INCEIF University Journals
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Editorial
No full textIn the Name of Allah, Most Gracious, Most Merciful. One of the positive developments that has emerged out of the COVID-19 pandemic is the spread of Islamic finance knowledge through free webinars to discuss current issues and the future of the industry. While workshops, trainings and conferences in the past hosted up to only a few hundred participants, the online knowledge sharing sessions have proved more impactful with far greater numbers of participants from all over the world benefiting from the discussions. Now, many of these online workshops and courses are even being organised for fees. It can be said that the pandemic has caused a leap in the provision of online Islamic finance education and training, which is becoming a key component in the future of education.
The pandemic has also highlighted a few other Islamic finance areas that are envisaged to grow in importance. Firstly, Islamic fintech is playing a crucial role in providing the necessary platform for innovative products and services to meet the needs of Islamic finance customers. The use of big data and artificial intelligence can also help Islamic banks in mitigating the cost of transparency and tracking problems arising in financing activities. Secondly, there is a heightened importance of Islamic social finance tools – including zakat (alms), ṣadaqah (voluntary charity) and qarḍ ḥasan (benevolent loan) – to address the challenge of reducing human suffering in the short-term of the pandemic crisis. Reliance on waqf (Islamic endowments) can be another measure for a more sustainable recovery in the longer term. Other Islamic finance tools can also form part of the COVID-19 response and recovery package. In the medium term, for instance, trade financing, financing that is aligned to support specific SDGs, as well as impact investing that supports businesses with social impact could be important avenues through which Islamic banks support recovery. In the long-term, besides waqf that can contribute towards social and economic development, green ṣukūk, SDG-aligned ṣukūk, SRI ṣukūk or other fit-for-purpose ṣukūk can raise long-term financing to assist countries to recover more sustainably. Thirdly, another area that is expected to gather momentum is the combination of Islamic finance tools with Islamic digital platforms to increase the reach of Islamic finance products and services to new market segments such as the tech-savvy generation who favour online transactions. An example could be the establishment of Islamic P2P crowdfunding platforms where both individuals and businesses can access financing, invest and even engage in donations through waqf, ṣadaqah and zakat. Zakat e-platforms are also being developed based on blockchain technology that enable the tracking of the movement of zakat by zakat institutions from the moment of collection to the point of disbursement. Such zakat digital platforms increase transparency in the management of zakat and ensure the efficient utilisation of zakat funds
Developing a Sharīʿah-compliant equity-based crowdfunding framework for entrepreneurship development in Malaysia
No full textPurpose
Crowdfunding has become one of the preferred mechanisms to raise funds by startups and small entrepreneurs. As such, this paper aims to develop an appropriate framework for Sharīʿah-compliant equity-based crowdfunding (SEC) for entrepreneurship development in Malaysia.
Design/methodology/approach
The research begins by analyzing the intention of 200 entrepreneurs in Kuala Lumpur and Selangor regarding the use of crowdfunding to raise capital. The analysis is based on the theory of reasoned action (TRA), which is also associated with the technology acceptance model (TAM) and is effected by using structural equation modeling (SEM).
Findings
The entrepreneurs agree on the ease of use of crowdfunding in raising capital, although it appeared that they are quite reluctant to share their business ideas online. Subsequently, an SEC framework is proposed, to further enhance entrepreneurship development in Malaysia particularly in meeting the need for raising funds in line with Sharīʿah (Islamic law) principles.
Practical implications
This paper aims to contribute more to the development of a blueprint for an SEC platform for market players and regulators in Malaysia.
Social implications
This paper also aims to highlight the growing needs of entrepreneurs, particularly in Malaysia to have a Sharīʿah-compliant alternative to raise funds via crowdfunding.
Originality/value
This paper makes two main contributions. First, it provides evidence on Malaysian entrepreneurs’ intention to use crowdfunding for fundraising through TAM and SEM analysis. Second, it proposes an SEC framework for the development of entrepreneurs in Malaysia.
DOI: https://doi.org/10.1108/IJIF-07-2018-008
An analysis of the normative parameters of reward and risk in Islamic finance
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This study aims to define the parameters of the reward-risk principle in Islamic finance as established in the literature and discuss propositions that are presented on how such a principle is to be applied to Islamic banking products.
Design/methodology/approach
A descriptive approach is used to explore the normative parameters and criticisms of the application of reward-risk in Islamic finance.
Findings
The study finds that the principle of reward-risk is embodied in the multi-component concept of ʿiwaḍ (counter value) which must be evident in market transactions that involve commercial exchanges. The components include risk, costs, effort, value-adding and capital, all of which apply uniquely to different contractual forms of financing.
Research limitations/implications
The study uses academic literature and industry documents along with modest contact with prominent practitioners who provided general feedback on prevalent Islamic finance industry practices.
Practical implications
This study exposits the variety of approaches in applying the reward-risk principle and sheds light on the primary elements of the principle which will facilitate its greater consideration by the Islamic finance industry.
Originality/value
This study is a meaningful attempt at conveniently summing up and applying the parameters that are considered when discussing the scope of the reward-risk principle in Islamic finance.
DOI: https://doi.org/10.1108/IJIF-07-2019-010
Conceptual framework of internal Sharīʿah audit effectiveness factors in Islamic banks
No full textPurpose
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.
DOI: https://doi.org/10.1108/IJIF-09-2018-009
A benchmark modelling for participation-based tax increment financing
No full textPurpose
This paper aims to present the theoretical and conceptual framework of a new method in public finance called “participation based tax increment financing (P-TIF)” by combining conventional tax increment financing (TIF) within the Sharīʿah-compliance structure.
Design/methodology/approach
This study develops a benchmark model for P-TIF, which offers a participative contract between both lender and borrower. With the help of this model, a financing schema in P-TIF is established by incorporating stochastic modelling. Possible implications and alternative options of application are also explored with a discussion of challenges.
Findings
The results mainly indicate that P-TIF promises lenders to be a part of increment from tax earnings, in return for a reduced interest rate. They show how a rise in participation of the lender in a given contract lowers the interest rate. Under the base case scenario, the interest rate is reduced to zero when the participation of the lender in tax increment is set at 50%.
Practical implications
With the feature of being interest-free, P-TIF can be implied also within the Sharīʿah-compliance framework, thanks to the model it is based on. Additionally, as the model in this paper is parametric, it can be applicable to various cases in Islamic finance.
Originality/value
To the best of our knowledge, this is the first paper in the literature in the sense that it provides a conceptual idea and respective model for TIF method within a Sharīʿah-compliance framework.
DOI: https://doi.org/10.1108/IJIF-03-2019-004
Editorial
No full textIn the Name of Allah, Most Gracious, Most Merciful. In August 2020, the licence of an Islamic bank in the Indian Ocean island of Mauritius was revoked by the Central Bank for having failed to comply with certain requirements of local banking laws. The non-compliance issues related to capital adequacy, internal control systems, anti-money laundering and combatting the financing of terrorism and record-keeping obligations. This news might not have made headlines in the global Islamic banking industry, but it has certainly shattered the image that Islamic banking held among the population and has hindered the overall progress of an industry that has hardly taken off in the island.
This case is highlighted because bank failures are less talked about in the industry. When it comes to what one expects of an Islamic bank, generally the list is quite long: Sharīʿah compliance, quality of service, economic performance, technological advancement, and so on. In the literature, Islamic banks are called upon not only to show “financial performance” but also “social performance”. Using Carroll’s (1979) famous definition of corporate social responsibility (CSR), an Islamic bank – like any other firm – should be foremost profitable, efficient and viable (economic responsibility). It should obey laws and regulations (legal responsibility), embrace Islamic and ethical norms (ethical responsibility) and assume social roles in the form of corporate philanthropy (discretionary responsibility). The futurist Brett King, who speaks about the future of banks, adds the responsibility of “going digital” for banks – including Islamic banks – to survive. In his book Bank 4.0: Banking Everywhere, Never at a Bank, he foresees a bank in 2050 to be one that leverages on leading-edge technology such as blockchain, artificial intelligence and voice-based smart assistants to embed banking within customers’ daily spending and money decisions. He foretells: “The coming Bank 4.0 era is one where either your bank is embedded in your world via tech, or it no longer exists.
Muḍārabah and mushārakah as micro-equity finance: perception of Selangor’s disadvantaged women entrepreneurs
No full textPurpose
This study aims to gain the perception of Selangor’s disadvantaged women on the Sharīʿah (Islamic law) rules on two micro-equity financing instruments, namely, muḍārabah (profit sharing) and mushārakah (profit-and-loss sharing) (M&M).
Design/methodology/approach
A survey was carried out in the rural area of Selangor district in Malaysia by administering a self-generated structured questionnaire. A total of 330 completed questionnaires were retrieved from the members of an Islamic microfinance institution (IsMFI), namely, Amanah Ikhtiar Malaysia (AIM). The data were analysed by using structural equation modelling.
Findings
The female borrowers of AIM perceive the Sharīʿah rules of M&M requiring high moral and ethical values and diligent repayment performance. They are aware of some other underlying provisions such as business liquidation, share transfer, information discloser and business termination. The overall findings of this study suggest that the perceived Sharīʿah rules are akin to those that are commonly used in general partnership businesses between Muslims. It also indicates that disadvantaged entrepreneurs would accept the rules that are easy to comprehend as well as favourable to their interests. It further suggests that respondents’ experiences of microfinance and business operation do not have a significant influence on their perception of M&M instruments.
Research limitations/implications
This study was limited to Selangor. So, the perception of Muslim women surveyed may not represent the views of all women in Malaysia. However, it can offer a primary understanding of the said issue.
Practical implications
The findings of this study can help IsMIFs take initiatives to offer M&M as micro-equity finance to poor women entrepreneurs.
Originality/value
So far, limited studies have been carried out on M&M-based microfinancing. This paper offers new insights presenting disadvantaged women entrepreneurs’ perception of these financing instruments.
DOI: https://doi.org/10.1108/IJIF-04-2018-004
Sharīʿah-compliant central banking practices: lessons from Muslim countries’ experience
No full textPurpose
The purpose of this study is to document how a central bank can perform its primary and secondary functions in a Sharīʿah-compliant manner. It also seeks to investigate the outcomes of the experiments of Muslim-majority countries in this regard.
Design/methodology/approach
As a first step, a detailed review of existing literature is conducted, which discusses the views of scholars and practitioners on the central banking mechanism in a fully Sharīʿah-compliant financial system. Moving further, the case studies of Iran, Sudan and Pakistan are presented to highlight experiences of regulators from three Muslim-majority countries, which aimed to achieve full compliance with Sharīʿah (Islamic law) principles related to Islamic finance. To evaluate their models, an assessment of their practices is performed in the light of Sharīʿah rules and principles based on existing literature. Finally, the issues involved in establishing a Sharīʿah-compliant central bank (SCCB) are discussed and improvements are suggested.
Findings
It is found that Iran played an effective role in pursuing broader objectives of monetary policy by setting priorities for credit allocation and assisting the government in reducing expenses; however, with respect to instruments, its experience is limited to the rebranding of conventional products. Sudan has not only used monetary policy to effectively curb inflation but also it has introduced various indirect instruments to perform monetary operations. Pakistan succeeded in formulating a theoretical roadmap to establish a SCCB but the desired objectives could not be achieved because of multiple factors.
Practical implications
This study has important policy implications for regulators and policymakers from Muslim countries, who can use the findings in shaping effective Sharīʿah-compliant central banking practices in their respective countries.
Originality/value
This study discusses the salient features of an important Islamic financial institution, the central bank and evaluates the experiments of three Muslim-majority countries in implementing Sharīʿah-compliant central banking practices. To the best of the knowledge, this evaluation has not been performed in the existing literature and the present study fills in this gap.
DOI: https://doi.org/10.1108/IJIF-01-2019-000
An empirical study of the challenges facing zakat and waqf institutions in Northern Nigeria
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The purpose of this paper is to unearth the factors inhibiting the development of zakat (the Islamic obligatory alms) and waqf (endowment) institutions in Northern Nigeria, with the aim of proffering appropriate solutions.
Design/methodology/approach
This paper uses a qualitative research methodology whereby data was sourced from relevant stakeholders in Northern Nigeria. To select the appropriate interviewees, maximum variation and homogenous purposeful sampling techniques were used.
Findings
The findings of the paper show that zakat and waqf institutions in Northern Nigeria have not achieved their inherent Sharīʿah objectives because members of the public have little or no trust or confidence in the institutions. Also, the potential zakat payers and waqf donors dislike political office holders’ involvement in the appointment of the institutions’ administrators. Finally, the administrators lack adequate managerial and administrative knowledge of the two institutions.
Research limitations/implications
The current research focusses on causes of low performance of zakat and waqf institutions solely in Northern Nigeria. It is envisaged that subsequent researchers may conduct research on the possibility of having a federal law that will strengthen the overall establishment and development of zakat and waqf in Nigeria. This will affect both Muslim-majority and Muslim-minority communities.
Originality/value
This paper represents a referenceable work in the field of zakat and waqf in Northern Nigeria, as it uses an approach that sources primary data in the form of participants’ point of view instead of relying on literature or document analysis. It is not a mere theoretical study of the literature but an empirical investigation of the problem.
DOI: https://doi.org/10.1108/IJIF-04-2018-004
Liquidity creation and bank performance: evidence from MENA
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Islamic banks have significantly different balance sheets from their conventional counterparts, leading to different implications in relation to liquidity creation compared to conventional banks. This work, first, investigates the liquidity creation of conventional and Islamic banks in Middle Eastern and North African (MENA) countries between 2011 and 2016. It then tests the relationship between liquidity creation and performance of these banks.
Design/methodology/approach
It uses the data of 491 commercial banks across 18 MENA countries between 2011 and 2016. The analysis is based on panel data techniques.
Findings
The banks created US$18.596 trillion of liquidity, about 28.4% of total assets. Conventional banks created more liquidity compared with Islamic banks. Nevertheless, Islamic banks created more liquidity per asset compared with conventional banks. The regression analysis revealed a significant and negative correlation between liquidity creation and performance of the banks using return on average equity (ROAE) measure. However, no significant relationship is observed between liquidity creation and return on average assets (ROAA) of MENA banks. Moreover, there is no difference between Islamic and conventional banks in the relation between liquidity creation and bank performance.
Research limitations/implications
The data are limited to the period 2011-2016; the period of this study was selected based on yearly data availability from the data source. Accounting measures were used to study the effect of liquidity creation on bank profitability, and the market-based measures were excluded, as there is no uniform sources in these countries that can be used to collect market-based data.
Practical implications
Bank managers must reach a trade-off between the advantages and disadvantages of liquidity creation, as well as consider the negative relationship between liquidity creation and bank performance when making their decisions.
Originality/value
First, to the best of the authors’ knowledge, this work is the first to analyse the relationship between the liquidity creation and performance of conventional and Islamic banks in MENA. Second, this study uses a sample of Islamic and conventional banks in MENA that have detailed information on the Orbis Bank Focus dataset, which is the most comprehensive database of commercial banks in the MENA region.
DOI: https://doi.org/10.1108/IJIF-01-2018-0009