ACCOUNTING FOR ISLAMIC BANKS

CHAPTER 1 Islamic Financial System

The Principal Characteristics of the Islamic Economic System

Pursuit of economic activities which are lawful. The individual is not allowed to hoard his wealth, keep it idle or squander it. Need to share that surplus so that the well being of the community is achieved. Prevents the accumulation of wealth in a few hands Achieves social justice without inhibiting individual enterprise.
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Objectives of the Islamic Economic System

Need fulfillment Respectable Source of Earnings Need fulfillment should be through the individuals effort. Equitable distribution of income and wealth

i. elimination of interest ii. zakah and iii. change in consumer behaviour to accord with Sharia

Growth and Stability

Objectives and Operations of Islamic Organizations

to enable Muslims to undertake economic activities within the framework of the Sharia as a means to attain falah

To Comply with Shariah!

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What Does it Mean By Shariah Compliance?

Validity and Permissibility

Valid is the contract that meets its requirements and conditions.

Permissible (Halal) is the contract that is used to obtain Halal (Permissible) ends.
A valid contract is not necessarily Halal (permissible). Initiating a marriage contract with a woman whereby all conditions are fulfilled but with the intention to divorce her the next day (just to obtain the sexual pleasure) is a valid contract, but it is not Halal. Selling guns to criminals is valid, but it is not Halal. Validity is based on the form of the contract while permissibility is based on the substance of the contract and the intention of the parties.

What is Maqasid As-Shariah?

It outlines the objectives and wisdom (hikmah) as prescribed by Syariah (Allah & His Prophet s.a.w.) in all its rulings to protect and preserve the benefits and interests (maslahah) of society. What is Maslahah?

is the benefits or interests which are deemed necessary from Syariah perspectives to protect and preserve the five darurah. (Al-Mansul, Fakhruddin Ar-Razi, p.24)


And We have sent you (O Muhammad) not but a mercy to the whole universe (Al-Ambiya:107)

Alleviate Hardship Justice

Eliminate Prejudice

Maqasid as-Shariah (The Objectives of Shariah)

Religion

Intellect
Life Lineage/Posterity

Wealth

Preservation and Promotion

Methodology in Determining Maqasid as-Shariah

Based on the Quran and Hadith of the Prophet s.a.w. Learn from the way the Companions and the Tabien derive their Syariah rulings and how they understand Nusus (the sources i.e. Quran and Hadith) The role of Aqal or using Rational Faculty

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Maqasid as-Syariah in Financial Transactions

The origin of Muamalat matters is by understanding its underlying wisdom (Imam AsSyatibi, Al-Muwafaqat, 2/300)
To facilitate the needs of human being (AlJumuah:10) Ar-Rawaj or to ensure wealth is circulated among as many as possible in a fair way (Al-Hasyr:7) To avoid dispute and ensure stability To promote maslahah and avoid harm To promote transparency and accountability (AlBaqarah:282)

To uphold and promote justice in acquiring wealth It is prohibited for a Muslim when he sells something which has defects to his brother unless he informs his brother about it (Al-Hakim)

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And We have sent you (O Muhammad) not but a mercy to the whole universe (Al-Ambiya:107)

Alleviate Hardship Justice

Eliminate Prejudice

Maqasid as-Shariah (The Objectives of Shariah)

Religion

Intellect
Life Lineage/Posterity

Wealth

1 2

Preservation and Promotion

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Free from Riba Free from Qimar or Maysir (Gambling)

Free from element of exploitation of needs (bay al-mudtarr) Free from jahl mufdi ila al-niza` (lack of information leading to dispute)

Free from Gharar Fahish

Free from Ikrah (coercion) Free from Ihtikar (hoarding)

A system grounded on moral and ethical framework of Shariah

Characteristics of Islamic Financial System

Free from Najsh (Raising prices by making false bids)

Community oriented and entrepreneur-friendly emphasising on productivity and physical expansion of economic production and services

Constructed upon the principles of brotherhood and cooperation

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What is Riba?

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Juridicial Meaning of Riba

Literally means excess, increase, expansion, growth. Def 1: Riba is any excess in return of which no reward or equivalent counter value is paid Def 2: a predetermined excess or surplus over and above the loan recd by the creditor conditionally in relation to a specified period Riba was made forbidden in the 8th or 9th year after the Hijrah (flight from Makkah)
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Quranic Prohibition
Those who devour riba will not stand except as stands

one whom Syaitan by his touch has driven to madness (Al-Baqarah: 275) But Allah has permitted Trade and forbidden riba (AlBaqarah:275)
O you who believe! Fear Allah and give up what remains of your demand for riba, if you indeed believers. If you do it not, take notice of a war from Allah and His Messenger; but if you turn back, you shall have your capital sums; deal not unjustly and you shall not be dealt with unjustly (Al-Baqarah:278-279)

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Hadith Justification

Avoid the seven grievous sins They asked: What are they. O Messenger of Allah? He (p.b.u.h.)replied, Associating anything with Allah, magic, killing a soul which Allah has declared inviolate without a just cause, devouring the property of an orphan, dealing with riba, fleeing on the day of fighting, and culminating the chaste, innocent, believing woman. (Muslim) Riba is of seventy three kinds, the lightest in seriousness of which is as bad as ones marrying his own mother; for the Muslim who practices riba goes mad. (Al-Hakim) The Messenger of Allah (p.b.u.h.) cursed the devourer of riba, his constituent, the one who acts as a witness to it, and one who acts as a notary to it.

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What is Gharar?

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Gharar

Literally: Deceit, fraud, uncertainty, danger,

peril, or hazard that might lead to destruction or loss Technically: uncertainty and/or ignorance of one/both parties in a contract over the substance or attributes of the object of sale, or doubt over its existence and availability at the time of contract

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Why does Islam prohibit Gharar?

To ensure full consent and satisfaction of the parties in a contract Without full consent, a contract may not be valid Full consent can only be achieved through certainty, full knowledge, full disclosure and transparency Gharar in commercial contracts may lead to injustice, exploitation and/or enmity among contracting parties
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Prohibition of Gharar

All jurists agree that gharar should be avoided in commercial exchange contracts Prohibition of gharar Indirect references made in the Quran Conclusively prohibited by the Sunnah of the Prophet s.a.w. Classical examples of gharar sale Sale of fish still in the sea Sale of birds in the air Sale of unborn animals Types of gharar Gharar yasir (minor or slight) Tolerated and will not invalidate a contract Gharar fahish (major or excessive) Not tolerated and may result in contract voidability
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Maisir

Gambling and any form of business activity where monetary gains are derived from mere chance

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Conclusion
An Islamic economic system should strive to achieve socio economic justice through the elimination of interest, the payment of zakah and most importantly to ensure all activities accord with the Sharia.

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