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Accountability and Islam

Mervyn K Lewis, Professor of Banking and Finance, School of Commerce,

Division of Business, Way Lee Building, University of South Australia – City
West Campus, GPO Box 2471, Adelaide, SA, 5001, Phone +61 8 8302 0536, Fax
+61 8 8302 0512, Email: [email protected]

Abstract

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Accounting in the broad sense is central to Islam, since accountability to God and the

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community for all activities is paramount to a Muslim’s faith. Based on shari’a – the
divine law of Islam – a comprehensive ethic can be formulated specifying how
commerce should be conducted, how business should be organized and governed, and
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how financial reporting should be made. Such obligations pose distinctive challenges
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to the implementation of systems of accountability under Islam, and these issues,
along with the inevitable gap between the ideal and the reality, are explored in this
paper.
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Fourth International Conference on Accounting and Finance in Transition

Adelaide, April 10-12, 2006

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THE ESSENCE OF ACCOUNTABILITY

One of the primary objectives of an accounting system is to aid accountability. Those

in charge of economic resources must give account of their stewardship, irrespective
of whether the transactions and resources in question are those of a government
organization or a private sector entity. This stewardship function has been a regular
feature of organized human activity from the earliest times (Brown, 1905; Brown,
1962; Stone, 1969). Originally specified at the level of the individual property owner,
nowadays accountability would be described in terms of an accounting by
management (either public or private) to assist in the efficient allocation of resources
by providing information, either for ex post monitoring of performance or for ex ante
decision-making by those responsible for making investment decisions (Whittington,
1992).

Yet accountability also has broader economic and social purposes and objectives and
no more so than under Islam in which economics, politics, religious and social affairs
– especially accounting – fall under the jurisdiction of the divine law of Islam – the
shari’a. The literal meaning of the Arabic word shari'a is 'the way to the source of

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life' and, in a technical sense, it is now used to refer to a legal system in keeping with
the code of behaviour called for by the Holy Qur'an and the hadith (the authentic
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tradition). Calder (2002: 1981) defines Islamic law as ‘a hermeneutic discipline
which explores and interprets revelation through tradition’. The Holy Qur'an (the
revelation) and sunna (the Prophet’s example as recorded in ahadith or the traditions),
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define clearly what is true, fair and just, what are society's preferences and priorities,
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what are the corporate roles and responsibilities, and also, in some aspects, spell out
specific accounting standards for accounting practices.

In the Holy Qur'an, for example, the word hesab is repeated more than eight times in
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different verses (Askary and Clarke, 1997). Hesab or 'account' is the root of
accounting, and the references in the Holy Qur'an are to 'account' in its generic sense,
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relating to one's obligation to 'account' to God on all matters pertaining to human

endeavour for which every Muslim is 'accountable'. All resources made available to
individuals are made so in the form of a trust. Individuals are trustees for what they
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have been given by God in the form of goods, property and less tangible 'assets'. The
extent to which individuals must use what is being entrusted to them is specified in
the shari'a, and the success of individuals in the hereafter depends upon their
performance in this world. In this sense, every Muslim has an 'account' with Allah, in
which is 'recorded' all good and all bad actions, an account which will continue until
death, for Allah shows all people their accounts on their judgement day (S4:62). This
adds an extra dimension to the valuation of things and deeds compared to those
already embodied in conventional financial statements.

Thus the basic similarity between hesab in Islam and 'accounting' lies in the
responsibility of every Muslim to carry out duties as described in the Holy Qur'an.
Similarly, in a business enterprise, both management and the providers of capital are
accountable for their actions both within and outside their firm. Accountability in this
context means accountability to the community (umma) or society at large. Muslims
cannot, in good faith, compartmentalise their behaviour into religious and secular
dimensions, and their actions are always bound by the shari'a. Islamic law thus

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embodies an encompassing set of duties and practices including worship, prayer,

manners and morals, along with commercial transactions and business practices.

BUSINESS PRINCIPLES

Muslim ought to conduct their business activities in accordance with the requirement
of their religion to be fair, honest and just toward others. Business activity, in
consequence, must be broadly inspired and guided by the concepts of tawhid (oneness
and unity of God), ihsan (goodness), and tawakkal (trust in God) while regulated,
within those boundaries, by a legal framework committed to values such as justice
and the ban on riba (interest) and the prohibition of ihtikaar (hoarding) and other
malpractices. In fact, a large number of Islamic concepts and values define the extent
and nature of business activity (Rahman, 1994). There are many positive values such
as iqtisad (moderation), adl (justice), ihsan (kindness par excellence), amanah
(honesty), infaq (spending to meet social obligations), sabr (patience) and istislah
(public interest). Similarly there are a number of values which are negative, and thus
to be avoided: zulm (tyranny), bukhl (miserliness), hirs (greed), iktinaz (hoarding of
wealth) and israf (extravagance). Economic activity within the positive parameters is

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halal (allowed and praiseworthy) and within the negative parameters haram
(prohibited and blameworthy) which has to be moderated. Production and distribution
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which are regulated by the halal-haram code must adhere to the notion of adl
(justice). Collectively, these values and concepts, along with the main injunctions of
the Holy Qur’an, provide a framework for a just business and commercial system.
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Trade and commerce
Just as Islam regulates and influences all other spheres of life, so it also governs the
conduct of business and commerce. Many verses in the Holy Qur'an encourage trade
and commerce, and the attitude of Islam is that there should be no impediment to
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honest and legitimate trade and business, so that people earn a living, support their
families and give charity to those less fortunate. Nevertheless, Muslims should not
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allow their business activities to dominate so that making money becomes a first
priority and they neglect religious duties; in particular, all trading must cease during
the time of the Friday congregational prayer. Nor must the future be overlooked :
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upon death one is expected to leave behind a family and descendants who perpetuate
the law of God, a permanent contribution which will benefit the community, and a
source of income for the poor and the needy and/or to generate job opportunities for
future generations.

Work and production

Islam requires every individual to work and to produce. Prophet Muhammad teaches:
'Never be lazy and helpless' (Rahman, 1994:9). There is no good in an individual who
does not want to produce and earn money. To Muslims, the unproductive hand is an
unclean impure hand. The route to economic achievement is hard work and
assumption of risk. It is not through inheritance. That is why Islamic law (by a
detailed description in the Holy Qur'an) defines exactly how the estate is distributed
after death. An individual's power of testamentary disposition is basically limited to
one-third of the net estate (ie. the assets remaining after the payment of funeral
expenses and debts) and two thirds of the estate passes to the legal heirs of the
deceased under the compulsory rules of inheritance, providing for every member of

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the family by allotting fixed shares not only to wives and children, but also to father
and mothers.

Thus what Abbas Ali (2005, p52) describes as the ‘Islamic Work Ethic’, implies that
work is a virtue in light of a person’s needs, and is a necessity for establishing
equilibrium in one’s individual and social life (Nasr, 1984). The centrality of work
and deed in Islamic thinking is succinctly addressed in the Holy Qur’an (6:132): ‘To
all are degrees (or ranks) according to their deeds.’ In this context, useful work is that
which benefits others and society. Subsequently, those who work hard are
acknowledged and are rewarded.

Consumption
Pursuing economic activities, however, must be based on moral and legitimate
foundations. Islam preaches moderation and a balanced pattern of consumption.
Luxury and over-consumption is condemned, as is poverty. Every being has a
minimum requirement to be able to live in dignity. The system is balanced out
through the act of zakat (almsgiving as an essential part of the system and faith). If
this source is not enough, the Islamic government would apply a temporary tax on the

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rich and affluent to balance the budget as a religious duty (fard kefaya).

Social responsibilities
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Individuals are expected to feel socially responsible for others in the community. One
cannot enjoy life while others cannot. In general, the aim of the Islamic economic
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system is to allow people to earn their living in a fair and profitable way without
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exploitation of others, so that the whole society may benefit. Islam also emphasises
the welfare of the community over individual rights. Where Muslims live under a
non-Islamic Government, zakat must still be collected from the Muslims and spent for
the good of society.
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Business ethics
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Under Islam, the paramount rule in business is honesty and fair dealing (Hussain,
1999). A Muslim business person should therefore be a person of high moral values
who would not set out to deceive or exploit others. Monopolies and price fixing are
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prohibited. Generally the market should be free and not subject to manipulation. This
is so that people will not be exploited by the more powerful in business transactions.
Those engaging in trade and commerce should behave equitably. Vendors of goods
should not hide any defects in them, nor lie about the nor lie about the weight or
quality of the goods. Dealing in stolen goods is prohibited. Hoarding is forbidden
when the intention is to force up the price in times of scarcity and so profit at the
expense of others.

Products should be useful and not harmful as defined in the Holy Qur'an and Islamic
law. Trading and investment can only be undertaken in activities which are not
prohibited in Islam (prohibitions include gambling, alcohol, pornography and
anything that is harmful to society). Agriculture and employment is encouraged as is
dignity of labour, and the prompt payment of a fair wage.

Property
While God is the absolute and eternal owner of everything on earth and in the
heavens, man has been appointed His vice-regent on earth and entrusted with the

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stewardship of God's possessions. Ownership of property is therefore a trust

(amanah) to be enjoyed conditionally so long as man follows the shari'a and remains
worthy of the trust. People have the right to use natural resources for the benefit of
mankind. But earth is a trust from God and should be looked after by those who have
charge of it and who will ultimately be accountable to God for their actions.

Rights to property in Islamic law may be divided into three categories - public
property, state property and private property (Normani and Rahnema, 1995). Islam
respects private property and the right of ownership is protected. Property may be
acquired through inheritance, gift, purchase or by taking up common property and/or
things on it.

Transactions and contracts

The general principle of the Islamic law of contract is contained in the Quranic verse:
'O you who believe! Fulfil all obligations' (S5.1). The definition of contract (al-'aqd)
is similar to that in the common law, but is wider in that it includes dispositions which
are gratuitous as well as endowments and trusts. A contract consists of an agreement
made between two or more people. Islamic law provides freedom of contract, so long

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as the terms do not conflict with the shari'a . In particular, it permits any arrangement
based on the consent of the parties involved, so long as the shares of each are

resources.
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contingent upon uncertain gain and are a function of productive transformation of

The basic principles of the law are laid down in the four root transactions of (1) sales
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(bay), transfer of the ownership or corpus of property for a consideration; (2) hire
(ijâra), transfer of the usufruct (right to use) of property for a consideration; (3) gift
(hiba), gratuitous transfer of the corpus of property, and (4) loan (ariyah), gratuitous
transfer of the usufruct of property. These basic principles are then applied to the
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various specific transactions of, for example, pledge, deposit, guarantee, agency,
assignment, land tenancy, waqf foundations (religious or charitable bodies), and
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partnerships, one of the main forms of business organisation, and the basis of much
Islamic financing (Lewis and Algaoud, 2001; Hassan and Lewis, 2006). The other
main type of enterprise is, of course, the modern corporation, and Islamic principles
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provide a clear conception as to how companies should be organized and governed.

BUSINESS ORGANIZATION

When Muslim countries emerged from World War II, the economic organization and
business and commercial practices in operation were overwhelmingly those inherited
from the Western colonial powers. Islamic economics developed as a social
discipline in response to this environment, with the aim of establishing or restoring
Islamic authority in areas where Muslims increasingly were falling under the sway of
Western ideas (Maudadi, 1975 [1947]; Ahmad, 1980; Nasr, 1994; Kuran, 1995).
How firms are organized, directed and controlled, in short what is now called
corporate governance, is one aspect of this broader agenda (Lewis, 2005). Yet,
despite considerable interest in the topic of corporate governance recently by
organizations such as the Islamic Development Bank (Chapra and Ahmed, 2002) and
AAOIFI (2003), there is not even as yet a unified expression in Arabic to represent
the meaning of corporate governance (Sourial, 2004).

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By contrast, the English terminology has clear origins. The word ‘governance’ comes
from the Greek word kybernan, meaning to ‘steer’, ‘guide’ or ‘govern’, which then
passed etymologically from the Greek to the Latin gubernare and the Old French
governer. At its broadest, governance – the act of governing – refers to the
relationship between the governors and the governed, such as that between the
government and the people, and has at its basis the decision-making powers ceded by
individuals to those in authority so that the common interests of society can be served.

This definition brings out the point that governance in all manifestations is essentially
about decision- making: by whom, for whom, and with what resources. These three
dimensions of decision-making apply irrespective of whether we are examining the
governing of a nation or, as in this case, the governance of an organization such as a
business enterprise.

While there may not be in Islam official juristic recognition of the concept of
corporate governance as such, an examination of the principal legal sources of the
Holy Qur’an and sunna reveals clear guidelines about decision-making processes in
an Islamic context. In particular, Islamic law and its distinctive Islamic institutions

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imply very different implications for decision-making than conventional approaches.
Islamic corporate governance necessarily has a wide commission, with obligations
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extending beyond shareholders, financiers and management to suppliers, customers,
competitors and employees, embracing the spiritual as well as the temporal needs of
the Islamic community. Specifically, the concepts of shura, hisba and the shari’a
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supervisory process and religious audit establish the basic building blocks of a system
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of Islamic corporate governance and business organization. This framework becomes
apparent when we consider the three dimensions of decision-making: by whom, for
whom, and ‘with what’ resources and thus ‘to whom’ accountability is due for the use
of resources.
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By whom. The Holy Qur’an is very clear on the issue of ‘by whom’. Consider the
following verses:
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‘And consult them on affairs (of moment). Then, when thou has taken a decision, put
thy trust in Allah.’(Al-Imran 3:159)

‘Those who respond to their Lord, and establish regular prayer; who (conduct) their
affairs by mutual consultation; Who spend out of what We bestow on them for
sustenance.’ (Ash-Shura 42:38)

In fact, according to The Presidency of Islamic researches in the commentary on Sura

Ash-Shura, ‘consultation’ is the key word of the Sura, and suggests the ideal way in
which a good man should conduct his affairs. The commentary goes on to note that
this principle was applied to its fullest extent by the Prophet Muhammad in his public
and private life, and was fully acted upon by the early rulers of Islamic society. The
Shura or Consultative Council had its origins in pre-Islamic times where it comprised
a council of tribal elders. Originally, it constituted an informal forum of deliberation
where decisions were arrived at when discussing new problems. During these
deliberations, the problems in question were thrown open for general discussion.
Members of the council were invited to express their considered personal opinions,

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and these opinions were thrashed out until a consensus of opinions was reached.
Islam introduced improvements in accordance with the moral principles enunciated by
the Holy Qur’an (Stork, 1999).

Thus the basic message of Sura Ash-Shura, to ‘live true in mutual consultation and
forbearance, and rely on Allah’, contains the essence of governance from an Islamic
perspective. Those who wish to serve Allah must ensure that their conduct in life is
open and determined by mutual consultation between those entitled to voice, for
example, in affairs of business, as between partners or parties interested, and in state
affairs as between rulers and ruled. Since the Holy Qur’an clearly mandates that any
decision involving more than one party requires access and consultation on the basis
of principles of shura, Islam encourages the participants to work together freely and
frankly when arriving at decisions (Shaikh, 1988). Institution of a shuratic decision-
making process explains how decision-making in business and other activities can
meet Islamic moral values. Decision-making is an important trust from God, and
Islam demands from those holding this trust to engender truthfulness, justice,
consultation and a spirit of consensus-seeking among participants during group
decision-making. On the basis of shura, leaders must encourage others to participate

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in decision-making. An employee would be expected to contribute his or her
knowledge to the formulation and implementation of the organizational vision, and
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consultative procedures should be applied to all affected ie shareholders, suppliers,
customers, workers and the community (Baydoun, Mamman and Mohmaud, 1999).
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For whom. ‘For whom’ is straightforward in Islam because the starting points are
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from Allah. The ultimate ends of business and economics, indeed any human activity,
are to Allah, and the means employed should not deviate in any way from the holy
law of Islam, the shari’a. A code of approved social behaviour was developed by the
Prophet Muhammad, and his companions were later appointed, when the Islamic
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community expanded in the early days of the Islamic state, to institutionalise,

perpetuate and preserve the codes and ensure compliance with the principles of
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shari’a. Under the early Abbasids (750 CE onwards), the institution of hisba was
established to ensure compliance with the requirements of shari’a. An office of local
administration, the office of the ‘inspector of the market’, continued into Islam from
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Byzantine times (Schacht, 1964). Its holder was given the title muhtasib (and his
office called hisba), and the functions were Islamicised by entrusting its holder with
discharging the collective obligation in the Holy Qur’an to ‘encourage good and
discourage evil’, making the muhtasib responsible for enforcing Islamic behaviour in
terms of community affairs and behaviour in the market, such as accuracy and
honesty in business dealings. Duties traditionally carried out by the muhtasib include:
correct weights and measures, fair trading rules, checking business frauds, auditing
illegal contracts, keeping the market free, and preventing hoarding of necessities
(Abdul Rahman, 1998).

Hisba, like the institution of shura, is a long-standing tradition of Islamic society that
can be seen to represent a core element of Islamic corporate governance. The role of
the institution became significant during the expansion of the Islamic state as the
number of business and commercial activities expanded, exemplifying the nature and
extent of the adoption of an ideal system of sacred law in early Islam. To what extent
the office could be revived in its traditional form is problematical. Nevertheless, the
institution of hisba survives in terms of the right of every Muslim, irrespective of the

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presence or absence of an officially appointed muhtasib, to come forth as a ‘private

prosecutor’ or enforcer of Islamic standards of governance (Schacht, 1964:52).

With what and to whom. The third plank of the Islamic corporate governance system
is the process of religious supervision to guarantee that all of the enterprise’s
operations, contracts and procedures conform with the Islamic moral code. To a
Muslim, all resources are God-given, and ownership of wealth belongs to God.
Individuals are only trustees and it is to God that accountability is ultimately due. The
purpose of the religious audit is to assure both insiders and outsiders that God’s law
are being followed by the firm in its business dealings. The processes involved in
religious supervision are illustrated most clearly in the case of Islamic financial
institutions (Algaoud and Lewis, 1999), but the governance principles operate across
the full range of business activities. The functions of the religious auditors, as spelt
out in the organization’s articles of association, are threefold. First, the religious
supervisors give advice to the board and the management about the religious
acceptability of the firm’s contractual arrangements and new product development.
Second, an independent report is provided to inform shareholders as to the
compliance of management with Islamic principles and to the extent that the business

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is run Islamically. Third, there is an audit involved with the special almsgiving levy,
zakat, to establish that the zakat fund is being correctly assessed and properly
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administered and distributed. In these various ways, the religious supervisory process
will testify that the articles of association, stipulating that the organization run its
business in accordance with Islamic law, are in fact met.
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FINANCIAL REPORTING DUTIES

Shuratic decision-making procedures provide a vehicle for ensuring that corporate

activities and strategies are fully discussed and that a consensus-seeking consultative
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process is applied within the firm and across shareholders, employees, suppliers,
customers and other interested parties. The institution of hisba offers a framework of
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social ethics, relevant to monitor the corporation, with the objective to obligate the
correct ethical behaviour in the wider social context. It also empowers individual
Muslims to act as ‘private prosecutors’ in the cause of better governance by giving
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them a platform for social action. The third pillar of the system is the discipline
provided by Islamic religious auditing, which is a device to solicit juristic advice,
monitor compliance with Islamic precepts and collect zakat. This extra layer of
auditing and accountability for resource use ensures that the enterprise operates as an
Islamic concern.

Yet no system of governance, however well conceived, will influence organisational

behaviour unless it is embedded in an appropriate ethical or moral climate and the
principals involved in decision-making set the pattern in the priorities and attitudes.
The same is true of the interface between the firm and the general community as
reflected in the financial reporting obligations needed for full accountability to the
umma. In an Islamic society, the development of accounting theory should be based
on the provisions of Islamic law along with other necessary principles and postulates
which are not in conflict with Islamic law. It goes without saying that Islamic law has
very clear views on the basic principles as to how financial reporting and accounting
practice should be undertaken in terms of objectives based on the spirit of Islam and
its teachings (Lewis, 2001).

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Disclosure
If the purpose of accounting information is to serve the public interest, it follows that
in an Islamic context the umma has the right to know about the effects of the
operations of the organisation on its well-being and to be advised within the
requirements of shari'a as to how this has been achieved. Accountability is thus
interpreted as being, first and foremost, accountability to God through making
information freely available. Truthful and relevant disclosure of information is
important, in different aspects of Islamic life. There are responsibilities such as
paying zakat, the calculation of which requires disclosure of the worth of assets and
liabilities in terms of the religious obligation to succour the poor, for it indicates a
Muslim's capacity to do so. Full disclosure is necessary for predicting future
obligations and assessing investment risk.

Six verses in the Holy Qur'an refer to 'relevance'. One meaning of the 'relevance'
referred to is disclosure of all facts (S2:71) '… Now hast thou brought the truth …'
also, based on (S4:135) 'O ye who believe! Stand out firmly for justice …'.
Essentially, these are directives to call it ‘how it is' in all things. Financial

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information is relevant from an Islamic viewpoint only when it includes the attribute
of 'truth', and fair and accurate disclosure of the matters at hand. On this basis, doubt
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must arise whether compliance with the conventional accounting practice of being
'conservative' regarding asset valuation and income measurement can conform with
shari'a, any more than would deliberate optimism and overstatement.
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Materiality
Adequate disclosure requires that a financial statement should contain all material
information necessary to make it useful to its users, whether it is included in the
financial statements, the notes accompanying them, or in additional presentations.
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Since the Holy Qur'an discloses the truth and best way for living in the world (S5:16),
so disclosure of all necessary information for the accomplishment of faithful
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obligations and the making of economic and business decisions consistent with that
ethos is the most important tenet of an Islamic accounting system.
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Sura 2:282-3 in particular puts commercial morality on the highest plane as regards
the bargains to be made, the evidence to be provided, and the doubts to be avoided.
Understandable information is an accountability necessity applicable to financial
information in an Islamic accounting framework, in which the information is not to
deceive the user, nor decrease understanding in such a way as to lead to a wrong
decision. By decreeing that financial information should be disclosed part by part,
materiality of financial affairs should be obvious in the context of the disclosure. In
general, the materiality of accounting information in an Islamic framework is
considered relevant if it is related to shari'a requirements.

Record keeping
According to the Holy Qur'an, followers are required to keep records of their
indebtedness:

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'Believers, when you contract a debt for a fixed period, put it in writing. Let
a scribe write it down fairly … and let the debtor dictate, not diminishing the
sum he owes …' (S2:282).

Islam thus provides general approval and guidelines for the recording and reporting of
transactions. Underpinning Islamic belief is the requirement that doubt and
uncertainty be removed from inter-personal engagements. In business affairs, trading
and the like, it clearly is evident that all parties' rights and obligations are to be fully
documented for verification and exploration. Verses place an emphasis on recording
material credit loans and transactions, and advise that these transactions should be
signed by debtors (to acknowledge their indebtedness and the amount thereof), the
ultimate in verification processes.

Reliability
Askary and Clarke (1997) identify nineteen verses in the Holy Qur'an placing
emphasis on the reliability of matter [2 (283), 3 (122, 159), 4 (58, 81), 7 (89), 8 (2, 27,
49, 61), 12 (11, 64, 66), 23 (8), 27 (39), 33 (72), 65 (3), 70 (32), 81 (21)]. As with
every other aspect of Islamic secular life, reliability extends into the area of

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accounting. If published financial information is unreliable, many followers will be
unable to accomplish their religious responsibilities, they will be unable to assess their
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capacity to assist the disadvantaged, or their capacity to pay zakat. If the managers of
business entities are to be honest to the business entities' owners, Sura 4:58 indicates
that they must produce true and complete, reliable, financial disclosure for them. This
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verse places an emphasis on making over trusts to their owners (‘Allah doth command
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you to render back your Trusts to those to whom they are due …)’. In other verses,
there is an emphasis on the need to fulfil obligations.

Transparency
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Reliable information must also be presented correctly and fully, including details of
all the transactions undertaken. Sura 11:84-85, for example, says '… give full
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measure …'. True disclosure of financial facts, and the provision of them without any
deceit or fraud in order to satisfy users’ requirements, is thereby essential for
accomplishing such obligations and to facilitate the making of decisions on
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investment and business matters.

Balance sheets
Islamic financial statements must show the financial impact of financial transactions
and other consequences of Islamic economic activities. Accurate changes in the
financial position must be determinable from the balance sheet, along with how those
changes arose from the income statement. Under Islam, the elements of financial
position would include all items which are subject to financial evaluation, assets,
liabilities and the residual benefits, based on the Holy Qur'an. Many verses in the
Holy Qur'an deal with various aspects of property and assets. An Islamic asset
includes all valuable property resulting from previous events belonging to the owner.
Such an asset should not be usurped and if obtained in a lawful(halal) way has
economic benefits for its owners. Lawful acquisition is a critical aspect of 'asset' in
this context; rights to interest income are never recognised. Liability is defined in
Islam either as a faithful obligation, or any debt to other persons or business entities.
Again, in respect to both, the paying of interest is prohibited under the prohibition of
riba (Algaoud and Lewis, 2006). Finally, equity in residual benefits is obtained

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directly from the financial evaluation and contrasting assets and liabilities. Legality is
again an issue : sura 2:279 decrees that Muslim equity should not be mixed with
unlawful (haram) properties.

THEORY AND REALITY

How are we to reconcile these religiously-derived principles with the practical reality
of business and commercial life in Muslim countries? If Islamic principles were
applied, business organization would be marked by the concept of shura and the
application of shuratic decision-making processes involving consultation and
consensus-seeking, along with the institution of hisba providing a framework of social
ethics and empowering individual Muslims to act as ‘private prosecutors’ in the cause
of better governance and social action.

This is the ideal. The reality is probably closer to what Abbas Ali (2005, p172) calls a
‘sheikocracy’: hierarchical authority, rules and regulations contingent on the
personality and power of the individuals who make them, subordination of efficiency
to personal relations and personal connections, indecisiveness in decision-making,

re
informality among lower level managers and a generally patriarchal approach.
Nepotism is often evident in selecting the upper-level managers. Tradition plays a
tu
significant role in the life of individuals and groups. Extended families, friendships
and personal relationships reinforce group orientation and duties. Class origin and
kinship is significant.
c
Le
The Arab executive lives in a society where family and friendship remain
important and prevalent factors even in the functioning of formal
institutions and groups. Consequently … the Arab executive relies upon
family and friendship ties for getting things done within his organization
a

and society (Muna, 1980, p12).

eg

Such divergences between theory and practice has resulted in two responses (at least)
among Muslims. One is a fatalistic acceptance of the status quo. Ali considers that
Muslims, and Arabs in particular, hold two sets of identity. One is immediate, social
M

and spatially particular. The other is historical, cultural and global (Ahmad, 1984).
Violation of particular principles, cherished in the early days of Islam, is common
because the basic aspects of the reality of Arab politics and organizations are the
personalized nature of authority, tribalism, and fluidity and alternating fission and
fusion of group coalitions and alliances (Ali, 2005, p124).

He argues that the two identities are reconciled by the Islamic equivalent of
‘doublethink’.

‘Doublethink, a term used by George Orwell [in the classic work 1984] for
holding two contradictory beliefs simultaneously, in Arabia and other
Muslim countries, depicts a condition where the ideal (Islamic principles)
is held officially, but violated in practice. At the organizational level, this
situation produces what Child (1976) calls mental cheating. Managerial
behaviour, which remains strictly within the framework of the
authoritarian and hierarchical structure of the organization, seeks to
prepare subordinates to accept decisions already made by managers and to

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improve the individual manager’s images in a society where Islamic and

tribalistic values still have some important influence. The intention of
managers, in this case, is not to create a situation of real consultation, but
rather to create a feeling of consultation ‘ (Ali, 2005, p122).

The other response is what Deepak Lal (1998) refers to as the call to purify Islam
from all the corruptions that have crept in over the centuries into Muslim lives, and
thereby recreate the ‘golden era’ of Islam. The period of the four rightly guided
caliphs (Abu Bakr, Omar ibn-al-Khattab, Othman and ‘Ali) is generally regarded as
an ideal time, when Islam was practised perfectly and, with the dramatic conquests
and the expansion of the Islamic state, it appeared that ‘God smiled on Muslims’ (Lal,
p50).

The difficulty with this response is the potential for perpetual disappointment. As
Lindholm (1996) observes:

‘In the memory of Muslims ever since, this period appears as a divine
ordered social formation flowering under the benign regime of the

re
community’s duly elected representative — the Caliph.’

tu
‘Muslim thought is saturated with longing for a return of this idealized era
when ordinary men and women are imagined (in the soft glow of
collective memory) to have acted together selflessly under the leadership
c
of just and divinely guided Caliphs to realize the will of Allah in the world
Le
of human beings - a realization validated concretely through the vast
power and wealth acquired by the victorious army of the faithful’ (p80).

Even allowing for ‘apocryphal exaggeration’ (Atiyah, 1955, p36) and some less than
a

ideal circumstances (‘three of the four caliphs were assassinated’, Watt, 1996, p40),
the hold of this period of history over Muslim thinking remains strong, and results in a
eg

very different worldview from that held by most Christians. As Lindholm remarks:

‘Remembering their glorious world-conquering past, Muslims have not

M

pictured the ‘City of God’ in the Christian manner as beyond ordinary ken,
achieved in the radiant future by faith and renunciation. For them, God’s
mandate was actually realized in historical reality, under the authority of
the Prophet himself and the four pious rulers after him’ (p79).

‘Recalling their millennial past, the Muslim devout, unlike their Christian
cousins, have never inwardly consented to the disjuncture between the
religious experience of the community of believers (equal before God, led
by the Prophet and his deputies) and the reality of power-seeking secular
rulers prone to political intrigue and the use of physical coercion’ (pp80-
1).

These differences may be reflected in responses to public policy issues relevant to

business and commercial affairs. In terms of the principles outlined in earlier sections
of this paper, the distinctive characteristics of Islamic economics are that it is Godly,
ethical, humanly, and moderate and balanced (Khaliffa,2003). Business should reflect

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all of these four characteristics, and be conducted by Muslims in accordance with the
requirements of their religion to be fair, honest and just towards others. One
commentator (although not a Muslim) has even drawn attention to the ‘sharp
practices’ of Western companies such as Enron, the ‘misdeeds’ of auditing firms such
as Arthur Andersen, and what would seem to be an ‘immoral core’ at the heart of
capitalism, which is contrasted with the moral certainty of Islam with respect to
business ethics (Wilson, 2003).

However, any claims to a moral high ground must be tempered by the poor record of
many Muslim countries in terms of corruption. An earlier article (Iqbal and Lewis,
2002) documented the evidence using the World Bank data base. While some OIC
countries such Kuwait, Malaysia, Qatar fall into the highest quartile on the corruption
index (indicative of a strong control of corruption), a large number fall into the first
and second quartiles (indicating poor control of corruption). In terms of the
Transparency International’s Corruption Perception Index for 2003, the highest
ranking OIC countries are Oman (ranked 26), Bahrain (27) and Qatar (32), while the
lowest ranked Muslim countries are Sudan (106), Indonesia (122) and Bangladesh
(133). Further details can be found in the Global Corruption Report (2004).

re
The Iqbal and Lewis article goes on to compare the Islamic and Western approaches
tu
to corruption providing, in the process, the first systematic analysis of corruption in
terms of the Islamic intellectual heritage. On this point there can be no
misunderstanding: they document that shari’a unequivocally condemns corruption as
c
a severe threat to the social, economic and ecological balance. Furthermore, there
Le
seems little doubt that the widespread existence of corruption and the continuance of
corrupt behaviour in the business community would be corrosive and damaging to any
attempts to implement a system of Islamic corporate governance and business
organization.
a

The authors argue that Islam and the West can learn from each other with respect to
eg

governance and corruption. Indicative, perhaps, of the Islamic historical view, and
the desire for a return to an ideal era inspired by a renewal of faith, Islam views
corruption as a moral problem to be fought by developing greater internal fortitude
M

rather than relying on external law enforcement. Most Western researchers, by

contrast, consider that corruption is more than a moral issue and, at its core, is a
problem of bad governance. Unquestionably, Islamic societies can benefit from the
practical stratagems and administrative and civil reforms now emphasized in the
Western approach – in short, from better governance. The indices suggest that these
approaches do work. Nevertheless, there are going to be some situations where the
external constraints are weak. Here the West can benefit from reviving the idea, now
largely bypassed, that there is a significant moral and ethical dimension to reducing
corruption, needed in such circumstances to stiffen resolve and foster self-restraint.

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