The economic reality of Islamic banks’ transactions: a qualitative inquiry

Abstract

Purpose This paper aims to investigate the economic substance of Islamic banks’ transaction as perceived by the employees and regulators of banks and the effect of such substance on the need for special accounting standards for Islamic banks. If there is a distinctive “Islamic economic substance”, then special accounting practices may be necessary such as the standards of the Accounting and Auditing Organization for Islamic Financial Institutions. Design/methodology/approach A qualitative inquiry on one of the leading Islamic banks in the Middle East was conducted to investigate the economic substance of the bank’s main two transactions; the deposit system and Murabaha financing, as perceived by informants within one of the earliest Islamic banks and its regulators. Findings It is found that despite the belief that the transactions under examination were different from equivalents within conventional banking, practice within the bank was not consistent with such a belief. Informants largely perceived the economic reality of the investigated transaction as being not different from conventional banks’ transactions, and this would affect the need for special accounting and regulatory frameworks. Research limitations/implications This investigation is confined to informants working within one Islamic bank; their views and perceptions may not coincide with those working in other Islamic banks in the world. Practical implications The results of this investigation provide policy implications for Islamic banks, regulators and standards setters in regard to the need for special accounting standards for Islamic banks. Originality/value The paper is one of the first papers that uses a qualitative inquiry on the main transactions of Islamic banks and the related need for special accounting practices. The paper provides a new perspective on the debate over whether Islamic banking is genuinely innovative or is merely a replicate for conventional banking.

Experts' views onḥiyalin Malaysian Islamic banks: the case oftawarruq-based deposit products

“…Besides, the extensive usage of tawarruq contracts has caused the Islamic banking industry to become over-reliant on debt-based contracts (Alkhan and Hassan, 2019) and thus violating the sustainability of Islamic finance objectives (Ahmad et al, 2020). It is argued that the scenario has resulted in Islamic banking operations and functions being no different from conventional banking operations (Maali et al, 2020), with the exception of the adoption of Islamic terminologies to hide rib a transactions and evade Shar ı'ah restrictions (Ahmad et al, 2017).…”

“…, 2020). It is argued that the scenario has resulted in Islamic banking operations and functions being no different from conventional banking operations (Maali et al. , 2020), with the exception of the adoption of Islamic terminologies to hide ribā transactions and evade Sharī‘ah restrictions (Ahmad et al.…”

Creating a religious identity and impression management by Islamic banks

“…Customers' deposits are received from clients based on the Mudaraba contract, by which depositors place their funds with the bank. The bank invests the funds, with the profits being divided between the bank and the depositors, IMEFM 17,4 while in the case of loss, the depositors bear the losses and the bank receives nothing for its efforts (Maali et al, 2021). Thus, it is, at least theoretically, a profit and loss sharing arrangement where the deposits and any related "profit" are not guaranteed to clients.…”

“…The religious identity of IBs has been subject to continuous threat; IBs have been operating side by side with conventional banks and are subject to the same regulatory framework. To be able to survive competition against the conventional counterparts, IBs have been largely dependent on financial engineering by which they developed financial instruments that have many similarities, at least in substance, to conventional banks’ transactions (Maali et al , 2021). This is largely due to that IBs are replacing profit and risk-sharing financial instruments with more conventional debt instruments, moving IBs to increased similarity with conventional banks.…”

“…Although IBs have been created with the objective of providing financial services that comply with Islamic Sharia, there have been growing criticisms of IBs for replicating conventional financial transactions (Kuran, 1995; Khan, 2010; Maali et al , 2021). For instance, Saeed et al (2023) argue that IBs may sacrifice religious principles while serving some financially profitable consumer groups.…”