History of Islamic Accounting - Paper Example

This research tends to answer the question of whether empirical research can be used to depict the history of Islamic accounting. Modern literature has recently focused on the study of the Islamic culture. Islam was less considered as a significant culture for many years. However, recent developments in Islamic countries have enlightened literary artists to address the social, political, and economic policies utilized in these countries. Contemporary literature about financial standards has mostly focused on Islamic accounting. Most contemporary research about Islamic accounting still focuses on identifying sources of data and proof of concepts used in Islamic financial accounting. Most scholars are trying to identify the role played by the West in Islamic accounting. It is speculated that most Western accountants downplayed the concepts of Islamic accounting. Research on Islamic accounting currently covers most of the Middle Eastern countries. The United Arab Emirates is one of the fast developing countries in the Middle East. Researchers predict that this rampant development in the United Arab Emirates might be connected to a long history of policies and literacy. Therefore, this research intends to find out the scope of practical application of Islamic accounting within financial institutions in the United Arab Emirates. The research will involve three institutions in the United Arab Emirates and their understanding of Islamic accounting as used in their financial institutions.

Key Words: Islamic Financial Institutions, International Accounting Reporting Standards, Islamic Accounting, Sharia law, Empirical Research

Introduction

Historical Background

Islamic accounting is a financial reporting and accounting system that reflects on the application of the Sharia law. The history of Islamic accounting is perceived from different dimensions. The most contradictive aspect of Islamic accounting is its origin and evidence to show its development to the contemporary use. This contradiction emerges from the view of Islamic accounting by the Western scholars and the view of Eastern scholars. Ibrahim (2015) refutes the conception that Loca Patcilio was the first person to advance the concepts of accounting during the early fifteenth century. He affirms that the prophet Mohammed was the first to point out the concepts of accounting in the holy book of the Quran. Apparently, Ibrahim (2015) relates accounting to Islam in general. This is to express the fact that the history of Islamic accounting goes as far as the origin of Islam. Accounting was prioritized in Islam due to its significance in business activities, transactions, endowment, money exchange, and the collection of Zakat. The main aim for the introduction of accounting in these Islamic activities was to maintain the integrity of the capital and to enhance moral responsibility in the financial activities of the Muslims (Akinyemi, 2015).

The concept of Islamic accounting went through many stages as used in different generations. Islamic accounting was first documented as simple written concepts in the Quran. These writings connect the aspect of accounting to the religion of Islam. For instance, Allah says in the Quran that it is critical for two parties involved in a debt contract to write down the transaction (Ahmed, 2012). Apparently, this would help to serve justice for the two parties during the period of payment for the debt. During the writing stage, the accounting concepts had not been converted into complex and practical accounting functions. However, they reflected the actual premises of accounting.

After the writing of the accounting premises, accounting was practically applied in different ways over the years. The first application of the accounting concepts was used to calculate money in the era of the prophet. During this period, the prophet selected a group of individuals to collect Zakat and alms. However, he insisted that they keep the financial records of the transactions (Dima et al. 2014). This would help to keep track of the collection and disbursement of the financial records. The collection of the alms and Zakat also continued after the prophet through the Caliphs. They continued with the sacred activities in honor of the Muslim religion and as a show of their allegiance. However, the use of financial records was more crucial in their time compared to the previous ages. Financial records helped to prevent cases of booty and conquest.

The emergence of the Islamic state was pivotal in the history of Islamic accounting. During this period, there was a higher need to control the flow of the money in the Islamic treasury. This period also marked the beginning of accounting science in Islam. Many methods of keeping and evaluating financial records were developed during this period. These developments in Islamic accounting were aimed at creating a consistent accounting process, creating reliable accounting documents, creating an effective accounting system, and ensuring that accounting audits were accurate and balanced. These developments led to the contemporary use of accounting. However, the nature of accounting in the modern era is more advanced. Modern era Islamic accounting tends to surpass the application of the Islamic law in the accounting process (Mueller, 1968). The modern Islamic accounting mostly focuses on the application of contemporary accounting standards in the financial evaluation. The companies that are still cautioned by the Islamic law tend to incorporate portions of Islamic law in their accounting processes.

Currently, the Quran is the most reliable source of evidence that could be used to trace the long history of Islamic accounting. Most Western Scholars neglected to find out whether there are other existing sources of evidence that can be used to trace the origin and the development of Islamic accounting. Trokic (2015) was convinced that there could be ample reliable evidence to prove the history of Islamic accounting. However, most established Islamic communities were destroyed over the years due to civil wars and international conflicts. This resulted in the destruction of many archives, which had stored records about the developments of accounting activities in the Islamic states. This has made it almost impossible to prove some of the contradictory facts about the history of Islamic accounting.

Apparently, different forms of accounting resulted in the development of the modern advanced form of accounting. Trokic (2015) categorized Islamic accounting into different groups. He highlighted that Islamic accounting started with stable accounting, which involved the accounting for livestock. Other significant types of accounting during the development of Islamic accounting included Agricultural accounting and construction accounting. However, further advancements resulted in the establishment of warehouse accounting, currency accounting, and treasury accounting. These forms of accounting indicate a significant transformation like prospects addressed in accounting. It depicts the fact that Islamic accounting started with the accounting for simple agricultural products and currency. However, it advanced to the use of accounting of money systems, which require sophisticated accounting policies. All these advancements require a considerable amount of time to take the course.

Necessity of Basic Accounting Standards in Bringing Consistency in the Islamic Banking and Finance Operation

Research depicts major divisions among financial institutions in Islamic countries such as the United Arab Emirates and Malaysia regarding the use of Islamic accounting. Most of the institutions are struggling to meet to the global financial reporting standards. This is due to their increased financial transactions with other non Islamic countries (Ibrahim, 2015). The use of Islamic accounting makes it difficult to compare financial transactions. The introduction of a basic accounting system will be key to improving the compatibility and comparability of most Islamic Financial Institutions. The basic system will integrate essential financial accounting principles with essential Islamic accounting principles. This will enable Islamic Financial Institution to transact fairly with other global institutions.

Applicationof Islamic Accounting Relation to Empirical Research in Banks or Financial Institutions of UAE

Empirical research is crucial for the evaluation of the validity of various concepts in the society. Empirical research involves qualitative and quantitative studies, which aim to provide evidence for the facts presented on different topics. Empirical research takes different forms regarding the methodology used in data collection, and the setting of the research. It also involves the hypotheses tested during the research (Tinker, 2004). It is clear that the history of Islamic accounting is contradictory. Empirical research could be instrumental in identifying documented and observatory evidence about the history of Islamic accounting. Empirical research can help to prove the allegations made about the relationship between the history of Islamic accounting and the introduction of accounting in Italy (Tinker, 2004).

The use of Islamic accounting in the financial institutions in the United Arab Emirates (UAE) can help to bring out an effective case study about the history of Islamic accounting. This is relevant given the Islamic history of the country. The United Arab Emirates is one of the countries that were dominated by the Islamic law for many years. However, the recent advancement of the country on the world scale is commendable. Research can help to find out whether the institutions in the country incorporated Islamic accounting principles, or if they used other standardized principles (Zaid, 2000). Research indicates differences among stakeholders in the United Arab Emirates about the introduction of basic accounting principles (Zaid, 2000). This indicates lack of adequate empirical research to familiarize the owners and employees of UAEs financial institutions about the essence of adopting Islamic Accounting in the country. This also makes it necessary to study the provisions of the Islamic accounting against those of the other universal guidelines basing on commonly used concepts.

Impact of Islamic Accounting on Profitability of Islamic and Non-Islamic Banks

According to the Sharia law, collection of interest is against the provisions of Allah. This implies that all financial institutions that incorporate the Islamic accounting standards do not accrue profit through interest. This affects Islamic banks since they find it difficult to sustain themselves in the highly competitive and expensive financial market (Ibrahim, 2015). This also affects non Islamic financial institutions that transact with the financial institutions. The banks that borrow money from Islamic institutions benefit from no interest rates. However, it creates conflicts for banks that lend money to Islamic banks due to the struggle by the Islamic banks to uphold the premises of Islamic Accounting.

Literature Review

In the research about Islamic accounting, Trokic (2015) highlighted that the emergence of Islamic accounting was facilitated by the development of Islamic economics. However, he also highlighted that the history of Islamic accounting could be dated many years back to the period of the Caliphs and the writing of the Quran. On the other hand, Napier (2007) highly concentrated on identifying the roles played by both the Western countries and the Eastern countries in the introduction of accounting. He addresses the double entry system as the primary advancement towards the introduction of modern accounting. Napier (2007) intends...