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The Financial Management Perspective of Islamic Social

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 CHAPTER 8
THE FINANCIAL MANAGEMENT
PERSPECTIVE OF ISLAMIC
SOCIAL ENTERPRISE

Nathasa Mazna Ramli, Muhammad Iqmal Hisham Kamaruddin and

Nurul Aini Muhamed

INTRODUCTION

It is undeniable that a non-profit sector as the third sector plays

important roles in the economy nowadays. As a non-profit sector born
from loopholes of public and private sectors, its impacts is believed to
fulfill society’s interests that cannot be fulfilled by these two previous
sectors. The third sector concept is derived from accumulation of
public wealth and designed to distribute the wealth back to the society
wisely.

Non-profit organizations have been earning income by themselves

traditionally (Zimmerman & Dart, 2000). Despite dependency on public
for its sustainability and continuity, some of non-profit organizations
developed into stronger entities by generating revenues by themselves.
This ‘new’ trading activity by non-profit organization which is known
as Social Enterprise (SE) are not just to reduce dependency on public
support, it also creates other issues and challenges for these non-profit
organizations. The issues and challenges include matters relating to
financial management. The accounting and financial management
of SE consume as many issues and challenges as corporations with
profit-seeking motives.

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 Critical Readings in Islamic Social Finance

This chapter aims to present financial management perspective in SE,

particularly related to Islamic Social Enterprise (iSE). As an iSE, the
organization also needs to consider the Islamic principles in its operation
and management, including in the financial aspects. The paper is based
on a review of professional documents and comprehensive literature
review. The review aims to synthesize previous research findings and
views, thus capsulizing the structural overview for this topic. The
structural overview of this chapter, therefore could be oriented to
identify the gaps and direction for future research.

This chapter begins with an overview of the SE including its differences
with other entities which are profit-based organizations and non-
profit organizations. The definition of iSE is also established in this
section. Next, the discussion on financial management concepts are
presented in Section 2, where key elements for financial management
such as internal control system, financial planning and decision
making, financial reporting and disclosure and financial performance
measurement are being elaborated. Further, the chapter highlighted
Islamic principles and views relating financial management that iSE
have to take into consideration. Finally, the chapter is concluded by
highlighting the gaps and direction for future research.

THE CONCEPT OF SOCIAL ENTERPRISE (SE) AND

ISLAMIC SOCIAL ENTERPRISE (iSE)

In general, there are three economic sectors, which are public

sector, private sector and non-profit sector. Public sector consists of
governments and all publicly controlled or publicly funded agencies,
enterprises and other entities that deliver public programs, goods
or services (IIA, 2011). Private sector consists of private and all
individuals or groups of companies, enterprises, organizations and
other entities that operates with maximizing profit as main objective
(UNDP, 2012). Non-profit sector consists of civic and all socials
organizations, institutions, agencies and other entities apart from
public and private sectors (Frumkin, 2005).

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 Part 3 : Empirical Cases and Malaysian Experiences in Institutional Perspective

Generally, SE can be defined as an organization with primarily social

objectives, where funds surpluses are principally reinvested for that
purpose in the business or in the community, rather than being driven
to maximize shareholders’ wealth as in private sector (Spear et al.,
2009; Cabinet Office, 2006; Kerlin, 2006; DTI, 2002). Jamison (2006)
specifically defined SE as “…an organization that, through some
combination of the products and services that it sells and its method
of operation, generate net positive externalities and make conscious
effort to increase the positive externalities of its business, and reduce
the negative externalities” (p.1).

Based on the above definition, SE can be conceptualized as an

organization that is situated between two spectrums, which are for-
profit organization and non-profit organization. SE combines these
two elements’ objectives and goals which serve the society and at
the same time generate profits. Bielefeld (2009) summarized notions
of SE by listing three organizational forms of SE: 1) a non-profit
organization with some earned income, 2) a non-profit organization or
for-profit organization with the same concerns for social and financial
objectives, and 3) a for-profit organization with some emphasis
on social responsibility. Therefore, SE can be located in the three
economic sectors as shown in Figure 1.

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 Critical Readings in Islamic Social Finance

Figure 1: The Social Enterprise (SE) Area

Public Private
Sector Sector

Non-profit
Sector Social Enterprise

Source: Authors

The discussion so far leads to another question, which objective is

more important or is it equal? By referring to the definition of the SE,
it can be answered that the social objective is the primary concern of
the SE as compared to the profit-oriented objective. Bielefeld (2009)
also stated that the second organizational form, where SE has the same
concern for social and financial ends is typically the idea that often
conceptualized as “true” SE. Thus, the SE’s convergences between
the characteristics of profit-organization and non-profit organization
are done by putting both social mission and business opportunity in
line as the organization’s objectives and goals (Gordon Liu & Ko,
2011). SE deviates from the regular charity perspective by embedding
the elements of modern business entity in the charity institutions and
involving in trading activities for the purpose to generate revenues.

Cornelius et al. (2008) attempt to distinguish the identification between

SE with social corporate responsibility (CSR) by private sector. They
summarized that although private organizations with CSR activities

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and programs have both social and profit objectives, its primary
objective and focus are based on profit. In contrast, SE primary focuses
on social objective and followed by profit objective. However, CSR
activities of a corporation primary focus on profit objective and then
followed by social objective. However, their discussion contradicts
Bielefeld (2009) organizational forms of SE.

The SE activities comes into various types of social business

activities such as trading, service delivery contracts, cultural arts,
education and employment skills training, recycling and childcare
provision. Although SE varies in their social business activities, it
can be simplified into four common characteristics as stated by Di
Domenico et al. (2010) which are,: (1) revenues generations from
trading activities; (2) aim to achieve social and environmental goals;
(3) generate additional benefits such as social capital and community
cohesion; and (4) closely associated with the target group of the
organization.

There is, however, no specific definition for the iSE. Nevertheless,

there are limited studies that discuss Islamic social entrepreneurship
such as Miles (2010), Al Alak et al. (2010) and Hoque and Parker
(2014). Prior studies on Islamic social entrepreneurship also do not
have agreement in the definition of the term. This is similar with
Bielefeld (2009), where he stated that the term social entrepreneurship
is problematic, but concluded that it focuses on individual as change
agents, and not on groups or organizations. Muliyaningsih (2013)
discusses the role of social entrepreneur in Islamic welfare system.
She emphasized how an individual could play act as an intermediary
of zakat institutions. Al Alak et al. (2010) proposed salient traits of
Islamic entrepreneur, which among others are fear of Allah and Halal
earnings. Therefore, a broader definition of iSE can be concluded that
it is similar to SE. On top of that, iSE consists of Islamic elements
and principles in its management and practices. The Islamic elements
in iSE can be either owned or managed by Muslims, has objectives
towards Islamic religion, operated and managed according to Islamic
law (Shariah law) and principles.

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 Critical Readings in Islamic Social Finance

There are a lot of SE around the world. Thompson and Doherty (2006)
for example, identified 11 different SE that have competitive financial
sustainability:

1. Genesis – projects by a group that creates a series of community-

based services from chicken farms to dental care in UK.
2. Suma – competitive wholesalers of health and food distribution
based on West Yorkshire, UK.
3. KaBoom! – starts as collection of corporate and public donations
for thousands of playgrounds in US and expands to education and
advocacy services.
4. Play Pumps – provides fresh water with sustainable activities
based on mixture donations and loans based at South African.
5. Trade Plus Aid –helps third world communities by providing a
route to market for communities production skills based at Ghana.
6. Cafedirect – provides market opportunities to third world
coffee bean producers with pays above average prices to ensure
community benefits based at UK.
7. Honey Care – Model framework in helping small village
communities to produce honey based at Kenya.
8. Easybeinggreen – provides energy-saving advocacy from
specifically from house to house based at Australia.
9. Trinity Partnership – company limited by guarantee (CLBG) that
supports community-based business, activities and programs
based at East Lancashire, UK.
10. Train 2000 – another CLBG that provides high quality business
and economic development supports and focus on women as it
targets.
11. Merseyside Dance Initiative (MDI) – other CLBG that focuses
on providing cultural activities especially educating community
on dance.

There are also SE operates in Malaysia for society benefits. The SE

varies based on its objectives and community targets. Examples of SE
are in Table 1.

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 Part 3 : Empirical Cases and Malaysian Experiences in Institutional Perspective

Table 1: Examples of SE in Malaysia

No Name of the SE Details

1 KakiSeni Provides art supports in term of training
and expertise for community
2 Do Something Acts as one-stop-hub that manages
Good volunteer resources for community and
charity work
3 PT Foundation Provides HIV/AIDS education and
(Pink Triangle) support programs for community
4 EPIC Homes Trains and empowers urban folks
program to build houses for aboriginal
communities living at rural areas

Source: www.socialenterprise.org.my

There are also several iSE operates in Malaysia. For example is Amanah
Ikhtiar Malaysia. The organization provides micro finance and other
business aids to community based-business especially at rural areas.
Another example is Charity Shoppe by Islamic Relief Malaysia, where
the iSE that sold charity items to support humanitarian activities.
Kedai Amal Aman Palestin is another iSE operating in Malaysia. The
iSEs sell their own products based on humanitarian crisis. The funds
generated are to fund the organization humanitarian programs, which
are mostly for Palestine and Syria.

THE CONCEPTSAND ISSUES IN FINANCIALMANAGEMENT

Financial management is a back bone of any organizations, whether

in public sector, private sector or non-profit sector. Good financial
management is surely important for iSE, particularly in ensuring that
the objectives and missions can be met. For a corporation, the goal of
financial management is to increase the shareholders’ wealth (Ross et
al., 2012). However, in the absent of shareholders, the role of financial
management in SE and iSE is different. The financial management
of SE and iSE will focus mainly on the expectation of stakeholders,

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particularly donors, without disregarding wealth creation from its

funds. Palmer and Randall (2005) suggested that for non-profit
organization, financial priorities should be focused on accountability
and value. Non-profit organizations are financially accountable to
wider stakeholders as they are funded by money from the public
and charitable trust. In terms of value, the management of non-profit
organization has to exhibit value for money and effectiveness.

Indeed, financial management is an important aspect for a sustainable

organization. Financial management relates to the efficiency and
effectiveness of organization in managing money (funds). It also
refers to planning, reporting, and financial decision making in
organizations (Ross et al., 2012). Organizations with strong financial
management are better able to fulfill their missions and deliver high-
quality services. Reports on the fund mismanagement of faith-based
organizations have indicated the importance of financial management
in these organizations (Bowrin, 2004). Sulaiman et al. (2008) has
suggested that lack of regulation and code of conducts has contributed
to inefficiency in religious organizations. The management of the
organization may misuse the funds that results in inaccurate reporting
management system such as budgeting, financial statement and
internal control (Adil et al., 2013). A proper financial management
system, therefore, can ensure that managers of organization will use
the funds efficiently and hence, safeguard the donors’ interest.

In order to provide a base for discussion of financial management, the

definition of the term needs to be established. Liu (2010) highlighted
that financial management refers to financial management theories
according to which financing should be conducted in the most proper
way, the collected capital should be utilized and managed in a most
effective way in enterprises and decisions on the reinvestment and
distribution of profits should be made most reasonably. Salazar et al.
(2012) stated that financial management consists of “financial strategies
which are goals, patterns or alternatives designed to improve and
optimize financial management in order to achieve corporate results”
where financial strategy “represents a path to achieve and maintain
business competitiveness and position a company as a world-class
organization” (p.2).

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According to the Chartered Institute Management Accountants

(CIMA), financial management constitutes ten of these activities,:
1) setting financial objectives, 2) planning and acquiring funds, 3)
ensuring funds are effectively managed, 4) management and financial
accounting, 4) formulating strategy, 5) planning and controlling
activities, 6) decision making, 7) optimizing use of resources, 8)
disclosure to others external parties, 9) disclosure to employees,
and 10) safeguarding assets (Wise, 1998). The definition of financial
management, therefore varies from one author to another author.
However, it lays the importance of financial management for an
organization. There are certain areas in financial management that
need to be focused in gaining good financial management practice.
This paper mainly focuses its discussion on internal control system,
financial planning and decision making, financial reporting and
disclosure, and also financial performance management.

Good internal control practice is one of the financial management keys

to ensure all organizations including SE and the iSE are conducted
smoothly and capable to achieve its objectives. It also can avoid
deficiencies which results in decrease of public support and indirectly
will constrain the organization’s mission to achieve its objectives
(Petrovits et al., 2011). As SE and iSE are involved with both social
and financial goals, the usage of funds must be properly handled and
internal control is believed to enhance proper usage of funds.

The Committee of Sponsoring Organizations of the Treadway

Commission (COSO) in its framework, Internal Control – Integrated
Framework (COSO, 1992) stated that internal control is broadly defined
as a process, effected by an entity’s board of directors, management
and other personnel – designed to provide reasonable assurance about
the achievement of the entity’s objectives with regards to reliability
of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.

COSO further explained there are five main components in internal

control which are,: (1) control environment; (2) risk assessment;
(3) control activities; (4) information and communication; and (5)
monitoring. Control environment refers to policies, procedures, flows,

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structures, guidelines and standards set up by the board to run the

organization according to its objectives. Meanwhile, risk assessments
refer to procedures in identifying and analysing organization’s risks
to achieve its objectives. Next, control activities refer to procedures
that drive management directives to meet organization’s objectives.
Information and communication refer to methods used to provide
information needed for decision making process. Lastly, monitoring
refers to supervising ongoing operations’ performance to ensure it is
on track towards organization’s objectives.

There are few control activities that need to be focused on as

highlighted in COSO latest framework, Internal Control – Integrated
Framework (COSO, 2012) in order to ensure good internal control
practices which are: (1) segregation of duties; (2) authorization and
approval; (3) verification and reconciliation; (4) physical control; and
(5) supervisory check. These control activities are also required from
SE and iSE as it can ensure proper financial management practices
similar to public and private sectors.

Financial planning, budgeting and decision making are critical

processes for an effective financial management in an organization.
Once the organization’s goals and objectives have been identified,
planning and budgeting became essential components of strategy
execution. Palmer and Randall (2005) have listed down the purpose
of budgeting for non-profit organisations,: 1) to co-ordinate different
activities (departments) towards a single plan, 2) to communicate
and set targets, 3) to maximize and allocate resources, 4) to identify
financial problems, 5) to establish a system of control by having a plan
against actual results can be compared, and 6) to compel planning.
The importance of budgeting in the financial management process
can ensure that the social objectives and financial objectives can be
achieved.

In addition, the management or board of an organization might have

to make decision relating to capital investment, project appraisal
and source of funding. However, financial decision making and
project appraisal techniques in the non-profit organization relatively
unsophisticated. Palmer and Randall (2005) highlighted that even

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in the most commercial of areas, non-profit organizations seem

hesititated to adopt appraisal techniques.

Financial disclosure is also part of financial management. Financial

disclosure is generally described as a set of documents containing all
related financial information needed whether by internal or external
parties who have interests towards this information. Previous study in
non-profit organizations by Arshad et al. (2012) stated that financial
disclosure especially financial reporting is an important medium
used by the management to communicate current organization’s
performance with internal and external users.

For external users such as donors, recipients and community,

financial disclosure is prepared in accordance to current accounting
standards such as International Financial Reporting Standard
(IFRS), International of Accounting Standard (IAS) and Malaysia
Financial Reporting Standard (MFRS). Some financial statements
such as statement of comprehensive income, statement of financial
performance, statement of cash flow and statement of equity are
required to be produced.

For internal users such as employees, managers and board of directors/

trustees, financial information that are required are varying and there
are no specific standards to follow. However, some guidelines have
been prepared by certain bodies such as by Institute of Management
Accountants (IMA) and Chartered Institute of Management
Accountants (CIMA). These guidelines for financial information
can be used in decision making process. Example of these financial
information are budget planning, costing, earning forecast and
financial analysis. These information can be used as good financial
management practices in non-profit organizations including SE and
iSE.

Another element of financial management is performance measurement

of the organization. Performance measurement is important not only
for public and private sector, but also for non-profit sector including SE
and iSE. Medina-Borja and Triantis (2006) stated that the survivability
of non-profit organization is depending on their capabilities in

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evaluating and measuring their own performance. Moreover, Beamon

(2004) claims that performance measurement is crucial towards
non-profit organizations’ accountability. It had positive relationship
as performance evaluation gives positive result; where it indirectly
increases the accountability of the non-profit organization. Thus, it
can be said that performance measurement evaluation will give impact
towards accountability and survivability of non-profit organizations.

Basically, there are no standard measurements for SE and iSE.

However, some previous study on measuring performance for the SE
and non-profit organizations can be used to evaluate the iSE. Bagnoli
and Megali (2009), Larsson and Kinnunen (2008), Zimmermann
and Stevens (2006), Wainwright, (2002) and Solà and Prior (2001)
identified that in order to evaluate performance for SE and non-profit
organizations, it must consider five stages which are,: (1) inputs;
(2) outputs; (3) throughputs; (4) outcomes and (5) impacts. Inputs
consist of all possible elements needed in order to carry out non-
profit organizations’ objectives through its activities and programs.
Evaluation on outputs refers to quantity and quality of products or
services delivered. In the throughput stage, the performance evaluation
includes both efficiency and effectiveness measures for non-profit
organizations. Evaluation on outcomes relates to results of non-profits
organizations that are linked to its objectives. Lastly, evaluation at
impact stage is an evaluation on the consequences of organizations’
activities towards community targeted.

Furthermore, Medina-Borja and Triantis (2006) stated that the result

in evaluating inputs and outputs can be referred to as the efficiency
of non-profit organizations while the result in evaluating throughputs,
outcomes and impacts can be referred to as the effectiveness of
non-profit organizations. According to Beamon and Balcik (2008),
efficiency is defined as a measure on how economically all resources
are utilized in providing products and/or services while effectiveness is
defined as a measure on to what extent each organization’s objectives
are achieved.

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Moreover, financial measurements also need to be focused in order

to evaluate organization’s performance. Lee (2010) and William and
Robert (2003) identified three most suitable ratios that can be used to
evaluate non-profit organization’s financial performance which are: 1)
fiscal performance ratio; 2) fundraising efficiency ratio; and 3) public
support ratio. In addition, Krishnan et al. (2003) added another ratio
evaluation which is program service ratio.

Fiscal performance ratio shows on fiscal-management status and

calculated from total revenues divided by total expenses. Fundraising
efficiency ratio is used to measure how efficient are non-profit
organizations in utilizing their assets. This ratio is calculated by
dividing total fundraising expenses to total fundraising revenues. The
extent of organization’s dependency on donations can be measured
by public support ratio, which is calculated from the amount of total
donations divided by total revenues. Lastly, program service ratio is
used to measure the amount of funds spent towards organizations’
objectives. This ratio is calculated by dividing total program service
expenses to total expenses.

Another well-known performance measurement for SE and iSE

is Social Return on Investment (SROI). SROI is an evaluation to
measure the social impact in term of monetary rate, relative to
investment required to create that impact (Rotheroe & Richards, 2007;
Flockhart, 2005; Olsen & Lingane, 2003). SROI is calculated from
the net present value of benefits divided by the net present value of
investments (Millar & Hall, 2012).

Palmer and Randall (2005) highlighted the needs for the management
and board of non-profit organizations to have clear procedures in
managing financial matters. Management and board must have
appropriate skills in ensuring effective financial management to take
place. Palmer and Randall (2005) also stressed on the importance of
clear financial responsibilities of each staff. Indeed, the most important
personnel are the treasurer, financial director or the chair of a finance
committee. This is due to the fact that these individuals are regularly
in discussion with external parties such as investment managers and
auditors.

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Walker et al. (2015) highlighted financial management challenges

that are faced mostly by non-profit organizations. The study
concluded four main challenges where the first challenge was related
to the financial department. They stated that staff members of non-
profit organization had less than optimal financial management
skills. In addition, the financial department was understaffed and
equipped with underdeveloped information technology (IT) systems.
Walker et al. (2015) also mentioned that a lack of transparency
regarding organizations’ financial positions existed in the non-profit
organizations, including an absence of useful forecasts. This has
resulted in uninformed choices and decisions made by the management
and board relating to the program and organizational needs.

Thirdly, incomplete understanding of the true costs of program

delivery became a challenge to non-profit organizations (Walker et al.,
2015). This includes the support functions necessary for high-quality
programs, which left those programs chronically underfunded. Finally,
Walker et al. (2015) reported that the organizations’ financial staff
members were working in isolation. The financial staff members had
limited connections to staff members who understood the resources
needed to support and strengthen the programs.

The success and sustainability of SE, therefore, can be concluded will

be very much depending on an effective financial management system.
It is very important for the management to be actively involved in the
financial management process. This is to ensure that performance of
the SE can be measured and corrective actions can be made. There is a
need for good financial management system in religious organizations,
including iSE, as they are viewed as public trust, existing for the
benefits of the society (Afifuddin & Siti Nabiha, 2010).

FINANCIAL MANAGEMENT OF ISLAMIC SOCIAL

ENTERPRISE (iSE): ISLAMIC PERSPECTIVES

This chapter has established that iSE is equal to SE, where the
organization has primarily social objectives together with financial
objectives. However, iSE operation and management are within Islamic

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principles, including the financial management. Islam encourages

every Muslim to manage their mal (wealth) wisely. From al-Daruriyat
theory of Maqasid Shariah (objective of Islamic law), there are five
fundamental elements and one of it was Yuhafizu Al-Mal (property
management). There also a verse from al-Quran that calls Muslim to
manage property modestly as in the following verse: “And [they are]
those who, when they spend, do so not excessively or sparingly but are
ever, between that, [justly] moderate.” (Al-Furqan 25:67).

Thus, the management of financial matters must be performed not

just for individual purposes, but organizations and even a nation
themselves need to have good financial management. For each
elements of financial management, there are Islamic principles that
have to be considered. The area of the financial management can be
viewed from the Islamic perspectives.

Generally, iSE raises its funds from Islamic sources. Funds from
Islamic sources can be described as collection of Islamic cash and
its equivalent collected for social benefits. There are several types
of funds from Islamic sources. Each of them had their own unique
characteristics that differ from one to another. Sheila et al. (2012) for
example, distinguish characteristics between zakat, waqf and sadaqah.
In addition, there are other sources of Islamic funds such as hibah,
infak and qard hasan, which also have their own unique characteristics
(ISRA, 2011). These unique characteristics can be recognized from
their definitions as follows:

· Zakat – The amount of money or kind taken from specific types of

wealth when they reach a specific amount at a specific time which
must be spent on specific categories in specific ways.
· Waqf – The amount of money or kind that had been given by donors
with specific purposes and it is an irrevocable gift of a corporeal
property (‘ain) for the benefit of donor’s family or someone else or
something and the benefits from this type of charity are normally
for public interest.
· Sadaqah – The amount of money or kind that had been transferred
to other people or parties without compensation seeking that
involves giving or donating without mentioning its usage in
specific.

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· Hibah – A transfer of a certain property (mal) without any

material consideration. It means uncompensated transfer between
individuals.
· Infak – Given acts for the betterment of the community and its
members (Kahf, 2007).
· Qard hasan – A loan that is interest-free and extended on goodwill
basis, primarily for welfare purposes. Also refers to a benevolent
loan.

Islamic funds are usually utilized in various forms to give its benefits
to the beneficiaries (Ahmed, 2002). ISE has to ensure that each
Islamic funds received by the organization is used according to its
characteristics. Moreover, these Islamic funds are encouraged to be
performed as in the following verse: “Those who spend their wealth
[in Allah’s way] by night and by day, secretly and publicly - they will
have their reward with their Lord. And no fear will there be concerning
them, nor will they grieve.” (Al-Baqarah 2:274).

ISE as a partly enterprise also may enter into financial contract with
other parties. There are also several Islamic financing contracts that
can be used in financing the operation of iSE such as ijarah (leasing),
murabahah (mark-up sale), bay’ mu’ajjal (price deferred sale)
and musharakah (joint venture). However, these contracts are not
commonly used in iSE but it is more of a norm used among Islamic
Financial Institutions (IFI) as part of their products and services.

As an iSE, the organization must be aware of funds that are used in its
operations. There are prohibition in Islam which are funds that have
and derived from the elements of riba ’(interest), gharar (uncertainty)
and maysir (gambling) (ISRA, 2011; and Wilson, 2007). Riba’ is
every excess in return of which no reward or equivalent counter is
paid. While, gharar is any bargain in which the result of it is hidden.
Maysir or also known as qimar is any activity which involves betting.

Each of these prohibited funds is disallowed to be practiced in every

Islamic organizations including iSE. Riba’ for example, its prohibition
are stated in the following verse: “O you who have believed, fear Allah
and give up what remains [due to you] of interest, if you should be

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believers” (Al-Baqarah 2:278). While, prohibition of gharar are stated

in the following verse: “O you who have believed, do not consume
one another’s wealth unjustly but only [in lawful] business by mutual
consent. And do not kill yourselves [or one another]. Indeed, Allah is
to you ever Merciful” (An-Nisa’ 4:29). Lastly, prohibition for maysir
is based on this following verse: “O you who have believed, indeed,
intoxicants, gambling, [sacrificing on] stone alters [to other than
Allah], and divining arrows are but defilement from the work of Satan,
so avoid it that you may be successful” (Al-Maidah 5:90).

In Islam, internal control system and its practices are ordered by Allah
(SWT) in the following longest verse in Quran: “O you, who have
believed, when you contract a debt for a specified term, write it down.
And let a scribe write [it] between you in justice. Let no scribe refuse
to write as Allah has taught him. So let him write and let the one who
has the obligation dictate. And let him fear Allah, his Lord, and not
leave anything out of it. But if the one who has the obligation is of
limited understanding or weak or unable to dictate himself, then let
his guardian dictate in justice. And bring to witness two witnesses
from among your men. And if there are not two men [available], then
a man and two women from those whom you accept as witnesses -
so that if one of the women errors, then the other can remind her.
And let not the witnesses refuse when they are called upon. And do
not be [too] weary to write it, whether it is small or large, for its
[specified] term. That is more just in the sight of Allah and stronger as
evidence and more likely to prevent doubt between you, except when
it is an immediate transaction which you conduct among yourselves.
For [then] there is no blame upon you if you do not write it. And take
witnesses when you conclude a contract. Let no scribe be harmed or
any witness. For if you do so, indeed, it is [grave] disobedience in you.
And fear Allah. And Allah teaches you. And Allah knows of all things”
(Al-Baqarah 2:282).

The above verse orders few internal control activities such as records,
segregation of duties and verifications. In addition, the above verse
also highlighted that every debt transaction needs to be recorded. The
one who records must not from the one who gives the debt and the
one who receives the debt, which shows about segregation of duties

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 Critical Readings in Islamic Social Finance

activities. Furthermore, the above verse also state about verification

activities when every record needs to have witness to check on it.

Islam also encouraged people to plan their life, including matters

relating to financial management. In the following verse stated:
[Joseph] said, “You will plant for seven years consecutively; and what
you harvest leave in its spikes, except a little from which you will eat.”
(Yusuf 12:47). This verse shows that wealth needs to be planned well
for the sake of future challenges. This verse also relates with Joseph
role as financial advisor during that time. This shows that in financial
management, it is not just only for self-managing wealth but it is also
for managing organization’s and country’s wealth. By having well-
planned and structured financial planning process in managing wealth,
it helped the Muslim world to provide basic needs to the public by
using Islamic funds such as zakat, waqf and sadaqah.

ISE also would surely be involved in making decisions relating to

financial matters. Financial decision making is most related to the
concept of financial accountability. As financial decision making
focuses on financial accountability issues in private sector, it also
undeniable that this ‘financial accountability’ concept also exists in
iSE. Although absence of shareholders ownership in iSE, financial
accountability still becomes an important issue especially when it is
concerning the community interests. Thus, people who are in charge
of the iSE are also accountable for their actions and decision making
process.

From Islamic perspective, Shahul (2000) and Lewis (2006) stated

that accountability can be viewed from two perspectives which
are humanity’s accountability to Allah (SWT) (hablumminallah)
and humanity’s accountability to other people (hablumminannas).
Hablumminallah is developed from concept of khilafah (vicegerency)
and concept of amanah (trust). These concepts happen when people
are worshiping Allah (SWT) as khalifah and obey with all orders and
avoid any cautions from Him in this world. These duties have been
stated in the following verse: “And let there be [arising] from you
a nation inviting to [all that is] good, enjoining what is right and
forbidding what is wrong, and those will be the successful” (Ali Imran
3:104).

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 Part 3 : Empirical Cases and Malaysian Experiences in Institutional Perspective

While, hablumminannas is normally known as accountability concept

among people. From organizational point of view especially the
Islamic philanthropic institutions, Iqmal and Nathasa (2015) stated
that hablumminannas must consist and possessed by all possible
stakeholders who are related to the organization’s interests. This
includes internal parties such as employees, mutawalli (management),
board of directors/trustees and also external parties such as donors,
recipients, community or society and others.

It is undeniable that the concept of time value of money is widely used

as part of the mechanisms in decision making processes. Although iSE
decision making might not as complicated as private businesses, it
still needs to be considered. An effective decision making is important
especially to evaluate potential returns for every ‘investment’ that
will be done towards achieving social and business goals. In Islam,
time value of money is opposed by majority Islamic scholar as it has
additional or usufruct element which is known as riba’ (Siddique &
Rahim, 2015). Therefore, these issues should be the concern of iSE
as Islamic institution. ISE may be able to apply the concept of time
value of money as part of its financial decision making consideration
although it was used widely in enterprises.

However, Siddique and Rahim (2015) further identified that time value
of money can be used as evaluation tool but not as a consideration in
decision making process. Its means that for every potential investment
and expenditure made for both social and business goals, time value
of money can be used as evaluation tools to identify whether those
potential investments and expenditures can give positive returns for
both goals as expected in the future. However, time value of money
cannot be implemented especially in figures amount to be put as part
of predicted results in the future.

In addition, Ayub (2009) elaborated that the use of time value of money
in Islamic institution can be used for pricing goods and its usufruct, but
it cannot be used for ‘opportunity cost’ or ‘cost of funds’ that literally
involved with the value of money itself. For iSE, time value of money
can be used to evaluate its potential investments and expenditures in
term of physical value for those investments and expenditures itself

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 Critical Readings in Islamic Social Finance

in the future, but it cannot be used to evaluate in terms of money

devaluation that occurs for every investment and expenditure in the
future. Thus, it can be said that time value of money is not rejected as
one of the evaluation tools in financial decision making process for
iSE.

Moreover, other than time value of money, there are still a lot of
approaches for performing financial decision making such as mean-
variance portfolio analysis, capital budgeting, expected returns and
Multi Criteria Decision Aid (MCDA). However, the most challenging
to perform any approaches for financial decision making was the
human factor itself (Zopounidis & Doumpos, 2002). Same approach
used will result different decisions as decision makers differ in term of
their preferences, Islamic values, ethics, experiences and knowledge.

As discussed in previous section, financial disclosure is one of the

financial management. From the Islamic view, Baydoun and Willet
(1997) stated that a ‘full disclosure’ does not mean an organization
needs to disclose everything in particularly but to disclose everything
that is believed important to internal and external users. In addition,
Abdul Rahim (2003) specified there are at least four main objectives in
financial disclosure for Islamic organizations. The first two is focusing
on shariah rules for the organization to avoid riba’ and obligation
to pay zakat. The next two is focusing on community or public
concern which is a part of social responsibility and full disclosure
requirements. The four objectives are also in line with the needs of
financial disclosure for iSE.

Besides these financial disclosure objectives, Islam also orders the one
who is accountable with the responsibility to disclose all information
needed in a correct way, without hiding the truth. This has been stated
in the following verse: “Not upon the Messenger is [responsibility]
except [for] notification. And Allah knows whatever you reveal and
whatever you conceal” (Al-Ma’idah 5:99).

There are also financial standards from Islamic perspectives for

reporting and disclosing purposes such as the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI).

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 Part 3 : Empirical Cases and Malaysian Experiences in Institutional Perspective

However, this standard only focuses on Islamic financial institutions.

Nonetheless, certain elements in this Islamic financial reporting and
disclosure standard can be used for iSE, particularly relating to Islamic
funds such zakat, waqf and sadaqah.

Islam encourages Muslim to observe and learn from every life

event or transaction history. This observation and learning process
is important not only to seek evidence and achievement but also for
better understanding. Particularly, it is stated in the following verse:
“Say, Observe what is in the heavens and earth. But of no avail will
be signs or warners to people who do not believe” (Yunus 10:101).

Regardless of various types of measurement tools, each of it must

be performed completely as in the following verse:”And give full
measure when you measure, and weigh with an even balance. That is
the best [way] and best in result” (Al-Isra’ 17:35). In addition, there
should also be no worries in measuring everything that occurs in this
world as Allah (SWT) stated that everything have their own unique
results as in the following verse: “Indeed, all things We created with
predestination”(Al-Qamar 54:49).

Overall, effective and efficient financial management for Islamic

institutions, including iSE are important in ensuring accountability
of the institutions. The management and board of iSE should not
only focus on whether or not its objectives are aligned with Islamic
value but also the operation and management of iSE also needs to be
parallel with Islamic principles and elements, including the financial
management system.

CONCLUSION

This chapter has presented the concepts of SE and established the

definition of iSE. It is important to understand the basis of operation and
objectives of SE and iSE, before delving into financial management of
these organizations. The concepts of financial management and their
importance have also been discussed, focusing on selected key area
of financial management. It is found that the most critical challenge

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 Critical Readings in Islamic Social Finance

for SE and iSE is relating to their management and staff. It can be

concluded that unskilled staff and lack of understanding in financial
procedures by the board can hinder effective and efficient financial
management in SE.

This chapter also discussed the Islamic principles and views relating
to financial management. It is believed that as an iSE, the organization
needs to take into consideration the Islamic principles and views.
Instead of focusing only on Islamic social objectives, iSE should also
ensure that its operation and management are in line with the Islamic
guideline.

Discussion in this chapter has opened further questions relating to iSE,

particularly relating to financial management and board governance.
Future studies should be done relating to the financial management
practices of iSE, including Islamic elements in the financial matters.
Besides that, studies on actual board governance process in the SE,
particularly on the role played by the board in financial issues should
also be conducted. Future studies can either be done through interviews
and content analysis of documents. It is expected that future studies
in these areas could enhance the management accountability of the
institutions and increase the confidence of stakeholders.

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