Summarization: Islamic Accounting and Banking System

Islamic Corporate Reports

Nowadays, the relationship between religion and other parts of human life have become the urgent concern of the modern society. Consequently, there are many investigations of the mentioned issue. The bright example can be the article written by Nabil Baydoun and Rogert Willet “Islamic Corporate Report”. The scientists investigate the relation between religion and accounting. They state that there is a lasting connection between financial welfare of the country and its current religion respectively.

According to Baydoun and Rogert (2001), the Islamic code is considered to be one of the basic moral codes in the world. Many countries try to follow it. Consequently, there emerges the issue of applying that code to accounting systems. The Western financial accounting statements (WFASs) are fundamentals of the accounting system in the Western world. Actually, this kind of system is developed namely for Islamic countries. They are based on moral principles of a particular religion. That is why the authors state that the system should be a little bit changed in order to apply it to the worldwide use. Great attention is paid to basic constructs of the measurement and disclosure practices involved in the WFASs. Consequently, the main theme of the particular article is to describe appliance of the WFASs to the usage of non-Islamic countries.

Much attention is paid to the fact that the WFASs will work in non- Islamic countries in case it is changed. The reason lies in the fact that most Islamic corporations work with the non-Islamic ones so attention should be paid to the methods of cooperation. According to the article, Western companies apply common principles and such forms of accounting as colonialism and multinationalism (Baydoun & Willett, 2001). Consequently, the need for cooperation with non-Islamic partners presupposes modification of the WFASs. Basically, the whole accounting system is based on the religious and ethical principle. Representatives of the Western culture believe that the moral code of the Sharia has to be applied to the commerce. Additionally, this code is equal to the assumptions once produced by the application of the medieval canon law in the Western European society. The mentioned information proves the fact that most other countries are not aware of the fundamental issue of the Western accounting system. That is why it is paramount to shape it according to some alternative norms that will suit all the countries. Thus, the main change has to be connected with the change of ICRs. It should involve a current balance in addition to the historical cost balance. Moreover, the value-added statement has to replace the profit statement (Baydoun & Willett, 2001).

One more important issue that should be taken into consideration is Islamic ethical principles. They are social accountability and full disclosure. Actually, application of moral principles to the accounting system will help to make it more profitable and prosperous respectively. The moral principles enable to make cooperation friendlier and less intense respectively.

To sum up, the article deals with the description of the Islamic accounting system and its impact on worldwide financial systems. It has been mentioned that Western countries have warm working relationships with other countries. Consequently, in order to maintain them, they should apply one universal system of accounting. It is the WFASs. This kind of system is based on the Islamic principle of Sharia that is common in the Western counties. Nevertheless, it is unknown in other counties. Accordingly, in order to have fruitful cooperation with world countries, the WFASs should be changed. It should be modified according to universal principles and norms respectively. In such a way, cooperation can bring enormous results.

Do Islamic Societies Need Their Own Accounting and Reporting Standards?

For the last decade, a difference between Islamic and Western accounting systems has been observed. It is absolutely true that in Islamic accounting the usage of interest and usury is prohibited. In contrast, most Western accounting systems pay enormous attention to the mentioned issues. Nowadays, Islamic countries set up a deep and lasting cooperation with other international countries. Consequently, the Islamic accounting system requires some changes in order to compete with other states.

According to the article “Do Islamic Societies Need Their Own Accounting and Reporting Standards?”, the best solution in the improvement of the accounting system is a standard system (Mirza & Baydoun, 1999). The required standards will provide required guidance for firm managers as well as accounting practitioners. The article states that the need for accounting standards is the same as any other kind of standards. The main purpose is to ease comparisons and level economic and social costs of helping alternatives with which one is stood up when making rational decisions (Mirza & Baydoun, 1999). The Muslim society does not take into consideration the use of usury. They are likely to operate the conflict between the use of interest and its banning rather than close themselves off the world market. That is why, it is required to provide an accounting and reporting system that arranges certain religious characteristics of Islam. Moreover, the system has to help corporations to manage effectively and cooperate with other non-Muslim firms easily.

In accordance with the article, the new system should cover all aspects of financial reports such as profit, balance sheet, statement cash flows, and social data. Moreover, information concerning Muslim relationships like zakat and qard is to be involved as well. The basic criteria for accounting reports in the Muslim society are sufficient contracting, social accountability, and full disclosure. Managers have to check all aspects of the mentioned issues. The standard theory of the Islamic accounting reports requires to be supplemented by the explanation of reporting practices that are being followed. That is why, new regulations have to be more flexible and general respectively. It should cover both interest- and non-interest-based transactions. The detailed analysis enables to impose costs on corporations.

One more important step is to allow the system that will predict the increase or decrease of costs. In a Muslim society, it is prohibited to predict any further actions since only God knows what is going to be in the future. If the corporation provides a profound analysis of the desirable financial increase, it will benefit future development of the company. The essence of the article lies in the fact that the Muslim accounting system requires a standards system that will investigate every aspect of accounting.

To sum up, due to the development of the modern world, cooperation between countries starts progressing dramatically. The countries’ cooperation requires the relevant system that can operate it. Consequently, great attention is paid to the financial state of the country. Speaking about Muslim countries, their financial system totally depends on the religion. They reject the importance of interest and usury. Moreover, they are not allowed to predict future financial increase or decrease respectively. In fact, such a system is not good at all and it needs changes. A great solution is to apply the accounting system that will check all aspects of the financial development of the country. In such a way, it is possible to make international cooperation more effective and prosperous as well.

Development in Islamic Banking: A Financial Risk-Allocation Approach

Development of the Islamic banking has become one of the basic events in the mid-1940s. Many Islamic financial companies have opened a great variety of financial institutions all over the world. It has been treated as a growing part of international economy. In fact, such an extreme progress of the Islamic banking has been caused by marketing of petrol and oil. Moreover, Islamic banking has gained wide popularity among international companies. New Muslim banking products have been introduced to the general usage. There are many reasons for such great success.

According to the article “Development in Islamic Banking: A Financial Risk-Allocation Approach”, Islamic banking has made breakthroughs in 70 countries in Asia, Africa, Europe, and North America. Moreover, it has opened the fertile soil in the Middle East and on the Indian subcontinent. The most effective segments of the Islamic banking are takaful and sukuks. The increasing number of Western accounting institutions has been involved in Islamic banking in order to bring innovations into their actions and attract international investments.

The lasting development and success have caused a wide range of problems for Islamic banking. It faces many challenges. The first issue is that the Islamic banking has to improve its liquidity, governance, and risk management. They are considered to install domestically and internationally compatible standards. That is to say that each component of the bank has to be analyzed in terms of every aspect. All banks are required to build new principles based on universal norms. The influence of the religion should be leveled as well. The reason is quite obvious as not all international corporations are ready to take into consideration Islamic norms and principles. Consequently, in order to work worldwide, banks should provide separate norms for international cooperation.

The article states that Islamic banks have to change the overwhelming use of murabaha financing and PLS financing (Khan & Bhatti, 2008) The financial system should be oriented on international countries. Islamic banks have also failed in the development of human resource management. This part is of paramount importance since it presupposes the environment inside the company. One more problem lies in the lack of sufficient knowledge concerning the role of leaders. Actually, the Islamic banking does not take into consideration the role of leaders. The leader is the heart of any company. He/she is the force that operates the working procedure. Consequently, the leader’s work influences further success and prosperity of the company. Furthermore, the leader helps to create the working atmosphere. All the mentioned facts are basic components of a successful business. It is of paramount importance that each of them works perfectly. In accordance with the article, most drawbacks of the Islamic banking deal with the excessive role of moral norms and principles. The Muslim culture is famous for its strict rules and norms. That is why, it will be better if some of them are leveled or even demolished at all. It will help to avoid misunderstanding during cooperation.

All in all, the article deals with the description of the Islamic banking system. The Islamic banking system has gained a wide popularity since the mid-1940s. It has become one of the leading banking systems in the world. Such a great increase has been influenced by oil trading. The Islamic banks spread its influence across Africa, Asia, Europe, and North America. Despite such an extreme rise in the world financial market, there are some faults in its development. The basic ones are connected with insufficient human resource management and leadership. Moreover, the Muslim banking is based on strict moral and ethical norms, which are not appropriate for international countries. That is why, it is required to change accounting standards in order to gain enormous prosperity in the future.