Accounting for Islamic financial transactions
FN 6103
Full Islamic vs. Shariah Compliance
In Islamic Banks Institutions
Omer Bin Thabet
0880944
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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, as defined by Shariah authorities.
Therefore, Shariah compliance launched, which means 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 deference commercial 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.
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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.
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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
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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.
2. 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 Mazhab in
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.
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3. 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?
4.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
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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. www.islamica-me.com.m
Bank Negara Malaysia,(2007). Shariah resolutions in islamic Finance. www.bnm.gov.my
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