Islamic accounting provides an alternative accounting system that aims to enable businesses and organizations to operate according to Shari'ah or Islamic law. It addresses key Islamic financial principles like prohibiting interest, requiring payment of zakat, and promoting profit-and-loss sharing arrangements. The growing Islamic financial industry, estimated at over $1.3 trillion globally, has led to the establishment of standards and regulations to ensure Shari'ah compliance for Islamic financial institutions and their stakeholders.

2. Have you heard about..
Tahwid Khalifa
AdalahIkhtisab
Shari'ah

3. Introducing: Islamic Accounting
• an alternative accounting system,
• It aims to provide users with information enabling
them to operate businesses and organizations
according to Shari'ah, or Islamic law.

4. Key Factors of Islamic Accounting
Interest-free Loans Zakat
Conventional accounting, considered insufficient to
accommodate these unique characteristics of Islamic
Financial Institutions [IFIs].

5. Why do I need to know this?
The Emergence of Islamic Financial Institutions
• The Islamic funds in global financial institutions is
estimated to be at US$1.3 trillion.
• The Islamic financial market is estimated to be worth
US$400 billion in size, with annual growth rate of
12-15%.
• There are over 300 Islamic financial institutions
currently operating in about 75 countries.

6. Some Important Islamic Organisations
Takaful Companies
Awqaf
Insurance
Company
Charitable Trust

7. Ijara
Salaam Future Contract
Lease Contract
Istisna
Manufacturing
Financing
Islamic financial system terminologies

8. Murabaha
Mudharaba
Musharaka
Deferred
Payment Contract
Special form of
Partnership
Joint Venture
Islamic financial system terminologies

9. Objectives of Islamic Accounting
Non-Financial DisclosureFulfilment of Zakat duties
AccountabilityStewardship
Shari’ah Compliance

10. Accounting and Auditing Organization for Islamic
Financial Institutions
• Established to maintain and promote Shari'ah
standards for Islamic financial institutions.
• Issued
o 25 accounting standards,
o 7 auditing standards,
o 6 governance standards,
o 41 Shari'ah standards,
o 2 codes of ethics.

11. USERS OF ISLAMIC ACCOUNTING INFORMATION
• Zakat payers and the Government
authority in charge of Zakat
assessment and monitoring.
Zakat
Beneficiaries
• Local community and employees and
employees have an important stake
in the organisation as in Western
society.
Local Community
and Employees
• Good and services must be
halal (permitted) under the
Shari’ah
Consumers

12. Bibliography
• Dr. Shahul Hameed bin Mohamed IbrahimPhD Dissertation (UK: University of Dundee, 2000)
http://www.iium.edu.my/iaw/phdcontents.htm
• Islamic banking and finance
https://en.wikipedia.org/wiki/Islamic_banking_and_finance
• Perceptions of Muslim Accounting Academicians By : Rizal Yaya
http://www.iium.edu.my/iaw/Articles/Objectives%20and%20Characteristics%20of%20Islamic%20Accounting.htm
• Islamic Accounting: Challenges, Opportunities and Terror
http://www.accountingweb.com/aa/auditing/islamic-accounting-challenges-opportunities-and-terror
• Islamic Accounting Systems and Practices By Dr. Syed Mohammad Ather FCMA and Md. Hafij Ullah
http://www.academia.edu/7624898/Islamic_Accounting_Systems_and_Practices
• AAOIFI
http://www.aaoifi.com/

13. THANK YOU

14. Shari’ah
• Shari'ah, is the Islamic legal system derived from
the religious precepts of Islam, particularly the
Quran and the Hadith.
• The term Shari'ah comes from the Arabic
language, which means a body of moral and
religious law.

15. Tawhid
(Unity and Oneness of God)
The concept of Tawhid implies
• there is only One God who is the creator and
sovereign of all,
• Islam requires total submission to Him in all
aspects of life.
Economics – therefore is part of religion.

16. Khalifa
(Vicegerancy)
The concept of Khalifa implies
• Man is the agent of God,
• implies trust and responsibility, authority and
duty, election and service,
• This puts some restriction on the use of economic
resources.
PROPERTY – belongs to God, accessible to everyone.

17. Ikhtisab
(Accountability)
The concept of Ikhtisab implies
• every act in this world will have to be
accounted for to Allah
• associated with this concept is the belief in
rewards and punishments.
Man is answerable to God for his wealth - how he
acquired and spent it.

18. Adalah
(Justice)
The concept of Adalah implies
• the objective of individual and social welfare and
public benefit as the objective of an Islamic state.
• distributive equity is sought in an Islamic
economic framework
Transactions need to be SOCIALY JUSTIFIED

19. The Problem of Riba
• ‘Riba has been translated into English as usury or interest.
• The Qur’an specifically prohibits Riba.
• To charge interest from someone who is constrained to
borrow to meet his essential requirements is considered an
exploitative practice in Islam.
• Riba is also said to lead to the concentration of wealth by
transferring wealth from the poor to the rich.
WHY?
INTEREST = EXPLOITATION

20. Zakat Collection and Distribution
• Zakat is a compulsory “religious levy
by which Muslims share a part of
their wealth for the benefit of
others”.
• Zakat is a wealth based levy. The
rate of wealth Zakat is 2.5%.
THE BENEFECIRIES OF
ZAKAT:
The Destitute
The Poor and Needy
The Zakat Collectors
Anyone Struggling for a
Righteous Cause
Debtors
Travellers Stranded in a Foreign
Land
People in Bondage or Slavery
Those Who Have Just Converted
to Islam

21. Awqaf
• It is the setting aside of certain assets usually
land, buildings etc. for the exclusive use for
specific charitable/religious purposes under a
legal deed.
• The asset cannot be sold, inherited or
expropriated by the government.

22. Takaful Companies
• Conventional insurance is prohibited by Islamic Shari’ah due to the
element uncertainty in contingent contracts as well the elements of
gambling especially in relation to life insurance.
• In addition, the practice of investing premiums in interest-bearing
securities is also prohibited.
• Takaful operates as a co-operative savings and mutual help scheme.
• Premiums paid by the policyholders are not recorded as income.

23. Murabaha and Bai al-Mu’ajjal
• Originated in the deferred sale (Bai al-Mu'ajjal) contract.
• In this contract, a buyer of goods requests an agent to
buy the goods for him, on the understanding that the
agent will charge a mark-up on the cost of the goods
which will be sold to the buyer.
• The Islamic banks saw this as an opportunity in
financing a purchase.

24. Mudharaba
• Mudharaba is a labour-capital partnership,
• The profit sharing ratio between the entrepreneur and the
investor is pre-determined in advance,
• In case of losses, the investor bears the entire loss, the
entrepreneur loses his labour as he is not paid a salary.

25. Musharaka
• This is plain partnership financing.
• In case the bank does not play an active part in the
business, then the entrepreneur may charge
management salary or expenses to the business
account.
• the bank has full rights of administration in Musharaka
contracts.

26. Ijara
• Ijara is rent or leasing of assets.
• Only operational leases are allowed in Islam, wherein the
owner permits the user to use of an asset for a particular
period which is shorter than the economic life of the
asset without any transfer of ownership rights.

27. Salaam
• an advance purchase contract, where the goods of a
particular quality and quantity which is not yet in
existence can be the subject of a contract.
• This is an important means of financing agricultural or
fishing activities.

28. Istisna
• Istisna is the payment for commissioned manufacture,
• Unlike salaam, payment is at delivery or according to
manufacturing or construction progress. Thus, this
instrument can be used to finance construction or
manufacturing projects.

29. Stewardship
• not only means the custody and safekeeping of
resources but also for their efficient and profitable use
and for protecting them from the greatest extent
possible from an unfavourable economic impact,
• Concept of stewardship arose from the Islamic concept
of Khilafa (Vicegerancy) and Amanah (Trusteeship).

30. Accountability
• From an Islamic perspective, accountability is a basic
ingrained concept in the Muslim community,
• it forms one of the core concepts of belief i.e. the belief
in the hereafter, heaven and hell, accounting and
punishment.

31. Shari’ah Compliance
• To enable the activities of the entity to be controlled to be in line
with the Shari’ah.
• Here, not only is the immediate Shari’ah meaning of (halal)
permitted activities and avoidance of prohibited (haram) activities
meant, but also a broader more comprehensive view of the
Shari’ah, including the protection of the environment.

32. Assessment and Distribution of Zakat
• Under conventional accounting, tax avoidance is a major
activity for accountants. No consideration is given to the
fact that less tax means less wealth distribution and less
money for public benefit,
• Under the Islamic economic system, Zakat is a
cornerstone of public fiscal policy of in Islamic State.
Even in the absence of a truly Islamic government, many
Muslim countries have departments to collect Zakat and
distribute them.

33. Non-Financial Disclosure
• Islamic banks must account to their owners and other
stakeholders as to the extent to which they have
complied with the ethical dictates.
• Islamic bank would have to disclose:
• The avoidance of prohibited transactions
• The extent to which their activities have contributed to the economic and
social development of various poor sectors of society
• The ethical treatment of employees and depositors and entrepreneurs.
• The extent to which they have safeguarded the environment and
conserved energy.
• The collections and disbursement of Zakat from the bank’s operations