Is­lamic banks adapt­ing to IFRS ac­count­ing rules

Kuwait Times - - BUSINESS -

Rec­on­cil­ing ac­count­ing stan­dards and re­li­gious prin­ci­ples is chal­leng­ing Is­lamic banks and reg­u­la­tors as they adapt to new in­ter­na­tional book-keep­ing rules due to come into force in 2018.

The new rules, known as IFRS 9, will leave their mark on all major prod­ucts used by Is­lamic banks - from sim­ple sav­ings ac­counts to Is­lamic bonds - and im­pact their bot­tom-lines. Banks around the globe are gear­ing up to im­ple­ment IFRS 9 from Jan­uary 2018, pos­ing a par­tic­u­lar chal­lenge for many Is­lamic fi­nance con­tracts as they change the way fi­nan­cial as­sets are clas­si­fied and mea­sured, re­quir­ing lenders to book ex­pected losses in ad­vance. The prob­lem for most Is­lamic fi­nan­cial prod­ucts is that their ac­count­ing treat­ment can often di­verge from the ac­tual eco­nomic sub­stance of a trans­ac­tion, a key con­cept be­hind IFRS 9.

This has prompted the Bahrain-based Ac­count­ing and Au­dit­ing Or­ga­ni­za­tion for Is­lamic Fi­nan­cial In­sti­tu­tions (AAOIFI) to set up a work­ing group to look at ways to re­vise its rules for Is­lamic fi­nan­cial in­sti­tu­tions, which now hold as­sets worth around $2 tril­lion. AAOIFI is­sues guide­lines that are fol­lowed wholly or in part by Is­lamic fi­nan­cial in­sti­tu­tions across the world, so its ef­forts would help align the in­dus­try to global prac­tices.

The work­ing group is re­vis­ing AAOIFI’s ac­count­ing stan­dard for pro­vi­sions and re­serves and de­vel­op­ing a new one for im­pair­ments and ex­pected losses, sec­re­tarygen­eral Hamed Has­san Merah told Reuters. These changes will be dis­cussed at a work­shop in Jor­dan on Dec. 14 and at a meet­ing of AAOIFI’s ac­count­ing board start­ing on Dec. 26, with an ex­po­sure draft ex­pected to be re­leased for pub­lic com­ment early next year, Merah said.

AAOIFI will also look at amend­ments to its stan­dard for in­vest­ment ac­counts and a new stan­dard cov­er­ing Is­lamic de­riv­a­tives such as waad and kha­yar, Merah added.

A po­ten­tial clash with Is­lamic prin­ci­ples could make IFRS im­ple­men­ta­tion tricky for Is­lamic banks when it comes to ac­count­ing of pro­vi­sions and im­pair­ments. “We still see di­verg­ing prac­tices in a num­ber of as­pects,” Ab­delilah Be­latik, sec­re­tary-gen­eral of the Gen­eral Coun­cil for Is­lamic Banks and Fi­nan­cial In­sti­tu­tions, a Bahrain­based non-profit or­ga­ni­za­tion, said.

“Some of these dif­fer­ent prac­tices are due to reg­u­la­tory rea­sons, and in other cases to the lack of guid­ance.” Is­lamic banks’ credit rat­ings, prof­itabil­ity and the cost of fund­ing to cus­tomers could be af­fected by IFRS, Ha­mad Ab­dulla Eqab, chair­man of AAOIFI’s ac­count­ing board, said dur­ing the or­gan­i­sa­tion’s an­nual con­fer­ence ear­lier this month.

For in­stance, while IFRS 9 re­quires recog­ni­tion of ex­pected losses, AAOIFI rules only per­mit recog­ni­tion of in­curred losses. Is­lamic law does not al­low cus­tomers to be charged for a fu­ture event or a fu­ture loss, said Eqab, who is also group chief fi­nan­cial of­fi­cer at Al­baraka Bank­ing Group.

An­other is­sue re­lated to IFRS 9 is how some Is­lamic fi­nance trans­ac­tions are clas­si­fied, such as murabaha and musharaka. Murabaha is a cost-plus-profit ar­range­ment widely used to struc­ture Is­lamic loans, while musharaka is a part­ner­ship con­tract where two or more par­ties share prof­its ac­cord­ing to a stip­u­lated ra­tio.

They could be deemed trad­ing ac­tiv­i­ties de­pend­ing on the spe­cific de­tails of each con­tract, Be­latik said. Is­lamic bonds, or sukuk, may also be af­fected.

A pop­u­lar sukuk struc­ture is a sale and lease-back con­tract known as ijara. How­ever, some sukuk could be clas­si­fied as leases and there­fore fall un­der a dif­fer­ent stan­dard, IFRS 16. — Reuters

OPEC oil price stands at $44.88 pb

The OPEC daily bas­ket price was down last Fri­day by 34 cents to stand at $44.88 per bar­rel, com­pared with $45.22 last Thurs­day, the or­ga­ni­za­tion said yes­ter­day. OPEC bul­letin pub­lished that the an­nual rate of its bas­ket price for 2015 was $49.49 pb. The new OPEC Ref­er­ence Bas­ket of Crudes (ORB) is made up of the fol­low­ing: Sa­ha­ran Blend (Al­ge­ria), Gi­ras­sol (An­gola), Ori­ente (Ecuador), Iran Heavy (Is­lamic Repub­lic of Iran), Basra Light (Iraq), Kuwait Ex­port (Kuwait), Es Sider (Libya), Bonny Light (Nige­ria), Qatar Ma­rine (Qatar), Arab Light (Saudi Ara­bia), Mur­ban (UAE) and Merey (Venezual).

Euro­pean Bank to lend Tu­nisia 400 mil­lion eu­ros

The Euro­pean In­vest­ment Bank (EIB) has agreed to grant loans to Tu­nisia worth 400 mil­lion eu­ros for youth and in­fra­struc­ture projects, the Tu­nis gov­ern­ment said yes­ter­day. The deal will be signed dur­ing an in­ter­na­tional in­vest­ment con­fer­ence in Tu­nis to­day, the prime min­is­ter’s of­fice said in a state­ment. It quoted EIB Pres­i­dent Werner Hoyer as say­ing the money would be pro­vided for projects tar­get­ing youth, chil­dren, and schools, as well as a bridge project in the north­ern city of Biz­erte. The projects will have an “im­me­di­ate im­pact”, it said. The state­ment added that the EIB had made a com­mit­ment to pro­vide a to­tal of 2.5 bil­lion eu­ros worth of fund­ing to the North African coun­try, with­out giv­ing de­tails. Tu­nisia’s econ­omy has been hit by so­cial un­rest and mil­i­tant at­tacks fol­low­ing a 2011 up­ris­ing that top­pled for­mer leader Zine El-Abidine Ben Ali, leav­ing many young peo­ple frus­trated at a lack of eco­nomic op­por­tu­ni­ties.

TOKYO: A woman walks past the elec­tronic board show­ing Nikkei stock In­dex (left) at a se­cu­ri­ties firm in Tokyo yes­ter­day. Asian stock mar­kets were mixed Mon­day af­ter oil prices slid on un­ease about this week’s meet­ing of OPEC mem­bers to dis­cuss pos­si­ble out­put cuts.—AP

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