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

IFSB’s Guiding Principles on Shari'ah Governance Systems for Institutions Offering Islamic Financial Services defines “Shari'ah governance system” as the set of institutional and organisational arrangements through which an institution offering Islamic financial services oversees Shari'ah compliance, i.e., that Islamic banking products and operations are in accord with Shari'ah principles. This requires the establishment of a Shari'ah advisory board. The Shari'ah governance of Islamic financial institutions (IFIs) in Malaysia consists of two components: the Shari'ah apex body, which is the Shari'ah Advisory Council (SAC) established by the Commission, and the Shari'ah advisors appointed by the respective institutions (Shari'ah Committees). Their roles are directing, reviewing, supervising and approving or rejecting the activities of IFIs in order to ensure compliance with Shari'ah rules and principles. The extent to which Islamic banks comply with Shari'ah principles is, to a great extent, determined by the role of such boards. Consequently, this body needs sufficient authority to enable its members to perform their functions effectively. However, many issues have arisen about the role and competency of Shari'ah advisors. This research aims to examine the current practice of Shari'ah advisory in Malaysia from the perspectives of advisors, bankers and regulators. The research focuses on the roles and functions practically played by the Shari'ah advisors and the IFIs’ expectations of them. Problems faced by the Shari'ah advisors, bankers and regulators need to be specifically identified so that measures to bridge the gaps between them may be proposed. This will ensure a harmonious relationship between all stakeholders as well as ensuring that the dayto-day running of IFIs will be compliant with Islamic law. 

The Islamic finance and banking industry has developed tremendously in recent years. The viability of this industry as an alternative method of investment can no longer be denied. As the current global economic and financial crisis laid bare the systemic problems of conventional finance, the Islamic financial system has been offered as a solution by its proponents. However, Islamic finance has been using conventional finance benchmarks, such as KLIBOR, COFI, LIBOR, etc. to determine its own cost of funds, and hence its return on financial investments. This is so because Islamic finance, if not part of the existing conventional finance, has always served as a financial intermediary for surplus and deficit units. Islamic banking, as the dominant institution in the Islamic finance industry, has gone beyond the function of a financial intermediary, for it also serves as a wakil, custodian, partner, entrepreneur, and guarantor. Nonetheless, Islamic finance has yet to come up with an alternative Islamic Pricing Benchmark (IPB) to determine its cost of capital. The need for having such an IPB for Islamic finance cannot be overemphasized; that would make it more comprehensive and independent from the conventional benchmarks that rely on interest rates, the very thing that Islamic finance abhors. Therefore, this project aims to develop an Islamic pricing benchmark model for the Islamic banking industry, more specifically for Malaysia, given its prominence in the Islamic finance industry. The project has reviewed the Shari'ah perspective on an Islamic pricing benchmark and has also examined the conventional pricing benchmark being used by banks. The paper further discusses the theoretical formulation of an Islamic benchmark. Thereafter, using sectoral industry and macroeconomic data, it tests the viability of the benchmark using simulation.

This research paper discusses the implementation of ibra’ in the contemporary Islamic banking operation. It attempts to examine the compatibility of the current implementation of ibra’ with Syariah framework. This is due to the fact that its implementation which originally aims to lessen the burden of debts has nevertheless contributed to the increasing number of legal disputes over default cases. Therefore, this paper is a revisit of the ibra’ issue within the context of scholarly debate on the issue of da‘ wa ta‘ajjal which is closely linked with conditional ibra’ on a bilateral basis. The element of time value of money from an Islamic perspective is also taken into account in selecting preferable juristic view which serves the maqa’sid al-Syari‘ah. This paper empirically proves that the current implementation of unilateral ibra’ by Islamic banking institutions has resulted in the increase of default cases in the court. Hence, this paper suggests that ibra’ should be implemented on a bilateral basis rather than a unilateral in order to secure justice for those who subscribe to Islamic banking products. 

This paper discusses the concept and operations of the swap instrument as a hedging mechanism in the Islamic financial system. The main objective of this paper is to give a clearer picture of the swap mechanism as offered by the international Islamic financial institutions and how its operations are structured in accordance with Shari'ah principles and contracts. The paper also outlines the Shari'ah parameters that need to be observed by the financial institutions offering the various swap instruments. In preparing this paper, ISRA has held a series of internal discussions as well as with outside parties, including Shari'ah experts and operating officers from international banks directly involved in the structuring of Shari'ah-compliant swap products. Documents related to the products and related academic materials were also referred to, giving a wider and thorough perspective on the issue. 

The prohibition from receiving and paying interest in Islamic banking system raises the question on how the monetary policy would be conducted in the absence of interest, both as a tool of monetary policy and also the choice of monetary variables to be controlled. In addition, the Islamic banking system is designed on the principle of profit sharing or non-profit sharing. In the first model, there is purely profit sharing principle on both assets and liabilities. In the second model, there is mixed of profit sharing and non-profit sharing principles. The difference lies in the sharing of profit from both models. Consequently, both models have implications for formulating the design and use of tools of monetary policy.

Pre-signing refers to the event in which the customer signs a series of Shari'ah transactional documents (including legal documents) at a single sitting; and, thereafter, the bank shall sign the same documents at a separate sitting on a later date. Pre-signing of all the transaction documents is a questionable issue, as it represents a departure from the familiar sequence of offer and acceptance. The aim of this paper is to evaluate the current practices of Islamic banks in conducting pre-signing and analyze the Shariah implications. In doing this, the paper first discusses the pillars of contracts in the Shari'ah and reviews some fatwas on pre-signing. It then shares the findings from a survey conducted on pre-signing practices by Islamic banks in Malaysia. In the analysis section, four situations of pre-signing are highlighted and the Shariah implication of each is discussed.

In the last 27 years, the world has witnessed more than 124 distinct financial crises. The financial meltdown caused by the current global financial crisis brought the financial world to its knees. This paper aims to discuss how the Islamic finance industry can reshape itself by learning lessons from the global financial crisis. To achieve this aim, the paper first identifies the lessons that can be learnt from the crisis including risk transfer & imprudent credit growth, failure of risk management, liquidity and leverage, lax regulation and opaque disclosure. The paper then suggests how the economic agents’ behavior and responsibilities could be reshaped by highlighting the sellers’ standard of care and regulatory responsibility. The paper concludes that the global financial crisis revealed the weaknesses of the global financial architecture on one side and provided an opportunity for Islamic finance to show its inherent strengths and qualities on the other. To facilitate this, the paper offers some possible Shari‘ah-based solutions that can help the financial world avoid similar crises in the future. 

In 2009, Bursa Malaysia launched a new trading platform called Suq al-Sila’ or Commodity Murabahah House. It was introduced to facilitate certain Islamic financial transactions, particularly commodity murabahah based on tawarruq. This platform is claimed to provide genuine commodity transactions where possession and delivery of the commodity can take place without any hindrance, as opposed to the controversial widespread form of tawarruq that uses platforms like the London Metal Exchange (LME). This paper discusses the practice of tawarruq using Bursa Malaysia’s Commodity Murabahah House. In particular the paper comprehensively examines the debates over tawarruq which eventually lead to the OIC Fiqh Academy’s declaration that organized tawarruq is impermissible. This paper concludes that despite the criticisms and some unresolved Shari‘ah matters entangling the practice of tawarruq, the effort made by Bursa Malaysia to introduce a platform such as Commodity Murabahah House is commendable. Furthermore, since the nature of modern organized tawarruq may not strictly comply with Shari‘ah principles, the reasons behind using this facility should be carefully taken into consideration, especially situations of real urgency and cases of need. 

This paper aims to examine how Islamic banks create wealth: how customers as depositors invest their money through the banks; how the banks invest the funds at their disposal; and how economic agents such as individuals, firms and government use these funds. It also examines how this money generates profit, which is then distributed to Islamic banks and depositors, and hence preserves and develops the wealth (mal) of economic agents. It also raises the larger question of whether Islamic banks contribute to the well-being of society by focusing on return to depositors and to shareholders.

Sukuk comprise one of the fastest-growing segments of the Islamic debt capital market. This paper aims to shed light on Shari‘ah issues that arise in asset-based sukuk structures and operations. It first discusses the concept of sukuk and delineates the difference between asset-based and asset-backed sukuk. It then discusses Shari‘ah issues with regards to ownership (qabd). From the analysis of case studies conducted, three major issues were identified in the operation of asset-based sukuk. They are sukuk-holders’ interest in the underlying assets, restrictions on asset disposal, and due diligence regarding sukuk assets. The paper concludes that restriction of the right of disposal poses a serious doubt whether asset-based sukuk structures truly comply with Shari‘ah principles. Furthermore, the coupling of this restriction of disposal with the purchase undertaking at par effectively turns sukuk into a debt instrument. Hence the paper suggests that there is a need to move towards asset-backed sukuk that clearly fulfils the Shari‘ah requirement. Nonetheless the paper recognizes that the current legal framework impedes the issuance of asset-backed sukuk. Instead of making overnight changes to the sukuk market, the paper highlights the need for all stakeholders to come together and thoroughly discuss measures needed for a transition to an improved market.

The main objective of this paper is to review the use and status of derivatives in Islamic finance. This is done by first explaining the basic derivative contracts of forwards, futures, options and swaps. Thereafter, the discussion turns to the use of derivatives with sukuk. The paper then explores the debate between scholars on the admissibility or otherwise of forwards, futures and options in Islamic finance. It then examines contracts in Islamic finance that have derivative-like features and which can be used for the same purposes of hedging as forwards, futures, options and swaps. It concludes by highlighting areas for future research.

The new Central Bank of Malaysia Act 2009, known as Act 701, was gazetted on the 3rd of September 2009. Anything related to Islamic finance is thoroughly discussed in Part VII of the Act. The previous Central Bank of Malaysia Act 1958 (Act 519) only discussed the Shariah Advisory Council in one section of Part II under the heading of establishment, capital and administration of the bank, whereas the new Act provides comprehensive details for the function of the Shariah Advisory Council in Part VII. The paper reviews the anomalies surrounding the Shariah Advisory Council (SAC) prior to the amendment of the Central Bank Act and highlights the nature of the amendements made. The paper also elaborates the role of expert opinion (al-ra’yu al-khabir) from an Islamic perspective before concluding by summarizing the effect of the amendment on the industry as a whole.