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4. Salam is a sale of goods where the price is paid in advance and the goods are delivered in the future.
5. Istisna’ is a contract for manufacturing or construction whereby the manufacturer seller agrees to provide the buyer with goods identified
by description after they have been manufactured or constructed in conformity with that description within a pre-determined time-frame
and price. 6. Ijara operating lease is a form of leasing. It involves a contract where
the bank buys and then leases an item. The duration of the lease, as well as the basis for rental, are set and agreed in advance
7. Ijarawa- igtina lease with optional ownership is another form of Ijara, except that included in the contract is a promise from the customer to
buy the equipment at the end of the lease period, at a pre-agreed price.
B. Islamic Value
According to Chapra 1992: 200 Islamic worldview is based on three fundamental principles: Tawhid unity, khilafah vicegerency, free will
responsibility, and Adalah justice, equilibrium . Haniffa and Hudaib 2004:
7 argue that there is some important concepts in understanding Islamic worldview related to commercial activities include tawhid unity of Allah,
khalifah vicegerency, ibadah worship, halal permissible and haram prohibited activities, ummah community and maslahah public benefit
:
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1. Tawhid Unity According to Naqvi 1992: 15 unity is a concept where the
political, economic, social and religious aspects of an individuals life are integrated into a homogeneous whole, consistent from within the
individual himself as well as integrated with the vast Universe. The doctrine of Unity preserves the absolute monotheism of Islam where
Gods sovereignty is recognized. This dominates Islamic belief and practices and consequently affects how Muslims view religion. The
concept of Unity is Tawhid. Tawhid
is the highest principle of Islam. Tawhid is the basis on which the Islamic worldview and strategy are founded. Sulaiman
2005:3 defines Tawhid as the Unity of God and the belief that the universe is consciously designed and created by God and do not come
into existence by chance or accident. Tawhid is the highest principle of Islam. The belief in Tawhid or the oneness of god constitutes the most
important principle of an Islamic society. In simple terms, it expresses the conviction that there is only one source of power that is worthy of
worship and reverence. It also constitutes the basis of all other principles of the faith. Tawhid is held to arm the faithful against the
worship of false gods, such as other men, nations, money or ideas Nomani and Rahnema, 1994: 34.
The model of implementing the principle of Tawhid in the socio- economic, financial and political order involves organizing the modes
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of resource mobilization, production and their financing in ways that bring about complementary linkages between the Shari’ah determined
possibilities. The external meaning of Tawhid is now explained in terms of an increasingly relational, participatory and complementary
developmental order wherein possibilities unify among themselves Choudhury and Hussain, 2005: 204. According to Nomani and
Rahnema 1994: 35 the traditional and formalistic Islamic man, concerned only with private Islamic junctions, has to experience three
different forms of liberation before he can transform into an unalienated social being armed with an Islamic mission that gives
meaning and directions to his life. First, man has to emancipate himself from all his inner instinctual
sources of temptation. Self-purification or tazkiyah cleanses the individual from attachment to the pleasures of wealth, power, fame and
the sense. This individual and psychological aspect of Tawhid compels the new Islamic want to liberate his oppressed inner self, attaining a
mystical spirit of total freedom and emancipation. Second, at social level, Tawhid requires the new Islamic man to
reject all submission and subservience to other men. In the economic realm, Tawhid is interpreted as a call to abolish the exploitation of the
weak by the strong, for the eradication of feudalism, capitalism, or many other class-polarized societies.
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Third, at the cultural level, Tawhid engages the new Islamic man in a constant struggle against cultural imperialism and blind allegiance to
all the fads, fashions and forms of artistic and individual expression that originate in the west.
2. Khilafah vicegerency, free will responsibility The concept of Khilafah vicegerency defines a persons status and
role, specifying the individuals responsibilities to himself and his responsibility to the ummah. Chapra 1992: 203 suggests four
implications emanating from the concept of khilafah: The first is universal brotherhood where mutual sacrifice and
cooperation are the social order. Such a social order allows the development of the entire human potential. Accordingly, from the
perspective of business enterprises, competition is encouraged if it is healthy, raises efficiency, and helps promote the well-being of
society. Competition that results in jealousy, ruthlessness and destruction must be avoided.
The second implication of khilafah is that the individual is regarded as the trustee for Gods resources. This leads to a totally
different meaning to private ownership as understood in the secular world. Although private ownership is recognized in Islam, ownership
is not absolute. The property owner recognizes his responsibility of using his resources in a manner that will provide benefits not only to
himself but more importantly, to society.
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The third implication of khilafah is the emphasis on a humble lifestyle. A lifestyle of extravagance may result in
unnecessary pressure on resources which, in turn, may lead to the inability to satisfy the basic needs of society.
Finally, khilafah also implies the concept of human freedom in Islam. An individuals freedom to act is not curtailed by any other
individual but is constrained by the bonds of social responsibility. Hence there is a qualification as to what individual freedom entails in
Islam. Unlimited freedom goes hand in hand with unlimited responsibilities. Consequently, it is inconceivable that anyone would
want unlimited freedom. 3. Al Adl justice, equilibrium
Al Adl or justice is a combination of moral and social values
denoting fairness, balance, temperance and straightforwardness. There are three basic criteria for the attainment of social justice:
absolute freedom of conscience, complete equality of all men and the permanent mutual responsibility of society and individuals. It
follows that if the social behavior pattern and the economy of Islamic societies are strictly in accordance with Islamic teachings,
there cannot exist extreme inequalities of income and wealth. In Economics term Al Adl means the profit not only for individual that
can harm people but to society Karim, 2007: 50. However, Islam recognizes inequalities in so far as these relate to skills, initiatives,
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efforts, as well as risk. Injustice and Islam are at variance with each other and cannot coexist without either of the two being uprooted or
weakened. Chapra 1992: 210 gives an important framework that must be discussed:
a. Need Fulfillment The logical fulfillment of brotherhood and the trust nature of
resources is that these resources must be utilized to satisfy the basic needs of all individuals and to assure everyone a standard of
living that is compassionate and respectable, and in harmony with the dignity of man inherent in his being the khalifah of God. Since
resources are relatively limited, this goal cannot be actualized unless claims on the available resources are made only within the
limited of humanity and general well-being. Need fulfillment must be within the framework of simple-living and, while it should
include comforts, it cannot take the dimension of waste and snobbery which have been prohibited by Islam but which have
nevertheless become uncontrolled in Muslim countries. This stress on need fulfillment in Islam received an important
place in the fiqh and other Islamic literature throughout Muslim history. The jurists have unanimously held the view that it is the
collective duty fard kifayah of Muslim society to take care the basic needs of the poor.
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b. Respectable source of earning The dignity attached to the status of khalifah implies that need
fulfillment must be through the individual’s own effort; accordingly, the jurists have emphasized the personal obligation of
every Muslim to earn a living to support himself and his family. Since a Muslim may not be able to fulfill the duty of earning an
honest living unless opportunities are available for self- employment or unemployment, it may be inferred that it is the
collective obligation of a Muslim society to ensure for everyone an equal opportunity to earn an honest living in keeping with his
ability and effort. Only when these are unable to fulfill their collective
obligation, should the state enter into the picture. This will impose a smaller economic burden on the Islamic state. The ultimate
objective of all help should be to enable those so helped to stand their own feet through an increase in their ability to earn more. But
until this becomes a reality, the help must also include income supplements. Islam has a built-in institutional arrangement to get
the necessary wherewithal for this purpose through the obligatory payments of zakat including ’ushr and voluntary contributions in
the form of sadaqa and awqaf. The government should also make the maximum possible budgetary appropriations.
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c. Equitable Distribution of income and wealth In spite of need fulfillment, there can be extreme inequalities
of income and wealth. Inequalities can be admitted in a Muslim society primarily insofar as they are more or less in proportion to
skill, initiatives, effort and risk. These are bound to be normally distributed in a society where Islamic teachings are sincerely
followed. Hence Islam not only requires the fulfillment of everyone’s needs, primarily through a respectable source of
earning, but also emphasizes an equitable distribution of income and wealth.
The Islamic stress on equitable distribution has been so intense that there is some Muslims who have held the opinion that equality
of wealth is essential in a Muslim society. It is the general opinion of Muslim scholars that if the social behavior pattern and the
economy are restructured in accordance with Islamic teachings, there cannot be extreme inequalities of income and wealth in a
Muslim society. d. Growth and sustainability
It may not be possible for the Muslim ummah to realize the objectives of need fulfillment and a high level of self-employment
and employment without using the available resources with maximal attainable efficiency, and generating a reasonably high
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rate of economic of growth. Even the goal of equitable distribution of income and wealth will be realized faster and with smaller
sacrifice on the part of the well-to-do if a higher rate of growth is attained and the poor are enabled to obtain a proportionately larger
share of the fruits of that growth. A better performance in terms of economic stability will also help reduce the suffering and
inequities that recession, inflation and unpredictable movements in prices exchange rates necessarily bring about.
4. Halal and haram, ummah, and maslahah Shariah aspects of Islamic banking and finance revolve around
Shariah requirements. The purpose of the Shari’ah requirements is to ensure that the products are permissible halal and to ensure that the
trading in them becomes permissible and valid halal and sahih. According to Deraman Islamic banking products are based on and
developed from permissible halal contracts which do not involve gharar, maisir, and riba
. The concept of ummah community in Islam implies unity and
harmony in social, economic and political affairs. In many Islamic activists, the notion of ummah is an important and integral part of the
modern Muslim consciousness. While the concept is part of the Qur’anic revelations, its meaning and usage has evolved with the
changes and growth in the world of Islam. According to Hassan
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2002: 4 Ummah can be viewed at least from two analytical perspectives.
From the first perspective, the Ummah can be viewed as a community. In sociology, community types of social organizations are
characterized by social homogeneity, and they are largely based on primordial and organic ties and have a moral cohesion, often founded
on common religious sentiments. These types of social organizations are transformed and dissolved by the growing social differentiation
caused by the increasingly complex division of labor, individualism and modern capitalistic competitiveness, which gives rise to a society
based on associational types of relationships. From the second perspective, the Ummah can be viewed as a
collective identity. Collective identity is grounded in the socialization process in human societies Individuals develop it by first identifying
with the values, goals and purposes of their society and by internalizing them. This process, besides constructing the individual
identity, also constructs the collective identity. As such, Islam gives preference to the needs of the ummah over
those of the individuals. Whenever conflict of interest arises, the needs of the ummah must be met first maslahah. Therefore,
economic goals must be pursued for the betterment of the ummah. Haniffa argues 2004: 9 by adhering to Shari’ah Islami’iah, mankind
is able to realize benefits for the ummah via removal of hardship Raf
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al-haraj, prevention of the forbidden Daf al-darar and striving for the truth Haqiqiyah before pursuing self-interest. Such promotion of
equality and virtues in society would guarantee the achievement of Al- adl justice and Al-falah
. C.
Social Reporting: In Islamic Perspective
1. Corporate Social Responsibility According to Kotler and Lee 2005: 15 Corporate Social
Reporting is a commitment to improve community well being through
business practices and contributions of corporate resources. Ararat and
Göceno lu 2006: 2
define CSR as institutionalized corporate practices and behavior drives by the acceptance of moral obligation
and accountability for the consequences of corporate activity for all of the stakeholders and society at large. In the other side, Emily 2008: 3
defines CSR is a voluntary form of regulation over the potentially negative impacts of business activities on society and the natural
environment. According to Al Khater and Naser 2003: 539 Corporate Social Responsibility
is a responsibility of actions which do not have purely financial implications and which are demanded of an
organization under some implicit and explicit identifiable contract. In general term, Corporate Social Responsibility is a voluntary
commitment undertaken by a company or a public institution to contribute to the improvement of the environment and society. Thus,
through CSR, company can promote economic prosperity that is
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aligned with the priorities of sustainable development. It stated in the UU no 40 2007 about CSR and environment is a company
commitment in the economic development Anshori, 2008: 30. 2. Social Reporting
Social Accountability is the responsibility to account for actions for
which one has under an established contract. In the former context, responsibility must be clearly defined to satisfactorily discharge
accountability arising from that responsibility Sulaiman and Willet, 2002: 23.
Gray et al 1987: 9 define corporate social disclosure as the process of communicating the social and environmental effects of
organization’s economic actions to particular interest groups within society and to society at large. At such, it involves extending the
accountability of organizations particularly companies, beyond the traditional role of providing a financial account to the owners of
capital, in particular, shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities
than simply to take money for their shareholders. In Islamic perspective, Haniffa and Hudaib 2004: 18 define
disclosure as disclosing information that would aid economic as well
as religious decision-making. It means disclosing any information deemed relevant and should be rightfully given to members of the
Ummah to facilitate their economic and religious decision-making.
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According to the definition above, it can be concluded that social disclosure
is disclosing information concerning the impact of an entity and its activities on society.
Voluntary social reporting is highly valuable exercises for a
variety of reasons, not the least of which is its usefulness for experimentation purposes Gray, 2001: 13. Al-khater and Naser
2003: 540 argue that Corporate Social Responsibility reporting
is important to various users of corporate information such as employees,
consumers, local community, and government and its agencies, and pressure groups and society at large. According to Haniffa and Hudaib
2004: 17 the purpose of social information is to determine and communicate to relevant user groups the social impact of business
activities. Besides that, it has a function to determine the effects corporate actions have on the quality of life of society and hence the
emphasis on accountability. As it is generally understood in non- Islamic accounting, the primary objective of social responsibility
accounting may be similar to Islamic accounting but it should have a wider focus. Haniffa 2002:141 argues the objectives of social
responsibility and accountability are addressed in both instances but the underlying principle is different. The concept of accountability in
islam is different as it extends beyond human superiors to God, as presented in table 2.1.
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Table 2.1 Objectives and ethical statements of Islamic social reports
Objectives:
1. To demonstrate accountability to God and community 2. To increase transparency of business activities by providing
relevant information in conformance to the spiritual needs of Muslims decision makers
Ethical statements: To demonstrate
accountability 1. To Strive to provide excellent
lawful products service as trustee of God
2. To fulfill obligations to God and society
3. To create reasonable profits in conformance with Islamic
principles 4. To attain the objectives of the
business venture 5. To be just with employees and
communities 6. To ensure that business activities
are ecologically sustainable 7. To recognize work as form of
workship
To demonstrate transparency
1. To provide information regarding all lawful and lawful activities
undertaken 2. To provide relevant information
regarding financing and investment policy
3. To provide relevant information regarding employees policy
4. To provide relevant information regarding relationships with
communities 5. To provide relevant information
regarding the use of resources and protection of the
environment Sources: Haniffa. Social Responsibility Disclosure: An Islamic
Perspestive 2002:136.
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3. Scope of disclosure Haniffa 2007: 101 gives a benchmark of ideal ethical identity
based on the Islamic precepts follows that is focus on developmental and social goals:
Islamic Bank is expected to be more socially responsible than their conventional counterparts, as Islam emphasizes social justice. One of
the indicators is their contribution to and management of Zakah religious levy, Saddaqa charity and Qard Hassan benevolent
loans funds. Zakah is one of the five pillars of the Islamic faith and the spending of the proceeds and the beneficiaries are specified in the
Qur’an. However, there have been mixed opinions as to which party is liable for Zakah: banks or individuals i.e. shareholders and
depositors. Regardless of who is liable, what is more important is for the Islamic Bank to communicate the following details:
a. A statement showing the sources and the uses of the Zakah fund. b. The balance of the Zakah fund not yet distributed, and the reasons
for the delay in distribution, if the amount is material. c. An attestation by the Shari’ah Supervisory Board either in the
report of the Board or separately that the amount of Zakah has been properly computed and these funds have been distributed
according to God’s will.
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Unlike Zakah, which is obligatory, Saddaqa charity is voluntary in nature and can be used for purposes allowed by Shari’ah for the benefit
of society. Hence, Islamic Bank should communicate: a. The amount and the sources and uses of charity funds, separate
from the Zakah funds. Public duties in Islam are seen as a part of the general meritorious and
ethical tendency of the faith. The concepts of Ummah, Amanah and Adl
stress on the importance of sharing a common goal and removal of hardship in society and this could be achieved via Saddaqa charities,
Waqf trusts and Qard Hassan lending with no profit. As such,
Islamic Bank should ideally communicate the following in their annual reports:
a. The amount and the sources and uses of such funds; b. The banks’ policies in providing such funds and how non-
repayment of such funds will be dealt with. Matters on employees should also be given due attention as they are
related to the ethical concept of Amanah and Adl. Employees are the greatest asset of the business and their welfare should be given due
attention. It is the responsibility of employers to ensure that employees are paid fair wages, not overworked and have the opportunity to fulfill
their spiritual obligations. Equal opportunity is also stressed in Islam. Hence, the following should be communicated in the annual report:
a. Employees’ welfare.
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b. Training and development especially on Shari’ah awareness, amount spent on training, provision of special training or
recruitment schemes. c. Equal opportunity
d. Reward to employees. Debtors receive special attention in Islam. Lenders are asked to be
lenient with their debtors and in certain circumstances, debtors are entitled to receive Zakah and debts should be written off as charity. As
such, Islamic Bank is expected to demonstrate and communicate such commitments in their annual reports:
a. Debt policy and type of debt b. Amount of debts written off.
Public duties in Islam are seen as a part of the general meritorious and ethical tendency of the faith. The circumstantial needs of the
community within which the Islamic Bank operate should first be catered to. Hence, Islamic Bank should ideally communicate the
following to indicate their commitments to society: a. Creating job opportunities;
b. Supporting organizations that benefit society and participating in government social activities;
c. Sponsoring Islamic educational and social events.
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D. Benchmark for Social Disclosures by Islamic Banks
