FYI "Even if I (me and you) am/are not from the finance related professional field, as a Muslim, I am interested in the services offered at the Islamic Banks, how far we have come in this development and what potentials remain to be explored an how me , a common person/layman, can benefit/use it for a halaal maintenance." From: [log in to unmask] ISLAMIC ECONOMICS BULLETIN Indian Association of Islamic Economics Vol.9, No.4, July-August 1999 PERFORMANCE AUDITING FOR ISLAMIC BANKS By Muhammad Akram Khan There are over one hundred and fifty Islamic institutions handling billions of dollars and employing thousands of persons and providing financial services to Muslims and non-Muslims all over the world. The pace of development of these institutions is commendable. These institutions are busy in innovating new methods of business and experimenting with shari’ah -supported financial instruments. Despite that, there is a valid criticism on their current approach of concentrating mainly on those modes of finance which bring them a relatively risk-free fixed return such as murabahah and ijara. The original thinking that Islamic banking should be based on the concept of profit-loss sharing or mudarabah has attracted a very small percentage of the business of the Islamic banks The Islamic banks feel hesitant to adopt profit loss sharing as it involves monitoring of the client’s performance very closely which is both expensive and cumbersome. They feel that the present state of accounting integrity and moral training of their clients leaves much to be desired. In these circumstances, they would be invoking a very high risk. As a result, the Islamic banks have devoted most of their attention to those modes of finance, which bring them an assured return. Another criticism on Islamic banks is that they are very much like conventional banks so far as their role in the uplift of the society is concerned. The original rationale of the Islamic banks entailed a very active role for these institutions in promoting equitable distribution of wealth, industrialization, self-reliance and moral values in financial matters, But they have not paid much attention to these highest objective. Instead they become indifferent to the end-use of funds, once they have provided the finance and remain concerned with their mark- up or return. This makes them very much similar to the conventional banks. The Islamic banks, in their turn contend that they do not have enough means to play the proposed higher role. In the absence of sufficient data and analytical tools they are forced to depend on the conventional methods of control and management. The Islamic banks can adopt performance auditing in two areas: 1. They can view their own performance against a broader criteria which covers physical, financial, social and shari’ah considerations. This will help them improve their efficiency and effectiveness and makes them more competitive in the international market. 2. They can use this technique to review the performance or their client with relation to the planned outputs. The Islamic banks need not do this on their own. They can agree with their clients for arranging performance audits at the end of a fiscal period by practicing firms of auditors. Part of the cost of performance audits can also be borne by the investors. The report of auditors can focus on the fact that the client used the finance of the bank with due regard for economy, efficiency and effectiveness. Such an assurance from and independent auditors will be more satisfying to the savers whose funds the banks supplied to the entrepreneurs as well as to the banks themselves whose concern remains supreme about the proper utilization of funds. Performance audit of such business concerns who take money on the basis of profit-loss sharing or mudarabah will disclose their diseconomies and inefficiencies. At this stage, it will be possible for the banks to identify cases where the negligence was willful. In such cases, part of the losses can be transferred to such entrepreneurs. An arrangement of this sort will enable the Islamic banks to adopt musharakah and mudarabah on an increasing scale. This will also scale down criticism on the Islamic banks regarding the choice of the modes of financing. NEW BOOKS & ARTICLES BOOKS 1. Gran, P., Islamic Roots of Capitalism - Egypt 1760 - 1840, Syracuse NY, USA : Syracuse University Press 1997. 2. Hayes,. S.L. (III) and Vogel F.E., Islamic Law and Finance, Religion Risk and Return, London: Kluwer Law International, 1998. 3. Sato Trugitaka, State and Rural Society in Medieval Islam: Sultans, Muqta’s and Fallahum, Leiden Netherlands: E.J. Brill, 1997. 4. Usmani, Muhammad Taqi, An Introduction to Islamic Finance, Karachi, Idaratul Ma’arif, 1998.. 5. Vadillo, Ummar Ibrahim, The Return of the Gold Dinar, : A Study of Money in Islamic Law, Cape Town , South Africa, Madina Press, 1996. 6 Zakat - Islamic System of Social Justice, Hyderbad: India, MEDNET: Mustafa Educational Network Trust, 1997. ARTICLES 1. Dadkhah, Kamran M., “Ahmad Kasravi on Economics”, Middle Eastern Studies (London), Vol. 34 No. 2. 1998, pp. 37 - 59. 2. El-Gamal, Mahmoud, A., “The Survival of Islamic Banking : A Micro Evolutionary Perspective”, Islamic Economic Studies (Jeddah) , Vol. 5, Nos 1 & 2, November 1997 & April 1998, pp. 1 - 19. 3. Khan , Muhammad Akram, “Performance Auditing for Islamic banks” Islamic Economic Studies (Jeddah), vol. 5, Nos 1 & 2 November 1997 7 April 1998, pp. 23 - 36. 4. Obaidullah, Mohammed, “Capital Adequacy Norms for Islamic Banks”, Islamic Economic Studies (Jeddah), , vol, 5, Nos 1 7 2 November 1997 & April 1998, pp. 23 - 36 5. Quis Soumay Permlla, “Towards an Islamic Ecosomology, “ Islamica (London). vol , No. 4 1998 pp. 19-32. 6. Qadri, S.M., “The Quran and Interest in the Islamic Society”, in Mohammed Taheer (ed ) Studies in Quran. New Delhi, India: Anmol Publications 1997. 7. Tawfiq, M. Amin, “The Awqaf in Modern Egypt,” The Islamic Quarterly (London), vol XLII, No. 4 1998. ---------------------------------------------------------------------------- To unsubscribe/subscribe or view archives of postings, go to the Gambia-L Web interface at: http://maelstrom.stjohns.edu/archives/gambia-l.html ----------------------------------------------------------------------------