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D. Benchmark for Social Disclosures by Islamic Banks
Maali et al 2006: 272 assert that Fundamental to an Islamic perspective on social reporting is an understanding of the concepts of accountability,
social justice and ownership that are central to social relations. 1. Accountability
Al-Khater and Naser 2003: 540 define accountability as the relationship between two parties, the accounter and the accountee,
when the latter is accountable to the former for hisher activities and the consequences.
Gray 2001: 11 defines accountability as identifying what one is responsible for and then providing information about that
responsibility to those who have rights to that information. Al-Khater and Naser 2003: 540 refer to three basic elements of
the accountability concepts. a. The accountee has an obligation to provide the accounter detailed
information. b. The responsibilities of those who are held accountable for their
action and the consequences must be spelled out clearly. c.
Stating accounts of action and related consequences will be used by the accounter as a yardstick to assess the accountee. This is
expected to have implications for hisher decisions. Yet accountability also has broader economic and social purposes,
objectives, and no more so than under Islam in which economics,
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politics, religious and social affairs, especially accounting, fall under the jurisdiction of the divine law of Islam, the Shari’ah Lewis,
2006:2 The Islamic view of accountability creates different objectives for
accounting and reporting. Napier 2007: 10 divides the Islamic view of accountability based on two main themes. The first of these is the
concept of Tawhid. Baydoun and Willett 1997: 6 argue that the
concept of the unity of God gives rise to a different and broader concept of accountability than that implied by Western models
In the Islamic framework, all people are accountable to God on the Day of Judgment for their actions during their lives. The second main
theme is the concept of ownership in Islam. God has appointed man his vice-regent Khalifa on earth and entrusted him with stewardship
of God’s possessions. This does not imply that Islam does not recognize private ownership. Everyone has the right to own property,
but the ownership is not absolute. Napier, 2007: 10. In a business enterprise, both management and the providers of
capital are accountable for their actions both within and outside their firm. Accountability in this context means accountability to the
community Ummah or society at large Lewis, 2006:2. 2. Social Responsibility and Justice
Individuals are expected to feel socially responsible for others in the community. In general, the aim of the Islamic Economic system is
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to allow people to earn their living in a fair and profitable way without exploitation of others, so that the whole society may benefit. Islam
also emphasizes the welfare of the community over individual rights Lewis, 2006:4.
Responsibility sets limits to what man is free to do by making him responsible for what he does and as such. In Islam, there should be no
contradiction between individual freedom and collective freedom. The difference between the two is bridged by the sense of social
consciousness and Responsibility Sulaiman, 2005: 7. Islam stresses the concept of social responsibility.
The term
‘brotherhood’ Akhowa is widely used in Islamic societies. In this context, justice refers to being fair with everyone Maali et al, 2006:
272. Justice in Islam also includes the equitable distribution of wealth
. The prohibition of Riba Usury, Infaq, the requirement to pay Zakah
and the provision of Qard Hassan interest-free loans are clear examples of the Islamic emphasis on social justice Maali et al, 2006:
272. Infaq emphasizes benevolence by voluntarily spending one’s
wealth on the poor and the needy, while the various institutions are
considered as formal obligations for all Muslims. The most
important institution for the equitable distribution of wealth is the alms tax Zakah. It is one of the pillars of Islam that requires each Muslim
to pay a fixed minimum percentage over his or her wealth, property as well as earnings, to the poor and the needy.
For Islamic businesses, the
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requirement to deal justly encompasses all dealings with employees, customers and all members of the society in which these businesses
operate Maali et al, 2006: 272. 3. Ownership and Trust
Islam perceives ownership as a trust Amanah. There is no an absolute ownership for human beings, rather it is relative. A part of
one’s assets is a right of other people Triyuwono, 2004: 4. In Muslim trade, the concept of Amanah trust is significant.
Amanah comes very close to the concept of fiduciary responsibility
and stewardship function Malik et al, 1999: 4. This trustee-ownership
principle implies that ownership should be exercised for the benefit of society as well as for the benefit of the owner Maali et al, 2006: 272.
God’s commandments and the benefits of society should be given priority when dealing with properties. The owner is responsible for
using the available resources according to the will of God and to the benefit of society.
According to Maali et al 2006: 16
there are three broad objectives that can be set as the bases for identifying the social disclosures of
Islamic business enterprises: 1. To show compliance with Islamic principles, in particular dealing
justly with different parties. 2. To show how the operations of the business have affected the well-
being of the Islamic community.
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3. To help Muslims to perform their religious duties. Such objectives will now be used as the basis for proposing a
benchmark for social reporting by Islamic banks. Maali et al
2006: 16 set out the number of items that should be
disclosed in islamic banks’ annual reports. 1. Disclosure of Shari’ah Supervisory Board opinion
One distinct feature of the modern Islamic banking movement is the role of the Shari’ah board, which forms an integral part of an
Islamic bank. A Shari’ah board monitors the workings of the Islamic bank and every new transaction that is doubtful from a
Shari’ah standpoint has to be cleared by it. Therefore, the first measure that an institution is in compliant with Shari’ah is to
appoint a Shariah Supervisory Board SSB or Shariah Supervisory Committee SSC.These boards include some of the
most respected contemporary scholars of Shari’ah and the opinions of these boards are expressed in the form of fatwas. The users of
Islamic banks’ annual reports will interest in the report of the Shari’ah Supervisory Board because it shows whether the bank has
complied with Islamic principles or not and whether it has dealt justly with different parties.
2. Unlawful transactions Islamic banks should not enter into any transaction that
violates Islamic principles. Shari’ah prohibits the excessive
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uncertainty in contracts example entering into a transaction whose consequence is out of usual trade norms. Hence, any contract base
on a future uncertain event such as hedging, dealing in derivatives, etc, within Islamic banking, is not generally allowable. Where a
bank is entered into transactions that are inconsistent with Shari’ah principles, and hence regarded as unlawful Haram by Islam, the
duty of accountability to God and society implies that information about these transactions should be disclosed to the community. It
considers that the bank should disclose the following: a. The nature of these transactions
b. The reasons for undertaking such transactions c. The opinion of the Shari’ah Supervisory Board regarding the
necessity of undertaking such activities d. The amount of revenue expenses earned paid in such
transactions e. How the bank disposed, or intends to dispose, of such revenues
f. Disclosing such items would help the Islamic community in assessing whether the bank has violated Islamic principles and
the reasons for such violation. In addition, disclosure will help in assessing the materiality of such prohibited transactions, and
hence the magnitude of the impact on the well-being of the Islamic community.
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3. Zakah Zakah
is a tax that every Muslim, whose wealth exceeds a certain nisab minimum amount, has to pay. The Shariah specifies
that only individuals are liable for zakah. It is the individual owners who are responsible for determining the amount that should
be paid out as zakah Gambling and Karim, 1991:103. Islamic banks may be required by law to pay zakah or the
shareholders andor the depositors may require a bank to pay zakah on their behalf. For those banks that are required by law or their
shareholders to pay zakah, Islamic Bank should ideally communicate the following in their annual reports:
a. A statement showing the sources and the uses of the zakah fund. This statement will show from which sources the funds
were collected shareholders, depositors, others and to which uses they have been applied. It is important to provide detailed
disclosures of such uses to assure readers of annual reports that these funds is used according to God’s will.
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 is
properly computed and these funds are distributed according to God’s will.
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4. Qard Hassan Qard Hassan is a non-profit bearing financing intended to
allow the borrower to use the loaned funds for a period of time with the understanding that the same amount of the loaned funds
will be repaid at the end of the Qard period Haniffa and Hudaib, 2004: 25.
Qard Hassan is a sort of loan which does not require borrowers to pay interest or even some
parts of profits earned from their businesses, except repaying the principal loan to the banks
Triyuwono, 2004: 9. Providing Qard Hassan benevolent or interest-free loans
for socially beneficial causes is an important social contribution that Islamic Bank may make, especially to the local community in
which they operate. As such, Islamic bank should ideally communicate the following in their annual reports:
a. The sources from which such loans are financed: these sources may include the bank own funds and depositors’ funds. Users
need to know whether the bank finances such activity from its own resources or from the depositors’ resources, and whether
or not the bank operates a formal scheme whereby depositors may designate funds to be used for Qard Hassan.
b. The amount advanced to beneficiaries during the year, and the purposes for which these loans were given.
c. Its policy for providing such loans.
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d. Its policy for dealing with those who are unable to repay their loans.
5. Charity and other social activities In addition to Qard Hassan, Islamic banks should engage in
other social activities, such as making charitable donations charity is voluntary in nature and can be used for purposes
allowed by Shari’ah for the benefit of society Haniffa and Hudaib,
2004: 25 . It is not obligatory but strongly recommended Islamic
banks, which usually control large funds, are expected to participate in providing such charitable donations. Islamic society
and the stakeholders of the bank should know about the bank’s contribution to the well-being of society and whether the bank
fulfils society’s expectations regarding this issue. Rather, such activities should be genuine, and not undertaken for publicity
purposes. We therefore recommend that Islamic Bank should disclose:
a. The nature of charitable and social activities financed by the bank
b. The amount spends on these charitable and social activities. c. The sources of funds use for charity: the sources may include
the bank’s own funds and revenues from sources prohibited by Shari’ah
6. Employees
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Other revealing indicators of an organization’s ethical stand from an Islamic perspective are the ways it treats its employees and
debtors as well as its commitments to society. Employees are the greatest asset of the business and their welfare should be given due
attention. The Islamic community needs to know if the bank deals
justly with its employees: exploitation and discrimination are not acceptable, as these are strictly prohibited by the Qur’an and
Sunah. In addition, education and training are important as Islam encourages the search for knowledge. So, the bank must disclose:
a. Payments of wages and bonuses. b. Education and training for employees.
c. Equal opportunities. d. The working environment.
7. Late repayments and insolvent clients Islamic
banks, when
utilizing mark-up
financing arrangements such as Murabaha and Ijara, may face situations in
which clients are unable to pay amounts when they fall due. It will expect users to be interested in how the bank deals
with insolvent clients, and whether the bank deals with them in an ethical way, consistent with Islamic principles. Therefore, it
considers that the Islamic bank should disclose: a. The bank’s policy in dealing with insolvent clients.
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b. The amounts charged as late penalties, if any. c. The opinion of the Shari’ah Supervisory Board regarding
whether charging penalties is permissible. d. How the bank deals with such penalties allocation to charity or
revenue. 8. The environment
Destruction or damage of the physical environment, if it is considered harmful to an individual or community, is prohibited in
Islam. As Haniffa 2001:18 observes that there are about 500 verses in the Qur’an giving guidance on matters related to the
environment and how to deal with it, which indicates the importance of taking care of the environment.
Banking is unlikely to cause direct harm to the environment in the way that the oil and nuclear industries might, but Islamic
Bank is not expected to finance activities that lead to harming the environment, because such projects will harm the Islamic society.
In addition Islamic Bank is able to provide donations to help preserve the environment. Users will require assurance that the
activities of Islamic Bank affect positively the wellbeing of the Islamic society. Therefore it is expected that Islamic Bank report
on the following issues: a. The amount and nature of any donations or activities
undertaken to protect the environment.
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b. Disclosures indicating whether the bank has financed any projects that may lead to harming the environment.
9. Other community involvement aspects In addition to their zakah and charitable activities, Islamic
Bank is expected to undertake other activities which enhance the well-being of the Islamic community in which the Islamic Bank is
allowed to operate and make profits. Thus, Islamic Bank should respect the requirements of their community. Because of this,
Islamic Bank should give priority in their investments to those areas that help in solving the problems of the society, even if this will
lead the Islamic Bank to sacrifice some of their profits. Thus, it is expected that Islamic Bank will disclose its role in:
a. Enhancing economic development in the communities in which it operates.
b. Solving the social problems such as housing and literacy of the societies in which it operates.
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CHAPTER III RESEARCH METODOLOGY
Kategori