There is a great need for the question of morality and the need for moral factors to be stressed on the modern commercial and financial mind. It (Islamic banking) is going to be a major force in the commercial life of the world in the years to come”, stressed Sir Peter Tapsell, British parliamentarian, at the Institute of Islamic Banking and Insurance’s May seminar on the ‘Development of an Accounting System for Islamic Banking’.  

There are those who would say that Thatcherism with which Sir Peter as a Conservative Party MP has been associated for the last 15 years and which is deemed’ to promote individualism as opposed to a community or even collective sense of care and responsibility ,epitomizes the move away from the moral factor in business and banking. Or what former Conservative premier Ted Health has called ‘the unacceptable face of capitalism.’  

Perhaps Sir Peter will take the message of ethical business and banking back to some of his colleagues – that it is alive and kicking and that Islamic banking and finance, in particular is currently its mainstay globally. While the ethical business and banking movement is still very much developing in the West, in countries such as Malaysia, Pakistan, Iran and other Muslim states, it is steadily gaining a strong foothold which will eventually have profound implications for both financial, monetary and thus economic management in these countries.

Of course things can and do go wrong from time to time, but what last month’s conference and a number of such conferences on Islamic banking held in the Middle East and in Pakistan, confirm is that the momentum is gathering a much faster pace and that Islamic banking is gaining in acceptance especially in its own constituencies and in its sophistication. The challenge surely is to narrow the gap between Islamic economic and banking theory as stipulated in the Shariah with its actual practice in modern society.  

The gap is closing but perhaps its pace is too slow to make any significant impact as yet in the financial sectors of even countries such as Malaysia, where regulation and supervision in Islamic banking is deemed so strict that that executives teeter on the edge of demanding danger money for taking the risk of being an Islamic banker in the country. Section 47 of the Islamic banking Act of Malaysia and it subsequent amendments prescribe imprisonment and hefty fines for mismanagement ,proven negligence ,fraud and even glaring errors bordering on the incompetent.

As Mustapha Hamat, Manager, Accounts Department of Bank Islam Malaysia confirms: “working in an Islamic bank in Malaysia is a hazard .It Is not a luxurious occupation. It is very strict. Under Section 47, a banker can go to jail simply for reporting the wrong figure(albeit by mistake) to the Central Bank. The disclosure of accounting policy and statements is even stricter in Malaysia since Islamic banks are subject also to the variations of Shariah  policy”.

On the specific issue of accounting systems, the development of a separate one for Islamic finance and banking, as Sir Peter Tapsell suggested, could be misconstrued as a move away from harmonization, the catchphrase in international trade and banking. But a he rightly pointed out this move away from the harmonization must not be seen as “a negative one but seen as a positive alternative” to the existing system. Harmonisation as many EC negotiators will tell you is fine if the playing fields are level. But as suggested the Western interest-based accrual system of accounting cannot be suitable for an interest-free Islamic banking and finance system. The anomalies are too numerous. This does not mean harmonization is not desirable within Islamic banking itself. Harmonization both in the system and standards of accounting and auditing is essential for Islamic banking, which must be taken up not only by self-regulating accounting organizations but also by respective monetary authorities and securities commissions.

The alternative view is that should Islamic banking be put into an accounting and auditing strait-jacket? Why not have diversity since different Islamic banks are not necessarily comparable due to variations in activities and even in Shariah applications due to different opinions of Shariah Advisory Boards?

Comparability is a secondary issue. At the same time there is a difference between an accounting system and standards. Perhaps the accounting system could be largely similar to the existing one but accounting procedures and standards could be designed for Islamic products, which have to satisfy both Shariah and accounting and auditing requirements.

Some commentators such as Professor Trevor Gambling suggest that a reticence for disclosure especially in the Muslim and banking world is “a cultural thing”. The truth is that if there is such a reticence then it is more out of convenience than culture. For transparency and accountability are tenets of the Islamic business and banking ethics. The Bahrain Monetary Agency(BMA)for instance insists that Islamic banks must adhere to international accounting and auditing standards –both off and on balance sheets. It is the responsibility of auditors to ensure this.

Islamic banking’s future will depend on how effective it is in the modern world. Eventually, the consensus at least among Islamic bankers, is that it will be the normal banking business in most of the Muslim countries, if not all.