Business Zakat Accounting: Fiqhi Basis by Dr Mohammed Obaidullah

The available zakat accounting standards as well as laws governing business zakat reflect a sort of consensus that adjusted net working capital of a business may be regarded as the base for computation of zakat liability of a business. The second accepted alternative is the adjusted growth capital which essentially arrives at the same outcome, given the accounting equality between total assets and total liabilities and equity in the balance sheet of a business organization. The apparent consensus follows from fiqhi prescription of imposing zakat on urud al-tijarah or the inventory of goods available for trade.

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Zakatability of Urud Al-Tijarah

We briefly summarize below the fiqhi basis for zakat liability on urud-al-tijara. The full line of arguments and counterarguments are available in chapter 4 of the text Fiqh Al-Zakat by Dr Yusuf Al-Qaradhawi.

Urud al-tijarah, according to Islamic jurists implies business inventory, which means any commodities obtained for the purpose of resale for profit, except liquid monetary assets. Some jurists define ‘urud al tijarah as anything that one buys in order to sell for profit. We quote here from the work of Dr Qaradhawi the evidence from the Qur’an, the Sunnah and Ijma for zakat obligation on business inventory.

The Quran

“O ye who believe, give of the good things which ye have honorably earned, and of the fruits of the earth which we have produced for you.” (Surah Al-Baqarah No.2, Verse: 267)

Scholars interpret the words ‘that you have earned’ as things earned by means of trade, and the words ‘that we have produced from the earth for you’ as things earned by means of agriculture. This is supported by other verses about zakah that are general and therefore include business assets, such as the verses:

“and on their wealth and possessions there is the right for he who asked and he who is deprived,” (Surah al Dhariyat, 51:19)

“and on those in whose wealth is a recognized right for he who asks and he who is deprived,” (Surah al Ma’arij, 70:24-25)

and

“Out of their goods take sadaqah so by it thou might purify and sanctify them.” (Surah al Tawbah, 9:103)

The Sunnah

Abu Daud reports from Samurah bin Jundub that ” the Prophet (p) used to order us to pay al sadaqah out of what we have for sale.” (Mukhtasar Al Sunan, Vol. 2, p.175)

Al Daraqutini reports Abu Dharr “I heard the Messenger of God (p) saying ‘Camels are zakated, lambs are zakated, and clothes and housewares are zakated.” (Al Muhalla, Vol. 5, pp. 234-235)

There is no disagreement that clothes and other housewares for personal or household use are exempt, which means that housewares and clothes mentioned in this saying refer to business inventory for resale. This is in addition to the general sayings that obligate zakah on all kinds of wealth without discrimination, such as “give zakah on your wealth.” (Al Tirmidhi, Vol. 3, p. 91)

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Islamic Financial Services Board (IFSB) preps liquidity guidance for Islamic banks, warns of risks – Reuters

ifsbThe Kuala Lumpur-based Islamic Financial Services Board (IFSB) plans to issue a guidance note for Islamic banks on the adoption of liquidity standards, warning lenders lack high-quality assets to meet new regulatory requirements under Basel III.

The IFSB sets global guidelines for Islamic finance, although national financial regulators have the final say on their implementation and enforcement.

The Islamic body aims to issue the guidance note in 2014, having already issued a liquidity guideline in March of last year, according to an IFSB report released on Tuesday.

A separate guideline on capital adequacy, currently under revision, will be issued at the end of 2013.

Read more at : http://www.reuters.com/article/2013/05/15/islamic-finance-liquidity-idUSL6N0DW04R20130515

Islamic Accounting – An Introduction

“Corporation have emerged as the dominant governance institution on the planet, with the largest among them reaching into virtually every country in the world an exceeding most government in size and power, increasingly, it is the corporate interest more than the human interest that define the policy agendas of state and international body although the reality and its implication have gone largerly unnoticed and unaddressed”(Korten). The western models of accounting have contributed to this situation.

According to Hayashi, “The traditional Western double-entry based accounting technology is well-suited to an orthodox, positivist society of any kind. It is not surprising that it is proving inadequate, as people are returning to more integrated world views, whether Islamic or otherwise”. The main critics of western accounting states that it failed to consider the social interest, promote the exploitation of capitalist over labor and society and Promote the concentration of wealth and power o the hand of the rich.
Accounting is being developed based on religion and culture in many societies. Shinto for example has a potential drive to establish a Shinto based Accounting in Japan as the Japan is society with has strong commitment to traditions and culture. According to the research the culture and accounting are closely related. Different culture, different economic – socio-politico systems demand different accounting system. The researchers in Islamic accounting emphasis that “Islam is different from Occident (Capitalist ideology), so it must have its own accounting system”.

The western accounting is Individuality – oriented, focus on individuality aspect without consider any social aspect and secular. But the Islamic accounting has to be developed to address these issues Society – oriented and should be based on focus on society aspect, basically Al Qur’an & As Sunnah (Shariah),
religious (must responsibility to God at the Judgment Day).

Therefore, It is necessary to develop an accounting system based on Islamic values and guidelines to the will benefit the mankind. Sura Baqara V 282 clearly states about the recording of transactions and give divine guidance to the humanity in all the aspects of business and accounting.

The Islamic accounting practices will be able report accurate income determination, to promote efficiency and leadership, to comply with the shariah (Islamic principles), commitment to justice, to adapt to positive social change. The Islamic accounting should be based Al-Quran and As-Sunnah.
The key success in Islamic accounting practices is the formation of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The AAOFI was found to report ethical dimensions in the Islamic financial institutions which was not addressed by the international accounting standards. The formation of AAOFI is the key stone for success in Islamic finance industry.
Islamic finance industry gave the real sprit to Islamic accounting. There are many researches going in this field. Some western educational institutions started to offer courses in Islamic accounting. These developments signify that Islamic accounting will also develop along with Islamic finance industry and will the benefit the humanity.

Dr. Jamaldeen M Faleel DBA
Assistant Professor – Finance and Accounting
Effat University – Jeddah, KSA

ACCA, KPMG undertake expert discussions on Islamic finance

The Association of Chartered Certified Accountants (ACCA) and KPMG are hosting the second in a series of high-level roundtable discussions in Dubai on May 5.

These discussions aim to answer critical questions on the growing issue of how the financial reporting of Islamic finance can be harmonised and made more consistent internationally.

The event will bring together experts from the fields of accounting standard-setting, auditing, regulation, Islamic banking and ratings agencies. The first event in the series was held in Malaysia last October and the next will be held in London, this demand reflects the growing international interest in the subject.

Aziz Tayyebi, the ACCA’s Head of International Development who is also an expert in Islamic finance, said: “Islamic Financial Institutions (IFIs) are being set up in various countries including South Korea and Ireland and conventional multinational firms are also increasingly offering Shariah-compliant products. This is why we need a platform such as this, with some of the leading stakeholders in international Islamic finance, to address some fundamental questions around the topic of Islamic finance.” Some of the questions that will be under consideration by the expert panel in Dubai will include

· Should the objectives of the financial reporting of Islamic financial transactions be different from those of mainstream financial reporting?

· Should Islamic Finance use distinct Islamic accounting principles to provide a faithful representation of the nature of these transactions?

· Do non-financial institutions that use Islamic finance products have different accounting issues to IFIs?

Samer Hijazi, KPMG Audit Director and an expert in Islamic finance, noted: “As the Islamic finance sector matures and becomes increasingly mainstream, greater synergy of practices and transparency of institutions that sell Shariah-compliant products will become critical.”

Muhammad Tariq, KPMG’s Head of Islamic Finance in the UAE, added:“It is timely to review the current financial reporting practices across the globe and to address the issues which might prevent a consistent internationalised approach, with all the benefits that we have seen in the development of IFRS”.

Guests for the roundtable which is to be held at the Emirates Tower Hotel in Dubai, will include Wayne Upton, director of international activities, IASB, MNCs, global and local banks.

Together these distinguished panellists will not only discuss the wider issues related to harmonising financial reporting practices for Islamic finance, there will also be some specific questions addressed at the forum, aimed at the compatibility of IFRS with Islamic Finance practices:

· Does the prohibition of taking part in interest-based transactions influence the increasing use of discount rates for measuring the market value of financial instruments?

· Are concepts such as ‘control’, ‘risks and rewards’ and ‘rights and obligations’ – essential in determining accounting treatment under IFRS?

· Are the treatments of various types of profit-sharing investment accounts under IFRS consistent with the Shari’a basis for those transactions?

The ACCA is the global body for professional accountants. It aims to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.

KPMG is one of the best-known names in business. Its global network of member firms provides audit, tax, and advisory services to local, national, and multinational organisations.
—

source : khaleej times

Zeti Urges the Accounting Professionals to Engage with Islamic Finance Industry

The globalisation of Islamic finance offers huge potential for greater intermediation of cross border financial flows, especially surplus funds, between economies from different parts of the world, thus presenting new opportunities for the industry. Islamic finance is an increasingly important component of the international financial system and continues to gain global acceptance. As such, strengthening the accounting, financial reporting, auditing and disclosure standards are very much a vital part of this process, as it is for the conventional financial sector.

This was the message of Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, in her keynote address titled ‘Islamic Finance: Strengthening the Global Financial Market’ to the 18th World Congress of Accountants (WCOA) 2010 which was convened in Kuala Lumpur in early November 2010 and officially opened by Malaysian Prime Minister Mohd Najib bin Abdul Razak.

The Congress, with the general theme ‘Accountants: Sustaining Value Creation’, discussed the challenges to the industry in the aftermath of the recent financial crisis. The Congress attracted over 6,000 delegates, of which some 70 per cent were from abroad.

“As we enter this new phase of globalisation in which Islamic finance is very much a part of, the cumulative efforts of the standard setters, the regulators and the industry will raise the potential to address the many challenges before us. We need to leverage on the respective areas of strengths and address the weaknesses with unrelenting perseverance,” declared Dr Zeti.

In a global financial environment that is faced with extraordinary challenges of regulatory reforms and uncertainties, Islamic finance, with estimated funds under management totalling USD1 trillion, is proving to be a positive force. Shariah principles, stressed the Governor, require that financial transactions in Islamic finance be accompanied by an underlying productive economic activity that will generate legitimate income and wealth. As such this connects the sector to the real economy.

Its profit and risk sharing requires the appropriate due diligence, disclosure and transparency, and emphasise the importance of governance and risk management. The Shariah Board in the respective individual financial institutions is an extra layer of oversight. Not surprisingly, despite the turmoil and uncertainties in the global financial system, Islamic finance, she added, has demonstrated its resilience and its continued global expansion during this period, expanding at an average annual rate of 20 per cent and representing one of the fastest growing segments in the financial industry.

The sector has also been able to respond to the changing demands of consumers and businesses by providing the range of differentiated products and services, including consumer financing, asset and wealth management, Islamic insurance and capital markets products.

In Malaysia, for instance, the Islamic banking system accounts for 20 per cent of the total banking system while the Sukuk market accounts for more than 50 per cent of the bond market. Following the liberalisation initiatives in this decade, there is greater foreign institutional presence and substantial foreign participation in Malaysia’s Islamic financial system. The Islamic financial system in Malaysia is also well supported by a robust regulatory and supervisory regime, legal and Shariah framework, and payment and settlement systems that are also important in supporting its sustainability and second to none.

The globalisation of Islamic finance, advised Dr Zeti, has been due to increased liberalisation which has prompted Islamic financial institutions (IFIs) to venture beyond their domestic borders, with the result that there are over 600 IFIs that operate in some 75 countries today. Similarly, it has resulted in increased foreign participation to raise funds in these markets and has also strengthened financial and economic ties between Asia and the Middle East. Indeed, sukuk, which is growing at an average annual rate of 40 per cent, have emerged as an attractive new asset class for investors while becoming a preferred financing and capital raising option for issuers.

Dr Zeti commended the role of the Islamic Financial Services Board (IFSB) in contributing to the orderly global expansion of Islamic finance and to the development of a cohesive cross-border regulatory framework and international best practices for the Islamic financial system. The two new initiatives in 2010 – the establishment of the Islamic Financial Stability Forum (IFSF) as a platform for cross-border engagement among regulators to discuss efforts to achieve financial stability in the Islamic financial system, and the establishment of the International Islamic Liquidity Management Corporation (IILM) in October – a liquidity management infrastructure for Islamic financial institutions – will cumulatively contribute towards the continued resilience of the global industry.

On financial reporting, Dr Zeti observed that applying the existing accounting frameworks and conventions to Islamic financial institutions may prove to be more challenging given the unique features of Islamic financial transactions such as the equity based and profit sharing contracts. Given the risk sharing features of these contracts, it may raise the case for a higher level of transparency for users to better understand and be better positioned to assess the underlying risks and their likely financial impact.

Similarly, there are different views on how conventional accounting concepts, such as reporting based on substance over form, and cash flow discounting principles, can be applied to Islamic financial transactions. As such, Dr Zeti advised greater understanding on these issues to further evolve solutions that would improve the value of financial reporting.

She commended the work done by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in enhancing cross-border comparability of Islamic financial transactions. At the same time, the newly-established regional Asian-Oceanian Standard-setters Group (OSG) is examining the technical issues in financial reporting of Islamic finance.

“The efforts by AAOIFI and OSG represent important contributions to current efforts to evolve an accounting framework that is appropriate and that will support further the global development of Islamic finance. It is important that the standards setting bodies such as the International Accounting Standards Board (IASB) is engaged in this process to complement, and to leverage on the current global efforts to converge international accounting frameworks,” she urged.

source : mifc

Should financial reporting for Islamic finance be different?

a6fa3e5b3359be4eSYARIAH-BASED financial transactions, more commonly known as Islamic finance, have grown in strength and are being accepted beyond their traditional Muslim market. The originally niche solutions to cater for Muslims who wish to participate only in financial transactions which comply with syariah principles are now being offered by traditional financial institutions as far as Europe.

There is no doubt that Islamic finance is growing, moved by promoters in a number of epicentres, Malaysia included. The establishment of the Islamic Financial Services Board, which issues global prudential standards and guiding principles for the Islamic finance industry which includes banking, capital market and insurance sectors, demonstrates the maturity of the industry.

As Islamic finance products become more globalised, the issue whether they should be reported using conventional accounting standards or using a specialised “syariah-compliant” accounting standards becomes something that needs quick resolution.

In 1991 the Accounting and Auditing Organisation for Islamic Financial Institutions or AAOIFI was established to develop accounting and auditing standards for this sector. The thinking behind this was that due to the difference in concepts between Islamic finance and conventional finance, financial transactions based on syariah need to be accounted in such a way to reflect the principles, in harmony with traditional accounting standards. Since AAOIFI was established before convergence became the main stream mantra in accounting standards setting, such an approach was considered appropriate by market participants.

With the establishment of the International Accounting Standards Board (IASB) in 2001 carrying the mission of developing a single high-quality standard for the world, there seems to be some issues pertaining to financial reporting for Islamic finance.

Given that convergence in accounting standards is gaining momentum and the world is looking forward towards having the International Financial Reporting Standards (IFRS) as the ultimate set of standards, should the standards developed by AAOIFI be abandoned and should IFRS be adopted wholesale by institutions offering Islamic finance products for the sake of convergence?

Before contemplating the answer to this question, let us consider some differences between the principles of the financing models.

Essentially, Islam prohibits interests on loan and speculative trading.

The parties in syariah-based financial transactions are supposed to take risks and share profit or loss in transactions backed by productive assets. Due to this, Islamic finance products create different relationship structures between the provider of funds and the user of funds compared to lender and borrower relationship in conventional financing.

All Islamic financial products must go through a validation process by syariah advisers of the institutions intending to issue the products. This is then translated into legal agreements between financial institutions, customers and other related parties, structured based on the types of financing.

Since IFRS is supposed to be free of any ideology (except for the belief that market is always perfect), transactions including Islamic finance would be reported based on the contracts. Additionally, the principle of substance over form has always been applied in conventional accounting. AAOIFI accounting standards provide accounting treatments based on the financial products and additional disclosures deemed necessary in line with Islamic principles. This is perhaps where the risks of divergence between IFRS and AAOIFI standards could appear.

It is quite interesting that IASB and the Financial Accounting Standards Board of the United States (FASB) are in the process of developing a common conceptual framework for financial reporting. This process is ongoing.

If the proponents of Islamic finance sincerely believe Islamic finance should be in the mainstream rather than remaining as a niche sector, the opportunity of being seriously involved in the development of the financial reporting framework should be taken seriously.

Since AAOIFI has done a lot of good work in the area of accounting for Islamic finance, it could engage IASB and argue for Islamic finance to be accommodated in the newly minted framework. The IFSB working model with the Basel Committee on Banking Supervision could be considered by AAOIFI.

What could be the options for the accounting profession and other players in Islamic finance in Malaysia?

Given the competitive environment, Malaysia has to start its own initiative in promoting and positioning Islamic finance into the mainstream of global financial reporting framework.

We have well-established institutions which can be leveraged upon to enhance the understanding and knowledge on financial reporting for syariah-based financial transactions. The International Centre for Education in Islamic Finance (INCEIF) and its sister organisation, the International Syariah Research Academy for Islamic Finance (ISRA), together with universities in Malaysia with Islamic finance interests could be the knowledge-base that could be used by the accounting profession for this purpose.

The Malaysian Accounting Standards Board (MASB) could continue to be the link to IASB while regulators such as Bank Negara Malaysia and the Securities Commission would continue to provide the regulator perspectives on accounting for Islamic finance transactions.

Initiatives similar to the Financial Reporting Standards Implementation Committee (FRSIC) initiated by the Malaysian Institute of Accountants (MIA) can also be considered in moving this forward. This FRSIC-like committee could anchor the work using the IFRS platform and leverage on the resources and input from the institutions mentioned above in determining the way forward and providing input to IASB.

It would also be natural for accounting firms and professional accounting bodies to support such an initiative.

Written by Nik Mohd Hasyudeen Yusoff

source : theedge

Dundee University – First University in UK to offer MSc in Islamic Accounting and Finance

A SCOTTISH university is to offer the UK’s first postgraduate course in Islamic finance.

Dundee University will unveil its MSc in Islamic accounting and finance at a conference on ethical finance in Edinburgh today. The course has been created to meet increased demand from the banking sector.

Dr Rania Kamla, a lecturer in theDr Rania Kamla, a lecturer in the accountancy and finance department at Dundee who will lead the new course, said high street banks were increasingly catering for Muslims and needed knowledgeable staff.

She said Islamic banking should not invest in areas in conflict with the religion’s teachings such as pork products, alcohol, the arms trade, or pornography.

“But it is also about the deeper impact, so it would also encourage investment in communities and try to reach out to disadvantaged groups, “she added.

There is only one dedicated bank that adheres to the teachings of Sharia law, the Islamic Bank of Britain.

Dr Kamla said: “It was originally based in London and Birmingham, but has now expanded to Scotland. Up to 20 financial institutions in the UK now provide Islamic products, including HSBC. It is not allowed in Islam to charge interest, therefore they promote interest-free banking.

“Instead, they depend on profit and loss sharing, so you both share in the risk.”

The MSc course, which begins in September, is expected to take a handful of students in the first year while the university gauges demand.

Omar Shaikh of the Islamic Finance Council said: “This is a wonderful opportunity for Scottish students to study Islamic finance, in Scotland.

“Education is extremely important if we are to realise the ambition to make Scotland and UK a global gateway for Islamic finance.”

Legal firm Tods Murray, which created the first Islamic mortgage in Scotland, organised today’s conference. Partner Graham Burnside said: “The role of Islamic finance and ethical-based financial systems in today’s economy has not been fully explored, and the launch of Dundee University’s course is an important step to ensure that Scotland does not miss out on the potential it offers.”

The Islamic and Ethical Finance Conference, takes place at the Tods Murray headquarters in Edinburgh Quay, and will explore the various faces of ethical finance and Scotland’s heritage in faith-based finance.

Speakers include specialists from the Islamic finance industry and representatives from the Church of Scotland, the Co-Op Bank and the Scottish Widows Investment Partnership.

Professor Christine Helliar, dean of the school of accounting and finance at Dundee University, said of the new course: “Graduates will be able to bridge the gap between accounting and financial knowledge and how it relates to Islamic law. The programme will include an introductory element to the main issues, coverage of the most popular products and how they relate to Sharia law, and how conventional banks compare with the practices of Islamic banks.”

DIVINE PROFITS

UNDER Islamic teaching usury is not allowed therefore borrowing money must be done under special arrangements.

For example if you wanted a mortgage to buy a property, the bank would buy the house and then sell it back to you but charge you profit.

In other words the deal would be based on profit sharing by both parties rather than interest payments.

This is because profit is allowed under Sharia law while charging interest on debt is considered immoral.

Islam also precludes banking which invests in businesses which go against the teachings of the religion.

So for example, it would be un-Islamic to invest in the arms trade or pornography.

But it would also not be seen as ethical to gain profit out of firms that are involved with pork products or alcohol which are also barred by the religion.

source : scotsman