Digest Finance

Accounting for Bank Deposits, Trust Financing (Mudarabah) and Tax for the Poor and Needy (Zakat) of Islamic Financial Institutions: Distinctions

Vol. 24, Iss. 4, DECEMBER 2019

PDF  Article PDF Version

Received: 6 August 2019

Received in revised form: 14 October 2019

Accepted: 8 November 2019

Available online: 25 December 2019

Subject Heading: Banking

JEL Classification: М41

Pages: 368–378


Subject The article deals with Islamic financial mechanisms and their recognition in accounting records of Islamic financial institutions.
Objectives The study unfolds the specifics of bank deposits, trust financing and tax paid to the poor under the Islamic accounting model.
Methods The study involves methods of comparative analysis, systematization, classification, analogy and comparison.
Results I examine financial mechanisms of Islamic institutions and give examples how the mechanisms are recognized in accounting books. I also classified their types and emphasized their distinctions. Islamic banks accrue no interests on savings. Financial instruments are based on principles of profit and loss sharing. In addition to income tax, Islamic financial institutions pay the religious tax. The article presents AAOIFI standards governing the above accounts and reveals accounting records of capital proceeds and/or repayment, accrual of profit and/or loss, informs on the requirement to prepare a special report, which is published along with other traditional reports. The article also gives a detailed account of a special tax to the poor (Zakat), terms of its collection and payment, rules and method for its calculation, who is entitled to the payments and the reasons for doing so, measurement of assets and liabilities that are subject to the tax.
Conclusions and Relevance The Islamic accounting model provides for three types of on?call deposits, i.e. Wadiah, Amanah and Qard Hasan. They are recorded in accounting books as if it were the conventional accounting model. Investment deposits (Mudarabah) are different. They do not provide for any return. The return solely depends on the outcome of a project. Accounts are based on profit and loss sharing principles and resemble venture capital existing in the modern economic practice.

Keywords: Islamic accounting, reporting, AAOIFI, standards, accounting records


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