AN EXPLORATORY STUDY OF IJARAH ACCOUNTING PRACTICES

IN MALAYSIAN FINANCIAL INSTITUTIONS

Aniza Mohd. Shariff Abdul Rahim Abdul Rahman

INTRODUCTION:-
Ijarah has been conceptually understood as a contract of exchange where one
party enjoys the benefit rising from employment by another party in return for a
thought for the services reduced and from the use of an asset. Scholars of the
four schools of Islamic jurisprudence (Shafi’ie, Maliki, Hanbali and Hanafi) have
cited various definitions of the contract of Ijarah. In brief, these definitions agree
on the fact that the contract of Ijarah is a contract on using the benefits or
services in return for compensation (Kharofa, 1997).

Theremaybe a massive frame of studies onthe Islamic monetary machine in stand

ard. However, literature that mainly discusses the Ijarah agreement is restricted.
The take a look at is prompted to discover accounting issues in Ijarah due to the
dearth of studies on Ijarah. The scarce availability of literature written on the
topic of Ijarah is due to several feasible motives.
The maximum fundamental motive is the infancy degree of Islamic banking and
finance in comparison to traditional finance. The concept of Islamic
finance turned into stimulated through the primary convention on Islamic
economics in 1976. Glaringly, Ijarah, which is a part of Islamic finance, is
very much in its early levels of improvement.

FINDINGS
Basic Principles of Islamic Financing and Ijarah:-
Islamic finance is an moral, indigenous and equitable mode of finance, which
derives its
ideas from the Qu’ran (The found out e-book of Muslims), the traditions of the
Prophet
Muhammad (peace be upon him), and the Shari’ah Islami’ah
(Islamic law), that's primarily based on the Qu’ran and Sunnah

There are clear differences among Islamic finance and ‘conventional’ finance
(Qureshi and Millet, 1999). those differences are derived from
three fundamental prohibitions via the Shari’ah Islami’ah. the first prohibition is in
opposition to riba’(usury) that is meant to prevent exploitation and to
maximize social advantages

Islam prohibits gharar (uncertainty) in activities. Gharar

is considered as not Islamic
because it can purpose injustice to every other party. The third prohibition is in
opposition to maisir (gambling).

One of the maximum critical concepts of Islamic finance is the scriptural

injunction in opposition to riba’ and there is now
a fashionable consensus among Muslim economists that riba’ isn't always
confined to usury but encompasses interest as nicely. The prohibition of usury is
ordained in Islam in all forms and motive. This prohibition is strict, absolute and
unambiguous. The Holy Qur’an in verse 278 of Surah Al-Baqarah states: “O ye
who trust! Fear Allah and give up what stays of your call for for riba, if ye
are indeed believers”, and verse 2: 279 says “if you do it not,
take notice of battle from Allah and His Messenger, however if ye turn again,ye
shall have your capital sums. Deal no longer unjustly and you shall no
longer be dealt with unjustly”. Riba’ can be defined as predetermined price over
and above the actual amount of the major. It is prohibited due to the
fact while profit is legitimately allowed; the events cannot predetermine
guaranteed earnings. That is based on the principle of “unsure gains” which, on a
strict interpretation, does no longer even permit an undertaking from
the patron to pay off the borrowed major plus an amount to do not
forget inflation.
The Need for Harmonization of Accounting Practices of
Islamic Financial Instruments
 The want for an accounting preferred isn't very distinct from
the need for some other kind of requirements, whether requirements for
weights and measures, or requirements for clothing sizes, grades of red
meat, or baseball facts (Mirza and Baydoun, 2000).
 The goal or objective of an Islamic accounting well-known is to facilitate
comparisons and thereby reduce the social and economic costs of assessing
the options with which one is confronted in making rational decisions.
 Unless a proper disclosure with regard to the financial reporting,
the underlying Shari’ah
principles and the accounting methods followed is made,
the records contained in the
monetary announcement will no longer be beneficial for
a comparison of the overall performance of different Islamic
banks (Hamat, 1994). Insufficient disclosure of the underlying
Shari’ah principles will issue the Islamic banks’ sports to quite a
few questions in regards to their Islamicity. thus,
the want for well-known accounting practices in the reporting of
Islamic banks’ operations could be very clear.

The Extent of Acceptability of AAOIFI FAS 8 among

Malaysian Islamic Financial Institutions
Most of the monetary institutions in Malaysia adopted the MASB as
opposed to the IAS and AAOIFI standards. a complete of eleven out of
the thirteen establishments followed the MASB in their practice.
The purpose which could reason this example is that the MASB is
the simplest fashionable setter in Malaysia.

Consequently, monetary establishments in Malaysia are supposed to

comply with the MASB as it is one of the regulatory our bodies. Prior
to the life of the MASB, maximum of
the economic establishments followed the IAS necessities. Therefore,
the IAS nonetheless enjoys a better popularity than the AAOIFI general.

That is shown in that 4 monetary establishments

still use the IAS. As for the AAOIFI, it's miles a brand new company as
compared to the IAS. Further, the AAOIFI is aimed
toward Islamic financial institutions.
The traditional monetary establishments might not be aware
of the life of the AAOIFI well-known. Furthermore,
this agency is based in Bahrain. Of the 3 standards, the AAOIFI won the
least number of adoptions via the
monetary institutions.

Out of 13, simplest 2 institutions had followed the AAOIFI. Best one
organization makes use of all of the three standards.
The group is bank Islam Malaysia Berthed. As noted earlier, the
AAOIFI standards are targeted at Islamic banks. Therefore, financial
institution Islam has to be aware about the existence of the
AAOIFI’s popular. As for the IAS, it had been there long before the
MASB turned into mounted. Therefore, possibly for this
reason, financial institution Islam nevertheless adopts the IAS. The
MASB is mandatory for financial institutions in Malaysia;
as a result, bank Islam isn't always excluded from conforming to the
MASB.

Conclusion:
The findings on the evaluation between Ijarah and traditional leasing from
the criminal
and accounting elements confirmed that there
are great variations between those two
contracts. as a result, Ijarah have to now not be seen as an imitation
of conventional leasing in view that the definitions, types, concepts, goals,
presentation, size strategies,
disclosure and substance of Ijarah are distinctive to those of conventional leasing.
it could be concluded right here that the main cause why a number of the
statements set through the
AAOIFI have a rating lower than three is that AAOIFI treats them otherwise as
compared with
the IAS 17 and MASB 10 and some of the treatments only exist in
the AAOIFI’s popular
and no longer in the IAS 17 or the MASB 10. moreover, most of the Ijarah
practitioners in
Malaysia still use the IAS 17 and MASB 10 as their main hints for Ijarah. any other
reason why those statements have a low suggest score is possibly that, the Ijarah
practitioners
themselves are unsure a way to address Ijarah problems as maximum of them are
following the IAS
17 and MASB standards for leasing, while what they're definitely doing is Ijarah
financing. Furthermore, they may now not be aware of the lifestyles of the
AAOIFI’s preferred for Ijarah.
Therefore, they may be nonetheless the use of the MASB 10 and IAS 17
as tips. this case may also
be due to the lack of promoting of challenge given by way
of the better government responsible
for Islamic banking merchandise in Malaysia to the adoption of the
AAOIFI’s general.