Islamic Deposits And Investment Accounts In Incomesmoothing In Post-Reclassification Of The Islamic financial Service Act 2013

by Assoc. Prof. Dr. Mohd Yaziz Mohd Isa and Prof. Datuk Seri Dr. Md Zabid Haji Abdul Rashid

Expert Journal of Finance (2014), No. 2, Pages 18 -25


This study attempts to determine the impact of the reclassification on income smoothing practices by Islamic banks in Malaysia through loss provisions. It is well acknowledged that Islamic banks set up an allowance for loss provisions in order to absorb any future losses. However, alternative mechanisms, such as Profit Equalization Reserve (PER) and Investment Risk Reserve (IRR) instead of loss provisions, are used to smooth income. This study determines whether the exercise by Islamic banks in Malaysia to reclassify Islamic deposits to investment accounts after the enacted Islamic Financial Service Act (2013), may have caused unintended consequences in less profit payout to investment account holders. The results do not indicate any unintended consequences of less profit payout to investment account holders from the present exercise by the Islamic banks in Malaysia to distinguish Islamic deposits from investment accounts.


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