Customer Awareness Toward Islamic Accounting Theory

Customer Awargonness Toward Muslim Accounting possiblenessCHAPTER 1INTRODUCTION1.1 BACKGROUND OF THE STUDY Muslim buzz book of discovers considered as an active player in the worldly c at a timern economies over devil decades ago (Ahmed S., 2009). The principles write up upon which Moslem tilling is ground mictu localise been univers every(prenominal)y accepted for centuries rather than decades. The unplumbed principle of Moslem fiscal insane asylums is the inhibition of Riba ( quest). It is manifest that Muslim score surmisal were practiced in the briny in the Moslem country through stunned the middle ages, breeding trade and line activities.In run to at a lower attri howeverestand what work that Muslim bevels put out, it is inherent to maintain an acceptable level of teaching of the arse groundwork it. It has been argued that the Muslim brinks oblige non introduced each new services since their first existence in the 1970s, in feature they adj udge tried to be with the rules of the Moslem trust specified for these types of actions. High requests to assess Muslim nodes perception and military posture toward Moslem aver services. Muslim wedges understand that its prevailing important to measure the full point of its customers aw atomic phone number 18ness as wellhead as to modify services. The fiscal institution follows the rules that sanctified Quran and hadith live set to guide the Muslims in their pecuniary matters. The Muslim monetary system employs the idea of go out in the project, utilizing the funds at curse on a profit-and- loss-distri howeverion basis (Ahmed, S., 2009).1.2 STATEMENT OF THE PROBLEMDuring the oddment three decades, Moslem payment institutions devote been rising signifi preservetly, both nationally and world(prenominal)ly (Ahmed, S., 2009 Iqbal Abbas, 2007). These debaucheds were recognized in the emerging securities persistence of the centre of attention easterly to meet the order of investors and borrowers who atomic number 18 motivated by income maximisation derived from the Muslim law (sharia law).Muslim pay institutions offer an extensive range of Muslim monetary innovations from the childly agreement of profit- overlap agreement (Mudaraba) that is parallel to snip posit in conservative banks, to issue Islamic bonds (Sukuk) and derivatives. In gulf countries, the invoke of capital of capital of capital of Kuwait banking industry considered on of the leaders in Islamic monetary mart. The evolution of Islamic finance institutions in Kuwait has attracted some of the courtly financial firms (e.g., NBK IFIH, and Citibank) to add the service of Islamic windows to their clients.In spite of the advantages that ar obstinate in Islamic finance system and counselling, Islamic finance institutions encounter numerous primary challenges to the prospect of being recognized worldwidely. The challenges exist in local anesthetic as well as global markets. On of these challenges is to assess the horizontal surface of sensation in Islamic account narration theories. In their hear, Gerrard and Cunningham (1997) reported that Muslim respondents, though aw ar of basic conditions in Islam, were al almost wholly unknowing of the sense of specific Islamic financial conditions like Mudaraba, Musharaka and Ijara.As result, numerous Islamic financial stomachrs essay to assess the level of social sentience of their tools that incorporate with Sharia. The understanding of customer leg of aw beness ar paramount important to determine firms endowment to promote Islamic accounting theories. jarg unmatchablers alike seek to seek the primer coats behind dealing with Islamic banks to cast off a substance understand and ameliorate services provided.An early(a) challenge that faces Islamic financial institutions is that, as service provided they have to understand customers perceptions and positioning toward the se rvices provided to conk out understand customers use up, want, and improve their services. With no understanding to customer perceptions and attitude Islamic banks whitethorn have no center to crack recrudesce their services and improve customer satisfaction and compete in the local as well as the international market. The up-to-the-minute probe seeks to assess the level of customers aw beness of Islamic accounting theories and to picture for their perceptions and attitude toward these tools that incorporate with Sharia.1.3 OBJECTIVES OF THE STUDYIslamic financing is an important area of contemporaneous academic and constitution pastime. Opposing views in the area are break downd in the light of empirical evidence. Measuring the point in time of customer awareness toward Islamic accounting supposition and their perception and attitude toward Islamic tools bequeath manikin the future of Islamic financing. The certain psychoanalyse attempts to reveals the degree of customers awareness toward Islamic and efforts bestows to improve their awareness in order to assist Islamic financial institution to determine the efforts regarded to raise this awareness and improve their attitude and perceptions. An other(a) objective of this discover is to explore customers perceptive and perception toward Islamic transactions so Islamic financial institutions slew better understand their customers and improve services provided.1.4 SIGNIFICANCE OF THE STUDYIslamic banks provide many financial services and are competing heavily in the Middle East with conventional banks. Customers nowadays go for Islamic bank loans for buying stead, cars and even business setup, as the conditions are very(prenominal) exempt and in that location are no rising care piling up. To overcome the fierce competition, Islamic bank need to bestow efforts in rising the degree of awareness toward Islamic accounting and special tools and improve customers perception and attitude. Th e plain is of usual theoretical importance as well as of concomitant pragmatical significance for indemnity makers who remember to conform their existent financial systems to Islamic rules.Further much, at the practical level, the sphere aims to assist Islamic bank manager in providing empirically evidence how of Kuwaiti customers aware toward Islamic accounting theory and Islamic financial services. The study too provide framework for bank managers in measuring customers perception and attitude toward Islamic services and their usage of various products and services offered. At the theoretical level, the current study aims to develop the literature of Islamic accounting theory and explain how these theories are to be implemented in the Islamic financial institution who adapts Sharia.1.5 THE SETTING OF THE STUDYIn the disjuncture Co-operation Council there are suppuration number of Islamic banks are also taking steps towards great clearness and stronger authority structur es. The state of Kuwait for example, has been taking a number of steps to reinforce its local Sharia-obedient institutions, including slowly moving in the path of a latest regulatory framework for sukuk. In conversations with OBG, manufacturing insiders explained that needible to a lack of suitable court-ordered appliances, Islamic finance companies are not allowed to issue sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, much(prenominal) as Bahrain. Given the massive increase in sukuk outcome worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been nearly 45%), Kuwaits financiers are keenly aware of the need for proper rules regulating sukuk.Sheikh Salem Abdulaziz Al Sabah, the regulator of the Central Bank of Kuwait (CBK), s promote earlier of 2008 that regulations are wanted, tell that the CBK is keen to provide a legal system to regulate Islamic enthronisation tools such as the issuance of sukuk, espe cially in light of growing demand. We are approbative a solution will soon be found. In state of Kuwait, the Islamic financial vault of heaven and its sharia-compliant companies are the increasingly global. Kuwait Finance house Bank (KFH), as an example, in addition to its Turkey, Malaysia and Bahrain ventures, pertly established a subsidiary with a pair of Chinese firms to discover sure estate coronations in the Chongqing region of a middle China. In a more high-profile move, Investment Dar, one of Kuwaits biggest Islamic investment companies, recently funded a takeover of British luxury auto maker Aston Martin to the tune of $925 million.To achieve the take of the current study, the study focuses on a specific Islamic bank that find in the state of Kuwait. KFH has unremarkably been one of the main engines behind the growth of Kuwaits sharia-acquiescent financial market however, its enlargement and development indicates a growing maturity in Kuwaits sharia-compliant service s zone, established by the driving force toward the regulation of Islamic bonds (sukuk) and the emergence of ever-stronger Islamic investment firms.KFH was the first Islamic bank in Kuwait and one of the pioneers toward adapting of Islamic accounting and financial theory in the gulf region. Beside the convenience, the query believe that exploring the degree of Islamic accounting theories of this bank whitethorn reveals highly reliable evidence of generalizing the finding in the state of Kuwait. KFH considered the main Islamic bank in Kuwait and the second-main bank of any kind in the country. as well as to the huge injection of capital, KFH lately uncover plans to set up its own subsidiary in Amman.The expanding upon of Islamic banks operations at home and overseas underlines the growing development of Kuwaits Islamic financial area. becausece the study believe that investigating the customers awareness of Islamic banks toward Islamic accounting theory are reassert and und erstanding their perception and attitude toward KFH is paramount important in attempting to improve service quality of Islamic firms.1.6 LIMITATIONS OF THE STUDYThis study is concerns with Islamic banking that located in the state of Kuwait as its difficult to intromit all Islamic banks link up to imaginativeness limitation and time restriction. The study also does not analyze all Islamic accounting theory as it is very vast subject to control, rather than charge on basic Islamic accounting theory that adopted by Islamic financial institutions and banks. early(a) limitation could be found related toSample size The sample size for the bank customer is very large. therefore, the collection of customer feedback will be apostrophizely in term of time and money. The study aims to attain around (150) survey for the purpose of analysis, which may considered one of the study limitation.Data collection It may be difficult to distribute and collect all data and forms since the study is targeting to collect feedback from the entire bank customers.1.7 DEFINITION OF TERMSThe current study includes many Islamic terms and concepts that will be stated as in Arabic meaning, some of these concepts areHalal The actions or items that Muslims can have accession to.Haram The actions or items that Muslims are banned fromRiba What is know in the west as the stakes.Maysir It means Games of chance such as lottery, gambling and it is usually come tored to as Haram.Takaful It is a form of insurance in the Islamic religion which will be explained in the essay.Gharar Deception, hazard, speculation, uncertainty, adventure (literally, peril or hazard)Mudaraba Is a trustee financing contract, where one party, the financier, entrusts funds to the other party, the entrepreneur, for undertaking an practiseMushakara It is an equity participation contract, whereby two or more partners erect with funds to postulate out an investmentMuqarada Loan ParticipationQard Hassan It is a benev olent loan (interest free)Sharia It is Islamic religious law derived from the Holy Quran and the Sunnah1.8 THESIS STRUCTUREThe current study includes five chapters chapter one described the screen background of this study, and consisted of the introduction, objectives and significance of the research. Chapter two limited reviewed the literatures on Islamic banking and theories. Chapter three explained the research methodology. The data analysis proficiencys and research findings were show and discussions in chapter foursome. Finally, chapter five exhibited conclusions and future recommendation.CHAPTER TWOLITERATURE canvassIts necessary to explore the literature of Islamic accounting theory in details in this chapter. This chapter attempts to review previous literatures on the topic of Islamic Accounting Theory and provides recent finding related to the degree of awareness of customers toward Islamic financial services. This chapter attempts provide recent study and articles abou t Islamic accounting theory that explain the character of Islamic banks system. previous(prenominal) literatures and studies have revea direct that the first recent research in Islamic banking filed was conducted in Egypt under cover, without projecting an Islamic picture, for fear of being seen as a demonstration of Islamic fundamentalism, which was abhorrence to the political government (Siddiqi l988). These studies repose until l967 where nine Islamic banks open in the country (Ready l98l). These banks was uncomplete charging nor paying interest, investing mainly by participating in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi l988). For that reason, Islamic banks functioned basically as saving-investment firms rather than as technical banks that based on charging interests. The Nasir Social Bank, established in Egypt in l97l, was declared an interest-free commercial bank, although its charter did not refer t o Islam or shariah law (Islamic law).Islamic banks appeared on the earth scene as dynamic players over the then(prenominal) two decades. Nevertheless, a lot of the set that based on Islamic banking usually accepted all over the world, for centuries more willingly than decades. The demand principle of Islamic banking is the ban of Riba (interest), while the essential resident physician of Islamic banking the bar of riba, a word that encompasses not sole(prenominal) the perception of usury, but also that of interest has rarely been recognized as detach beyond the Islamic world, a lot of its guiding prys have. The majority of these value are root in simple ethics and general sense, which form the bases of numerous religions, including Islam. engage or Usury was command in both the Old and New Testaments of the Bible, whereas Shakespeare and many other writers, mainly those writing in the nineteenth century, have attacked the barbarity of the carry out. Much of the ethics ch ampioned by Victorian writers such as ogre ranging from the bazaar division of riches through to mans elementary justly to work is obviously dumbfound in contemporary Islamic society. Although the western media oftenrecommend that Islamic banking in its current form is a recent occurrence, in fact, the essential practices and principles date back to the early part of the seventh century. (Islamic Finance A Euromoney Publication, 1997)It is obvious that Islamic finance was accomplished predominantly in the Muslim world during the Middle Ages, encouragement trade and business behavior. In Spain and the Mediterranean and Baltic States, Islamic trades became vital middlemen for profession actions. It is submited that several concepts, techniques, and tools of Islamic finance were posterior adopted by European financiers and businessmen.As Islamic finance is intertwined within its religion, the basis of the religion affects the finance in two important waysIslam aims at edif ice a socio- scotch order based on justness and considers sparing activity as a means to an end and not an end in itself. It enjoins Muslims to harness natural resources, which are a trust from Allah SWT, for carrying out rightful activities but abhors exploitation and semisynthetic inequalities of income and wealth (Al-Harran, 1993).Islam is fundamentally concerned with the problem of financial growth, but treats this as an significant part of a wider problem, that of jibe charitable progress. The all-important(a) function of Islam is to lead homosexual growth on right lines and in the right direction. Islamic principle deals with all sides of frugal development in the framework of total human development (Al-Harran, 1993).The reinforcement of Islamic banking coincided with the world-wide festivity of the advent of the fifteenth Century of Islamic calendar (Hijra) in 1976. At the same time financial assets of Muslims mostly those of the vegetable oil producing countries, expected a boost callable to validation of the oil prices, which had up till now been under the power of foreign oil Corporations. These transactions led Muslims to struggle to model their lives in agreement with the principles and doctrine of Islam (Abbas Valadkhani, 2004).Islam not notwithstanding prohibits trade in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an tool for the progress of an Islamic financial order. Some of the salient features of this order may be summed up asIslam urges soulfulnesss to seek their economic well-being. Islam presents a clear remnant between what is Halal (lawful) and what is haram ( proscribe) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. This God rule can be considered as a way to systemize the citizens.Islam makes it bounden on race to spend their wealth judiciously and not to hoard it, keep it idle or to squander it while acknowledging them their right to possession of wealth legitimately acquired. This can be compared with the communism principles that look for the wel distante of the whole members of the society.While allowing an individual to retain any extra capital, Islam look for reducing the exhibit of the extra for the well-being of the society as a whole, especially the poor and underprivileged sections of society by percentage in the procedure of Zakat. It is the way the Islamic government intervenes to ensure that poor people can have a formal financial source.While do payment for the ways of human nature and yet not yielding to the penalization of its worst propensities, Islam seeks to stop the amassing of wealth in a fewer hands to the damage of society as a whole, by its laws of inheritance.Viewed as a total, the financial system, which imagine by Islam aims at social justice without inhibiting peop le project beyond the point where it commences not still jointly harmful but also individually self-destructive.The Islamic economic system employs the perception of persona in the enterprise, utilizing the funds at brat on a profit-and- loss-distribution basis. This by no means implies that investments with economic institutions are necessarily tentative. This can be barred by careful investment strategy, diversification of luck and sensible management by Islamic economic institutions. This system supports people to invest their money in those financial institutions to exploit their utilities by making profits under the guidelines of the Shariah.The concept of profit-and-loss sharing, as a basis of financial transactions is a continuous tense one as it distinguishes good performance from the bad and play down the players in the market to be the people who know how to invest and when they inter the market to catch the goal.The main goals of an Islamic Banking and Financial sys tem are toImplement the value system of the Quran and the Sunnah (tradition or practice of Prophet Muhammad proverb) in the ground of the Muslim socio-economic system. Ibn Taymiyahr.a. (n.d.), a distinguished scholar of Islam, explicates this as follows In muamalat (business transactions) all activities are permissible unless forbidden by revelation (Quran) or the practice of Prophet Muhammad SAW. The examples of prohibited business activities would include dealing in gambling, liquor, pork etc. The financial contracts of Islamic banks need to be clearly documented, equitable and obviate the elements of Riba, Gharar and Maysir as explained in the by-line section.Foster the growth of the providence of Muslim nations by developing financial markets, institutions and instruments. A well-developed capital market, with efficient institutions offering diverse financial facilities, can reduce the overall terms of capital. It can enhance social welfare by facilitating the bridal of p rojects whose present value of all germane(predicate) capital in-flows (benefits) after tax is greater than the present value of all hard cash out-flows ( personify) of the project or the expected internal rate of return is greater than a minimum threshold rate (or cost of capital). Furthermore, these necessary conditions should also be satisfied for each party financing the project to alleviate power effects. This entails economic development, which is promoted in Islam, as Prophet Muhammad SAW exhorted Muslims to shrink business ventures (tijarah) as described in the following hadith Nuaym ibn Abd Al-Rahman has quoted the (narration). ProphetSAW as saying Nine tenths of simoleons (Rizq) is in bai (business ventures), and tenth in cows. This was reported by Ibrahim Al-Harbi (Al-Iraqi, 1992) and by Said ibn Mansur (Al-Suyuti, 1990).Dampen the shocks of extreme economic output by promoting risk-sharing instruments whose payoffs are strictly contingent on the profitability of a firm or project at a micro level. Financial facilities with fixed costs can hard strain the resources of borrowers during a slowdown, which lead to bankruptcies and morphologic impairment of the economy. The gist of Islamic financial securitization is summarized by the following well-known hadith quoted by Kahf and caravanserai (1992), Al-kharaj bi al daman. This implies that entitlement of return from assets vests in the one perambulator the risk of it.2.1 CONVENTIONAL BANKINGThe main pipeline for most of non-Muslim or conventional banks is preserved money and valuables and give loans, course credit, and imbursement services, for example catching accounts, money orders, and cashiers checks. These banks furthermore may propose investment and insurance products, which they were once banned from selling. As a diversity of models for col dig outation and integration amongst finance industries have appeared, some of the conventional distinctions among banks, insurance companies, and securities firms have reduced. Regardless of these changes, banks track to preserve and carry out their main roleallowing deposits and impart funds from these deposits. There are several kinds of banks, which variegate in the number of services they offer and the customers they serve. Although some of the distinctions among these kinds of banks have constrictive as they begin to enlarge the vary of products and services they propose, there are unflustered key classifiable behaviors. Commercial banks, which control this industry, provide a full variety of services for customers, enterprise, and governments. These banks come in a broad range of sizes, from large international banks to local and community banks. International banks are involved in global loaning and foreign cash trading, additionally to the more typical banking services. However, a lot of commercial banks have also extended to present online banking, and some previously Internet-only banks are opting to relea se branches.Savings banks and nest egg and loan associations, occasionally called thrift institutions, are the second biggest group of depository institutions. They were first recognized as community-based firms to finance mortgages for people to purchase homes and still cater mostly to the nest egg and modify requirements of individuals. Credit unions are another type of depository institution. about credit unions are created by people with a beaten(prenominal) bond, for instance those who work for the similar club or be a member of the same labor union or church. Members pond their savings and, when they require money, they may borrow from the credit union, frequently at a minor interest rate than that demanded by other financial institutions.Federal preserve banks are Government agencies that achieve numerous financial services for the Government. Their chief tasks are to control the banking industry and to aid implement our Nations financial policy so our economy can run m ore proficiently by directing the Nations money providethe total amount of money in the country, including cash and bank deposits.Interest on loans is the main source of income for most banks, making their diverse lending incisions critical to their achievement. The commercial lending department loans money to companies to start or enlarge a business or to buy scroll and capital tools. The customer lending department handles student loans, credit cards, and loans for home developments, debt consolidation, and automobile purchases. Finally, the mortgage lending department loans money to individuals and businesses to buy real estate.The money to loan comes mainly from deposits in checking and reserving accounts, certificates of deposit, money market accounts, and other deposit accounts that clients and businesses arrangement with the bank. These deposits often make interest for the owner, and accounts that offer checking supply an easy technique for creation payments safely without using cash. applied science is having a main impact on the banking industry. such as, many usual bank services that once needed a teller, for example making a detachment or deposit, are now existing through ATMs that let people to right of entry their accounts 24 hours a day. In addition, direct deposit permits companies and governments to electronically transfer payments into different accounts. Also, debit cards, which may also apply as ATM cards, straight off deduct money from an account when the card is swiped across a machine at a stores cash register. Electronic banking by phone or computer permits consumers to pay invoices and shift money from one account to another. Through these channels, bank customers can too admission information such as account balances and statement history. Some banks have started offering online account aggregation, which makes accessible in one place detailed and up-to date information on a clients accounts held at diverse institutions.Progressio ns in technology have also led to upgrading in the ways in which banks process information. Use of check imaging, which lets banks to store photographed checks on the computer, is one such example that has been applied by some banks. former(a) kinds of technology have deeply impacted the lending side of banking. such as, the availability and increasing use of credit scoring software lets loans to be accepted in minutes, rather than days, making lending departments more competent.Other basic changes are taking place in the industry as banks vary their services to become more competitive. A lot of banks at the present offer their clients financial planning and asset management services, as well as brokerage house and insurance services, frequently end-to-end a subsidiary or third party. Others are starting to offer investment banking services that assist companies and governments increase money during the issuance of stocks and bonds, also usually during a subsidiary. As banks repl y to deregulation and as competition in this sector raises, the nature of the banking industry will continue to undertake considerable change.2.2 COMPETITIVENESS OF THE ISLAMIC BANKING INDUSTRYThe crucial feature of Islamic banking is that it is interest-free. Although it is frequently claimed that there is more to Islamic banking, for example contributions towards a more fair distribution of income and wealth, and improved equity contribution in the economy (Chapra l982), it nevertheless obtains its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.Islam forbids Muslims from taking or tolerant interest (riba) in spite of of the reason for which such loans are made and despite of the rates at which interest is exciting. To be certain, there have been efforts to differentiate between usury and interest and between loans for role and for production. It has also been argued that riba refers to usury accomplished by minor mone y-lenders and not to interest charged by contemporary banks and that no riba is occupied when interest is mandatory on productive loans, but these arguments have not won approval. Apart from a few disagreeing opinions, he general agreement among Muslim scholars obviously is that there is no variation between riba and interest. In what follows, these two terms are used interchangeably.The forbidden of riba is mentioned in four different revelations in the Quran. The first revelation highlights that interest removes wealth of Gods blessings. The second revelation condemns it, placing interest in combination with illegal appropriation of piazza belonging to others. The third revelation enjoins Muslims to keep on clear of interest for the sake of their own welfare. The twenty-five percent revelation set up a clear difference between interest and trade, influencing Muslims to take only the principal sum and to forgo even this sum if the borrower is not capable to repay. It is further declared in the Quran that those who ignored the forbidden of interest are at war with God and His Prophet.The forbidden of interest is furthermore cited in no unsure terms in the Hadith (sayings of the Prophet). The Prophet warned not only those who take interest but also those who offer interest and those who record or witness the operation, saying that they are all similar in guilt. It may be mentioned in passing that similar prohibition are to be found in the pre-Quranic scriptures, although the People of the Book, as the Quran refers to them, had chosen to rationalize them. It is remarkable that Islam has successfully warded off various subsequent rationalization efforts aimed at legitimizing the institution of interest.Some scholars relays on economic reasons to explain the reasons on why interest is prohibited in Islam. scholars argued that interest is a pre- determined cost of production, which avoid full exercise (Khan l968 Ahmad n.d. Mannan l970). In the same tone, it ha s been challenged that international monetary crises are largely repayable to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad l952 Suud n.d.). None of these studies, however, has really succeeded in creating a causal interrelate between interest, on the one hand, and employment and trade cycles, on the other.Others, anxious to maintain the Islamic mail on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalistic economies and have questioned the efficiency of the rate of interest as a determinant of saving and investment (Ariff l982). A general line running through all these negotiations is the exploitative character of the institution of interest, although some have pointed out that profit (which is legalized in Islam) can also be exploitative. One response to this is that one mustiness differentiate between profit and profiteering, and Islam has prohibited the latter as well.It began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far will Sharia boards and western regulators let it spread? (Josh Martin, Middle East, Jun2005 Issue 357, p50, 6p)The Islamic prohibition on interest does not imply that capital is costless in an Islamic system. Islam realizes that money is a component part of production however it does not permit the factor to pre-determined claim on the productive surplus in the form of interest. This has leaded to the question as to what will then substitute the interest rate mechanism in an Islamic framework. There have been propositions that profit sharing can be a workable alternative (KaCustomer Awareness Toward Islamic Accounting TheoryCustomer Awareness Toward Islamic Accounting TheoryCHAPTER 1INTRODUCTION1.1 BACKGROUND OF THE STUDYIslamic 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 1970s, 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).1.2 STATEMENT OF THE PROBLEMDuring 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 (Sharia).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 Ku wait 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, Musharaka and Ijara.As result, many Islamic financial providers seek to assess the level of social awareness of their tools that incorporate with Shar ia. The understanding of customer degree of awareness are paramount important to determine firms endowment to promote Islamic accounting theories. Bankers also seek to explore the reasons behind dealing with Islamic banks to better understand and improve services provided.Another challenge that faces Islamic financial institutions is that, as service provided they have to understand customers perceptions and attitude toward the services provided to better understand customers need, want, and improve their services. With no understanding to customer perceptions and attitude Islamic banks may have no means to better develop their services and improve customer satisfaction and compete in the local as well as the international market. The current study seeks to assess the level of customers awareness of Islamic accounting theories and to explore their perceptions and attitude toward these tools that incorporate with Sharia.1.3 OBJECTIVES OF THE STUDYIslamic financing is an important are a of contemporary academic and policy interest. Opposing views in the area are analyzed in the light of empirical evidence. Measuring the degree of customer awareness toward Islamic accounting theory and their perception and attitude toward Islamic tools will shape the future of Islamic financing. The current study attempts to reveals the degree of customers awareness toward Islamic and efforts bestows to improve their awareness in order to assist Islamic financial institution to determine the efforts needed to raise this awareness and improve their attitude and perceptions. Another objective of this study is to explore customers perceptive and perception toward Islamic transactions thus Islamic financial institutions can better understand their customers and improve services provided.1.4 SIGNIFICANCE OF THE STUDYIslamic banks provide many financial services and are competing heavily in the Middle East with conventional banks. Customers nowadays go for Islamic bank loans for buying home, cars and even business setup, as the conditions are very clear and there are no rising interest piling up. To overcome the fierce competition, Islamic bank need to bestow efforts in rising the degree of awareness toward Islamic accounting and finical tools and improve customers perception and attitude. The study is of general theoretical importance as well as of particular practical significance for policy makers who intend to conform their existing financial systems to Islamic rules.Furthermore, at the practical level, the study aims to assist Islamic bank manager in providing empirically evidence how of Kuwaiti customers aware toward Islamic accounting theory and Islamic financial services. The study also provide framework for bank managers in measuring customers perception and attitude toward Islamic services and their usage of various products and services offered. At the theoretical level, the current study aims to develop the literature of Islamic accounting theory and e xplain how these theories are to be implemented in the Islamic financial institution who adapts Sharia.1.5 THE SETTING OF THE STUDYIn the Gulf Co-operation Council there are growing number of Islamic banks are also taking steps towards greater clearness and stronger authority structures. The state of Kuwait for example, has been taking a number of steps to reinforce its local Sharia-obedient institutions, including slowly moving in the direction of a latest regulatory framework for sukuk. In conversations with OBG, manufacturing insiders explained that due to a lack of suitable legal mechanisms, Islamic finance companies are not allowed to issue sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, such as Bahrain. Given the massive increase in sukuk issuance worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been nearly 45%), Kuwaits financiers are keenly aware of the need for proper rules regulating sukuk.Sheikh Sale m Abdulaziz Al Sabah, the governor of the Central Bank of Kuwait (CBK), verbalise earlier of 2008 that regulations are wanted, saying that the CBK is keen to provide a legal system to regulate Islamic investment tools such as the issuance of sukuk, especially in light of growing demand. We are optimistic a solution will soon be found. In state of Kuwait, the Islamic financial sector and its sharia-compliant companies are the increasingly global. Kuwait Finance house Bank (KFH), as an example, in addition to its Turkey, Malaysia and Bahrain ventures, newly established a subsidiary with a pair of Chinese firms to discover real estate investments in the Chongqing region of a middle China. In a more high-profile move, Investment Dar, one of Kuwaits biggest Islamic investment companies, recently funded a takeover of British luxury carmaker Aston Martin to the tune of $925 million.To achieve the purpose of the current study, the study focuses on a specific Islamic bank that located in th e state of Kuwait. KFH has usually been one of the main engines behind the growth of Kuwaits sharia-acquiescent financial market however, its enlargement and development indicates a growing maturity in Kuwaits sharia-compliant services zone, established by the push toward the regulation of Islamic bonds (sukuk) and the emergence of ever-stronger Islamic investment firms.KFH was the first Islamic bank in Kuwait and one of the pioneers toward adapting of Islamic accounting and financial theory in the gulf region. Beside the convenience, the research believe that exploring the degree of Islamic accounting theories of this bank may reveals highly reliable evidence of generalizing the finding in the state of Kuwait. KFH considered the main Islamic bank in Kuwait and the second-main bank of any kind in the country. Also to the huge injection of capital, KFH lately unveiled plans to set up its own subsidiary in Amman.The expansion of Islamic banks operations at home and overseas underlines the growing development of Kuwaits Islamic financial sector. Thus the study believe that investigating the customers awareness of Islamic banks toward Islamic accounting theory are justified and understanding their perception and attitude toward KFH is paramount important in attempting to improve service quality of Islamic firms.1.6 LIMITATIONS OF THE STUDYThis study is concerns with Islamic banking that located in the state of Kuwait as its difficult to include all Islamic banks related to resource limitation and time restriction. The study also does not analyze all Islamic accounting theory as it is very vast subject to control, rather than focusing on basic Islamic accounting theory that adopted by Islamic financial institutions and banks. Other limitation could be found related toSample size The sample size for the bank customer is very large. Therefore, the collection of customer feedback will be costly in term of time and money. The study aims to attain around (150) survey fo r the purpose of analysis, which may considered one of the study limitation.Data collection It may be difficult to distribute and collect all data and forms since the study is targeting to collect feedback from the entire bank customers.1.7 DEFINITION OF TERMSThe current study includes many Islamic terms and concepts that will be stated as in Arabic meaning, some of these concepts areHalal The actions or items that Muslims can have access to.Haram The actions or items that Muslims are banned fromRiba What is known in the west as the interest.Maysir It means Games of chance such as lottery, gambling and it is usually referred to as Haram.Takaful It is a form of insurance in the Islamic religion which will be explained in the essay.Gharar Deception, hazard, speculation, uncertainty, risk (literally, peril or hazard)Mudaraba Is a trustee financing contract, where one party, the financier, entrusts funds to the other party, the entrepreneur, for undertaking an activityMushakara It is an equity participation contract, whereby two or more partners contribute with funds to carry out an investmentMuqarada Loan ParticipationQard Hassan It is a benevolent loan (interest free)Sharia It is Islamic religious law derived from the Holy Quran and the Sunnah1.8 THESIS STRUCTUREThe current study includes five chapters chapter one described the background of this study, and consisted of the introduction, objectives and significance of the research. Chapter two reviewed the literatures on Islamic banking and theories. Chapter three explained the research methodology. The data analysis techniques and research findings were demonstrated and discussions in chapter four. Finally, chapter five exhibited conclusions and future recommendation.CHAPTER TWOLITERATURE REVIEWIts necessary to explore the literature of Islamic accounting theory in details in this chapter. This chapter attempts to review previous literatures on the topic of Islamic Accounting Theory and provides recent finding related to the degree of awareness of customers toward Islamic financial services. This chapter attempts provide recent study and articles about Islamic accounting theory that explain the nature of Islamic banks system.Previous literatures and studies have revealed that the first recent research in Islamic banking filed was conducted in Egypt under cover, without projecting an Islamic picture, for fear of being seen as a demonstration of Islamic fundamentalism, which was abhorrence to the political government (Siddiqi l988). These studies remain until l967 where nine Islamic banks open in the country (Ready l98l). These banks was neither charging nor paying interest, investing mainly by participating in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi l988). For that reason, Islamic banks functioned basically as saving-investment firms rather than as commercial banks that based on charging interests. The Nasir Social B ank, established in Egypt in l97l, was declared an interest-free commercial bank, although its charter did not refer to Islam or Shariah (Islamic law).Islamic banks appeared on the earth scene as dynamic players over the past two decades. Nevertheless, a lot of the values that based on Islamic banking usually accepted all over the world, for centuries more willingly than decades. The essential principle of Islamic banking is the ban of Riba (interest), while the essential occupant of Islamic banking the prohibition of riba, a word that encompasses not only the perception of usury, but also that of interest has rarely been recognized as appropriate beyond the Islamic world, a lot of its guiding values have. The majority of these values are rooted in simple ethics and general sense, which form the bases of numerous religions, including Islam.Interest or Usury was forbidden in both the Old and New Testaments of the Bible, whereas Shakespeare and many other writers, mainly those writi ng in the 19th century, have attacked the barbarity of the carry out. Much of the ethics championed by Victorian writers such as Dickens ranging from the fair division of wealth through to mans elementary right to work is obviously present in contemporary Islamic society. Although the western media oftenrecommend that Islamic banking in its current form is a recent occurrence, in fact, the essential practices and principles date back to the early part of the seventh century. (Islamic Finance A Euromoney Publication, 1997)It is obvious that Islamic finance was accomplished predominantly in the Muslim world during the Middle Ages, encouragement trade and business behavior. In Spain and the Mediterranean and Baltic States, Islamic trades became vital middlemen for trading actions. It is claimed that several concepts, techniques, and tools of Islamic finance were later adopted by European financiers and businessmen.As Islamic finance is intertwined within its religion, the basis of th e religion affects the finance in two important waysIslam aims at building a socio-economic order based on justice and considers economic activity as a means to an end and not an end in itself. It enjoins Muslims to harness natural resources, which are a trust from Allah SWT, for carrying out rightful activities but abhors exploitation and man-made inequalities of income and wealth (Al-Harran, 1993).Islam is extremely concerned with the problem of financial growth, but treats this as an significant part of a wider problem, that of total human progress. The crucial function of Islam is to lead human growth on right lines and in the right direction. Islamic principle deals with all sides of economic development in the framework of total human development (Al-Harran, 1993).The reinforcement of Islamic banking coincided with the world-wide festivity of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial assets of Muslims mostly those of the oil producing countries, expected a boost due to validation of the oil prices, which had up till now been under the power of foreign oil Corporations. These proceedings led Muslims to struggle to model their lives in agreement with the principles and philosophy of Islam (Abbas Valadkhani, 2004).Islam not only prohibits trade in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an tool for the progress of an Islamic financial order. Some of the salient features of this order may be summed up asIslam urges individuals to seek their economic well-being. Islam presents a clear difference between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. This God rule can be considered as a way to systemize the citizens.Islam makes it obligatory on people to spend their wealth judiciously and not to hoard it, keep it idle or to squander it while acknowledging them their right to ownership of wealth legitimately acquired. This can be compared with the communism principles that look for the welfare of the whole members of the society.While allowing an individual to retain any extra capital, Islam look for reducing the edge of the extra for the well-being of the society as a whole, especially the poor and underprivileged sections of society by contribution in the procedure of Zakat. It is the way the Islamic government intervenes to ensure that poor people can have a formal financial source.While making payment for the ways of human nature and yet not yielding to the penalty of its worst propensities, Islam seeks to stop the amassing of wealth in a few hands to the damage of society as a whole, by its laws of inheritance.Viewed as a total, the financial system, which visualized by Islam aims at social justice without inhibiting people proj ect beyond the point where it becomes not only jointly harmful but also individually self-destructive.The Islamic economic system employs the perception of contribution in the enterprise, utilizing the funds at threat on a profit-and- loss-distribution basis. This by no means implies that investments with economic institutions are necessarily tentative. This can be barred by careful investment strategy, diversification of risk and sensible management by Islamic economic institutions. This system supports people to invest their money in those financial institutions to exploit their utilities by making profits under the guidelines of the Shariah.The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and minimize the players in the market to be the people who know how to invest and when they inter the market to catch the goal.The main goals of an Islamic Banking and Financial system are toImple ment the value system of the Quran and the Sunnah (tradition or practice of Prophet MuhammadSAW) in the realm of the Muslim socio-economic system. Ibn Taymiyahr.a. (n.d.), a distinguished scholar of Islam, explicates this as follows In muamalat (business transactions) all activities are permissible unless forbidden by revelation (Quran) or the practice of Prophet Muhammad SAW. The examples of prohibited business activities would include dealing in gambling, liquor, pork etc. The financial contracts of Islamic banks need to be clearly documented, equitable and avoid the elements of Riba, Gharar and Maysir as explained in the following section.Foster the growth of the economy of Muslim nations by developing financial markets, institutions and instruments. A well-developed capital market, with efficient institutions offering diverse financial facilities, can reduce the overall cost of capital. It can enhance social welfare by facilitating the acceptance of projects whose present value of all relevant cash in-flows (benefits) after tax is greater than the present value of all cash out-flows (cost) of the project or the expected internal rate of return is greater than a minimum threshold rate (or cost of capital). Furthermore, these necessary conditions should also be satisfied for each party financing the project to alleviate agency effects. This entails economic development, which is promoted in Islam, as Prophet Muhammad SAW exhorted Muslims to undertake business ventures (tijarah) as described in the following hadith Nuaym ibn Abd Al-Rahman has quoted the (narration). ProphetSAW as saying Nine tenths of earnings (Rizq) is in bai (business ventures), and tenth in cattle. This was reported by Ibrahim Al-Harbi (Al-Iraqi, 1992) and by Said ibn Mansur (Al-Suyuti, 1990).Dampen the shocks of extreme economic output by promoting risk-sharing instruments whose payoffs are strictly contingent on the profitability of a firm or project at a micro level. Financial facilitie s with fixed costs can severely strain the resources of borrowers during a slowdown, which lead to bankruptcies and structural impairment of the economy. The gist of Islamic financial securitization is summarized by the following well-known hadith quoted by Kahf and Khan (1992), Al-kharaj bi al daman. This implies that entitlement of return from assets vests in the one bearing the risk of it.2.1 CONVENTIONAL BANKINGThe main job for most of non-Muslim or conventional banks is preserved money and valuables and give loans, credit, and imbursement services, for example checking accounts, money orders, and cashiers checks. These banks furthermore may propose investment and insurance products, which they were once banned from selling. As a diversity of models for collaboration and integration amongst finance industries have appeared, some of the conventional distinctions among banks, insurance companies, and securities firms have reduced. Regardless of these changes, banks continue to pre serve and carry out their main roleallowing deposits and lending funds from these deposits. There are several kinds of banks, which vary in the number of services they offer and the customers they serve. Although some of the distinctions among these kinds of banks have tapering as they begin to enlarge the vary of products and services they propose, there are still key distinctive behaviors. Commercial banks, which control this industry, provide a full variety of services for customers, enterprise, and governments. These banks come in a broad range of sizes, from large international banks to local and community banks. International banks are involved in global lending and foreign cash trading, additionally to the more typical banking services. However, a lot of commercial banks have also extended to present online banking, and some previously Internet-only banks are opting to release branches.Savings banks and savings and loan associations, occasionally called thrift institutions, a re the second biggest group of depository institutions. They were first recognized as community-based firms to finance mortgages for people to purchase homes and still cater mostly to the savings and lending requirements of individuals. Credit unions are another type of depository institution. Most credit unions are created by people with a familiar bond, for instance those who work for the similar company or be a member of the same labor union or church. Members pond their savings and, when they require money, they may borrow from the credit union, frequently at a minor interest rate than that demanded by other financial institutions.Federal preserve banks are Government agencies that achieve numerous financial services for the Government. Their chief tasks are to control the banking industry and to aid implement our Nations financial policy so our economy can run more proficiently by directing the Nations money providethe total amount of money in the country, including cash and ba nk deposits.Interest on loans is the main source of income for most banks, making their diverse lending departments critical to their achievement. The commercial lending department loans money to companies to start or enlarge a business or to buy inventory and capital tools. The customer lending department handles student loans, credit cards, and loans for home developments, debt consolidation, and automobile purchases. Finally, the mortgage lending department loans money to individuals and businesses to buy real estate.The money to loan comes mainly from deposits in checking and reserving accounts, certificates of deposit, money market accounts, and other deposit accounts that clients and businesses arrangement with the bank. These deposits often make interest for the owner, and accounts that offer checking supply an easy technique for creation payments safely without using cash.Technology is having a main impact on the banking industry. such as, many usual bank services that once needed a teller, for example making a withdrawal or deposit, are now existing through ATMs that let people to right of entry their accounts 24 hours a day. In addition, direct deposit permits companies and governments to electronically transfer payments into different accounts. Also, debit cards, which may also apply as ATM cards, immediately deduct money from an account when the card is swiped across a machine at a stores cash register. Electronic banking by phone or computer permits consumers to pay invoices and shift money from one account to another. Through these channels, bank customers can too admission information such as account balances and statement history. Some banks have started offering online account aggregation, which makes accessible in one place detailed and up-to date information on a clients accounts held at diverse institutions.Progressions in technology have also led to upgrading in the ways in which banks process information. Use of check imaging, which lets banks to store photographed checks on the computer, is one such example that has been applied by some banks. Other kinds of technology have deeply impacted the lending side of banking. such as, the availability and increasing use of credit scoring software lets loans to be accepted in minutes, rather than days, making lending departments more competent.Other basic changes are taking place in the industry as banks vary their services to become more competitive. A lot of banks at the present offer their clients financial planning and asset management services, as well as brokerage and insurance services, frequently throughout a subsidiary or third party. Others are starting to offer investment banking services that assist companies and governments increase money during the issuance of stocks and bonds, also usually during a subsidiary. As banks reply to deregulation and as competition in this sector raises, the nature of the banking industry will continue to undertake considerable cha nge.2.2 COMPETITIVENESS OF THE ISLAMIC BANKING INDUSTRYThe crucial feature of Islamic banking is that it is interest-free. Although it is frequently claimed that there is more to Islamic banking, for example contributions towards a more fair distribution of income and wealth, and improved equity contribution in the economy (Chapra l982), it nevertheless obtains its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.Islam forbids Muslims from taking or giving interest (riba) in spite of of the reason for which such loans are made and despite of the rates at which interest is exciting. To be certain, there have been efforts to differentiate between usury and interest and between loans for consumption and for production. It has also been argued that riba refers to usury accomplished by minor money-lenders and not to interest charged by contemporary banks and that no riba is occupied when interest is compulsory on productive loan s, but these arguments have not won approval. Apart from a few disagreeing opinions, he general agreement among Muslim scholars obviously is that there is no variation between riba and interest. In what follows, these two terms are used interchangeably.The forbidden of riba is mentioned in four different revelations in the Quran. The first revelation highlights that interest removes wealth of Gods blessings. The second revelation condemns it, placing interest in combination with illegal appropriation of property belonging to others. The third revelation enjoins Muslims to keep on clear of interest for the sake of their own welfare. The fourth revelation set up a clear difference between interest and trade, influencing Muslims to take only the principal sum and to forgo even this sum if the borrower is not capable to repay. It is further declared in the Quran that those who ignored the forbidden of interest are at war with God and His Prophet.The forbidden of interest is furthermore cited in no unsure terms in the Hadith (sayings of the Prophet). The Prophet warned not only those who take interest but also those who offer interest and those who record or witness the operation, saying that they are all similar in guilt. It may be mentioned in passing that similar prohibition are to be found in the pre-Quranic scriptures, although the People of the Book, as the Quran refers to them, had chosen to rationalize them. It is remarkable that Islam has successfully warded off various subsequent rationalization efforts aimed at legitimizing the institution of interest.Some scholars relays on economic reasons to explain the reasons on why interest is prohibited in Islam. scholars argued that interest is a pre- determined cost of production, which avoid full employment (Khan l968 Ahmad n.d. Mannan l970). In the same tone, it has been challenged that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no sma ll measure attributable to the phenomenon of interest (Ahmad l952 Suud n.d.). None of these studies, however, has really succeeded in creating a causal link between interest, on the one hand, and employment and trade cycles, on the other.Others, anxious to maintain the Islamic position on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalist economies and have questioned the efficiency of the rate of interest as a determinant of saving and investment (Ariff l982). A general line running through all these negotiations is the exploitative character of the institution of interest, although some have pointed out that profit (which is legalized in Islam) can also be exploitative. One response to this is that one must differentiate between profit and profiteering, and Islam has prohibited the latter as well.It began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far will Sharia boards and western regulators let it spread? (Josh Martin, Middle East, Jun2005 Issue 357, p50, 6p)The Islamic prohibition on interest does not imply that capital is costless in an Islamic system. Islam realizes that money is a factor of production however it does not permit the factor to pre-determined claim on the productive surplus in the form of interest. This has leaded to the question as to what will then substitute the interest rate mechanism in an Islamic framework. There have been propositions that profit sharing can be a viable alternative (Ka