Islamic banking products under IFRS

Islamic banks operate in many IFRS countries, and conventional banks offer Islamic windows. Their products use sales, leases and partnerships instead of loans, but IFRS looks through the legal form. This guide explains how the main Islamic banking products are classified and measured under IFRS, works through a murabaha, and covers where AAOIFI standards apply instead.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Islamic banking products are structured to comply with Sharia principles, which prohibit interest, but under IFRS they are accounted for according to their economic substance. A murabaha, where the bank buys an asset and sells it to the customer at a disclosed mark-up payable in instalments, is a financial asset at amortised cost, with the profit recognised using the effective interest method. Ijarah is usually a lease under IFRS 16, sukuk are assessed under IFRS 9 like other debt-like instruments, and profit sharing investment accounts are generally liabilities. In this guide's example, a 20,000 car sold on murabaha for 23,000 earns 1,608 of profit in year 1, not a third of the mark-up.

At a glance

Principle
Substance over legal form
Murabaha
Financial asset, amortised cost
Ijarah
Usually a lease under IFRS 16
Sukuk
IFRS 9 classification tests
Investment accounts
Usually liabilities
Alternative
AAOIFI standards in some countries
Islamic banking products under IFRSPrinciple: Substance over legal form; Murabaha: Financial asset, amortised cost; Ijarah: Usually a lease under IFRS 16; Sukuk: IFRS 9 classification tests; Investment accounts: Usually liabilities; Alternative: AAOIFI standards in some countries.KEY FACTS AT A GLANCEIslamic banking products under IFRSPrincipleSubstance over legal formMurabahaFinancial asset,amortised costIjarahUsually a lease underIFRS 16SukukIFRS 9 classificationtestsInvestment accountsUsually liabilitiesAlternativeAAOIFI standards in somecountriesTax BakersIslamic banking products under IFRSPrinciple: Substance over legal form; Murabaha: Financial asset, amortised cost; Ijarah: Usually a lease under IFRS 16; Sukuk: IFRS 9 classification tests; Investment accounts: Usually liabilities; Alternative: AAOIFI standards in some countries.KEY FACTS AT A GLANCEIslamic banking products underIFRSPrincipleSubstance over legal formMurabahaFinancial asset, amortised costIjarahUsually a lease under IFRS 16SukukIFRS 9 classification testsInvestment accountsUsually liabilitiesAlternativeAAOIFI standards in some countriesTax Bakers
Key facts at a glance, as set out in this guide.

How are the main Islamic banking products treated under IFRS?

Islamic banking products under IFRSIslamic banking products under IFRSStructureUsual IFRS treatmentMurabahaCost-plus saleon creditAmortised costIjarahLease, oftenending in ownershipIFRS 16 leaseMusharakaPartnershipFair value oramortised costSukukCertificates inan assetIFRS 9 testsInvestmentaccountsProfit-sharingdepositsLiability
IFRS follows the economics, not the contract's name.

A murabaha example

A customer wants a car costing 20,000. The bank buys the car and immediately sells it to the customer for 23,000, payable in 36 monthly instalments of 638.89. The 3,000 mark-up is fixed at the outset.

ItemAmount
Murabaha receivable at initial recognition20,000
Effective profit rate, monthly0.776%
Effective profit rate, annual equivalent9.72%
Profit recognised in year 11,608
Total profit over three years3,000

Under IFRS 9, the bank's asset is the right to receive the instalments, measured at amortised cost, and the mark-up is recognised using the effective rate, so more profit falls in the early months when the balance outstanding is highest. Recognising the mark-up straight-line, a third each year, would front-load nothing and overstate later profit. The bank's brief ownership of the car before resale is usually not material to the accounting, although it carries legal risks the bank must manage.

An ijarah example

A bank buys equipment for 100,000 and leases it to a customer for five years under an ijarah ending in transfer of ownership, for rentals totalling 125,000. Because ownership passes at the end and the term covers the equipment's useful life, it is a finance lease: the bank derecognises the equipment and recognises a lease receivable of 100,000, earning 25,000 of finance income over five years at the rate implicit in the lease.

Do Islamic financing assets pass the SPPI test?

Most do, because the customer pays a fixed amount that compensates the bank for the time value of money and credit risk, even though it is not called interest. Murabaha and ijarah receivables usually qualify for amortised cost. Musharaka and mudaraba arrangements, where the bank shares in the profits and losses of a venture, may fail the SPPI test and be measured at fair value through profit or loss, or be equity investments, depending on their terms.

How are sukuk accounted for?

Sukuk are certificates giving holders a share in an asset or venture and the returns from it. For the holder, the IFRS 9 analysis looks at the actual cash flows: many sukuk are asset-based, with fixed periodic distributions and repayment of the face amount, and qualify for amortised cost; asset-backed sukuk whose returns depend on the performance of the underlying assets may not. For the issuer, sukuk are usually financial liabilities.

How are profit sharing investment accounts treated?

Depositors in profit sharing investment accounts share in the profits of the assets financed, and in theory bear losses. Under IFRS, they are usually financial liabilities, because the bank has an obligation to deliver cash, and in practice banks smooth returns using profit equalisation and investment risk reserves. How those reserves are presented, and whether any part is equity, needs careful analysis of the contract terms.

Where are AAOIFI standards used instead?

The Accounting and Auditing Organization for Islamic Financial Institutions issues financial accounting standards that some jurisdictions require Islamic banks to use, such as Bahrain, while others require IFRS with supplementary guidance. Under AAOIFI standards, investment accounts are often shown between liabilities and equity. See IFRS 9 classification, the effective interest method and bank accounting.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

How is murabaha accounted for under IFRS?

As a financial asset at amortised cost, with the mark-up recognised as profit using the effective interest method over the financing period.

Is ijarah a lease under IFRS 16?

Usually yes; an ijarah ending in transfer of ownership is typically a finance lease for the bank as lessor.

Do Islamic financing products pass the SPPI test?

Most fixed-return products such as murabaha and ijarah do; profit-and-loss sharing arrangements may not.

Are profit sharing investment accounts equity or liabilities?

Under IFRS they are usually financial liabilities, although some AAOIFI-based reporting shows them between liabilities and equity.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments
  2. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

BankingBank accounting: the key IFRS issuesIFRS 9Classification and measurement under IFRS 9: business model and SPPIIFRS 9Amortised cost and the effective interest method under IFRS 9

More in Banking

Previous in this topicOffsetting and netting agreementsNext in this topicBank fee income under IFRS 15TopicAll 15 guides in Banking

This guide is general information. It is not tax or legal advice for your situation.