Source Title: Three conferences organised across the globe this year have signified beginning of a new era for Islamic banking. These conferences are now setting to grip with real and specific issues rather than limiting themselves to the more general aspects of profit and loss (PLS) banking.

Past conferences on Islamic Banking tended to concentrate more on descriptive aspects of the interest free system, with delegates avoiding potential problem areas. So it is not surprising that the increasingly supplied nature of these new conferences means that many problems are being brought to light. This does not signify a sudden increase in the number of new problems facing Islamic banking nor does it mean developments in world problems. Rather, the number of issues raised in the three conferences represents a positive step for Islamic banking. These are not the kind of issues that a serious financial system and certainly not one that purports to provide a workable alternative to the conventional - can afford to ignore.

The first of the three conferences, which took place at the Holiday Inn, London, on May 24th provided a model example of the new trend. Organised by the London-based Institute of Islamic banking and Insurance (IIBI), in conjunction with the accountancy firm Price Waterhouse and the Geneva based financial institution Dar Al Maal Al Islami, the conference took up the thorny issue of developing an accounting system in Islamic banking subject.

This represented a confident step for the IIBI. Accounting standards have proved to be a topic which has been the subject of much interest and indeed controversy among individual Islamic makers and auditors over the past few years but so far a viable and internationally workable solution to the problem has remained elusive.

Indeed, it has long been accepted wisdom in banking circles - both conventional and Islamic - that the Islamic banking sector is in danger of suffering a serious image problem unless it gets its act together and tackles head on the problem of accounting standards. Whilst no one is doubting the validity of Islamic banking per se-Islamic financial institutions manage funds to the tune of billions of dollars - its credibility is set for a knock if it does not come up with viable accounting standards. And whets more, an accounting standard that can be applied to the 100 or more Islamic financial houses operating worldwide.

The unavoidable fact is that the lack of common accounting standards can only result in doing Islamic banking a grave disservice. This is particularly so in the West. European capitals are the places where Islamic banks should have taken off on a wider scale but so far have failed to do so. The need for common accounting standards is no more true than in London, given the less than easy relationship Islamic banking has experienced with the Bank of England over the past few years. The hallmark of successful banking regulating is prudence, and in the opinion of the British regulators inconsistent balance sheets between the Islamic banks can only signify a no-go area.

Not surprisingly, the message that came from Islamic bankers and auditors at the London conference was clear. Whilst Islamic banks are on track in developing common accounting standards, there are still many hurdles to cross. In fact, given the seriousness of the subject, progress, so far, has been lamentably slow.

Conference delegates pointed out that at the moment, it is not possible to compare the financial statements of the different Islamic banks. For example, Islamic banks use four different accounting methods to recognise income arising from the popular Murabaha transactions. And as Mr Samir Badawi ex of the accountancy firm Ernst and Young pointed out, experience has shown that the Islamic banks do not always choose to reveal the particular methodology adopted.

Another example, and another major source of confusion is the concept of ‘Funds under Management’, which allows banks to escape liability of these funds because they are off balance sheet. The most disturbing aspect of this is that discrepancies in approach can occur between banks from one country to another, although they are still part of the same parent group.

Other speakers at the conference confirmed the view that circumstances will have to change. Mr. Omar A. Ali Chief Executive Officer of the Dar Al Maal Al Islami, said that all Islamic banks had to operate under strict religious guidelines, in effect prohibiting interest in all their business and trade transactions. But, he pointed out, this shared system does not mean that they could avoid indefinitely the dual tasks of developing and standardising an appropriate accounting system for Islamic banking.

It was made clear that puzzlingly slow as the sector has been in arriving at a workable solution, this is not for lack of interest. Two separate bodies are currently engaged in finding solutions. The Organisation of Islamic Conference (OIC), the pan-Islamic body dealing in financial and commercial matters, had given the task of establishing common Islamic                banking accounting standards applicable to all Islamic financial institutions to the Jeddah-based Islamic Development Bank (IDB). The Board of Governors of which then set up the Islamic Accounting Standards Board (IASB). However, despite an interval of some years, the IASB has so far failed to produce any concrete results.

And whilst the private sector standard-setting body the Financial Accounting Organisation for Islamic Banks and Financial Institutions (FAOIBFI), was set up in Bahrain with the expressed mandate of tackling this very task, it too has found the going tough. The planning committee of the FAOIBFI is still to introduce a uniform and universally applicable set of Islamic banking accounting standards.

However, delegates acknowledged that there were various logistical problems faced by Islamic accounting bodies in their task. Since many Islamic banks are based in the non-Muslim world, they have the added consideration of cooperating with the local statutory requirements. It was stressed that Islamic Banks “must work in harmony with the constraints of the local statutory requirements.” However, the Muslim Central Banks came under fire by delegates for lacking the political will to remove discrepancies. Greater coordination between themselves, and the Western Central Banks was advised.

Another area that is causing problems is that every Islamic bank is required to employ in-house religion advisers — Shariah Supervisory Boards (SSB) to make sure that all operation carried out under the auspices of the bank are done so in accordance with Islamic law. Whatever the advantages in terms of ensuring that the bank only deals in Islamically acceptable practices tills has the obvious disadvantage               of producing a variety of differing accounting practices for the same transaction. It was suggested that this problems could be avoided by establishing one central Shariah council to serve all Islamic banks.

Speakers also drew attention to the, perhaps more worrying, frequent lack of transparency in Islamic Banks’ financial reporting - often of an extremely limited nature, to say the least. This does not mean that Islamic bankers have anything to hide on the contrary, the Shariah obliges Islamic bankers to be prudent and honest in their advice but the fact of the matter is that some of the Islamic banks are dragging their feet when it comes to changing their style of financial reporting. Not altogether surprisingly, Islamic banks are currently facing external pressures for fuller accounts.

Mr. Samir lamented tile fact that the auditors of Islamic banks were not yet doing enough to give sufficient information to shareholders. But, he pointed out that although in theory the auditing of Islamic banks should be no different from the auditing of other banks experience shows that it requires certain knowledge of the Shariah which may not always exist. Other members such as Dr. Trevor Gambling, Professor at Birmingham University, cited cultural reasons for different approach of financial accounting. However, it was left to Mr. Muazzam Ali the Institute of Islamic Banking and assurance to put the general feeling of the conference participants words by pointing that “ although are no easy situations to the problems of accounting the basic principle of Islamic banking is that all information should be available in such a way to enable the average client to understand the financial position of the organisation.”

Iran’s offering by the Tehran Monetary and banking Research institute of Iran, similarly created the new trend of tackling specific problems head on. Fortunately, the now annual conference on monetary and Foreign change Policies’, itself to dealing specifically with Islamic banking in Iran, ugh a paper was on a comparative analysis of Islamic banking in various Islamic countries. However, the conference provided a fascinating insight into the banking of an economy moving towards Islamisation. And it should be remembered that the Iranian economy many additional pressures to attend with such as the adjusting of exchange rates.

The conference did not shy away from controversial issues such as developing an interest-free securities market, a topic that has been the subject of some controversy recently. As was to be expected, Dr A. Djahankhani’s paper on this subject, “Proposing securities consistent with and within the framework of the interest-free financial system.’ provoked much discussion.

The highly technical nature of the topics discussed in the conference and their wide-ranging nature is a promising sign for Islamic bankers in Iran. Since the Islamic revolution of 1979, the government has consistently stated its commitment Islamising the banking system. Yet so far, progress has been slow and erratic. The May conference provided a strong indication that the government is finally taking their commitment seriously.

Moving to the Far East, the Singapore-based Centre for Management Technology (CMT) organises its second two-clay conference of the year in July (the first took place in January). To be held in Kuala Lumpur, the conference will take place under the title of ‘Second International Conference on the Challenges of Interest- free/Islamic Banking System: Successful Implementation and Operations              of Islamic Financial Markets, Products and Standards’.

True, many of the issues to be covered are of a general nature and are similar to those discussed in the January event. These include Pakistan’s Islamic banking model, revenue sharing banking in Indonesia, and legal issues in Islamic Banking as well as the Malaysian Islamic Banking Act of 1993.

But this time the July event will be firmly in line with the general trend for         1994’s Forecasts for this unanimous that as well more crucial issues will The programme has already revealed that, in common with the London conference, high on the agenda will be accounting in Islamic banking and taxation issues. And like the Tehran conference, Islamic stock broking and unit trusts, securitisation and debt trading will be discussed. As well as of course the framework of the Islamic inter-bank market on which Malaysia has already proved itself to be a pioneer.

The year 1994 will go down in banking history as the year in which Islamic banking conferences took on a new and more demanding role. But so far these conferences have taken place in the UK, Iran and the Far East, with the Gulf - the home of Islamic banking - being notable by its absence. Therefore there is all the more reason to hope that the Bahraini conference, organised by the Bahrain Ministry of Information and the International Association of Islamic Banks (IAIB) in cooperation with Reuters Corporation, scheduled to take place in Manama in October of this year will rise to the occasion and adopt a similarly critical and analytical approach towards Islamic banking.