Islamic banking is the conduct of banking in accordance to the principles of Shariah. Shariah is often simply defined as Islamic law, but a better and far more accurate definition is as follows; Shariah refers to a 'code of law or divine injunctions that regulate the conduct of human beings in their individual and collective lives.
In Shariah a loan can, however be given, known as a qard, but no interest can be imposed for the loan to be repaid. The main reason for the prohibition of riba in Islam is that of 'distributive justice, because the prohibition of Riba is intended to prevent the accumulation of wealth in a few hands, that is, it is not to be allowed to "circulate among the rich' Holy Qur'an, '.
If no interest can be taken by Islamic banks in their transactions with customers, the question arises as to how does Islamic banking conducts its business? It is not, after all a charity. Islamic banks can also charge fees for their services as in juala or ujr or act as an agent wakalah and obtain a fee from there. For example, in the case of deposits, a Malaysian Islamic bank accepts deposits for both saving and current accounts under the contract of wadiah safe-custody together with another contract, named dhaman suretyship contract.
In a wadiah yad dhamanah transaction the custodian the bank would be able to utilise the money deposited in the account since the custodian would be solely held liable for any damage or loss incurred on the deposit. On the other hand, the depositors are given the assurance that they may withdraw their money at any time and their money will be guaranteed from any damage and the like.
The Islamic bank has no legal obligation to pay depositors a fixed return. However a discretionary reward known as hibah is usually given by the Islamic banks. Business and trade activities should take place on the basis of fair and legitimate halal profit, there should be giving of zakah alms tax , and monopoly is prohibited.
It will start with an overview of the historical development of Islamic banking and then it will explain the regulatory and governance framework of Islamic banking, before concluding. Historical Development In Malaysia the era of Islamic banking can be traced back to when a savings body was created to save money for future pilgrims of haj n12 known as Lembaga Urusan dan Tabung Haji or Haj Pilgrim's Fund Board.
The money that was saved by the pilgrims was utilized to invest in Shariah permissible investments. The pilgrim's board exists until today and carries out Shariah permissible activities. Bank Islam, a fully fledged Islamic bank was also incorporated as a public company in Bank Islam Berhad was the first fully fledged bank that offered Islamic banking products and services. This was to remain for 10 years. Then in commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under what was known as Islamic banking scheme also known as "Islamic windows".
This was hugely successful because a greater number of the public whether Muslim or non-Muslim were allowed to participate in Islamic banking. These Islamic subsidiaries are established by the domestic commercial banks and are licensed as Islamic banks under the IBA During the same period foreign Islamic banks were given licenses to practice Islamic banking in Malaysia.
While there are 15 banks participating in the Islamic Banking Scheme. The IBA defines an Islamic bank as any company which carries on Islamic banking business and holds a valid license. And it defines 'Islamic banking businesses as any banking business whose aims and operations do not involve any element which is not approved by the religion of Islam. The religion of Islam is not defined by the IBA According to s. Moreover, this research enriches empirical evidence on management accounting practices in the banking industry which are not well developed Carenys and Sales, and especially in Islamic banks that were previously more conceptual Zainuldin et al.
The remainder of this paper is structured as follows. Section 2 presents the literature review, followed by Section 3 that explains hypotheses development.
Section 4 describes the research method. Section 5 presents the empirical results and an interpretation of the results. Section 6 contains the conclusions and contributions. Theoretical background and hypotheses development 2. These factors, through the process of interaction, will mutually adapt to one another, thereby forming coalignment Hofer and Schendel, The concept of coalignment was developed from contingency theory Ginsberg and Ventakraman, This theory assumes that certain combinations of organizational structure and the context have a positive impact on performance.
The application of contingency theory in the area of management accounting and control systems assumes that organizations tend to use management accounting practices and control systems that are appropriate to their strategic orientation Luft and Shields, On the other hand, strategic management accounting practices consider external outward looking conditions, such as competitors and consumers, as well as long-term information, with the main objective of increasing the effectiveness of program achievement.
As highlighted by Chenhall , management control systems encompasses the systematic use of management accounting practices and other controls such as personnel and cultural controls.
Mechanistic management control relies more on formal rules and standard operating procedures that tend to be tight and uniform. Nevertheless, conventional management accounting practices are still implemented intensively on providing feedback and information for tactical decisions Nishimura, , Carenys and Sales, , Sleihat et al.
Respondents then performed self-evaluation based on given indicators. Low-cost strategy is concerned with how to protect and strengthen competitive position in the market by promoting low prices of products or services Porter, Differentiation strategy designates uniqueness as the main source of competitiveness, including the inherent quality of the brand or image Allen et al. A comprehensive performance measurement model was developed by Mohammad et al.
Maqasid Shariah can be interpreted as the goal of Islamic law. As a result, establishing justice and promoting welfare as social values will be more easily realized. Hypotheses development 3. Jusoh et al. Strategic orientation, management accounting practices and management control systems are indicators of strategic coalignment 3.
Iman and Hartono also concluded that coalignment between business strategy partnership or alliance and the information technology strategy had a positive impact on the performance of banks in Indonesia.
This study uses maqasid Shariah-based performance, covering aspects of education, justice and public welfare. Therefore, strategic coalignment is predicted to have a positive impact on maqasid Shariah-based performance by proposing H2 as follows: H2. Coalignment between strategic orientation, management accounting practices and the management control system positively affects the maqasid Shariah-based performance.
Each stage of the corporate life cycle has implications on organizational learning. The more mature an organization, the better the organization understands its business processes, so potential failures decline.
The corporate life cycle has also implications on the availability of organizational resources. In summary, corporate life cycle can strengthen or weaken the relationship between strategic coalignment and performance, depending on the stage of the corporate life cycle. Consequently, this study proposes H3, which is expressed as follows: H3. Data and methodology Coalignment in 4.
The total of 82 questions were grouped into six sections. The pilot survey involved 20 respondents who have three-nine years of experience working in Islamic banks. Table I shows the distribution and the collection of questionnaires. For most respondents outside Java, the questionnaires were sent using the express posted service with delivery time of two-three working days.
In-depth interviews were also conducted with several respondents who met directly to discuss the contents of the questionnaires. Phone calls and correspondence using e-mail were conducted to initiate and monitor the data collection process. Shariah Rural Banks 63 Meanwhile, 63 BPRS who returned questionnaires came from various regions throughout Indonesia with a diverse business scale and corporate life cycle. Of the respondents, 63 per cent held mid-level and 37 per cent held top-level positions.
As many as 51 per cent of the respondents had more than 14 years of work experience in banking and only 16 per cent of respondents had less than seven years of experience.
Another measurement model is the relationship between coalignment as a latent variable and its indicators So, Map and Mcs using the second CFA. Then, the structural model is the relationship between coalignment and performance. Results of H2 that was tested using regression concept as structural model are shown from the value g 4. H3 was examined using multi-sample analysis. Homogeneity tests were conducted using the Levene test.
Validity and reliability tests were also conducted using CFA. Invalid and unreliable indicators were omitted from the analysis. Meanwhile, valid and reliable indicators were then examined according to SEM using Lisrel software. Empirical results 5. Table III presents descriptive statistics of valid and reliable variables for further analysis.
On a scale of 6, the most important strategic orientation variable for organizational development is extensive network with the highest mean value of 4. EDU1 2. In total, 90 per cent of respondents also stated that management accounting practices are very important in helping managers implement business strategy.
In general, both conventional and strategic management accounting practices are intensively used with a mean value of more than four out of six for all variables. The highest mean value of 5. In accordance with management accounting practices, 90 per cent of respondents disclosed the importance of management control systems in helping managers implement business strategy.
Table II also shows the mean values of mechanistic control variables are relatively higher than organic control variables. For organic control, the highest mean value is result control OMCS1 with a mean value of 4. Table III shows that the maqasid Shariah-based performance of Indonesian Islamic banks is satisfactory though not yet maximized.
Although the contribution of Islamic banks to real sector development has been satisfactory MAS2 , other social performance indicators must be improved. This study divides the life cycle of Islamic banks into four stages, namely, start-up, growth, maturity and decline, as presented in Table IV.
Of the 97 respondents, 53 per cent were at stage three, 38 per cent stage two, 5 per cent stage four and 4 per cent stage one. Therefore, the strategic orientation, management accounting practice and management control system are valid as indicators to measure strategic coalignment, so H1 is not rejected. Total 23 11 63 97 Islamic banking corporate life cycle Source: Data compiled from the results of this research survey Lcso 0.
Description: Coalign: Strategic Coalignment, Figure 2. As shown in Figure 3, the p-value is equal to 4. The estimated value of 0.
In conclusion, coalignment between strategic orientation, management accounting practice and management control system will boost maqasid Shariah-based performance; thus, H2 of this study is not rejected.
It also supports previous studies concerning the positive impact of strategic coalignment on performance, as conducted by Powel , Bergeron et al. In summary, coalignment between a low-cost strategic orientation, strategic management accounting practice and mechanistic management control system will have a positive impact on maqasid Shariah-based performance at Islamic banks.
The conclusion that Islamic banks tend to implement low-cost-oriented strategy is consistent with conditions in the national banking industry in general, as found by Gani and Jermias , who demonstrated that Defender strategy has similar characteristics with low-cost strategy, as proposed by Miles and Snow Low-cost strategy implemented by Islamic banks is the preferred choice for at least two reasons.
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