INCEIF University Journals
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Impact of Inflation on Islamic Financing: Empirical Evidence from Malaysia
No full textPredictable increases in inflation can severely damage the financial sector by hindering its ability to finance capital formation. Recent studies provide evidence regarding the importance of the financial sector in reducing information asymmetries and illustrate that high inflation rates lead to an increase in credit market frictions with negative effects on the financial sector. In particular, these theories highlight the fact that an increasing rate of inflation lowers the real return on money and assets, which in turn leads to a reduction in savings and squeezes the credit markets, which exacerbates credit market frictions, resulting in a reduction in credit availability in the economy. Existing theoretical models also suggest that there exists an acceptable threshold for the inflation rate and once this threshold is exceeded, it exacerbates credit market fictions and leads to credit rationing. In the case of Islamic banks, this relationship is yet to be examined
The Application of Commodity Muḍārabah in Bursa Suq Al-Sila’ Malaysia vis-a-vis Jakarta Future Exchange Shariah Indonesia: A Comparative Analysis
No full textTawarruq has been extensively used by Islamic financial institutions (IFIs) recently, mainly to address liquidity shortages and to structure risk management tools. The common term used in the market to denote tawarruq is “commodity mur ba ah” or sometimes “commodity musāwamah”. The concept of tawarruq has gained wide acceptance among market players due to its flexibility, which allows IFIs to provide cash with predetermined fixed income, just as their conventional counterparts do
The Performance of Islamic Banks and Macroeconomic Conditions
No full textThe recent financial meltdown has made manifest the need to search for an alternative financial system that is more resilient. Theoretically, the principles underlying Islamic banking and finance promise a more stable system. According to these principles—which originate in the Shar ah—Islamic banks should focus on feasible economic investments, undertake transactions backed by real assets and finance potentially productive activities. Hence, in principle, they are insulated from speculative and unproductive activities, and their performance is not subject to the same macroeconomic forces as that of their conventional counterparts. However, empirical evidence that supports the claim that the performance of Islamic banks is not related to the external economic environment is very limited. Accordingly, the motivation of this study is to fill in the gap by providing empirical evidence as to whether the performance of Islamic banks depends more on their internal conditions rather than external factors. Using global Islamic banks’ data and applying the standard panel data approach, our findings point that the performance of Islamic banks depends more on bank specific characteristics such as capital, asset quality and liquidity while macroeconomic factors do not significantly influence Islamic banks’ profits. This lends support to the theoretical assertion that Islamic bank performance does not rely heavily on the macroeconomic environment
Critique of the Non-Interest Banking Framework in Nigeria
No full textThe released framework by the Central Bank of Nigeria (CBN) for the regulation and supervision of non-interest banks (NIBs) in Nigeria on 13 January, 2011, has laid to rest the debate on whether or not the government recognises the potentials and viability of Islamic banking and finance (IBF) in Nigeria and has posed a new challenge of how to successfully implement the provisions of the new framework in the context of the existing conventional financial system. Using a literature survey, this paper provides a critique of the non-interest banking (NIB) framework in Nigeria and examines the challenges of introducing it into the current conventional system. The paper observes that, with the framework, an opportunity has been created for banks that are interested in providing financial products and services based on the principles of the Shar ah to do so through full-fledged non-interest banks and windows or subsidiaries of interest-based conventional banks. It however posits that unless some factors are considered in its implementation, the provisions of the framework―though laudable―may not take the IBF industry far. The paper therefore suggests that the CBN, bank operators and other stakeholders should take very seriously the issue of manpower and infrastructural development and strict compliance with the guidelines in order to successfully apply the framework
Instituting Sharīʿah Audit in Malaysian Islamic Financial Institutions
No full textThe overall objective of Islamic finance is to preserve socio-economic justice and ethical values in obligations and contractual rights arising from financial transactions. It obligates Islamic financial institutions (IFIs) to fully comply with the principles of the Sharīʿah in all their activities. Complacency of IFIs in fulfilling these requirements would lead the market to lose confidence in these institutions. Eventually, it would render these institutions just another version of their conventional counterparts, and it might retard the growth of the whole Islamic finance industry. Therefore, complete adherence to Sharīʿah rulings is the only option for IFIs. In order to correctly measure the rule compliance of these institutions, a proper Sharīʿah audit mechanism should be put into operation that would validate the level of compliance of these IFIs. This paper highlights the practical challenges in implementing such a Sharīʿah audit system. It also proposes some suggestions to address these challenges
A Critical Analysis of the Resolution of the Sharīʿah Advisory Council of Securities Commission Malaysia: A Case Study of the Crude Palm Oil Futures Contract
No full textOn November 26, 1997, the Shari’ah Advisory Council of Securities Commission Malaysia (SAC) resolved that the crude palm oil futures contract is in accordance with Sharīʿah principles. This resolution is a contentious one as it conflicts with the resolutions of the mainstream internationally represented organisations of Sharīʿah scholars, namely, the Islamic Fiqh Academy of the Muslim World League (IFA-MWL), the Islamic Fiqh Academy of the Organisation of Islamic Cooperation (IFA-OIC), and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
Sharīʿah Issues in Islamic Capital Markets: Ṣukūk
No full textThe purpose of this paper is to ascertain the prevailing Sharīʿah issues in Islamic capital markets, particularly ṣukūk. Common features of conventional bonds are replicated in ṣukūk via late penalty payment upon default, trading of debt-based ṣukūk, purchase undertaking in equity-based structures and ownership status in assetbased transactions. These features pose Sharīʿah concerns and are discussed in the paper from the perspective of current practices and views of scholars by compiling various references that reveal the diversity of the Sharīʿah. The paper does not claim to provide solutions to the issues of debate; rather it engages in providing an analysis of these Sharīʿah issues. The four issues covered are certainly not exhaustive; more issues are expected to creep up as ṣukūk structures continue to evolve over time. The paper provides value by shedding light upon the discussed issues and it also highlights the need for a balance between growing the ṣukūk market and upholding Sharīʿah in all aspects when structuring ṣukūk
Risk Sharing: An Alternative to Interest-Based Debt Financing
No full textRisk sharing―the essence of Islamic finance―appears to have all the desirable characteristics that would make it the basis of an ‘antifragile’ and resilient economic order. Its epistemological roots are discernible from Verse 275 of Chapter 2 of the Qur’an. The verse, in part, allows exchange (al-bayʿ) and prohibits interest (al-ribā). Exchange requires risk sharing because it entails exchange of property rights’ titles between contracting parties. Financing based on interestrate debt does not allow the exchange of the creditor’s property rights to the debtor with respect to the amount loaned; the creditor retains the property rights on the money. Taken together, allowing exchange and prohibiting interest constitute the organizing principle of Islamic finance
Instruments for Meeting Capital Adequacy Requirements Under Basel III: A Sharīʿah Perspective
No full textThe Basel III regulatory framework has set out new capital and liquidity standards for banking institutions. In particular, Basel III has increased the minimum capital levels to be maintained by banks and redefined the criteria for qualifying regulatory capital instruments to be included under Tier-1 (T1) and Tier-2 (T2) capital. The overall objectives of the reforms are to enhance the banking sector’s ability to absorb shocks arising from financial and economic stress and reduce the risk of spillover from the financial sector to the real economy (BCBS, 2011: 1)
Sharīʿah Governance, Expertise and Profession: Educational Challenges in Islamic Finance
No full textThe shortage of qualified Sharīʿah practitioners (scholars) is a major challenge facing the Islamic finance industry, which relies on the high concentration of a few top scholars/practitioners for Sharīʿah compliance assurance. A good number of the top practitioners have risen to prominence in the absence of any recognized standard or requirement for this profession. Their qualification and training which equip them with the necessary skills to be effective in dealing with the complexities and linkages in a modern economy and financial system is an important area of concern. These challenges can be addressed in the long-run by taking a number of steps: (a) establishing educational and training institutions with relevant programmes; (b) designing curriculum and setting standards for qualifying Sharīʿah practitioners as a professional pool to serve the industry; and (c) forming a professional body to recognise and certify Sharīʿah practitioners just as is done in any modern professional discipline. This conceptual paper examines the pertinent issues and delineates a brief outline of a qualification framework to initiate the relevant discourse