Emerald | Journal of Islamic Accounting and Business Research

A critique on accounting for the mudarabah contract

Muhannad A. Atmeh, Abdul Hadi Ramadan — 2012-04-13 00:00:00.0

Abstract

Purpose – The purpose of this paper is to examine the accounting treatment for mudarabah contract and its implications on the reliability and fairness of the financial statements. In addition, the paper also aims to explore the effect of provisions and reserves on profit allocation among unrestricted investment account holders (UIAHS). Design/methodology/approach – This study reviews the accounting treatment for mudarabah contract as stated in the Accounting Standards for Islamic Financial Institutions issued by the AAOIFI and compares it with other financial reporting frameworks, especially the IFRS. Findings – The paper finds that presenting UIAHS in a separate category in the financial position statement (balance sheet), without reclassifying the assets in the financial position statement to reflect the assets attributable to UIAHS, suggests undue bias in the financial statements. This contradicts the concepts of full disclosure and true and fair view of the financial statements. The paper also reveals that reserves may result in profit misallocation among UIAHS. Additionally, there is an overlap between provisions and reserves, which may affect the reliability and fairness of the financial statements. It is also revealed that reserves presented under the UIAHS section could not be readily understandable since investors have no right to these reserves. The paper further finds that using a donation contract in business may result in diverting wealth from the less wealthy to the wealthier. Originality/value – The paper criticizes the AAOIFI treatment for UIAHS and suggests an extension to this treatment by presenting assets attributable to UIAHS in order to enhance disclosure. Additionally, it questions the applicability of using donation (Tabarru) contract in transactions with profit-making substance.

Disclosure of Shariah compliance by Malaysian takaful companies

Nor Aziah Abu Kasim — 2012-04-13 00:00:00.0

Abstract

Purpose – This paper seeks to explore the disclosure of Shariah compliance as reported by the Shariah Committee (SC) in the annual reports of takaful companies in Malaysia. Disclosure of Shariah compliance is important in enhancing and protecting the Islamic identity of takaful operators, thereby providing Muslims with an alternative insurance system. The paper also aims to discuss whether the advisory role constrains the SC members to improve disclosure which can boost consumers' confidence and companies' accountability. Both confidence and accountability on Shariah compliance would also help promote Malaysia as an Islamic financial centre. Design/methodology/approach – Content analysis of the SCs' reports in the 2008/2009 annual reports of seven takaful operators in Malaysia were conducted and the findings discussed with three officers from Bank Negara Malaysia (Central Bank of Malaysia). Subsequent to the discussion, the findings were further clarified and confirmed with a former member of the SC through e-mail correspondence. Findings – Disclosure of Shariah compliance by the SC reflects high conformance to the Bank Negara Malaysia guidelines. Although the high level of conformance promotes comparability, it does not necessarily fully address disclosure issues such as providing adequate and relevant information. Shariah compliance by takaful companies seems to develop in much the same manner as other disclosure practices, that is, a tendency to comply with rules rather than with principles. Related to the disclosure issue, SC members are constrained by the advisory role and part-time basis of appointment from fully participating in every stage of product process from its conception to its implementation. Research limitations/implications – The paper relies heavily on Shariah compliance reported by the SC in the annual reports of takaful companies. Nonetheless, findings were confirmed with three officers from Bank Negara Malaysia and with a former member of the SC to enhance the findings' credibility. In future, interviews can be conducted with other stakeholders such as takaful managers, Islamic academics and members of the SC to better understand the nature of disclosure practices by takaful companies. Practical implications – Insights drawn from this study suggest the need to enhance disclosure on Shariah compliance in the SC reports and to further strengthen the role of the SC members. As Shariah governance mechanisms, both the SC reports and SC members can be utilised to enhance the identity of Islamic businesses and fulfils the religious obligations. Originality/value – This paper highlights the need for increased transparency through adequate and relevant disclosure of Shariah compliance information in the SC report of takaful companies. It also raises the concern that the advisory role entrusted to SC members might not be adequate for them to effectively ensure that compliance with Shariah principles are adhered to at all times as expected by Bank Negara Malaysia.

The UK legal reforms on pension and the opportunity for Islamic pension funds

Faizal Ahmad Manjoo — 2012-04-13 00:00:00.0

Abstract

Purpose – Recent developments in pension law in the UK has seen a shift towards the creation of a Shari'ah fund under the National Employment Savings Trust (NEST) to cater for British Muslims' retirement needs. However, as the concept of funded pension is an alien concept in Islamic history, there is a need to analyse the intricacies associated with the establishment of such occupational pension plan. The purpose of this paper is firs, to address the concept of pension to see how it fits with Muslim ethos, and second, to highlight some Fiqhi (Islamic jurisprudence) issues that need to be addressed before establishing the Shari'ah pension fund. Design/methodology/approach – The paper first traces the historical development of pension in the UK and how the issue of an ageing population is shaping the reforms. It subsequently highlights some of the Fiqhi issues that need to be addressed in establishing the new Shari'ah fund and recommendations are then made. Findings – The paper sheds some light on the need to consider the idea of savings in Islam to meet retirement needs because the societal structure of Muslim community in the UK is economically changing as compared to the past. Hence, the concept of pensions is seen to fit into the maqasid of Shari'ah which includes protection of life, family and wealth. However, there are some haram (non permissible) elements, such as annuities and nominees (which affect the law of inheritance), that need to be eliminated in the legislation and pension models currently available. Hence, a model is suggested to help make the Shari'ah fund offered to British Muslims via NEST to be religious compliant. Practical implications – The recommendations made in this paper will facilitate to some extent addressing some of the fiqhi issues to make the fund religiously suitable. Social implications – To align an Islamic occupational pension model with that of its mainstream counterparts requires addressing some of the fiqhi issues to make the fund religiously suitable. Originality/value – A modern Islamic occupational pension fund is a new phenomenon in the Muslim world, and this issue is hardly being addressed so far. This paper highlights some pertinent fiqhi issues to be considered in establishing such an occupational pension fund.

Viewpoints: when the Islamisation model doesn't work

Razwan Ul-Haq — 2012-04-13 00:00:00.0

Abstract

Purpose – The purpose of the paper is to encourage debate around the issues of the bank and Islamisation. Design/methodology/approach – The work is an ideological examination of approaches to Islamisation and includes references to thinkers from Muslim history. Findings – The Islamisation model is not wholly appropriate in the banking sector. Practical implications – The paper highlights the limitations of the Islamisation approach and puts forward the case for another methodology, Namely the model of Islamication. Social implications – The impact of the author's recommendations, if followed would revolutionise the way banking is carried out. Originality/value – The conceptualization of Islamication with regard to banking has not yet been academically formulated. This paper provides a platform to do this. Although Muslim societies and Muslims living in the West will be interested in the paper, non Muslim scholars Europe too, faced with a banking crisis may welcome some of the report's recommendations.

Ijarah contract: a practical dilemma

Fahad Zafar — 2012-04-13 00:00:00.0

Abstract

Purpose – This purpose of this paper is to highlight the weakness in vehicle Ijarah contract. Design/methodology/approach – A real life example of a vehicle Ijarah contract was studied in which a customer gets a car from an Islamic bank and then misuses the system. Findings – The case study provides a path for more research on Ijarah contract for vehicle leasing. Islamic bankers should take into account the amount of down payment requested besides the fulfilment of other criteria. Vehicle Ijarah contract is only appropriate when the amount of deposit or down payment requested is below 40 per cent threshold, otherwise a diminishing Musharakah contract should be preferred. Research limitations/implications – The research is only on one case reported in one of the Islamic banks in Pakistan. The solution is also by only one Shariah scholar. The future research should be on similar contract at entire Islamic Banking Industry. Views of all top Shariah scholars should be taken to mitigate such kind of risks for Islamic banks. Practical implications – This paper would trigger management of all Islamic banks to alter the structure of their vehicle Ijarah contracts. Social implications – Islamic bankers would be warned against making a vehicle Ijarah contract with individuals wanting to contribute more than a down payment, just for the sake of cheating the system. Originality/value – This paper is of great importance to the management of Islamic banks as this would raise flag against any future losses due to loopholes in the structuring of contracts.

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