Bassam Mohammad Maali, Usama Adnan Fendi and Muhannad Ahmad Atmeh
This paper aims to investigate the economic substance of Islamic banks’ transaction as perceived by the employees and regulators of banks and the effect of such substance on the…
Abstract
Purpose
This paper aims to investigate the economic substance of Islamic banks’ transaction as perceived by the employees and regulators of banks and the effect of such substance on the need for special accounting standards for Islamic banks. If there is a distinctive “Islamic economic substance”, then special accounting practices may be necessary such as the standards of the Accounting and Auditing Organization for Islamic Financial Institutions.
Design/methodology/approach
A qualitative inquiry on one of the leading Islamic banks in the Middle East was conducted to investigate the economic substance of the bank’s main two transactions; the deposit system and Murabaha financing, as perceived by informants within one of the earliest Islamic banks and its regulators.
Findings
It is found that despite the belief that the transactions under examination were different from equivalents within conventional banking, practice within the bank was not consistent with such a belief. Informants largely perceived the economic reality of the investigated transaction as being not different from conventional banks’ transactions, and this would affect the need for special accounting and regulatory frameworks.
Research limitations/implications
This investigation is confined to informants working within one Islamic bank; their views and perceptions may not coincide with those working in other Islamic banks in the world.
Practical implications
The results of this investigation provide policy implications for Islamic banks, regulators and standards setters in regard to the need for special accounting standards for Islamic banks.
Originality/value
The paper is one of the first papers that uses a qualitative inquiry on the main transactions of Islamic banks and the related need for special accounting practices. The paper provides a new perspective on the debate over whether Islamic banking is genuinely innovative or is merely a replicate for conventional banking.
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Keywords
Muhannad Ahmad Atmeh, Bassam Mohammad Maali and Usama Fendi
This paper aims to propose a model of Zakah treatment for financial instruments. The model depends on the link between the financial assets and liabilities that emerge from a…
Abstract
Purpose
This paper aims to propose a model of Zakah treatment for financial instruments. The model depends on the link between the financial assets and liabilities that emerge from a financial instrument contract.
Design/methodology/approach
The determination of Zakah on contemporary financial instruments is controversial, with various conflicting Fatwas being presented. This paper introduces a theoretical model that integrates Fiqh rules, accounting, finance and economic principles to propose a method for calculating Zakah on financial instruments. This theoretical model can be the foundation for future empirical and statistical testing.
Findings
The proposed model advocates omitting the financial assets/liabilities when determining the Zakah base for companies, as the Zakah burden relies on the owner of the real asset. The paper elaborates on the implementation of the model on debts, investments and cash accounts.
Research limitations/implications
The paper does not investigate whether or not the accounting approach in dealing with financial contracts is deemed acceptable by Fiqh scholars, nor does it discuss whether or not this may affect the Zakah fatwas regarding these types of accounts.
Practical implications
The paper establishes a conceptual framework for the Zakah on financial assets. This will pave the way for future empirical research and testing to validate the framework in different contexts. In addition, if regulators adopt this model and apply it to all companies, it would promote fairness and justice at the national level.
Social implications
The proposed model advocates omitting the financial assets/liabilities when determining the Zakah base for companies, as the Zakah burden relies on the owner of the real asset. The paper elaborates on the implementation of the model on debts, investments and cash accounts.
Originality/value
To the best of the authors’ knowledge, this is the first attempt to utilize the accounting approach in order to determine the amount of Zakah.
Details
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Bassam Mohammad Maali and Muhannad Ahmad Atmeh
The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry…
Abstract
Purpose
The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry, and the effect of such practice on the concept of risk sharing in Islamic finance.
Design/methodology/approach
The study critically analyzes the Mudaraba contract used by Islamic banks to mobilize funds, the use of Profit Equalization Reserves and Investment Risk Reserves, the use of other income smoothing techniques and the insurance of Islamic banks’ by regulatory agencies in some countries based on the Takaful and Tabarru’ concepts.
Findings
This paper shows that Islamic banks are increasingly using the concepts of Takaful and Tabarru’, which are intended originally for social welfare, as tools to justify the move to more guaranteed-in-substance type of deposits, and hence, more risk shifting rather than risk sharing in the Mudaraba contract. This use, is argued, moves Islamic banking towards more market-oriented, but less Shariaa-compliant in substance.
Research limitations/implications
This papers examined the behaviour of Islamic financial institutions and Islamic scholars based on the available literature. No empirical analysis was conducted.
Originality/value
This paper contributes to the ongoing debate about the substance of Islamic banking transactions and the risk shifting inherent in such transactions. Furthermore, it is the first study that examines the extent of utilizing different social welfare concepts to legalize – from Shariaa perspective – Islamic banking transactions.