NON-FINANCIAL MANAGEMENT ACCOUNTING
MOSTAQUE HUSSAIN AND ERKKI K LAITINEN
Management Accounting Systems (MASs) help management to evaluate competitive opportunities, cross functional communication, co-operation, market analysis, quality assessment & management, customer satisfaction, etc.
Therefore, MASs can be useful for Islamic banks and financial institutions (IBFIs) to measure performance, improve the efficiency of organisation, management information system, and planning and controls in order to maximise the benefits to its clients and society at large.
The IBFIs are expected to conduct transactions for the benefit of both the banks and the customers, and to uphold the principles of the Sharia. It is not desirable to label IBFIs as either charities or profit-making organisations only.
Making profit is acceptable for IBFIs, but the accumulation of profit without utilisation for the betterment of the community is forbidden. Because of this revelation, IBFIs are expected to be more sensitive to the needs of society and to promote social welfare programmes. The management of IBFIs should be responsible for developing and implementing policies that aim for this.
The banking sector has undergone political, social, economic and financial change world-wide. If IBFIs want to compete successfully and meet the demands of the community, the few financial tools currently being used must be augmented with new ones. In addition. Islamic banks (IBs) are supposed to take responsibility for their activities.
In the conventional system, customers deposit money and the bank are responsible for the betterment of the deposits. In the case of IBs, customers/investors depositing their money are obliged to also take on risk. Consider this exposure to direct risk, against the possibility that if IBs are not honest or sincere, or if the monitoring systems are not well developed or do not function, then there is room for mis-use of funds or inefficiency in handling them.
Therefore, systems must be in force to prevent this and meet the demands of interested parties. That is, by good management, IBs should diversify the risk in order to yield a higher return to their investors as against the conventional banks’ return on deposits.
However, there is still scope for misapplication of resources even within the context of socio-economic development. It can be used as an excuse to explain the low rate of return due to the investment in society-orientated rathe r than profit-orientated activities, thus leading to complacency and a shirking of the responsibilities of the organisation towards its clients.
It is perhaps notable that a few banks make a great deal out of being so-called welfare banks and working for the well-being of society. But the question can be asked: exactly how much are they doing, and what’s the real benefit to society? Most importantly, is there an alternative, and are the priority needs of societies really being addressed? It is necessary for banks to employ some critical methods to measure and clearly identify the most pressing and urgent investment needs of society.
However, IBFIs are not charitable organisations, so, in order to survive in the free competitive market, they must keep enough ability to maintain balanced objectives, that is, survival and socio-economic improvements, and at the same time they have to satisfy their customers. In this case, a Balance Scorecard of performance measures would be worthwhile for IBFIs to measure overall performance, i.e., financial and non-financial, qualitative and quantitative and external and internal.
Any activity is, per se, neither good nor bad; it can only be comparatively judged. If IBFIs claim that they are doing fine and are not comparable to others, that can provide opportunities to hide the true picture of the organisations, i.e., their real performance and efficiency. A comparative judgement would reveal the true picture.
However, owing to the globalisation of the money market, financial regulators are increasingly dependent on their counterparts abroad. These days, financial disturbances can originate in any significant market in any country. This can lead to quite unpredictable knock-on effects, transmitted through payments and settlement arrangements, anywhere in the world.
As a result, banking supervisors working in different places are being drawn increasingly together, and these have tended to set a benchmark for best supervisory practice in other parts of the world. IBFIs are not outside of the modern financial market and hence they need to be benchmarked for this purpose.
In the modern economic era, competition is sharp in any business and therefore continuous improvement of business is essential. IBFIs are not outside this reality. If they want to stay (and they will stay), then they must take action towards their continuous improvement. In this case. Total Quality Management (TQM) can be used in IBFIs as a tool to assure ongoing efforts in improvement.
The traditional notion of overhead (OH) allocation no longer functions well and the complexity of transaction and the cost effectiveness of every activity needs to be put under considerable scrutiny. In this sense, every production process should be measured according to its activity that consumes resources, and every product should be priced according to the consumption of activities.
That is the remuneration of service and its cost calculation should depend on its activity, but not only on one or two volume-based cost driver/s. Since Activity-Based Cost Management (ABCM) puts the emphasis on activity, it is important to count the OH costs, and measure non-financial activity, according to the multiple activity drivers rather than the traditional one or two volume-based cost driver/s (which can distort the importance of non-volume and non-financial activities).
However, the identification and selection of activity drivers depends on the institution’s set-up goals, and the kind of functions/activities undertaken, and in this case IBFIs have an opportunity to set up and identify activity drivers according to their non-financial as well as financial goals and objectives.
Any organisation has its life cycle and IBFIs have, too. The cost structures vary in different times and cycles of the life of an organisation. If IBFIs want to count their service production cost accurately, then they can consider the character of the life-cycle in other organisations, and accordingly they can measure the performance of their organisations.
Islamic banks are in the category of ‘service shops’ (according to Fitzgerald et al’s, 1991, process type theory). In the process type theory, performance measures vary according to the process of service function in different organisations. In processing/providing services IBs are different from their conventional counterparts. Therefore, Process Type Theory can also be useful in IBs to measure non-financial as well as financial performance.
However, Integrated Performance Measures very much depend on the organisational strategy. IBFIs’ strategy is certainly not the same as that of conventional banking or financial institutions. In this case, IBFIs also can consider the Integrated Performance Measures.
Costs are the function of overheads and the pricing of risks. Overheads can be streamlined through Business Process Re-engineering (BPRI). IBFIs have a number of forms of risk; these have to be identified and measured for greater success in a strategically driven management, and overall improvement of performances. Therefore, BPRI can be considered in IBFIs for the purposes concerned.
There are many undefined issues in IBFIs, such as auditing, marketing, product development and accounting issues, which are yet to be clarified. However, since the depositors/investors of IBFIs are dealing at their own risk, the IBFIs can misuse the resources or be guilty of complacent inefficiency. They can excuse themselves in the name of socio-economic development.
Furthermore, if the IBFIs want to compete and run in parallel with the conventional banking system, then they have to be more efficient and therefore they need to measure their performance accurately and properly. Therefore, the management of IBFIs needs more sophisticated Accounting and MASs to maximize the benefits for shareholders and depositors, and conform to the principles of the Sharia.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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