DAF04 - Accountability and ethics in Islamic financial institutions

Supervisors: Dr Umair Riaz and Dr Anwar Halari (Department of Accounting and Finance, The Open University Business School, Faculty of Business and Law).

Project Description:

A key aim of any accounting system is to support accountability. Those managing financial resources must report on their governance, whether dealing with a government agency or a private corporation. This accountability aspect has long been integral to human society (Stone, 1969). While it initially focused on individual property owners, modern accountability is now commonly understood as management reporting—either public or private—facilitating effective resource allocation. This is achieved by supplying information for evaluating performance afterward or for guiding investment decisions beforehand (Whittington, 1992).

Accountability also serves larger economic and social purposes, particularly within Islam, where economics, politics, religion, and social matters—including accounting—are governed by divine law (Kamla et al., 2006; Riaz et al., 2017). The Holy Quran clearly delineates what is true, just, and fair, outlines society's values and priorities, defines corporate responsibilities, and specifies specific accounting standards for accounting practices. If accounting information is intended to serve the public interest, then in an Islamic context, the nation is entitled to understand how an organisation's operations impact its welfare and receive guidance aligned with Sharia (Islamic law) on achieving this. Truthful and pertinent disclosures are crucial across various aspects of Islamic life. Responsibilities like paying zakat and taxes necessitate revealing the value of assets and liabilities, as this disclosure reflects a Muslim's ability to assist the poor.

Theoretical approaches to Islamic finance assert that financial institutions must adhere to Shariah in all operations, particularly those focusing on socio-economic justice and the prohibition of interest (Wilson, 1997; Zaher and Hassan, 2001; Beekun and Badawi, 2005; Kuran, 2004; 2006; Kamla, 2009). Siddiqi (2001), along with Haron and Hisham (2003) emphasise that modern Islamic banking encompasses more than just the ban on interest; it strives to meet socio-economic goals and social justice. It also aims to balance income and expenditure to benefit society (Haron, 1995; Al-Omar and Abdel-Haq, 1996). Therefore, Islamic finance seeks to cultivate a harmonious, balanced, and equitable society, promoting wealth distribution while prohibiting practices that may adversely affect individuals (Siddiqi, 2001). While the conventional financial system focuses principally on the economic and financial aspects of transactions, the Islamic system places an equal emphasis on the ethical, moral, social, and religious dimensions of trade to enhance equality and fairness for the good of society as a whole (Iqbal, 1997).

Several researchers agree that social finance represents a form of investment that aims to address environmental, social, and financial challenges while generating economic returns (Azman & Ali, 2019). The examination of social finance revolves around how social connections, norms, ethical attitudes (Rizzi et al., 2018), and ideologies influence financial behaviour and drive societal transformations (Ozsoylev et al., 2014). The need to foster adaptation and harmonisation between social and financial contexts has become essential in the current context (Wu et al., 2023). In Islam, corruption is seen as a moral challenge requiring stronger internal resilience rather than dependence on external law enforcement. Conversely, many Western scholars view corruption not merely as a moral issue but fundamentally as a governance problem (Riaz et al., 2023). Islamic societies can undeniably gain from the practical strategies and administrative reforms highlighted in the Western method—essentially, improved governance. Evidence indicates that such approaches are practical. However, there will be instances where external constraints are insufficient.

How can we align these religiously derived principles with the practical aspects of business and commerce in Muslim nations? Some of the areas of investigation can be as follows:

• Broader implications of micro-accountability practices within Islamic financial and non-financial organisations.
• The role of society and other stakeholders in demanding accountability in Islamic organisations.
• What structural, institutional, or relational factors contribute to the prevalence of power imbalances that undermine accountability within the context of Islamic institutions.
• Whether and how can Islamic financial institutions can establish a social ethics framework that empowers individuals to serve as private prosecutors for improved governance and social engagement?
• How can disclosures forecast future obligations and evaluate investment in Islamic products such as sukuks (bonds).

We envisage the research project to be flexible according to the interests and background of the PhD candidate. The supervisory team is open to both qualitative and quantitative research methodologies.

Expectation:

The doctorate is expected to develop specific research questions within this area and gradually develop three working papers over the period of three years that are publishable in internationally recognised academic journals.

It is hoped that the prospective candidate will demonstrate an interest in developing both a theoretical/conceptual and empirical contribution within this field.

Applicant Expectation:

The doctorate is expected to develop specific research questions within this area and gradually develop three working papers over the period of three years that are publishable in internationally recognised academic journals.

It is hoped that the prospective candidate will demonstrate an interest in developing both a theoretical/conceptual and empirical contribution within this field.

Applicant Specification:

The candidate must express a keen interest in sustainability accounting research. Prior knowledge and experience in either qualitative or quantitative research methodologies is required, such as a past undergraduate or postgraduate dissertation.

About the Supervisors:

Umair’s research is interdisciplinary which is influenced explicitly by critical theorising, concentrating on social accounting, financial reporting, accountability and critical accounting concerning culture, diversity, language, and power, particularly regarding religion and notions of Islamic banking and NGOs. My research is embedded in wider social theories, allowing multiple approaches to analysis. These include attention to social identity's multi-dimensional and intersecting aspects in constructing narratives. Umair’s specialised work in the area of Islamic banking and finance is a particular factor that would help expand the literature and contribution in this area. He has supervised four PhD students to a successful completion in this area.

Anwar’s research is interdisciplinary and centres on the themes of accountability, sustainability, governance issues and environmental accounting. He is investigating the role of accountants in the move towards sustainability, with a particular emphasis on accountants attitudes towards sustainability, identity group norms and professional and societal norms. He is also exploring how accountabilities are enacted within governance structures in religious organisations with a particular focus on everyday practices of accountability. His recent work was published in Qualitative Research in Accounting and Management where he explored accountants perspectives of their engagement in the circular economy. Anwar also wrote a piece on what COVID-19 means for universities' sustainability plans.

Both Anwar and Umair were recently Guest Editor of the Journal of Financial Reporting and Accounting special issue entitled “Islamic Financial Accounting, Reporting, and Accountability.

Key Reading:

Al-Omar, F. & Abdel-Haq, M. (1996). Islamic Banking: Theory, Practice and Challenges”. Zed Books, London.

Azman, S.M.M.S. & Ali, E.R.A.E. (2019). Islamic social finance and the imperative for social impact measurement, Al-Shajarah: Journal of the International Institute of Islamic Thought and Civilization (ISTAC).

Beekun, R. I. & Badawi, J. A. (2005), “Balancing Ethical Responsibility among Multiple Organizational Stakeholders: The Islamic Perspective”. Journal of Business Ethics, (60), 131–145.

Haron, S. (1995). The Philosophy and Objective of Islamic Banking. Revisited, New Horizon, New York, NY.

Haron, S. & Hisham, B. (2003), “Wealth mobilization by Islamic banks: the Malaysian case”. Paper presented at International Seminar on Islamic Wealth Creation, University of Durham.

Iqbal, Z. (1997), “Islamic financial System”. Finance and Development, pp. 42-45.

Kamla, R., Gallhofer, S., & Haslam, J. (2006). Islam, nature and accounting: Islamic principles and the notion of accounting for the environment. Accounting Forum, 30(3), 246-265.

Kamla, R. (2009). Critical insights into contemporary Islamic accounting. Critical Perspectives on Accounting, 20(8), 921–932.

Kuran, T. (2004). Islam and Mammon: The Economic Predicaments of Islamism. Princeton University Press, Princeton, NJ.

Ozsoylev, H.N., Walden, J., Yavuz, M.D., & Bildik, R. (2014). Investor networks in the stock market. Review of Financial Studies, 27(5), 1323-1366.

Riaz, U., Burton B.M. & Monk, L. (2017a). Perceptions on Islamic banking in the UK – Potentialities for empowerment, challenges and the role of scholars”. Critical Perspectives on Accounting, 47, 39-60.

Riaz, U., Burton, B. M. & Fearfull, A. (2023). Emotional propensities and the contemporary Islamic banking industry. Critical Perspectives on Accounting, 94, 102449.

Rizzi, F., Pellegrini, C. & Battaglia, M. (2018). The structuring of social finance: Emerging approaches for supporting environmentally and socially impactful projects. Journal of Cleaner Production, 170, 805-817.

Siddiqi, M. N. (2001). Islamic Banking: True Modes of Financing. New Horizon. (109), 15-20.

Stone W. E. (1969). Antecedents of the accounting profession’, The Accounting Review, April, 284-29.

Whittington G. (1992). Accounting and finance, in The New Palgrave Dictionary of Money and Finance, edited by P. Newman, M. Milgate and J. Eatwell, London: Macmillan, 1, 6-10.

Wilson, R. (1997). Economics, Ethics and Religion: Jewish, Christian and Muslim Economic Thought. Macmillan in association with the University of Durham.

Wu, X., Shen, Y., Chen, J., & Chen, Y. (2023). Social–financial approach for analyzing financial transitions. Financial Innovation, 9(1), 89.

Zaher, T. S. & Hassan, M. K. (2001). A Comparative Literature Survey of Islamic Finance and Banking”. Financial Markets, Institutions & Instruments, 10(4), 155-199.