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

Amir Shaharuddin

The 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.

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Maheran Mohd Jaffar

A musharakah contract is a joint venture between two or more parties and the profit is shared according to the agreed profit-sharing ratio. The new musharakah model internalises this concept and takes into account the investment of two parties, the rate of profit, as well as two profit-sharing rates. At present, this model is the only model that uses two profit-sharing rates to ensure justice in a joint venture investment. This can create opportunities to generate other Islamic investment or banking products that will attract more foreign investors who are keen on musharakah products. Apart from this, this can initiate other researches and collaborations in Islamic banking/financing and investment, thus enhancing the Islamic investment status. The system of the musharakah model can definitely be commercialised.

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Ahmad Azam Othman, Rosmawani Che Hashim & Akhtarzaite Abdul Aziz

The Letter of Credit (LC) serves as an instrument of payment in international trade. Its aim is to facilitate trade between seller and buyer in different countries. To date, the Islamic banking environment promotes the use of the Islamic LC as a method of financing in international trade, particularly to Muslims and to the general public as a whole. Thus far, this facility is offered not only by Islamic banks, but also by all commercial banks. It is basically governed by the same rules of the UCP 600 that regulate the conventional LC. Realising the peculiarity in the application of this conventional rule to the Islamic LC, this paper focuses on the aim of harmonising the practice of the Islamic LC with the requirements of Shari'ah principles where elements such as interest (riba) and uncertainty (gharar) are prohibited. It begins by giving the background of the Islamic LC in Malaysia. Next, it discusses the definition and types of Islamic LCs, murabahah (cost-plus sale), wakalah (agency) and musharakah (partnership), as the issuance of the Islamic LC is based on these three concepts. In addition, it highlights comparisons between these three concepts. Furthermore, the focal point of discussion is on Shari'ah issues in the practice of the Islamic LC, such as governing rule, subject-matter, interest, INCOTERMS and insurance, contract('aqad), discrepancy fee, and exclusion of risk of goods in the Islamic LC. Discussion of these issues leads us to identify whether they are in compliance with Shari'ah principles. In relation to this, various proposals are suggested to harmonise the rules applicable to the Islamic LC and Shari'ah principles.

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Nurdianawati Irwani Abdullah & Nazliatul Aniza Abdul Aziz

Nomination 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 takaful 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 takÉful 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 takaful operators to provide better and enhanced implementation of nomination and hibah in family takaful.

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Amirul Afif Muhamat & Saadiah Mohamad

Small 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 SharÊÑah-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.

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Muhammad Ibrahim & Hamim Syahrum Ahmad Mokhtar

The 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.

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Mohamed Fairooz Abdul Khir

Hilah (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. This research aims to explore the concept of Hiyal and set clear Shari'ah parameters for their application in Islamic finance.

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Mohd Zakhiri Md Nor

The objectives of this research are to examine the interaction between fatawa, resolutions, Shari'ah rulings and conventional laws in contemporary Islamic finance in the Malaysian conventional legal framework. This research will analyse the practices in Saudi Arabia, Pakistan and Sudan through comparative analysis and the lessons to be learned. Another objective is to examine the extent of consistency of current Islamic finance practices in Malaysia in the context of established classical legal frameworks and to propose recommendations to fatwa-issuing bodies, Shari'ah advisory bodies, dispute settlement agencies and executive governmental functionaries for better governance of Shari'ah in Malaysia.

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Muhammad Muhaizam Musa

The emphasis of this study will be to look at how Islamic banks are placing themselves in compliance to the prudential standards and whether the conflicts of interest are still the main part of the problem in Islamic banks. The findings of this study, will bring some light to the issue of minimum capital requirements as the best tools to measure banking stability and determine if Islamic banks are still facing conflicts of interest or acting as they should be to foster the values underpinned by Shari'ah.

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