase Order and comparing it
to conventional loan, we concluded that financial transparency is more enforced
in Islamic banking than in conventional one. Transparency protected Islamic
banking transactions from falling into the subprimes
crisis.

Keywords

Keywords: Islamic Banking, Transparency, Disclosure, Conventional banking, Standards, AAOIFI

References

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