Degree

Master of Business Administration Executive

Faculty / School

School of Business Studies (SBS)

Year of Award

2023

Advisor/Supervisor

Dr. Muhammad Asif Jaffer, Assistant Professor, Institute of Business Administration, Karachi

Project Type

MBA Executive Research Project

Access Type

Restricted Access

Executive Summary

Muslims have a rich history of engaging in commerce and conducting business transactions guided by the principles of Shariah law, which provide a framework for ethical behavior and economic transactions in accordance with Islamic beliefs. This adherence to Islamic principles extends to the corporate world, where companies seek Shariah compliance to align their operations with these principles. Various global and Pakistani institutions are tasked with evaluating and certifying the Shariah compliance of companies.

In numerous countries, specialized stock market indices have been established to monitor the performance of Shariah-compliant companies. These indices serve as benchmarks for investors seeking to align their investments with Islamic principles. In Pakistan, the Finance Act of 2016 incentivized companies to obtain Shariah compliance status by offering a 2% tax rebate. However, this incentive was later removed by the Finance Act of 2021, which has led to a decrease in motivation for companies to pursue Shariah compliance.

There are over 20 Shariah screening frameworks employed to assess companies' adherence to Islamic principles. These frameworks primarily rely on financial statements to determine Shariah compliance. While there are various financial reporting standards globally, including local Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has also issued accounting standards tailored to the unique requirements of Islamic financial institutions and Shariah compliant companies.

Despite the existence of AAOIFI's accounting standards, many organizations, irrespective of these Shariah standards, are obligated to comply with IFRS or local GAAP. This regulatory requirement presents accounting challenges for Shariah-compliant companies due to the distinctive characteristics and principles of Islamic finance.

Our primary research focuses on examining how Shariah screening organizations address the impact of accounting framework differences arising from companies following IFRS instead of AAOIFI-based financial reporting standards. A comparison of 140 common terms between IFRS and Financial Accounting Standards (FAS) revealed significant differences in 31 terms, while 293 IFRS definitions were absent in FAS.

Surveying professionals, including ACCA/ACMA/CA certified accountants, and individuals from listed companies, we found that awareness of AAOIFI's accounting standards was limited. Moreover, many were unaware of the distinctions between IFRS and AAOIFI standards, including differences in definitions, treatment of financial instruments, and guidelines. Notably, 75% of professional accountants were unaware of AAOIFI's accounting standards, and 37.5% of respondents from listed companies were unfamiliar with the Islamic Indices of Pakistan Stock Exchange (PSX).

Most companies in our sample did not prioritize obtaining Shariah compliance status, reflecting a lack of incentives or awareness.

To address these issues, AAOIFI should enhance awareness of its accounting standards among professionals and advocate for their inclusion in national accountancy body curricula. Shariah screening organizations should collaborate with PSX, ICAP, and SECP to increase awareness among professionals and investors, emphasizing the importance of Shariah compliance. Additionally, they should work closely with regulators to enforce required disclosure requirements for Shariah-compliant companies in accordance with the Companies Act of 2017.

Future research should explore the willingness of accounting students and professionals to include AAOIFI accounting standards in professional qualification curricula, analyze individual IASB accounting standards in line with Shariah principles, and assess the attitude of professionals and corporations towards obtaining Shariah compliance status if regulatory incentives are introduced or expanded.

Pages

iii, 75

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