INCEIF University Journals
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Islamic Finance: The Structure-Objective Mismatch and Its Consequences
No full textThis paper raises the issue of an initial structure-objective mismatch in the launching of Islamic finance. The abolition of interest and promotion of growth with equity were goals of the conceived system. These goals expressed a long term vision to improve the condition of the Muslim community across the world. However, the organizational form adopted for Islamic finance was that of the existing commercial banks, which essentially provided short-term loans on interest to industry and commerce. The choice thus involved an intrinsic mismatch between the structure and objectives of Islamic finance. The mismatch did carry some advantages, but–from a more important angle–it exposed Islamic finance to commitments and influences which could not align very well with the goals the pioneers had in mind. Note that the focus here is not a reversal of the mismatch but identifying its consequences, which have forced the nascent Islamic system to converge and compete with the mature conventional finance dominated by the West. The ground realities are not being adapted to Shari’ah norms; it is the norms that are being stretched to the limit to meet the demands of the conventional system. Ordinary Muslims who hoped to benefit from Islamic financing remain unattended. Thus, what Islamic finance can or cannot change will depend on where its ongoing integration with the conventional system leads it. Currently, most merits claimed for the Islamic system defy evidence. The basic reforms financial systems require in the face of current crisis are the control of credit, leverage lure and speculation. Islamic finance is, in principle, better equipped to achieve these ends
Performance of Islamic and Conventional Exchange Traded Funds in Malaysia
No full textETFs have attracted many investors as one of the most innovative products of financial engineering. By virtue of the nascent nature of MyETF-DJIM Titan 25 and FBM 30ETF in Malaysia, comparative performance studies are essential during a financial crisis. MyETF is different from FBM 30ETF in terms of investment scope and Shari’ah governance structure. While MyETF has achieved its objective in tracking its index, FBM 30ETF has failed in this respect. Despite its higher total risk, MyETF performed better than its index. The same applies in the case of FBM 30ETF. Although MyETF has bigger net assets, economies of scale, and better diversification, the performances of the two funds are lacklustre and similar, with FBM 30ETF performing somewhat better. Notwithstanding their success to outperform their respective benchmarks, both ETFs had comparable negative performance, with decline in prices and NAV. The negative returns have caused abnormality in their measurements
Shari'ah Parameters oh Hiyal in Islamic Finance
No full textHilah (plural: hiyal) is a juristic term defined as the use of acumen and ingenuity to avoid difficulty in one’s commitment to Shari'ah rulings, especially in financial and economic matters. Hiyal have been widely exercised in Islamic finance to provide remedies for the fulfilment of financial needs. The wide application of permissible hiyal in economic activities illustrates that hiyal play an important role in Islamic finance, as they alleviate financial predicaments and hardship
An Empirical Investigation into SMEs’ Perceptions of Credit Guarantee Corporation (CGC ) Malaysia Berhad: A Case Study of the Islamic Guarantee Scheme in Malaysia
No full textSmall and Medium Sized Enterprises (SMEs) are considered the backbone of most economies, whether developing or developed, due to their contributions to national output and employment. In Malaysia, the government has formulated various strategies to enhance the development of SMEs. One such strategy resulted in the formation of the Credit Guarantee Corporation, whose responsibility is to be a loan guarantor for the SMEs. The phenomenal rise of Islamic banking and finance in the global market in recent years has prompted many financial institutions in Malaysia to start offering a line of Shari'ah-compliant products in their effort to tap into the latest market opportunities. SMEs now have a choice whether to take up Islamic loans and various other innovative Shari'ah-compliant products or to use the conventional products in financing their business. This paper reports an empirical study on the use of Islamic credit guarantee schemes among SMEs in Malaysia and analyses data from 87 respondents out of a total of 300 questionnaires sent. The study investigates factors that explain their choice of the Islamic finance guarantee scheme as opposed to conventional ones offered by the CGC, their perceptions on the quality of services provided and on the expected role of the government. The study reveals that there is still a low level of awareness and usage of Islamic guarantee schemes among the respondents. This empirical study represents an early investigation into Islamic guarantee schemes among the SMEs in Malaysia. The findings on the variables that influence their demand obtained from this study have practical implications for the government and the service providers in terms of product formulation and development, incentives, tax and policy creation
Case Studies of the Practice of Nomination and Hibah by Malaysian Takaful Operators
No full textNomination is a process whereby a policyholder who purchases the insurance policy should name someone to benefit from the policy in the event of the policyholder’s death. Nomination is purposely performed to ensure the beneficiaries receive the takaful benefits promptly. The current practice of the nomination clause in family takaful operation is basically vague because the Takaful Act 1984 does not expressly provide any rule to that effect. This study aims to examine the status of nominees for Muslim participants and non-Muslim participants in family takaful as stipulated in the tak ful nomination form. It is significant to clarify the status of the nominee, either as a beneficiary or an executor, in order to avoid any misconception among the legal heirs in the future. Besides this, the study also seeks to assess how far the related concept of hibah to the nomination in family takaful is currently implemented by the takaful operators in Malaysia. Hibah seems to be an alternative for Muslim participants to allocate the takaful benefits to the right beneficiaries without adhering to the Islamic law of inheritance (fara’id). This study adopts the document analysis to identify whether the takaful nomination form is standardised and clarified in respect of the status of the nominee for each takaful operator in Malaysia. Samples of eight licensed takaful operators are selected in this study. The results of this study found that the takaful nomination form is not standardised among all the takaful operators. The status of the nominee is not clarified in some takaful nomination forms either as a beneficiary or an executor. In addition, the application of hibah seems to violate the nature of hibah itself as hibah should take place during the lifetime of the participant. This study concludes and proposes some recommendations for tak ful operators to provide better and enhanced implementation of nomination and hibah in family takaful
Understanding the Concept of Maslahah and Its Parameters When Used in Financial Transactions
No full textThe consideration of public interest represents one of the promising bases of the Shari’ah for addressing the needs of Muslim society at large. The Shari’ah has given consideration to maslahah as a source of law in order to accommodate natural development and social changes and needs. However, maslahah should be addressed in ijtihad within particular Shari’ah standards and parameters to ensure that the exercise of ijtihad is conducted in a sound manner without contradicting the norms and principles of the Shari’ah. As is known, maslahah is one of the secondary sources of the Shari’ah that is widely recognised by scholars in issuing fatwa and resolutions. It represents one of the essential sources for dealing with issues and matters for which there is no explicit indication in the Qur’an or Sunnah. The ultimate objective in issuing fatwas and resolutions based on maslahah is preserving the interests of the public. The objective of enacting Shari’ah rules based on maslahah is to achieve fairness and justice by achieving benefits and removing hardships. In the context of Islamic finance, ijtihad based on maslahah is very essential, especially for regulators and corporate governance organs, which refer to them to provide standards, parameters, regulations and policy for the benefit of the Ummah. This study is an attempt to examine the parameters within which maslahah should be used, for utilising it without proper guidelines may lead to its abuse. The study begins by defining maslahah and examining the relationship between maslahah and maqasid. It then looks at the basis for consideration of maslahah in the Qur’an and Sunnah and examines jurists’ views on it. This is followed by a discussion of the parameters of maslahah and contemporary applications of maslahah in financial transactions, and, finally, the conclusion
Juristic Analysis of the Profit Distribution Method of Malaysian Islamic Banks
No full textThe relationship between depositors and Islamic banks is governed by a mudarabah contract. In principle, the former are regarded as rabb ul-mal (capital providers) while the latter are considered as mudarib (entrepreneurs). Profit generated from the business will be shared between both parties according to a pre-determined ratio. The present article reviews some Shari'ah issues which arise from the profit distribution method implemented in Malaysian Islamic banking institutions. It examines to what extent the current practices fulfil the principles and the ethical framework of the mudarabah contract as propounded by the classical jurists. The article analyses the justifications of the local Shari'ah scholars in modifying the doctrine to adapt to the modern banking business. This includes their decisions in authorising the Weighted Method (WM), the Profit Equalisation Reserve (PER), the indicative profit rate and the interim profit payment
Capital Requirements and Banking Behaviour for Islamic Banks
No full textMany regulators have regarded minimum capital requirement as a successful factor in controlling the stability of the banking system. However, research, in particular on Islamic banks, has found that this tool may not necessarily be the most efficient in protecting the bank from systemic risk (Chapra and Khan, 2000; Sundararajan and Erico, 2002) as findings indicate that there are conflicts of interest between shareholders and other depositors’ rights on their funds
Islamic Liquidity Management – The Malaysian Experience
No full textThe paper examines the Malaysian experience in managing Islamic liquidity from the perspective of regulators. While there are a multitude of factors that create a vibrant money market system for effectively managing liquidity, this paper looks at six factors: a large number of active players in the market; diversity and sophistication of Islamic instruments; a market transparency framework; an effective mechanism and system for tendering, settlement and information dissemination; government support in market development; and a robust legal and regulatory framework. The paper also discusses issues relating to Islamic liquidity management and raises the possibility of building linkages among Islamic financial markets, developing joint funds, strengthening information sharing and human talent management as well as creating a private-sector-driven association for Islamic financial market participants