Investigating the applicability of the expected credit loss model to Islamic Sukuk: Law aspects

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Abstract

This paper examines the application of the expected credit loss (ECL) model under International Financial Reporting Standards (IFRS) 9 to Islamic Sukuk, which indicates that accountants do not regard any gap between Islamic financial instruments and IFRS. Since Sukuk have special features according to Islamic finance, such as the non-usage of interest (riba) and risk-sharing, this paper reviews the issues and possible modifications that may be required for their compliance with both Sharia and international accounting standards. Applying a mixed-methods approach, 30 experts in Islamic finance and accounting were interviewed for qualitative perceptions, while the data were supplemented by a survey of 182 stakeholders in the Islamic finance sector. The results tend to indicate that the ECL model is consistent with Sharia rules and substantially improves risk management under Islamic finance without adversely affecting Sharia compliance, especially in the case of Sukuk (Paltrinieri et al., 2023; Uluyol, 2021). However, the operational challenges of the non-interest-based nature and diverse structures of Sukuk obviously require customized approaches when applying the ECL model. This research is hence relevant and contributes valuable practical considerations to the literature for policymakers and practitioners in Islamic finance and accounting toward aligning Islamic financial products with international standards (Adelopo et al., 2023).

Keywords: Islamic Finance, Sukuk, Expected Credit Loss (ECL) Model, IFRS 9, Sharia Law, Risk Management, Global Accounting Standards, Financial Instruments, Compliance, Jordanian Listed Firms

Authors’ individual contribution: Conceptualization — A.M., M.D.O., and A.A.-A.; Methodology — A.M.; Software — M.D.O.; Validation — A.M., M.D.O., and A.A.-A.; Formal Analysis — M.D.O. and A.A.-A.; Investigation — A.M., M.D.O., and A.A.-A.; Resources — A.M.; A.A. Data curation — A.A.-A.; Writing — Original Draft — A.M.; Writing — Review & Editing — M.D.O. and A.A.-A.; Visualization — A.A.-A.; Supervision — A.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G21, G32, M41

Received: 10.04.2024
Accepted: 11.10.2024
Published online: 16.10.2024

How to cite this paper: Morshed, A., Othman, M. D., & Al-Amarneh, A. (2024). Investigating the applicability of the expected credit loss model to Islamic Sukuk: Law aspects. Corporate Law & Governance Review, 6(3), 81–89. https://doi.org/10.22495/clgrv6i3p9