KNEKS (National Committee for Islamic Economy & Finance) with the support of DinarStandard and Salaam Gateway has published a Islamic finance books which looks at the impact of Covid-19 crises on the Islamic finance on 22rd May 2020. The book can be downloaded from Salaam Gateway. Download
Agriculture as a food supply plays vital role in the existence of humanity. Agriculture also supplies raw materials for industry such as textiles and sugar. …..
Abstract: Bridging global economic inequalities calls for effective financial alternatives such as awqa ̄f banks to better attend to the needs of the poor and underprivileged. This is expected to address the root causes of poverty and ensuing economic gaps, improving much of the living standards whether pertaining to education, health, shelter, employment or basic social services while reducing the state’s economic and financial burden. We envision awqa ̄f banks as institutions which are established through cash awqa ̄f and which operate multiple awqa ̄f funds alongside an assortment of financial instruments. The main use of their awqa ̄f funds are the issue of low-cost credit to the poor, economically disadvantaged and underprivileged, instead of focusing solely on generating and maximizing shareholder profits. This is to support the economy through of steady and sustainable growth, effectively raising the lower bar on per capita income and lifting multitudes out of poverty and need. This paper explores how low-cost credit can be provided to the poor or lower income demographics through awqa ̄f banks, while addressing relevant issues such as Shari’ah compliance, services rendering, investment and awqa ̄f distribution. This paper also examines current studies on awqa ̄f in relation to finance and banking, the basic functions, and characteristics of the Shari’ah-compliant awqa ̄f bank, as well as evaluations of awqa ̄f banks. Current studies show that there is a legitimate need for Shari’ah-compliant awqa ̄f banks which not only providing services for its beneficiaries but also manage investments and awqa ̄f funds that contribute to overall national development and economic growth. This study would be of high relevance to experts, practitioners, financial managers, regulators, and policy makers in the fields of awqa ̄f, banking and finance.
Effat University , IRTI and INCEIF
The 5th Islamic Finance Conference (IFC 2019) ON
ISLAMIC BANKING AND INSURANCE IN THE ERA OF DIGITAL TRANSFORMATION
Date: December 1st 2019
Venue: Effat University, Jeddah, Kingdom of Saudi Arabia
You are cordially invited to submit your research papers for presentation at the 5th Islamic Finance Conference (IFC 2019) on December 1st, 2019 that will take place in Jeddah (Saudi Arabia). The IFC 2019 is organized by Effat University, the Islamic Research and Training Institute IRTI and the International Center for Education in Islamic Finance INCEIF. The aim of this conference is to bring together the local and international researchers, scholars and policymakers to present and to discuss research in the field of financial technology, smart contracts and Islamic financing.
Following the success of the previous Islamic Finance Conferences, Effat University, the Islamic Research and Training Institute IRTI, and the International Center for Education in Islamic Finance INCEIF are organizing the 5th IFC scheduled to be on the December 1st 2019 in Jeddah, Saudi Arabia. Themed “ISLAMIC BANKING AND INSURANCE IN THE ERA OF DIGITAL TRANSFORMATION”, the forthcoming IFC 2018 is expected to platform academicians, scholars, researchers, professionals, bankers, insurers and other stakeholders to be together to discuss the revolutionary technology of Blockchain and digital transformation that the Islamic finance ecosystem could leverage to exponentially enhance business processes and streamline operations.
The digital transformation could include smart contracts and blockchains, cryptocurrencies, cybersecurity, Insure Technology, Crowdfunding, payment platforms as an emerging channels that could be utilized in the Islamic banking and insurance industry. The Digital Transformation and Fintech offer a tremendous amount of opportunities available for bankers and insurers to achieve multiple strategic objectives such as financial inclusion, customer-oriented financial services, operation excellence and competitive advantage.
The IFC 2019 addresses the question of what role digital transformation and blockchain technologies play in Shariah banking and Islamic insurance, and How Muslim entrepreneurs, bankers, insurers and small businesses could benefit from blockchain and Fintech?
The Conference on ISLAMIC BANKING AND INSURANCE IN THE ERA OF DIGITAL TRANSFORMATION” is aiming:
- To enrich the theory of Islamic financial innovation and its role in financing SMEs.
- To highlight the significance of FINTECH and practice of digital insurance and banking.
- To address various issues currently faced by Islamic finance technology.
- To assess the current innovative efforts of the Islamic finance industry.
Deadline for abstract submission : September 30th
Notification for abstract acceptance : October 10th
Deadline for full paper submission : November 20th
Conference dates : December 1st
LANGUAGES – The language of the conference will be in English.
The theme of the Conference will be “ISLAMIC BANKING AND INSURANCE IN THE ERA OF DIGITAL TRANSFORMATION ”
The main topics of the conference include, but not limited to:
- Islamic banking and Insurance
- Takaful and Waqf
- Digital banking
- Fintech and Saudi vision 2030
- Ethics and regulation of digital Islamic finance
- Blockchain and cryptocurrency
- Issues with Islamic financial innovation
- Shari’ah scholars and SSBs and their position vis-à-vis Islamic financial innovation.
- Dynamic Islamic Capital Market
- Islamic Finance and SME Financing
Authors are invited to submit their full papers in English, in Word formats. Submissions should be made though email IFC@effatuniversity.edu.sa or ConfBay website (www.confbay.com). Contact person: Dr Tahar Tayachi email@example.com
Any submissions after the September 30th will not be entertained. All the papers’ submission are peer-reviewed and the decision notification is made latest by October 10th.
Both theoretical and empirical papers are considered by the conference. The authors are required to use the following format:
- Length: 10 to 15 pages, Font Times New Roman, size 12, 1.0 line spacing (single space), A4 paper size, Margins: 1 inch or 2.5cm
- Author(s) names, affiliation, correspondence address, and email address should be provided in title page
- Between three to six key words should be mentioned by the author(s)
- Tables and figures should be placed in their appropriate location in the paper
- References should follow APA format
Registration Fees : No registration fees
Conference Publication :
Selected papers presented in the conference would be published in a special issue of the following ABS/Scopus Indexed journals:
Journal of Islamic Business and Management (JIBM) JIBM, www.jibm.org
ISRA International Journal of Islamic Finance, http://www.emeraldgrouppublishing.com/services/publishing/ijif/index.htm
Islamic Economic Studies, http://www.emeraldgrouppublishing.com/services/publishing/ies/index.htm and http://iesjournal.org/english/home.html
Vulture financing and vulture fund assets are increasing in size in recent years as an alternative investment, taking a major share in the conventional finance industry. Vulture funds and vulture investors are adopting the behaviors of vultures that prey on financially distressed companies and buying the near default bonds or debts in return for higher capital gains.
Demand for food is expected to increase by 70% by 2050 and annually $ 80 billion investment is needed to meet the future demand according to the estimates of World Bank. Middle- class population from developing country has led to the increasing demand for higher value foods such as fish, meat, and dairy products. Overall, the demand for higher value foods going to increase in next three decades which can result in increased in investment for agriculture. Agriculture is one an important source of income for the people living in rural area of developing countries. The major challenges faced by the farmers are lack of access to finance their agricultural production. Financial institutions don’t want risk themselves by investing in agricultural production and business due to their inherent risks and lower returns. Farmers are less fortunate to get loans compared to the business and industries.
Wakaf — the Arabic word for an endowment to a charitable cause — contributed significantly to the global socioeconomic landscape in the past, especially in eradicating poverty. However, in modern times, wakaf has not had a compelling impact on improving the welfare of the people, according to Dr Farrukh Habib, researcher at International Shari’ah Research Academy for Islamic Finance.
While there are many reasons for this, it is mainly due to the mismanagement of wakaf assets, he says. Although these assets are estimated to be worth more than US$1 trillion globally, it has been difficult for individuals and institutions to maximise the value of the endowments.
A new report published by the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank Group has demonstrated that Islamic social finance comprising zakat, waqf and not-for-profit microfinance is attracting increasing interest in the Central Asian countries, the Balkans and the Russian Federation.
The ‘IRTI Islamic Social Finance Report 2017’ is the maiden study of its kind that also traces the historical roots of Islamic social finance institutions in this region, while exploring their future potential in the light of legal, regulatory frameworks, customs and cultural practices that are unique to this region. This issue of the report—the third in the series—analyses the resource gap and the Islamic social finance pontential specifically in the Russian Federation, Kazakhstan, Kyrgyzstan, Tajikistan, Bosnia and Herzegovina, and Macedonia, and concludes that Islamic social finance could close the resource gap and end poverty in these countries.
Key recommendations of the report include enhancing the legal and regulatory frameworks for Islamic social finance; institutionalizing zakah collection and distribution; creating enabling environment for non-profit microfinance products; and expanding the scope of awqaf beyond building mosques and Islamic education schools.
In terms of Islamic microfinance, the report finds that most of the areas where Muslim populations live are agrarian but there are no Islamic financial institutions providing financing to small-holder rural farmers at competitive rates. Hence, farmers continue to approach conventional institutions for financing. The reports also finds that financial literacy in the region remains very low, and therefore recommends that Islamic microfinance institutions must embark on a massive financial literacy campaign if they are to rid the society of riba (interest-based financing).
Other recommendations of the report include:
· Legal and regulatory steps should be taken to institutionalise zakah collection and distribution, recover lost awqaf properties, and facilitate ease of business for Islamic microfinance instituions.
· Muslim organizations should maintain database of the needy and share it with Islamic charity organizations to make it more effective to distribute Islamic social finance proceeds to the needy.
· Regional Muslim organizations should work out general rules on accounting, distributing and reporting on the funds collected in the form of zakah or other contributions of the Muslims.
· Public enlightment of Muslims on the waqf concept to widen the scope of attention given to the sector, beyond building mosques and religious education schools, to cover also constructing educational and scientific institutions, hospitals and rehabilitation centers, the development of infrastructures, and the support of entrepreneurship among the Muslims.
· Development of the Islamic capital market in CIS countries is of high importance, given that further development of monetary waqf would have to be supported by liquid Islamic financial instruments.
· To make Islamic microfinance more competitive, amendments in civil and tax legislation should be made, for example, to address the issue of double taxation in murabaha (mark-up sales).
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates that provide the investor the right to own the underlying revenue-generating assets and rights and/or services, besides of the income stream they might yield. Sukuk are normally ruled by English law in cases of dispute or arbitration, owing to its trustworthy law provisions.
Since mid-2000s, Sukuk emerged with growing popularity as a realistic and practical shariah compliant long-term financing tool. Malaysia is the largest country in the world for sukuk market, and is committed to continuously advance its financial services industry to meet the ever growing needs of its stakeholders who include, businesses, investors, and the government. Additionally to appeal on the regional and global market levels. This has led to the Sukuk markets around the world to grow and raise significant sources of capital despite a series of substantial amount of sukuk defaults in the Gulf Corporation Countries (GCCs) had blemished the market’s confidence on sukuk, as well as some Malaysian cases such as of Johor Corporation, Ingress Sukuk, Tracoma Holdings, and Nam Fatt Corporation.
Implications of sukuk default
Sukuk defaults elevated numerous questions about the underlying structures and capability of the sukuk as an alternative source of funding as this is issue very crucial since it affects the welfare of all the involved stakeholders. This has laid down more emphasis on the need to identify default risk in sukuk in order to better supervise and manage its affiliated risks. High degree of certainty was needed concerning the post-default process in sukuk transactions since the risk for a default is inherent in all sorts of transactions. Now, the utmost carefully structured products could flop due to conditions beyond investors’ control.
Therefore, this paper aims to shed light on the issue of sukuk default and its implication on several cases. Also, it attempts to analyze the implication of sukuk default on a country’s reputation, the legal aspect and on the investor’s protection.
As previously mentioned above, the market for sukuk has developed quickly over the last few years with regards to size, numbers, and complexity. Sukuk is now known as a substitute for conventional bonds and is employed in Islamic financing framework for the last two decades. It provides access to foreign governments and corporations to an enormous and increasing Islamic liquidity pool of funds, other than conventional methods.
While sukuk are supposed to be more secure than the conventional bonds, since they are performed only on asset backed assets, sukuk are now asserted to have lost trustworthiness as a practicable and worthwhile Islamic long-term project financing instrument. Due to the complexity of their structure and several legal issues, it was difficult to apply a reliable rating process for sukuk. However, from a rating view point, evaluating the risk of the issuer’s innate credit strength is central to the final rating result. This was acknowledged when a series of default events took place.
For instance, the period 2003 till 2010 witnessed a series of default in some counties. On top of them is Malaysia with nine big cases, then Pakistan with two and one default event in each of Saudi Arabia. Kuwait, and the USA. Those default cases are: Saad Group’s Golden Belt($650 M), East Cameron Gas ($165.6 M), The Investment Dar Company($100 M), New Allied Electronics Indus-tries ( $ 16.4 M) + Maple Leaf(Rs8 billion), Oxbridge Height ($2.82 M), Hartaplus, Ingress ($ 7.2 M), Oilcorp Bhd ($ 20.6 M), PSSB Ship management (RM40 m), Tracoma Holdings (RM 100 m), M-Trex Corporation (RM 60 m), Englotechs HOLDING (RM 50 M), Straight A’s portfolio (RM 200 M), and Malaysian International TunaPort (RM 240 m ). Based on information from RAM rating agencies, there were 24 recorded default events in Malaysia over the period 2003-2010. Other defaults did follow the ones mentioned earlier. A sample of those defaults will be discussed in the next part in this research along with the reasons that lead to their occurrence.
Court cases relating to defaulted sukuk
The first case of default revolves around East Cameron Partners (ECP). The structure of the sukuk was made in the following sequence. The issuer SPV, East Cameron Gas Company (ECGP), which is incorporated in Cayman Islands issued USD165.7 million worth of sukuk. The proceeds of the sukuk would be employed to buy the ORRI from the Purchaser SPV, just after the Funding Agreement for USD$ 113.8 million would be made. The left over sum was to be used for a development plan, standby account, and to purchase put options for natural gas to hedge against the risk of fall in gas prices. Then, the originator paid his share of the capital in the form of a transmission of ORRI into the buyer SPV. The next step was that the purchaser SPV would be holding ORRI in the properties, would then entitled to around 90 percent of East Cameron Partners’ net revenue generated though gas production. The gas and oil production would be sold to two sources with Merill Lynch acting as a backup. The Proceeds of the oil and gas sale would be channeled into an allocation account. When sukuk reach maturity, the issuer SPV would exchange all the sukuk against the amount left to be transferred to the sukuk holders.
Reason of default was because that the originator attempted to wrap the sukuk assets that was royalty interests on oil and gas revenues kept by an offshore special purpose vehicle (SPV), into its domain, while the sukuk issuer had been publicized as bankruptcy tool. Meanwhile, the assets were moved in a seemingly shariah compliant true sale. The court holding was that the originator had already sold the underlying assets in a true sale deal.
The second case was for a 5-year musharakah sukuk was issued by The Investment Dar (TID) with the association of ABC Islamic Bank (Bahrain) in 2005. The sukuk offered 6-month LIBOR plus 2% annual, while the 2006 sukuk issue guaranteed a LIBOR plus 1.25 percent for the first 3 years and LIBOR plus 1.75 percent for the rest of the remaining period, to be paid every six months. The Sukuk issued in 2005 were registered on the Bahraini Stock Exchange whereas the 2006 sukuk were issued and registered in Dubai International Financial Exchanges. The first issue was limited and was established in the Cayman Islands. Next, sukuk are issued by the SPV to sukuk investors, primarily against the proceeds of the sukuk. The second issuance was a trust agreement with sukuk holders, the SPV entered into a musharakah agreement, in which the SPV capitalized the proceeds of the sukuk to hold 48.78 of musharakah capital. Instantaneously, the originator, TID, paid its share by shifting all rights, benefits, and entitlements to the TID vehicles and property to musharakah, valued at $157.5 million valuation as specified by a third party and arranged by the partners, thus acquiring the outstanding 52.22 percent of capital in musharakah. The total amount was invested in the motor vehicles and in property assets. The musharakah assets were converted into 150 units, in which TID acquired 76.83 units and the issuer held 73.17 units. The agreement was that the returns on the underlying assets were to be split among the SPV and TID. For more security for the investment, the originator offered an undertaking to repurchase the SPV portion in the underlying assets at the end of sukuk period or in case of early insolvency. As agreed upon between the originator and the SPV, management of the musharakah would be carried out by the originator, in exchange for a fee and plus an incentive fee in case the musharakah accounts would provide a net profit during a given time. The structure of the sukuk was approved by the shariah boards on each partner side.
Later when the agreement took place, TID defaulted under a $100m sukuk in January 2009. The sukuk was ruled by English law using an offshore SPV and the underlying assets were located in Kuwait. Since the sukuk were asset-based, investors were at the theoretical positon to sell the assets if TID. Following in March 2010, TID gained court defense under Kuwait’s new financial firmness law that ceased all lawsuits related with insolvency towrds TID. TID subsequently settled with Sukuk holders on a six year period of restructuring.
Reasons for Default
TID was in good financial condition till 2007. But during 2008, TID reported a net loss of KD 80. 3 million, for the first time since its foundation. Two reasons were behind this situation. First, was the unrealized losses of KD 88.14 million relating to an impairment in the value of investments in associates. Second, was the actual realized losses of about KD 9.3 million on investments, which in the eventually led to the downfall of the company. During late 2008, TID defaulted on its debt obligations as to liquidity problems. Early in 2009,TID entered in a debt restructuring plan.
The third sukuk default occurred on mid-2009, where a Saudi business company defaulted on periodic disbursements. Consequently, Moody’s lowered the rating of the company to junk grade. Few banks in the Gulf were affected harshly by the Saad sukuk default for of their exposure to the deeply distressed Saudi conglomerates who are Saad Group and Ahmad Hamad Al Gosaibi and Brothers.
Saad Sukuk Structure was based on lease and sublease contracts. The transaction was structured according to a head lease agreement, Golden Belt 1 Sukuk Company, which is a SPV listed in Bahrain, entered into a long Head Lease Agreement with the chairman of Saad, in which the SPV, as head lessee, obtains some land parcels on lease from the Head Lessor, Mr Al-Sanea, for 25 years maturity. The net takings of the sukuk would be employed to pay the total rental amount due in upfront by the issuer/head lessee to the head lessor. Then, the Golden Belt 1 issues sukuk of $650 million in exchange of the leasehold rights on the land parcels and pays full rental payment upfront to owner of Saad Group. Afterwards, according to a sub-lease agreement, Golden Belt 1 sub-leases the land parcels to Saad for five years in return for half yearly rental payments at LIBOR plus 0.85 percent, which happened to be the same return as paid for the Sukuk that was an Ijara contract. This would lead to Saad transfering the rental amounts to the SPV at the promised rate, which enables the SPV to transfer the rental amount to the sukuk holders accordingly. Once they reach maturity, sukuk are then exchanged by the sukuk holders, Saad transfers the sukuk amount to the SPV. 7. The SPV, subsequently pays out the sukuk amount to the investors.
Reasons for Default
Saad company had a huge default amount that was $15.7 billion, comprising its Islamic bonds. Saad was confronted with huge liquidity crisis during 2008 and was not able to service its debt obligations promptly. The originator company was surprisingly providing improper and misleading information that was not never delivered to the regulators. Consequently, the Saudi Arabian Monetary Authority (SAMA) halted Saad group assets on May 2009. Additionally, was accused of dishonesty and fraud and was charged of USD10 for misappropriation of the funds of Algosaibi Investment Holding company, the formal owner of the SPV. As a result, the accounts of Saad in Cayman Islands, which were valued at around $9.2 billion, were frozen by November 2009.
The fourth and last sukuk case to be discussed in this research will be Nahkeel sukuk, which was Dubai-based. Nahkeel was a high profile and the largest ever sukuk default case to date. It was issued late in 2006, with maturity of 3 years, which raised a total of $3.5 billion. The sukuk were registered on the Dubai International Financial Exchange. The purpose of the sukuk was to finance a property development project for one project in Dubai, which is Nahkeel Co. PJSC. A SPV was established for this purpose under the name of Nahkeel Development Limited. The originator, Nahkeel Holdings 1, was a subsidiary of Nahkeel World, which was itself owned by another public sector company, Dubai World. Nahkeel Holdings 1, Nahkeel Holdings 2 and Nahkeel Holdings 3 held full ownership in Nahkeel Co. PSJS. The sukuk had the status of a sovereign bond by the rating agency as they were issued by public sector. Investors then, expected an implicit government warranty for the sukuk. In addition the sukuk had a Moody’s (A1) and Standard & Poor’s (A+) ratings.
The Nahkeel sukuk had been issued on an Ijarah manfaa basis, which enabled sukuk holders’ to obtain the leasehold interest of the primary assets without transferring the title of the assets to them via SPV. Thus, Sukuk holders had only the right to the stream of income generated by the assets but not on the assets themselves.
The agreement was structured that the SPV, namely Nahkeel Development, would issue Nahkeel sukuk to raise $3.5 billion to purchase the leasehold interest in definite land, building and other property at the Dubai Waterfront, which was valued at that time at AED 15.5 billion in 2006 by Jone Lang Lassalle. The SPV would then transfer the collections of the sukuk to Nahkeel holding 1 and purchases leasehold rights of the underlying properties from Nahkeel Holding 1, for 50 years. Additionally, the SPV, would lease the sukuk assets to Nahkeel Holding 2 for a period of 3 years. The SPV would upon maturing of the lease period at specific price and with payment of the other half of the rental payments.
By November 2009, Dubai World demanded a restructuring of its $26bn debt. Investors feared that its $4bn Nakheel sukuk would also default. The sukuk was governed by English law and structured using English trust law concepts to bestow only beneficial ownership on the investors in the form of leasehold rights. Significantly, leasehold rights are not deliberated real rights under UAE law, where the assets indirectly owned by the government were located. Eventually, the default was prevented by Abu Dhabi bailout of $5 billion.
Reasons for Insolvency/default
On the outbreak of the financial crisis over the period 2007-2009, the macroeconomic condition forced Dubai’s government to seek a standstill for $59 billion debt owed by one of the state-owned companies Dubai World, including Islamic sukuk of 3.5 billion. Several factors interplayed and lead to the factors which caused Dubai World to in effect default, including huge short term borrowings, decrease in oil prices, the explosion of the real estate price bubble because excessive supply of residential and commercial properties. At that time, the value of Nahkeel was not clear. Furthermore, the guarantee of Dubai World became worrying since the holding company itself was additional negatively affected by the financial crisis. Moreover, being a holding company, Dubai World may have superior creditors than sukuk holders. Finally, the sukuk’s default was activated by the exact financial situation of the obligor. It was held that if the majoirty of funds in related parties had been utilized sensibly, the halt demand for at least the Nahkeel sukuk, could have been prevented.
Despite the defaults which faced Islamic sukuk in the past years in several countries especially in the gulf however it seems Islamic sukuk are still in demand and actually growing and becoming very popular, perhaps due to the increased regulation. This demand can be attributed to that Islamic sukuk are founded on Shariah principles and on real assets such as real estates.
The overall market sentiment show that many investors and business yet believe in rightly believe that Islamic sukuk have decent investment forecasts and are safer than other forms of investment investments when compared with other conventional instruments..
www.academia.edu/…/Shocking_21_defaulted_sukuk_cases_in_the_last… Sukuk Defaults: On Distress Resolution in Islamic
Finance AAOIFI, 2008, Accounting and auditing organization for islamic financial institutions. Anwar, Haris, and Michael Patterson, 2009, Aston martin owner is first to default on gulf sukuk (Bloomberg). Boustany, Iad G., Sleiman Roula, and Elias Sayegh, eds., 2005. Securitization in mena/gcc: Activity overview by asset class (Globe White Page Ltd, London).
Boustany, Iad Georges, 2006, New sukuk technology, (International Financing Review, Middle East). El-Gamal , Mahmoud A., 2007, Mutuality as an antidote to rent-seeking shari‘a arbitrage in islamic finance, Thunderbird International Business Review.
El-Hawary, Dahlia, Wafik Grais, and Zamir Iqbal, 2004, Regulating islamic financial institutions: The nature of the regulated, Working Paper No. 3227 (World Bank Policy Research ).
Fidler, Stephen, 2009, Defaults pose latest snag in islamic-bond market, Wall Street Journal Halawi, Adnan, and Abir Atamech, 2012, Sukuk quarterly bulletin, (Zawya).
Hasan, Zulkifli, and Mehmet Asutay, 2011, An analysis of the courts’ decisions on islamic finance disputes, ISRA International Journal of Islamic Finance 3.
Hassan , Kamal Abdelkarim , and Muhamad Kholid, 2010, Bankruptcy resolution and investor protection in sukuk markets, (QFINANCE).
Howladar, Khalid 2009, The future of sukuk: Substance over form? Understanding islamic securitization, asset-backed and aaoifi principles, (Moody’s Investors Service).
IMF, 2010, United arab emirates: 2009 article iv consultation, IMF Country Report (International Monetary Fund).
by : Hanan Gabil, Wed Al-Nafie and Wejdan Al-Harbi
In early history of accounting, the first name to describe the system of debits and credits in journals and ledger which in fact still the basics of today’s accounting is called Luca Pacioli, year 1494.
Accounting is defined as a valuable knowledge to be performed and it is considered to be the main index for all countries’ economy. Accounting is also an essential part in processing information of business and economy activity into financial statements. In other words, accounting is the universal language of business and economics as well as finance. However, unfortunately, there is still fraudulent and dishonest practices in business and economic activities. Accounting can be divided into 6 categories as follows:
- Finance Accounting
- Management Accounting
iii. Auditing Accounting
- Forensic Accounting.
There is no certain activity that could be possible done without relying on accounting, because accounting deals with information that consists of financial status and profitability of economic enterprises.
Islamic accounting has existed since the 1500s and has its own principle that not only can decrease the degree of unexpected activities pertaining to accounting process but also increase the welfare of both internal and external parties of the business. That’s because Islamic accounting has an aspect that has more meaning and value which is a similar aspect of conventional accounting too. It comprises of all values required to the most preferable accounting process. This essay details the differences between Social accounting and Islamic accounting.
Ethics in accounting has been posed after scandals that had the greatest impact of the recent century such as examining collapse hiding, law breaking, fraud and violating moral standards. This setback drove companies towards a common strategic goal – principles of accounting. Thus, the following four elements of principle are essential in ethics:
- Honesty and trustworthiness
This rule requires a complete and honest presentation of relevant financial and non-financial information. Information presented should be adequately transparency and must not be used for an ethical advantage. A high degree of integrity and discretion is essential.
Objectivity requires all professionals and information to be fair and unbiased. Professional judgment must be free from conflict of interest such as hospitality and family relationship. It is strongly recommended to refrain from personal relationships and accepting gifts on duty.
- Confidentiality of information
Unless absolutely necessary and required by the relevant accounting and auditing standards, confidential information should not be disclosed or be used to gain any unethical advantage.
- Professional competence and conduct
Professionals are required to have an appropriate level of academic and work competence, preferably related to their field. Any offers of professional duty for which one does not possess sufficient skills to execute the task effectively should be declined. Professionals must always comply with relevant accounting and auditing standards and perform their duties diligently.
According to the ethical code of conduct, having a code does not eliminate fraudulent activities. In fact, it is a guide to accountants which needs to be fully accepted by professionals before it can be effectively adopted into practice. Therefore, there are two additional codes that are incorporated into Islamic accounting:
- Faith-driven conduct
Under Islamic accounting, self-monitoring is fundamental. Self-monitoring may be defined as being constantly conscious of one’s actions and their accountability before Allah on the day of judgment. It is also important to seek Allah’s satisfaction instead of pleasing people while performing professional duties which are consistent with Islamic values and the Shariah. One must always be diligent and sincere in his work and actions. This also stresses on keeping promises and honouring agreements.
Legitimacy requires all professional duties to be according to the Shariah. Accountability to Allah is given priority over accountability to the management. Professionals must have competent knowledge of the Shariah rules and principles through education and formal training. All business activities and transactions must be Shariah compliant and should be verified for religious legitimacy by professionals who are responsible for executing them.
Social accounting is also coined as Social Responsibility Accounting because of its responsibility to measure and inform the public about the social activities undertaken by the enterprise and their impact on the society. It is the vision of which a business seeks to make a valuable impact on social operations. In simpler words, social accounting can facilitate the identification and management of social risks.
Business is a socio-economic activity and its objective is the welfare of the society. It requires full responsibility for providing solutions for social issues. Therefore, the concept of social accounting is to manage huge amounts of funds at their disposal and invest substantial amounts in social activities so as to nullify the adverse effects of industrialization.
The benefit of social economy is to act as an evidence of social commitment, fulfill its obligations, and advise the government and the general public to form correct opinions that are just and ethical. However, it does have its limitations. It can be labor intensive if strategic planning has not been set, or also been not useful for benchmarking.
In an Islamic society, accounting should establish purposes according to Islamic teachings in relation to contemporary accounting thought. Those which are Shariah-compliant are pursued and those that are not are discarded.
Certain Islamic ethical principles have a direct impact on accounting policy and principles.
These principles are derived from the Holy Qur’an and the Sunnah, that stresses on the need for justice, truth, and fairness, and are considered to be a society’s priority and responsibility. This also contains specific standards for accounting practices. In Islamic financing principles, it must follow specific elements which gives it distinctive religious identity. These elements are:
- Riba (interest): The payment and taking of interest as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’an.
- Zakat: The process of repetitive distributions of income and wealth is inherently in Islam to guarantee a fair standard of living for every people especially the poor. Zakat is different from a tax, A tax is an obligation of citizens toward the society, whereas zakat is an obligation of a Muslim not only to society but also to Allah.
- Haram: Islamic banks cannot finance activities or items forbidden in Islam,
Islamic banks give priority to essential production which caters to the needs of
the majority of the Muslim community.
- Takaful (joint-guarantee): The only type of insurance that would appear to be lawful according to the Shari’ah insurance.
Muslims ought to conduct their business activities according to the requirements of their religion which are moderation, justice, kindness, honesty, spending to meet social obligations. Unfairness and greed should be avoided at all times.
Applying Islamic accounting principles leaves a beneficial impact directly and indirectly on the internal and external parties of the business; some of which are highlighted below.
- Less possibilities of unexpected activities by the accountant such as fraud in business and society.
- The creditor will feel more secure in investing their funds in the business.
- Financial statement and reporting will facilitate better and more accurate decision making by the users.
- One of the Islamic accounting purpose is to be concerned about the employees and their families when performing their jobs. It can be useful in reducing poverty and increasing the welfare of the society within the company. This increases the purchasing power of the underprivileged which indirectly contributes to the economic growth.
The company also benefits from increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world.
Overall, accounting is the recording of financial transactions and focuses on presenting the information in financial statements, These reports must be prepared according to accounting principles. Accounting also provides essential information to the management to keep the business financially healthy. It places high importance on ethical values. It is of utmost importance for a business to provide accurate evaluation, truth in operations, clear revenues and expenses.
Social accounting differs from Islamic accounting. The general concept of Corporate social responsibility (CSR) is to guarantee sustainability which is forbidden under Islamic accounting Exception is only made if it can be regenerated. CSR activities has a direct impact on the social environment. Therefore, it is required by law for CSR activities and information about its operations to be truthfully disclosed to the general public.
Because Islamic accounting obligates businesses to follow the Sharia strictly, it is considered a religious responsibility. Economic responsibility requires financial statements to be viable, profitable and efficient whereas ethical accounting is obliged to respect societal and religious values.
Therefore, Islamic accounting is considered to be much more complex than the social CSR concept in terms of providing the economy with accurateness, justice without taking or giving interest.
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