Financial Management and Accounting

Financial Management and Accounting

Introduction

International financial management is also referred to as international finance. It is the management of finances in an international business environment that is involved in trading and earning money from the exchange of foreign currency. It is mainly used in the determination of exchange rates, comparing rates of inflation, providing an investment idea on the debt securities, prediction, and judgment of the foreign markets, and it helps in describing the economic status of other countries. In the financial system, there is a category that caters to all races and different religious groups. The main ones that we are going to focus on are the sharia banking and Western banking. Sharia banking is Islamic banking that complies with Islamic law and the practical application by the development of Islamic economics. Western banking is mainly used by the other general public and is not guided by Islamic laws.

Sharia banking and Saudi financial management and Western banking financial management

Sharia banking and Saudi financial management are mainly guided by the sharia laws from the Muslim community. Sharia banking is against the charging and payment of interest, which is referred to as riba in Arabic. So, instead of the Sharia and Saudi banks charging interest on the amounts of money borrowed by individuals, they agree with the borrower. The bank agrees with the individual who signs an agreement that they will borrow the funds and refund the principle with a given percentage of their profits after a given number of years. Similarly, individuals depositing cash in the banks sign up an agreement that after a given number of years, the bank pays back the deposited amount with a percentage of the profits the bank generated from the funds (Elsa, Utami & Nugroho 2018).

The western banks, however, when it comes to lending and borrowing, a fixed interest rate is determined before the actual transaction is made. The individuals borrow cash for some time with a given rate that they have to pay also. The western banks always take collateral for security purposes in case the individual might not be in a position to pay back the loan. When an individual deposits funds with these banks, they are given a specific interest rate that the bank charges on deposits for a given period. After the maturity of the period agreed upon, the individual can claim both the principle and the interest accrued over time (Iqbal & Quibtia 2017).

For the sharia and Saudi banking financial management in contrast to the western banking financial management system, they adapt the purpose of achieving moral purpose through the financial services they offer. The sharia banking system is based on Islamic belief, which is guided by the socio-economic justice in commercial dealings. The Sharia and Saudi financial management have to scrutinize the kind of business you are getting involved in after being offered the loan. They cannot provide loan assistance for businesses that are haram according to their Islamic laws. Sharia banks do not always support businesses that involve alcohol, pork, or pork by-products, pornography, or gambling. Whereas the western banking financial management system does not consider the kind of business you are going to undertake, their main concern is for you to repay the loan and the interest in due time as agreed (Lone, Aldawood & Bhat 2017).

The Sharia and Saudi financial management systems prohibit deceit, uncertainty, and the idea of hazards and risks. They prohibit this to protect individuals from unexpected losses brought about by exploitation by others. The Islamic laws are against any form of gambling and easy acquisition of wealth by chance. Whereas the western banking system is for the provision of conventional bonds that have uncertainties and risks due to the speculative nature of the bonds, the Sharia banking system is against it. The reasons behind the prohibition of conventional bonds by the sharia and Saudi banking systems is the fact that it has a stipulated interest rate, which compensates for an uncertain future circumstance (Salman & Nawaz 2018).

A joint venture contract characterizes sharia banking referred to as the Musharaka. It is a contract between the bank and the customer. A section of the profits generated by the business activities of individuals is set aside for the customer, and the other part is divided between two partners proportionately to their shares of capital. The losses are also shared in proportion to their capital share. In the western banking financial systems, such a joint venture is not practiced (Setiawan 2019).

The Sharia banks put faith in a trusted entrepreneur who is effective in the management of their assets. The entrepreneur is referred to as mudarib. The profits generated by the enterprise are shared between the bank and the mudarib. An agreement guides them, mostly the proportion of 60 to 40 is used. The proportion is mutually agreed on, and there are usually no questions behind the proportion shares. In case of the occurrence of losses, it is assumed by the bank. And the mudarib in such a case does not get any award. The conventional western banks do not practice this.

Difficulties of a Saudi company operating in countries that do not follow Sharia banking practices

The company might be faced with a legal obstacle from the country of operation. You will find that most non-Muslim countries have legal laws that require banks to operate on the principle of interest; a good example is India. Such a law can affect the company if it’s banking with the Sharia banks since the sharia banks are prohibited from offering interests. The regulations regarding the Cash Reserve Ratio and Statutory Liquidity Ratio tend to make banks to reserve a large portion of their deposits on interest earnings.

The company might also have difficulty in the treatment of debt and equity. Most Islamic financial institutions operate based on profit and loss sharing between the bank and the customers. But in the case of countries that do not follow the Sharia banking system, the interests are exempted from taxation. At the same time, dividends are taxed while in Islamic financial institutions, capital is usually equity-based, this poses a significant disadvantage for the Islamic companies that bank with Islamic financial institutions as compared to other conventional financial institutions.

The company might be faced with the problem of the lack of Islamic Insurance. Islamic banking and financial institutions bring about a sense of insecurity and lack of confidence. The uncertainties are due to the lack of deposit insurance and credit guarantee as compared to other conventional financial institutions, which include these services. There is also the lack of interest-free instruments coupled with underdeveloped Islamic primary markets and the inexistence of the secondary market for Islamic products; these problems may face the Saudi company too (Beg 2016).

Lack of Sharia experts in the other country could be a difficulty the company faces. Qualified Sharia experts are responsible for checking if the firms are operating per the Sharia laws. Lack of experts will increase the problems of the different firms since there will be no adequate regulation on the Islamic firms that have to operate as per the Islamic Quran requires (Beg 2016).

There will be the issue of lack of transparency. This will demotivate, and the investors tend to lose confidence. The company might end up losing faith due to the lack of transparency in profit distribution, financial documentation, and compliance with both the government and the Sharia laws. In a country that is not following the sharia banking system as its primary banking system, the Islamic financial institutions will find it hard to attain such transparency. There is always a fear of false reporting of profits by borrowers. There is also no hefty penalty for defaulters. Thus the funds can end up being misused.

In conclusion, the Sharia banking and Saudi financial management system are mainly based on the inspirations from the Quran. It has been one of the fastest-growing segments in the international banking and capital markets. It is becoming accepted in many countries as an alternative to the conventional western banking systems. The modern western banking management systems have taken part in incorporating the Sharia banking systems in their conventional systems so that it can widen its customer base.

References

Beg, S. A. N. A. (2016). Prospects, problems, and potential of Islamic banking in India. International Journal of Accounting and Financial Management Research, 6(3), 9-20.

Elsa, E., Utami, W., & Nugroho, L. (2018). A Comparison of Sharia Banks and Conventional Banks in Terms of Efficiency, Asset Quality, and Stability in Indonesia for the Period 2008-2016. International Journal of Commerce and Finance, 4(1), 134-149.

Iqbal, Z., & Quibtia, M. (2017). Theoretical Differences between Islamic Banking and Conventional Banking. International Journal of Business and Social Science, 8(1).

Lone, F. A., Aldawood, E. M., & Bhat, U. R. (2017). Comparative analysis of customer satisfaction towards Islamic and conventional banking: an empirical study from Saudi Arabia. International Review of Management and Marketing, 7(1), 273-280.

Salman, A., & Nawaz, H. (2018). Islamic financial system and conventional banking: A comparison. Arab Economic and Business Journal, 13(2), 155-167.

Setiawan, A. (2019, November). Harmonization of Islamic Law Norms in Sharia Banking Laws. In 2nd International Conference on Indonesian Legal Studies (ICILS 2019) (pp. 567-574). Atlantis Press.