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Islamic Deposits and Investment Accounts in Income Smoothing in Post-Reclassification of the Islamic Financial Service Act 2013

Author

Listed:
  • Mohd Yaziz MOHD ISA

    (Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia)

  • Zabid Haji ABDUL RASHID

    (Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia)

Abstract

This study attempts to determine the impact of the reclassification on income smoothing practices by Islamic banks in Malaysia through loss provisions. It is well acknowledged that Islamic banks set up an allowance for loss provisions in order to absorb any future losses. However, alternative mechanisms, such as Profit Equalization Reserve (PER) and Investment Risk Reserve (IRR) instead of loss provisions, are used to smooth income. This study determines whether the exercise by Islamic banks in Malaysia to reclassify Islamic deposits to investment accounts after the enacted Islamic Financial Service Act (2013), may have caused unintended consequences in less profit payout to investment account holders. The results do not indicate any unintended consequences of less profit payout to investment account holders from the present exercise by the Islamic banks in Malaysia to distinguish Islamic deposits from investment accounts.

Suggested Citation

  • Mohd Yaziz MOHD ISA & Zabid Haji ABDUL RASHID, 2014. "Islamic Deposits and Investment Accounts in Income Smoothing in Post-Reclassification of the Islamic Financial Service Act 2013," Expert Journal of Finance, Sprint Investify, vol. 2(1), pages 18-25, December.
    • Handle: RePEc:exp:finnce:v:2:y:2014:i:1:p:18-25
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    More about this item

    Keywords

    Islamic banks; Islamic deposits; investment accounts; Profit Equalization Reserves; Investment Risk Reserves;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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