Islamic Accounting Applications of Islamic Finance

Islamic banks and financial institutions have demonstrated an unprecedented success since their emergence in commercial form in 1970s. The expansion of the asset base of the industry and its diffusion into main financial centers in the world is a clear indication of its success. While Islamic finance is constituted through Islamic normativeness as expressed through Sharia compliance process coupled with the standards developed by the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board within dual banking system, their accounting system follows conventional system of accounting which is based on the fictitious claim that accounting is value free. However, this chapter is developed through the assumptions that neither economics and finance, nor accounting and management is value free as value system and ontologies determine their nature and operations. In expanding this assumption, this chapter aims to identify the Islamic accounting implication for Islamic finance with the hope that Islamic banks and financial institutions, in particular, and Muslim societies, in general, can move onto authentic accounting system and philosophy shaped by Islamic ontology and epistemology. This chapter hence aims to develop and identify the way Islamic accounting can apply to Islamic finance transactions and contracts as well as institutions such as zakat. It also presents some critical reflections on the practice of Islamic accounting and accounting standards.