The Consequences of AAOIFI Adoption: Countrywide Perspectives

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) began to issue standards long ago and by 2021 will mark its 31st anniversary. The existing literature on AAOIFI, which has had its share of supporters and critics, may be categorized into the following three parts: (1) literature evaluating compliance levels, (2) literature examining the AAOIFI determinants, and (3) literature assessing the economic consequences of AAOIFI. Thus far, the third strand in the first research phase has no practical study evaluating the impact of AAOIFI adoption at a national level. Therefore, this report adds to the literature by measuring the macroeconomic effects of AAOIFI on economic size and growth rate based on foreign direct investment (FDI), economic development (ED), corruption, and stock market development (SMD). Data for 150 Islamic banks (IBs) in 22 countries for 10 years (2010–2019) are collected and analyzed using an ordinary least squares (OLS) approach. Our results create indicate that IBs across countries that adopt AAOIFI are further getting an advantage by growing in FDI and GDP than non-adopters. Our results further support the role of AAOIFI adoption by countries rather than adoption by banks on reducing the level of corruption. After applying several robustness checks, our results remain the same, with slight variations. Our results create value for central banks, regulators, setters of an accounting standard as AAOIFI and IASB, investors, and all categories of Islamic Financial Institution (IFI) whether adopters or not by identifying the contributions of AAOIFI adoption. The contemporary international literature is deficient in practical evidence on the consequence of AAOIFI adoption at the macro, such as FDI and corruption. To the author’s knowledge, that is one of the original research that provides confirmation of the significance and influences of AAOIFI adoption from a countrywide perspective.