FINANCIAL PERFORMANCE MEASUREMENT AND DISTRIBUTION POLICY OF ISLAMIC FINANCIAL INSTITUTIONS

Abstract

This paper addresses the issues of financial performance measurement and proposes the need for a profit sharing distribution policy of Islamic financial institutions. A conceptual analysis of the integral concepts of performance measurement, such as income, capital and cost of funds, is done in view of the existing accounting assumptions and principles. The importance of profit-sharing ratio and the diversity of financing contracts explained in this paper affirms the need for a more comprehensive analysis of the financial performance of Islamic financial institutions. A portfolio return model of Islamic financing contracts is proposed for the financial institutions. A profit distribution policy that states and discloses the manner of profit determination and distribution between the Islamic financial institution and the investment depositors is proposed. The policy is expected to reduce information asymmetry in meeting investment account holders' expectations. Both the accrual and cash aspects of performance measurement and distribution policy are discussed in this paper.

JEL classification: G20, G31, M40, Z12

Key words: Financial reporting, Performance measurement, Islamic financial institutions