Roszaini Haniffa and
play an important role in economic regeneration and social justice (Siddiqi, 1995). They have been entrusted with the safekeeping of depositors’ savings and shareholders’ capital and putting these funds to good use. Hence, they are not only financially accountable but also morally accountable for their business behaviour. As such, we expect IBs to communicate clearly the following in their annual reports:
commitments to operate within Shari’ah prin- ciples/ideals;
commitments to provide returns within Sha- ri’ah principles/ideals;
commitments to engage in investment activities that comply with Shari’ah principles;
commitments to engage in financing activities that comply with Shari’ah principles;
commitments to fulfil contractual relationships with various stakeholders via contract (uqud) statements’;
current and future directions in serving the needs of Muslim communities;
statements of appreciation to stakeholders.
Current and prospective shareholders and fund depositors would ideally like to assess and judge the credentials of those who have been entrusted with their funds and who have full authority in making economic decisions on their behalf in enforcing the rules of God. In other words, those who manage and govern IBs are expected to be believers imbued with piety and righteousness, and to have knowledge and competence in relevant fields associated with banking as well as knowledge of Shari’ah, especially those areas related to business transactions (fiqh al-mu’amalat). Hence, we expect IBs to communi- cate the following aspects of management to their stakeholders:
names, positions and pictures of board mem- bers and top management;
profile of board members and top manage- ment as indicators of their knowledge of and competence in banking and Shari’ah;
aspects of good corporate governance: bal- anced board, no role duality, having an audit committee, limited multiple directorships and shareholdings.
Provision of interest-free products and services Unlike the foundation of conventional banking, which is interest based (riba), IBs must avoid any form of such dealings, as Islam strongly prohibits interest, as found in four different revelations in the Qur’an.5 Consequently, the various financial instru- ments developed by IBs have been based on two principles: the profit-and-loss sharing principle and the mark-up principle (Aggarwal and Yousef, 2000). Financing instruments based on the former principle include mudharabah (venture capital) and musharakah (partnership arrangement), while instruments based on the latter include murabahah (resale with stated profit), bay’al-salam (forward sale contract), ijarah and ijarah wa iqtina (operating and financial lease). To remain competitive, IBs have been innovative in their offering of products that do not violate Shari’ah but to a certain extent, they are still perceived as
Islamising’ products and instruments of the capital-
istic system rather than applying their own minds in developing products based on Islamic concepts. With fierce competition, more sophisticated markets and demand for more transparency by stakeholders, one of the ways in which IBs can deal with those matters is to communicate effectively regarding the following:
details of investment activities;
if new products have been introduced, whether they have been approved by the SSB (ex-ante) as well as an explanation of the basis of the Shari’ah concept legitimising the new product.
Islamically acceptable deals Islamic banking is much more than offering interest- free products. IBs should only finance projects or support practices and products that are permissible (halal) and avoid financing or investing in activities considered abhorrent in Islam, such as gambling, alcohol, drugs, etc., or in short, those that bring harm to society and the environment. IBs must also avoid speculative transactions or excessive risks (gharar), such as investments in futures markets, since the consequence is not known. In Islam, parties to the contract should have perfect knowledge of the counter values intended to be exchanged and cannot predetermine a guaranteed profit. The rationale