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1 – 10 of 119Muhammad 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 of this…
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.
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Mohamad Akram Laldin and Hafas Furqani
This paper aims to observe the development of the Sharīʿah governance framework (SGF) and practice in Islamic financial institutions (IFIs) in Malaysia.
Abstract
Purpose
This paper aims to observe the development of the Sharīʿah governance framework (SGF) and practice in Islamic financial institutions (IFIs) in Malaysia.
Design/methodology/approach
The study is a qualitative-based research. It uses various documents and content analysis approach to understand and analyze the structure, process and practice of SGF in IFIs in Malaysia.
Findings
It is found that the Central Bank of Malaysia, Bank Negara Malaysia, has attempted to develop a comprehensive framework of Sharīʿah governance for IFIs in Malaysia. The framework governs the practice of the industry, covers stakeholders’ scope of duties and responsibilities and provides details on processes and procedures in the operations of IFIs to achieve the objective of Sharīʿah compliance. To maintain the relevance of the SGF to the needs of the industry, the framework has also been updated recently in 2017. The amendments aim to strengthen the effectiveness of Sharīʿah governance implementation within the Islamic finance industry.
Originality/value
This study attempts to comprehensively examine the evolution of the SGF Sharīʿah governance framework for IFIs in Malaysia. The Malaysian model of the SGF is unique and could be emulated by other countries in developing the Islamic finance industry in their respective jurisdictions.
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This study aims to develop a Sharīʿah-compliance rating mechanism for the Islamic financial services industry (IFSI), with a special focus on banking. The banking sector is taken…
Abstract
Purpose
This study aims to develop a Sharīʿah-compliance rating mechanism for the Islamic financial services industry (IFSI), with a special focus on banking. The banking sector is taken as the area of focus due to its leadership role in the volume of global Sharīʿah-compliant assets.
Design/methodology/approach
The objectives of the Islamic financial system (IFS) are selected as the basis for ratings. A range of performance indicators (leading to achievement of the objectives) is grouped into four broader categories and used in the study to allocate scores with a sum total of 100. Special considerations – including the amount of resources required in performing an activity, suitability of prevailing business conditions, the degree of compulsion/discretion in performing a task and linkage with the essence of the IFS – were taken into account in the allocation of scores.
Findings
This study groups multiple performance measures into four categories, including portfolio construction (deposits mechanism, participatory and asset-based modes of financing), access to finance (service to the less-privileged and sector screening), reputation (disclosures and stakeholders’ survey) and Sharīʿah governance (Sharīʿah supervision and controls, charitable operations, human resources, product development and organization). The Portfolio, Audit, Reputation and System (PARS) rating system is then developed.
Practical implications
A Sharīʿah-compliance rating system is helpful in measuring the progress towards goal achievement of the IFS and in gaining stakeholders’ trust. It is also important for Sharīʿah boards and regulators in policy formulation, for management in addressing weaknesses and taking corrective measures and potentially for standard-setting bodies.
Originality/value
This study presents a comprehensive quantitative Sharīʿah-compliance rating mechanism, taking into consideration the objectives of the IFS – equitable distribution of wealth and financial stability, in addition to Sharīʿah-compliance in operations. Development of Sharīʿah-compliance quality ratings for Islamic banking is essential to gain customers’ trust; the suggested methodology is thus a contribution to the literature on Islamic finance.
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Zakariya Mustapha, Sherin Kunhibava and Aishath Muneeza
This paper aims to highlight resolution of Islamic finance dispute by common law-oriented courts in Nigeria with respect to Sharīʿah non-compliance and legal risks thereof, as…
Abstract
Purpose
This paper aims to highlight resolution of Islamic finance dispute by common law-oriented courts in Nigeria with respect to Sharīʿah non-compliance and legal risks thereof, as well as the lesson to learn from Malaysia in that regard. This is with view to ensuring Sharīʿah compliance and legal safety of Islamic finance practice as prerequisites for sustainability of the Nigerian Islamic finance industry.
Design/methodology/approach
A qualitative method was used; interviews were conducted with different categories of experts and primary data collected in relation to Sharīʿah non-compliance and legal risks in adjudicating Islamic finance dispute by civil courts and the role of expert advice as basis for court referral to Financial Regulation Advisory Council of Experts. A doctrinal approach was adopted to analyse relevant legislative provisions and content analysis of secondary data relevant to applicable provisions in matters of finance before civil courts.
Findings
The paper discovers an indispensable role of conventional financial regulations in sustaining Islamic finance industry. Appropriate laws for Islamic finance under the conventional framework foster legal safety and Sharīʿah compliance of Islamic finance activities in related cases handled by courts. Nigeria civil courts can aid sustainability of Islamic finance when so equipped and enabled by laws that address apparent Sharīʿah non-compliance and legal risks in judicial dispute resolution. Inadequate legal provisions for dispute resolution breeds Sharīʿah non-compliance and legal risks in Islamic finance, undermine its prospects and stand inimical to its sustainability.
Research limitations/implications
This research is limited by its focus on Sharīʿah non-compliance and legal risks alone, which emanate mainly from judicial resolution of Islamic finance dispute by Nigerian civil courts.
Practical implications
This research seeks to motivate a determined and deliberate regulatory action and change in approach towards addressing apparent risks associated with Islamic finance while resolving disputes therein by civil courts. It has implications on common law jurisdictions generally that adopt similar approach as Nigeria's while introducing Islamic finance into their conventional finance framework.
Originality/value
Dispute resolution and other regulatory functions of civil courts are important to Islamic finance though apparently overlooked while introducing Islamic finance in Nigeria as in other emerging jurisdictions. This research ascertains the role of the civil courts as indispensable for Islamic Financial Institution (IFIs) operations and demonstrates that such courts are needed for the development and sustainability of Islamic finance industry. The research demonstrates the end-to-end requirement of Sharīʿah compliance of Islamic financial transactions as absolute and needs be ensured and guarded at dispute resolution level by properly equipped courts.
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Abdul Rashid and Muhammad Saarim Ghazi
The objective of this study is to present a theoretical framework, which helps ascertain the meanings of the Sharīʿah audit quality and identify the factors that affect it.
Abstract
Purpose
The objective of this study is to present a theoretical framework, which helps ascertain the meanings of the Sharīʿah audit quality and identify the factors that affect it.
Design/methodology/approach
The current literature of conventional and Islamic finance on audit quality is critically reviewed to propose the theoretical framework for the quality of Sharīʿah audit.
Findings
The paper suggests that for a better Sharīʿah compliance at Islamic banking institutions (IBIs), the role of audit practitioners is very much indispensable. The competency of the practitioner is one of the important factors that affect the quality of the Sharīʿah audit. Assessment and identification of Sharīʿah risk in different financial arrangements, contracts and transactions require a unique competency on the part of the auditor, that is, gripping Sharīʿah law besides traditional assurance skills and techniques.
Practical implications
The Sharīʿah compliance is one of the primary objectives of IBIs, which works at the conceptual level, product development and implementation level, various business models and governance level. Sharīʿah audit function, internal or external, is an important component of Sharīʿah governance framework and provides an independent assessment of IBIs’ compliance with the Sharīʿah rules and principles and helps in managing the Sharīʿah non-compliance risk and ensuring sound internal Sharīʿah control system.
Originality/value
The paper proposes a theoretical framework for defining the Sharīʿah audit quality and determining the factors that are significant in affecting the Sharīʿah audit quality in the IBIs of Pakistan.
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Mustafa Mohd Hanefah, Muhammad Iqmal Hisham Kamaruddin, Supiah Salleh, Zurina Shafii and Nurazalia Zakaria
The existence of internal control for Sharīʿah-compliance promotes reasonable assurance that the Islamic financial institution’s (IFI’s) objectives are achieved in the following…
Abstract
Purpose
The existence of internal control for Sharīʿah-compliance promotes reasonable assurance that the Islamic financial institution’s (IFI’s) objectives are achieved in the following categories, namely, the effectiveness and efficiency of operations, the reliability of financial reporting and the level of compliance with applicable laws and regulations, as well as accounting and auditing standards. Sharīʿah non-compliant income (SNCI) is an important issue in IFIs’ operations. Thus, the purpose of this paper is to identify issues related to governance and internal control of SNCI in selected IFIs in Malaysia.
Design/methodology/approach
This research uses a case study approach to gather data on the measures of governance and risk management in relation to the internal control for SNCI in IFIs. Interviews were conducted with officers of the Sharīʿah and internal audit departments on internal control practices regarding SNCI.
Findings
Regulator’s guidelines on SNCI are simple and brief, lacking rigour in terms of governance, risk management and audit procedures. The section on SNCI is only a brief statement within the Bank Negara Malaysia’s Guidelines on Financial Reporting for Islamic Banking Institutions and also in the Operational Risk Integrated Online Network system operated by IFIs. Most of the respondents in the interviews suggested that there should be a proper guideline in determining the classification of SNCI. Second, although IFIs have established the purification account to manage SNCI, the real practice varies from one IFI to another. Third, although there are supposedly documented procedures established in relation to management and administration of SNCI, the following events still occur in practice, namely, no authorisation from the Sharīʿah Committee (SC) on various types of income channelled to the SNCI account; unauthorised use of SNCI for other purposes; SNCI not being reported in the annual financial reports; and distribution of SNCI prior to obtaining the SC’s consent. Fourth, there is an absence of Sharīʿah risk assessment conducted on operational risk by IFIs to identify any potential Sharīʿah non-compliant event.
Research limitations/implications
This research contributes to the importance of Islamic corporate governance theory and Sharīʿah risk management, as well as strengthening the case for reporting SNCI to shareholders. It also contributes to the body of knowledge on the capability of the management in managing the internal control system of IFIs’ SNCI.
Originality/value
A new internal control assessment matrix is proposed for Sharīʿah-compliance in IFIs.
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Mansor Isa, Siew-Peng Lee, Obiyathulla Ismath Bacha and Rubi Ahmad
The purpose of this study is to understand and evaluate the roles and functions of the Sharīʿah committee (SC) of Islamic banks (IBs) in Malaysia and to recommend a resetting of…
Abstract
Purpose
The purpose of this study is to understand and evaluate the roles and functions of the Sharīʿah committee (SC) of Islamic banks (IBs) in Malaysia and to recommend a resetting of the scope of responsibilities to enable the SC to effectively respond to current market needs.
Design/methodology/approach
A Likert-type survey questionnaire was developed and distributed to all available SC members through e-mails and online surveys as well as self-administered questionnaires. At the end of the survey, 87 useable questionnaires were collected from 161 SC members, representing a 54% response rate.
Findings
This study finds that most SC members have the necessary Sharīʿah qualification, and they are mostly academics with doctoral degrees. However, there is a noticeable lack of diversity in the composition of experts in the committees. Respondents indicate that their main functions are to ensure Sharīʿah compliance of bank operations and product offerings. This is of course consistent with their stated functions as outlined in the Bank Negara Malaysia's Sharīʿah Governance Policy Document (BNM, 2019). The study finds that SCs are not involved in product development, nor responsible for financial performance. Respondents indicate three ways to enhance the role of SCs: improving banking knowledge of the members, more engagement with the board of directors (BoDs) and broadening the functions of SCs.
Practical implications
This study highlights two policy implications. First, there is a strategic need for IBs to consider having a diversity of expertise in the SCs while maintaining the Sharīʿah experts as core members. Second, this study recommends a reset of the scope of duties of the SC to include three new areas: risk management, product development and financial performance.
Originality/value
This study evaluates the current functions of the SC of IBs in Malaysia and provides suggestions for improvement in the composition of the committee and in the scope of duties of SCs based on contemporary needs.
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The purpose of this paper is to supply basic insights into the principle of shūrā (consultation) in Islamic banking, the idea of a centralised approach to the corporate governance…
Abstract
Purpose
The purpose of this paper is to supply basic insights into the principle of shūrā (consultation) in Islamic banking, the idea of a centralised approach to the corporate governance of Islamic financial institutions (IFIs), the roles of a centralised Sharīʿah board as the highest authority on Sharīʿah issues and its distinguishing features from a de-centralised system and the advantages and disadvantages of the two governance systems.
Design/methodology/approach
In analyzing these, the paper adopts the critical legal studies approach and refers to the provisions of the Qurʾan and Sunnah, ijmāʿ (consensus) of Sharīʿah scholars and recent Islamic banking reports.
Findings
Despite the fact that the double-digit growth of the current US$2tn Islamic banking industry is a promising sign for its further expansion – expecting to cross the US$6.5tn mark by 2020 – there remains concern over the lack of standardization or rather the diversified approaches to the corporate governance of IFIs across key Islamic banking regions.
Practical implications
There has been much debate surrounding the issue of whether the Islamic banking industry requires a centralised Sharīʿah board at the state level to complement the Sharīʿah boards at the IFIs’ individual level in providing better supervision of the Sharīʿah-compliance of IFIs. The fact that the industry is already equipped with two prominent standard-setting agencies in the form of the AAOIFI, the IFSB does little to suggest that best governance practices – which centre around the themes of consistency, harmony and uniformity – are on the horizon, at least not whilst their issued standards and guidelines remain voluntary for IFIs.
Originality/value
All in all, it is aspired that this paper may assist the reader in evaluating the pros and cons of the whole concept of Sharīʿah board centralisation.
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Latifah Algabry, Syed Musa Alhabshi, Younes Soualhi and Omar Alaeddin
The main purpose of this research is to figure out the most effective determinants that play a vital role in enhancing the effectiveness of the internal Sharīʿah audit in the…
Abstract
Purpose
The main purpose of this research is to figure out the most effective determinants that play a vital role in enhancing the effectiveness of the internal Sharīʿah audit in the Islamic banking industry.
Design/methodology/approach
This paper reviews the existing literature to build comprehensive knowledge that would assist in determining the main factors that impact on the effectiveness of Sharīʿah audit in Islamic banks.
Findings
This research proposes a conceptual framework of factors that impact on Sharīʿah audit effectiveness in IBs based on previously published studies. The proposed framework includes external and internal factors as well as internal Sharīʿah audit structure, process and requirements.
Practical implications
First, the regulators need to provide a detailed framework for Sharīʿah audit which covers the main requirements for effective Sharīʿah governance. Second, Islamic financial institutions (IFIs) need to pay more attention to following the Sharīʿah audit process in order to achieve the objective of effective Sharīʿah governance. Finally, the dearth of empirical research on the role and effectiveness of Sharīʿah audit in Islamic banking highlights the need to develop an appropriate methodology to enhance the study of the effectiveness of Sharīʿah governance practices.
Originality/value
The Sharīʿah ensures compliance with its rules and regulations and enhances the soundness and credibility of the Islamic finance industry. This study identifies a number of issues that require further investigation in order to establish a better system of Sharīʿah audit and to identify the factors that affect Sharīʿah auditing practices. This paper is unique in covering the main elements that have influence on the effectiveness of Sharīʿah audit and proposes them in one framework.
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Abdalmuttaleb Musleh Alsartawi
This paper aims to investigate the relationship between the composition of Sharīʿah supervisory boards (independence and frequency of meetings) and the performance of Islamic…
Abstract
Purpose
This paper aims to investigate the relationship between the composition of Sharīʿah supervisory boards (independence and frequency of meetings) and the performance of Islamic banks in the Gulf Cooperation Council (GCC) countries.
Design/methodology/approach
The study developed a multiple linear regression model, and data were collected from the annual reports of 48 standalone Islamic banks listed in the GCC countries covering the period between 2013 and 2017.
Findings
The results showed a statistically significant and negative relationship between the composition of the Sharīʿah supervisory boards and the performance of Islamic banks.
Research limitations/implications
As the current study used only one indicator, that is Return on Assets to measure performance, it is recommended to expand the framework of this study, through the addition of market-based performance indicators such as Tobin’s Q.
Practical implications
This study recommends the GCC countries to follow a more proactive Sharīʿah governance model to strengthen their frameworks from both regulatory and non-regulatory aspects.
Originality/value
The study contributes to the Sharīʿah governance and Islamic banking literature relating to the GCC countries as previous studies gave no attention to the composition of Sharīʿah supervisory boards.
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