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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

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