INCEIF University Journals
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Distribution of Muḍārabah Profits in Classical Schools of Fiqh: Clarification of a Misconception
No full textCizakca (2011) states that profits in a muḍārabah contract, according to the Mālikīs and Shāfiʿīs, follow the same formula as in a joint active partnership (ʿinān).1 This means that both profit and loss in a muḍārabah contract should be distributed between the investor (rabb al-māl) and the entrepreneur (muḍārib) according to the proportion of capital contributed. He further argues that, conversely, it is only the Ḥanafīs who tolerate the sharing of returns between the two parties based on any percentage that is mutually agreed to by them; hence, permitting departure of profit distribution from the capital investment ratio. Meanwhile, he remains silent about the view of the Ḥanbalīs on this matter
Islamic Norms, the Excel Formula and Home Financing Models
No full textThis paper adds to the series of writings on Islamic home financing presented and published by the author since February 2010. It spells out certain norms Islamic banks must observe in home financing and demonstrates that the conventional model based on an Excel formula does not meet the stated norms. It may well be emphasized that in Islam the question of observing these norms arises before, and not after, the selection of the formula; additional juristic requirements may only follow subsequently. Is it not then surprising that many Islamic banks are using the formula to determine the periodic installment payments in their home financing programs? The paper finds, for example, the popular Mushārakah Mutanāqiṣah Partnership (MMP) Islamic home financing model to be non-compliant with the stated norms. It presents a new model―the Zubair Diminishing Balance Method (ZDBM)―and argues that the alternative is not only fully observant but is superior to the MMP model on some other counts as well
Conceptual Analysis of Islamic Home Financing Models
No full textThis paper examines the properties of Islamic home financing models, including the mushārakah mutanāqiṣah partnership (MMP), bayʿ bi thaman ājil (BBA) and Zubair Diminishing Balance Methods (ZDBM). The conceptual study uses the financier’s outstanding balance as a general theoretical framework for a comparative analysis of these models. It is shown that differences in the structure and dynamics of balances have a bearing on the speed of ownership transfer. There is a trade-off between the convenience of fixed installments and faster speed of ownership transfer rates relative to payment ratios. Fixed installments, while more convenient, are conducive to relatively slower speeds of ownership transfer. In contrast, higher installments in earlier periods may be prohibitive, but have the effect of increasing the relative speed of ownership transfer. It is possible to derive hybrid models with a balanced mixture of Islamic home financing modes where the recourse is made to both murābaḥah and mushārakah principles to govern the rights and obligations of contractual parties. This hybrid modelling constitutes an attempt to eliminate compounding, preserve customer’s rights to optimal rates of ownership transfer, secure financier’s rights to legitimate profits and meet preferences for either constant or variable installments. The various needs and preferences can hardly be met with a single home financing model. This conceptual analysis suggests that there is a need for greater transparency and better assessment of the inherent risks and trade-offs associated with various financing models. It is the liberty of choice between options of financially equivalent schemes that can be conducive to informed and rational decisions. Given the diversity of stakes and the overriding importance of public interest, perhaps no single model represents a viable long-term solution on its own. A full set of Islamic home financing options however may
Application of Suftajah in Modern Islamic Financial Institutions
No full textThe current practices of Islamic finance have evolved over time, just as the practices of its conventional counterpart have. However, some mechanisms used during the times of early Muslims, such as suftajah (bill of exchange), are still applied in modern business practices. In some Muslim countries, the ancient form of this financial transaction is still in use, although it is not necessarily popular among merchants and businessmen
The Fiqh Characterization of Ijārah Mawṣūfah Fī Al-Dhimmah: An Analysis of Juristic Views
No full textThe application of the Shar ah principle of ijārah mawṣūfah fī al-dhimmah (forward lease) can be traced back to the early days of Islam. It is derived from the original contract of ijārah (lease), which has been widely used in the structuring of Islamic financial transactions to cater for various Muslim and non-Muslim needs over time. Thus, the classical books of Islamic jurisprudence have amply discussed its applications in various forms according to the prevailing circumstances
Venture Capital Strategies in Waqf Fund Investment and Spending
No full textThe cash waqf (endowment) has come into prominence in recent years since many Malaysian state Islamic religious councils and the Federal government (through a foundation) began promoting cash waqf schemes. However, unlike the Ottoman form which spent its income―derived from simple money-lending and istighlāl (purchase and lease-back) practices―on the provision of services to meet public needs or for alms-giving, the modern cash waqf invests in low return savings or is converted through the process of istibdāl (substitution) into low-income generating assets. This conceptual paper discusses the application of certain venture capital strategies in both the investment and spending decisions of the cash waqf. In its investment decisions, the cash waqf might utilise some of the tools employed by venture capital firms for choosing its investments and for mitigating risks. In fact, there is also a possibility for the cash waqf to consider certain venture capital opportunities as an alternative asset class in which to invest a portion of its corpus. In its spending decisions, the cash waqf may choose its beneficiaries in much the same way as a venture capital firm would choose its investees; that is, by putting together a portfolio of non-profit organizations (NPOs) with proven track records for delivering social results and which are seeking to grow their organizations to achieve financial sustainability. This paper therefore proposes an Enterprise Waqf Fund (EWF) model that combines the cash waqf model with relevant concepts from venture capital to enhance the dynamism of cash waqf. Policy and legal reforms are also recommended at the end of the paper that would provide an enabling environment within which the Enterprise Waqf Fund can operate
Credit Guarantee Scheme: A Combination of Kafālah and Wakālah Bi Ajr as an Alternative to Kafālah Bi Ajr
No full textThe idea behind the establishment of a credit guarantee scheme in the market is to assist small- and medium-sized enterprises (SMEs) to get access to financing from financial institutions by providing them a liquidity guarantee. Financial institutions’ provision of liquidity at a reasonable cost to these enterprises, especially those that do not possess sufficient collateral, encourages further expansion of financing for small and medium enterprises. In the current practice, a guarantee is given to facilitate enterprises to have better access to financing from financial institutions by improving their rating. The product kafālah bi ajr (a guarantee for which a fee is charged) is usually used for this purpose. Under kafālah bi ajr, a guarantee is given, in return for which the guarantor charges the debtor a certain amount as a fee
A Critique of the Diminishing Balance Method of Islamic Home Financing
No full textThis paper criticizes a new ‘Islamic’ home financing model proposed in Hasan (2011a), “Islamic Home Finance in the Social Mirror”, that appeared in ISRA International Journal of Islamic Finance, Vol. 3, Issue 1, pp. 7-24 and in another subsequent paper Hasan (2011b), “Riba in La-Riba Contracts: Where to Turn in Islamic Home Financing?”. These papers argued that the Diminishing Balance method, which the author affectionately calls the Zubair Diminishing Balance Method (ZDBM), is superior to the Islamic Mushārakah Mutanāqiṣah partnership (MMP) model, which the papers claim to be no better than its conventional ribā-based counterpart. The ZDBM is argued to be cheaper for the customer without being costlier to the bank. Also at any point in time, the debt on a default date is argued to be smaller in the ZDBM model. This paper discusses the fallacies in the arguments presented and shows that the ZDBM is similar to the conventional interest-based loan or, at best, similar to the murābaḥah-based bayʿ bi thaman ājil (BBA). Moreover, it is not cheaper, as claimed, but potentially more burdensome and increases the probability of default. Hence the ZDBM would face similar problems to those encountered in BBA financing, particularly when it comes to early settlement; the balance of financing can even be more than the original financing amount. The MMP model is indeed, therefore, superior to the ZDBM and is also Sharīʿah-compliant without much ado
Building Agent-Customer Relationship in the Takāful Industry: A Framework of Islamic Relationship Marketing
No full textThe term ‘relationship marketing’ has grown to become a popular subject in the marketing literature over the last three decades. The literature indicates the significance of maintaining long-term relationship with customers, especially these days. The questions that then arise are: what are the antecedents that significantly contribute to building and maintaining a long-term buyer-seller relationship, and what are the outcomes of a strong buyer-seller relationship? Discussions of relationship marketing have even gained popularity in the Asian literature since 2000; yet research conducted on the issue of Malaysian Islamic financial institutions is very scarce. The existence of a gap in the Asian literature on this topic has led the researchers to develop a suitable theoretical framework of Islamic relationship marketing for Islamic financial institutions, particularly the takāful industry. The study expects that the framework of Islamic relationship marketing will be a reference material for players in the takāful industry in strengthening their relationship with their customers. Indeed, a strong agent-customer relationship will ensure the development of the takāful industry in the future
Efficiency and Stock Market Performance of Islamic Banks in GCC Countries
No full textUsing data envelopment analysis (DEA), this paper estimates the efficiency of 25 Islamic banks operating in the Gulf Cooperation Council (GCC) countries during the period 2003-2009. It also examines the relationship between the efficiency of Islamic banks and the performance of their stock. The results suggest that efficiency measures, particularly technical and pure technical efficiency, have increased over the period of study while scale efficiency remained constant. The inefficiency of Islamic banks can be attributed to pure technical inefficiency rather than to scale inefficiency. We also find that large and small banks are more efficient than medium banks in terms of overall technical efficiency. Furthermore, the empirical findings show that both technical and pure technical efficiency changes are positively related to share returns, while changes in scale efficiency have no impact on stock performance. Finally, regression also indicates a significant and positive association between market return and the book-to-market equity ratio with share prices