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1 – 10 of over 2000
Article
Publication date: 20 September 2021

Azlin Alisa Ahmad, Mohd Hafiz Mohd Dasar and Nik Abdul Rahim Nik Abdul Ghani

This study aims to analyse the Shariah issues in the implementation of tawarruq contract in the Islamic profit rate swap (IPRS) instrument in Malaysia.

Abstract

Purpose

This study aims to analyse the Shariah issues in the implementation of tawarruq contract in the Islamic profit rate swap (IPRS) instrument in Malaysia.

Design/methodology/approach

This is a qualitative study in applying data analysis and semi-structured interview approaches. Data was collected from various documents including journals, articles and past studies conducted by scholars. To achieve the purpose of this study, the data is analysed based on thematic analysis.

Findings

The study found several Shariah issues regarding the implementation of tawarruq contract in the IPRS instruments, which have remained a dispute amongst the Islamic financial scholars such as its profit-making purpose, encouragement of debt, impediment of shared risk concept, disputed underlying assets, a deception towards allowing riba and dual agency.

Research limitations/implications

This study recommends several improvements such as the establishment of a neutral agency that does not represent any banking institution to manage the tawarruq contract commodity purchase from Bursa Suq al-Sila’ (BSAS). In addition, a neutral agency can provide aid in terms of transaction facility or at least consultation service for clients to enable them to conduct the commodity transactions independently.

Practical implications

Moreover, guidelines should be established on the separation of the deadline to sign the agreement of appointment of a bank as the commodity purchase agent and the agreement of appointment of the bank as the commodity sale agent on behalf of clients. All transactions related to tawarruq contract commodity must be done through BSAS. The regulators and industry experts may create a guideline for the IPRS based on the issues and recommendations that have been discussed in this study.

Originality/value

On the basis of the analysis of the criticisms and issues in the implementation of tawarruq contract in the IPRS instrument, the current study found that an intermediating institution is allowed to gain profits from transactions conducted so long as they are based on Shariah principles of contract in Islam. As there is no parameter specifically for IPRS, thus the suggested parameter can be used by policymakers such as the Central Bank of Malaysia to ensure the industry complies with Shariah principles.

Details

Qualitative Research in Financial Markets, vol. 14 no. 3
Type: Research Article
ISSN: 1755-4179

Keywords

Book part
Publication date: 19 December 2016

Md. Faruk Abdullah and Asmak Ab Rahman

The objective of the chapter is to discuss the role of wa’d (promise) to mitigate risk in different Islamic banking products. The chapter will illustrate the element of wa’d in…

Abstract

Purpose

The objective of the chapter is to discuss the role of wa’d (promise) to mitigate risk in different Islamic banking products. The chapter will illustrate the element of wa’d in different Islamic banking products in Malaysia.

Methodology/approach

The study has adopted the document review method to get information on different banking products. Moreover, it conducted semi-structured interviews with bankers to get in-depth information.

Findings

The study finds out that wa’d plays a vital role in structuring several products including retail products, trade financing products, and treasury products. Along with the unilateral wa’d there is a usage of double wa’d (wa’dan) in some product structures. In most of the products, wa’d is included as a risk mitigation instrument along with other major underlying Shari’ah contracts. Some Shari’ah issues are involved with these products namely the Shari’ah rulings related to wa’dan, “form over substance,” etc.

Originality/value

This is an in-depth field study which adds new knowledge on wa’d-based products. The experience of Malaysia might be a lesson for other countries to minimize risk in their Islamic banking products.

Details

Advances in Islamic Finance, Marketing, and Management
Type: Book
ISBN: 978-1-78635-899-8

Keywords

Article
Publication date: 26 April 2019

Simon Archer and Rifaat Ahmed Abdel Karim

This paper aims to examine the issue that arises in the context of benchmark rate (or interest rate) changes made for reasons of monetary policy in a jurisdiction with a…

Abstract

Purpose

This paper aims to examine the issue that arises in the context of benchmark rate (or interest rate) changes made for reasons of monetary policy in a jurisdiction with a significant presence of Islamic banks. Changes, especially increases, in the prevailing interest rate made by central banks raise issues of asset-liability management for banks, which typically have longer maturities on the asset side than on the liabilities side, resulting in exposure to interest rate risk for conventional banks, and what is known as rate of return (RoR) risk for Islamic banks, which for reasons of compliance with Islamic religious law (Shari’ah) do not use interest in their operations. Islamic banks use various financial instruments which reflect the cost of funds by means of contracts of sale on credit or of leasing or forms of partnership, which allow them to earn returns on their funds and to pay returns to customers who deposit funds with them.

Design/methodology/approach

The methodology of this study consisted of a descriptive analysis of the relevant characteristics of Islamic banks and their economic and regulatory environments, illustrated by a case study approach applied to two jurisdictions, namely, Sudan and Malaysia.

Findings

In jurisdictions where Islamic banks represent a significant share of the market for financial services, if the contracts used in Islamic financing allow for periodic adjustments of the profit rate or lease rental, this could result in a significant impediment to the full implementation of monetary policy and hence to the maintenance of financial stability.

Originality/value

This study is (to the best of authors’ knowledge) the first thorough analysis in the literature of the issues arising from the exposure of Islamic banks to RoR risk and has clear implications for regulatory and central bank policy.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 12 August 2014

Seng Kiong Kok, Gianluigi Giorgioni and Jason Laws

– The purpose of this paper is to highlight the possibility of structuring an Islamic option which includes an element of risk sharing as opposed to risk transfer.

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Abstract

Purpose

The purpose of this paper is to highlight the possibility of structuring an Islamic option which includes an element of risk sharing as opposed to risk transfer.

Design/methodology/approach

The approach adopted in this research involved a combination of a wa’ad (promise) and murabaha (cost plus sale) and examining if they could form a risk-sharing Islamic option. The payoffs were assumed to be dependent on bi-period outcomes.

Findings

The paper attempted to create a hybrid risk-sharing option by combining elements of both wa’ad (promise) and murabaha (cost plus sale). The results yielded are dependent on the eventual direction of the market (in-the-money, at-the-money and out-the-money). While the results are not definitive, they do provide arguments for the adoption of a risk-sharing, as opposed to a risk-transfer, methodology when it comes to structuring risk management instruments.

Research limitations/implications

One of the major limitations of this research is the inability to assess the Shariah compliance of the proposed instrument. Shariah compliance is determined by a Shariah Supervisory Board, and every effort has been made to ensure that Shariah financial principles are adhered to in the creation of this structure.

Practical implications

The structure provides some interest arguments in the creation of risk management tools under a Shariah financial framework. The structure illustrates the benefits of having a risk-sharing mode over the conventional risk-transfer stances of most risk management tools.

Originality/value

The paper offers a new way of structuring a risk management tool in Islamic finance. It explores the highly debated area of derivatives in Islamic finance and proposes a new way of creating a risk management tool that involves some elements of risk sharing.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 7 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 3 May 2016

Muhammad Rizky Prima Sakti, Ahmad Syahid, Mohammad Ali Tareq and Akbariah Mohd Mahdzir

The purpose of this study is to investigate shari’ah scholars’ views and experiences pertaining the shari’ah issues, challenges and prospects in Islamic derivatives. Specifically…

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Abstract

Purpose

The purpose of this study is to investigate shari’ah scholars’ views and experiences pertaining the shari’ah issues, challenges and prospects in Islamic derivatives. Specifically, this paper critically examines the criticisms toward conventional derivative instruments and the controversies surrounding underlying contracts and current Islamic derivative products.

Design/methodology/approach

This study uses qualitative methods to form a deeper understanding of shari’ah scholars’ perception and experience on Islamic derivatives. Semi-structured interviews were conducted with five shari’ah scholars who are currently working in Islamic financial institutions in Malaysia and Singapore. This study used phenomenological techniques for its data analysis.

Findings

This study has found that shari’ah scholars are aware of the shari’ah issues surrounding Islamic derivatives and have provided comprehensive insight on the solution to these issues. It was found that it is important to take into account the derivatives instruments in Islamic financial industry because of the need for hedging and risk mitigation within Islamic financial institutions. Nonetheless, the study has also found that the use of wa’ad contracts to structure Islamic profit rate swaps and foreign currency exchanges are problematic because of it having features of bay’ al-kali’ bil-kali (the sale of one debt for another).

Originality/value

This study is one of few studies that highlight the shari’ah issues of Islamic derivatives in Islamic banking and finance industry. This paper is of value in discussing risk management and Islamic derivatives in Islamic financial institutions and how there are many issues under the investigation process, particularly issues related to controversial underlying contracts and products.

Details

Qualitative Research in Financial Markets, vol. 8 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 29 January 2020

Jamshaid Anwar Chattha, Syed Musa Alhabshi and Ahamed Kameel Mydin Meera

In line with the IFSB and BCBS methodology, the purpose of this study is to undertake a comparative analysis of dual banking systems for asset-liability management (ALM) practices…

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Abstract

Purpose

In line with the IFSB and BCBS methodology, the purpose of this study is to undertake a comparative analysis of dual banking systems for asset-liability management (ALM) practices with the duration gap, in Islamic Commercial Banks (ICBs) and Conventional Commercial Banks (CCBs). Based on the research objective, two research questions are developed: How do the duration gaps of ICBs compare with those of similar sized CCBs? Are there any country-specific and regional differences among ICBs in terms of managing their duration gaps?

Design/methodology/approach

The research methodology comprises two-stages: stage one uses a duration gap model to calculate the duration gaps of ICBs and CCBs; stage two applies parametric tests. In terms of the duration gap model, the study determines the duration gap with a four-step process. The study selected a sample of 100 banks (50 ICBs and 50 CCBs) from 13 countries for the period 2009-2015.

Findings

The paper provides empirical insights into the duration gap and ALM of ICBs and CCBs. The ICBs have more variations in their mean duration gap compared to the CCBs, and they have a tendency for a higher (more) mean duration gap (28.37 years) in comparison to the CCBs (11.79 years). The study found ICBs as having 2.41 times more duration gap compared to the CCBs, and they are exposed to increasing rate of return (ROR) risk due to their larger duration gaps and severe liquidity mismatches. There are significant regional differences in terms of the duration gap and asset-liability management.

Research limitations/implications

Future studies also consider “Off-Balance Sheet” activities of the ICBs, with multi-term duration measures. A larger sample size of 100 ICBs with 10 years’ data after the GFC would be more beneficial to the industry. In addition, the impact of an increasing benchmark rate (e.g. 100, 200 and 300 bps) on the ICBs as per the IFSB 20 per cent threshold can also be established with the duration gap approach to identify the vulnerabilities of the ICBs.

Practical implications

The study makes profound contributions to the literature and suggests various policy recommendations for Islamic banks, regulators, and standard setters of the ICBs, for identifying and measuring the significance of the duration gaps; and management of the ROR risk under Pillar 2 of the BCBS and IFSB, for financial soundness and stability purposes.

Originality/value

To the best of the authors’ knowledge, this is a pioneer study in Islamic banking involving a sample of 100 banks (50 ICBs and 50 CCBs) from 13 countries. The results of the study provide original empirical evidence regarding the estimation of duration gap, and variations across jurisdictions in terms of vulnerability of ICBs and CCBs in dual banking systems.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 6
Type: Research Article
ISSN: 1759-0817

Keywords

Case study
Publication date: 14 July 2015

Aisyah Abdul Rahman and Raudha Md Ramli

The case is suitable for use in the topics related to the functions and roles of hedging and the Islamic derivatives/hedging instruments.

Abstract

Subject area

The case is suitable for use in the topics related to the functions and roles of hedging and the Islamic derivatives/hedging instruments.

Study level/applicability

The case is designed for undergraduate students, taking courses in Islamic Banking, Islamic Finance and Risk Management for Islamic Banking Institutions.

Case overview

This case describes the theory and application of Islamic Cross Currency Swap (ICCS) in the market. Having this understanding enables case analysts to understand the functions and roles of hedging and the Islamic derivatives or hedging instruments of ICCS comprehensively. The case begins with Yusof, the new finance officer of Al-Yemeni Sdn. Bhd to analyse the permissibility of hedging and derivatives to hedge against currency fluctuations from Islamic perspective. Yusof had to complete the report before the Board of Director's quarterly meeting, which was within a week. Having in mind that the company's mission was to be a Shariah-compliant stock by 2012, Yusof was responsible for ensuring that the company was administrated in an Islamic way. Besides, he also had to ensure that the company generated income and profit as planned. In doing so, he had to strategise all possible risk exposures that could be mitigated or hedged. This case ends by giving the case analyst information on ICCS offered by Al-Rizky Bank Berhad (ARBB). In this case, Yusof had to find out whether hedging is allowed in Islam. What are the Islamic derivatives? What are the different views of Shariah scholars on various types of derivatives? What is the modus operandi of ICCS? Is the ICCS offered by ARBB Shariah compliant? What are the possible risk exposures being hedged in ICCS?

Expected learning outcomes

To provide exposure on the concepts of hedging from Islamic perspectives; to provide exposure on the concepts of Islamic derivatives/Islamic hedging instruments; to stimulate understanding on the modus operandi of ICCS in ARBB; and to help case analysts understand what makes the Islamic hedging instruments become Shariah compliant.

Supplementary materials

Teaching notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

Details

Emerald Emerging Markets Case Studies, vol. 5 no. 4
Type: Case Study
ISSN: 2045-0621

Keywords

Content available
Book part
Publication date: 19 December 2016

Abstract

Details

Advances in Islamic Finance, Marketing, and Management
Type: Book
ISBN: 978-1-78635-899-8

Article
Publication date: 17 May 2011

Ismail Wisham, Aishath Muneeza and Rusni Hassan

The purpose of this paper is to theoretically assess the legal position of the Islamic doctrine of wa'd (or pledge) in relation to 'aqd (within the sphere of Islamic finance), and…

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Abstract

Purpose

The purpose of this paper is to theoretically assess the legal position of the Islamic doctrine of wa'd (or pledge) in relation to 'aqd (within the sphere of Islamic finance), and compare it with the conventional viewpoint, while discussing the several modes/means/usages in terms of applied Shariah.

Design/methodology/approach

The paper utilizes a doctrinal approach to focus on the theoretical aspect of the concept while attempting to suggest practical adaptation and structuring, enabling smoother and more efficient use. The status quo was dependent on the wa'd being an operational instrument in today's world and further development in terms of bridging the understanding was the approach.

Findings

Before invoking the legal validity of wa'd in a court, it is important to view the practice of wa'd to be a dominant ideology utilized in Islamic finance. The first advocate who called for the practice of the binding promise in commutative financial contracts was probably Sheikh Mustafa Al‐Zarqa who adopted the position that if it was admissible, for the unilateral promise (wa'd) to be binding in donations, then, in his view, it was even more justifiable for the wa'd to be binding in commutative contracts. According to the preponderant opinion among Maliki scholars, a unilateral promise is as binding as a contract if the reason was mentioned in it or the contract was initiated based on the promise, a view shared by scholars such as Imam Bukhari. The other point of view, according to contemporary jurists such as Al‐Syntiqi and Dr Muhamed Sulaiman opine that a unilateral promise would not create any liability upon the promisor and it also does not confer any right to the promisee, although from religion point of view, it is recommended to fulfill it.

Practical implications

Fully understanding the modus operandi of a wa'd in key as today, wa'd has established itself within the domain of several transactions under Islamic banking and finance, such as replicating conventional short selling, structuring FOREX markets option and even operating in a double wa'd structure.

Originality/value

The paper would prove useful and informative on the theoratical aspect of the concept especially to students starting out in Islamic finance. For those already well versed or immersed in the field, the paper would certainly provide ideas and exploratory suggestions into the development of the concept in terms of enhancement.

Details

International Journal of Law and Management, vol. 53 no. 3
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 8 November 2022

Jingya Li, Ming-Hua Liu and Keshab Shrestha

The paper aims to examine whether the daily conventional money market overnight rate influences the monthly investment rate of Islamic deposits in Malaysia. The traditional…

Abstract

Purpose

The paper aims to examine whether the daily conventional money market overnight rate influences the monthly investment rate of Islamic deposits in Malaysia. The traditional approach, which averages the high-frequency data to match the low-frequency data, results in information loss for the high-frequency data.

Design/methodology/approach

The paper uses the mixed data sampling (MIDAS) model to study the relationship between Islamic banking and conventional banking. The Malaysian data are used for the analysis as Malaysia has one of the most developed Islamic financial industries in the world, and it is well-known for its dual banking system.

Findings

The evidence shows that the conventional overnight rate has a positive effect on the Islamic deposit rate. The results are consistent for Islamic deposit rates with different maturities. The positive aggregate effect holds when the lag length of the daily conventional overnight rate goes up to 90 days. Additional evidence shows that the daily conventional overnight rate has a similar effect on the conventional deposit rate.

Originality/value

This paper documents that the relationship between Islamic banking and conventional banking is not monotonous. When high-frequency data is averaged with low-frequency data, the non-linear relationship will be masked. It highlights the importance of using high-frequency data to get a detailed picture.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 16 no. 3
Type: Research Article
ISSN: 1753-8394

Keywords

1 – 10 of over 2000