Shari’ah issues, challenges, and prospects for Islamic derivatives: a qualitative study

2016 ◽  
Vol 8 (2) ◽  
pp. 168-190 ◽  
Author(s):  
Muhammad Rizky Prima Sakti ◽  
Ahmad Syahid ◽  
Mohammad Ali Tareq ◽  
Akbariah Mohd Mahdzir
Keyword(s):  
Financial Institutions ◽  
Foreign Currency ◽  
Risk Mitigation ◽  
Financial Industry ◽  
Structured Interviews ◽  
Content Type ◽  
Banking And Finance ◽  
Finance Industry ◽  
Derivative Instruments ◽  
Islamic Financial Institutions

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.

Issues and challenges of IFRS 9 in Malaysian Islamic financial institutions: recognition criteria perspective

2021 ◽  
Vol 12 (2) ◽  
pp. 239-257
Author(s):  
Marziana Madah Marzuki ◽  
Abdul Rahim Abdul Rahman ◽  
Ainulashikin Marzuki ◽  
Nathasa Mazna Ramli ◽  
Wan Amalina Wan Abdullah
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Business Models ◽  
Fair Value ◽  
Financial Instruments ◽  
Structured Interviews ◽  
Content Type ◽  
Reporting Framework ◽  
Islamic Financial Institutions ◽  
Ifrs 9

Purpose The purpose of this paper is to investigate the effects and challenges of the new amendment of International Financial Reporting Standards (IFRS) 9 in Malaysia from the perspectives of regulators, auditors, accountants and academicians in Malaysian Islamic financial institutions. For the purpose of this study, this paper focuses on the recognition criteria perspective of the standard, which provides a basic understanding of the financial reporting framework. Design/methodology/approach Using 10 series of semi-structured interviews undertaken with key individuals in regulatory bodies, audit companies, full-fledged Malaysian Islamic Banks and Malaysian higher learning institutions. Findings The findings revealed that IFRS 9 strengthens International Accounting Standards 39 in terms of relevance and reliability, recognition of financial instruments and identification of business models. Nevertheless, Islamic financial institutions face challenges in terms of a faithful representation of fair value, substance over form, identification of financial instruments before recognition criteria and the extent of the role of risk management in reducing manipulation in identifying business models. Research limitations/implications This study provides implications to regulators and standard setters in Malaysia to enhance the quality of financial reporting framework and practices in Islamic financial institutions in this country using IFRS 9. Practical implications Practically, the findings of this study can be used by the regulators to resolve the issues that arise in adopting IFRS 9 among Islamic financial institutions to further enhance financial reporting quality. Originality/value The findings of this study are very important to ensure that the adoption of IFRS among Islamic financial institutions are in line with Sharīʿah principles. To date, no studies have been done on the challenges of adopting IFRS 9 among Islamic financial institutions in Malaysia.

scholarly journals Towards New Sharia Governance for Islamic Financial Institutions

2021 ◽  
Vol 18 (1) ◽  
pp. 39-58
Author(s):  
Abdulazeem Abozaid
Keyword(s):  
Financial Institutions ◽  
Financial Services ◽  
Financial Institution ◽  
Islamic Banking ◽  
Banking And Finance ◽  
Finance Industry ◽  
Regulatory Authorities ◽  
Governance Model ◽  
Islamic Financial Institutions ◽  
Shariah Governance

Since its inception a few decades ago, the industry of Islamic banking and finance has been regulating itself in terms of Sharia governance. Although some regulatory authorities from within the industry, such as Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), the Islamic banking and finance industry remains to a great extent self-regulated. This is because none of the resolutions or the regulatory authorities' standards are binding on the Islamic financial institution except when the institution itself willingly chooses to bind itself by them. Few countries have enforced some Sharia-governance-related regulations on their Islamic banks. However, in most cases, these regulations do not go beyond the requirement to formulate some Sharia controlling bodies, which are practically left to the same operating banks. Furthermore, some of the few existing regulatory authorities' standards and resolutions are conflicted with other resolutions issued by Fiqh academies. The paper addresses those issues by highlighting the shortcomings and then proposing the necessary reforms to help reach effective Shariah governance that would protect the industry from within and help it achieve its goals. The paper concludes by proposing a Shariah governance model that should overcome the challenges addressed in the study.Pada awal berdiri, Lembaga Keuangan Syariah merupakan lembaga keuangan yang menerapkan Hukum Syariah secara mandiri dalam sistem operasionalnya. Ia tidak tunduk pada peraturan lembaga keuangan konvensional, sehingga dapat terus berkomiten dalam menerapkan Hukum Syariah secara benar. Selanjutnya, muncullah beberapa otoritas peraturan yang berasal dari pengembangan Lembaga Keuangan Syariah. Diantaranya adalah Islamic Financial Services Board (IFSB) dan Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Hal ini tidak menyimpang dari kerangka peraturan Hukum Syariah, sebab standar peraturan dan keputusan yang dikeluarkan ditujukan khusus untuk Lembaga Keuangan Syariah saja. Beberapa Negara telah menerapkan peraturan tata kelola Hukum Syariah pada Bank Syariah mereka. Namun dalam banyak kasus, peraturan yang diterapkan tidak mampu mengontrol Lembaga Keuangan Syariah tersebut secara penuh. Sehingga, secara praktis proses pengawasan diserahkan kepada lembaga keuangan yang beroperasi. Akan tetapi, beberapa standar dan keputusan yang dikeluarkan oleh sebagian pemangku kebijakan bertentangan dengan keputusan yang dikeluarkan oleh beberapa akademi Fiqh. Artikel ini ditulis untuk menyoroti permasalahan yang timbul pada tata kelola Lembaga Keuangan Syariah, khususnya kekurangan yang tampak pada sistem tata kelola. Kemudian, penulis akan mengajukan usulan tentang efektifitas tata kelola Lembaga Keuangan Syariah yang bebas dari permasalahan.

A proposed framework for implementing risk-based Shari’ah audit

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Suleiman Dalhatu Sani ◽  
Mustapha Abubakar
Keyword(s):  
Financial Institutions ◽  
Real Life ◽  
Financial System ◽  
Practical Work ◽  
System Stability ◽  
Illustrative Case ◽  
Content Type ◽  
Finance Industry ◽  
Islamic Financial Institutions

Purpose This paper aims to recommend a framework that serves as a practical work tool for conducting risk-based Shari’ah audit (RBSA) in Islamic financial institutions (IFIs). Design/methodology/approach Qualitative research method was used through critical in-depth content analysis of documented literature to generate deep insights, further supported with a hypothetical illustrative case study application of the framework on an Islamic bank, aimed at bringing the framework to a practical, near real-life scenario. Findings A robust RBSA framework has been developed which focuses on Shari’ah non-compliance risks to systematically and practically arrive at a rated opinion on the level of an IFI’s adherence with Shari’ah rules and principles as recommended by the Accounting and Auditing Organization for Islamic Financial Institutions, aimed to safeguard the IFI and promote financial system stability at large. Research limitations/implications Practical realities limited the study to the use of a hypothetical case study bank. Future researchers can apply the framework to a real case study of diverse IFIs for effective contextual recalibration in diverse jurisdictions. Practical implications This paper aids the development of both internal and external Shari’ah audit practice using the risk-based approach. Social implications The RBSA framework contributes to promoting public trust and confidence in the Islamic finance industry. Originality/value This paper has proposed this RBSA framework as a practical work tool for Shari’ah auditors in their engagements and regulators in promoting sound governance and financial system stability. It provides foundation for future researchers in the field.

scholarly journals Moratorium in Islamic Hire Purchase Financing: A Shariah Perspective

2021 ◽  
pp. 13-29
Author(s):  
Azmuddin Razali ◽  
Mohammad Amir Wan Harun
Keyword(s):  
Financial Institutions ◽  
Financial Services ◽  
Advisory Council ◽  
Policy Document ◽  
Banking And Finance ◽  
Finance Industry ◽  
Regulatory Perspective ◽  
Islamic Financial Institutions ◽  
Current Outbreak ◽  
The Impact

This study examined the implementation of moratorium in the Islamic hire purchase financing based on Al-Ijarah Thumma Al-Bay’ (AITAB) from the Shariah perspective. The implementation of moratorium by Bank Negara Malaysia (BNM) is a new practice in the banking and finance industry in Malaysia. Implementing the moratorium causes several changes to the AITAB contract such as the extension in contract tenure and the increase in the total payment obligation due to the profit charged on the outstanding principal. This study analysed these changes from the Shariah perspective by using the al-takyif al-fiqhi methodology. The results of the analysis confirm the practice of moratorium by IFIs is in line with the Shariah requirements as long as it is agreed by the parties to the contract - which are the bank and the customer. Needless to say, both Ijarah Policy Document and Hire Purchase Act 1967 allow any forms of amendments including profit compounding when the AITAB contract is restructured, provided that such amendments are agreed between the contracting parties. Despite this permissibility, IFIs are still required to comply with the new ruling issued by SAC BNM that prohibits the practice of profit compounding during the COVID-19 crisis. Although, in principle, the ruling is based on the concept of ihsan (beneficence) which is not compulsory (wajib) but rather recommendation (istihbab) from the Shariah perspective; however, from the regulatory perspective the ruling is compulsory for IFIs to comply pursuant to section 28(1) and 28(2) of Islamic Financial Services Act 2013 (IFSA) that stated compliance with Shariah means compliance with any ruling of the Shariah Advisory Council. The moratorium is seen as a manifestation of the concept of ihsan (beneficence) towards the customers affected financially due to the COVID-19 pandemic. This commendable effort should be encouraged and continued by the Islamic financial institutions in upholding the Shariah principle of maslahah and lifting of difficulties (raf al-haraj), particularly in the current outbreak of COVID-19 and the impact of MCO.

scholarly journals Islamic Financial Services Act (IFSA) 2013 and the Sharīʿah-compliance requirement of the Islamic finance industry in Malaysia

2018 ◽  
Vol 10 (1) ◽  
pp. 94-101 ◽  
Author(s):  
Mohamad Akram Laldin ◽  
Hafas Furqani
Keyword(s):  
Content Analysis ◽  
Financial Institutions ◽  
Financial Services ◽  
Design Methodology ◽  
Islamic Finance ◽  
Content Type ◽  
Governance Framework ◽  
Finance Industry ◽  
Islamic Financial Institutions ◽  
Comprehensive Framework

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.

Musharakah Mutanaqisah home financing: issues in practice

2018 ◽  
Vol 9 (1) ◽  
pp. 91-103 ◽  
Author(s):  
Alam Asadov ◽  
Zulkarnain Bin Muhamad Sori ◽  
Shamsher Mohamad Ramadilli ◽  
Zaheer Anwer ◽  
Shinaj Valangattil Shamsudheen
Keyword(s):  
Financial Institutions ◽  
Current Mode ◽  
Fair Value ◽  
The Body ◽  
Islamic Finance ◽  
Islamic Banks ◽  
Periodic Review ◽  
Content Type ◽  
Finance Industry ◽  
Islamic Financial Institutions

Purpose This paper aims to examine the practical issues in the Musharakah Mutanaqisah (MM) financing and subsequently, recommends possible solutions to mitigate these issues and improve the current practice. Design/methodology/approach This paper analyses the theory and current practices of MM offered by Islamic banks. Findings It is suggested that Islamic financial institutions consider revaluation of property’s value to its fair value, especially during termination of MM contract and annual or agreed periodic review of the market value of the assets to determine the “rental” payments by the customer. It is also recommended that Islamic financial institutions should share all associated costs in performing the contract. Research limitations/implications Research findings reported in this paper contribute to the body of knowledge on MM in general and to the Islamic finance practices in Malaysia and abroad. Indeed, the Malaysia Central Bank (i.e. Bank Negara Malaysia) should form a special committee to look into the issues highlighted in this paper and recommend strict guidelines for Islamic financial institutions to improve their practices. Practical implications Islamic banks should extend the use of MM contract in automobile and trade financing where rent or profit could be easily identified and value of the asset is more certain. The regulators and Islamic financial standard setting authorities need to oversee the Shari’ah board decisions on MM contracts and keep the gates in the interest of ensuring a more viable and authentic Islamic finance industry. Originality/value This paper briefly views the current mode of MM contracts, specifically for home financing, and highlights the incompliance to Shari’ah requirements in exercising these contracts in practice.

Shariah board, web-based information and branding of Islamic financial institutions

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ishfaq Ahmed ◽  
Ahmad Usman ◽  
Waqas Farooq ◽  
Muhammad Usman
Keyword(s):  
Financial Institutions ◽  
Internet Banking ◽  
Qualitative Inquiry ◽  
Board Members ◽  
Islamic Banks ◽  
Structured Interviews ◽  
Web Based ◽  
Content Type ◽  
Islamic Financial Institutions ◽  
The Impact

Purpose With the advent of technology and internet banking, the role and value of bank’s websites have increased. Additionally, the Islamic banking boom has also increased the role of Shariah-based banking in the market. But neither web-based information nor Shariah board members have been investigated for their possible effects on the branding of Islamic banks. Against this backdrop, this study aims to explore web-based information and Shariah board as a source of branding of Islamic financial institutions (IFIs). Design/methodology/approach An interpretivism-based thematic inquiry is carried out through semi-structured interviews of 22 customers of Islamic banks. Findings The findings of the study highlighted the fact that customers’ perceived web-based information is in line with the Shariah objectives but showed low level of trust on that information. They assumed that the practices are not consistent with this information. Moreover, the Shariah board members were considered as brand ambassadors, and customers valued board members more than the Shariah board and Islamic bank itself. Findings further highlight the more knowledge customers have about the Shariah board members (experience, qualification, achievements, etc.) the greater is the impact on the branding of the IFIs. Originality/value This study offers a novel perspective by considering the value of web-based information and Shariah board on branding of Islamic banks. As there is no such study available in literature, up to the best of researchers' knowledge, the qualitative inquiry may suffice the study objectives and research questions.

Limited purpose banking (LPB) and Islamic finance

Humanomics ◽  
2014 ◽  
Vol 30 (2) ◽  
pp. 122-135 ◽  
Author(s):  
Edib Smolo ◽  
Abbas Mirakhor
Keyword(s):  
Financial Institutions ◽  
Design Methodology ◽  
Financial System ◽  
Islamic Finance ◽  
Extensive Literature ◽  
Content Type ◽  
Finance Industry ◽  
Islamic Financial Institutions ◽  
Alternative Solutions ◽  
Practical Implications

Purpose – This paper primarily aims to review and analyze a new model for Islamic finance based on Laurence J. Kotlikoff's idea of limited purpose banking (LPB). In addition, this paper aims to highlight, explain and discuss various aspects of LPB and how it suits the original aspirations of pioneer writers in Islamic finance. Design/methodology/approach – Based on an extensive literature review, this paper aims to highlight, explain and discuss the reform of the Islamic finance industry based on Kotlikoff's model of LPB. Findings – Based on a modified LPB model, Islamic financial institutions could be established to provide specific services with clear aims and objectives. These LPB Islamic financial institutions would operate in a similar way to LPB. Research limitations/implications – As there is no perfect plan, the proposal of this paper is far from being perfect and is open to discussions and improvements. The paper will, hopefully, spark off quite a discussion on the topic; may result in a better understanding of the model; and provide some alternative solutions to the current structurally ill financial system. Practical implications – The paper provides some practical ideas for a better implementation of Shari'ah principles in financial intermediation of the Islamic financial system. Originality/value – Kotlikoff's LPB proposal for reforming the financial system is new and has been directed to the conventional financial system. This paper represents the first attempt to apply his proposal to the Islamic finance industry.

Conceptualizing the duties and roles of auditors in Islamic financial institutions

Humanomics ◽  
2015 ◽  
Vol 31 (2) ◽  
pp. 201-213 ◽  
Author(s):  
Radiah Othman ◽  
Rashid Ameer
Keyword(s):  
Economic System ◽  
Financial Institutions ◽  
Work Requirements ◽  
Content Type ◽  
Roles And Responsibilities ◽  
Islamic Perspective ◽  
Finance Industry ◽  
Islamic Financial Institutions ◽  
Conventional Banks ◽  
Islamic Economic

Purpose – The purpose of this paper is to describe the role and responsibilities of Shari’ah auditors in Islamic financial institutions (IFIs) in the auditing process in the IFIs, to highlight capacity building challenges in the Shari’ah auditing industry. Design/methodology/approach – The authors used a legitimacy theory to understand linkages between demand for Shari’ah audit and the role of Shari’ah auditors in IFIs complemented with the review the Accounting and Auditing Organization of Islamic Financial Institutions and Auditing Standard for Islamic Financial Institutions to understand the Shari’ah audit work requirements from an Islamic perspective. Findings – Shari’ah auditing is an emerging field of investigation. There is no doubt that conventional auditing has a significant influence on the auditing frameworks used in IFIs. Western auditing practices are undergoing a metamorphosis to meet the needs of stakeholders in the Islamic economic system. The role and responsibilities of auditors in IFIs are much broader than those found in conventional banks in relation to an examination of a variety of contracts, product structures, transactions reporting, preparation of financial statements, reports, marketing circulars and any other legal documents, which are pertinent to IFIs’ operations. Practical implications – We posit that the absence of a proper Shari’ah auditing framework and standards attuned to the needs of an Islamic economic system could dampen the future of the Islamic finance industry. The regulators and management of IFIs should meet the expectations of the stakeholders to whom they owe a duty of care by selecting competent professionals for auditing work, along with transparent policies and systems. Originality/value – This paper presents an attempt to establish auditors’ roles and responsibilities from an Islamic perspective.

scholarly journals Shortcomings and proposed reforms in the existing shariah governance of islamic banking

2020 ◽  
Vol 2 (1) ◽  
pp. 15-34
Author(s):  
Abdulazeem Abozaid
Keyword(s):  
Financial Institutions ◽  
Financial Services ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Banking And Finance ◽  
Finance Industry ◽  
Regulatory Authorities ◽  
Islamic Financial Institutions ◽  
Shariah Governance

Since its inception a few decades ago, the Islamic banking and finance industry has been self-regulated with regards to Shariah governance. Despite the existence of certain regulatory authorities from within the industry, such as Accounting and Auditing for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), none of their resolutions or standards are effectively binding. Few countries have enforced some rules related to Shariah-governance. Still, in most cases, these rules did not go beyond the requirement of formulating Shariah controlling bodies, which is practically left to the banks themselves. Islamic banks are almost left to choose or dismiss their Shariah controllers, and no clear criteria are set by any authority to ascertain the proper qualifications of the Shariah controllers. Moreover, some of the Shariah standards and fatwas are found to conflict with the established resolutions issued by Fiqh academies. These matter point to the deficiencies in the existing Shariah governance and hence the need to address them.

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