The Impact of Implementing Value-Added Tax on the Islamic Banking Practices

Abstract

The main aim of this research is to determine the impact of implementing VAT on Islamic banking practices. Prohibition of Riba (interest) and Gharar (uncertainty) are the fundamental principles of Islamic banking and key differentiators to differentiate it from conventional banking practices.  It was found that Riba and Gharar are the two main hindrances for the Islamic banks operating in Saudi Arabia, as these two are not endorsed by existing Sharia principles. As a result, the Islamic banks in the country leveraged Mudarabah to invest in asset development, which is supported by Sharia principles. On the other hand, rising interest rates, influenced by VAT implementation that caused a rise in commodity prices as well, led to consumers seeking less loan support. In contrast, it increased the money deposit volume of consumers. With the development of a compliance team, the Islamic banks in the country are recommended not only to enforce the practice of Standard operation procedure (SOPs ) but also to start a fee-based structure that is endorsed by Sharia principles, and it would also help banks to accumulate VAT collections through fees from customers.