The effect of compliance with AAOIFI standards on financial performance of Islamic banks

Abstract

PurposeThis research study aims to examine the effect of the compliance with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards on the performance of Islamic banks.Design/methodology/approachThe sample consists of 628 bank-year observations from eight countries that adopt the AAOIFI standards during the period 2009–2020.FindingsThe findings reveal a significant positive relationship between the overall compliance level with AAOIFI standards and the two performance measures in Islamic banks.Practical implicationsThe findings are useful for various groups of preparers and users of Islamic banks’ annual reports, such as academics and researchers, accountants, management of Islamic banks and national and international organizations.Originality/valueThis research provides new empirical evidence on the effect of compliance with AAOIFI standards (accounting and governance) on Islamic banks performance. In addition, the findings reveal that the examination of compliance level should not be restricted to an overall compliance index that contains all the AAOIFI standards, but should rather take into consideration the different types of these standards (accounting and governance).