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Article
Publication date: 10 July 2017

Muhammad Adeel Ashraf and Ahcene Lahsasna

Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose…

Abstract

Purpose

Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose of this paper is to quantify the Sharīʿah risk taken by Islamic banks, so that customers are better informed on the level of Sharīʿah compliance that will help in removing the persistent level of skepticism toward Sharīʿah compliance.

Design/methodology/approach

This research has used the scorecard based modeling approach to build the Sharīʿah risk rating model, which consists of 14 factors that capture Sharīʿah risk and are grouped in 5 major areas revolving around regulatory support, quality of Sharīʿah supervision, business structure, product mix and treatment of capital adequacy ratio. The score calculated by applying the model is grouped into 4 tiers reflecting the level Sharīʿah compliance at bank as non-compliant, weak compliance, satisfactory compliance and high level of Sharīʿah compliance. Three case studies were conducted by applying the model to Islamic banks from Malaysia, Pakistan and Saudi Arabia.

Findings

The final Sharīʿah risk scores calculated by the model clearly differentiate the 3 banks on basis of their Sharīʿah risk. The underlying scores also highlighted the areas where banks need to improve to reduce their Sharīʿah risk.

Originality/value

This model can be applied by customers of Islamic banks who are interested in understanding Sharīʿah-related aspects of Islamic banking industry. This model can be applied on standalone basis or as an extension to the conventional counter party risk rating models. This model can benefit management of Islamic banks toward allocation of capital against Sharīʿah risk under Basel III, and regulators can apply the model to measure industry wide risk of Sharīʿah non-compliance.

Details

ISRA International Journal of Islamic Finance, vol. 9 no. 1
Type: Research Article
ISSN: 0128-1976

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Article
Publication date: 12 June 2017

Saiful Azhar Rosly, Muhammad Arzim Naim and Ahcene Lahsasna

The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks.

Abstract

Purpose

The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks.

Design/methodology/approach

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.

Findings

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.

Research limitations/implications

The paper is written based on content analysis, Malaysian legal cases with hypothetical examples for better understanding.

Practical implications

Islamic banking should be able to use the findings to estimate potential loss from Shariah non-compliant risk and make the necessary provisions.

Originality/value

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.

Details

Journal of Islamic Accounting and Business Research, vol. 8 no. 3
Type: Research Article
ISSN: 1759-0817

Keywords

Content available
Article
Publication date: 10 July 2017

Ashraf Md. Hashim

Abstract

Details

ISRA International Journal of Islamic Finance, vol. 9 no. 1
Type: Research Article
ISSN: 0128-1976

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Article
Publication date: 20 April 2015

Lukman Ayinde Olorogun

This paper aims to consider a contribution model of a general Islamic insurance industry which allowed the return of underwriting profit to the Islamic insurance…

Abstract

Purpose

This paper aims to consider a contribution model of a general Islamic insurance industry which allowed the return of underwriting profit to the Islamic insurance participants. The objective is to create a justified and equitable means of computing contribution which maximises the expected ownership right of the Islamic insurance fund.

Design/methodology/approach

The accumulation of funds and claims paid were characterised in form of accumulation and decay function over a period of time. It provides necessary and sufficient conditions for their existence and uniqueness. Mathematical derivative procedures were adopted to derive the underwriting returns to be returned to the Islamic insurance participants. Lastly, this paper recommends the incorporation of underwriting returns’ variable into the traditional actuarial model and provides theoretical justification for the process.

Findings

Then, the derivation of underwriting returns through convolution of accumulated funds and claims paid views in the form of Laplace Transform led to a conjecture and proved. Thereafter, the proposed and adjusted model was arrived at.

Originality/value

This study, to the best knowledge of the researcher, is the first attempt in the quantification of Islamic insurance industry. Thus, the model is the first attempt of creating a justified way of calculating the Islamic insurance participants’ contributions.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 8 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

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