Accounting for Islamic financial transactions

FN 6103

Full Islamic vs. Shariah Compliance

In Islamic Banks Institutions

Omer Bin Thabet

0880944

Full Islamic against Shariah Compliance

for transactions In Islamic Banks Institutions

1. Introduction

The main difference between Islamic Bank and conventional is the sources of law which govern these banks. The functions and operating modes of conventional banks are based on fully manmade principles, while Islamic Banks are based on the Shariah Principles.Islamic banks institutions (IBI) generally aim to make their financial transactions according to Islamic law. To achieve this goal these transactions must be free of:riba,gharar, risk, and haram industries, asdefined by Shariah authorities.

Therefore, Shariah compliance launched, whichmeans that a particular investment or financial transaction has been conducted or structured in a way considered “legal” or “authorized” pursuant to Islamic law. The functions of Shariah compliance and level of adherence is determined differently across banks, mainly depending on the bank’s policy and vision and its interest to employ Shariah principles.

As a result, the name of full Islamic transactions raised against shariah compliance transactions among Islamic banks due to deferencecommercial laws as well as Islamic law (mazhab) within Islamic countries. For instance, Bia Bithaman Ajil which includes Bia Aina, this transaction is prohibited in all mazhabis except Shafi' that applies in Malaysia.

For that reason, this paper tries to identify the differences between these two Islamic terms with Islamic banks institutions.

2. Shariah compliance

In order to have financial products comply with Shariah, banks need to satisfy minimum criteria of shariah law regarding the avoidance of riba, maysir, and gharar. Once these are satisfied and bank obtains Shariah supervisory bored approval, the product or structure can be market as Shariah compliant. Shariah Supervisory member must be scholars and fully independent who are highly qualified to issue fatawa on financial transactions. In addition, they must to have considerable experience with knowledge of modern dealings and transactions.

The Shariah Compliance framework may include the following:

1. A system of compliance having special emphasis on Shariah aspects with relevant provisions of existing laws, rules, regulations, policies and procedures related to Islamic Banking need to be set in in the IBI’s processes in such a manner that monitoring and reviewing of issues related to Shariah compliance forms part of internal control structure.

2. Monitoring and reviewing for Shariah Compliance should cover all activities, products and locations of the IBI.

3. The basic purpose of this responsibility is to ascertain whether the transactions, processes and products undertaken by the IBI are Shariah compliant and all related conditions are being met, as approved by Shariah Advisor.

4. All necessary documents should be provided to Shariah compliance officials in performance of their functions.

5. Irregularities, if any, related to Shariah Compliance shall be rectified with the approval of Shariah Advisor.

3. Fully Islamic

Is also called Shariah-based, under this mechanism, banks takes the compliance with Shariah law a step further. Not only do individual products have to meet all the requirement, but also all operations within the bank are required to be comply with Shariah law. This extends to contracts with suppliers, rental contracts and labor contracts. The bank is completely set up to work in line with the ethical framework of Shariah, which makes it more likely to be able to structure all products to meet the Shariah requirements. Moreover, under fully Shariah compliance there is no co-mingling of conventional and Islamically raised fund, since all fund are raised in line with Shariah requirements.

4. Discussion

Both shariah compliance and fully Islamic banks are aim to produce products according to Islamic law to fulfill their costumer needs. But the products of these banks are not equally acceptable to Muslim who preferred fully Islamic products. The difference of Islamic law among banks is due to the following reasons:

  1. Conventional banks, many conventional banks and financial institutions are increasingly becoming interested in Islamic finance and investment. As we know these banks trade in unlawful products such as riba, maysir etc. to handle Islamic products these banks adopts shariah compliance. But these products not reach to fully Islamic banks yet because conventional banks still maintain operations which are not comply with Islamic law.
  1. Different schools of taught,within Islam there is different schools (Shafi', Hanifa', Hanbali, and Maliki) which fully agreed with regards to Fiqh i'badat but there is different opinion in some issues in Fiqh muamalat, Islamic finance classified under second type "Fiqh muamalat". The adoption of any of these Mazhabin any area of Muamalat will make it fully Islamic transaction. However, lately contemporary issues rise which have no clear treatments in Shariah plus those issues have not supported by Ijma among scholars. Some of these issues implement in within financial sector. For instance, Bia Aina ( especially in Bia Bithaman Ajil), this type of sale implements in some of Islamic countries such as Malaysia (Shafi'), this sale is lawful in Shafi' schools of taught under some situation only but is rejected in some Muslim countries such as middle east. Hence, Islamic banks need to adopt shariah compliance in such products to make it along with Sharia requirements.
  1. Lack of regulation regards to Islamic finance, most Muslim countries are following the common law. The implication of this law is witnessed by all aspects of live such as social, commercial, economic etc. Unfortunately, Islamic finance in these Muslim countries classified under commercial common law which designed to serve conventional banks only the bad things this law is mandatory for Muslim. Under this law Islamic banks are not free to practice activities according to Shariah, they only allowed to deal with services nothing else. As we know Islam encourages to deal with real economic (commodity trade) than financial economic. The practice that, Islamic banks should work to achieve this goal. Therefore, the terminology of shariah compliance comes to enable Islamic banks to have products comply with Shariah requirement through common law.

The bad story here, we proposed Islamic finance which suppose to be the best alternative in finance industry without any cooperation among Muslim countries. The question is, does this industry will go further with current situation or the Islamic finance not more than phenomenon will disappear soon?

  1. Conclusion

Islamic economic aims to substitute financial economic with real economic (commodity). This put heavy burden on Islamic financial institution. Therefore, Shariah prohibited certain type of transaction within this sector especially riba, gharar, mysir etc.The issue is how to implement Sharaih with these banks or how to make their products according to Shariah requirements?

There is two approaches on hand to handle this matter either full Islamic compliance or Shariah compliance. Within conventional banks and Islamic banks which implement in non Muslim countries,it's hard to apply first approach due to several reasons such as the validity of commercial law where they implement so the second approach is the best solution here.

On the other hand, in most Muslim countries they use full Islamic which mean full Islamic products and all operations here are according to Shariah compliance. Yet, come Muslim countries are far from this practice due to their law which derived from common law.

To handle full Islamic products with Islamic banks large initiatives needed to take by Muslims all together must cooperate to fulfill it such as the uniform Islamic regulation with this sector.

Reference:

Instructions & Guidelines for Shariah Compliance in Islamic Banking Institutions in Pakistan, (2007).

Shariah compliance vs shariah-based: competition or cooperations.

Bank Negara Malaysia,(2007). Shariah resolutions in islamic Finance.

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