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The purpose of this paper is to explore the critical factors that influence Muslim consumers’ motivation towards the Islamic market mechanism.

The paper also attempts to formulate Ibnomer Mohamed Sharfudddin’s “Islamic Administrative theory and Klaus Hurrelmann’s socialization theory” based on the “productive processing of reality (PPR)” model. The data were collected by distributing a self-administered questionnaire to a sample of 147 participants residing in the major cities in Peninsular Malaysia. The constructs and items used in the questionnaire were derived from the basic guidelines provided in the literature review and Al-Qur’an and Sunnah (Prophet’s deeds) on the conduct of Malaysian business practices.

The results suggest that while awareness of the Islamic market mechanisms exists amongst businesses, in practice, not many obey such rules. However, a significant relationship does exist between the Muslim consumer motivational factors and Islamic market mechanisms.

First, limitation in scope as only two main components (productive service and commodity market) practices was examined. Future research may include other types of variables practices in the Islamic market mechanism. Second, the sample size is small and respondents were restricted to marketing and the academic sector. Future research should be done on bigger sample size and more on diverse sample, such as extended to the manufacturing sector and the service industry because manufacturing firms and the service sector might have different Islamic market mechanism practices and outcomes compared to marketing and the academic sector.

Productive service and commodity market have positive impact on consumers’ motivation towards the Islamic market mechanism. Government’s controlling and monitoring in the market has positive effect on consumers’ motivation in selecting the Islamic market mechanism.

There is a need for more research on how to establish the Islamic market mechanism practice. In addition, the outcomes of this paper are of particular significance to policymakers, as it better informs them as to how best to design the Islamic market mechanism to make it more practical regardless of various religious beliefs.

This research is a rare attempt on the part of scholars and researchers in Malaysia to relate the Islamic market mechanism practices and guidelines on a specific discipline. Based on the researchers’ knowledge, it is the first study investigating the application of the Islamic market mechanism practice in Malaysia.

The purpose of this paper is to determine the optimal profit-and-loss sharing (PLS)-based contract when market frictions occur.

This paper opts for an adverse selection analysis and Monte Carlo simulation to assess the less risky contract for the principal and the agent when musharakah, mudarabah and venture capital financings are used in imperfect markets. Furthermore, this framework enables us to capture the level of market frictions that the principal can bear and the level of audit that he/she may undertake to mitigate bankruptcy.

The simulation results reveal that Musharakah is the less risky contract for the principal compared to Mudarabah and venture capital when the shock is low and high. Furthermore, our findings indicate that the increase of market frictions engender higher audit cost and profit-sharing ratios. The increase of the safety index in the case of high shock is most likely attributed to the increase of the audit parameter for all contracts to mitigate the selfish behavior of the agent. Accordingly, the principal tends to require a higher profit-sharing ratio to compensate for the severer information asymmetry.

This paper has two main limits. First, the results were not compared to real data because the latter are not available. Second, this paper is a general framework to determine the less risky contract for the principal and does not consider the firm and sectoral characteristics. However, it can be extended in various ways where stress can be put on conflicts of interest between the principal and the agent with the aim to determine the contract that aligns their interests. In addition, the examination of firm dynamics in the case of equity and debt financing can provide further arguments for economic agents regarding the value of the firm, the growth rate and the lifetime of the project when information is asymmetrically distributed.

The findings shed some light on the necessity of the Islamic finance experts to re-think of the promotion of Musharakah because it dominates the two other contracts when market frictions occur.

Although Maghrabi and Mirakhor (2015), Alanzi and Lone (2015) and Lone and Ahmad (2017) among others showed that profit and loss sharing can ensure economic growth, findings may motivate economic players to consider Musharakah financing with the aim to reach financial inclusion and social, which is in line with Shari’ah requirements and Islamic values.

Although several papers highlighted the financial contracting theory from Shari’ah perspective, they ignored the financial issues that are associated to adverse selection. This paper provides theoretical evidence regarding the selection of the less risky financing mode in case of equity financing using Monte Carlo simulation.

This paper aims to understand the issue of interest rate benchmarking in Islamic financial institutions (IFIs) from a macro-economic perspective and assessing the relevance of creating a Sharīʿah-compliant profit rate benchmark to solve this issue. This paper also aims at suggesting an Islamic alternative that will handle both the negative economic impact on IFIs as well as on their financial performance.

The paper is based on literature review of conventional finance and Islamic finance theories to construct a theoretical model to assess the impact of interest rate benchmarking on the ability of IFIs to achieve the objectives of the Islamic economy.

The macro-economic perspective concludes that conceiving a profit rate benchmark for the Islamic finance industry is not relevant to raising the Sharīʿah credibility of the industry. Indeed, several adjustments need to be introduced in terms of the business model.

The recommendations of this paper require the involvement of financial authorities and governments for their implementation. Indeed, the adjustments require a macro-economic review.

The paper considers a profit rate benchmark irrelevant and inefficient. Instead, it suggests the necessary adjustments in terms of business model and economic approach for IFIs to achieve their objectives.

The paper considers zakat implementation and the adjustment of IFIs as the real path to implement a fair wealth distribution in the society.

The creation of a profit rate benchmark has always been the only solution for the pricing issue in IFIs. This paper challenges this idea and tries to give a deeper understanding of the situation.

The purpose of this paper is to present an analysis of current practices of Islamic mortgages in the light of the principles of Islamic financial system, to document divergences – if any. A subsidiary goal is to develop an Islamic Mortgage Model (IMM) based on Musharakah principles.

The author documents theoretical underpinnings of risk-return sharing from the Shari’ah perspective. A comparative study of conventional and Islamic mortgages is completed; existing practice of Islamic mortgages analyzed in the light of Musharakah principles and divergences identified. IMM is developed after taking divergences and Musharakah principles into considerations. A housing case is used to highlight differences (in financial terms) under multiple methods and scenarios.

Study documents multiple divergences from Musharakah principles in the existing practice of Islamic mortgages including ignorance of market pricing in the negotiation of rentals and trading of equity units, and transfer of all ownership risks and rewards (vacancy, damage, destruction and market) to one partner (i.e. customer). Practice is divergent from principles in the area of economic substance. Modified IMM is developed by taking into account Musharakah principles; and differences highlighted by calculating financial figures – to determine financial rights and liabilities of the parties.

Divergence from the principles of risk-return sharing leads to failure in the achievement of Islamic finance objective of equitable distribution of wealth. Moreover, protection of capital for financier reduces the market abilities to achieve financial stability by matching credit expansion with the rise in the real economy. Shari’ah boards and regulators, as well as, management of Islamic banking industry are expected to incorporate proposed changes in-practice for the realization of Islamic finance objectives.

This study contributes to Islamic finance literature in the area of risk-return sharing. Based on important objectives of Islamic finance – equitable distribution of wealth and financial stability – divergences identified and a modified IMM in the light of Musharakah principles is presented. Descriptive rules are transformed into financial figures to document financial rights and liabilities of the concerned parties.

The purpose of this paper is to find applicable Islamic pricing benchmarks (IPBs) instead of the market interest rates which are currently used in Islamic finance as benchmark.

The suggested model (Islamic pricing benchmark model (IPBM)) obviously reveals the feasibility and practical effectiveness of a substitute to London Interbank Offered Rate (LIBOR) and as an evaluator tool to suggested investment projects. The model is a suggested mechanism which could be used as an alternative choice to the conventional borrowing based on the forbidden Riba or on interest. The suggested IPBM depends on estimating the rate of return for any project on consideration of the cash flows in future which is expected to be relative to the invested capital.

The IPBM approach might be applied to financial tools, where the fund owner bears the loss since it is not because of negligence. An instrument to help identify the investment for target rates of return (as an alternative choice to LIBOR) to identify a breakeven point based on expected cash flows for the project to be financed instead of based on seeking the indicators of interest or Riba (as LIBOR). This feature of the IPBM model as an Islamic benchmark renders it as a Shariah pricing mechanism for the Islamic financial products.

The IPBM could be used as a financial instrument to assist in identifying the investment for the target return rates to determine a breakeven point based on expected cash flows for the project to be funded instead of being based on seeking the interest indicators or Riba (as LIBOR). This feature as an Islamic benchmark is considered as a Shariah pricing mechanism for the Islamic financial products. In particular, the proposed model incorporates the Shariah parameters. In that, it is hoped that the Islamic financial instruments will be more comprehensive in their Shariah compliance and thereby may bring more credibility to the Islamic financial system in general.

This paper highlights several important issues related to the IPBMs in Islamic financial institutions which are not widely discussed among researchers. This study contributes to finding an alternative IPB for the Islamic financial products which is currently using the conventional interest rate (LIBOR) as its benchmark. The current study provides empirical evidence for the possibility of relying on the IPBM as an Islamic benchmark to price Islamic financial transactions.

The capital asset pricing model (CAPM) is the most widely used asset pricing model that measures risk–return relationship. The CAPM is based on Markowitz’s mean variance analysis. The advancement of Islamic finance leads to the question whether or not the practice of modern investment theories and analyses such as the Markowitz’s mean variance analysis and CAPM are in accordance to shariah and could be used in pricing Islamic financial assets. Therefore, this paper aims to present a review of the CAPM and to discourse the set of assumptions underlying the model in terms of shariah compliance.

Although most of the assumptions are not contradictory to shariah principles, there are Islamic variables such as prohibition of short selling, purification and zakat that should be taken into consideration when pricing Islamic financial assets. We then develop a mathematical model which is a modification of the traditional CAPM that incorporates principles of Islamic finance and integrating zakat, purification of return and exclusion of short sales.

As a proof-of-concept, this paper presents the results of an empirical study on the proposed shariah-compliant CAPM in comparison to the traditional CAPM. The results show that the proposed Islamic CAPM is appropriate and applicable in examining the relationship between risk and return in the Islamic stock market.

This study contributes to existing body of knowledge by presenting an algorithm and mathematical derivation of the shariah-compliant CAPM which has been lacking in the literature of Islamic finance. The paper offers a novel approach in pricing Islamic financial assets in accordance to shariah, advocated by modern investment theories of Markowitz’s mean variance analysis and CAPM.

This paper aims to investigate the influence of the determinants (pricing, type of structure, Shariah auditing, Shariah risk and Shariah documentation) and the sukuk legitimacy among Islamic financial institutions using a qualitative approach. The paper further explained the significance of the determinants on legitimacy, evaluated the relationship between sukuk characteristics and sukuk legitimacy and examined the moderating effect of Shariah Supervisory Board (SSB) on the relationship.

The study used a purposive sampling technique to select the target respondents required for the survey (semi-structured interview). This technique is applied by selecting members of SSBs among Islamic financial institutions. A total number of ten members are selected as the sample size for the study based on their experience and basic knowledge of Fiqh Al-Mua’malat and its application in Islamic financial institutions.

The findings revealed that the determinants have a significant impact on the sukuk legitimacy, meaning that there is a positive and significant relationship between the determinants and the sukuk legitimacy. In addition, this study indicates the empirical evidence of the moderating effect of SSB on the relationship between the determinants and the sukuk legitimacy.

This study has added to the literature by examining the determinants of sukuk legitimacy while evaluating the moderating effect of SSB on the relationship. Besides, this might add benefits to the numerous Islamic financial institutions relating to the amendment of its regulatory frameworks with the view to pushing the sukuk market investors to move toward asset-backed structure. In addition, the SSB in central banks must also focus its attention regarding the sukuk legitimacy and its application among the various Islamic financial institutions.

This study has added a new discussion to the body of knowledge, i.e. examining the sukuk legitimacy and its relationship with sukuk determinants; hence, an approach that is not widely discussed in the previous studies. Furthermore, conducting such research in the field of Islamic finance provides novelty in the literature among both emerging and developed economies including Malaysia. This is because to the best knowledge of the researchers, there was no empirical study (within the literature) that combined these variables and evaluated their empirical significance. Accordingly, this would enlighten the Islamic Ummah and propel the society’s intensity toward contributing to knowledge and might further provide clarification on the determinants and the sukuk legitimacy to prospective scholars, precisely on the moderating effect of SSB on the relationship between determinants and legitimacy of sukuk.

This paper aims to present the idea of using classic Islamic finance instrument Salam to conduct import transactions. It documents the complete framework of the proposed model. At present, this mode is not used by Islamic Financial Services Industry although it is capable of becoming a viable risk-sharing instrument.

First, the features of existing import financing products are explored and compared with various contractual features of Salam. Second, a discussion on why banks are reluctant in practicing Salam is included. Third, the pricing techniques, accounting treatment and collateral arrangements related to proposed product are discussed. Finally, the feasibility of this product in present industry environment is assessed.

The proposed model carries certain features that make it a true risk-sharing product. For example, it suggests changing bank’s role from intermediary to entrepreneur and favours better alignment of risk between the related parties. This work has also proposed using market-based returns, instead of the existing interest-based benchmarks, for pricing the contract. To practice this product, a dedicated effort of all the stakeholders is required. The product features can contribute to the goal of practicing responsible financing, engrained in true economic reality.

The present work is a technical paper, and the product features may be improved in the light of feedback from the industry and academia.

The proposed model views Islamic bank as a trader instead of a lender, who will assume the effective ownership of imported goods before selling them to the customers. The pricing structure will also be unique, as the margins will be decided upon the basis of market-driven returns of the underlying assets. Indeed, by entering into such contract, Islamic Banks will be exposed to market-related risks. They will be required to design their risk management frameworks accordingly.

It is widely argued that many Islamic finance products are similar to their conventional counterparts in substance. There is a need for the instruments that carry risk sharing attributes. This paper aims to bridge this gap by investigating the potential of classical Islamic finance product Salam for conducting foreign trade transactions.

The majority of economic crises impact the wealth of people which in turn affect their financial capacity to purchase residential properties. However, the home financing method may also have an impact on the behaviour of house prices. This chapter intends to test argued resilience of Islamic finance to situations of financial crisis by using an Islamic home financing product called Enhanced Musharakah Mutanaqisah (EMM) which was proposed by Asadov and Ibrahim (2018) as an example and compare its performance to conventional mortgage. Two different models of home financing, conventional and EMM based ones are developed with the former reflecting basic features of conventional mortgage and the latter using rental rates and house price indices for product pricing. Both models are compared using aggregate data for the US housing market for the past 30 years in order to demonstrate the resilience of the EMM model. The findings of the study show that EMM is more flexible in terms of reflecting real situations in both the housing market and aggregate economy as compared to the conventional model. Its pricing is more accommodating particularly during times of economic downturns, and it can potentially provide the solution to numerous mortgage defaults arising from such conditions. Despite the proposed models being tested using data only from the United States, the analysis can be generalized for other countries as well. The implementation of the EMM model, as an example of Shariah-based Islamic financial product, is expected to bring fairness and justice in the relationship between financial institutions and its clients. To the best of our knowledge, this is the first attempt of simulating a Musharakah Mutanaqisah based home financing using both actual rental rates and house prices for product pricing.