INCEIF University Journals
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Unsustainability of the Regime of Interest-Based Debt Financing
No full textEvidence has been mounting that the interest-based debt financing regime is under increasing distress. Evidence also suggests that financial crises—despite the various labels assigned to them: exchange rate crisis or banking crisis—have been debt crises in essence. At present, data suggest that the debt-to-GDP ratio of the richest members of the G-20 is expected to reach the 120% mark by 2014. There is also evidence that, out of securities worth US$ 200 trillion in the global economy, no less than three-fourths represent interest-based debt. It is difficult to see how this massive debt volume can be validated by the underlying productive capacity of the global economy. This picture becomes more alarming considering the anemic state of global economic growth. There is great uncertainty with regard to interest rates. Although policy-driven interest rates are near zero, there is no assurance that they will not rise as the risk and inflation premiums become significant. Hence, a more serious financial crisis may be in the offing and a general collapse of asset prices may occur. This paper argues that the survival of the interestbased debt regime is becoming less tenable, as is the process of financialization that has accompanied the growth of global finance over the last four decades. It further argues that Islamic finance, with its core characteristic of risk sharing, may well be a viable alternative to the present interest-based debt financing regime
Insolvency Law in Malaysia and the Adjudication Order (Taflīs) on a Bankrupt in Islamic Finance: Similarities and Differences
No full textBankruptcy is a legal process, under the order of a court, by which the debtor’s assets are taken by the Director General of Insolvency. These assets are later distributed equitably among the creditors. The Bankruptcy Act 1967 (hereafter referred to as the ‘Principal Act’) was amended by the Bankruptcy (Amendment) Act 2003 (hereafter referred to as the ‘Amendment Act’)
Blazing the Trail: The Institutional Framework for Dispute Resolution in Malaysia’s Islamic Finance Industry
No full textThe dispute resolution framework in Islamic finance as practiced in most countries has proven to be inadequate, particularly in its application and interpretation of the Sharīʿah. Malaysia has consistently proven its prime position in blazing the trail in most legal and regulatory issues in the Islamic finance industry. It has recognised the increasing importance of the architectural aspects of the industry such as the need to establish the dispute resolution framework
Takāful from a Maqāṣid al-Sharīʿah Perspective
No full textThe takāful sector has grown significantly over the past three decades. It represents an ethical alternative to conventional insurance and conforms to the maqāṣid al-Sharīʿah (objectives of Islamic law). Takāful helps to reduce fear and worry of the participants by providing an avenue for getting general and family protection and by indemnifying loss and damage against certain risks according to the injunctions of the Sharīʿah. Indeed, takāful plays an important role in society, and its ethical underpinnings enable the sector to position itself as the financial sector that truly promotes the maqāṣid al-Sharīʿah
Sharīʿah-Compliant Credit Cards: An Analysis of Underlying Structures
No full textThe purpose of this paper is to provide an analysis of various structures retail clients today. The paper discusses case studies from several jurisdictions to show that various Sharīʿah-compliant contracts or combinations of contracts are being used to structure Islamic credit cards so that customers enjoy similar benefits to those derived from conventional credit cards. It is submitted that Sharīʿah-compliant credit cards which encourage excessive spending (isrāf) should not be promoted on the basis that they counter the basic Sharīʿah principle of moderation and avoiding wastage. Furthermore, the recent financial crises highlighted that the structure of the product will provide little benefits if other factors, such as stringent credit screening processes, need-based analysis and customer’s interests, are ignored or given secondary importance
Revisiting the Sharīʿah Ruling of Capital Guarantee in a Muḍārabah Contract
No full textMuḍārabah is a form of partnership contract based upon the spirit of profit sharing. It is widely applied in Islamic deposit products as it does not face any Sharīʿah issues compared to other Sharīʿah contracts used in Islamic deposit products such as qarḍ and wadīʿah
The Global Financial Crisis, Securitization and Islamic Finance: An Opportunity for Inward and Outward Reform
No full textIt is often contended by academics and practitioners in the Islamic finance industry that the global financial crisis would not have happened if the international financial markets had followed the principles of Sharīʿah, especially in the asset securitization sphere. This article attempts to respond to these assertions by examining the factors that contributed to the global financial crisis alongside an analysis of how Islamic finance could have been of value in its aversion. Specifically, the article provides details on the origins of the global financial crisis, its evolution and triggers. It then proceeds to investigate the financial principles, both conceptually and practically, in the Islamic securitization (ṣukūk) model. Ultimately, it is argued that from a conceptual standpoint, Islamic financial principles would have served to avert the crisis; however, contemporary ṣukūk practices would have only been likely to reduce the probability of its occurrence. This outcome is important insofar as it assists the Islamic finance industry achieve its full potential, which includes the capability of proposing effective reforms to the international financial architecture
The Practice of Sharīʿah Reporting in Malaysia: Does Country of Origin or Being a Member of AAOIFI Matter?
No full textThe establishment of the Sharīʿah Supervisory Board (SSB) or Sharīʿah Advisory Board (SAB) as part of the governance mechanism has been supportive to the growth of the Islamic banking and finance industry. The existence of the SSB as an integral part of Islamic financial institutions (IFIs) has been essential in building up market confidence that the Islamic products and services of these institutions conform to the provisions of the Sharīʿah (Bakar, 2002). This is a distinctive characteristic that sets the Islamic finance industry apart from its conventional counterpart (Hasan, 2009; Mannan, 1986)
The Case for Receivables-Based Ṣukūk: Convergence Between the Malaysian and Global Sharīʿah Standards on Bayʿ Al-Dayn?
No full textThe ṣukūk market has been an innovative market, with ṣukūk structures evolving from “asset-backed” to “asset-based” and from “blended-assets” to “asset-light” structures. New ṣukūk structures were introduced mainly to solve the key problem faced by issuers who lack suitable Sharīʿah-compliant physical assets to support their ṣukūk issuance. This paper focuses on the “blended-assets” ṣukūk known as ṣukūk al-wakālah, a type that blends different types of physical assets and receivables. Whilst the Malaysian fuqaha (jurists) have allowed the sale of ṣukūk having 100% receivables, the fuqaha from the rest of the world have only permitted the sale of ṣukūk having substantial physical assets. This paper therefore discusses the fiqhī (juristic) analysis behind the requirement of having a minimum threshold (either 51%, 33% or 30%) of physical assets for ṣukūk issuance and trading purposes. The paper poses the question of whether the threshold of physical assets can be further reduced to 10%. In particular, it examines the issue of whether trading of a ṣukūk representing 90% receivables and 10% physical assets is permissible under the Sharīʿah
Incentive-Compatible Ṣukūk Mushārakah for Private Sector Funding
No full textDespite the huge potential on both the demand and supply sides of the ṣukūk market, the current ṣukūk structures fall short of adequately meeting the market’s needs as the Sharīʿah compliance of many of them and/or their economic efficiency are questionable. Even though partnership-based ṣukūk are claimed to reflect the true spirit of Islamic finance, their underuse as a financing instrument is a notable fact. Such a situation, if not addressed, will impede the development of the ṣukūk market in the future. This paper proposes an innovative ṣukūk mushārakah model for consideration by companies and revenue generating infrastructure projects. The model has an incentive-compatible feature by making the share of the issuing entity in the profit positively related to its performance in addition to a convertibility clause. The sector Return on Equity (ROE), adjusted with the firm beta, is considered a benchmark for measuring the performance of the firm. The paper examines the design of the model, its risk return profile as well as its pricing for secondary market trading. The theoretical properties of the model are empirically validated through two types of simulations: Monte Carlo Simulation and backtesting. The proposed model constitutes a new class of financial security with respect to the residual nature of the claim and its limited tenor. It, thus, presents an opportunity for diversification. The model implies higher risk for the investor, as neither the profit nor the capital is guaranteed–like common stock– but the return is expected to be higher. The model would entail higher financial cost for companies–as compared to debt instruments–but it would imply at the same time lower probability of bankruptcy, since the ṣukūk are equity-based instruments