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    Louella J Moore
    Is the FASB/IASB concerned about Islamic views on interest...
    question posted August 2, 2011 by Louella J Moore, last edited April 30, 2012 
    2787 Views, 8 Comments
    question:
    Is the FASB/IASB concerned about Islamic views on interest which have resulted in few IFRS adoptions?
    details:

    Many Islamic countries do not view 'interest' as a legitimate business expense and try to structure transactions to avoid the appearance of interest.  Even long term leases and payments which eventually will result in acquisition of a long term asset are construed as rents in Islamic accounting.  Western countries on the other hand seemly see hidden, capitalizable interest hiding under every rock.  Not capitalizing has been a problem in lease contracts;  trying to predict contingent rentals in order to capitalize them is likely to be a problem as well.   On the surface it appears that the FASB/IASB are working for compromise between cultures that see interest as a central fact of life but not with those that see it as problematic.   It seems acounting standards reflect culture.  Is anyone at the FASB or IASB concerned that new accounting standards may reflect or be contributing to a widening rift between Islamic and capitalistic/Western cultures?

    Comment

     

    • Robert E Jensen

      Islamic Accounting

      August 24, 2011 message from Mohammad Asim Raza

      Hi Robert -
      Read your response on the AECM listserv - I think you would find the Thomas McElwain's writing on interest in his Islam in Bible to be interesting. Here is excerpt.

      Usury

      Islamic banking is well-known in the financial world and is becoming popular as an investment alternative even outside the sphere of Islam. The prohibition of usury or charging interest on any lending is described in the literature of every Islamic school of jurisprudence. In justification of the prohibition Ali (1988, 141a) quotes Qur'an 2:275 `Those who swallow interest will not (be able to) stand (in resur­rection) except as standeth one whom Satan hath confounded with his touch.'

      The Bible is also very clear on the matter of usury. It is in perfect harmony with Islam. The Arabic term for usury, raba, is rather neutral, coming from a root meaning to remain over or increase. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent.

      The term neshek itself is used twelve times in the Bible, but related words are used several times as well. All of them either prohibit usury or speak of it in deprecating terms.

      Leviticus 25:36,37. `Take thou no usury of him, or in­crease: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.' The Hebrew term for increase here, tarbath, is a cognate of the Arabic riba. The word `or' in the translation of verse 36 is an interpretation of the undesignated copula we-. This is an example of the typical Hebrew habit of pairing synonyms.

      Exodus 22:25. `If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury.' This text already brings up the question of whether usury in general is prohibited, or merely usury of a brother, that is one under the covenant of God. The Torah has been interpreted to permit usury from unbelievers.

      Deuteronomy 23:19-20. 'Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.'

      Here the import of the passage in Exodus becomes clear. Usury is prohibited from those under the covenant, but permitted from strangers, that is, unbelieving heathens. Beyond this clarification there is an interesting remark on economy. The strength and well-being of the economic situation is considered to depend on the avoidance of usury.

      Psalm 15:1-5. `Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that putteth not out his money to usury...' The prohibition of usury in the Psalms is universal, whether the loan is made to believers or unbelievers.

      Jeremiah 15:10. `Woe is me, my mother, that thou has borne me a man of strife and a man of contention to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.' The words of Jeremiah imply not only a prohibition on lending with interest, but on borrowing with interest as well. The guilt is thus attached to both parties in the transaction.

      As part of the divine definition of justice we find in Ezekiel 18:8-9, `He that hath not given forth upon usury, neither hath taken any increase... he is just, he shall surely live, saith the Lord God.' This is a positive approach to the problem, as well as another affirmation that neshek and tarbith are equivalent.

      Ezekiel 18:13 makes the point negatively, `Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.' The context suggests that the abomination of usury is one of the sins provoking the Babylonian captivity. Verses seventeen and eighteen release the innocent children of the effects of their parents' sins in taking usury.

      Ezekiel 22:12. `In thee have they taken gifts to shed blood; thou has taken usury and increase, and thou hast greedily gained of thy neighbours by extortion, and hast forgotten me, saith the Lord God.' The taking of usury is equated here with bribes in judgement resulting in the execution of the innocent, and with extortion. Ezekiel thus defines more carefully what he means by `abominations' in chapter eighteen.

      After the captivity the matter of usury arose again, and was put to a quick end by the intervention of Nehemiah. Nehemiah's argument is not based on fear of renewed captivity as a result of usury. Rather, he appeals directly to law and justice. Having authority as governor, his measures were met with success: Nehemiah five.

      The Gospel references to usury are neither legislative nor normative. In a parable we find Jesus quoting a master scolding a servant for neglecting his property. Matthew 25:27 'Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.' The same story is repeated in Luke 19:23. Jesus makes no comment here on usury as such. The text does reveal that Jesus' hearers were familiar with the practice and that at least some, those having capital, approved of it. The context might well be lending to unbelievers.

      In sum, usury is prohibited in the Torah when between believers. The prophets suggest usury to be one of the factors resulting in the Babylonian captivity. Ezekiel uses very strong language against usury, equating it with bribery and extortion. The Psalms seem to apply the prohibition not merely within the context of believers but in general.

      Although it appears that the Torah at least might permit usury in some contexts, the sum of Biblical teaching comes down firmly against it. The Islamic form of banking finds support not only in the Qur'an but in the Bible as well.

      http://www.al-islam.org/islaminthebible/index.htm 

      Regards, Mohammad Asim Raza, CPA
      Baltimore, MD 21208

       

      August 25, 2011 reply from Bob Jensen

      Hi Mohammad,

      I don't want to get into any religious debates over debt versus equity or how nations of Islam participate in global capital markets today. I think Islamic finance ministers have become masters of structured finance that avoid the terms "interest" and "usury"--- http://en.wikipedia.org/wiki/Structured_finance 

      Bob Jensen's threads on Islamic Accounting are at
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting 

      I do think a "rose" by any other name is still a "rose" such that a changed definition of lending will not change lending in and of itself. For example, deferred-collection sales contracts are a form of interest-bearing debt even if the word "interest" is never mentioned when negotiating deferred payment prices.

      What we do know is that there should be a trade-off between risk and return so as to attract varied investors who are willing to take on varied levels of risk and expected returns. If investors are not allowed to lend (say by buying U.S, Treasury Bonds that earn the closest thing we have to risk free returns) then the governments of virtually all nations will have to find some other way to finance long-term projects and deficits.

      If equity investors cannot obtain financial leverage with debt, this will greatly affect willingness to invest in ownership shares.

      I totally disagree with Robert Walker about debt if he will not agree to a risk-return variation in investment alternatives. If virtually risk-free investing is still an alternative then I think we just have a rose by another name.

      Will Robert Walker also ban deferred collection sales contracts?

      What Robert Walker fails to mention is that the modern economic world has entered into the realm of "structured financing" where old definitions of debt versus equity become blended in very complex ways, often with derivative financial instruments and hedging management of risk --- http://en.wikipedia.org/wiki/Structured_finance  

      Bob Jensen's threads on Islamic Accounting are at
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting 

      Respectfully,
      Bob Jensen

      August 25, 2011 reply from Mohammad Asim Raza

      Hi Bob - there is no doubt that Islam prohibit the use of interest - but does allow mark up which in principle is not interest. Interest and interest on interest is prohibited in Islam. My mention of the link was due the fact that other scriptures also are negative or against the use of interest as mentioned by McElwain.

      There is an on going debate on the topic of interest whether it is paid on money or capital. Muslim scholars recognize that the loaned funds either create debt or asset. The question is if they are used to create additional wealth then why should the lender only be remunerated a fraction of money, interest in this case, since justice would require that the lender be compensated to the extent of involvement of financial capital in creating the incremental wealth - the point that well made by Dr Abbas Mirakhor.

      Ps see the remarkable work on Islamic Economics by Baqir AsSadr (Pls note that there is no such thing as Islamic Economics, wrote it for convenience, in Islam the term is Iqtisad which is derived from qasdis-sabil, i.e., the straigh path. Other meanings of Iqtisad are straight and upright, maintaining a moderate attitude and holding neither less or more). The book covers several important topics and was his original work on the subject.

      That said, Islamic finance is still developing (read: not perfect) and there are quite a hurdles to over come from the practical (there are much more traditional banks to work with) point of view - pls see the two attached documents - on Islamic Securitization, and Islamic home ownership in the US. The third attachment is a recent research mostly focusing on Australia, but provides a table indicating the activities of Islamic banking from asset percentage point of view in comparing to regular banking.

      Not but least, Islam allows several arrangements as I am sure you must be aware of Mudaraba (commenda) and Musaraka (partnership), Beneficence loans (Al Qard al Hassan, as Quran mentions it) - non interest bearing loans to those who are in need, deferred payment sale (bay Muajjal), deferred payment installment in which the price of the product is agreed to between buyer and seller at the time of the sale and can not be changed for deferring payments, leasing (Ijara), cost plus sale, service charge, just to name a few. My friend Muath is covering some of the developments that have beeen taking place http://islamicfinance2009.blogspot.com/ 

      So, Islamic financing is still developing and scholars are working on the alternatives - there is no doubt that interest causes ill and perpetuate greed in general.

      Thank you for your reply, Bob, I may not be able to quickly reply to you as you know I am currently working on my dissertation work which is taking a whole lot of time.

      Respectfully,
      Raza

       

       

    • Robert E Jensen

      Islamic Accounting

      August 24, 2011 message from Mohammad Asim Raza

      Hi Robert -
      Read your response on the AECM listserv - I think you would find the Thomas McElwain's writing on interest in his Islam in Bible to be interesting. Here is excerpt.

      Usury

      Islamic banking is well-known in the financial world and is becoming popular as an investment alternative even outside the sphere of Islam. The prohibition of usury or charging interest on any lending is described in the literature of every Islamic school of jurisprudence. In justification of the prohibition Ali (1988, 141a) quotes Qur'an 2:275 `Those who swallow interest will not (be able to) stand (in resur­rection) except as standeth one whom Satan hath confounded with his touch.'

      The Bible is also very clear on the matter of usury. It is in perfect harmony with Islam. The Arabic term for usury, raba, is rather neutral, coming from a root meaning to remain over or increase. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent.

      The term neshek itself is used twelve times in the Bible, but related words are used several times as well. All of them either prohibit usury or speak of it in deprecating terms.

      Leviticus 25:36,37. `Take thou no usury of him, or in­crease: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.' The Hebrew term for increase here, tarbath, is a cognate of the Arabic riba. The word `or' in the translation of verse 36 is an interpretation of the undesignated copula we-. This is an example of the typical Hebrew habit of pairing synonyms.

      Exodus 22:25. `If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury.' This text already brings up the question of whether usury in general is prohibited, or merely usury of a brother, that is one under the covenant of God. The Torah has been interpreted to permit usury from unbelievers.

      Deuteronomy 23:19-20. 'Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.'

      Here the import of the passage in Exodus becomes clear. Usury is prohibited from those under the covenant, but permitted from strangers, that is, unbelieving heathens. Beyond this clarification there is an interesting remark on economy. The strength and well-being of the economic situation is considered to depend on the avoidance of usury.

      Psalm 15:1-5. `Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that putteth not out his money to usury...' The prohibition of usury in the Psalms is universal, whether the loan is made to believers or unbelievers.

      Jeremiah 15:10. `Woe is me, my mother, that thou has borne me a man of strife and a man of contention to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.' The words of Jeremiah imply not only a prohibition on lending with interest, but on borrowing with interest as well. The guilt is thus attached to both parties in the transaction.

      As part of the divine definition of justice we find in Ezekiel 18:8-9, `He that hath not given forth upon usury, neither hath taken any increase... he is just, he shall surely live, saith the Lord God.' This is a positive approach to the problem, as well as another affirmation that neshek and tarbith are equivalent.

      Ezekiel 18:13 makes the point negatively, `Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.' The context suggests that the abomination of usury is one of the sins provoking the Babylonian captivity. Verses seventeen and eighteen release the innocent children of the effects of their parents' sins in taking usury.

      Ezekiel 22:12. `In thee have they taken gifts to shed blood; thou has taken usury and increase, and thou hast greedily gained of thy neighbours by extortion, and hast forgotten me, saith the Lord God.' The taking of usury is equated here with bribes in judgement resulting in the execution of the innocent, and with extortion. Ezekiel thus defines more carefully what he means by `abominations' in chapter eighteen.

      After the captivity the matter of usury arose again, and was put to a quick end by the intervention of Nehemiah. Nehemiah's argument is not based on fear of renewed captivity as a result of usury. Rather, he appeals directly to law and justice. Having authority as governor, his measures were met with success: Nehemiah five.

      The Gospel references to usury are neither legislative nor normative. In a parable we find Jesus quoting a master scolding a servant for neglecting his property. Matthew 25:27 'Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.' The same story is repeated in Luke 19:23. Jesus makes no comment here on usury as such. The text does reveal that Jesus' hearers were familiar with the practice and that at least some, those having capital, approved of it. The context might well be lending to unbelievers.

      In sum, usury is prohibited in the Torah when between believers. The prophets suggest usury to be one of the factors resulting in the Babylonian captivity. Ezekiel uses very strong language against usury, equating it with bribery and extortion. The Psalms seem to apply the prohibition not merely within the context of believers but in general.

      Although it appears that the Torah at least might permit usury in some contexts, the sum of Biblical teaching comes down firmly against it. The Islamic form of banking finds support not only in the Qur'an but in the Bible as well.

      http://www.al-islam.org/islaminthebible/index.htm 

      Regards, Mohammad Asim Raza, CPA
      Baltimore, MD 21208

       

      August 25, 2011 reply from Bob Jensen

      Hi Mohammad,

      I don't want to get into any religious debates over debt versus equity or how nations of Islam participate in global capital markets today. I think Islamic finance ministers have become masters of structured finance that avoid the terms "interest" and "usury"--- http://en.wikipedia.org/wiki/Structured_finance 

      Bob Jensen's threads on Islamic Accounting are at
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting 

      I do think a "rose" by any other name is still a "rose" such that a changed definition of lending will not change lending in and of itself. For example, deferred-collection sales contracts are a form of interest-bearing debt even if the word "interest" is never mentioned when negotiating deferred payment prices.

      What we do know is that there should be a trade-off between risk and return so as to attract varied investors who are willing to take on varied levels of risk and expected returns. If investors are not allowed to lend (say by buying U.S, Treasury Bonds that earn the closest thing we have to risk free returns) then the governments of virtually all nations will have to find some other way to finance long-term projects and deficits.

      If equity investors cannot obtain financial leverage with debt, this will greatly affect willingness to invest in ownership shares.

      I totally disagree with Robert Walker about debt if he will not agree to a risk-return variation in investment alternatives. If virtually risk-free investing is still an alternative then I think we just have a rose by another name.

      Will Robert Walker also ban deferred collection sales contracts?

      What Robert Walker fails to mention is that the modern economic world has entered into the realm of "structured financing" where old definitions of debt versus equity become blended in very complex ways, often with derivative financial instruments and hedging management of risk --- http://en.wikipedia.org/wiki/Structured_finance  

      Bob Jensen's threads on Islamic Accounting are at
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting 

      Respectfully,
      Bob Jensen

      August 25, 2011 reply from Mohammad Asim Raza

      Hi Bob - there is no doubt that Islam prohibit the use of interest - but does allow mark up which in principle is not interest. Interest and interest on interest is prohibited in Islam. My mention of the link was due the fact that other scriptures also are negative or against the use of interest as mentioned by McElwain.

      There is an on going debate on the topic of interest whether it is paid on money or capital. Muslim scholars recognize that the loaned funds either create debt or asset. The question is if they are used to create additional wealth then why should the lender only be remunerated a fraction of money, interest in this case, since justice would require that the lender be compensated to the extent of involvement of financial capital in creating the incremental wealth - the point that well made by Dr Abbas Mirakhor.

      Ps see the remarkable work on Islamic Economics by Baqir AsSadr (Pls note that there is no such thing as Islamic Economics, wrote it for convenience, in Islam the term is Iqtisad which is derived from qasdis-sabil, i.e., the straigh path. Other meanings of Iqtisad are straight and upright, maintaining a moderate attitude and holding neither less or more). The book covers several important topics and was his original work on the subject.

      That said, Islamic finance is still developing (read: not perfect) and there are quite a hurdles to over come from the practical (there are much more traditional banks to work with) point of view - pls see the two attached documents - on Islamic Securitization, and Islamic home ownership in the US. The third attachment is a recent research mostly focusing on Australia, but provides a table indicating the activities of Islamic banking from asset percentage point of view in comparing to regular banking.

      Not but least, Islam allows several arrangements as I am sure you must be aware of Mudaraba (commenda) and Musaraka (partnership), Beneficence loans (Al Qard al Hassan, as Quran mentions it) - non interest bearing loans to those who are in need, deferred payment sale (bay Muajjal), deferred payment installment in which the price of the product is agreed to between buyer and seller at the time of the sale and can not be changed for deferring payments, leasing (Ijara), cost plus sale, service charge, just to name a few. My friend Muath is covering some of the developments that have beeen taking place http://islamicfinance2009.blogspot.com/ 

      So, Islamic financing is still developing and scholars are working on the alternatives - there is no doubt that interest causes ill and perpetuate greed in general.

      Thank you for your reply, Bob, I may not be able to quickly reply to you as you know I am currently working on my dissertation work which is taking a whole lot of time.

      Respectfully,
      Raza

      August 27, 2011 reply from Bob Jensen

      Hi Raza,

      When you invest proceeds of bond debt into "capital," your debt still remains along with the bond debt's cash flow or fair value risk that can never be simultaneously eliminated (shifted) until the debt is paid off. What you do with the proceeds can never shift both types of risk. It's impossible to shift both types of risk even though you keep harping on "risk shifting" with proceeds into "capital investment" without being perfectly clear about what type of risk is being shifted with such an investment.

      It's impossible to simultaneously eliminate both a debt's cash flow and fair value risks no matter whether or not you created a "capital" investment with the bond proceeds. And these risks exist apart from insolvency risk. The bonds can be risk-free in terms of insolvency risk and still have cash flow or fair value interest rate risk.

      It's also questionable whether you've created capital with some uses of the proceeds?

      What if you borrow in U.S. dollars for the purposes of speculating in options on Euros where the bond proceeds go to paying for options on Euros? Is this a capital investment?

      What if you borrow U.S. dollars to speculate in U.S. Treasury Bond options on interest rates? Is paying $1 million in option premiums of interest rate options a capital investment?

       

      One added point that should perhaps be shared with the AECM is that your supposed risk shifting from debt to capital means that this capital investments must be tied to particular contracts in the capital structure of a firm..

      This violates the "capital structure irrelevancy theory" of Modigliani and Miller --- http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem 

      This was one of the main reasons Modigliani won the Nobel Prize in Economics. It will be earth shaking if you can convince economists that you've refuted that theory. Keep up the good work even if you can't convince me about the relevancy of capital structure.

       

      August 27, 2011 reply from Raza

      Hi Bob - you seem still confused (or want to get your last word in, just like in every other post) and harping on the side topics. The money is only a potential capital. For the money to become a capital, there has to be entrepreneurial effort. In other words you get interest on your debt while return on your capital. Debt is unsustainable, interest is bad, and also corresponds to your biblical values considering you are a conservative.

      Respectfully,
      Raza

       

      Jensen Comment
      I never mentioned my "biblical values" in this or any other thread in my life.

      Added Jensen Comment
      The Financial Commercial Bank:  A Saudi Joint Stock Company
      For the Year Ended December 31, 2007
      www.cs.trinity.edu/~rjensen/temp/IslamicJointStockCompany.pdf  

      Somebody sent this to me. Please note that I did not add any of the yellow highlights or comments.
      Nor do I have the slightest idea who added these yellow highlights or comments.
      Nor do I defend the implication in Footnote 3(f) that Special Income Revenue and Expense and Special Income Rate Swaps are the equivalent as interest as defined in the Western world.
      Nor do I have any idea who the counterparties are to these contracts or if they viewed Special Income Revenue and Expense as Interest Income and Expense.

      I especially found Footnote B.1-1 interesting on how changes in Special Commission Rates will affect future cash flows or fair values. This is on printed Page 46 (also Page 49 on my reader).

       

       

    • Robert E Jensen

      "AAOIFI in wide review of Islamic finance standards," by Bernardo Vizcaino, Reuters, April 29, 2012 ---
      http://www.reuters.com/article/2012/04/29/us-islamic-finance-regulation-idUSBRE83S04A20120429

      Islamic finance may face its biggest shake-up in years as a top standard-setting body seeks to reform the way the industry does business, including the role of highly paid scholars in enforcing religious principles.

      Khaled Al Fakih, the new secretary-general of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), outlined plans for a sweeping review of its guidelines in an interview with Reuters.

      Some of AAOIFI's reforms may prove controversial by challenging entrenched interests in the fast-growing business. Islamic financial assets hit $1.3 trillion globally last year, a 150 percent rise in the past five years as the industry expanded beyond core markets in the Middle East and Malaysia, financial lobby group TheCityUK estimates.

      "We would like to see insightful debate...that can help us develop standards that can benefit the industry," Fakih said by email from Bahrain, ahead of AAOIFI's annual meeting there on May 7 and 8.

      His organization plans to start consultations on reforming the operations of sharia boards, the groups of Islamic scholars which rule on whether financial institutions' activities and products are religiously acceptable, by the middle of this year. A final draft of the reforms is not expected to be ready before the end of next year at the earliest.

      AAOIFI will also work on a new framework for disclosing financial data, and will look at revising standards for takaful (Islamic insurance), investment accounts and other products.

      Fakih, a Lebanese-born commercial banker who took over at AAOIFI in February, said basic elements of Islamic finance such as murabaha, mudaraba and ijara - structures designed to permit investment while obeying religious bans on paying interest and pure monetary speculation - would be reviewed next year.

      CONTROVERSY

      For many in the industry, AAOIFI's review cannot come too soon. Although far smaller than conventional banking, which has tens of trillions of dollars of assets, Islamic finance has grown much more quickly in the last few years, so its flaws could start to affect banking systems and economies.

      Much of its growth has occurred because it can count on the support of large pools of sharia-compliant funds in the booming Gulf and southeast Asia, which have not pulled back during the global financial crisis as Western funds have.

      Last year's Arab Spring uprisings in the Middle East promise a fresh wave of growth; new, Islamist-led governments want to promote the industry after their authoritarian predecessors discouraged it for ideological reasons.

      But the growth has exposed weaknesses in Islamic finance. One is the lack of a clear consensus on what products and procedures are permissible; the sharia boards of individual banks and investment firms can issue conflicting rulings.

      This can create big controversies. When Goldman Sachs (GS.N) announced last October that it planned a $2 billion sukuk issue, which would make it one of the first top Western banks to raise money in that way, its own sharia advisors approved the plan. But some other scholars criticized it; six months later, the sukuk has not been issued and it is not clear when it might be.

      The sharia board system is open to accusations of conflict of interest because scholars are paid handsomely - in some cases, with hourly fees of $1,000 or more - by the very firms whose behavior they are supervising.

      The ambiguity in regulation has let some Islamic financial institutions, such as Kuwait's Investment Dar, argue in court that contracts into which they had entered were not valid because they were not sharia-compliant in the first place.

      AAOIFI plans to improve the operations of sharia boards by strengthening the certification process for scholars, Fakih said. The organisation currently offers scholars two professional credentials, but they have been criticized as not sufficiently rigorous and too easy to obtain.

      In addition, AAOIFI is developing new guidance on the relationship between Islamic financial firms and their sharia boards, "similar to international best practices on terms of reference for financial institutions' board of directors".

      One way to reduce conflicts of interest might be to limit the length of scholars' tenure at individual firms, to prevent them from forming excessively close relationships with their employers that might compromise their objectivity. However, Fakih did not mention this idea. Current AAOIFI standards acknowledge "engagement over a prolonged period of time may pose a threat to independence", but do not prescribe specific limits.

      AAOIFI will also look at ways of fostering the rise of a new, younger generation of Islamic scholars, through steps such as training courses, Fakih said. This could remove a bottleneck to growth in the industry by loosening the dominance of about two dozen veteran scholars who have practiced for decades and hold multiple board positions.

      RESISTANCE

      It is not yet clear whether reformers in AAOIFI will be able to push through changes over the potential opposition of many veteran scholars and financiers who profit from the status quo.

      Yasser Dalhawi, chief executive of Syariah Review Bureau, an Islamic finance advisory firm in Saudi Arabia, said change would be difficult. But he added that many people in the wider industry would support change as a way of ensuring growth and bringing Islamic finance closer to its religious principles.

      A survey of customers' attitudes to sharia boards, conducted a few years ago by a Gulf financial firm, found widespread dissatisfaction which was expressed in some cases with expletives, one prominent scholar told Reuters, declining to be named because of the sensitivity of the issue.

      To balance opposition to change within AAOIFI, Fakih seems to want to involve the widest possible range of industry interests in the debate; he called for "rigorous and meaningful discussions...not only among scholars but also with all participants of Islamic finance."

      Continued in article

      "Islamic finance - the social paradigm," Financial Times, April 16, 2012 --- Click Here
      http://www.ftseglobalmarkets.com/index.php?option=com_k2&view=item&id=3243:islamic-finance-the-social-paradigm&Itemid=54

       

      Bob Jensen's threads on Islamic finance and accoutning ---
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting

       

       

    • Robert E Jensen

      Sukuk --- http://en.wikipedia.org/wiki/Sukuk

      Islamic Bond Excitement in Financial Markets
      "Interested in buying sukuk? by Sabine Vollmer, CGMA Magazine, October 5, 2012 ---
      http://www.cgma.org/magazine/news/pages/20126503.aspx

      Following financial crises in the US and Europe, investors are increasingly attracted to raising funds for investments through Islamic bonds called “sukuk.”

      Sukuk are an alternative to conventional bonds that governments and companies sell regularly to raise funds. They comply with sharia law, the moral code of conduct based on the Quran, which prohibits charging interest and trading in debt.

      Ernst & Young’s Global Islamic Banking Centre of Excellence projects that global demand for sukuk is likely to triple to $900 billion in 2017. Here are a few reasons for the surge:

      • The world’s Muslim population is growing at about twice the rate of the non-Muslim population, the Pew Research Center estimates, driving the growth of the Islamic banking industry.
      • Banks in the Middle East are flush with cash because of high oil prices. Islamic banks, particularly those that were not hard hit by the financial crises in the US and Europe, are looking for opportunities to park their cash. Worldwide, Islamic assets held by banks account for an estimated $1.1 trillion, according to Ernst & Young’s Islamic banking report. Their share of all commercial bank assets varies from country to country. In the Middle East and North Africa, Islamic assets constitute an average 14% of banks’ assets.
      • Muslim countries have increased government spending to stimulate, develop and sustain economic activity since the beginning of the Arab Spring.
      • Investors worldwide are seeking safer investments following global financial crises. Sukuk are unsecured, asset-based loans. Unlike asset-backed loans, which use buildings, land or patents as collateral, sukuk must be based at least 51% on an asset that generates rent, such as a building. The sukuk issuer can make amortised payments or a bullet payment at the end to pay off the sukuk. While the majority of the payments must come from the rent, a smaller portion can come from profits that a business generated.

      “Would the growth be the same if the US and the European market weren’t in crisis? Perhaps yes, but not at the rate you see now,” said Rizwan Kanji, a lawyer who specialises in sukuk transactions in the Dubai office of the law firm King & Spalding. “… The growth of sukuk will continue while the Western markets recover.”

      Establishing a global standardised sukuk trading platform that is open to all financial institutions would go a long way toward spurring more supply, according to Ashar Nazim, E&Y’s MENA Islamic finance services leader.

      Continued in article

      Jensen Comment
      CGMA Magazine seems to be getting more and more innovative.

      Bob Jensen's threads on Islamic and Social Responsibility Accounting ---
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting

    • Robert E Jensen

      "Recent developments in Islamic banking, finance and accounting," IAS Plus from Deloitte, December 27, 2012 ---
      http://www.iasplus.com/en/news/2012/december/islamic-banking-and-finance

      The rapid global growth in Islamic finance has brought increased international attention to the questions of what Islamic finance is, how it differs from conventional finance and and whether accounting for Islamic and conventional finance transactions can be harmonised.

      The papers for the AAOIFI - World Bank Annual Conference on Islamic Banking and Finance held earlier this month and recently posted to the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) website offer a good overview of current topics in Islamic Finance. However, they also illustrate that the definitions of Sharia-compliant operations are still diverse and can differ from jurisdiction to jurisdiction, which make a single approach to accounting difficult. Yet, as one of the speakers at the conference pointed out: "Ethics, transparency and accountability are values not alien to [the] Islamic world view." Please click for access to the conference papers on the AAOFI website.

      The need to harmonise the treatment of Islamic finance first in itself and then with international standards has lead to the publication of a series of papers over the last months. In September 2012, the Islamic Financial Services Board (IFSB) published a report from a high-level roundtable offered jointly with the International Organisation of Securities Commissions (IOSCO), which was to be a first step towards the development of international regulatory standards for Islamic capital market products. In November 2012, the Malaysian Accounting Standards Board (MASB) published a staff paper discussing Islamic finance, accounting treatments for various Islamic finance instruments, and the reasons why the MASB chose to require Islamic financial institutions to follow Malaysian Financial Reporting Standards, which are equivalent to IFRS.

      Finally, the Association of Chartered Certified Accountants (ACCA) followed suit with a report published on its website calling on the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance, standards and educate the investor community on key issues. ACCA points out that:

      • the IASB should consider issuing guidance on the application of IFRSs to the accounting for certain Islamic financial products;
      • it should also consider issuing guidance on additional disclosures in relation to Sharia-compliant operations;
      • the IASB should work with leading Islamic Finance standard-setters and regulators in establishing differences and developing harmonised solutions; and
      • the Islamic Finance Institutes (IFIs) should support the IASB by forming an expert advisory group.

      The IASB has responded to the repeated calls and has asked the MASB to help with setting up an expert advisory group on Islamic accounting. This development was first announced at the fourth meeting of the Asian-Oceanian Standard-Setters Group (AOSSG) at the end of November 2012 in Kathmandu where the IASB staff briefed the members on the plans. The IASB has since confirmed these plans in the feedback-statement to the agenda consultation:

       

      The IASB could benefit from learning more about Islamic (Shariah-compliant) transactions and instruments - neither the IASB nor our staff have expertise in this area. The IASB is establishing a consultative group to assess the relationship between Shariah-compliant transactions and instruments and IFRS and to help educate the IASB, mainly through public education sessions. Work undertaken by some standard-setters suggests that IFRS provides relevant information about Shariah-compliant transactions and that there is little, if anything, the IASB would need to do to bring this sector of the economy within IFRS. However, the IASB needs more information before it can make that assessment itself. We have asked the Malaysian Accounting Standards Board to assist us with setting up this group, reflecting the helpful analysis they provided to the AOSSG on Shariah-compliant matters.

       

      More information on developments in Islamic accounting and useful links are available on our dedicated IAS Plus page.

       

      Sukuk --- http://en.wikipedia.org/wiki/Sukuk

      Islamic Bond Excitement in Financial Markets
      "Interested in buying sukuk? by Sabine Vollmer, CGMA Magazine, October 5, 2012 ---
      http://www.cgma.org/magazine/news/pages/20126503.aspx

      Following financial crises in the US and Europe, investors are increasingly attracted to raising funds for investments through Islamic bonds called “sukuk.”

      Sukuk are an alternative to conventional bonds that governments and companies sell regularly to raise funds. They comply with sharia law, the moral code of conduct based on the Quran, which prohibits charging interest and trading in debt.

      Ernst & Young’s Global Islamic Banking Centre of Excellence projects that global demand for sukuk is likely to triple to $900 billion in 2017. Here are a few reasons for the surge:

      • The world’s Muslim population is growing at about twice the rate of the non-Muslim population, the Pew Research Center estimates, driving the growth of the Islamic banking industry.
      • Banks in the Middle East are flush with cash because of high oil prices. Islamic banks, particularly those that were not hard hit by the financial crises in the US and Europe, are looking for opportunities to park their cash. Worldwide, Islamic assets held by banks account for an estimated $1.1 trillion, according to Ernst & Young’s Islamic banking report. Their share of all commercial bank assets varies from country to country. In the Middle East and North Africa, Islamic assets constitute an average 14% of banks’ assets.
      • Muslim countries have increased government spending to stimulate, develop and sustain economic activity since the beginning of the Arab Spring.
      • Investors worldwide are seeking safer investments following global financial crises. Sukuk are unsecured, asset-based loans. Unlike asset-backed loans, which use buildings, land or patents as collateral, sukuk must be based at least 51% on an asset that generates rent, such as a building. The sukuk issuer can make amortised payments or a bullet payment at the end to pay off the sukuk. While the majority of the payments must come from the rent, a smaller portion can come from profits that a business generated.

      “Would the growth be the same if the US and the European market weren’t in crisis? Perhaps yes, but not at the rate you see now,” said Rizwan Kanji, a lawyer who specialises in sukuk transactions in the Dubai office of the law firm King & Spalding. “… The growth of sukuk will continue while the Western markets recover.”

      Establishing a global standardised sukuk trading platform that is open to all financial institutions would go a long way toward spurring more supply, according to Ashar Nazim, E&Y’s MENA Islamic finance services leader.

      Continued in article

       


      "Islamic Accounting," IAS Plus, January 3, 2011  --- http://www.iasplus.com/islamicfinance/islamicaccounting.htm

      Accounting Standards for financial reporting by Islamic financial institutions have to be developed because in some cases Islamic financial institutions encounter accounting problems because the existing accounting standards such as IFRSs or local GAAP were developed based on conventional institutions, conventional product structures or practices, and may be perceived to be insufficient to account for and report Islamic financial transactions. Shariah compliant transactions that observe the prohibition to charge interest may not have parallels in conventional financing and therefore, there may be significant accounting implications. Likewise, the Islamic finance industry is under considerable pressure to enhance practice and improve risk management systems and protect investors.

      On this page, we maintain a history of recent developments in Islamic accounting requirements and practices.

       


      August 24, 2011 message from Mohammad Asim Raza

      Hi Robert -
      Read your response on the AECM listserv - I think you would find the Thomas McElwain's writing on interest in his Islam in Bible to be interesting. Here is excerpt.

      Usury

      Islamic banking is well-known in the financial world and is becoming popular as an investment alternative even outside the sphere of Islam. The prohibition of usury or charging interest on any lending is described in the literature of every Islamic school of jurisprudence. In justification of the prohibition Ali (1988, 141a) quotes Qur'an 2:275 `Those who swallow interest will not (be able to) stand (in resur­rection) except as standeth one whom Satan hath confounded with his touch.'

      The Bible is also very clear on the matter of usury. It is in perfect harmony with Islam. The Arabic term for usury, raba, is rather neutral, coming from a root meaning to remain over or increase. The Biblical term for usury, neshek, is strongly negative, coming from a root whose basic meaning is to strike as a serpent.

      The term neshek itself is used twelve times in the Bible, but related words are used several times as well. All of them either prohibit usury or speak of it in deprecating terms.

      Leviticus 25:36,37. `Take thou no usury of him, or in­crease: but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.' The Hebrew term for increase here, tarbath, is a cognate of the Arabic riba. The word `or' in the translation of verse 36 is an interpretation of the undesignated copula we-. This is an example of the typical Hebrew habit of pairing synonyms.

      Exodus 22:25. `If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury.' This text already brings up the question of whether usury in general is prohibited, or merely usury of a brother, that is one under the covenant of God. The Torah has been interpreted to permit usury from unbelievers.

      Deuteronomy 23:19-20. 'Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the Lord thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.'

      Here the import of the passage in Exodus becomes clear. Usury is prohibited from those under the covenant, but permitted from strangers, that is, unbelieving heathens. Beyond this clarification there is an interesting remark on economy. The strength and well-being of the economic situation is considered to depend on the avoidance of usury.

      Psalm 15:1-5. `Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that putteth not out his money to usury...' The prohibition of usury in the Psalms is universal, whether the loan is made to believers or unbelievers.

      Jeremiah 15:10. `Woe is me, my mother, that thou has borne me a man of strife and a man of contention to the whole earth! I have neither lent on usury, nor men have lent to me on usury; yet every one of them doth curse me.' The words of Jeremiah imply not only a prohibition on lending with interest, but on borrowing with interest as well. The guilt is thus attached to both parties in the transaction.

      As part of the divine definition of justice we find in Ezekiel 18:8-9, `He that hath not given forth upon usury, neither hath taken any increase... he is just, he shall surely live, saith the Lord God.' This is a positive approach to the problem, as well as another affirmation that neshek and tarbith are equivalent.

      Ezekiel 18:13 makes the point negatively, `Hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.' The context suggests that the abomination of usury is one of the sins provoking the Babylonian captivity. Verses seventeen and eighteen release the innocent children of the effects of their parents' sins in taking usury.

      Ezekiel 22:12. `In thee have they taken gifts to shed blood; thou has taken usury and increase, and thou hast greedily gained of thy neighbours by extortion, and hast forgotten me, saith the Lord God.' The taking of usury is equated here with bribes in judgement resulting in the execution of the innocent, and with extortion. Ezekiel thus defines more carefully what he means by `abominations' in chapter eighteen.

      After the captivity the matter of usury arose again, and was put to a quick end by the intervention of Nehemiah. Nehemiah's argument is not based on fear of renewed captivity as a result of usury. Rather, he appeals directly to law and justice. Having authority as governor, his measures were met with success: Nehemiah five.

      The Gospel references to usury are neither legislative nor normative. In a parable we find Jesus quoting a master scolding a servant for neglecting his property. Matthew 25:27 'Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.' The same story is repeated in Luke 19:23. Jesus makes no comment here on usury as such. The text does reveal that Jesus' hearers were familiar with the practice and that at least some, those having capital, approved of it. The context might well be lending to unbelievers.

      In sum, usury is prohibited in the Torah when between believers. The prophets suggest usury to be one of the factors resulting in the Babylonian captivity. Ezekiel uses very strong language against usury, equating it with bribery and extortion. The Psalms seem to apply the prohibition not merely within the context of believers but in general.

      Although it appears that the Torah at least might permit usury in some contexts, the sum of Biblical teaching comes down firmly against it. The Islamic form of banking finds support not only in the Qur'an but in the Bible as well.

      http://www.al-islam.org/islaminthebible/index.htm 

      Regards, Mohammad Asim Raza, CPA
      Baltimore, MD 21208

       

      Bob Jensen's threads on Islamic Accounting ---
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting

       

    • Robert E Jensen

      "Islamic Finance is Growing Fast but Faces the Form-Versus-Substance Debate (Video)," by Usman Hayat, CFA, Enterprising Investory, June 11, 2013 --- Click Here
      http://blogs.cfainstitute.org/investor/2013/06/11/islamic-finance-is-growing-fast-but-faces-the-form-versus-substance-debate-video/ 

      Bob Jensen's threads on Islamic Accounting ---
      http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting

    • Robert E Jensen

      "Developing a Conceptual Framework to Appraise the Corporate Social Responsibility Performance of Islamic Banking and Finance Institutions," by M. Mansoor Khan, Accounting and the Public Interest, American Accounting Association, Volume 13, Issue 1 (December 2013) ---
      http://aaajournals.org/doi/abs/10.2308/apin-10375

      Abstract
      This paper fills some of the theoretical and empirical deficiencies regarding Corporate Social Responsibility (CSR) dimensions in Islamic Banking and Financial Institutions (IBFIs). The firms' CSR initiatives are the key to secure success in modern business and society, and there is a scope to develop a broader understanding of CSR in globally integrated business and financial markets. This paper provides the Islamic perspective of CSR, which is etho-religious based and, thus, more meaningful and intensified. It proposes a CSR framework for IBFIs based on principles of Islamic economics and society. The proposed framework urges IBFIs to engage in community-based banking, work toward the betterment of the poor, ensure the most efficient and socially desirable utilization of financial resources, develop their institutional frameworks, infrastructures, and innovative products to facilitate the wider circulation of wealth and sustainable development in the world. This paper observes that IBFIs have failed to deal with underlying CSR challenges due to lack of commitment and expertise in the field. The CSR-based outlook of IBFIs can only ensure their legitimacy, sustainability, and long-term success.

    • Robert E Jensen

      "Developing a Conceptual Framework to Appraise the Corporate Social Responsibility Performance of Islamic Banking and Finance Institutions," by M. Mansoor Khan, Accounting and the Public Interest, American Accounting Association, Volume 13, Issue 1 (December 2013) ---
      http://aaajournals.org/doi/abs/10.2308/apin-10375

      Abstract
      This paper fills some of the theoretical and empirical deficiencies regarding Corporate Social Responsibility (CSR) dimensions in Islamic Banking and Financial Institutions (IBFIs). The firms' CSR initiatives are the key to secure success in modern business and society, and there is a scope to develop a broader understanding of CSR in globally integrated business and financial markets. This paper provides the Islamic perspective of CSR, which is etho-religious based and, thus, more meaningful and intensified. It proposes a CSR framework for IBFIs based on principles of Islamic economics and society. The proposed framework urges IBFIs to engage in community-based banking, work toward the betterment of the poor, ensure the most efficient and socially desirable utilization of financial resources, develop their institutional frameworks, infrastructures, and innovative products to facilitate the wider circulation of wealth and sustainable development in the world. This paper observes that IBFIs have failed to deal with underlying CSR challenges due to lack of commitment and expertise in the field. The CSR-based outlook of IBFIs can only ensure their legitimacy, sustainability, and long-term success.