profiles of islamic financial reporting in malaysia by ...

PROFILES OF ISLAMIC FINANCIAL REPORTING IN MALAYSIA BY INSTITUTIONS

MOHD HALIM KADRI

JANUARY 2017


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MOHD HALIM KADRI

MOHD HALIM KADRI . SEGAMAT . 2017

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Published by © Mohd Halim Kadri, 2017 No. 17 Jalan Dedap 1, Taman Dedap, 85200 Jementah, Johor. Emel: [email protected] All rights reserved. No part of this publication may be reproduced, copied, stored in any retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise, without prior permission in writing from the author. Email: [email protected] Perpustakaan Negara Malaysia

Cataloguing-in-Publication Data

Mohd. Halim Kadri, 1970PROFILES OF ISLAMIC FINANCIAL REPORTING IN MALAYSIA BY INSTITUTIONS / MOHD HALIM KADRI. Bibliography: page 25 ISBN 978-967-14816-0-8 1. Financial statements—Malaysia. 2. Banks and banking—Religious aspects— Islam. 1. Title. 657.309595 Cover design Typesetting Typeface Typesize

: Mohd Halim Kadri : Mohd Halim Kadri : Times : 12

Printed by

: Alfitrah Technology & Trading Sdn Bhd (720019-V) No. 5 Bawah Jalan Bistari 4/12 Taman Yayasan 85010 Segamat, Johor

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TABLE OF CONTENT No.

PARTICULARS

Page

1.

Islamic financial institutions in Malaysia

1

2.

Islamic financial reporting in Malaysia

2

3.

Profiles of Islamic financial reporting in general

5

4.

Profiles of Islamic financial reporting by institutions

7

4.1

Bank Islam Malaysia Berhad

7

4.2

Affin Islamic Bank Berhad

8

4.3

Bank Muamalat Malaysia Berhad

9

4.4

Cimb Islamic Bank Berhad

10

4.5

Maybank Islamic Berhad

11

4.6

RHB Islamic Bank Berhad

12

4.7

AmIslamic Bank Berhad

13

4.8

Public Islamic Bank

14

4.9

Hong Leong Islamic Bank Berhad

15

4.10

HSBC Amanah Berhad

16

4.11

Citybank Islamic

17

4.12

Standard Chartered Saadiq Berhad

18

4.13

Alliance Islamic Bank Berhad

19

4.14

Alkhair International Islamic Bank Berhad

20

4.15

OCBC Islamic Bank Berhad

21

4.16

Al Rajhi Banking & Investment Corporation

22

4.17

Kuwait Finance House

23

5

Conclusions

24

6

Bibliography

25

Appendixes

27

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Profiles of Islamic financial reporting in Malaysia by institutions

1.

ISLAMIC FINANCIAL MALAYSIA

INSTITUTIONS

(IFI)

IN

According to Kadri (2015), Malaysian Government allows both conventional and Islamic financial system to be practiced side by side and they are licenced under two difference licences issued by Bank Negara Malaysia. Conventional financial system existed prior to independence whereas Islamic banking system only started in 1983 after the Government introduced Islamic Banking Act 1983. In the same year, the first Islamic banking, Bank Islam Malaysia Berhad was incorporated to provide alternative banking system that conceptually follow the teaching of Islam. The system has developed, evidenced by the introduction of Islamic banking windows by conventional banks in Malaysia in 1990s. Later on in 2000s, the conventional banks either transformed their Islamic banking windows into subsidiary or transformed themselves into Islamic banks. In terms of operations and reporting, all financial institutions in Malaysia are subject to legal provisions stated in Banking and Financial Institution Act, Companies Act 1965 and accounting standards issued by Malaysian Accounting Standards Board i.e MFRS. A part from that, Islamic banks and financial institutions are also subject to legal provisions enforced by Islamic Banking Act 1983 and Islamic Financial Services Act 2013. Last but not least, Islamic banking and financial institution are required to form a Syariah Advisory Board to give advice and oversee the adherence to Islamic principle in Islamic banking and financial institution operations. The list of Islamic financial institutions in Malaysia are as follows:

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Table 1.1: List of Islamic financial institutions in Malaysia No.

Name

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 15.

Bank Islam Malaysia Berhad Affin Islamic Bank Berhad Bank Muamalat Malaysia Berhad Cimb Islamic Bank Berhad Maybank Islamic Berhad RHB Islamic Bank Berhad AmIslamic Bank Berhad Public Islamic Bank Hong Leong Islamic Bank Berhad HSBC Amanah Berhad Citybank Islamic Standard Chartered Saadiq Berhad Alliance Islamic Bank Berhad Alkhair International Islamic Bank Berhad OCBC Islamic Bank Berhad Al Rajhi Banking & Investment Corporation Kuwait Finance House

15. 16. 17.

Established

2

1983 2005 1999 2003 2008 2005 2006 2008 2005 2008 2013 2008 2007 2007 2005 2006 2005


2.

ISLAMIC FINANCIAL REPORTING IN MALAYSIA

History of Islamic financial reporting in Malaysia The Malaysian Financial Reporting Act 1997 was enacted in 1997 to establish the Financial Reporting Foundation (MAREF) and Malaysian Accounting Standards Board (MASB). The Act empowers MASB to determine and issue financial reporting standards for public companies including financial institutions for the preparation and presentation of financial statements to be submitted to the respective authority such as Securities Commission of Malaysia, Companies Commission of Malaysia and Bank Negara Malaysia. MASB requires ‘an entity other than an private entity’ to apply Malaysian Financial Reporting Standards (MFRS) for annual periods beginning on or after 1 January 2012, with the exception of entities that are permitted in the alternative to apply an earlier framework Compliance with MFRS constitutes compliance with IFRS because Malaysia has converged with IFRS. Bank Negara Malaysia (BNM) circular, Financial Reporting for Islamic Banking Institutions issued on 5 February 2016, require a licensed person to comply with MFRS. As stated in paragraph 8.1 of the circular: …a licensed person shall ensure that financial statements are prepared in accordance with the MFRS… and shall disclose a statement to that effect in the financial statements. Islamic Banking Act 1983 only requires IFI to prepare and submit the copies of audited balance sheet (SOFP) and profit and loss account (SOPL) to Central Bank. However, Section 72 of the Islamic Financial Services Act 2013 states that financial statements has the same meaning as set out in the approved accounting standards issued or approved by the Malaysian Accounting standards Board under the Financial Reporting Act 1997 that 3


include SOFP, SOPL, SOCIE, SOCF and notes to financial statement. AAOIFI conformity all over the world There is a need for setting up a common standard for the accounting function in Islamic banks. And AAOIFI had taken charge to come out with standards for accounting as well as auditing of IFI. The standards set out by AAOIFI have been adopted by many countries while the others are using as guidlelines in measurement and recognition of transaction and events as well as for preparation and presentation of financial statements. As mentioned earlier in the introduction section, AAOIFI accounting standards have been made part of mandatory regulatory requirement in many countries such as Bahrain and Jordan and in other countries including Brunei and Malaysia, AAOIFI accounting standards have been used voluntarily as basis of internal guidelines. Sarea and Hanefah (2013) found that Bahrain IFIs are 100% conform to accounting standards issued by AAOIFI. Ullah (2013) found that seven Islamic banks in Bangladesh are 44.68% comply with AAOIFI whereas Sakib (2015) found that six banks financial statements in Bangladesh are on average 53.79% conform to the AAOIFI standards. Shatnawi and Al-bataineh (2013) found that Jordan Islamic banks are committed with the disclosure requirement of AAOIFI. Asian Oceanian Standard Setters Group (2015) studied the adoption of AAOIFI accounting standards by IFIs in 31 countries all over the world and found 46% of IFIs asserted compliance with IFRS, 34% comply with local GAAPs, 18% comply with AAOIFI and 2% do not specify the compliance with any standards.

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3.

PROFILES OF ISLAMIC FINANCIAL REPORTING IN MALAYSIA IN GENERAL – COMPLIANCE TO MFRS AND AAOIFI

The study was conducted on six types of financial statements that are proposed by AAOIFI, namely (1) the profit or loss, (2) the statement of financial position, (3) the statement of changes in equity, (4) the statement of cash flows, (5) the statement of changes in limited investment, and (6) a statement of sources and uses of charity fund. Preliminary results from the study of the financial statements of all Islamic banking in Malaysia found that all Islamic banking in Malaysia prepare their financial statements in accordance with MFRS and not AAOIFI. It is clearly stated in the notes to the financial statements. However, further research found that on average, the profit or loss of Islamic banking in Malaysia is compliant kepda AAOIFI guidelines at the level of 45.6%. It also had the highest compliance level of 77.8% while the lowest compliance level of 27.8% by certain banks. Statement of financial position recorded a 70.3% level of compliance to the statement presentation guidelines as proposed by AAOIFI with the highest at 75% while the lowest compliance level of 35%. In addition, compliance with AAOIFI guidelines for the statement of changes in equity is at the level of 95%, while compliance with the guidelines of the cash flow statement is at the level of 100%. Statements (3) to (6) have been complied with certain percentage level. But the last two statements (7 and 8), namely the statement of changes in restricted investments and a statement of sources and uses of charity funds were not reported as financial statements by Islamic banking in Malaysia. It is not a requirement that must be met based on the requirements of MFRS. Otherwise both will be reported only in the notes to the financial statements. 5


What is interesting about this study is that Islamic banking in Malaysia are 100% compliant to standards provided by MFRS. However, Islamic banks also use AAOIFI standards as a guide in providing and presenting their financial statements. There are a lot of similarities, especially in the presentation of statements of financial position at an average rate of 70.3%, the statement of changes in equity at an average rate of 95% and cash flow statement at the rate of 100%. It also shows that the MFRS adopted by Islamic banks in Malaysia are not different with AAOIFI in total. This is a good development. Table 3.1: The overall level of conformity of AAOIFI in general. No.

Financial statement

Conformity

1.

Statement on adoption of AAOIFI

2.

Statement on adoption of MFRS

100%

3.

Statement of financial position

70.3%

4.

Statement of profit or loss

45.6%

5.

Statement of changes in equity

95%

6.

Statement of cash flow

100%

7.

Statement of sources and uses of charity fund

47.1% (8/17 notes)

8.

Statement of restricted investment

17.6% (3/17 notes)

6

Nil


4.1

BANK ISLAM MALAYSIA BERHAD

BIMB was incorporated in 1983. As of 2015 it has RM2,342,706,000 paid-up ordinary share capital with 144 branches in Malaysia and more than 1000 self-service terminals worldwide. It offers 70 innovative and sophisticated comprehensive Islamic banking products and services to its more than five million customers. In term of financial reporting, it adopts fully the requirements made by Malaysian Financial Reporting Standards (MFRS) and adheres the requirements of AAOIFI at levels. Its SOFP complies 75% whereas SOPL 77.8% to AAOIFI. SOCIE is at 95% whereas SCF is at 100%. SSUCF and SORI are shown in the notes to financial statements. Table 4.1: Level of compliance to MFRS and AAOIFI standards No.

Financial statement

Conformity

1.

Statement on adoption of AAOIFI

Not mention

2.

Statement on adoption of MFRS

100%

3.

Statement of financial position

75.0%

4.

Statement of profit or loss

77.8%

5.

Statement of changes in equity

95%

6.

Statement of cash flow

100%

7.

Statement of sources and uses of charity fund

Yes (notes)

8.

Statement of restricted investment

Yes (notes)

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MOHD HALIM BIN KADRI was born in Batu Pahat, Johor on 3rd April 1970. He obtained his Doctor of Philosophy in Accounting in 2012. Prior to that, he obtained a Bachelor’s degree in accounting from UiTM in 1996 and Master’s Degree in the same discipline from Curtin University of Technology in Australia in 1997. He joined UiTM Johor since 1997. He has the experience of teaching accounting courses at Diploma and Degree level including Financial Accounting, Cost Accounting, Public Sector Accounting, Financial Reporting and Entrepreneurship. To date, he has published three books with UiTM Press, completed three research projects and published more than 50 articles in journals, conference proceedings, innovations exhibitions as well as local business magazines. His current research interest is in Islamic accounting, banking and finance.