International Shari'ah Research Academy for Islamic Finance (ISRA)

Mahmood Nathie

Recent turmoil in financial markets has once again emphasized 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 wholeof- regulatory approach. Further, Shari'ah compliance is found to be ineffectual without substantive legal support.

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Zubair Hasan

This 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.

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Mohamad Akram Laldin

The 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.

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Rifki Ismal

This 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.

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Norma Md Saad and Jarita Duasa

This study is divided into two parts. The first part of the study utilises econometric models to assess the economic performance of clients participating in the microcredit programme of Amanah Ikhtiar Malaysia (AIM). Several proxies are used for the economic performance variable (dependent variable), including level of earnings/income, ratio of spending to income and value of assets. The regressors (independent variables) used are education level, age, amount of loan, source of income and ownership of assets. The second part of this study concentrates on analysing the prospects of introducing Islamic microfinance products to be used in microfinance activities in Malaysia. In the first part of the study, we find that the economic performance of AIM participants is significantly determined by the amount of money borrowed from AIM. Other factors found to influence the respondents’ economic performance are education level, age, gender, assets owned before joining AIM and area of residence. Because level of education is found to contribute significantly to the economic performance of AIM participants, it is suggested that AIM work to educate its borrowers, and more specifically, to provide business training. In the second part of the study, the results show that there is a great demand for Islamic microfinance products in Malaysia. The findings of the study could serve as general guidelines for microfinance institutions in designing Islamic microfinance products for either Muslims or non-Muslim micro-entrepreneurs.

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Abdou Diaw, Salwana Hassan and Adam Ng Boon Ka

ETFs 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.

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Muhammad Ali Jinnah Ahmad

This research responds to the call for bringing re-takaful practices closer to the spirit of Islamic finance rather than replicating existing conventional products. An exploration of the wadiah yad damanah contract has raised the possibility that this contract can be applied as an operational model in re-takaful. Although the theory of this model has been mentioned by scholars before, no research was undertaken to test its validity and viability. Thus, ISRA, with the collaboration of MNRB Retakaful, has undertaken to explore this model on the basis of extensive discussion.

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Marjan Muhammad

he status of ibra’ as a unilateral contact granted on an purely discretionary basis (tabarru') by the Islamic banks is seen to be unjust compared to the practice of conventional banks, which provide loans to customers based on the “time value of money” principle. If the contract is terminated due to default, the payable amount will be the principal and the accrued interest only, as the conventional banks will not be entitled to any unearned interest. The main objective of this research is to look for any possibility of considering ibra’ as a bilateral contract that will be binding on both contracting parties, so that the issue of uncertainty and injustice upon immature termination of the contract will be eliminated.

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Shabnam Mokhtar

This research provides empirical evidence on how tranching is done in the Islamic space. To achieve this, case-study analysis of asset-backed sukuk in the market was conducted. This research note summarizes the findings from the case-studies analysis. In concluding the empirical findings, the authors identified possible Shari'ah issues that will be analyzed in the second part of the project.

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