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

Abu Umar Faruq Ahmad

The paper’s purpose is threefold: (1) probing what makes Islamic financing so important for the largest Muslim minority in a highly diversified multicultural Australia, (2) realising musharakah mutanaqisah (MM) as the real alternative for interest-based conventional finance and (3) evaluating the practice of MM by Australian Institutions offering Islamic Financial Services (AIIFS) from Islamic legal perspectives. By comparing the two systems - Islamic and conventional finance - the study finds that the latter is exploitative and thus creates conflict, stress and insecurity, while contributing to greater disparities of income and wealth. The practice of Islamic finance, on the other hand, is found to reduce conflict, stress and insecurity and make for a more harmonious and equitable society. In this context, the paper recommends that the regulatory impediments are removed to facilitate AIIFS to provide greater security, liquidity and diversity in order to meet the demand of investors in the Muslim community in Australia.

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Zulkifli Hasan & Mehmet Asutay

Most Islamic financial institutions operate in an environment where the legislative framework consists of mixed legal systems where the Shari'ah (Islamic law) co-exists with common law and civil law legal systems. As such, every transaction, product, document and operation must comply with the Shari'ah principles as well as relevant laws, rules and regulations. In the case where Islamic law is the ultimate legal authority, such as in Iran and Saudi Arabia, any issue in Islamic banking cases may not pose a big problem; whilst in the countries of mixed legal systems as in the case of Malaysia or in a non-Islamic legal environment such as in the UK, the issue is very significant. This inherent issue will be more complicated if Islamic finance disputes involve parties from different jurisdictions in cross-border transactions. This leads to the question of how Shari'ah principles apply together with the laws of the jurisdiction and how a case will be adjudicated in a court. In view of this unresolved issue, this paper attempts to critically review and analyse the courts’ decisions on Islamic finance disputes in four different jurisdictions, namely Malaysia, the United Kingdom, India and the United States. With the emergence of Islamic finance litigation, this paper strongly advocates that a proper legal framework and infrastructure as well as the substantial support of the legal fraternity are the prerequisites for the advancement and significant growth of the Islamic finance industry.This paper argues that Shari'ah-compliant Islamic banking is essentially a value co-creation business model that illustrates attributes associated with the emerging service-dominant logic paradigm. The underpinning Shari'ah philosophy of minimising ‘usage’ of one party by another results in the sharing of profit, losses, risk and the promotion of interest-free principles. Islamic banks that follow Shari'ah traditions endeavour to co-create value with their business and corporate customers in a manner that would resonate with the proponents of service-dominant logic. The authors argue that Shari'ah-compliant business models may be more appropriate for today’s volatile and socio-economic climate, evidencing their potential via business case examples. Shari'ah-compliant Islamic financing, such as sukuk (Islamic bonds), istisna' (construction finance), murabahah (commodity trade finance), mudarabah (finance trusteeship), musharakah (joint venture) and ijarah (Islamic leasing), is generally based on a business relationship and partnership approach. Such approaches are now gaining popularity and offer those engaged in service exchange the opportunity to co-create value or at least mutual benefit.

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Ahamed Kameel Mydin Meera

This article is written in response to the article by Murat Cizakca (2011), “The Islamic Gold Dinar – Myths and Reality”, which appeared in the ISRA International Journal of Islamic Finance, Volume 3(1), 2011, pp. 49-63. Cizakca basically provided a case against the gold dinar. However, it was obvious that the paper misunderstood what the denarists’ actual ideas and propositions are; thus, its refutations are mostly off target. This article explains the actual proposition of the denarists while simultaneously providing a review of Cizakca (2011).

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Catherine S F Ho & Nurul Afiqah Abd Rahman & Noor Hafizha Muhamad Yusuf & Zaminor Zamzamirn@Zamzamin

Different screening methodologies have been developed in the market to screen for Shari'ah-compliant investments. The Shari'ah screening processes are deemed important for investors to avoid prohibited activities and to select investments in permissible businesses in accordance with Islamic principles. This paper reviews the Shari'ah investment screening methodologies of twenty-one worldwide prominent Islamic finance users, including index providers, Shari'ah service providers, fund managers and a regulator. A comparative analysis is performed to highlight the differences and similarities of the Shari'ah-compliant methods and principles used by these renowned institutions. The results reveal that different users have different objectives and functions, reflected in their different screening methods applied. It is believed that greater harmonisation of the worldwide screening methods would assist in further accelerating growth of the Islamic investment sector. This paper thus provides some suggestions on achieving a common and unified screening rule.

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Michael Rainey & Omar Salah

The Islamic finance market has developed and expanded with the increased global demand for ethical investment products and the introduction of a variety of financial instruments. Within the Islamic finance market, sukuk has proven to be an important financial instrument. In the literature sukuk has been categorised into four major types: asset-backed, asset-based, debt-based and project based. There is a need to understand the differences between these categories in order to ensure their Shari'ah-compliance. The research question dealt with in this paper is: Why does the categorisation of sukuk structures matter and what are the differences between the various categories of sukuk? This paper describes such differences through an analytical case study of the General Electric Capital Sukuk Ltd. (GE Capital Sukuk) which issued sukuk in November 2009. The AAOIFI Resolution (2008) is taken as the starting point of discussion on the mechanisms used in practice in sukuk structures. By pointing out the differences between asset-based and project-based sukuk and by defining the structural features of the GE Capital Sukuk, this paper illustrates that depending on the category in which sukuk is categorised, Islamic finance practitioners may have to consider different structural and legal mechanisms when issuing sukuk. By categorising sukuk, the industry is not merely giving the structures a name. Rather, the sukuk categories carry background information on the structures; the distinctions also clarify what legal and structural features are permissible for each structure.

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Shabana Hasan & Marjan Muhammad

The application of unilateral promise (wa'd) in certain Islamic financial products, although recent, has witnessed spectacular development. It has been widely applied in products such as murabahah for a purchase orderer (murabahah lil amir bi al-shira’), leasing ending with ownership (ijarah muntahiyah bi al-tamlik), Islamic hire-purchase (ijarah thumma al-bay'), diminishing partnership (musharakah mutanaqisah), sukuk structures, and treasury products such as FX-i forward Islamic profit rate swaps. Some of these structures employ only one-way wa'd while others use two-way wa'd. Thus, it is important to examine principles of both unilateral promise (wa'd) and bilateral promise (muwa'adah) in order to identify whether structures that utilise two-way wa'd (wa'dan) comply with the rules of wa'd or whether they resemble the features of muwa'adah.

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Zurina Shafii

Malaysia is preparing itself for full compliance with IFRS in year 2012 as a basis for the financial reporting system in Malaysia. However, there are certain reporting issues that may arise due to the implementation of IFRS by IFIs. In particular, it is asked whether existing accounting standards could adequately address Islamic financial transactions, or whether the transactions are so unique that some other form of accounting framework would be required. This research aims to examine the Shari'ah permissibility of the underlying principles of IFRS and of specific issues arising from the underlying principles of IFRS. The study generally discusses whether IFRS principles could be adopted for the reporting of Islamic financial transactions.

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Mohamed Fairooz Abdul Khir

The rahn-based Islamic microcredit product is an increasingly popular financing option among small entrepreneurs, lower income groups and gold traders. However, its Shari'ah structure has been sharply criticised by some Islamic scholars despite its success for those who offer it such as Islamic banks and Islamic pawnshops. Hence, it is undeniable that there are some debatable Shari'ah issues that need further examination and immediate solution. In the case of the rahn-based microcredit product, the imposition of a safekeeping fee that exceeds the actual storage cost is considered the most crucial Shari'ah issue that requires scrutiny. Therefore, various takyif fiqhi models have been suggested by Islamic scholars in order to eliminate the ribawi element embedded in this product. This study seeks to gather the different takyif fiqhi models for this product and then identify the preferred opinion as to the most Shari'ah-compliant takyif fiqhi for this Islamic microcredit product.

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Muhammad Ali Jinnah Ahmad and Ashraf Md Hashim

Little research has been carried out on the concept of risk in takaful. Furthermore, risk in takaful has traditionally been associated with conventional insurance risks. As a result, although the literature on the operational concept of takaful is rich, this literature does not address the intricacies of risk because of the acknowledgment of conventional insurance risks in takaful. This preliminary study aims to provide a reference or parameter for Shari'ah screening of permissible risks that can be used by takaful operators in Malaysia. It is significant to understand this issue in order to harmonise takaful practice and enhance the cooperation between the takaful operators.

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Beebee Salma Sairally

It has been observed that a number of jurisdictions are developing their Islamic capital markets by utilising the efficiency provided by Offshore Financial Centres (OFCs) to structure Shari'ah compliant products. While there are a number of research papers discussing mainstream operations of OFCs, literature on the use of offshore jurisdictions for the structuring of Islamic financial transactions is very limited. This research will therefore shed light on the operations of OFCs offering Islamic financial services in terms of: the players involved; their Islamic capital market products and offerings; their development models, legal and regulatory regimes; and, opportunities and challenges faced. Based on the comparative analysis of the case studies, the research will also establish industry best practices that could serve as useful guides to prospective jurisdictions that are considering the development of the Islamic capital markets through their offshore sectors.

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