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Chp_05 the Need for Islamic Accounting-PF2-Estab of Isl Org

Chp_05 the Need for Islamic Accounting-PF2-Estab of Isl Org



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Published by: Dr. Shahul Hameed bin Mohamed Ibrahim on Jan 08, 2009
Copyright:Attribution Non-commercial


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Chapter 5Page 166
In the previous chapter, the researcher attempted to argue the need for an alternativeIslamic Accounting in the form of pull factors; those factors that motivate thedevelopment of Islamic accounting. The first category of Pull Factors, the theoreticalimperative of Islamisation of Accounting, was discussed in the previous chapter. Inthis chapter, the second category of Pull Factors, the practical imperative, will bediscussed.The practical imperative or necessity for the development of an alternative “IslamicAccounting” is the establishment of Islamic business and not for profit organisationswhich are specifically based on the Shari’ah or controlled by Muslims who may wishto follow its precepts. These socio-economic organisations are part of the Islamiceconomic and financial system, which is based on the Islamic world-view. Theresearcher believes that the objectives, operations and practical accountingrequirements of these organisations need an alternative “accounting” framework inorder for their objectives to be achieved, their operations to run smoothly and theiractivities accounted in a true and fair manner within the world-view in which theyoperate.This chapter is organised as follows:In section 5.1, the principles and objectives of the Islamic economic and financialsystem will be presented. As the prohibition of interest (
) “is one of the keyelements of the Islamic Economic programme” (Ahmad,1994a, p5), the definition of
, some possible reasons for its prohibition and the controversies surrounding itsdefinition are discussed.
Chapter 5Page 167
In section 5.2, the main types of Islamic business and non-business organisations,which attempt to operationalise the Islamic economic order, will be introduced. Thiswill include a discussion of their objectives, functions, history of establishment andaccounting implications. Due to the extensive scope of Islamic organisations, it isdifficult to cover all of them in detail in this research, as such only a brief sketch ispresented.Although this research attempts to argue the need for Islamic Accounting in for bothbusiness and non-business Islamic and Muslim organisations, The researcher feelsthat describing the accounting needs of many types of Islamic organisations in detailwill be too broad for this research project. As such, the researcher has opted toconcentrate on one industry i.e. the Islamic Finance industry where there has beenintense development. The Islamic banking and financial institutions constituting thisindustry, are examples of Islamic business organisations, which have establishedthemselves in the real world.Consequently, in section 5.3, Islamic banks and financial institutions will bediscussed in some detail. This will include taxonomy of Islamic financial institutions,their history, characteristics, differences with conventional banks and their modes ofoperation. The Investment of funds mobilised by Islamic banks present bothoperational and accounting problems for Islamic banks as they cannot be invested onthe basis of a predetermined fixed return on capital. The complexities of investingthrough an equity-like mode are full of agency, monitoring, accounting classificationand income recognition problems. In order to appreciate these problems, a detaileddescription of the Islamic financing instruments is presented in section 5.4.In section 5.5, the accounting problems of banks, as an example of the problems ofattempting to apply conventional accounting to Islamic organisations will bediscussed. This will include the problem of using conventional accounting conceptsand the attempt to introduce standards for the accounts of Islamic banks.
Chapter 5Page 168
This chapter concludes with section 6.6 that will discuss the possible benefits anIslamic accounting system for Islamic Banks would produce. Although the Islamicbanking and its problems are discussed in length in this chapter, the research doesnot concern itself with Islamic Banking or even Accounting for Islamic banks. Rather,the discussion is intended as an example of problems faced by Islamic organisationsin using conventional accounting and the need for an alternative accounting system.
Unlike, other economic systems, the Islamic economic system aims to achieve social justice from a religious ethical perspective. Although the Western economic systemsbe they capitalist, socialist or welfare state, aim to achieve human welfare, they allseem to have accepted interest as a fair reward for capital, although interest hasbeen condemned by Marx and even Fisher. The Islamic economic system is basedon its complete elimination from the economy by introducing the alternative ofparticipative investment as opposed to a rentier economy. The capitalist systemstrives to attain human welfare through the operation of the invisible hand driven byself-interest and a free market. The Marxist system attempted to create social welfareby ownership and centralisation of the production function by the state (representingthe workers). However, all these systems have been ‘unsuccessful’ in achievingsocial welfare for all (Chapra, 1992).Although it is a fact that there is no complete Islamic economic system in operation,the unique characteristics and features of the Islamic economic system are worthdiscussing and modeling for future implementation especially in Islamic countries.However, practical implementation of the Islamic banking system, which is a partialimplementation of the Islamic economic system, has overtaken academic discussion.Hence there is an urgent need to come up with both practical devices and theoreticalmodels, which can be, tested in future practice.

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