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Article
Publication date: 13 June 2016

Mezbah Uddin Ahmed, Ruslan Sabirzyanov and Romzie Rosman

The purpose of this paper is to examine the accounting treatment and reporting of a murabaha contract and its implication to the financial statements of Islamic banks. In…

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Abstract

Purpose

The purpose of this paper is to examine the accounting treatment and reporting of a murabaha contract and its implication to the financial statements of Islamic banks. In addition, the paper also explains the implication of time value of money on the measurement of a murabaha contract and the concept of substance over form in recognising financial transactions.

Design/methodology/approach

This study reviews the accounting treatment and reporting for a murabaha contract as stated in the Financial Accounting Standards (FAS) of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the application of a murabaha contract as a financial instrument based on International Financial Reporting Standards (IFRS).

Findings

The paper finds that, while IFRS-based financial reporting primarily focuses on economic consequences of financial instruments, AAOIFI further takes into consideration the legal structure of the instruments, which are based on Shari’ah precepts. The paper also finds that IFRS-based financial reporting cannot always capture the distinctive structure of the murabaha and, hence, may lack representational financial reporting. However, the IFRS recognizes the substance of a murabaha contract as financing, and the majority of Islamic banks in Malaysia report it as one of financing and not as a trading contract. For measurement, IFRS adopted the concept of time value of money where the profit allocation is based on amortized cost, which is similar to the measurement of conventional loan transactions that apply the concept of effective interest rate. Meanwhile, AAOIFI uses a straight-line basis to allocate the profit of a murabaha contract.

Practical implications

The forthright discussion and the observations of the paper are expected to assist regulators and standard setters in developing accounting standards that are in convergence but also cater to the unique characteristics of Islamic financial transactions.

Originality/value

The paper criticizes both accounting treatment of a murabaha contract based on the AAOIFI and IFRS and then suggests an extension of these treatments to be adopted to improve the reporting.

Details

Journal of Islamic Accounting and Business Research, vol. 7 no. 3
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 24 December 2020

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.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 14 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 10 April 2017

Faatima Kholvadia

The purpose of this study is to understand the economic substance of Islamic banking transactions in South Africa and to analyse whether the economic substance is closely related…

Abstract

Purpose

The purpose of this study is to understand the economic substance of Islamic banking transactions in South Africa and to analyse whether the economic substance is closely related to the legal form. Additionally, this study highlights the similarities and differences in the execution of Islamic banking transactions across different South African banks. The transactions analysed are deposit products of qard and Mudarabah and financing products of Murabaha, Ijarah and diminishing Musharaka.

Design/methodology/approach

The study was conducted through interviews with representatives from each of the four South African banks that offers Islamic banking products. Interviews were semi-structured and allowed interviewees to voice their perspectives, increasing the validity of the interviews.

Findings

The study found that specific Shariah requirements of Islamic banking transactions are considered and included in the legal structure of the contracts by all four banks offering Islamic banking products. However, the economic reality of these transactions was often significantly different from its legal form and was found to, economically, replicate conventional banking transactions. The study also found that all four banks offer Islamic banking products under the same Shariah principles, but in some instances (e.g. diminishing Musharaka), execute these transactions in different ways. This study is the first of its kind in South Africa.

Research limitations/implications

While safeguards have been used to ensure the reliability and validity of the research, there remain a few inherent limitations which should be noted: interviewees, while chosen for their expertise and level of knowledge, may provide highly technical insight which may be difficult to interpret. Detailed technicalities were therefore excluded from this research. The regulatory environment of banks in South Africa, for example, regulation imposed by the Financial Service Board on all financial institutions in South Africa, has not been explored. However, the regulatory environment was brought to the readers’ attention to help illustrate certain themes. This research uses only Shariah requirements as detailed in Section 2.2 to analyse transactions. Fatwas (rulings) issued by the Shariah Boards of South African Islamic banks have not been included in this study and may be an area of future research.

Originality/value

This study is the first of its kind in South Africa. The study adds to the Islamic banking literature by analysing the real execution of Islamic banking transactions rather than the theoretical compliance with Shariah law.

Details

Meditari Accountancy Research, vol. 25 no. 1
Type: Research Article
ISSN: 2049-372X

Keywords

Abstract

Details

A Modern Perspective of Islamic Economics and Finance
Type: Book
ISBN: 978-1-78973-137-8

Article
Publication date: 24 August 2012

Rasem N. Kayed

The purpose of this paper is to find out whether profit‐and‐loss‐sharing (PLS) modes of finance have become viable financial alternatives for entrepreneurship and enterprise…

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Abstract

Purpose

The purpose of this paper is to find out whether profit‐and‐loss‐sharing (PLS) modes of finance have become viable financial alternatives for entrepreneurship and enterprise development or whether they are still merely an academic endeavour.

Design/methodology/approach

The method employed in this study is a combination of extensive examination of existing literature and critical analysis of the outcomes of several relevant studies in order to establish the convergent/divergent relationship between theory and practice in Islamic finance.

Findings

Based on available bank level and country level data, the paper presents evidence that the divergence between the theoretical perspective and the practical implementation of PLS modes of finance is widening to an alarming level. The paper argues that this divergence by no means can be attributed to the construct and the disposition of the PLS instruments; it is rather the product of the negative attitude and the lack of proper infrastructure of the majority of Islamic financial institutions (IFIs) – and their (reluctance) to accommodate entrepreneurship through the genuine implementation of PLS instruments.

Practical implications

The findings of this study draw attention to the visible shortage in practical research pertaining to the application of the principles of PLS modes in financing entrepreneurial activities. The study suggests that the relevance, the direction and the resilience of future research undertakings should be focused on bridging the increasing gap between the prescribed role of PLS instruments and the actual performance of IFIs in promoting socio‐economic development through the creation of a vibrant entrepreneurship sector.

Originality/value

The paper points out that while PLS models dominate the theoretical literature on Islamic finance, and whereas the majority of mainstream Muslim scholars and financial authorities overwhelmingly judge PLS models as being compelling financial options and practical developmental tools, the reality of Islamic finance paints a different picture. The paper emphasizes the need for IFIs to conform to their own charters and assume a leading developmental role in order to realize al‐Shariah objectives (maqasid al Shariah). The paper identifies key research areas that warrant the attention of keen researchers with interest in the field of Islamic finance and entrepreneurship development.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 5 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 1 December 1996

Rifaat Ahmed Abdel Karim

Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues that the…

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Abstract

Reports that, unlike Western commercial banks, Islamic banks are prohibited by Islamic precepts to receive or pay interest, inter alia, in all their transactions. Argues that the Basle capital adequacy ratio (CAR), which was implemented in 1992 by regulatory authorities in many countries, is irrelevant to Islamic banks because it does not accommodate, among other things, one of the major instruments ‐ investment accounts ‐ through which Islamic banks mobilize funds on the basis of profit sharing. Develops four possible scenarios for the treatment of these accounts in the calculation of CAR and examines their impact on the financial and marketing strategies of Islamic banks in the light of the risk‐return relationship between the funds contributors of these banks.

Details

International Journal of Bank Marketing, vol. 14 no. 7
Type: Research Article
ISSN: 0265-2323

Keywords

Article
Publication date: 18 May 2021

Ahmad Abed Alla Alhusban, Ali Abdel Mahdi Massadeh and Haitham Haloush

This study aims to examine the validity of the installment payment contract when using the first Islamic credit card (ICC) in Jordan and will explore the hidden techniques that…

Abstract

Purpose

This study aims to examine the validity of the installment payment contract when using the first Islamic credit card (ICC) in Jordan and will explore the hidden techniques that are used to operate such a financial product. The purpose of the study will be achieved by examining the structure and the issues surrounding the first ICC that was introduced to the Jordanian market as a hybrid contract of Qard Hassan (benevolent loan), Murabaha, Wakalah (agency) and Bay‘ Al Ajjal (credit sale). In addition, a further objective is to examine whether this credit card is a Sharia-compliant financial product.

Design/methodology/approach

A qualitative research method approach was adopted to understand the issues, nature and structure of the first Jordanian ICC. This was due to the explanatory nature of the product, the different financial solutions it offered and the fact that the ICC in Jordan is, to date, relatively unexplored. This paper used the technique of content/thematic analysis that involves multiple sequenced steps to analyze these matters.

Findings

The main finding of this research is that the first ICC in the Jordanian financial market has caused a degree of uncertainty. This is because, once a customer decides to choose the installment payment contract option, the bank does not have real possession of the assets in question. The issue of constructive possession has been denied by several classic and contemporary Islamic scholars, including the General Iftaa Department of Jordan. Therefore, it can be seen that the installment payment contract option does not comply with Islamic principles and particular Fatwas that have been decreed.

Originality/value

This is the first study that shows how the first ICC, being a new Islamic financial product in Jordan, operates in relation to the installment payment contract. In addition, focusing on the concept of changing the nature of the contract from a Qard Hassan (benevolent loan) to a hybrid contract is significant, to encourage Islamic scholars to take a clear, legal stand under Sharia law.

Details

International Journal of Law and Management, vol. 63 no. 6
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 13 July 2020

Issam Tlemsani, Farhi Marir and Munir Majdalawieh

This paper revolves around the usage of data analytics in the Qur’an and Hadith through a new text mining technique to answer the main research question of whether the activities…

Abstract

Purpose

This paper revolves around the usage of data analytics in the Qur’an and Hadith through a new text mining technique to answer the main research question of whether the activities and the data flows of the Murabaha financing contract is compatible with Sharia law. The purpose of this paper is to provide a thorough and comprehensive database that will be used to examine existing practices in Islamic banks’ and improve compliancy with Islamic financial law (Sharia).

Design/methodology/approach

To design a Sharia-compliant Murabaha business process originated on text mining, the authors start by identifying the factors deemed necessary in their text mining techniques of both texts; using a four-step strategy to analyze those text mining analytics; then, they list the three basic approaches in text mining used for new knowledge discovery in databases: the co-occurrence approach based on the recursive co-occurrence algorithm; the machine learning or statistical-based; and the knowledge-based. They identify any variation and association between the Murabaha business processes produced using text mining against the one developed through data collection.

Findings

The main finding attained in this paper is to confirm the compatibility of all activities and the data flows in the Murabaha financing contract produced using data analytics of the Quran and Hadith texts against the Murabaha business process that was developed based on data collection. Another key finding is revealing some shortcomings regarding Islamic banks business process compliance with Sharia law.

Practical implications

Given Murabaha as the most popular mode of Islamic financing with more than 75% in total transactions, this research has managed to touch-base on an area that is interesting to the vast majority of those dealing with Islamic finance instruments. By reaching findings that could improve the existing Islamic Murabaha business process and concluding on Sharia compliance of the existing Murabaha business process, this research is quite relevant and could be used in practice as well as in influencing public policy. In fact, Islamic Sharia law experts, Islamic finance professionals and Islamic banks may find the results of this study very useful in improving at least one aspect of the Islamic finance transactions.

Originality/value

By using a novel, fresh text mining methods built on recursive occurrence of synonym words from the Qur’an and Hadith to enrich Islamic finance, this research study can claim to have been the first of its kind in using machine learning to mine the Quran, Hadith and in extracting valuable knowledge to support and consolidate the Islamic financial business processes and make them more compliant with the i.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 9
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 23 November 2012

Ismail Cebeci

The purpose of this paper is to analyse the extent of the contribution of the current Islamic financial system to society in terms of social responsibility (SR) required by the…

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Abstract

Purpose

The purpose of this paper is to analyse the extent of the contribution of the current Islamic financial system to society in terms of social responsibility (SR) required by the concept of social maslahah.

Design/methodology/approach

The paper adopts a critical analytic approach in considering the reasons of the failure of the social dimension of Islamic financial intermediation based on real figures of selected Islamic banks.

Findings

Concepts of SR and corporate social responsibility (CSR) are not enough to describe Islamic Banks' responsibilities. Also, this failure cannot be understood only with reference to the “external environment”, i.e. competition‐driven, capitalistic market conditions; but it is also closely related to the transformation of Islamic finance into an almost exclusively murabaha‐based Islamic banking, which promotes more individual maslahah than social maslahah. Compared to the murabaha, other product structures such as mudaraba and musharaka seem to be better instruments for expanding welfare and alleviating poverty.

Practical implications

There is a close relationship between Islamic banking contracts and social contribution of Islamic banks. This paper provides some practical solutions in this context. Also, empirical evidence derived from several conventional and Islamic banks supports these arguments.

Originality/value

This paper is the first to analyse the reasons for the social failure of Islamic Banks and to recommend substantial solutions in this scope and also offers practical help to practitioners of Islamic banking on the issue of social contribution of the Islamic banking business.

Details

Accounting Research Journal, vol. 25 no. 3
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 10 August 2020

Yasushi Suzuki and Mohammad Dulal Miah

This paper aims to propose two benchmarks “Shari’ah-compliant” benchmark and “Shari’ah-based” “raf’ al-haraj” (the removal of hardship) benchmark. The former benchmark can be…

Abstract

Purpose

This paper aims to propose two benchmarks “Shari’ah-compliant” benchmark and “Shari’ah-based” “raf’ al-haraj” (the removal of hardship) benchmark. The former benchmark can be applied to ensure that a transaction brings “profits on sales” and not “profits on loan”, and the latter benchmark should be addressed to ensure that a transaction does not exploit the customers of Islamic banks.

Design/methodology/approach

The authors draw upon the theory of institutional economics, in particular, instrumental and procedural rationality, to argue that the believers can pay their best effort as an exercise of ijtihad to understand and incarnate the logic and rationales implicit in the Qur’anic text.

Findings

Currently, there is no benchmark that determines the profit ceiling on murabaha. The authors suggest two types of “gray-zones” – the “Shari’ah-compliant but less contributing to the removal of hardship” and the “controversial on compliance but contributing to the removal of hardship in borrowers” to use as a benchmark in endorsing less shariah-compliant Islamic products.

Practical implications

There is no benchmark or a clear-cut demarcation that can be used to endorse less Shari’ah-compliant Islamic finance. Thus, Shari’ah-compliant’ benchmark and “Shari’ah-based” “raf’ al- haraj” benchmarks can be used to guide whether a financial transaction is acceptable or not. This guideline can be of huge practical relevance for Islamic finance.

Originality/value

There is no sensible study that offers such guidelines that can be used to demarcate whether a particular financial transaction, which has no clear-cut fatwa, is acceptable or not. Hence, the current research is novel and contributes to the existing literature of Islamic finance.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 14 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

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