FINANCIAL ASSETS AND LIABILITIES DISCLOSURE PRACTICES IN ISLAMIC

BANKS IN MALAYSIA
Mustafa Mohd Hanefah1
Zurina Shafii2
Nurazalia Zakaria3
Rosnia Masruki4
Fadilah Asuhaimi5
Universiti Sains Islam Malaysia (USIM)
ABSTRACT
Islamic banks in Malaysia are under the supervision of Bank Negara Malaysia (BNM). They are
required to follow the guidelines issued by BNM and adopt the accounting standards issued by
Malaysian Accounting Standards Board (MASB) in their preparation of financial reports.
Although Islamic banks do not share the same characteristics with other commercial and
investment banks but they are still required to prepare their financial reports according to
Malaysian Financial Reporting Standards (MFRS), which have been converged with
International Financial Reporting Standards (IFRS) beginning January 2012. The aim of this
paper was to study the reporting practices of six largest Islamic banks in Malaysia for financial
assets and liabilities in accordance to MFRS 139 Financial Instruments: Recognition and
Measurement, MFRS 7 Disclosure of Financial Instruments and MASB Technical Release 1 on
Accounting for Zakat on Business (MASB TRi-1). The study uses content analysis of salient
information required for disclosure by both MFRS and MASB Tri-1. In addition, the paper also
analysed the efforts by BNM in making Islamic banks financial reporting comparable to
international practices. The findings indicate overall compliance with MFRS 139 and MFRS 7.
However, limited compliance with MASB TRi-1 for disclosure on method used to determine
zakat on business were found. This is surprising because stakeholders need to know whether
the method used was in compliance with Shariah principles or not. Being transparent and
providing important Shariah related disclosures would benefit stakeholders as well as the bank
itself in attracting local and most importantly international funds.
Keyword: Islamic financial reporting, financial instruments, Shariah related disclosures
1. INTRODUCTION
1

Professor Dr Hajah Mustafa Mohd Hanefah, Deputy Vice Chancellor, Universiti Sains Islam Malaysia. Email:
mustafa@usim.edu.my
2
Associate Professor Dr Zurina Shafii, Director of Islamic Finance and Wealth Management Institute (IFWMI) &
Fakulti Ekonomi dan Muamalat, Universiti Sains Islam Malaysia. Email: zurina.shafii@usim.edu.my
3
Lecturer, Fakulti Ekonomi dan Muamalat, Universiti Sains Islam Malaysia. Email:nurazalia@usim.edu.my
(Corresponding Author)
4
Lecturer, Fakulti Ekonomi dan Muamalat, Universiti Sains Islam Malaysia. Email:rosnia@usim.edu.my.
5
Phd Candidate, Fakulti Ekonomi dan Muamalat, Universiti Sains Islam Malaysia.
Email:fadhilahasuhaimi@gmail.com

Islamic finance industry in Malaysia has been in existence for over 30 years. The enactment of
the Islamic Banking Act 1983 enabled the countrys first Islamic Bank to be established and
thereafter, with the liberalization of the Islamic financial system, more Islamic financial
institutions have been established. The first Islamic bank operated in 1983 for 10 years as the
only Islamic bank before the government allowed other conventional banks to offer Islamic
banking services using their existing infrastructure and branches known as Islamic windows.
By doing so, the Malaysian banking industry is forced to be more competitive which would
increase the performance and efficiency of the Islamic banking industry. Today in 2013, the
Islamic banking industry has grown rapidly where the number of full-fledged Islamic banks had
increased to 16 financial institutions consisting of 10 locally owned Islamic banks and six foreign
owned Islamic banks (Bank Negara Malaysia, 2013a).
Not only the number of Islamic banks had grown, the Islamic banking assets also rose sharply
from year to year. In 1997 the total Islamic banks assets accumulated of RM 17.8 billion rose
sharply to RM 77.4 billion in 2003 (Hamim et. al, 2006). While in April 2013, the total
accumulated assets of Islamic banks had rose to RM 399.6 billion (Bank Negara Malaysia,
2013b). This increase is expected to contribute to Malaysia GDP where it is expected to grow
six times of GDP in 2020 from 4.3 times of GDP currently in 2011 (Bank Negara Malaysia,
2012). Meanwhile, the contribution of the financial services sector to nominal GDP is expected
to grow from 8.6% of nominal GDP to between 10 and 12% by 2020.
Looking at the good performance of Islamic banking sector, the government of Malaysia aimed
to become the indisputable global hub for Islamic finance. Due to this, the Malaysia International
Islamic Financial Centre (MIFC) was launched in 2006 to strengthen the countrys position as an
international hub of Islamic finance. This initiative comprises a community network of financial
and market regulatory bodies, government ministries and agencies, financial institutions, human
capital development institution and professional services companies that are participating in the
field on Islamic Finance. From this initiative, it provides many impacts on the Malaysian Islamic
2

financial system which are; to maintain the confidence of the public with Islamic banks as the
custodians of public funds, promote a competitive financial system which provides efficient and
reliable services, ensure the growth of each Islamic banks for the development of a sound and
stable financial system, prevent the risk of a contagion and systemic failure of the financial
system and protect customers and stakeholders interests.
At the international level, Malaysia is considered as the world's most important Islamic-finance
centre, despite the larger size of Islamic banks in the oil-rich Gulf States and Indonesia that has
the largest Muslim population (The Economist, 2013). As such, it is important that Islamic banks
in Malaysia practices financial reporting disclosure that is acceptable by the global players to
enable comparable analysis and interpretation by existing and future investors. Therefore, the
objective of this paper is to examine the current practices for reporting financial instruments
offered by six largest Islamic banks in Malaysia. In addition, the paper also analyse the effort
undertaken by BNM in becoming more accepted globally.

2. LITERATURE REVIEW
2.1 Financial Reporting Standards
At the international level, The International Accounting Standards Board (IASB) was established
on April 1, 2001 to replace the International Accounting Standards Committee (IASC). The IASB
is expected to develop International Financial Reporting Standards (IFRS), which are
accounting standards promulgated after 2001, and to enforce the use of each standard. Many of
the standards forming part of IFRS are known by the older name of International Accounting
Standards (IAS). The IASs were issued between 1973 and 2001 by the Board of the
International Accounting Standards Committee (IASC). As from April 1, 2001 the IASB took over
the responsibility for setting IAS from the IASC. During its first meeting the IASB adopted
existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued
developing accounting standards, henceforth called IFRS. IFRS therefore comprise:
3

International Financial Reporting Standards (IFRS) standards issued after 2001;

International Accounting Standards (IAS) standards issued before 2001;
Standing Interpretations Committee standards (SICs) standards issued before 2001;

and
Conceptual Framework for the Preparation and Presentation of Financial Statements

(2010).
Initial efforts by the standard setters mainly focused on harmonizationreducing differences
among the accounting principles used in major capital markets around the world. By the 1990s,
the notion of harmonization was replaced by the concept of convergencethe development of a
single set of high-quality, international accounting standards that would be used in at least all
major capital markets (Lukenda and Scannella, 2009).
2.2 Challenges in Adopting IFRS for Islamic Financial Transactions Exclusivity, Harmonization
and Convergence
In relation to Islamic financial transactions, the key challenge has been to find a relevant
accounting framework that will allow for comparability with conventional finance as well as
international comparability without affecting the Shariah compliance of Islamic financial
transactions. However, if IFRS are to be implemented by IFIs, there are a number of reporting
issues that may arise. Generally, it is questioned as to whether the existing accounting
standards or IFRS could adequately address the reporting of Islamic financial transactions, or
whether the transactions are so unique that some other form of accounting framework is
required.
Smith (2004) reported that Islamic banks are faced with the challenge between adhering to the
distinctive characteristics of their operations and expanding business through deeper integration
into the global financial markets. While Islamic banks are eager to truly comply with and conduct
their businesses in accordance with Islamic principles, they also have to ascertain that there is
international accounting and financial standardisation in order to be part of the global financial
markets (Ratna, 2011).
4

Therefore, the thriving question that arises is whether the accounting for Islamic financial
transactions should:
i.
ii.

have its own exclusive standards and accounting treatments, or

harmonise and be comparable, but not necessarily identical, to its conventional

iii.

counterpart, or
converge fully with conventional accounting standards.

According to Mohamad Faiz (2010), exclusivity means that Islamic accounting is to prevail as a
parallel system of accounting along with its conventional counterpart. Thus, any Islamic financial
instrument will only be recorded by way of Islamic accounting. Harmonisation means that
financial reporting standards are fine-tuned to enable general comparison with its conventional
counterpart, but certain exemptions or amendments are allowed and Shariah related
disclosures may be required for specific Islamic financial transactions. The third option of
convergence means applying IFRS, in every aspect, to Islamic financial transactions.
Shahul Hameed (2007) argued that there is a need for a different set of standards for IFIs
mainly because IFIs are not based on the capitalist worldview which underlies the transactions
that current IFRS cater for. Other authors also agreed that the basic difference between Islamic
and conventional accounting is the objective of accounting itself. Shahul Hameed (2007) opined
that conventional accounting is based on providing information that is decision useful, while
Islamic accounting is based on accountability to Allah (God) and Shariah compliance. This view
is also supported by Naim (2010) where he considers the accountability framework within the
Islamic context to mean that IFIs are required to discharge their accountability in accordance
with the Shariah.
Shahul Hameed (2007) also called for a different set of standards for Islamic financial
transactions because the functions and contracts used by IFIs are different from those of
conventional banks. Most of the contracts are based on trading (such as sale and leasing)

whereas the modus operandi of conventional banks are based on the mobilisation of deposits
and advancement of loans on interest.
Rifaat (2001) discussed that the regulators interpretation of the IAS led to the various
accounting treatment of mudharabah investment account (some jurisdictions treat the account
as liability or as equity of taking it off balance sheet due to fact that investment account is fund
management. These treatments, according to Rifaat (2001) rendered the financial statements of
Islamic banks non-comparable. This draws attention to the fact that IASs are insufficient to cater
for the unique characteristics of the financial instruments used by Islamic banks. To address this
problem, he called for AAOIFI adoption to cater the unique characteristics of the contracts.
In general, the difference between AAOIFI and IFRS centres on the recognition and
measurement of financial instruments and leases. AAOIFI additionally requires disclosures to
convey Shariah compliance and provides guidance on the presentation of certain items unique
to Islamic finance. Another difference is that the AAOIFIs accounting requirements are drafted
to emphasise the legal forms of contracts approved by its Shariah Board. It does not consider
contracts (such as Bai al-Inah and Tawarruq) which are not approved by its Shariah Board even
though they may be used extensively in some Islamic finance jurisdictions.
ACCA and KPMG (2010), Naim (2010) and Ratna (2011) agreed that the best way to resolve
the differences in the accounting treatment and disclosure of Islamic financial transactions is by
harmonizing both AAOIFIs standards and IFRS as they are complementary to one another. This
means that IFRS have to be fine-tuned to accommodate Shariah principles. Naim (2010) and
ACCA and KPMG (2010) suggested that specific IFRS be issued for use only by IFIs. By taking
into account the unique features of Islamic financial transactions, the issuance of specific IFRS
would provide more useful information for decision making purposes.
The third approach is the full convergence of accounting standards for Islamic financial
transactions with IFRS. The Malaysian Accounting Standards Boards (MASB) initiatives are in
line with this approach. For instance, while issuing its SOP i-1 (2009), the MASB appears to
6

have already adopted this approach although it is tempered with caution for the remote
possibility for Shariah conflict. Paragraph 6 of SOP i-1 (2009) requires that Shariah compliant
transactions and events shall be accounted for in accordance with MASB approved accounting
standards, unless there is a Shariah prohibition. In developing SOP i-1, the MASB also sought
the advice of the Shariah Advisory Council of Bank Negara Malaysia which concluded that
generally accepted accounting principles (GAAP) do not conflict with Shariah methodologies.
More recently in January 2012, the MASB has officially pronounced its convergence to IFRS.
This is not to say that there would not be any accounting issues under full IFRS convergence.
Thus, those in favour of convergence believe that those issues, similar to other issues not
related to Islamic finance, can be resolved within the IFRS framework without having to resort to
a separate framework (exclusivity) or adopting mixed standards (harmonisation).
2.3 Financial Reporting Regulation for Islamic Banks in Malaysia
The accounting standard setting in Malaysia is spearheaded by Malaysian Accounting
Standards Board (MASB). Malaysia has had a comparatively easy journey towards
convergence since it has been incorporating the provisions of IAS into local accounting
standards since 1978 (Zainal Abidin, 2008). The current Financial Reporting Standards (FRSs)
issued by the MASB are already compliant with IFRS. On 19 November 2011, the MASB has
issued a newly approved accounting framework, the MFRS Framework. The MFRS Framework
comprises standards as issued by the IASB which are effective as from 1 January 2012.
Apart from the MFRS Framework, MASB also issues pronouncements in the form of technical
releases as additional guidance on accounting for Islamic financial transactions. This technical
releases supplement the MASB approved accounting standards and still effective to be used
together with the MFRS Framework. Currently, MASB has four Islamic technical releases as
follows:
i) MASB Technical Release TR i-1, Accounting for Zakat on Business
ii) MASB Technical Release TR i-2, Ijarah
7

iii) MASB Technical Release TR i-3, Presentation of Financial Statements of Islamic

Financial Institutions
iv) MASB Technical Release TR i-4, Shariah Compliant Sale Contracts

In 2005, Bank Negara Malaysia (BNM) came out with the Guidelines on Financial Reporting for
Licensed Islamic Banks (GP8-i). The objective of this guideline is to provide the basis for
presentation and disclosure of reports and financial statements of Islamic banks in carrying out
its banking and finance activities. Recently, in December 2012, BNM issued a revised GP8-i,
which is effective in January 2014. This recent guideline stresses that Islamic banks must
ensure financial statements are prepared in accordance to MASB accounting standards and the
requirement to use fair value option for measurement purposes. Additionally, it also outlines
minimum disclosure requirements with regards to Shariah related disclosures for financing and
deposit products, zakat related information, purpose and source of fund of qard financing,
murabahah inventories, ijarah assets further breakdown of financing and deposits according to
Shariah contract.

2.4 Recognition, Measurement and Disclosure for Islamic Financial Transactions

Islamic banking prosperity depends on the public trust especially the trust of depositors and
investors. The trust in Islamic banks relates to extent of adherence to Shariah principles. One
major source of public confidence is the quality of information issued to the investing public
about banks ability to achieve both financial and Shariah-related objectives (Tag El-Din, 2004).
Therefore, it is important to have unique accounting standards to regulate the provision of
accounting information about Islamic banks (Tag El-Din, 2004; Abdul Rahim, 2003). The need
for accounting records as means for trust building is emphasized in the Quran: ...Never get
bored with recording it, however small or large, up to its maturity date, for this is seen by Allah
as closer to justice, more supportive to testimony, and more resolving to doubt, except when it
8

is spot trade carried out amongst yourselves, then you are not to blame for not recoding it, (AlBaqarah: 282).
Islamic accounting shares with their conventional counterparts the same common process of
recognition, measurement and recording of transactions and fair presentation of rights and
obligations. Recognition of rights and obligations must apply to a given period of time tracing all
changes of consummated transactions that may have taken place. Measurement is the
quantification of financial effects of consummated transactions and the impact of other events
during the same period of time. The recording process offers a lucid classification scheme of
financial effects together with other events, in order to show the results of the entitys operations
and changes in its financial positions including cash flow. Periodic reports are, then, prepared
and issued by the entities to disclose their financial records during a given period of time.
The reason why Islamic financial accounting methods and principles have to be carefully
distinguished from their conventional counterparts is the same reason why Islamic banks and
conventional financial institutions have existed in the first place. Prohibition of interest in
financial dealings is the primary reason, but there are various other issues and fine details which
make up for the case of Islamic financial accounting standards.
Accounting recognition for Islamic banks is crucial due to recognition of assets acquired under
various Islamic modes of financing, profit/loss investment accounts, and funds (e.g. when
should Murabaha profit, or Mudarabah capital be recognised? When should investment profit be
recognised, and how is it measured?). Tag El-Din (2004) stresses that the rules governing
recognition and measurement must have clear reference to Shariah rules.
Similar train of thoughts is proposed by Abdul Rahim (2003) whereby he emphasises that
accounting and reporting for Islamic banks should be different from conventional accounting and
reporting as Islamic banks must portray that it abides by Shariah principles. To be precise,
Islamic banks must show that it does not involve in riba, pays zakat and be socially responsible

and not merely focusing on attaining profit. Therefore, the primary objective of accounting
information is to fulfil the ultimate accountability to Allah SWT.
Based on this argument, it affects the accounting concepts of recognition, measurement and
disclosure. In terms of recognition, Abdul Rahim (2003) opines that accounting recognition for
Islamic banks is not that different from the conventional practice where it defines the basic
principles that determine the timing of revenue, expense, gain and loss recognition in the
entitys income statement, and the timing of assets and liabilities recognition. Here, the concept
of accrual accounting is relied upon, where revenue is recognised when realised and expense is
recognised in accordance to the matching principle. Abdul Rahim (2003) further mentions that
accrual accounting does meet the requirement of Islamic objectives to determine real wealth.
However, most scholars do not agree on the use of historical cost in measuring the value to be
recorded for assets and liabilities due to it conflicts with the concept of fairness and justice. This
is especially true for determining zakat, whereby majority scholars recommend the use of
current price on the due date of zakat (Al-Qardawi, 1999). The argument for the use of current
market value has been based on the needs for the most accurate valuation of wealth to be
subjected for zakat. This is to serve justice to both the zakat recipients and zakat payers.
Many literatures have discussed the importance of disclosure for Islamic banks, where most
authors like Baydoun and Willet (1997), Shahul Hameed et al (2004) and Maliah (2001) have
expanded the scope of disclosure to include social accountability disclosure and full disclosure.
This has expanded the content of financial reporting to include environmental reporting, social
reporting and the like. Furthermore, AAOIFIs FAS 1 General Presentation and Disclosure in
Financial Statements of IFIs stresses the importance of having a specific statement outlining the
use of qard fund and zakat collection and disbursement. This more or less signifies the
importance of social responsibility by Islamic banks to the society.
3. RESEARCH METHOD

10

The study utilizes content analysis method to analyse the financial reporting disclosure practices
of selected Islamic banks in Malaysia. The sample chosen for the comparative disclosure
analysis were six Islamic banks with the highest asset value in financial year 2011, which
comprise of three largest local Islamic banks and three largest foreign owned Islamic banks
operating in Malaysia. Financial year 2011 was chosen due to the unavailability of the full
financial year financial statements for certain banks in year 2012. Only a few banks have
published the full year results while many only published the quarterly financial results. The list
of Islamic banks and their respective total asset value for the financial year 2011 is provided in
Table 1.
Table 1: List of Islamic Banks and Asset Value in Financial Year 2011
Name of Banks
Locally Owned Islamic Banks
Bank Islam Malaysia Berhad (BIMB)
CIMB Islamic Bank Berhad (CIMB)
Maybank Islamic Berhad (MIB)
Foreign owned Islamic Banks
Al Rajhi Banking & Investment Corporation (Malaysia)
Berhad (ARB)
Kuwait Finance House (Malaysia) Berhad (KFH)
HSBC Amanah Malaysia Berhad (HSBC)

Total Asset Value 2011

RM000
32,226,504
43,097,758
74,011,330
6,106,758
10,122,166
10,432,498

Source: Respective banks annual reports 2011

4. ANALYSIS AND DISCUSSION
The items of disclosure used for comparison are based on selected recognition and
measurement principles of financial assets and liabilities outlined in the MFRS 139 Financial
Instruments: Recognition and Measurement, MFRS 7 Disclosure of Financial Instruments,
MASB Tri-1 Accounting for Zakat on Business and disclosures unique to Islamic banking, such
as ar-rahnu and qard. Table 2 summarizes the comparative analysis performed.
Table 2: Comparative Disclosure Practices of the Largest Six Islamic Banks in Malaysia
No
1

Items of Disclosure
BIMB CIMB
MFRS 139 Financial Instruments: Recognition and Measurement
Initial recognition

A financial asset or financial liability is

MIB

ARB

KFH

HSBC

11

No

Items of Disclosure
recognized in the statement of financial

BIMB

CIMB

MIB

ARB

KFH

HSBC

ND

ND

ND

ND

ND

ND

ND

ND

ND

ND

position when the entity becomes a party to

2

the contractual provisions of the instrument.

Derecognition of financial asset (1)
A financial asset is derecognize when:
(a) the contractual rights to the cash flows
from the financial asset expire; or
(b) the entity transfers the financial asset
Derecognition of financial asset (2)
Upon derecognition of a financial asset, the
difference between:
(a) the carrying amount and
(b) the sum of (i) the consideration received
and (ii) any cumulative gain or loss that
had

been

comprehensive
4

recognised

in

income

other

shall

be

recognised in profit or loss.

Derecognition of a financial liability (1)
A financial liability is removed from the
statement of financial position when it is
extinguishedie when the obligation specified
in the contract is discharged or cancelled or

expires.
Derecognition of a financial liability (1)
The difference between the carrying amount of
a financial liability extinguished or transferred
to another party and the consideration paid
shall be recognised in profit or loss.

Initial measurement of financial assets and

financial liabilities
Initially, the entity shall measure a financial
asset or financial liability using its fair value
plus

transaction

costs

that

are

directly
12

No

Items of Disclosure
attributable to the acquisition or issue of the
financial asset or financial liability.
Subsequent measurement of financial assets
After initial recognition, loans and receivables

BIMB

CIMB

MIB

ARB

KFH

HSBC

shall be measured at amortised cost using the

8

effective profit method.

Subsequent
measurement

of

financial

liabilities
After initial recognition, an entity measure all
financial liabilities at amortised cost using the
effective profit method.
9

Impairment and uncollectibility of financial

assets
A financial asset or a group of financial assets
is

impaired

and

impairment

losses

are

incurred when there is objective evidence of

impairment as a result of a loss event. There
should be objective evidence of impairment
through observable data of the loss events
10

outlined in the standard.

Financial assets carried at amortised cost (1)
When there is an impairment loss on loans
and receivables has been incurred, the
amount of the loss is measured as the
difference

between

the

assets

carrying

amount and the present value of estimated

future cash flows discounted at the financial
assets original effective profit rate.
The carrying amount of the asset shall be
reduced

directly

or through

use

of

an

allowance account. The amount of the loss

13

No
11

Items of Disclosure
shall be recognized in profit or loss.
Financial assets carried at amortised cost (2)
In subsequent period, when the amount of the

BIMB

CIMB

MIB

ARB

KFH

HSBC

NR

ND

ND

ND

ND

ND

ND
ND
69%

ND
ND
81%

ND
75%

ND
75%

ND
75%

impairment loss decreases (such as an

improvement in the debtors credit rating), the
previously recognised impairment loss shall
be reversed either directly or by adjusting an
allowance
12

account.

The

amount

of

the

reversal shall be recognised in profit or loss.

Derivative instruments and hedging disclosure
Disclosure on the types of derivative financial
instruments, whether it is used as a hedge
instrument and hedge accounting through fair

value or cash flow hedge.

MFRS 7 Disclosure of Financial Instruments
13 Disclosure on the method used by banks to
determine fair value measurement (i.e. fair
value hierarchy and valuation techniques)
MASB Tri-1 Accounting for Zakat on Business
14 Disclosure on method used to determine zakat
on business.

Other unique disclosures pertinent to Islamic Banking

15 Qard Hasan financing
ND
16 Ar-Rahnu financing

Percentage of disclosure
75%

ND: Not Disclosed

NR: Not Related
The comparative analysis shows the items of disclosure presented by the six Islamic banks in
their financial statements, specifically information in the notes to the account. It showed that MIB
disclosed 81 percent of the selected items required by MFRS 139, MFRS 7 and MASB technical
release on zakat for business. This is the highest rate of disclosure as compared to other
Islamic banks identified in this sample.

14

The reporting practices for Islamic banks in Malaysia are highly regulated by the BNM. As BNM
strongly required the use of MASB standards in the reporting practices of Islamic banks, it is not
surprising that the level of disclosure is relatively moderate and high at 75 percent and more.
This is to the exception for CIMB ranking the lowest at 69 percent of disclosure items. The items
not disclosed by CIMB relate to derecognition of financial assets and liabilities, method for
determining zakat on business, disclosure whether having qard or ar-rahnu financing.
For derivative financial instruments, all banks provided the required disclosure, whereas only
ARB did not disclose any information on derivatives. Further review of the financial statements
showed that ARB does not have any derivative financial instruments in the financial year 2011.
An area of focus is the disclosure on the method used by banks to determine zakat base for its
payment of zakat on business. Only MIB disclose the method used by their banks whereas
other banks are silent on the method practiced. Such disclosure is required by the GP8-i and
MASB TR-i 1 as it reflects the social responsibility of Islamic banks towards the society and
uniquely distinguishes it from conventional banks.
Table 3 also highlighted whether Islamic banks offered qard hasan or ar-rahnu financing to its
customers. For ARB, KFH and HSBC, they only identified qard hasan without additional
disclosure mentioning ar-rahnu is included or not included as part of qard hasan. BIMB on the
other hand, only disclosed that they offered ar-rahnu financing without mentioning having qard
hasan. However, CIMB and MIB does not identify either type of financing where they only
mention Other financing as one of the line item. It is important for Islamic banks to specifically
identify which type of financing offered by them as these are unique financing offered by Islamic
banks not offered by conventional banks. Additional disclosure in the notes would be proven
helpful for users to better understand the products offered by these Islamic banks.
The limitation for this comparative analysis is that non-disclosure item could be assumed as
either the Islamic banks do not have such practice/transaction or the Islamic banks do practice

15

but did not disclose such activities. This limitation was also faced in a study by Vinnicombe
(2010) and Tower et. al (1998).
Additional Disclosure Requirement by the newly revised GP8-i
Bank Negara Malaysia (BNM) GP8-i is a guideline on Financial Reporting for Licensed Islamic
Banks issued in year 2005 to provide the basis for Islamic Banks in presentation and disclosure
of reports and financial statements. This effort is to ensure consistency and comparability of the
statements among the Islamic banks and at the same time to facilitate users in their evaluation
and assessment of the financial position and performance of an Islamic bank. The GP8-i
proposed the minimum disclosure requirements that should be observed by the reporting
institutions and they are encouraged to disclose additional information on the accounting
policies, new financial instruments and other material activities of the reporting institutions.
In December 2012, a revised GP8-i was issued, there are various changes introduced by BNM
especially emphasizing the importance of adhering to MASB accounting standards known as
MFRS and providing additional disclosures in relation to Shariah contracts underlying the
financing and deposits products offered by Islamic banks, sources and uses of qard fund etc.
Additionally, it stresses on the use of fair value option for recognition and measurement of
financial instruments. Table 3 provides a comparison of the major changes proposed by the
revised GP8-i (2012).
Table 3: Comparison of the Revised and Currently in use GP8-i
Disclosure item
Accounting policies

Revised GP8-i (2012) effective in

Information

year 2014
on each

Shariah

contract or main class of Shariah

GP8-i (2005)
The guideline does not mention to
classify based on Shariah contracts.

contract e.g. Murabahah, Ijarah,

Mudarabah, Istisna.
This guideline also

provide

suggested disclosure table detailing

the financing by types and Shariah
16

Disclosure item

Revised GP8-i (2012) effective in

GP8-i (2005)

year 2014
contracts which is seemed to be
Not mentioned about this but in the
comprehensive and reflective of the
Shariah Committee Report Format has
operations of Islamic bank founded
information on the disposal of Shariah
on Shariah principles.
Nature of income derived from
Shariah

non-compliant

non-compliant activities via charity etc.

activities,

including its amount, method of

disposal and control measure to
avoid recurrence of such prohibited
Deposits

from

customer

income.
The following

information

(restricted

and

deposits
The following

other loan

Zakat

and

account

unrestricted

investment account)
Types of customers
Maturity structures
Financing,

of

information

term
are

required to be disclosed:
Measurement basis
Types of financing
Geographical distribution
Profit rate sensitivity
Sector or economic purpose
Residual contractual maturity
The following information are
required to be disclosed:
responsibility
payment
method

towards

applied

Items to be disclosed are:

Types of deposits
Types of customers

required to be disclosed:
Types of deposits
Types of investment

receivables

are

in

zakat

Items to be disclosed are:

Type of financing
Contract
Type of customer
Profit rate sensitivity
Maturity
Sector

Items to be disclosed are:

purpose of zakat
basis of calculation of zakat

the
17

Disclosure item

Revised GP8-i (2012) effective in

GP8-i (2005)

year 2014
determination of zakat base
beneficiaries of zakat fund
Qard

A movement schedule of the qard

The guideline does not mention about

loan/financing

this disclosure.

opening
Murabahah

and

which

includes

closing

balances,

sources and uses of theqard fund

Disclose the acquisition or transfer

The guideline does not mention about

of ownership prior to its subsequent

this disclosure.

sale, the
carrying amount
purpose of

held

for

the

Murabahah(cost plus

sale)
which can be transacted at spot or
Ijarah

deferred basis.
The following

information

are

required to be disclosed:
disclosure of carrying amount
disclosure of the extent of the

The guideline does not mention about

this disclosure.

transfer of usufruct
It provides a suggested format for
the

Islamic

banks

to

consider

applying.

On comparison basis, the revised GP8-i requires greater amount of disclosure that reflects the
unique nature of Islamic banks operations. Analysing further the above additional disclosure
with guidelines and standards issued by international body such as International Financial
Standards Board (IFSB) and AAOIFIs entails the following discussion.
IFSB 4 Disclosures to Promote Transparency and Market Discipline for Institutions Offering
Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual
Funds) and the GP8-i (2012) suggest similar disclosure items required by AAOIFI, that is the
distinction between restricted and unrestricted investment accounts. IFSB 4 discusses the
18

disclosures for the investment account to include both restricted and unrestricted accounts as
well as separate proposed disclosures for restricted and unrestricted investment account.
AAOIFI in its FAS 1 General Presentation and Disclosure in Financial Statements of IFIs
required Islamic banks to have an off balance sheet disclosure statement on the movement of
the restricted investment accounts to be accountable for the investment account holders for
restricting the investment purposes of the given investments. In addition, the revised GP8-i
requires the Islamic banks to disclose a separate statement on the movement of qard fund and
disclosing on who are the zakat beneficiaries somewhat reflect the harmonization effort by BNM
in being align with AAOIFI.
5. CONCLUSION
This research studied the current reporting practices for financial assets and liabilities of the
largest three local and three foreign Islamic banks in Malaysia against MFRS 139, MFRS 7 and
MASB TR1-i on zakat for business. In general, these banks largely complies with MFRS 139
and MFRS 7 but has limited compliance with MASB TR1-i for zakat. Only one Islamic bank
discloses the method used to determine the income eligible for paying zakat. Disclosure on
information related to zakat is important as it strongly show how the Islamic bank is being
Shariah compliant in determining zakatable amount. In addition, the paper also analysed the
change in disclosure requirements in the GP8-i (2012) put forth by BNM in order to be more
globally comparable and accepted. It is apparent that BNM as the regulator of Islamic banks
plays an active role in ensuring Islamic banks accounting and reporting practice are in line with
Shariah principles as well as adhering to the accounting standards issued by MASB. This is
evidenced by the issuance of the revised GP8-i in 2012 that shows the harmonization effort by
BNM to incorporate items of disclosure proposed by IFSB as well as AAOIFI for comparability
purpose at the international level. Therefore, it is highly recommended that continuous
collaboration and support from MASB and BNM in providing standards and guideline that are
both Shariah compliant and globally accepted.
19

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