Social Dimensions of Islamic Banking
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Published: Thu, 15 Mar 2018
It is very interesting to know that banking operations in the modern world such as transactions savings of money and investments are highly encouraged but it is criticized in a way it operates in the modern world. Also, it is a claim by Muslims that Islamic principles are very flexible and universal that they are easily adoptable by anyone in every aspect of life. Therefore, these days, Muslims have started to operate all the in their own way and they have also done the same with the banking. (Qal’awi, G. 2009, p.10)
These practices by Muslims first started in Egypt in 1960s. After that, several efforts were done in this regard for example conference of Islamic foreign ministers in 1972 and as a result Al-Tanmiah Islamic Bank was formed. In 1975, this bank got support from all Islamic countries in the form of capital. After that, several individual struggles and effort led to the formation of Islamic banks for example Dubai Islamic bank in 1975. (Qal’awi, G. 2009, p.11)
As explained by Maali et al in 2006 on p.267, Islamic banking raised as a new system in the banking industry during the last century. Emergence of Islamic banking has challenged the dimensions of modern banking system for example social dimension. Therefore, it could be an important concept and can be studied to explore the role of Islamic banking for these new dimensions especially social dimension.
These are the goals and objectives of this research study. At first, it will make clear the role of Islamic banking in social dimension perspective of banking as discussed above. Secondly, it provides a clear picture of social responsibility dimension in banking and role played by Islamic banking in this regard. Finally, it will provide diagnosis to shortcomings and will lead to recommendations and projections.
Scope of Research Study:
Basically, the fundamental purpose of this research study is to analyze the role of Islamic banking for social dimensions and social activities executed by Islamic banks specifically under the geographical boundaries of Gulf region. It is important to note that my study will analyze all the things qualitatively for example banking reports and social disclosures under the context of Gulf. Talking about the importance of this research study, it will provides insights to researchers about how far the Islamic way has reached in meeting the social responsibility and social dimensions due on banking. This will help the researchers to analyze the whole situation and they will be able to recommend some strategies between the gap of success and distance covered till yet by Islamic way of banking. The research questions of my research study can be indicated as follows:
What is the nature of social disclosures by Islamic banks in Gulf region in their annual reports?
How the Islamic banks in Gulf focus on social dimensions and disclosures and what are these dimensions if any?
What are the ways, tactics and strategies to improve activities stated in the above research questions?
Ten Islamic banks having annual reports will be studied in this research study. The findings cannot be perfectly generalized due to small sample size. Errors like subjectivity and the misleading correlation (which are a part of content analysis) are expected to occur.
Structure of the dissertation:
I will discuss the theoretical framework and theories to be adopted in the next chapter. Then the literature review for this research study will be analyzed and discussed. After that, a methodology and data analysis techniques will be brought under light. Following that will be the context (political) of Gulf. Critical Analysis of banking annual reports will be done in the next chapter. Finally, I will conclude this research study with recommendations and additional strategies.
Chapter 2 – Literature Review
A lot of research has been done on this topic. In this chapter, we will review all the research based on our topic. For literature review, I have divided the articles into three categories. At first, every article will start with a preface providing an overview and logical flow of the coming discussion. Then, it will be the main body of the article discussing literature review related to social accounting, justice, sustainability and corporate social reporting. Finally, it will be concluded.
Let us first review some of the definitions or more specifically the basic concepts of corporate social reporting and sustainability. In the light of literature review, corporate social reporting can be defined as:
“The method of communicating the social and environmental belongings of organizations‘trade and industry procedures to fussy interest groups inside society and to society at large. As such, it involves extending the responsibility of organizations (mainly companies), further than the conventional function of providing a financial explanation to the owners of capital, in particular, shareholders. Such an addition is predicated ahead the supposition that companies do have wider responsibilities than just to make money for their shareholders.” (Owen, 1996) (Gray, 1987)
At second, despite the fact that the definition of sustainability has been highly criticized by united nations but still it is the most famous and prominent definition of sustainability which means efficient growth (Johnson, 2007). According to Johnson’s paper, the definition of sustainability is as under:
“Sustainable development meets the requirements of the current without compromise. It can increase a lot of points that could be analyzed concerning its allegation. Possibly the most important point is the term â€•sustainable development.”
Talking about the literature review, I have been inspired by various studies regarding the operations and measurements of Islamic banking for example Wilson (1982), Gambling and Karim (1986), Mirza and Baydoun (1999), Baydoun and Willett (2000), Sulaiman and Willett (2002), Rahman (2002), and Olson and Zoubi (2008). Inspiration is not due to the fact that the above authors describe the Islamic banking in term of its social perspectives rather than just discussing the financial numbers. It is important to note here that it is possible to differentiate the two perspective of banking through non-linear classification techniques. This is the reason for main section to contain interconnected reviews in Islamic accounting and banking literature, particularly those concentrating on social dimensions.
There are many studies regarding the harmonization of accounting by the effects of culture and especially under the Islamic institutions (Tsui, 2001). The paper of Hamids‘ et al., (1993) argued that religion is the main cultural factor that plays a very important role in recreation of national values and characteristics in accounting and it eliminates also all the barriers to international harmonization.
To achieve the purpose, several studies discussed the changes in cultural factors and their focus on especially religion factor. These studies also discussed the inheritance of Islamic culture and its traditional characteristics. Then difference between the Islamic and conventional commerce was discussed for example Mudaraba and Morabaha. Finally the implication of conventional and western commerce was critically analyzed.
It is important to note that the paper argued that Islam is a complete lifestyle as it covers all the values of life and ethics. It is a complete system. It was also found that several basics of western commerce were already inherited in Islamic commerce and Islam was the first religion to introduce these values to world and the entire west had adopted these values from Islam. This paper critically analyzed the controversial things between Islamic commerce and western commerce such as discounting, time value of money and interest which were inherited in west in order to find way of harmonization. This paper is very helpful in understanding the ways of harmonization of international accounting because of its critical and comparative analysis of Islamic and Western Commerce.
Murtuza (1999) attempts to discuss in his research paper the gap that exists in knowledge which is reflected in a need of economic knowledge associated to cultural and ethical values in Islam, in the course of demanding to discover how Islamic values shape a complete skeleton that is capable to sustain financial accountability and societal justice if exercised correctly.
In this paper, the author analyzed three basic elements of Islamic theoretical framework which were regarded as basic in economic activities, to creation of wealth and also for social welfare. These three elements are: Riba, Zakat, and Hisba. Most importantly this paper discussed the relationship between God and human beings for the creation of wealth.
The paper argued that the above three elements are the basis for Islamic commerce. It is a distinctive nature of Islam to have the above elements as these three concepts prevents the human beings from all kind of frauds and dishonesty. All the above three concepts not only discourage economic exploitations but also help the needy and poor and thus matching the ethical standards of social dimension. The paper concludes that Hisba consists of recommendation, caution, regulating, and commanding. To figure up, the deep meaning of the idea is mainly connected to refusal of economic exploitation, which will guide to raising accountability and social justice in the future.
According to Lewis (2001), the most important facts that can facilitate the entry of Islam into the business world Islam and Islamic law, the implications of Islam in business ethics and accounting, Islamic finance principles, and accounting for Islamic finance. A critical discussion of Islam and Islamic law were discussed in this paper and the role of these in regulation and governing the life of man were analyzed. A discussion concerning the five pillars of Islam, ethical standards and values was also done. Then the paper discussed the five basic practices and principles of Islamic Finance and the major difference between Islamic and conventional finance.
At the conclusion, the paper argued that the following points must be there to implement Islamic finance, firm or accounting. The first thing is a clear definition of business and its role for society and humanity. The second thing is a clear view of accounting and accountant’s responsibility.
On the way of criticizing the modern ways of west about business, banking and accounting, a distinctive paper is by Zarqa (2003). This study deeply discussed the interrelationships and differences between the Islamic and Western Economy.
Two main points were discussed in this paper. The first point was that there were some basic rules in pure sciences and in the same way there were some basic rules for researchers in social sciences as well which could not be ignored at any cost. Secondly, the paper argues that Islamic laws are rich of ethical values and social standards and these laws cover all aspects of life. Then the paper discussed ways of implementing the Islamic lecture and its harmonization with other economies.
In conclusion, the paper argued that Islamic sharia must be give a proper place while analyzing any aspect of real life. The paper also suggested to modern economists to swap the conventional values with Islamic values in modern economy for a better future.
For our discussion, it is important to bring under light the paper of Hameed et al. (2004). This paper mainly focuses on the Islamic institutions and their performance. Specifically, this paper analyzed some of the Islamic institutions like banks for example Bank (BIB) and Bank Islam Malaysia Berhad (BIMB) based on their annual reports and disclosures.
To achieve the objective or aim of this study, the author suggested alternative performance measures for annual reports of Islamic institutions and organizations. These measures can easily help organizations to perform better and to achieve their objectives. These measures were further divided into subcategories. These were sharia compliance, corporate governance and social indices.
This study revealed that BIB discloses more information than BIMB. It also argued that the two institutions have over-focused on financial numbers rather than social dimensions to satisfy their shareholders and collaborators. Also the public has limited access to Islamic institutions and the only access available is annual reports and disclosures. The author clarifies that Islamic banks need to disclose more information to remove any misconceptions and mistaken beliefs about Islamic banks.
Another important event here is that Accounting Standards Board (MASB) has recently issued its financial reporting in an Islamic way thus revealing the gap between Islamic accounting and conventional reporting and a presentation for those who want to disclose their reports in an Islamic way. (MASB, 2009)
The views of KAMLA et al. (2006) and Lewis are nearly the same. The central point in this paper was to demonstrate the idea of accounting for the atmosphere in the course of the role of Islamic values. This adds hold up to the case that conventional accounting can gain advantage from knowledge of Islamic principles. Through applying a critical automatic theory when looking for progress, researchers mentioned all the relevant Islamic values that are supplementary to the case.
Taking care of nature is a very important concept in Islam. This concept can be further broadened to social responsibility. This paper explained the concept of sustainability by using verses from the Holy Quran. These started with the unity of God, followed by the idea of trusteeship. Then, the paper mentions the idea of society principles and, finally, the concept of holism and the future of Umma.
In conclusion, the paper argues that Islam has a very solid foundation for social responsibility based on holistic views. Islam has a very well developed structure to deal with social issues and we need to evolve and adopt it.
Another important paper, in discussing the social aspects in accounting, is the paper of Maali et al. (2006). In order to justify the primary objective of research, the author focused on nature and extent of social reporting by Islamic institutions. The paper first set benchmarks and then analyzed the reporting of Islamic organizations and institutions. These benchmarks were based on Islamic views and principles. A basic objective of this research is to find out what is going around in social reporting by Islamic institutions and what is actually required by Islamic principles. The sample size included all the banks from the Islamic world. It was a sample of 29 banks. Content analysis was used as a basic method of evaluating the social disclosures by Islamic banks.
To achieve the paper goals, researchers organized three objectives compulsory for Islamic banks in terms of their social and cultural contribution in their social disclosures and reporting. The first objective was to provide a proof of obedience of Islamic principles and surrendering against Islamic values. Second was to illustrate that how the actions of banks can contribute to the social wellbeing of the society. Third was to facilitate Muslims in obeying their duties. The researcher used the above three objectives as benchmarks to evaluate Islamic banks performance. The benchmarks are a combination of the necessities of AAOIFI (professional body responsible for developing accounting, auditing, ethics, governance, and Sharia standards for the international Islamic banking and finance industry) (AAOIFI website, 2009) and those which had been completed from the social reporting literature.
It was found that Islamic banks are very far away from these benchmarks about conducting the research and analysis through content analysis. In conclusion, the paper argued that most of the Islamic banks did not care about the social and Islamic values. In addition, these banks did not even disclose activities in social reporting that may attract some criticism. In short, Islamic banks needed to do a lot if these banks wanted to meet the expectations of Muslims.
In a paper by Kamla (2007), the author conducted a critical analysis of social reporting and disclosure in Middle East. The importance of this study can be judged by the fact that it adds to significant accounting research by integrating the critical with the postcolonial perspective, which is an extraordinary combination in the field; only a few papers have done this.
The method used for research in this paper was content analysis and 68 Arab companies’ annual reports were analyzed and tested. An important step was that the analysis of sentences was done instead of counting them. The sample selected included nine Middle East countries and seven sectors. They were â€—economic,‘ â€—environmental,‘ â€—general social,‘ and â€—other cultural characteristics of the reports.‘ Under each measurement, there were some confidential sets of points (in total, 22 points) which were completed from the GRI‘s (Global Reporting Initiative) report of 2002. The study intended to discover if the practice of social accounting in the Middle East acted in an emancipative or repressive way.
In the outcome, it was evidently clear that the contextual factors played a chief function in the nature and level of disclosure. In addition to that, some common characteristics were mutual between the companies in the sample. The disclosures are more descriptive than quantitative, with no declaration by a third party. Also it is noticeably clear how the imposing understanding fashioned the disclosure by the being of a lot of disclosures related to governmental gratitude, customer relations‘ and employee-related issues,‘ nationalistic and religious aspects, with smallest social issues. In addition, there is a need of attention in regulatory structure for the Middle East. To figure up, it has been accomplished from all these results in the end that the look of the social accounting in the Middle East has been on the exploitive side of accounting.
The paper of Hasan S. (2007) examines generally the different aspects of social justice by Islam and conducts a critical analysis that if these aspects are applicable in the modern world or not. The paper also seeks out the aspects of social justice with the intent of bring peace to the new globalized modern world.
In track of objective, this paper addresses social justice by discussing distributive justice, relational justice and retributive justice along with the concept of equality and unity. The paper also argues that Muslim in the modern globalized world should be flexible and adaptable in order to achieve and implement the Islamic social justice in the modern world.
In conclusion, it is stated that there are some reason that drive Muslims away from the right path. Firstly, the concept of dialogue and ijetihad should be given a proper place in the government. Secondly, Zakat is the best way to ensure distributive justice. Thirdly, the retributive justice fails if the government fails to provide social, economic and political protection to citizens and fails to perform other duties. The paper focuses that social justice is not solely based on Islamic basic principles but it also requires implementation.
The study of Napier (2007) is the most comprehensive study from past to present of Islamic Accounting. This study examines the factors that guide to the form of thoughts and examination in Islamic accounting studies. Modern accounting in Islamic societies must confront the test of combining both a need to implement Islamic financial reporting system with a need to maintain Islamic values.
The paper compares and reviews the Islamic accounting with modern accounting and examines the gap between them. Four main areas are reviewed from Islamic literature: the impact of Islam as a religion on accounting, accounting concepts viewed from an Islamic perspective, multi- aspects on Islamic banking accounting, and the related issue of the need for special accounting standards.
The paper stated that due to the influence of western system of accounting and values, Islamic system is not finding a proper space in the modern world. Islamic banking and accounting are facing different challenges and tests like Zakat, historical and fundamental values and controversy among Islamic scholars regarding sharia. The paper recommended that there was a need of some more research for Islamic values and principles of accounting in order for proper justification and removal of misconceptions about Islamic accounting.
In another Hossain et al’ (2008) paper, there is a focus on Islamic corporate social responsibility and there is an attempt to assess the correlation of opinions of executives as agree, disagree, no comment, strongly agree and strongly disagree etc. The objective of this paper is to provide guidance to those managers of organizations who want to follow Islamic Corporate Social Responsibility and its implications.
In order to achieve paper goals, a research questionnaire was developed to focus corporate social responsibility in Malaysia. A sample of 50 firms was selected. Then the correlations of executives’ opinions were measured and also the managers’ opinions about corporate social responsibility were recorded in Malaysia. Several accuracy and reliability tests were conducted to justify the research such as t-test, z-test and ANOVA etc.
As a result there was a positive correlation r (.395 –.894). Also there was a considerable distance among the five statements. Moreover the Islamic idea of corporate social responsibility (Mean = 4.00, Standard Deviation = .7071) was observed to be higher in terms of five statements that the managers’ viewpoints about CSR (Mean = 3.8, Standard Deviation= .44721), t (4) = 4.242, p < .0005). It was found in the end that managers of Malaysia did very less planning for implementing CSR and exactly did it without a plan. The report recommended that the government should help the managers in developing and implementing a CSR plan.
If we move forward to Farook (2008), this paper proposes a framework for Islamic institutions and banks for addressing their social issues. There is an assumption in this paper that there is a social responsibility on Islamic institutions for two reasons: religious and financial reasons. At first, their being as a financial institution is actually a religious duty for social welfare. Secondly, if they are working as a financial intermediary or middle party then it is their duty to collect and invest in profitable, lawful and recommended opportunity.
The paper strives to reach its intention through extending the individual social responsibility to comprise the Islamic institutions. This is in accumulation to the specific duties which will be developed particularly for these institutions in the course of looking into Islamic values (Sharia).
This paper resembles the concept of disclosure with accountability and considers disclosure as not only a presentation but an auditable view of the Islamic institution for Public. Thus, the paper recommends a framework for Islamic institutions for resolving their social issues and addressing the social dimension.
The Objective of Dusuki‘s (2008) was to test the concept of corporate social responsibility under the light of islamic sharia or law. According to this paper, the basic concept of Islamic Law that provides and motivates for corporate social responsibility is the concept of God-consciousness.
Firstly, Islamic law was discussed in the paper as a foundation of understanding corporate social responsibility in Islam. After that, the paper discussed the God-consciousness concept of Islam which is also called Taqwa. At this point four main points were brought under discussion which were: human dignity, free will, equality, and rights, and trust and responsibility. In the end, implications of Islamic law for corporate social responsibility were discussed.
In concluding the paper, the findings could be summarized it was wise to say that the concept of social responsibility was inherited to Islam and it was not new to Islam. Moreover, social responsibility was one of the fundamental concepts of Islamic Sharia and the concept of God-consciousness highly encouraged and motivated the concept of social responsibility.
Covering further milestones to Kamla (2009) paper, this strives to critically evaluate the recent papers in Islamic banking and accounting (IBA). This paper recognize means for IBA to achieve liberation sensibly, how it contributes to the significant accounting project in achieving this liberation and fill the space that exists between Islamic accounting and the significant accounting project.
To achieve its goals, the paper critically examines the limited scope of researchers for IBA. Also the paper focuses on activities that can contribute to achieve the liberation. In conclusion, the paper argues that the IBA should integrate with other systems as well at micro and macro levels. The paper also addresses the issue of honesty in making social disclosures and reports. In the end, the paper discusses the role of accountants, economists, and managers for achieving this liberation and social disclosures.
According to my point of view, all the above researches are very consistent, accurate and reliable as these researches are supported by strong references and ground facts. Also, these researches are beneficial to my area of interest in several different ways. Despite the discussed detail of focusing on technical aspects in Islamic accounting and banking, I have also noticed a certain shortage in the empirical side in the field.
On the other side, despite the fact that there is an ongoing credit crisis and report by Asset Securitization Report (ASR) explaining the reasons, it is still projected those GCC domestic markets will remain stable at a good rate (ASR 2009). This provided me motivation and increased interest on researching banking in islam after credit crunch and the adaptability of Islamic concepts by the western world. My study will solely based on social disclosures and reporting by Islamic banks in Gulf. I want to bring into notice that the studies presented in literature review were in mix of English and Arabic but most of the studies are in English.
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