Islamic accounting theories

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CHAPTER 1:

INTORUDCTION

1.1 BACKGROUND OF THE STUDY

Islamic banks considered as an active player in the world economies over two decades ago (Ahmed S., 2009). The principles accounting upon which Islamic banking is based have been universally accepted for centuries rather than decades. The fundamental principle of Islamic financial institutions is the prohibition of Riba (interest). It is manifest that Islamic accounting theory were practiced mainly in the Islamic country throughout the middle ages, development trade and business activities.

In order to understand what services that Islamic banks offer, it is essential to maintain an acceptable level of information of the basis behind it. It has been argued that the Islamic banks have not introduced any new services since their first existence in the 1970’s, in fact they have tried to comply with the rules of the Islamic religion specified for these types of actions. High requests to assess Muslim customers perception and attitude toward Islamic bank services. Islamic banks understand that its paramount important to measure the degree of its customers awareness as well as to improve services. The financial institution follows the rules that Holy Quran and hadith have set to guide the Muslims in their financial matters. The Islamic financial system employs the idea of participation in the project, utilizing the funds at threat on a profit-and- loss-distribution basis (Ahmed, S., 2009).

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1.2 STATEMENT OF THE PROBLEM

During the last three decades, Islamic finance institutions have been rising significantly, both nationally and internationally (Ahmed, S., 2009; Iqbal & Abbas, 2007). These firms were recognized in the emerging market of the Middle East to meet the order of investors and borrowers who are motivated by income maximization derived from the Islamic law (Shari’a).

Islamic finance institutions offer an extensive range of Islamic financial innovations from the simple agreement of profit-sharing agreement (Mudaraba) that is parallel to time deposit in conservative banks, to issue Islamic bonds (Sukuk) and derivatives. In gulf countries, the state of Kuwait banking industry considered on of the leaders in Islamic financial market. The growth of Islamic finance institutions in Kuwait has attracted some of the conventional financial firms (e.g., NBK IFIH, and Citibank) to add the service of Islamic windows to their clients.

In spite of the advantages that are fixed in Islamic finance system and management, Islamic finance institutions encounter numerous primary challenges to the prospect of being recognized internationally. The challenges exist in local as well as global markets. On of these challenges is to assess the degree of awareness in Islamic accounting theories. In their study, Gerrard and Cunningham (1997) reported that Muslim respondents, though aware of basic conditions in Islam, were almost wholly ignorant of the sense of specific Islamic financial conditions like Mudaraba,

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