EVALUATING THE FINANCIAL REPORTING PRACTICES OF ISLAMIC FINANCIAL INSTRUMENTS FOR COMPLIANCE WITH SHARIAH REQUIREMENTS

Abstract

The introduction of value-based intermediation in Malaysian financial industries creates demands for applied studies to provide empirical evidence on the impact of value-based intermediation in achieving maqasid al-Shariah. This is to reduce the gap between Shariah compliance and achieving maqasid al-Shariah by the industry. For instance, the ijarah financing contract in the financial statement is under the leasing contract term and is no different from the conventional banks offering vehicle loans. Similar to murabahah financing, there is no reporting of underlying assets bought by Islamic banks as inventory before the assets are sold to the customers. Hence, the objectives of this research are: (1) to examine the substance in reporting financial instruments adopted by Islamic banks; and (2) to adopt the maqasid al-Shariah principles in validating the substance of the financial instruments adopted by Islamic banks. This research analysis was based on focus group discussions with the experts, and thematic analyses were conducted to assess the financial reporting practices that validate the economic substance and legal form of Islamic financial instruments in Islamic banks whether achieve the maqasid al-Shariah or merely compliance with Shariah. The study suggested a need for accounting standards that focus on Islamic financial instruments to ensure faithful representation of the financial statements. Moreover, the substance and legal form will align to reflect the financial statement based on policy documents that have been developed and to show the uniqueness of Islamic financial instruments in financial reporting.