Do Islamic Banking Standards Convey More Financial Transparency than Conventional Banking Ones?

This study examines the criteria of transparency and disclosure in Islamic banking and compares them to conventional banking. By examining the traditional accounting standards for transparency, namely IAS 1, IAS 24, IFRS 7 along with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards, we have highlighted that despite the fact that the conventional banking strives to achieve transparency; there is a lack of optimal transparency in conventional banking products. This deficiency is caused by the lack of the determination of the rate of change of interest and the variable interest loans, the securitization and the sale of the debt. This leads to a lack of transparency of all important financial and non-financial information, lack of disclosure in the balance sheet such as bankruptcy and the real characteristics of traded financial instruments. Nevertheless, the principles of Islamic finance, such as the prohibition of riba and gharar as well as the link to the real economy emphasize transparency in Islamic banking transactions. Hence, AAOIFI advocates high transparency. Besides the conventional disclosure, there is a disclosure on the basis of the distribution of revenues, the determination of selling prices and the statement of the illegitimate part of bank activity. Furthermore, by considering a sample of AAOIFI accounting standards 2 related Murabaha, to the Purchase Order and comparing it to conventional loans, we have concluded that financial transparency is more enforced in Islamic banking than in conventional one. Transparency protected the Islamic banking transactions from falling into the subprimes crisis.