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Islamic Accounting Theories


Islamic banking is picking up prevalence in developing markets in the wake of helping some monetary organizations stay away from the worst of the financial emergency. Islamic banks have been less influenced than numerous conventional banks in the current worldwide subsidence.

This is predominantly on the grounds that dissimilar to conventional banks; the Islamic banks did not open to misfortunes from interest in harmful resources nor have they been reliant on wholesale supports subsequent to these practices are not by the standards set out in the Sharia Law. In addition, recent years have as of now shown that there is an interest in Islamic banking past Islamic financial specialists.

The UK is one of the main places for Islamic banking on the planet, yet just 5% of its populace is Muslim. Also, in conclusion, governments and controllers in an assortment of nations have officially perceived the significance of Islamic banking as a plausible contrasting option to customary banking.

The worldwide retreat realized by the breakdown in credit supply saw large portions of the internationally acknowledged models of speculation vanish overnight with the fall of Lehman Brothers in September 2008. It is very much acknowledged that the credit crunch was essentially brought about by betting and insufficient direction.

The radical change in the speculation elements of the market and a reasonable inquiry of the profound quality of the venture business connote an unmistakable defining moment in the advancement of territorial and worldwide speculation markets. That will give new support to the as of now thriving Islamic private value and funding businesses Hence, unquestionably a framework in which betting is banned, where everything must be supported by unmistakable resources ought to be critical in a post-subsidence world. In this period of terrified savers and speculators, everybody might move their cash over to this generally safe framework.

Post-emergency markets are more reasonable and hunt down a morally based way to deal with venture. The new speculation markets, after the accident, will see a developing interest for a much more organization way to deal with private value and funding venture. In private value, the financial specialist offers both the dangers and the prizes, which recreates the essential standards of Islamic speculation. Indeed, even before the full assault of the worldwide downturn, the qualities of Islamic private value and funding guaranteed the parts delighted in expanding consideration from provincial and worldwide financial specialists.

For a huge number of Muslims, banks are establishments to be kept away from. Islam is a religion which keeps Believers from the teller’s window. Their Islamic convictions keep them from dealings that include usury or interest (Riba).

Muslims need banking administrations as much as anybody and for some reasons: to finance new business endeavors, to purchase a house, buy an auto, to encourage capital speculation, to embrace exchanging exercises, and to offer a sheltered spot for investment funds. For Muslims are not disinclined to honest to goodness benefit as Islam urges individuals to utilize cash in Islamically genuine endeavors, not simply to keep their assets unmoving.

Nonetheless, in this quick moving world, over 1400 years after the Prophet (S.A.W.), can Muslims discover space for the standards of their religion? The answer accompanies the way that a worldwide system of Islamic banks, venture houses, and other budgetary establishments have begun to come to fruition in light of the standards of Islamic finance set down in the Qur’an and the Prophet’s customs 14 centuries back. Islamic banking, taking into account the Qur’anic denial of charging interest, has moved from a hypothetical idea to grasp more than 100 banks working in 40 nations with multi-billion dollar stores around the world.

Islamic banking viewed as the quickest developing area in the Middle Eastern money related administrations market. Blasting onto the monetary scene scarcely thirty years prior, an expected $US 70 billion worth of assets are presently overseen as per Shari’ah. Store resources held by Islamic banks were rough $US5 billion in 1985 yet became over $60 billion in 1994.

The best-known element of Islamic banking is the disallowance on interest. The Qur’an disallows the charging of Riba on cash loaned. It is imperative to comprehend certain standards of Islam that support Islamic finance. The Shari’ah comprises of the Qur’anic summons as set down in the Holy Qur’an and the words and deeds of the Prophet Muhammad.












Islamic banks have been an important player on the planet economies more than two decades prior (Ahmed S., 2009). The standards accounting after that Islamic managing an account is based all around acknowledged for quite a long time as opposed to decades. The central rule of Islamic financial foundations is the forbiddance of Riba (interest). It shows that Islamic accounting hypothesis was honed primarily in the Islamic nation all through the middle Ages, improved exchange and business exercises.

Keeping in mind the end goal to comprehend what benefits that Islamic banks offer, it is crucial to maintaining a satisfactory level of data of the premise behind it. It has contended that the Islamic banks have not presented any new administrations since their first presence in the 1960’s; they have been able to fit the standards of the Islamic religion indicated for these sorts of activities. High asks for to evaluate Muslim client’s recognition and state of mind toward Islamic bank administrations.

Islamic banks comprehend that it’s vital to quantify the level of its client’s mindfulness and additionally to enhance authorities. The financial organization takes after the standards that Holy Quran and hadith have set to control the Muslims in their financial matters. The Islamic financial framework utilizes the possibility of support in the venture, using the assets at danger on a benefit and-misfortune circulation premise (Ahmed, S., 2009).


Amid the most recent three decades, Islamic account establishments have been rising altogether, both broadly and universally (Ahmed, S., 2009; Iqbal and Abbas, 2007). These organizations were perceived in the developing business sector of the Middle East to meet the request of speculators and borrowers who are inspired by wage expansion got from the Islamic law (Shari’a).

Islamic account establishments offer a broad scope of Islamic financial advancements from the fundamental assertion of benefit sharing understanding (Mudaraba) that is parallel to time store in preservationist banks, to issue Islamic bonds (Sukuk) and subsidiaries. In inlet nations, the condition of Kuwait saving money industry considered one of the pioneers in Islamic financial business sector. The development of Islamic account establishments in Kuwait has pulled in a percentage of the routine financial firms (e.g., NBK IFIH, and Citibank) to include the administration of Islamic windows to their customers.

Despite the points of interest that settled in Islamic fund framework and management, Islamic money organizations experience various essential difficulties to the possibility of being perceived universally. The challenges exist in the neighbourhood and additionally worldwide markets. One of these difficulties is to evaluate the level of mindfulness in Islamic accounting hypotheses. Muslim respondents, however, mindful of fundamental conditions in Islam, were entirely unmindful of the feeling of Mudaraba, Musharaka, and Ijara which are the Islamic financial conditions, Gerrard and Cunningham (1997).

As the result, numerous Islamic commercial suppliers try to evaluate the level of social familiarity with their apparatuses that consolidate with Shari’a. The comprehension of client level of mindfulness is vitally critical to decide firms’ enrichment advance Islamic accounting hypotheses. Financiers additionally look to investigate the explanations for managing Islamic banks to comprehend better and enhance administrations gave.

Another test that confronts Islamic financial foundations is that, as the government gave they need to understand client’s discernments and disposition toward the authorities gave to comprehend better customers need, need, and enhance their ministries. With no comprehension to customer recognitions and state of mind, Islamic banks may have no way to build up their administrations better and strengthen consumer loyalty and contend in the nearby and also the universal business sector.

The present study looks to survey the level of client’s consciousness of Islamic accounting speculations and to investigate their observations and state of mind toward these apparatuses that join with Shari’a.


Islamic financing is fundamental sector of conventional scholarly and policy objectivity. Opposing views in the area analyzed in the light of numerical proofs.

Establishing the level of clients’ knowledge on Islamic financial accounting principles and personal views and image towards Islamic financial tools will define the growth of Islamic financing in the future.

The current study attempts to reveal the degree of clients’ knowledge on Islam banking and steps taken to improve their knowledge to assist Islamic financial institution in determining the necessary effort to weigh up the knowledge and view on the sector.

Another objective of this study is to establish clients’ views and knowledge towards Islamic financial accounting theories hence assisting Islamic financial institutions to roll out more acceptable financial services and instruments.


Islamic banks provide many financial services and are competing heavily in the Middle East with conventional banks. Customers nowadays go for Islamic bank loans for buying a home, cars and even business setup, as the conditions are very clear, and there is no rising interest piling up. To overcome the banking fierce competition, Islamic bank needs to bestow efforts in raising the degree of awareness of Islamic accounting and finical tools and improve customer’s perception and attitude. The study is of general theoretical importance as well as of particular practical significance for policymakers who intend to conform their existing financial systems to Islamic rules.

Furthermore, at the practical level, the study aims to assist Islamic bank manager in providing empirically evidence how of Kuwaiti customers aware of Islamic accounting theory and Islamic financial services. The study also provides framework for bank managers in measuring customer’s perception and attitude toward Islamic services and their usage of various products and services offered. At the theoretical level, the current study aims to develop the literature of Islamic accounting theory and explain how these theories are to implement in the Islamic financial institution who adapts Shari’a.



In the Gulf Co-operation Council, there are a growing number of Islamic banks are also taking steps towards greater clearness and stronger authority structures. The state of Kuwait, for example, has been taking some steps to reinforce its local Sharia-obedient institutions, including slowly moving in the direction of a latest regulatory framework for Sukuk. In conversations with OBG, manufacturing insiders explained that due to a lack of suitable legal mechanisms, Islamic finance companies are not allowed to issue Sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, such as Bahrain. Given the massive increase in Sukuk issuance worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been approximately 45%), Kuwait’s financiers are keenly aware of the need for proper rules regulating Sukuk.

Sheikh Salem Abdulaziz Al-Sabah, the governor of the Central Bank of Kuwait (CBK), said earlier of 2008 that regulations are wanted, saying that the CBK is “keen to provide a legal system to regulate Islamic investment tools such as the issuance of Sukuk, especially in light of growing demand. We are optimistic a solution will soon be found.” In a state of Kuwait, the Islamic financial sector and its sharia-compliant companies are the increasingly global. Kuwait Finance House Bank (KFH), as an example, in addition to its Turkey, Malaysia and Bahrain ventures, newly established a subsidiary with a pair of Chinese firms to discover real estate investments in the Chongqing region of a central China. In a more high-profile move, Investment Dar, one of Kuwait’s biggest Islamic investment companies, recently funded a takeover of British luxury carmaker Aston Martin to the tune of $925 million.

To achieve the purpose, the study focuses on a particular Islamic bank that located in the state of Kuwait. KFH has usually been one of the main engines behind the growth of Kuwait’s sharia-acquiescent financial market; however, its enlargement and development indicate a growing maturity in Kuwait’s sharia-compliant services zone, established by the push toward the regulation of Islamic bonds (Sukuk) and the emergence of ever-stronger Islamic investment firms.

KFH was the first Islamic bank in Kuwait and one of the pioneers toward adapting of Islamic accounting and financial theory in the Gulf region. Besides the convenience, the research believes that exploring the degree of Islamic accounting principles of this bank may reveal highly reliable evidence of generalizing the finding in the state of Kuwait. KFH considered the leading Islamic bank in Kuwait and the second main bank of any kind in the country. Also to the massive injection of capital, KFH lately unveiled plans to set up its subsidiary in Amman.

The expansion of Islamic banks operations at home and overseas underlines the organic development of Kuwait’s Islamic financial sector. Thus, the study believe that investigating the customers awareness of Islamic banks toward Islamic accounting theory are justified and understanding their perception and attitude toward KFH is paramount important in attempting to improve service quality of Islamic firms.


This study is concerned with Islamic banking that located in the state of Kuwait as its difficult to include all Islamic banks related to resource limitation and time restriction. The study also does not analyze all Islamic accounting theory as it is very vast subject to control, rather than focusing on basic Islamic accounting theory that adopted by Islamic financial institutions and banks. Other limitation could be found related to:

  • Sample size: The sample size for the bank customer is colossal. Therefore, the collection of customer feedback will be costly in term of time and money.
  • The study aims to attain around survey for the purpose of analysis, which may be consider one of the study limitation.
  • Data collection: It may be difficult to distribute and collect all data and forms since the survey is targeting to receive feedback from the entire bank customers.


The current study includes many Islamic terms and concepts that will be stated as in Arabic meaning, some of these concepts are:

  • Halal: The actions or items that Muslims can have access to.
  • Haram: The actions or items that Muslims are banned from
  • Riba: What is known in the west as the interest.
  • Maysir: It means Games of chance such as lottery, gambling and it is usually referred to as Haram.
  • Takaful: It is a form of insurance in the Islamic religion which will be explained in the essay.
  • Gharar: Deception, hazard, speculation, uncertainty, risk (literally, peril or hazard)
  • Mudaraba: Is a trustee financing contract, where one party, the financier, entrusts funds to the other party, the entrepreneur, for undertaking an activity
  • Mushakara: It is an equity participation contract, whereby two or more partners contribute with funds to carry out an investment
  • Muqarada: Loan Participation
  • Qard Hassan: It is a benevolent loan (interest free)
  • Shari’a: It is Islamic religious law derived from the Holy Quran and the Sunnah


The current study includes five chapters: chapter one described the background of this study, and consisted of the introduction, objectives, and significance of the research. Chapter two reviewed the literature on Islamic banking and theories. Chapter three explained the research methodology.

The data analysis techniques and research findings demonstrated and discussions in chapter four. Chapter five includes conclusion and recommendations.









It’s necessary to explore the literature of Islamic accounting theory in details in this chapter. This chapter attempts to review previous literature on the topic of Islamic Accounting Theory and provides recent finding related to the degree of awareness of customers toward Islamic financial services. This chapter attempts provide recent study and articles about Islamic accounting theory that explain the nature of Islamic banks system.

Previous literature and surveys have revealed that the first recent research in Islamic banking filed conducted in Egypt under cover, without projecting an Islamic picture, for fear of being seen as a demonstration of Islamic fundamentalism, which was the abhorrence to the federal government (Siddiqi l988). These studies remain until l967 where nine Islamic banks open in the country (Ready l98l). These banks were neither charging nor paying interest, investing mainly by participating in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi l988). For that reason, Islamic banks functioned primarily as saving-investment firms rather than as commercial banks that based on charging interests. The Nasir Social Bank, established in Egypt in l97l, was declared an interest-free commercial bank, although its charter did not refer to Islam or Shariah (Islamic law).

Islamic banks appeared on the earth scene as dynamic players over the past two decades. Nevertheless, a lot of the values that based on Islamic banking usually accepted all over the world, for centuries more willingly than decades. The essential principle of Islamic banking is the ban of Riba (interest), while the critical occupant of Islamic banking – the prohibition of Riba, a word that encompasses not only the perception of usury but also that of interest – has rarely been recognized as appropriate beyond the Islamic world, a lot of its guiding values have. The majority of these values are rooted in pure ethics and general sense, which form the basis of numerous religions, including Islam.

Interest or “Usury” was forbidden in both the Old and New Testaments of the Bible, whereas Shakespeare and many other writers, mainly those writing in the 19th century, have attacked the barbarity of the carryout. Much of the ethics championed by Victorian writers such as Dickens – ranging from the fair division of wealth through to man’s simple right to work – is, of course, present in contemporary Islamic society. “Although the western media often recommend that Islamic banking in its current form is a recent occurrence, in fact, the essential practices and principles date back to the early part of the seventh century.” (Islamic Finance: A Euromoney Publication, 1997)

It is evident that Islamic finance was accomplished predominantly in the Muslim world during the middle Ages, encouragement trade, and business behavior. In Spain and the Mediterranean and the Baltic States, Islamic activities became vital middlemen for trading actions. It is claimed that several concepts, techniques, and tools of Islamic finance were later adopted by European financiers and businesspeople.

As Islamic finance is intertwined with its religion, the basis of the religion affects the investment in two important ways:

  1. Islam aims at building a socio-economic order based on justice and considers the economic activity as a means to an end and not an end in itself. It enjoins Muslims to harness natural resources, which are a trust from Allah SWT, for carrying out lawful activities; but abhors exploitation and man-made inequalities of income and wealth (Al-Harran, 1993).
  2. Islam is extremely concerned with the problem of financial growth, but treats this as a significant part of a wider problem, that of total human progress. The crucial function of Islam is to lead human growth on right lines and in the right direction. Islamic principle deals with all sides of economic development in the framework of total human development (Al-Harran, 1993).

The reinforcement of Islamic banking coincided with the worldwide festivity of the advent of the 15th Century of the Islamic calendar (Hijra) in 1976. At the same time, financial assets of Muslims mostly those of the oil producing countries expected a boost due to validation of the oil prices, which had up till now been under the power of foreign oil Corporations. These proceedings led Muslims’ to struggle to model their lives in agreement with the principles and philosophy of Islam (Abbas Valadkhani, 2004).

Islam not only prohibits trade in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is a tool for the progress of an Islamic financial order. Some of the salient features of this law may be summed up as:

  1. Islam urges individuals to seek their economic well-being. Islam presents a clear difference between what is Halal (lawful) and what is Haram (forbidden) in pursuit of such business. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. This God rule can be considered as a way to systemize the citizens.
  2. Islam makes it obligatory on people to spend their wealth judiciously and not to hoard it, keep it idle or to squander it while acknowledging them their right to ownership of property legitimately acquired. This can be compared with the communist principles that look for the welfare of the integral members of the society.
  3. While allowing an individual to retain any extra capital, Islam looks for reducing the edge of the extra for the well-being of the society as a whole, especially the poor and underprivileged sections of society by contribution in the procedure of Zakat. It is the way the Islamic government intervenes to ensure that poor people can have a formal financial source.
  4. While making payment for the ways of human nature and yet not yielding to the penalty of its worst propensities, Islam seeks to stop the amassing of wealth in a few hands to the damage of society as a whole, by its laws of inheritance.
  5. Viewed as a total, the financial system, which visualized by Islam aims at social justice without inhibiting people project beyond the point where it becomes not only jointly harmful but also individually self-destructive.

The Islamic economic system employs the perception of contribution in the enterprise, utilizing the funds at threat on a profit-and- loss-distribution basis. This by no means implies that investments with economic institutions are necessarily tentative. This can be barred by careful investment strategy, diversification of risk and sensible management by Islamic financial institutions. This system supports people to invest their money in those financial institutions to exploit their utilities by making profits under the guidelines of the Shariah.

The concept of profit-and-loss sharing, as a basis for financial transactions is a progressive one as it distinguishes good performance from the wrong and minimizes the players in the market to be the people who know how to invest and when they enter the market to catch the goal.

The primary purposes of an Islamic Banking and Financial system are to:

  1. Implement the value system of the Qur’an and the Sunnah (tradition or practice of Prophet Muhammad SAW) in the realm of the Muslim socio-economic system. Ibn Taymiyahr.a. (n.d.), a distinguished scholar of Islam explicates this as follows: “In mu’amalat (business transactions) all activities are permissible unless forbidden by revelation (Qur’an) or the practice of Prophet Muhammad SAW.” The examples of prohibited business activities would include dealing in gambling, liquor, pork, etc. The financial contracts of Islamic banks need to be clearly documented, equitable and avoid the elements of Riba, Gharar, and Maysir as explained in the following section.
  2. Foster the growth of the economy of Muslim nations by developing financial markets, institutions, and instruments. A well-developed capital market, with efficient institutions offering diverse financial facilities, can reduce the overall cost of capital. It can enhance social welfare by facilitating the acceptance of projects whose; present value of all relevant cash inflows (benefits) after tax is greater than the current value of all cash outflows (cost) of the project; or the expected internal rate of return is higher than a minimum threshold rate (or cost of capital). Furthermore, these necessary conditions should also be satisfied for each party financing the project to alleviate agency effects. This entails economic development, which is promoted in Islam, as Prophet Muhammad SAW exhorted Muslims to undertake business ventures (tijarah) as described in the following hadith Nu’aym ibn Abd Al-Rahman has quoted the (narration). ProphetSAW as saying: “Nine-tenths of earnings (Rizq) is in bai’ (business ventures), and tenth in cattle.” This was reported by Ibrahim Al-Harbi (Al-‘Iraqi, 1992) and by Sa’id ibn Mansur (Al-Suyuti, 1990).
  3. Dampen the shocks of final economic output by promoting risk-sharing instruments whose payoffs are strictly contingent on the profitability of a firm or project at a micro level. Financial facilities with fixed costs can severely strain the resources of borrowers during a slowdown, which lead to bankruptcies and structural impairment of the economy.

The gist of Islamic financial securitization is summarized by the following well-known hadith quoted by Kahf and Khan (1992), “Al-kharaj bi al Daman.” This implies that entitlement of return from assets vests in the one bearing the risk of it.


The primary job for most of the non-Muslim or conventional banks is preserved money and valuables and give loans, credit, and reimbursement services, for example checking accounts, money orders, and cashier’s checks. These banks furthermore may propose investment and insurance products, which they were once banned from selling.

As a diversity of models for collaboration and integration amongst finance, industries have appeared, some of the conventional distinctions among banks, insurance companies, and securities firms have reduced. Regardless of these changes, banks continue to preserve and carry out their leading role—allowing deposits and lending funds from these deposits. There are several kinds of banks, which vary in the number of services they offer and the customers they serve.

Although some of the distinctions among these types of banks have to taper as they begin to enlarge they vary of products and services they propose, there are still key distinctive behaviors. Commercial banks, which control this industry, provide a full variety of services for customers, enterprise, and governments. These banks come in a broad range of sizes, from large international banks to local and community banks.

International banks are involved in global lending and foreign cash trading, additionally to the more typical banking services. However, a lot of commercial banks have also extended to present online business, and some previously Internet-only banks are opting to release branches.

Savings banks and savings and loan associations occasionally called thrift institutions, are the second biggest group of depository institutions. They were first recognized as community-based firms to finance mortgages for people to purchase homes and still cater mostly to the savings and lending requirements of individuals.

Credit unions are another type of depository institution. Most credit unions are created by people with an intimate bond, for instance, those who work for the similar company or be a member of the same labor union or church. Members pond their savings and, when they require money; they may borrow from the credit union, frequently at a minor interest rate than that demanded by other financial institutions.

Federal Reserve banks are Government agencies that achieve numerous financial services for the Government. Their chief tasks are to control the banking industry and to aid implement our Nation’s economic policy so our economy can run more proficiently by directing the Nation’s money provide—the total amount of money in the country, including cash and bank deposits.

Interest on loans is the primary source of income for most banks, making their diverse lending departments critical to their achievement. The commercial loan department lends money to companies to start or enlarge a business or to buy inventory and capital tools. The customer loan department handles student loans, credit cards, and loans for home developments, debt consolidation, and automobile purchases. Finally, the mortgage loan department lends money to individuals and businesses to buy real estate.

The money to loan comes mainly from deposits in checking and reserving accounts, certificates of deposit, money market accounts, and other deposit accounts that clients and businesses arrangement with the bank. These deposits often make interest for the owner and accounts that offer checking supply an easy technique for creation payments safely without using cash.

Technology is having a primary impact on the banking industry. Such as, many standard bank services that once needed a teller, for example, making a withdrawal or deposit, now exist through ATMs that let people to the right of entry their accounts 24 hours a day. Also, direct deposit permits companies and governments to transfer payments electronically into different accounts.

Also, debit cards, which may also apply to ATM cards, immediately deduct money from an account when the card is swiped across a machine at a store’s cash register. Electronic banking by phone or computer permits consumers to pay invoices and shift money from one account to another. Through these channels, bank customers can too admission information such as account balances and statement history. Some banks have started offering online account aggregation, which makes accessible in one place detailed and up-to-date information on a client’s accounts held at diverse institutions.

Progressions in technology have also led to upgrading in the ways in which banks process information. Use of check imaging, which lets banks store photographed checks on the computer, is one such example that has been applied by some banks.

Other kinds of technology have profoundly impacted the lending side of banking. Such as, the availability and increasing use of credit scoring software let loans to be accepted in minutes, rather than days, making lending departments more competent.

Other essential changes are taking place in the industry as banks vary their services to become more competitive. A lot of banks at the present offer their clients financial planning and asset management services, as well as brokerage and insurance services, frequently throughout a subsidiary or third party.

Others are starting to offer investment banking services that assist companies and governments increase money during the issuance of stocks and bonds, also usually during a subsidiary. As banks reply to deregulation and as competition in this sector raises, the nature of the banking industry will continue to undertake considerable change.




The crucial feature of Islamic banking is that it is interest-free. Although it is frequently claimed that there is more to Islamic banking, for example, contributions towards a more fair distribution of income and wealth, and improved equity participation in the economy (Chapra l982), it nevertheless obtains its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.

Islam forbids Muslims from taking or giving interest (Riba) in spite of the reason for which such loans are made and despite the rates at which interest is exciting. To be certain, there have been efforts to differentiate between usury and interest and between loans for consumption and production. It has also been argued that Riba refers to theft accomplished by minor money-lenders and not to interest charged by contemporary banks and that no Riba is occupied when interest is compulsory on productive loans, but these arguments have not won approval. Apart from a few disagreeing opinions, he general agreement among Muslim scholars obviously is that there is no variation between Riba and interest. In what follows, these two terms are used interchangeably.

The forbidden of Riba is mentioned in four different revelations in the Qur’an. The first announcement highlights that interest removes wealth of God’s blessings. The second revelation condemns it, placing interest in combination with the illegal appropriation of property belonging to others. The third revelation enjoins Muslims to keep on clear of interest for the sake of their welfare. The fourth announcement set up a clear difference between interest and trade, influencing Muslims to take only the principal sum and to forgo even this amount if the borrower is not capable of repaying. It is further declared in the Qur’an that those who ignored the forbidden of interest are at war with God and His Prophet.

The forbidden of interest is furthermore cited in no uncertain terms in the Hadith (sayings of the Prophet). The Prophet warned not only those who take the interest but also those who offer interest and those who record or witness the operation, saying that they are all similar in guilt. It may be mentioned in passing that same prohibition are to be found in the pre-Qur’anic scriptures, although the ‘People of the Book,’ as the Qur’an refers to them, had chosen to rationalize them. It is remarkable that Islam has successfully warded off various subsequent rationalization efforts aimed at legitimizing the institution of interest.

Some scholars rely on economic reasons to explain the reasons on why interest is prohibited in Islam. Researchers argued that interest is a pre- determined cost of production, which avoid full employment (Khan 1968; Ahmad n.d.; Mannan l970). In the same tone, it has been challenged that international monetary crises are primarily due to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad l952; Su’ud n.d.). None of these studies, however, has succeeded in creating a causal link between interest, on the one hand, and employment and trade cycles, on the other.

Others, anxious to maintain the Islamic position on interest, have argued that interest is not very useful as a monetary policy instrument even in capitalist economies and have questioned the efficiency of the rate of interest as a determinant of saving and investment (Ariff l982). A general line running through all these negotiations is the exploitative character of the institution of interest, although some have pointed out that profit (which is legalized in Islam) can also be exploitative. One response to this is that one must differentiate between profit and profiteering, and Islam has prohibited the latter as well.

“It began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far will Sharia boards and western regulators let it spread?” (Josh Martin, Middle East, Jun2005 Issue 357, p50, 6p)

The Islamic prohibition on interest does not imply that capital is costless in an Islamic system. Islam realizes that money is a factor of production, however; it does not permit the element to pre-determined claim on the productive surplus in the form of interest. This has led to the question as to what will then substitute the interest rate mechanism in an Islamic framework. There have been propositions that profit sharing can be a viable alternative (Kahf l982a and l982b). In Islam, the owner of capital can officially share the profits made by the entrepreneur. What makes the profit- sharing allowable in Islam, while interest is not, is that in the case of the former it is only the profit-sharing percentage, not the rate of return itself that is predetermined.

It has been argued that profit-sharing can help assign resources efficiently, as the profit-sharing percentage can be prejudiced by market forces so that money will flow into those sectors that offer the highest proportion of profit-sharing to the investor, other things being equal (Naqvi, l982). However, conventional Islamic thinking on this subject naturally points to the need to replace interest with something else, although there is no clear agreement on what form the alternative to the interest rate mechanism should take.

The issue is not determined, and the search for an alternative persists, but it has not detracted from efforts to experiment with Islamic banking without interest. So according to these advantages and inducement, Islamic banking and finance are no longer designed to serve the needs of the Muslim society only.

The industry has started benchmarking its products to traditional suppliers regarding consumer convenience, benefits, pricing, transparency of procedures, and service standards. Consequently, Islamic banking and finance products have expanded popularity with non-Muslim societies due to their competitiveness and efficiency.

Recently Lloyds TSB Bank in the United Kingdom began offering its individual customers Shari’a-compliant current accounts and home finance products.


Islamic banking has the same principle as conventional banking excluding that it works by the rules of Syariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The fundamental principle of Islamic banking is the distribution of profit and loss and the forbidden of riba’ (interest). This section defines various concepts related to Islamic banking:

  • Wadiah (Safekeeping): In Wadiah, a bank regarded as worth keeping of the funds. An individual deposits his money in the bank with bank guarantees to the refund of the total money that was deposit when the person demands it. The depositor may be rewarded with ‘Hibah’ (gift) as a bank appreciation for him for using his funds to finance their activities (Ali, R. 2008).
  • Mudharabah (Profit Sharing): which is an agreement between a person or a bank who have capital and a businessperson, whereby the merchant can move funds for its business activity. The profits generated from the business will be shared between the two parties depending on the agreed between, however, losses are borne solely by the capital provider (Ali, R. 2008).
  • Musyarakah (Joint Venture): which is business partnerships or joint ventures where the profits made are shared on an agreed ratio while losses incurred, will be divided based on the participation equity rate.
  • Murabahah (Cost Plus): which mean selling of goods at a price includes a profit margin agreed by both parties. The purchase and sale price, other costs and the profit margin must be clearly stated at the time of the sale agreement (Ali, R. 2008).
  • Bai’ Bithaman Ajil (Deferred Payment Sale): which is selling of goods on a deferred payment basis at a price includes a profit margin agreed by both parties(Ali, R. 2008).
  • Wakalah (Agency), which mean that when a person appoints a representative to undertake transactions on his/their behalf (Ali, R. 2008).
  • Qardhul Hassan (Benevolent Loan), which is a loan that extended on a goodwill basis while the borrower person is only required to repay the amount borrowed. However, the borrower may, at his discretion, pay extra (without promising it) as a token of appreciation (Ali, R. 2008).
  • Bai’ al-Inah (Sell and Buy Back Agreement): The financier sells an asset to the customer on a deferred payment and then the investor for cash at a discount (Ali, R. 2008) immediately repurchases the asset.
  • Hibah (Gift): A gift or a given voluntarily in return for the loan given or benefit obtained (Ali, R. 2008).


The Holy Qur’an has prohibited gambling. Similarly, the hadith literature, in addition to banning gambling has also prohibited bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean, Risk).

The Hanafi school in Islam has defined gharar as “that whose consequences are hidden”, while the Shafi school describes it as “that whose nature and consequences are hidden”, similarly, the Hanbali school defines gharar as “that whose consequences are unknown” or “that which is undeliverable, whether it exists or not.” Finally, Ibn Hazm of the Zahiri School defines gharar as, “gharar is where the buyer does not know what he bought, or the seller does not know what he sold.”

Islamic scholar has clarified that gharar is the sale of the probable product whose existence or features are not particular, for the reason that dangerous nature that makes the trade same as gambling (Iqbal, Zamir & Abbas Mirakhor, 2007).

There are a number of hadith inhibt trading in gharar, often giving particular examples of gharhar dealings (e.g. selling “the birds in the sky or the fish in the water”, “the sperm and/or unfertilized eggs of camels”, “the catch of the diver”, “an unborn calf in its mother’s womb”, etc.). In their book, Iqbal, Zamir & Abbas Mirakhor (2007) explains that jurists have looked for many complete definitions of the term, and they started with the concept of yasir (minor risk); a financial trading with a small risk is considered to be allowable while trading in non-minor risk (bayu Al-ghasar) is deemed to be banned and prohibited.

Gharar was never fully determined upon by the Muslim jurists because of the difficulty in deciding what is and is not a “minor risk.” (Iqbal, Zamir & Abbas Mirakhor, 2007) Recently, derivatives tools (such as stock options) have only become familiar relatively. Some Islamic banks offer brokerage services for stock trading and perhaps even for derivatives trading (Iqbal, Zamir & Abbas Mirakhor, 2007).

Obstacles to Islamic Banking

Although the market has recognized the importance of Islamic Banking to the post-recession world, there are many obstacles to be overcome. The following are some of the impediments to the growth of Islamic Banking.

  • The biggest obstacle to the growth of Islamic banking is that various Shariah boards give contradictory rulings on the permissibility of different types of products developed within different Islamic banks. .This causes utter confusion and misunderstanding among individual customers as to the admissibility of various products.
  • The unfamiliarity with the Islamic Banking system and the lack of knowledge among ordinary consumers is a significant obstacle to be overcome by Islamic banking.
  • The lack of adequate liquidity instruments is a major hindrance in Islamic banking. For instance, Treasury bills and other marketable instruments.
  • The lack of prescribed global standards for Islamic Finance Law is disabling the banking community to create a genuinely global product line. The conventional banking system globally places tremendous importance on data protection and zero tolerance on money laundering. This is an example where a global standard can govern the smooth functioning of the conventional banking system.
  • Islamic financial and banking system cannot be set up nor grown without government involvement. This is clearly evident even in predominantly Muslim countries where successive governments have a hostile attitude towards the growth of Islamic banking.
  • The lack of awareness especially among Muslim people about the practicality and know-how of Islamic banking is a widespread issue that needs to be addressed.
  • As far as the conventional banking system is concerned there are some international supervisory standards and practices but in Islamic Banking no such standards or practices exists.
  • A major weakness in Islamic banking is that there is no lobby to persuade the regulators to make an environment suitable for the smooth functioning and development of Islamic banking.
  • The lack of a uniform regulatory and legal framework globally is a major drawback within Islamic banking.
  • The shortage of scholars and qualified managers locally and internationally shows a lack of adequate manpower to run the Islamic banking system.
  • The absence of an active Branch network even among countries that have adopted the Islamic banking system shows the lack of growth and encouragement for Islamic banking.




In this chapter, the study will present the methodology for the present study. The chapter will be divided into four sections; the first section presents the questions of the survey, the second section shows the data collection instruments, the third section will show the data collection procedures, and the final section presents data analysis.

The chapter presented the methodology adopted in this study. The purpose of this study is explanatory in nature while descriptive purposes were implemented to assist the primary research goal. The study uses quantitative research design. The collocation data instruments were developed from previous literature and studies. Before the questionnaire distribution, a pilot study was implemented to make sure of the validity and reliability of the questionnaire.

The sample of the survey is Islamic banks customers in Kuwait who visit the interval location. The study employed various statistical tools to provide empirical evidence that would answer research questions and either support or reject the research hypotheses.


Studies suggest that a study should have a clear plan to answer the research questions (Saunders et al., 2000). Similarly, Yin (2003) explained that a study design is a logic of collecting data to answer a research question accurately. This logic should thus support the researchers empirically to test the presented issues and hypotheses (Yin, 2003; Mouton, 2002).

Studies explain that selecting a research design is considered a crucial decision of a study (Creswell, 2003). Moreover, studies suggested that there are two types of research designs to select from when conducting a study: quantitative or qualitative design (Hair et al., 2006). Qualitative and Quantitative approaches are often used in social science research studies (Zikmund, 2003; Churchill et al., 2002). These two research designs are dissimilar in using, and the choice of a research design depends on the research problem (Hair et al., 2003).

The qualitative design suggests examining the variables in the natural context where they can be found. For the qualitative approach, the interaction between variables is essential. Qualitative research involves the non-numerical examination and interpretation of observation for the purpose of explaining the underlying phenomena (Zikmund, 2003). Qualitative design collects data through open-ended questions that provide direct quotations while the interview is the main method of the investigation (Yin, 2003).

The researcher is the primary instrument of the study while the data is collected through interviews (Yin, 2003; Zikmund, 2003). Studies suggest that qualitative design reinforces the process and meaning that are not deliberated regarding quantity, an amount of intensity, or frequency (Zikmund, 2003).

The quantitative research design stresses on examining the relationship between one thing (independent variable) and another (dependent variable) in the selected sample. Data gathered through survey provides statistical evidence that should answer the hypothesis or the questions of the study (Zikmund, 2003).

The quantitative approach is deemed as the most efficient way to address research hypothesis. A qualitative approach is used when the study considers a great closeness to the respondents, their usage, and perspectives (yin, 2003). The qualitative approach is more flexible and largely depends on the researcher’s explanations, reactions, and emotions (Yin, 2003).

The current study carries out many questions that need a more flexible research design. Due to the nature of this study and the hypotheses presented, the current study uses quantitative data. As most relevant instruments, the study uses questionnaires to collect numerical data.

Furthermore, the researcher believed it necessary to clarify that the current study is applied research, as the outcomes and recommendations may assist Islamic banks in Kuwait to understand customer perceptions toward various issues related to Islamic Banking.


To achieve its purpose, the present study seeks to provide empirically based answers the following research questions:

  • What is the degree of customer awareness toward Islamic accounting theory?
  • What are the current efforts of Islamic banks in improving customer awareness toward their practice and principles?
  • What are the most common Islamic services that the clients utilize when choosing Islamic banks?
  • What are the customer’s attitudes and perception of Islamic banks?
  • What are reasons behind dealing with Islamic banks?

The scales used in previous studies provided the basis for developing the research questionnaire. Due to availability issue of the earlier study in this field, the study will go through tests to check the validity and reliability of the survey and its procedures.

To make sure the used study is valid, the questioners will be sent to 20 potential respondents and then evaluate their responses. To find out whether the study is reliable or not we will measure the internal consistency which is the most popular methods of estimating reliability. The questioners will be arbitrarily split into two groups and then gauge the correlation between the two subsets of questioners.

For a better result, we will use statistic known as Cronbach’s alpha which is based on the mean (absolute value) inter-item correlation related to all possible variable pairs. Cronbach’s alpha provides a conservative estimate of reliability and commonly represents the lower bound to the reliability of a scale of items (Zikmund, 2003).


To answer the research above questions, a questionnaire in English was designed with a set of issues that were mainly developed from the literature especially the efforts of Kamal Naser (1999) in measuring the degree of customers toward Islamic services in Jordan.

The data collection instrument is a 3-page self-administered questionnaire, which consists of two sections (see Appendix A). Part 1, 2, 3 and four was put in a way to collect information on customers’ perception and attitude toward Islamic banks. Using a 5-point Likert-type scale, respondents rated their agreement from (1) ‘Strongly disagree’ to (5) ‘strongly agree’. Each of these dimensions was adopted from the different study that was presumed to be relevant to this study.

Customer’s perceptions were deemed to be very high if the mean (average) value was between 4 and 5. However, if the average value was between 1 and 2, they were deemed to have difficulty to move across future or next generations. A mean value that equals three was considered to have average (moderate).


This chapter discusses and summarizes the validity and reliability of the questionnaire.

Previous studies suggest that it is important to check and measure the validity and the reliability of the questionnaire. Zikmund (2003) indicates that validity emphasizes on whether the findings of the study are really about what they appear to be all about.

He stressed that validity is a significant element of any research project because it is concerned with whether the findings are really about what we intend to measure. While, on the other hand, Reliability defined as; “the degree of which a study generates the same result on different occasions and by different researchers” (Saunders et al., 2000).

Questionnaires (which have to be unstructured or semi-structured in qualitative approaches) are best not viewed as ‘instruments’ in the sense of structured quantitative surveys – but more as ‘guidelines’. The more formal a qualitative questionnaire, the less likely a ‘natural’ free-flowing narrative event will occur. The term ‘validity’ also is more a term to apply to quantitative than qualitative approaches. ‘Trustworthiness’ is a more appropriate context to use.

To ‘measure’ the trustworthiness of a qualitative questionnaire schedule – the best approach is a team expert review of the questions themselves – for reducing ambiguity, leading questions, emotive questions, stressful questions. Validity is a quantitative concept, and I try to avoid using ideas that are about one type of research as standards for assessing a different kind of research.

Still, analogies can be helpful, as long as they aren’t taken too far. In particular, one of the fundamental validity questions with quantitative questionnaires is whether you measure what you hope to measure. Or, put another way, are the survey respondents thinking about the same things as you are when they answer your questions.

The analogy for a qualitative interview would be a goal of hearing about what you want to learn about. I like to summarize the goal in qualitative interviews as “listening and learning,” so you need questions that will guide your research participants to talk about things that will help you understand their lives and experiences.

Finally, regarding standards for qualitative research, validity would be measured via ultimate criterion of “credibility.” You want to do your studies in a way that others (e.g., your readers and reviewers) will find it to be both believable and meaningful. So, what kinds of research procedures will help you meet those goals? That idea also reinforces what Saunders et al., 2000 suggested — that hearing how others react to your draft set of questions will help you interpret whether or not these issues will serve your purposes.

The questionnaire items of this study were designed and implemented in prior researches and surveys. However, to eliminate the possibility of getting wrong answers, a study should give more intention to validity issues (Saunders and Thornhill, 2003).


It is important that a study checks the validity and reliability of the data collection instruments before the distribution process. Thus, a pilot test will be conducted by distributing the questionnaires to Islamic banks customers. A total of 15 copies expected to distribute as a model test.

To test the validity and reliability, SPSS (Statistical Package for Social Science) version 19 and Cronbach’s alpha test will be employed. Cronbach’s Alpha is a standard statistical measure used for estimating the reliability of indicators. Methodologist suggested that the closer Cronbach’s alpha is to 1.0, the more reliable is the scale (Zikmund, 2003).

Accordingly, Cronbach’s Alpha computed, and the results compared achieved the recommended cut-off point (0.7), which indicated that scales were reliable (Zikmund, 2003).


Using random and convenience approaches, the study will distribute around 150 questionnaires among Islamic banks customers who come to the distribution location at bank complex in Kuwait City, where all Islamic banks located there. The study will distribute the survey by using both email and paper approaches.

Using his personal relationships and connections, the study attempted to enhance to respondents’ rate. The study assured participants that their personal information and responses would be used only for research purposes and would be kept strictly confidential.



To analyze the collected data, the study incorporates Statistical Package For Social Science (SPSS) version 19 to analyze the results of the questionnaire. First, all the negatively worded statements were reversed coded before any statistical analysis was done. The study implements various statistical tools such as:

  • Descriptive analysis (Logarithm Mean, Frequency, and Standard Deviation) was conducted. Descriptive statistical tools employed to describe the participant’s personal characteristics and their general profiles.
  • Chronbach’s alpha test. Zikmud (2003) suggests that Chronbach’s alpha value can be used to describe the reliability of factors extracted from multi-point formatted scales. He suggests that Alpha value of 0.70 is deemed a desirable threshold while a value of 0.60 is acceptable as the minimum cut-off point.
  • To test the relationship between the variables of the study, the Personal Correlation test will be implemented.




Islamic banking is in a rapidly growing stage as a feasible alternative to conventional banking. Although innovative solutions for some issues are still lacking, it would be unfair to compare its progress to that of established traditional finance. There will be no justification in looking for disadvantages in it in contrast to the problems of conventional banking today, especially in the light of the current crisis in South East Asia, where countries had to call out for a revamping of the traditional financial system. It is important to keep the spirit and flame growing in the progress of Islamic banking.

In fact, developments in Islamic finance are of great interest to us worldwide. As with conventional financing, Islamic banking benefits from their transparency, good governance and an internationally accepted regulatory framework that governed this important form of investment especially when the decision makers who govern the Islamic banking process manage to find the way for more competitiveness under the Shari’a umbrella.

Therefore, it is important for the Islamic banking industry to keep working with regulators in the West to make Shari’a-compliant products more available in the West, but much of the demand for these products will continue to come from the Muslim world. The Islamic banking industry can evolve into being more sophisticated and modern only if promoters of Shari’a technological organizations and professional advisers work together to meet the regulatory, legal and judicial challenges resulting from operating in jurisdictions which implement differing legal systems and compliance policies. Also, to overcome the main obstacles that slow the expansion of Islamic banking worldwide and to meet the global demand for advanced and sophisticated Islamic products, the industry and its advisers will need to continue to work in close collaboration with many different regulators and developers to create legal structures within which to operate in a secure Islamic banking manner.

To operate and grow in the global market efficiently, the following suggestions are desirable.

  • The creation of a global association of Shariah boards is essential to equip various Shariah scholars with the knowledge and skills to develop new Islamic banking products and to ensure continued growth in the Islamic banking industry.
  • It is vital that adequate promotion of the Islamic banking sector products takes place on a regular basis to generate interest and loyalty from Muslims and non-Muslims. The development of various products can be held through advertisement, awareness, road shows, speeches, programs and various print and visual media for targeting potential customer base. This will help to spark awareness on Islamic banking among Non-Muslims as well.
  • Though it is hard and not practicable shortly, the banking system in various Muslim countries should transfer to the Islamic Banking system. Similar to the recent unrest in the Middle East, if one Muslim country adopts the Islamic banking industry then other countries can follow suit and reap the rewards of the Islamic banking sector.
  • The proponents of Islamic banking must educate and negotiate with government regulators to explain some of the complexity regarding the operational viability of Islamic financial instruments in an economy and create a favorable environment for the smooth functioning of the Islamic financial system.
  • It is essential that the latest technological developments are incorporated into Islamic banking so that Islamic banking can also provide the convenience offered by the conventional banking system. Example the development of telephone and internet banking has seen a dramatic shift in the way people conduct their business needs in the traditional banking system. Thus, Islamic banking must also incorporate these ideas into their product portfolio to attract additional interest in the system and to offer convenience to the various users.
  • Sharing the knowledge on Islamic banking system within the countries that is working to develop the system.
  • The research and development effort that develops new services that are compliant with Islamic teachings needs to be improved. Currently, the research and development effort in this area is inadequate and not in a position to develop innovative products necessary for the expansion of the Islamic banking industry.

For the growth of Islamic banking shortly it is important that the existing Islamic banks from mergers with each other and form strategic alliances with other major banks like HSBC to compete on the same level similar to a bank in the conventional banking system.







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