The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks.
Al-bai-bithaman ajil (BBA) contract documentation is analyzed in the light of the legal environment in Malaysia and measurement of Shariah non-compliant risk based on constructed or hypothetical cases.
Shariah non-compliant risk will adversely affect bank’s earnings when BBA contracts are deemed invalid in the court of law, either in a foreclosure or ruling via court declaration.
The paper is written based on content analysis, Malaysian legal cases with hypothetical examples for better understanding.
Islamic banking should be able to use the findings to estimate potential loss from Shariah non-compliant risk and make the necessary provisions.
This paper provides new insights of risks faced by credit-intensive Islamic banks, that when relinquishing critical requirement of Islamic contract such as ownership risk will suffer loss.
Rosly, S.A., Naim, M.A. and Lahsasna, A. (2017), "Measuring Shariah non-compliance risk (SNCR): claw-out effect of al-bai-bithaman ajil in default", Journal of Islamic Accounting and Business Research, Vol. 8 No. 3, pp. 272-283. https://doi.org/10.1108/JIABR-02-2016-0018
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