AAOIFI reporting standards: Measuring compliance

Islamic banking and finance have grown rapidly in recent decades. Islamic banks offer a range of products, which, in complying with Islamic law, often differ from traditional Western financial products. Consequently, developing accounting standards to guide Islamic financial reporting is now an important issue. To this end, the Accounting and Auditing Organization for Islamic Financial Organizations (AAOIFI), was established in Bahrain in 1991. While the AAOIFI has published a substantial body of accounting and governance standards empirical research into compliance with these standards is lacking. This article addresses that gap. A benchmark index is constructed to measure the compliance of Islamic banks licensed and domiciled in Bahrain. The findings of the study show compliance to be very high with respect to the governance standard relating to the in-house supervisory boards of Islamic banks, and reporting the Islamic murabaha contract. In contrast, compliance with the AAOIFI's requirements regarding the zakah religious tax and the mudaraba contract is relatively low.