INCEIF University Journals
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Islamic Bank Failure: A Case Study
No full textRecent turmoil in financial markets has once again emphasised the need for regulatory vigilance–especially in relation to banks in distress and those experiencing a run on depositors’ funds. The Islamic Bank Ltd of South Africa collapsed in 1997, and its failure exposed the cost of bad credit risk management, operational dysfunction and regulatory breaches. This study finds early regulatory intervention may have addressed major liquidity shortcomings and perhaps even forestalled the bank’s collapse. Despite effective intervention measures, the evidence shows a run on funds fuelled by noise and loss of confidence is difficult to reverse without direct and significant central bank liquidity infusion and deposit guarantees. Evidence of poor management and dereliction of duty by external auditors to report on material irregularities reinforces the need for a new whole- of-regulatory approach. Further, Shari’ah compliance is found to be ineffectual without substantive legal support
Assessing the Demand and Supply of Liquidity in Islamic Banking (The Case of Indonesia)
No full textThis paper attempts to assess the demand and supply of liquidity in Islamic banks and to check the resilience of the industry to liquidity pressure. Firstly, it identifies the sources of short-term demand and supply of liquidity. Secondly, it assesses the historical performance of banks to manage liquidity. Thirdly, this paper predicts the short-term future performance and investigates the resiliency of the industry against any liquidity pressure by using ARIMA models and Bayesian technique. The paper finds that the industry has historically managed liquidity very well. Nevertheless, the resiliency against liquidity pressures is not strong enough because it does not perform well when irregular demand of liquidity or a liquidity run occur. As such, this paper suggests to Islamic banks that they intensify education of the public on Islamic banking principles, improve banking facilities, products and services, and optimize bank financing
The Implementation of Ibra’ in Islamic Banking and Finance: An Analysis in terms of Banking Operations and Maqasid al-Shari’ah
No full textThe concept of ibra’ in Islamic Law has normally been discussed and applied in issues regarding debts (duyun) and rights (huquq). Technically, ibra’ is defined as either “considering the money owed one to be a present to [the debtor]” (al-Khurashi, n.d, p.103), or “waiving the ownership that is owed one” (Ibn al-Humam, n.d., p. 389). In the context of Islamic banking and finance, ibra’ refers to granting ownership or waiving one’s right, partially or totally, to the debts for which another is liable
Analytical Study of the Interaction Between Fatawa, Shari'ah Rulings, Resolutions and Conventional Laws in Contemporary Islamic Finance in Malaysia with Cross Reference to the Practices in Saudi Arabia, Pakistan and the Sudan
No full textA sound legal framework is vital for the establishment of resilient financial institutions and markets. The Shari'ah and conventional systems offer their own frameworks for Islamic finance governance and financial contracts implementation. The legal framework for contemporary Islamic finance in Malaysia includes fatawa, Shari'ah rulings, resolutions and conventional laws. All these play important roles in shaping the development of Islamic finance. Indeed, the Shar ah and legal frameworks are paramount to ensure the sustainable development of Islamic finance and give due protection to consumers in Islamic finance (Aziz, 2007). In other words, it is important for a state to preserve equal justice for the citizen and to protect Islamic finance customers, in order to achieve the goals of Shari'ah
Financial Crisis: Risks and Lessons for Islamic Finance
No full textThe severity of the current financial crisis has shaken the foundations of the capitalist financial system and has led to the search for ideas and solutions. This paper identifies the failure of risk mitigation at different levels as the main cause of the crisis. While following the principles of Islamic finance would have prevented the occurrence of the crisis, the practice of Islamic finance of mimicking its conventional counterpart can make the industry vulnerable to similar crises. Lessons for the Islamic financial sector are drawn by suggesting ways in which risks can be mitigated at the levels of institutions, organisations and products. In doing so, some key risks arising in Islamic finance are identified and various ways in which the Islamic finance sector can be made stable and resilient are proposed
From “Asset-backed” to “Asset-light” Structures: The Intricate History of Sukuk
No full textThis paper traces the development of the sukuk market through sukuk case studies. It discusses how sukuk has evolved from an asset-backed structure, where sukuk holders have ownership rights over the underlying asset, to an asset-based structure, where sukuk holders rank pari passu with unsecured creditors. This paper subsequently highlights the emergence of the asset-light structure, where the requirement of having tangible assets seems to be rather minimal. It also discusses the Shari’ah concerns that arise in the asset-light structure
Shari’ah Parameters of Islamic Derivatives in Islamic Banking and Finance
No full textThe word “derivative” is a relatively new term in the commercial world; its first usage in the courts took place only in 1982 in the US, and 1995 in the UK (Swan 2000). “Derivatives” has been defined as ‘...a financial instrument whose value depends on the value of other, more basic variables’, (Hull 2005 p.1). “Derivative” is therefore a generic term that classifies instruments that display the same features. Common derivative instruments in conventional finance include “forwards”, “futures” “options” and “swaps”
Alternative Dispute Resolution in Islamic Finance: Legal Challenges and the Way Forward
No full textIslamic finance has proven successful ever since Malaysia announced the intention to be the forerunner in Islamic banking. Since then it has expanded beyond the boundaries, and the industry has reached a net worth of more than a trillion ringgit. Despite this, the legal system has been chaotic and inconsistent in regulating the industry. English law has played a major role in the development of the Islamic finance industry. nevertheless, debate has centred on whether contracts governing international islamic finance transactions should be governed by shari’ah law, english law, or a combination of the two
Islamic Pricing Benchmark
No full textIn the past forty years, the Islamic finance industry (IFI) has experienced huge expansion and developed from a niche industry to a viable alternative for global financial architecture. However, IFI still uses conventional finance benchmarks, such as lIBOr, to determine its own cost of funds, and hence its return to financial investments. At the present time, IFI uses the interest rate as the benchmark for Islamic finance products. Profit rates charged by IFIs are basically replicas of the market interest rates. This practice, although discouraged, is basically accepted in Islamic finance as the interest rate is used merely as a benchmark only. Nevertheless, any reference to the interest rate should be minimised, if not eliminated, as much as possible. Therefore the need for providing an Islamic pricing benchmark for IFI cannot be over-emphasised