INCEIF University Journals
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The Ageing Population Crisis from an Islamic Perspective
No full textThe International Monetary Fund’s (IMF) Global Financial Stability Report (2012) warned against the ageing population crisis as a major concern for governments. The basis of this crisis is the associated financial burden created by the longevity risk. Longevity risk is the risk that individuals live longer than anticipated, with consequent shortfalls in incomes post-retirement. Due to the colossal amount involved in mitigating this risk, state intervention is important to mitigate the aggregate longevity risk at national levels. Although ageing is a well-articulated theme in Islam, not much has been written on the present day longevity risk crisis in Islamic finance, despite protection of human dignity being considered as a pillar of maqāṣid al-Sharīʿah (the higher objectives of Islamic law). This paper explores the concept of longevity risk and proposes a new line of products that can be adopted by Islamic banks and Islamic insurance (takāful) companies through Islamic pensions to mitigate longevity risk from an Islamic perspective by using longevity ṣukūk and awqāf
Perpetual Ṣukūk: A Preliminary Sharīʿah Assessment
No full textPerpetual ṣukūk are among the latest innovative instrument in the Islamic capital market. The introduction of this instrument has been driven by its commercial advantages as well as new regulatory requirements particularly in the financial sector. Perpetual ṣukūk have distinctive features compared to common ṣukūk for the instrument carries no maturity date and is typically treated as equity (from an accounting standpoint) rather than debt. While this innovation is commendable, it deserves Sharīʿah consideration of some of its structural and operational aspects. This paper attempts to analyse selected issues and highlight justifications provided by respective Sharīʿah advisers in approving perpetual ṣukūk. The paper begins with providing an overview on perpetual ṣukūk, its common features and basic requirements and its specific characteristics when issued as Additional Tier 1 (AT1) capital instruments by financial institutions to meet capital requirements under Basel III. Subsequently, the paper illustrates selected structures of recent perpetual ṣukūk issued in Malaysia and other countries. Finally, it highlights some potential Sharīʿah issues that might arise and deliberates upon them from the Sharīʿah perspective. The discussion and analysis of most of the Sharīʿah issues in this paper are, however, neither conclusive nor exhaustive
Methodology of Purging Interest Income
No full textThe process of removing interest income from total income is known as interest purification or purging. It is one of the important requirements of the Sharīʿah when undertaking Islamic investments. Purification can be either of interest income only or of different kinds of impure income.
Interest income is accrued on bank deposits, loans advanced or interest-based investments. It is reported as ‘Interest Income’ in financial statements of companies. Generally, interest income is reported as a part of Total Income. The company benefits from the accrued interest income by utilising it for meeting its costs or expenses from various operations or for paying dividends and creating reserves. 
Sharīʿah Contracts Underpinning Mushārakah Mutanāqiṣah Financing: A Conceptual Analysis
No full textThis paper examines the Sharīʿah contracts applicable in mushārakah mutanāqiṣah financing (MMF) (diminishing partnership) and possible Sharīʿah issues arising from the combination of different Sharīʿah contracts to effect the financing. The paper employs the qualitative research method, using textual and document analysis. It finds that the fiqh characterization of MMF by the International Islamic Fiqh Academy of the Organisation of Islamic Cooperation (IFA-OIC), which is also found in the Bank Negara Malaysia (BNM) Shariah Standard on Musyarakah, is the best contemporary approach, but it needs to be explicated. This paper identifies two major phases of MMF that are essential to attaining its objective: partnership and ownership, each phase with its own underlying and supporting contracts. It suggests that the partnership phase, which involves either shirkat al-milk (partnership in ownership) or shirkat al-ʿaqd (contractual partnership), should be separate from the ownership phase, which applies either a bayʿ (sale) or hibah (gift) contract. The process also involves a number of subordinate contracts in the form of lease (ijārah), forward lease (ijārah mawṣūfah fī al-dhimmah) and manufacturing contract (istiṣnāʿ) as well as a purchase undertaking (waʿd). Lastly, the contractual phases of MMF discussed in this paper and pertinent issues highlighted could guide contracting parties towards a better understanding of each contract involved in MMF and what is to be expected from them
Issues in Islamic Hedging Practices: A Critical Analysis
No full textHedging is an important concept in overall risk management in conventional finance. The need for hedging is also recognised in Islamic finance, although hedging strategies in Islamic finance are different from their conventional counterparts as they must be in compliance with the Sharīʿah principles. Accordingly, the following international Sharīʿah standard-setting bodies and other Sharīʿah authorities outside Malaysia have issued resolutions acknowledging the need for hedging and discussing various instruments to be used for that purpose: 
Surplus-Sharing Practices of Takāful Operators in Malaysia
No full textIn takāful (Islamic insurance), surplus in the takāful fund will emerge when the overall operations of the fund perform better than expected, i.e. when the underwriting, investment and expense management yield favourable results. Surplus, in general, refers to the excess amount of contributions available in the takāful fund after taking into account total claims paid, amount payable for retakāful contributions, reserves allocated and investment profits accrued to the fund. Given the rightful roles of takāful operators as ‘managers’ of the takāful fund and participants as owners of the fund, this paper discusses the current practice of surplus management and distribution, including the application of the surplus-sharing concept, among takāful operators in Malaysia. The study combines both qualitative and quantitative research methods and relies greatly upon availability of disclosures on the surplus distribution practice by takāful operators. The paper also sets out to establish the effectiveness of the existing practice in promoting a strong and sustainable takāful fund, upholding participants’ stature as owners of the takāful fund and enticing consumers to participate in takāful, as well as identifying the areas within the practice that can be improved to further enhance the feature and value proposition of surplus in takāful. The study affirms that, in actual practice, the surplus generated from the takāful fund is distributed between participants and takāful operators, with variation seen from the perspectives of frequency of distribution, method of distribution and specific Sharīʿah contracts used to underlie the distribution. Several improvements on the disclosures of information on surplus are also suggested in the paper
Accounting Issues in the Reporting of Profit Sharing Investment Accounts in Islamic Banks’ Financial Statements Under IFSA 2013
No full textIssues in the reporting of Islamic financial instruments have been discussed since early 2000. Among these issues is the debate about whether the accounting standards promulgated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or the International Financial Reporting Standards (IFRS) should be adopted for reporting Islamic financial transactions. Abdel Karim (2001) explained the need to implement the AAOIFI accounting standards as these standards specifically cater for the unique characteristics of the contracts that govern the operations of Islamic banks
A Fiqhī Analysis of Tradability of Islamic Securities
No full textSecondary markets are vital for the development of Islamic capital markets (ICMs) (Aziz, 2007). They facilitate the reselling of securities among investors, thus adding liquidity to these instruments (Mishkin, 2004: 26-27). Besides this basic role, secondary markets assist in reducing average cost of capital; bringing about a rational representation of the pricing of securities in primary as well as secondary markets; facilitating the exchange of investment risks; evaluating the performance of private and public sector; and mitigating information asymmetry (Ahmed, 1995; Al-Eshkar, 1995; El-Gari, 1993; Mishkin, 2004). However, secondary market trading of Islamic securities involves various issues. One of the greatest concerns is the lack of standardization, or at least harmonization, of ICM products. There are also conflicting resolutions, standards and individual fatwas (Islamic legal opinions) on the tradability of Islamic securities within the industry. It is feared that this creates confusion in the industry and may hinder the overall development of the ICM (Cox, 2005; Shaharuddin et al., 2012). Given the importance and concerns regarding the ICM, this study aims at investigating the vital issue of tradability of Islamic securities from the fiqh (Islamic jurisprudence) perspective
The Concept of Actual Financial Loss (Ḍarar Mālī Fiʿlī) in the Context of Islamic Banking Operations
No full textAs a financial intermediary, an Islamic financial institution’s (IFI) efficiency in liquidity management is determined by its financing to deposit ratio which is calculated as the amount of the respective IFI’s financing divided by the amount of its deposits at any given time. The higher the ratio, the more the IFI is said to be utilising the funds and the more the bank is deemed efficient, provided that its cost of operation is managed efficiently. Most deposits need to be paid back to the depositors in a certain period of time, depending upon the types of deposit. To generate assets, an IFI usually provides Islamic financing facilities from these much shorter maturity funds (deposits) which may lead to asset-liability mismatch, particularly in the event of breach of terms and conditions as well as default by the customers. On account of this scenario, the IFI usually imposes various charges on customers to compensate for the financial loss it suffers, particularly in relation to asset-liability mismatch that affects its capital and liquidity requirements. 
Risk Sharing Versus Risk Transfer in Islamic Finance: A Critical Appraisal
No full textSome writers on Islamic finance have recently resuscitated the old ‘no risk, no gain’ precept from the earlier literature in the wake of the 2007-2008 financial crisis. They argue that the basic reason for the recurrence of such crises is the conventional interest-based financial system that subsists purely based on the transfer of risks. In contrast, Islam shuns interest and promotes the sharing of risks, not their transfer. The distinction is used to make a case for replacing the conventional system with the Islamic; for that alone is thought as the way to ensuring the establishment of a just, stable and crisisfree financial system. In support of this thesis is cited the evidence that Islamic banks have faced the current crisis better than their conventional counterparts. The present paper is a critique of this line of thought. It argues that risk sharing is not basic to Islam. Islam approves profit-and-loss sharing; sharing of risk is a consequence of that, not its cause. There is no such thing as a risk sharing contract per se in Islamic finance that, when entered into, gives rise to profitand- loss sharing. The paper concludes that while there is a case for encouraging participatory finance in Islam, there is none for treating risk sharing as its inviolable principle. What really requires emphasis is the need for transparent moral conduct and commitment to Islamic ethical norms