Islamic Banking: Islamic Approach Essay

Question:

Describe and Discuss about the Case Study for Islamic Banking and Islamic Approach.

Answer:

Introduction

The Muslim population covers nearly 25% area of the total world and the accounting system is also considered differently according to the Islamic approach. The Muslims have to manage the accounts according to the principal of the Islam and for this, they need a well determined system which is known as the AAIOFI. The Islamic accounting can be considered on the different level with different and specific meanings. In the first aspect, the Islamic accounting system may be affected by the religious aspects. By the religious impact, specifically Pakistan have to maintain their specific accounts and they also have to manage their financial aspects wisely. Secondly, the rules defined by AAIOFI may be different from the rules on the international level. Finally, the Islamic accounting system can only be imposed on those countries which are considered as the Muslim dominating countries. Pakistan followed all rules related to it, so these rules are also imposed on Pakistan too. By considering all these aspects, the AAIOFI can be imposed on the Islamic country (AAOIFI Team, 2015).

The research paper shown below mainly covers the various aspects related to the development of the Islamic accounting system in Pakistan. Along with this, the findings related to the difference between the traditional and the conventional system of the accounting is also discussed thoroughly. The research paper also covers the literature review, appropriate research methodology, research questions followed by the conclusion and the recommendations.

Literature Review

The Islamic Accounting System and the AAIOFI are considered as the wide topic to be discussed. There are various researchers and the philosophers identified who present their individual views on the particular topic. In one of the journal, the author defined the cultural paradigm and the synopsis related to the cultural aspects thoroughly. According to the Stefana Dima, Dalia David and Pausiana, it is clearly defined that the AAIOFI possess some unique standards with them. The Islamic accounting system possesses the different views on the particular aspect. The Islamic accounting can be understood on the religious level. The Islamic identity can only be applied to the Muslim dominating country and the Islamic accounting may also possess the difference in aspects in comparison to the international accounting system. In short, this research paper will be helpful in reflecting the different perspectives related to the Islamic accounting in Pakistan.

Similarly, in another research paper, the key players in the growth and development of the Islamic Accounting System in Pakistan are also defined on the wide level. In this research paper, it is also defined that the Islamic accounting system is also influenced by the Shariah Law, which is the most prominent law in the Pakistan and other Islamic countries. The Shariah laws are based on the Islamic teaching & the learning standards and in fact, the banks and the organization in Islamic countries also believe in implementing the laws in the Islamic Accounting system of Pakistan (Yaquby, Eshaq, & Barwari, 2015).

Imtiaz Badshah, Frode Melvin and the Konstantin Timoshenko highlighted in their journal the role of religion in the accounting system. The author defines that there are various factors which can influence the Islamic Accounting system of Pakistan named as the legal system, economic and the political system, taxation, international and the political system, but the most dangerous system which is also least noticeable is the religious factor (Badshah, Mellemvik, & Timoshenko, 2013). The religious factors affect the working strategy and the functioning of the Islamic Accounting System and in fact, the religious factors also play the important role in shaping the central government accounts policies too. As Pakistan is also considered as the Federal Republic of Pakistan, so Islam is also adapted as the State religion. By assuming these literature reviews on the individual level, the more clarity to the topic can be defined.

Research Questions

  • What growth and development have been identified in the Islamic accounting system since its initiation?
  • What are the major differences observed between the traditional Islamic Accounting system and the conventional or the modern accounting system?

Growth and developmental aspects of Pakistan

The developmental aspects of the Islamic accounting system are discussed on the broader level. From the initial level to the top level, there are various changes which have been observed in the accounting system. There are various standards related to the AAIOFI are mentioned. But according to the growth perspectives and the adaptation by the government of Pakistan the standards are selected. In different years, well -defined system has been introduced. Like in 1997, the project for the improvement of the financial reporting and auditing has been introduced. In year 2001, the controller general of the accounts and the ordinance is introduced and in year 2004, the new accounting model has been introduced (Sharairi, Islam, & Harun, 2013). The adaptation of the standards as per the requirement are helpful in changing the phase of the Islamic Accounting system in Pakistan. The new accounting model has possessed the various charts and the codes to define the recording of the transactions of the financial years. This model makes the system more specific and prominent through which the requirement related to the cost accounting can be assessed.

There are some specific standards of AAIOFI also which are adapted by the organizations of Pakistan. The State Bank of Pakistan (SBP) adapted some of the standards from the AAIOFI which are mentioned in the paragraph defined. The defaults in payment by debtors, Murbaha to the purchase orderers, Sales and leaseback, Mudarba and the Termination of the contract. As the various standards are defined in the AAIOFI, so it becomes essential for the organizations of Pakistan to select only those standards which are required by them. By this, the suitable structure of the organization can be managed easily.

There are other improvements which have been observed in the Islamic accounting system. With the introduction of the accounting system in the Pakistan, the use of the traditional bookkeeping approach has also been reduced. Rather than this, the computerized and the technical methods are adopted to prepare the records and the accounts for the process to be completed. For the development and the growth of the organization, the AAOIFI also prepared some of the growth plans for the shareholders and the Islamic bank managers. By this, the managers and the shareholders also contribute in the coordinated manner and also provides the most advanced and the upgraded system for the improvement in the accounting system. In fact, the accounting system is totally based on the Shariah law and has also been influenced by this law only (Deloitte Global Services Limited, 2016).

According to the developmental perspectives, the Accounting system developed and practiced in the Islamic state is divided into 7 major types. These systems are the Stable accounting, Rice farm accounting, construction accounting, Mint accounting, and sheep grazing accounting, treasury accounting and the warehouse accounting. The selected standards of the AAIOFI take into consideration as per the requirement. The development of the accounting system in these seven differently identified perspectives has been helpful in increasing the mode of transactions and defined the money processing in the short span of time. To explain the developmental aspects from the growth point of view, the basic difference between the two is defined below (Zawya, 2014).

Traditional vs Conventional Accounting system

The traditional system of the Islamic accounting system has been initiated through the well-defined system of managing the business and accounting in the country. The new methods of trading and growth are being identified with the help of the traditional system (Ashfaq, Younas, Usman, & Hanif, 2014). But, to develop the appropriate and professional system of the Accounting in the country, it is essential to introduce the most advanced system of the conventional Accounting system. The newly developed conventional system is the only solution for the development and the growth of the Islamic accounting system in Pakistan. The major difference which can be discussed between the two is related to the changes in the operational aspects and sharing of the information. In the traditional system, the information sharing to the stakeholders is not considered as an essential process. But in case of the modern system, the stakeholders shows a wider knowledge of the investment (Islamic Banker Limited, 2016). This change is considered as the great source of development in the Islamic Accounting system of Pakistan.Similarly, the strategic approach of sharing the information among the stakeholder is also being considered important. In case of the traditional system, the management and the accounts department associate with an idea of accounting system, but in the modern system, all the departments are concerned with the accounts department (Mohamed, 2006). By this, the coordination of the accounts department with the other departments can be maintained thoroughly.

Research Methodology

Research Methodology is the strong pillar which will help in providing the suitable outcomes as per the requirement of the research. So, it is essential that the selection of the research methodology should be done in a well- defined manner. The quantitative approach is quite helpful and well suited in this scenario. So, the most suited type of research methodology is named as the quantitative type of the research methodology.

For identifying the views of the different people in identifying the various standards related to the AAIOFI, it is essential to conduct the appropriate survey. The best method to present the quantitative research is to collect the data from the bankers and the employees who are working in the banks of Pakistan. They can able to provide the best suited and the result oriented data. The data can be gathered by preparing the suitable questionnaire or by preparing the appropriate forms which can be filled by the bankers to provide the suitable answers. After gathering the data, the data can be analyzed either by the primary data analysis or the secondary data analysis. In Primary data analysis, the various questions can be framed and the output can be shown by the various graphs and the pictorial presentation. The secondary analysis method uses the sources from the internet to define the standards of the AAIOFI in Pakistan.

In contrast to adapt the quantitative data, it is essential to prepare a well-organized questionnaire so that the main aspects can be defined in a fruitful manner (Iasplus Team, 2014). Other than preparing the questionnaire, the other methods can also be adapted for the suitable quantitative analysis. For defining the appropriate aspects related to the research some of the questions are framed below: -

What growth and development will be defined in the Islamic Accounting system?
  • Effective increment in the cost.
  • Modern technical improvement
  • Categorization of the Islamic Accounting System
  • Other
Which system is the more suitable for Islamic Accounting System?
  • Conventional system
  • Traditional System
  • Both
  • May be conventional or Traditional
What are the limitations related to the Islamic Accounting System?
  • Limited to Islamic rules of Sheriah
  • Approaches are different from other accounting system
  • Can be applied by Muslim dominating country
  • Other

While doing the quantitative analysis, the mathematical, numerical and the statistical analysis of the collected data can be done thoroughly. The quantitative methods can easily be used for the descriptive and the experimental aspects of the process. The flexible process of analysis and the highly developed system for the data processing will be provided. By the help of this, the most suitable results can be generated on the large scale.

Findings

Through the findings, the major aspects related to the topic have been assessed. The findings cover the growth or the developmental aspects along with the role of the traditional and the conventional Accounting System in Pakistan. With the help of the charts defined in the methodology, it is also clear that the qualitative approach will be best suited for presenting the current aspects related to Islamic Accounting System Pakistan.

Conclusion and Recommendations

By studying the various aspects related to the Islamic accounting system i.e. AAIOFI, it is clearly shown that it helps in providing the various helpful aspects of the organization existing in Pakistan. But, according to the research, it is also clear that the institutes like the Audits and Accounts training institutes and the Pakistan Institute of Public Finance and the Accountants (PIPFA) do not prefer any course related to the cost accounting and the financial aspects. This reveals that in some cases, the Islamic organization also prefers the heterogeneous approach of the accounts rather than pursuing the homogeneous approach for the accounting system.

The involvement of the Non-reliable and the Non- transparent account in the Islamic accounting system is continuously hindering the growth aspects of the organization. The development of the country is also hindered by this system and the new approaches for the growth are also difficult to recognize. The introduction of the new model of the accounting system is helpful in reducing all the major errors related to the accounting system in Pakistan. But, to continue the developmental aspects in the country, it is essential to adapt the modern methods and the techniques of the growth for the organization who are adapting the various AAIOFI standards.

There are various aspects and the recommendations provided to implement the suitable Islamic Accounting System in Pakistan. Though the standards provided by the AAIOFI are broadly defined and highly appreciated by the western countries, but still some improvements are required for the development of the Islamic Accounting System of the Pakistan. The consistency in the growth and development of the Islamic Accounting system in Pakistan is required. For maintaining the consistency, it is essential to manage the integrity of the AAIOFI standards which are followed by the Pakistan. It is also recommended that the new approaches for the conventional system should also be identified, so that the implementation of the conventional system can become easier in reference to the Islamic Accounting system. If the appropriate implementation can be done, then the Accounting System will become more transparent and easier to understand. The drastic changes can be observed in the developmental aspects of the Islamic Accounting system. By following these recommendations, it would become easier to change the actual stage of the Islamic Accounting system in Pakistan. Other than this, there are various minor changes which are helpful in making the Islamic Accounting System more vibrant and cooperative.

Bibliography

AAOIFI Team. (2015). AAOIFI official website. Retrieved from

Ashfaq, K., Younas, S., Usman, M., & Hanif, Z. (2014, October). Traditional Vs. Contemporary Management Accounting Practices and its Role and Usage across Business Life Cycle Stages: Evidence from Pakistani Financial Sector. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 104–125. Retrieved from

Badshah, I., Mellemvik, F., & Timoshenko, K. (2013). ACCOUNTING FROM A RELIGIOUS PERSPECTIVE: A CASE OF THE CENTRAL GOVERNMENT ACCOUNTING IN ISLAMIC REPUBLIC OF PAKISTAN. Asian Economic and Financial Review, 03(02), 243-258. Retrieved from

Deloitte Global Services Limited. (2016). Islamic accounting. Retrieved from

Iasplus Team. (2014, December 30). AAOIFI issues new accounting standard. AAOIFI issues new accounting standard. Retrieved from

Islamic Banker Limited. (2016). AAOIFI Standards. AAOIFI Standards. Retrieved from

Mohamed, S. A. (2006). Islamic Accounting. CERT. Retrieved from

Sharairi, M., Islam, J., & Harun, H. (2013). A History of the Development of Islamic Accounting Standards: An Investigation of the Influence of Key Players. 9th Asian Business Research Conference. BIAM Foundation, Dhaka. Retrieved from

Yaquby, S., Eshaq, S., & Barwari, S. (2015). AAOIFI SHARIA STANDARDS. BIBF. Retrieved from

Zawya. (2014, December 02). Accounting and Auditing Organization for Islamic Financial Institutions. Accounting and Auditing Organization for Islamic Financial Institutions. Retrieved from

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