Ponzi Operandi: Affinity Fraud Risk for Shari'ah-Compliant Investment Funds
Mahmood Nathie, Jacqueline M. Drew and Michael E. Drew
Ponzi schemes using the principles of affinity fraud are a real and current risk for Islamic investors. This paper examines the use of affinity fraud in targeting the Islamic community and analyses Shari'ah norms that seek to protect people from fraud and cheating. Using case studies from three countries, the paper identifies the common traits pervasive in Ponzi schemes including legal ruses aimed at circumventing the Shari'ah interdiction on interest and other proscriptive acts by unscrupulous and fraudulent operators. The examination shows that the nascent Islamic finance market should be vigilant of copycat schemes that have the potential to undermine the industry. Like other affinity frauds, there is the need to develop early warning systems aimed at preventing, or at least minimising, the prevalence of such schemes in the Islamic financial industry.
Incentive-Compatible Sukuk Musharakah for Private Sector Funding
Abdou Diaw, Obiyathulla Ismath Bacha and Ahcene Lahsasna
Despite the huge potential on both the demand and supply sides of the sukuk market, the current sukuk structures fall short of adequately meeting the market’s needs as the Shari'ah compliance of many of them and/or their economic efficiency are questionable. Even though partnership-based sukuk 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 sukuk market in the future. This paper proposes an innovative sukuk musharakah 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 sukuk are equity-based instruments.
Building Agent-Customer Relationship in the Takaful Industry: A Framework of Islamic Relationship Marketing
Marhanum Che Mohd Salleh, Nurdianawati Irwani Abdullah and Siti Salwani Razali
The 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 takaful industry. The study expects that the framework of Islamic relationship marketing will be a reference material for players in the takaful industry in strengthening their relationship with their customers. Indeed, a strong agent-customer relationship will ensure the development of the takaful industry in the future.
Venture Capital Strategies in Waqf Fund Investment and Spending
Tunku Alina Alias
The 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 istighlal (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 istibdal (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.
Shari'ah-Compliant Credit Cards: An Analysis of Underlying Structures
The 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 Shari'ah-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 Shari'ah-compliant credit cards which encourage excessive spending (israf) should not be promoted on the basis that they counter the basic Shari'ah 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 Shari'ah Ruling of Capital Guarantee in a Mudarabah Contract
Mohamed Fairooz Abdul Khir
This research re-examines the issue of capital guarantee in a mudarabah contract and deliberates upon the Shari'ah view on a mudarib voluntarily offering a guarantee of capital as a benevolent act. This study finds that the juristic texts generally prohibit capital guarantee in a mudarabah contract if it is stipulated by the rabb al-mal. This study preliminarily establishes that the ruling should be different if the mudarib himself volunteers to guarantee it in the event of loss, even if it results in a similar binding effect that holds the mudarib liable to guarantee the capital.
A Critical Appraisal of Shari'ah Issues Related to Sukuk al-Ijarah
Said Muhammad Bouheraoua, Beebee Salma Sairally and Shabana Hasan
This research examines the Shari'ah issues associated with two types of sukuk al-ijarah. The first issue relates to sukuk alijarah al-muntahiyah bi al-tamlik, i.e., sukuk based on assets that are the subject of lease agreements ending in the transfer of ownership back to the party from whom the assets were originally purchased; what is the Shari'ah ruling on issuing and trading such sukuk? The second issue relates to sukuk al-ijarah al-mawsufah fi al-dhimmah, that is sukuk based on forward leases; what is the rule for issuing and trading such sukuk?
The Investment Initiative in Takaful: Issues and Challenges
Mohammad Mahbubi Ali and Muhammad Ali Jinnah Ahmad
This research discusses the contentious issues surrounding the investment fund in the takaful industry, focusing mainly on the Shari'ah issues, operational issues and legal challenges experienced by takaful operators in carrying out the investment role. The research also proposes guidelines and parameters for investment activity in the takaful industry.
Maqasid al-Shari'ah and the Foundational Requirements in Developing Islamic Banking and Finance
Mohamad Akram Laldin and Hafas Furqani
This research discusses the role of maqasid al-Shari'ah in developing the Islamic financial system with the aim of shedding light on how the maqasid al-Shari'ah should be treated as the main parameter for Shari'ah-compliant finance. The discussion will cover the investigation of the meaning of maqasid al-Shari'ah, its dimensions and scope, how it can be constructed and the means (wasa’il) to apply in order to realize maqasid al-Shari'ah in Islamic banking and finance.
Credit Guarantee Scheme: A Combination of Kafalah and Wakalah Bi Ajr as an Alternative to Kafalah Bi Ajr
Mohd Bahroddin Badri
This research analyses the operation of the credit guarantee scheme that prevails in the market and examines the jurists’ views and arguments pertaining to the ruling on charging a fee for providing a liquidity guarantee. The research also explores the possibility of applying the hybrid contract of Wakalah bi ajr (agency for which fee is charged) and kafalah (guarantee) as an alternative instrument for the credit guarantee scheme.