Recent events, from the start of Ramadan, to the Pope’s controversial remarks about Islam, to the discovery of a new tape by two of the September 11 attackers, to the release of Bob Woodward’s latest book, have once more made Islam a topic of conversation. Beyond the headlines, however, exists a complex religious and social system that affects far more people than just Muslims. Islamic finance, particularly Islamic banking, insurance and accounting, is playing a growing role around the globe, especially in the business world.
Islamic accounting is generally defined as an alternative accounting system which aims to provide users with information enabling them to operate businesses and organizations according to Shariah, or Islamic law. With little doubt, the greatest challenges to Islamic accounting and finance in the United States stem from a lack of knowledge and understanding of Islam and the intricacies of its financial laws and concerns regarding terrorism, combined with the U.S. regulatory framework and guiding principles of American business. The Muslim and Islamic financial markets within the U.S. and around the world, currently represent an enormous opportunity for those willing to overcome these challenges.
Islam & Islamic Financial Laws
“To professional accountants who have been brought-up on the idea of accounting as an ‘objective’, technical and value-free discipline, the idea of attaching a religious adjective to accounting may seem embarrassing, unprofessional and even dangerous,” Dr. Shahul Hameed bin Mohamed Ibrahim says in Islamic Accounting – A Primer.
Both conventional and Islamic accounting provide information and define how that information is measured, valued, recorded and communicated. Conventional accounting provides information about economic events and transactions, measuring resources in terms of assets and liabilities, and communicating that information through financial statements users, typically investors, rely on to make decisions regarding their investments. Islamic accounting, however, identifies socio-economic events and transactions measured in both financial and non-financial terms and the information is used to ensure Islamic organizations of all types adhere to Shariah and achieve the socio-economic objectives promoted by Islam. This is not to say, or imply, Islamic accounting is not concerned with money, rather it is not concerned only with money.
Islamic accounting, in many ways, is more holistic. Shariah prohibits interest-based income or usury and also gambling, so part of what Islamic accounting does is help ensure companies do not harm others while making money and achieve an equitable allocation and distribution of wealth, not just among shareholders of a specific corporation but also among society in general. Of course, as with conventional accounting, this is not always achieved in practice, as an examination of the wide variances in wealth among the populations of Arab nations, particularly those with majority Muslim populations shows.
In addition, because a significant part of operating within Shariah means delivering on Islam’s socio-economic objectives, Islamic organizations have far wider interests and engage in more diverse activities than their non-Islamic counterparts.
Concerns About Terrorism
The diverse activities and interests organizations pursue under Shariah is a cause for concern when applying conventional accounting to Islamic organizations. After all, conventional accounting can be used to disguise unethical and even illegal activities within the very organizations they were intended to provide information about. Imagine how easy it is to overlook or just not identify such information when employing an accounting system not designed for use with the type of organization it is being applied to.
In the past, the issues raised by this mismatch focused on the ability of users beyond the Muslim world to make appropriate decisions regarding investments. Since September 11, 2001, however, the concern has changed from the potential loss of investment to the possibility of supporting terrorism.
This concern is particularly significant for non-profit organizations involved in providing humanitarian relief outside the U.S.. Fortunately, the U.S. Department of the Treasury (DoT) has issued updated Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-based Charities (Guidelines).
“The abuse of charities by terrorist organizations is a serious and urgent matter, and the Guidelines reinforce the need for the U.S. Government and the charitable sector alike, to keep this challenge at the forefront of our complementary efforts,” Pat O’Brien, Assistant Secretary for the Treasury’s Office of Terrorist Financing and Financial Crime, said in a statement announcing the updated guidelines. The Treasury Department is committed to protecting and enabling legitimate and vital charity worldwide, and will continue to work with the sector to advance our mutual goals.”
The Guidelines urge charities to take a proactive, risk-based approach to protecting against illicit abuse and are intended to be applied by those charities vulnerable to such abuse, in a manner commensurate with the risks they face and the resources with which they work. At the request of the charitable sector, the Guidelines contain extensive anti-terrorist financing guidance, as well as guidance on sound governance and financial practices that helps prevent the exploitation of charities.
The regulatory environment Islamic individuals and organizations are most concerned with, considering the current political climate, are those relating to anti-terrorism and anti-money laundering. Yet the tensions arising from regulatory requirements within the U.S. related to American business practices often prove more difficult to resolve.
It is in trying to balance the expectations of distinct business cultures that the differences between conventional and Islamic accounting are most notable. For instance, depending upon the type of transactions the organizations are engaged in, the roles, responsibilities and rights assigned to each party can be contradictory and even in direct conflict. In some situations, such as transactions involving private equity, venture capital, profit sharing and liquidations, organizations and individuals employing conventional accounting may actually find they prefer Islamic accounting. Other issues, such as those related to taxation, require significant effort to resolve. The inherent flexibility of Shariah is a benefit under these circumstances, since the complexity of the American tax code is highly inflexible.
The number of Muslim consumers, investors and business owners has grown along with the Muslim American population which is currently estimated to be between six and seven million. Although demand for Islamic financial products and services has increased, both the supply and the number of providers remain insufficient. It should also be noted that Islamic orthodoxy, expressed as the desire to implement Shariah as the sole legal foundation of a nation, is actually associated with progressive economic principles, including increasing government for the poor, reducing income inequality and increasing government ownership of industries and industries, especially in the poorer nations of the Muslim world.
“While it is common to associate traditional religious beliefs with conservative political stances on a wide range of issues, this is only partly true,” said Robert V. Robinson, Chancellor’s Professor and chair of Indiana University’s Department of Sociology. “The Islamic orthodox are more conservative on issues having to do with gender, sexuality and the family, but more liberal or left on economic issues.