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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

Keywords

Content available
Article
Publication date: 1 November 2018

Muhammad Hanif

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…

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.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 2
Type: Research Article
ISSN: 0128-1976

Keywords

Content available
Article
Publication date: 19 June 2018

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.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 1
Type: Research Article
ISSN: 0128-1976

Keywords

Content available
Article
Publication date: 17 July 2019

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…

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.

Details

ISRA International Journal of Islamic Finance, vol. 11 no. 2
Type: Research Article
ISSN: 0128-1976

Keywords

Content available
Article
Publication date: 19 November 2020

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…

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.

Details

ISRA International Journal of Islamic Finance, vol. 12 no. 3
Type: Research Article
ISSN: 0128-1976

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Article
Publication date: 12 November 2020

Zakariya Mustapha, Sherin Binti Kunhibava and Aishath Muneeza

The purpose of this paper is to review the literature on Islamic finance vis-à-vis legal and Sharīʿah non-compliance risks in its transactions and judicial dispute…

Abstract

Purpose

The purpose of this paper is to review the literature on Islamic finance vis-à-vis legal and Sharīʿah non-compliance risks in its transactions and judicial dispute resolution in Nigeria. This is with a view to putting forward direction for future studies on the duo of legal and Sharīʿah non-compliance risks and their impact in Islamic finance.

Design/methodology/approach

This review is designed as an exploratory study and qualitative methodology is used in examining relevant literature comprising of primary and secondary data while identifying legal risk and Sharīʿah non-compliance risks of Nigeria’s Islamic finance industry. Using the doctrinal approach together with content analysis, relevant Nigerian laws and judicial precedents applicable to Islamic finance practice and related publications were examined in determining the identified risks.

Findings

Undeveloped laws, the uncertainty of Sharīʿah governance and enforceability issues are identified as legal gaps for Islamic finance under the Nigerian legal system. The gaps are inimical to and undermine investor confidence in Nigeria’s Islamic finance industry. The review reveals the necessity of tailor-made Sharīʿah-based regulations in addition to corresponding governance and oversight for a legally safe and Sharīʿah-compliant Islamic finance practice. It brings to light the imperative for mitigating the legal and Sharīʿah non-compliance risks associated with Islamic finance operations as crucial for Islamic finance businesses, Islamic finance institutions and their sustainable development.

Research limitations/implications

Based on content analysis, the review is wholly doctrinal and does not involve empirical data. Legal safety and Sharīʿah compliance are not to be compromised in Islamic finance operations. The review would assist relevant regulators and investors in Islamic financial enterprises to understand and determine the impact and potential ramifications of legal safety and Sharīʿah non-compliance on Islamic Finance Institutions.

Practical implications

This study provides an insight into the dimensions and ramifications of legal and Sharīʿah non-compliance risks of Nigeria’s Islamic finance industry. This study is premised on the imperative for research studies whose outcome would inform regulations that strike a balance between establishing Islamic financial institution/business and ensuring legal certainty and Sharīʿah compliance of their operations. This study paves way for this kind of research studies.

Originality/value

The findings and discussions provide a guide for regulators and researchers on the identification and mitigation of legal and Sharīʿah non-compliance risks in Islamic finance via a literature review. This study, the first of its kind in Nigeria, advances the idea that research into legal and Sharīʿah non-compliance risks of Islamic financial entities is key to mitigating the risks and fostering the entities and their businesses.

Details

International Journal of Law and Management, vol. 63 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

Content available
Article
Publication date: 19 June 2018

Abd Hakim Abd Razak

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…

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.

Details

ISRA International Journal of Islamic Finance, vol. 10 no. 1
Type: Research Article
ISSN: 0128-1976

Keywords

Content available
Article
Publication date: 10 July 2017

Ashraf Md. Hashim, Farrukh Habib, Ziyaat Isaacs and Mohamed Anouar Gadhoum

The purpose of this paper is to explain and critically analyse the Sharīʿah screening criteria and cleansing process for income generated from stocks with a special focus…

Abstract

Purpose

The purpose of this paper is to explain and critically analyse the Sharīʿah screening criteria and cleansing process for income generated from stocks with a special focus on a newly developed ISRA-Bloomberg methodology.

Design/methodology/approach

The paper focuses on the methodology of ISRA-Bloomberg in terms of Sharīʿah screening of stocks and the income cleansing process. To achieve this objective, this paper adopts a descriptive approach.

Findings

The methodology of ISRA-Bloomberg is unique in terms of its criterion for screening stocks, the cleansing process and coverage of the universe of stocks. It facilitates the investors by offering a novel colour-coding scheme to indicate the Sharīʿah compliance of a stock. It also provides the exact ratios of the Sharīʿah-compliance criteria to the investors so they can closely observe changes in the trend of ratios and decide beforehand whether or not a company is likely to remain within the Sharīʿah-compliant list. The paper further discusses the issues in the screening and cleansing practices faced by the industry.

Research limitations/implications

This research is limited to the criteria of screening and income purification of stocks which have been used by ISRA-Bloomberg from a Sharīʿah perspective.

Practical/implications

The robust screening criteria and comprehensive analysis of the stocks will enhance the confidence of Islamic capital market participants. The investors, regulators and index providers will be equally able to benefit from this initiative.

Originality/value

The paper focuses on the recently established methodology of ISRA-Bloomberg, which has not been discussed in the literature until now. The methodology, because of its exceptionality, may add a new dimension to Sharīʿah screening and cleansing of stocks.

Details

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

Keywords

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Article
Publication date: 11 September 2017

Engku Rabiah Adawiah Engku Ali and Umar A. Oseni

In propelling Malaysia to become a high value-added and high-income economy by 2020, the Central Bank of Malaysia has consistently emphasized the need for a new trajectory…

Abstract

Purpose

In propelling Malaysia to become a high value-added and high-income economy by 2020, the Central Bank of Malaysia has consistently emphasized the need for a new trajectory of transformation and growth which will leverage on a robust legal framework that for enhancing Islamic financial transactions. This paper aims to examine the latest major policy initiatives and legal reforms introduced to promote both local and cross-border transactions that seek to project Malaysia as a hub for Islamic financial transactions.

Design/methodology/approach

While adopting an analytical approach in analysing the relevant issues, the study relies on doctrinal legal method in highlighting major reforms introduced to enhance the legal and regulatory framework of Islamic finance.

Findings

The study finds that the importance of law reforms in strengthening the financial system cannot be overemphasized, particularly when it comes to the need for an end-to-end Sharīʿah compliance framework and consumer protection.

Practical implications

Other emerging jurisdictions aspiring to adopt Islamic finance products can learn from the Malaysia’s pioneering role in introducing an effective legal and regulatory framework.

Originality/value

Though there are a number of studies on Malaysia’s leading role in the law and regulation of Islamic finance, this study is one of the earliest attempts to explore the role of the Central Bank of Malaysia in enhancing the legal framework for Islamic financial transactions through the introduction of the Islamic Financial Services Act 2013 and other relevant policy regulations.

Details

International Journal of Law and Management, vol. 59 no. 5
Type: Research Article
ISSN: 1754-243X

Keywords

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Article
Publication date: 28 November 2020

Murniati Mukhlisin

This study aims to measure levels of Sharīʿah-compliance in Islamic financial institutions (IFIs) financial reporting standards with the objective to investigate the…

Abstract

Purpose

This study aims to measure levels of Sharīʿah-compliance in Islamic financial institutions (IFIs) financial reporting standards with the objective to investigate the application of Maqāsid ul-Sharīʿah as a compliance measure reflected in the reporting standards.

Design/methodology/approach

This paper adopts Maqāsid ul-Sharīʿah’s model to measure levels of Sharīʿah-compliance amongst three available financial reporting frameworks and presentation standards; international financial reporting standards (IFRS), accounting and auditing organization for Islamic financial institutions (AAOIFI), Pernyataan Standar Akuntansi Keuangan (PSAK) Syariah. NVivo 10 software is used in this paper to help measure quantitatively the compliance level of each standard.

Findings

The findings suggest that the use of Maqāsid ul-Sharīʿah leads to a more complete understanding of how the meaning of Sharīʿah and its values can be integrated into the demands of financial reporting, and hence, offering greater convergence between ethics and accounting regulations amongst IFIs.

Originality/value

It documents different context of content analysis that takes examples of Islamic financial reporting studies and uses both classical and contemporary theoretical bases. The main outputs are designed for standard setters and policymakers with expectation for Sharīʿah objectives (i.e. Maqāsid ul-Sharīʿah), to be embedded in the preparation of financial reporting standards for the IFIs. Hence, they will be able to show their full accountability then gain better trust from the stakeholders.

Details

Journal of Islamic Accounting and Business Research, vol. 12 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

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