2/7/2021 Customer Awareness Toward Islamic Accounting Theory

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CHAPTER 1:
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Islamic banks considered as an active player in the world economies over two decades ago (Ahmed S., 2009). The principles accounting
upon which Islamic banking is based have been universally accepted for centuries rather than decades. The fundamental principle of
Islamic financial institutions is the prohibition of Riba (interest). It is manifest that Islamic accounting theory were practiced mainly in the
Islamic country throughout the middle ages, development trade and business activities.

In order to understand what services that Islamic banks offer, it is essential to maintain an acceptable level of information of the basis
behind it. It has been argued that the Islamic banks have not introduced any new services since their first existence in the 1970’s, in fact
they have tried to comply with the rules of the Islamic religion specified for these types of actions. High requests to assess Muslim
customers perception and attitude toward Islamic bank services. Islamic banks understand that its paramount important to measure the
degree of its customers awareness as well as to improve services. The financial institution follows the rules that Holy Quran and hadith
have set to guide the Muslims in their financial matters. The Islamic financial system employs the idea of participation in the project,
utilizing the funds at threat on a profit-and- loss-distribution basis (Ahmed, S., 2009).

1.2 STATEMENT OF THE PROBLEM

During the last three decades, Islamic finance institutions have been rising significantly, both nationally and internationally (Ahmed, S.,
2009; Iqbal & Abbas, 2007). These firms were recognized in the emerging market of the Middle East to meet the order of investors and
borrowers who are motivated by income maximization derived from the Islamic law (Shari’a).

Islamic finance institutions offer an extensive range of Islamic financial innovations from the simple agreement of profit-sharing
agreement (Mudaraba) that is parallel to time deposit in conservative banks, to issue Islamic bonds (Sukuk) and derivatives. In gulf
countries, the state of Kuwait banking industry considered on of the leaders in Islamic financial market. The growth of Islamic finance
institutions in Kuwait has attracted some of the conventional financial firms (e.g., NBK IFIH, and Citibank) to add the service of Islamic
windows to their clients.

In spite of the advantages that are fixed in Islamic finance system and management, Islamic finance institutions encounter numerous
primary challenges to the prospect of being recognized internationally. The challenges exist in local as well as global markets. On of
these challenges is to assess the degree of awareness in Islamic accounting theories. In their study, Gerrard and Cunningham (1997)
reported that Muslim respondents, though aware of basic conditions in Islam, were almost wholly ignorant of the sense of specific
Islamic financial conditions like Mudaraba, Musharaka and Ijara.

As result, many Islamic financial providers seek to assess the level of social awareness of their tools that incorporate with Shari’a. The
understanding of customer degree of awareness are paramount important to determine firms endowment to promote Islamic
accounting theories. Bankers also seek to explore the reasons behind dealing with Islamic banks to better understand and improve
services provided.

Another challenge that faces Islamic financial institutions is that, as service provided they have to understand customer’s perceptions
and attitude toward the services provided to better understand customers need, want, and improve their services. With no
understanding to customer perceptions and attitude Islamic banks may have no means to better develop their services and improve
customer satisfaction and compete in the local as well as the international market. The current study seeks to assess the level of
customer’s awareness of Islamic accounting theories and to explore their perceptions and attitude toward these tools that incorporate
with Shari’a.

1.3 OBJECTIVES OF THE STUDY

Islamic financing is an important area of contemporary academic and policy interest. Opposing views in the area are analyzed in the
light of empirical evidence. Measuring the degree of customer awareness toward Islamic accounting theory and their perception and
attitude toward Islamic tools will shape the future of Islamic financing. The current study attempts to reveals the degree of customers
awareness toward Islamic and efforts bestows to improve their awareness in order to assist Islamic financial institution to determine the

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efforts needed to raise this awareness and improve their attitude and perceptions. Another objective of this study is to explore
customers perceptive and perception toward Islamic transactions thus Islamic financial institutions can better understand their
customers and improve services provided.

1.4 SIGNIFICANCE OF THE STUDY

Islamic banks provide many financial services and are competing heavily in the Middle East with conventional banks. Customers
nowadays go for Islamic bank loans for buying home, cars and even business setup, as the conditions are very clear and there are no
rising interest piling up. To overcome the fierce competition, Islamic bank need to bestow efforts in rising the degree of awareness
toward Islamic accounting and finical tools and improve customer’s perception and attitude. The study is of general theoretical
importance as well as of particular practical significance for policy makers who intend to conform their existing financial systems to
Islamic rules.

Furthermore, at the practical level, the study aims to assist Islamic bank manager in providing empirically evidence how of Kuwaiti
customers aware toward Islamic accounting theory and Islamic financial services. The study also provide framework for bank managers
in measuring customer’s perception and attitude toward Islamic services and their usage of various products and services offered. At the
theoretical level, the current study aims to develop the literature of Islamic accounting theory and explain how these theories are to be
implemented in the Islamic financial institution who adapts Shari’a.

1.5 THE SETTING OF THE STUDY

In the Gulf Co-operation Council there are growing number of Islamic banks are also taking steps towards greater clearness and
stronger authority structures. The state of Kuwait for example, has been taking a number of steps to reinforce its local Sharia-obedient
institutions, including slowly moving in the direction of a latest regulatory framework for sukuk. In conversations with OBG,
manufacturing insiders explained that due to a lack of suitable legal mechanisms, Islamic finance companies are not allowed to issue
sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, such as Bahrain. Given the massive increase in sukuk
issuance worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been nearly 45%), Kuwait’s financiers
are keenly aware of the need for proper rules regulating sukuk.

Sheikh Salem Abdulaziz Al Sabah, the governor of the Central Bank of Kuwait (CBK), said earlier of 2008 that regulations are wanted,
saying that the CBK is “keen to provide a legal system to regulate Islamic investment tools such as the issuance of sukuk, especially in
light of growing demand. We are optimistic a solution will soon be found.” In state of Kuwait, the Islamic financial sector and its sharia-
compliant companies are the increasingly global. Kuwait Finance house Bank (KFH), as an example, in addition to its Turkey, Malaysia
and Bahrain ventures, newly established a subsidiary with a pair of Chinese firms to discover real estate investments in the Chongqing
region of a middle China. In a more high-profile move, Investment Dar, one of Kuwait’s biggest Islamic investment companies, recently
funded a takeover of British luxury carmaker Aston Martin to the tune of $925 million.

To achieve the purpose of the current study, the study focuses on a specific Islamic bank that located in the state of Kuwait. KFH has
usually been one of the main engines behind the growth of Kuwait’s sharia-acquiescent financial market; however, its enlargement and
development indicates a growing maturity in Kuwait’s sharia-compliant services zone, established by the push toward the regulation of
Islamic bonds (sukuk) and the emergence of ever-stronger Islamic investment firms.

KFH was the first Islamic bank in Kuwait and one of the pioneers toward adapting of Islamic accounting and financial theory in the gulf
region. Beside the convenience, the research believe that exploring the degree of Islamic accounting theories of this bank may reveals
highly reliable evidence of generalizing the finding in the state of Kuwait. KFH considered the main Islamic bank in Kuwait and the
second-main bank of any kind in the country. Also to the huge injection of capital, KFH lately unveiled plans to set up its own subsidiary
in Amman.

The expansion of Islamic banks operations at home and overseas underlines the growing development of Kuwait’s Islamic financial
sector. Thus the study believe that investigating the customers awareness of Islamic banks toward Islamic accounting theory are justified
and understanding their perception and attitude toward KFH is paramount important in attempting to improve service quality of Islamic
firms.

1.6 LIMITATIONS OF THE STUDY

This study is concerns with Islamic banking that located in the state of Kuwait as its difficult to include all Islamic banks related to
resource limitation and time restriction. The study also does not analyze all Islamic accounting theory as it is very vast subject to control,
rather than focusing on basic Islamic accounting theory that adopted by Islamic financial institutions and banks. Other limitation could
be found related to:

Sample size: The sample size for the bank customer is very large. Therefore, the collection of customer feedback will be costly in
term of time and money. The study aims to attain around (150) survey for the purpose of analysis, which may considered one of
the study limitation.
Data collection: It may be difficult to distribute and collect all data and forms since the study is targeting to collect feedback from
the entire bank customers.

1.7 DEFINITION OF TERMS

The current study includes many Islamic terms and concepts that will be stated as in Arabic meaning, some of these concepts are:
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Halal: The actions or items that Muslims can have access to.
Haram: The actions or items that Muslims are banned from
Riba: What is known in the west as the interest.
Maysir: It means Games of chance such as lottery, gambling and it is usually referred to as Haram.
Takaful: It is a form of insurance in the Islamic religion which will be explained in the essay.
Gharar: Deception, hazard, speculation, uncertainty, risk (literally, peril or hazard)
Mudaraba: Is a trustee financing contract, where one party, the financier, entrusts funds to the other party, the entrepreneur, for
undertaking an activity
Mushakara: It is an equity participation contract, whereby two or more partners contribute with funds to carry out an investment
Muqarada: Loan Participation
Qard Hassan: It is a benevolent loan (interest free)
Shari’a: It is Islamic religious law derived from the Holy Quran and the Sunnah

1.8 THESIS STRUCTURE

The current study includes five chapters: chapter one described the background of this study, and consisted of the introduction,
objectives and significance of the research. Chapter two reviewed the literatures on Islamic banking and theories. Chapter three
explained the research methodology. The data analysis techniques and research findings were demonstrated and discussions in chapter
four. Finally, chapter five exhibited conclusions and future recommendation.

CHAPTER TWO
LITERATURE REVIEW
It’s necessary to explore the literature of Islamic accounting theory in details in this chapter. This chapter attempts to review previous
literatures on the topic of Islamic Accounting Theory and provides recent finding related to the degree of awareness of customers
toward Islamic financial services. This chapter attempts provide recent study and articles about Islamic accounting theory that explain
the nature of Islamic banks system.

Previous literatures and studies have revealed that the first recent research in Islamic banking filed was conducted in Egypt under cover,
without projecting an Islamic picture, for fear of being seen as a demonstration of Islamic fundamentalism, which was abhorrence to the
political government (Siddiqi l988). These studies remain until l967 where nine Islamic banks open in the country (Ready l98l). These
banks was neither charging nor paying interest, investing mainly by participating in trade and industry, directly or in partnership with
others, and shared the profits with their depositors (Siddiqi l988). For that reason, Islamic banks functioned basically as saving-
investment firms rather than as commercial banks that based on charging interests. The Nasir Social Bank, established in Egypt in l97l,
was declared an interest-free commercial bank, although its charter did not refer to Islam or Shariah (Islamic law).

Islamic banks appeared on the earth scene as dynamic players over the past two decades. Nevertheless, a lot of the values that based on
Islamic banking usually accepted all over the world, for centuries more willingly than decades. The essential principle of Islamic banking
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the perception of usury, but also that of interest – has rarely been recognized as appropriate beyond the Islamic world, a lot of its
guiding values have. The majority of these values are rooted in simple ethics and general sense, which form the bases of numerous
religions, including Islam.

Interest or “Usury” was forbidden in both the Old and New Testaments of the Bible, whereas Shakespeare and many other writers,
mainly those writing in the 19th century, have attacked the barbarity of the carry out. Much of the ethics championed by Victorian
writers such as Dickens – ranging from the fair division of wealth through to man’s elementary right to work – is obviously present in
contemporary Islamic society. “Although the western media oftenrecommend that Islamic banking in its current form is a recent
occurrence, in fact, the essential practices and principles date back to the early part of the seventh century.” (Islamic Finance: A
Euromoney Publication, 1997)

It is obvious that Islamic finance was accomplished predominantly in the Muslim world during the Middle Ages, encouragement trade
and business behavior. In Spain and the Mediterranean and Baltic States, Islamic trades became vital middlemen for trading actions. It is
claimed that several concepts, techniques, and tools of Islamic finance were later adopted by European financiers and businessmen.

As Islamic finance is intertwined within its religion, the basis of the religion affects the finance in two important ways:

1. Islam aims at building a socio-economic order based on justice and considers economic activity as a means to an end and not an
end in itself. It enjoins Muslims to harness natural resources, which are a trust from Allah SWT, for carrying out rightful activities;
but abhors exploitation and man-made inequalities of income and wealth (Al-Harran, 1993).
2. Islam is extremely concerned with the problem of financial growth, but treats this as an significant part of a wider problem, that of
total human progress. The crucial function of Islam is to lead human growth on right lines and in the right direction. Islamic
principle deals with all sides of economic development in the framework of total human development (Al-Harran, 1993).

The reinforcement of Islamic banking coincided with the world-wide festivity of the advent of the 15th Century of Islamic calendar (Hijra)
in 1976. At the same time financial assets of Muslims mostly those of the oil producing countries, expected a boost due to validation of
the oil prices, which had up till now been under the power of foreign oil Corporations. These proceedings led Muslims’ to struggle to
model their lives in agreement with the principles and philosophy of Islam (Abbas Valadkhani, 2004).
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Islam not only prohibits trade in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic
Law) deems Haram (unlawful). Islamic banking is an tool for the progress of an Islamic financial order. Some of the salient features of
this order may be summed up as:

1. Islam urges individuals to seek their economic well-being. Islam presents a clear difference between what is Halal (lawful) and what
is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are
morally or socially injurious. This God rule can be considered as a way to systemize the citizens.
2. Islam makes it obligatory on people to spend their wealth judiciously and not to hoard it, keep it idle or to squander it while
acknowledging them their right to ownership of wealth legitimately acquired. This can be compared with the communism
principles that look for the welfare of the whole members of the society.
3. While allowing an individual to retain any extra capital, Islam look for reducing the edge of the extra for the well-being of the
society as a whole, especially the poor and underprivileged sections of society by contribution in the procedure of Zakat. It is the
way the Islamic government intervenes to ensure that poor people can have a formal financial source.
4. While making payment for the ways of human nature and yet not yielding to the penalty of its worst propensities, Islam seeks to
stop the amassing of wealth in a few hands to the damage of society as a whole, by its laws of inheritance.
5. Viewed as a total, the financial system, which visualized by Islam aims at social justice without inhibiting people project beyond the
point where it becomes not only jointly harmful but also individually self-destructive.

The Islamic economic system employs the perception of contribution in the enterprise, utilizing the funds at threat on a profit-and- loss-
distribution basis. This by no means implies that investments with economic institutions are necessarily tentative. This can be barred by
careful investment strategy, diversification of risk and sensible management by Islamic economic institutions. This system supports
people to invest their money in those financial institutions to exploit their utilities by making profits under the guidelines of the Shariah.

The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance
from the bad and minimize the players in the market to be the people who know how to invest and when they inter the market to catch
the goal.

The main goals of an Islamic Banking and Financial system are to:

1. Implement the value system of the Qur’an and the Sunnah (tradition or practice of Prophet MuhammadSAW) in the realm of the
Muslim socio-economic system. Ibn Taymiyahr.a. (n.d.), a distinguished scholar of Islam, explicates this as follows: “In mu’amalat
(business transactions) all activities are permissible unless forbidden by revelation (Qur’an) or the practice of Prophet Muhammad
SAW”. The examples of prohibited business activities would include dealing in gambling, liquor, pork etc. The financial contracts of
Islamic banks need to be clearly documented, equitable and avoid the elements of Riba, Gharar and Maysir as explained in the
following section.
2. Foster the growth of the economy of Muslim nations by developing financial markets, institutions and instruments. A well-
developed capital market, with efficient institutions offering diverse financial facilities, can reduce the overall cost of capital. It can
enhance social welfare by facilitating the acceptance of projects whose; present value of all relevant cash in-flows (benefits) after
tax is greater than the present value of all cash out-flows (cost) of the project; or the expected internal rate of return is greater
than a minimum threshold rate (or cost of capital). Furthermore, these necessary conditions should also be satisfied for each party
financing the project to alleviate agency effects. This entails economic development, which is promoted in Islam, as Prophet
Muhammad SAW exhorted Muslims to undertake business ventures (tijarah) as described in the following hadith Nu’aym ibn Abd
Al-Rahman has quoted the (narration). ProphetSAW as saying: “Nine tenths of earnings (Rizq) is in bai’ (business ventures), and
tenth in cattle”. This was reported by Ibrahim Al-Harbi (Al-‘Iraqi, 1992) and by Sa’id ibn Mansur (Al-Suyuti, 1990).
3. Dampen the shocks of extreme economic output by promoting risk-sharing instruments whose payoffs are strictly contingent on
the profitability of a firm or project at a micro level. Financial facilities with fixed costs can severely strain the resources of
borrowers during a slowdown, which lead to bankruptcies and structural impairment of the economy. The gist of Islamic financial
securitization is summarized by the following well-known hadith quoted by Kahf and Khan (1992), “Al-kharaj bi al daman.” This
implies that entitlement of return from assets vests in the one bearing the risk of it.

2.1 CONVENTIONAL BANKING

The main job for most of non-Muslim or conventional banks is preserved money and valuables and give loans, credit, and imbursement
services, for example checking accounts, money orders, and cashier’s checks. These banks furthermore may propose investment and
insurance products, which they were once banned from selling. As a diversity of models for collaboration and integration amongst
finance industries have appeared, some of the conventional distinctions among banks, insurance companies, and securities firms have
reduced. Regardless of these changes, banks continue to preserve and carry out their main role—allowing deposits and lending funds
from these deposits. There are several kinds of banks, which vary in the number of services they offer and the customers they serve.
Although some of the distinctions among these kinds of banks have tapering as they begin to enlarge the vary of products and services
they propose, there are still key distinctive behaviors. Commercial banks, which control this industry, provide a full variety of services for
customers, enterprise, and governments. These banks come in a broad range of sizes, from large international banks to local and
community banks. International banks are involved in global lending and foreign cash trading, additionally to the more typical banking
services. However, a lot of commercial banks have also extended to present online banking, and some previously Internet-only banks
are opting to release branches.

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Savings banks and savings and loan associations, occasionally called thrift institutions, are the second biggest group of depository
institutions. They were first recognized as community-based firms to finance mortgages for people to purchase homes and still cater
mostly to the savings and lending requirements of individuals. Credit unions are another type of depository institution. Most credit
unions are created by people with a familiar bond, for instance those who work for the similar company or be a member of the same
labor union or church. Members pond their savings and, when they require money, they may borrow from the credit union, frequently at
a minor interest rate than that demanded by other financial institutions.

Federal preserve banks are Government agencies that achieve numerous financial services for the Government. Their chief tasks are to
control the banking industry and to aid implement our Nation’s financial policy so our economy can run more proficiently by directing
the Nation’s money provide—the total amount of money in the country, including cash and bank deposits.

Interest on loans is the main source of income for most banks, making their diverse lending departments critical to their achievement.
The commercial lending department loans money to companies to start or enlarge a business or to buy inventory and capital tools. The
customer lending department handles student loans, credit cards, and loans for home developments, debt consolidation, and
automobile purchases. Finally, the mortgage lending department loans money to individuals and businesses to buy real estate.

The money to loan comes mainly from deposits in checking and reserving accounts, certificates of deposit, money market accounts, and
other deposit accounts that clients and businesses arrangement with the bank. These deposits often make interest for the owner, and
accounts that offer checking supply an easy technique for creation payments safely without using cash.

Technology is having a main impact on the banking industry. such as, many usual bank services that once needed a teller, for example
making a withdrawal or deposit, are now existing through ATMs that let people to right of entry their accounts 24 hours a day. In
addition, direct deposit permits companies and governments to electronically transfer payments into different accounts. Also, debit
cards, which may also apply as ATM cards, immediately deduct money from an account when the card is swiped across a machine at a
store’s cash register. Electronic banking by phone or computer permits consumers to pay invoices and shift money from one account to
another. Through these channels, bank customers can too admission information such as account balances and statement history. Some
banks have started offering online account aggregation, which makes accessible in one place detailed and up-to date information on a
client’s accounts held at diverse institutions.

Progressions in technology have also led to upgrading in the ways in which banks process information. Use of check imaging, which lets
banks to store photographed checks on the computer, is one such example that has been applied by some banks. Other kinds of
technology have deeply impacted the lending side of banking. such as, the availability and increasing use of credit scoring software lets
loans to be accepted in minutes, rather than days, making lending departments more competent.

Other basic changes are taking place in the industry as banks vary their services to become more competitive. A lot of banks at the
present offer their clients financial planning and asset management services, as well as brokerage and insurance services, frequently
throughout a subsidiary or third party. Others are starting to offer investment banking services that assist companies and governments
increase money during the issuance of stocks and bonds, also usually during a subsidiary. As banks reply to deregulation and as
competition in this sector raises, the nature of the banking industry will continue to undertake considerable change.

2.2 COMPETITIVENESS OF THE ISLAMIC BANKING INDUSTRY

The crucial feature of Islamic banking is that it is interest-free. Although it is frequently claimed that there is more to Islamic banking, for
example contributions towards a more fair distribution of income and wealth, and improved equity contribution in the economy (Chapra
l982), it nevertheless obtains its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.

Islam forbids Muslims from taking or giving interest (riba) in spite of of the reason for which such loans are made and despite of the
rates at which interest is exciting. To be certain, there have been efforts to differentiate between usury and interest and between loans
for consumption and for production. It has also been argued that riba refers to usury accomplished by minor money-lenders and not to
interest charged by contemporary banks and that no riba is occupied when interest is compulsory on productive loans, but these
arguments have not won approval. Apart from a few disagreeing opinions, he general agreement among Muslim scholars obviously is
that there is no variation between riba and interest. In what follows, these two terms are used interchangeably.

The forbidden of riba is mentioned in four different revelations in the Qur’an. The first revelation highlights that interest removes wealth
of God’s blessings. The second revelation condemns it, placing interest in combination with illegal appropriation of property belonging
to others. The third revelation enjoins Muslims to keep on clear of interest for the sake of their own welfare. The fourth revelation set up
a clear difference between interest and trade, influencing Muslims to take only the principal sum and to forgo even this sum if the
borrower is not capable to repay. It is further declared in the Qur’an that those who ignored the forbidden of interest are at war with
God and His Prophet.

The forbidden of interest is furthermore cited in no unsure terms in the Hadith (sayings of the Prophet). The Prophet warned not only
those who take interest but also those who offer interest and those who record or witness the operation, saying that they are all similar
in guilt. It may be mentioned in passing that similar prohibition are to be found in the pre-Qur’anic scriptures, although the ‘People of
the Book’, as the Qur’an refers to them, had chosen to rationalize them. It is remarkable that Islam has successfully warded off various
subsequent rationalization efforts aimed at legitimizing the institution of interest.

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Some scholars relays on economic reasons to explain the reasons on why interest is prohibited in Islam. scholars argued that interest is a
pre- determined cost of production, which avoid full employment (Khan l968; Ahmad n.d.; Mannan l970). In the same tone, it has been
challenged that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no
small measure attributable to the phenomenon of interest (Ahmad l952; Su’ud n.d.). None of these studies, however, has really
succeeded in creating a causal link between interest, on the one hand, and employment and trade cycles, on the other.

Others, anxious to maintain the Islamic position on interest, have argued that interest is not very effective as a monetary policy
instrument even in capitalist economies and have questioned the efficiency of the rate of interest as a determinant of saving and
investment (Ariff l982). A general line running through all these negotiations is the exploitative character of the institution of interest,
although some have pointed out that profit (which is legalized in Islam) can also be exploitative. One response to this is that one must
differentiate between profit and profiteering, and Islam has prohibited the latter as well.

“It began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far
will Sharia boards and western regulators let it spread?” (Josh Martin, Middle East, Jun2005 Issue 357, p50, 6p)

The Islamic prohibition on interest does not imply that capital is costless in an Islamic system. Islam realizes that money is a factor of
production however; it does not permit the factor to pre-determined claim on the productive surplus in the form of interest. This has
leaded to the question as to what will then substitute the interest rate mechanism in an Islamic framework. There have been
propositions that profit sharing can be a viable alternative (Ka

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