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

As Islamic finance is still at the infancy stage, the industry is facing numerous road bumps and legal hurdles all over the globe, including Malaysia. From 1987 to October 2012, the Malaysian courts decided a substantial number of cases involving Islamic finance matters. The decisions made in the reported cases stirred controversy and debates in the market; the regulator, market players, academics and even the end consumers all had something to say about them. Some decisions in the reported cases involving Islamic financial transactions have had an undeniably adverse impact on market confidence and stability. Due to the court decisions, the regulator has amended the existing laws to enhance its regulatory framework in the attempt to maintain market stability. Yet market players remain uneasy about the trend in legal decisions, and stakeholders have realised the urgent need for a stronger legal backbone for the Islamic finance industry. A few previous studies have analysed the development and features of cases involving Islamic finance disputes and the courts’ attitude towards them. However, the need remains for a critical study on the trend and pattern of those decided cases in Malaysia. Hence, this study aims to provide a critical analysis of the reported cases in Malaysia involving Islamic financial disputes in the period from 1987 to October 2012 with a particular focus on the trend and patterns in them. The study then discusses the impact of those cases on the Islamic finance industry and recommends the possible immediate legal redress and remedies to its stakeholders, particularly the regulator, banking institutions and the consumers, in order to ensure the continuous growth of the industry domestically and globally by backing it with a strong and viable regulatory framework.

This research paper seeks to highlight the importance of the Shariah Advisory Council of the Central Bank of Malaysia (SAC) in the determination of Shari'ah issues in adjudicating Islamic banking disputes. Effective resolution of Islamic banking disputes requires the adjudication of both civil and Islamic law issues raised by the parties. Civil courts are well equipped only to adjudicate civil law issues whereas they lack competency to determine issues of Shari'ah compliance or non-compliance. In Malaysia, an attempt has been made to address the problem by the enactment of certain amendments in the Central Bank of Malaysia Act 1958 and subsequently enacting new provisions in the Central Bank of Malaysia Act 2009. The new provision makes it compulsory for the civil courts and arbitrators to refer Shari'ah issues to the SAC for determination. Even though challenges are being made against the provision, including on constitutional grounds, the provision seems to be working: to date, courts and arbitrators have already referred such issues to the SAC, and answers have been given and acted upon. The article proposes this model as a viable solution that could be adopted by other countries wishing to introduce or develop Islamic finance

The objective of this research is to provide a clearer understanding of the options contract in Islamic finance. Option contracts provide economic benefits of hedging and flexibility of use; however, they are also used for speculative purposes that contravene the Shari'ah. Options are also objected to because of the payment of a premium, and conditional options are not allowed in currency exchanges. Islamic options have been engineered, and some Islamic banks do use them for hedging purposes. This paper begins with an explanation and description of options in conventional finance, including the benefits, and moves on to explain the Shari'ah view on conventional options. The paper then moves on to describe Islamic options that exist within Islamic finance itself—urbun (earnest money), hamish jiddiyyah (security deposit), and khiyar al-shart (stipulated option)—and thereafter explains Islamic options created by Islamic banks to hedge against risk, focussing specifically on currency risk, sukuk (Islamic bonds) and commodity hedging. The paper concludes by discussing which types of options may be deemed to be acceptable from a Shari'ah point of view.

The rahn-based Islamic microcredit facility is currently popular among Islamic financial institutions in Malaysia, essentially because of its commercial features, which make it attractive and competitive with conventional pawnbroking. However, the substance of this product triggers some Shari'ah issues, which are mainly centred on the safekeeping fee the bank charges the customer under the principle of ijarah al-hifz (safekeeping fee) and wadi'ah yad al-damanah (guaranteed safe custody). This research is primarily intended to examine the key Shari'ah issues associated with the structure that is widely accepted at present. Other potential structures are also examined and compared with the current structure. This research undertakes a case study of two selected Islamic banks that offer a rahn-based Islamic microcredit facility to their clients. The product manual of each bank has been examined to understand the structure flow of the product, payment of the safekeeping fee and other relevant operational aspects of the product. Interviews have also been employed to gather data related to the operation of this product that was not available in the product manuals of the two selected Islamic banks. Taking into account all the Shari'ah issues relevant to the current structure, this research proposes a new structure as a viable alternative to the current structure of rahn-based Islamic microcredit facility. It is found that the proposed structure, based on sarf, can serve as an alternative to the current structure because it complies with the Shari'ah and meets most of the distinctive features of the Islamic microcredit facility.

This research paper explores the global phenomenon of longevity risk caused by the ageing population, the factors that have contributed to it and its impact at the macro-economic level, specifically with regard to the Muslim world. The study shows that, demographically, the Muslim world is moving towards an ageing population. The main factors contributing to this trend are: 1) improvements in both healthcare and standards of living; 2) a drop in fertility rates, and; 3) a drop in mortality rates. According to statistical data, the future demographic trend in the Muslim world is that there will be more elderly people (those above 65 years old) than young people (those under 15 years) by 2030. Politically this situation is problematic because of the potential economic, financial and social impact on citizens and nation states. This creates a longevity risk, the effects of which are already being witnessed in countries such as Japan and Italy, which are faced with ever ageing populations. Longevity risk can be separated into aggregate longevity risk and specific longevity risk. The aggregate longevity risk is usually underwritten by governments because it takes into account the impact of the longevity risk at the national macro-level. The specific longevity risk, on the other hand, is usually underwritten by the private sector. It relates to individuals who want to mitigate the risk at their own cost. The conventional pension and insurance markets in the West have developed some products to mitigate longevity risk. From an Islamic perspective this is a new area of attention, especially for the takÉful industry, which needs to approach the matter from within an Islamic ethos. As Islamic economics and finance have certain idiosyncrasies, this paper approaches the issue of ageing and longevity risk from a holistic perspective to provide some direction for Muslim countries to consider.

Offshore Financial Centres (OFCs) are typically small nation states which seek to attract foreign financial capital through numerous incentives. In these jurisdictions, offshore financial services represent the dominant source of economic activity. As the Islamic finance industry is growing and maturing, the expertise and advantages offered by these OFCs are being sought after by investors and Islamic finance service providers to invest in and structure Shari'ah-compliant products. This research therefore undertakes a cross-country analysis of key OFCs which actively promote the provision of Islamic financial services. Four case studies are examined: the Cayman Islands, Luxembourg, Labuan International Business and Financial Centre (Labuan IBFC) and Bahrain Financial Harbour (BFH). In this respect, the research discusses their competitive strategies in attracting offshore Islamic financial businesses, particularly focusing on the business and regulatory infrastructure and tax policies adopted by these jurisdictions. Moreover, their products and offerings as well as the challenges and opportunities in offering Islamic capital market services have been deliberated upon. A comparative analysis of these OFCs has also been made based on their ranking in some international indices that rate the global competitiveness of world economies. Overall, the paper delineates the lessons learnt from the best practices of these OFCs which will serve as useful guides for jurisdictions venturing into offshore Islamic financial businesses.

The concern over Shariah-compliant transactions is firmly entrenched in the activities and operations of Islamic financial institutions (IFIs). As a business entity established within the ambit of Shariah, an IFI is expected to be guided by values, principles, objectives and rulings of the Shariah. However, ensuring effective Shariah compliance is not a straightforward matter. As financial markets become increasingly sophisticated, heightened product innovations and engineering in Islamic finance entail genuine concern over the need to strengthen Shariah compliance throughout the product life cycle. This means that, while a product may be deemed Shariah compliant prior to its launch (ex-ante), the IFI must also be cognizant of the need to ensure that the entire ex-post process—including contract execution, utilization of funds, investment activities, the audit and governance process—are all in place. This paper focuses on the framework for dealing with Shariah non-compliant transactions in Islamic finance. The framework delineates the concept of illegitimate income and its sources from the Islamic perspective in order to develop a coherent approach to dealing with diverse non-compliance situations based on established principles of the Shariah. Although it is not expected that an IFI will deliberately involve itself in illegitimate activities, any incident of non-compliance needs to be immediately addressed, rectified and reported. This is not only to ensure the purity of the income earned but, more importantly, for IFIs to put in place adequate systems and controls to ensure such that non-compliance with Shariah rules and principles can be averted.

Antara kekangan bank-bank yang melaksanakan perbankan Islam dalam menawarkan produk pembiayaan berasaskan perkongsian seperti mudarabah ialah isu jaminan modal. Ini kerana antara prinsip asas dalam kontrak mudarabah ialah tanggungjawab jaminan terletak di atas bahu pemodal (rabb al-mal). Dalam konteks pembiayaan untuk industri kecil dan sederhana, prinsip asas jaminan modal ini mendedahkan bank kepada risiko kerana fenomena hari ini menyaksikan industri-industri tersebut tidak menunjukkan pencapaian dan prestasi yang meyakinkan dan sesetengahnya pula mengalami kebankrapan awal. Kajian ini cuba mendapatkan penyelesaian yang sesuai dari sudut ekonomi dan diterima dari sudut syariah, dengan menerokai permasalahan jaminan modal dari perspektif syarak, sama ada boleh diletakkan di atas bahu pengusaha (mudarib). Pendapat fuqaha berserta dalil-dalilnya berkaitan isu jaminan mudarib akan dibincangkan secara terperinci. Kajian ini akan mengemukakan cadangan berkaitan isu ini dengan menjadikan industri kecil dan sederhana sebagai rujukan khusus.

The Islamic banking industry has experienced rapid growth, notably in Southeast Asia and the Middle East. However, after four decades in operation, the two regions have diverged over Shariah resolutions. The former is said to have adopted a more lenient and flexible approach as compared to the latter. The present paper examines this issue by analysing fatwas issued by Malaysian Shariah scholars and their GCC counterparts. The discussion focuses on fatwas related to the Islamic capital market. The fatwas are analysed based on resolutions made by the Shariah advisors of the Malaysian Securities Commission, Kuwait Finance House, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the International Islamic Fiqh Academy, Dubai Islamic Bank and Dallah al-Baraka Group. The study is pertinent to bridging the gap related to Islamic banking practices in various Muslim countries by advocating the harmonisation of Shariah rulings

The concept of the time value of money (TVM) has been well accepted and widely applied in the conventional financial system for a very long time. However, Islamic scholars hold differing views regarding its conceptual and practical foundation in the Islamic financial system. The opponents of TVM have argued that recognizing it will lead to acceptance of riba, against which Islam is at war. This may, however, be a hasty judgment. Islam does not reject any concept that aligns with its teaching, promotes justice among people and secures their interests, particularly in financial transactions. The concept of TVM establishes that time can be given a counter-value in association with real commercial activities. Therefore, Islamic acceptance of TVM should not be disregarded, particularly in financial transactions, such as deferred sales and loan contracts, in order to uphold justice. However, the concept of TVM must be applied in accord with specific Shariah parameters because applying it without complete adherence to its Shariah parameters may lead to actual riba. In contrast, if the Shariah parameters are completely complied with, the application of TVM may result in removal of riba and achievement of fair economic effects in financial transactions. Hence, this study aims to examine the legal status of the time value of money in Islam and then formulate the Shariah parameters for its application in Islamic finance. The study employed the library method to collect information, which was analysed using comparative, deductive and inductive methods. The study establishes that Islam recognizes the legitimacy of the time value of money arising from deferment (ajal), but its application must be in conformity with the Shariah parameters in order to avoid riba.

This paper aims to provide a comprehensive study of key Shariah issues associated with two types of sukuk al-ijarah. The first type is sukuk al-ijarah 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. The second type is sukuk al-ijarah al-mawsufah fi al-dhimmah, i.e. sukuk based on forward leases. The paper prefaces the discussion on these two types of Sukuk al-ijarah with a critical review of some of the definitions proposed for sukuk al-ijarah, and it proposes a definition inclusive of tangible assets, usufruct and services. It also provides an explanation of the practical challenges faced by corporations in issuing sukuk, particularly with regard to marketing, investor demand, ratings considerations, and legal impediments to ownership of sovereign assets. In exploring the key Shariah issues related to sukuk al-ijarah al-muntahiyah bi al-tamlik, the paper discusses the following: the ownership of the underlying asset for both asset-based and asset-backed sukuk; the obligor selling the asset and its usufruct to the sukuk holders and then turning around and repurchasing the usufruct; and the inclusion of a binding promise by the original seller to buy back the asset after the lease ends. Under sukuk al-ijarah al-mawsufah fi al-dhimmah, the Shariah issues discussed relate to both the issuance and trading of such types of sukuk in which the underlying assets of the forward leases pertain to physical assets and usufructs whose specifications the obligor undertakes to provide.

Aktiviti pelaburan emas semakin rancak di Malaysia dan disertai oleh pelbagai golongan termasuk umat Islam. Dari perspektif syariah, produk-produk dan teknik-teknik pelaburan emas perlu menepati prinsip dan hukum syarak, supaya aktiviti kewangan masyarakat Islam tidak terkeluar daripada landasan agama. Kertas kajian ini ditulis bagi menganalisis beberapa produk, pelan dan teknik pelaburan emas yang aktif dijalankan di pasaran berdasarkan prinsip dan hukum-hakam perniagaan emas menurut Islam. Parameter Pelaburan Emas yang diperakukan oleh Jawatankuasa Fatwa Majlis Kebangsaan Bagi Hal Ehwal Ugama Islam Malaysia dirujuk sebagai panduan dalam analisis ini. Penulisan kajian ini dibuat dalam tiga bahagian utama. Bahagian pertama menjelaskan pelaburan emas secara umum dari perspektif syarak. Bahagian kedua memaparkan jenis-jenis pelaburan emas yang dijalankan di Malaysia. Bahagian ketiga pula membawakan produk, pelan atau teknik pelaburan emas untuk dianalisis dari sudut syariah dengan berpandukan kepada Parameter Pelaburan Emas. Kertas kerja ini juga memberi panduan dari sudut syariah dan undang-undang tentang isu salah nyata di dalam iklan dan risalah yang kerap berlaku dalam aktiviti pelaburan emas, serta memberi panduan tentang kaedah pelupusan harta haram jika suatu skim pelaburan emas didapati tidak patuh syariah.

Most life (family) takaful products today are structured on the form of unit-linked or investment-linked models. This essentially means that there is a clear segregation between the investment fund and the takaful or tabarru' fund. Indeed, the concept of takaful, which is premised on the principle of tabarru', makes it convenient for family takaful operators to adopt the investment-linked conventional life insurance model. However, when it comes to traditional conventional life insurance products, family takaful seems to be lagging behind. This is due to some inherent features of traditional life insurance that cannot be replicated in family takaful product design, such as the various guaranteed benefits, in the form of cash values, besides the normal contingency benefits (i.e., benefits linked to misfortunes of the participants such as death, disability, sickness, etc.) that are structured in traditional life insurance products. The paper studies how family takaful can be competitively structured in a manner that allows various competitive product features demanded by the public to be offered, features that resemble those of traditional life insurance, without in any way violating Shari'ah principles. In particular, the wadi'ah concept is proposed to be adopted in family takaful product design, as it will allow various forms of guaranteed benefits (non-participating benefits) to be offered to participants in a manner similar to their conventional counterparts. The paper argues that the cash values in the wadi'ah fund are similar to the non-forfeiture benefit in a traditional life plan. However, it is important to note that there is a fundamental difference between these products, i.e. takaful and conventional life insurance. Whilst the latter is based on a purchase-and-sale arrangement, the former is based on the principle of tabarru', by which participants cooperate to help and indemnify one another on the basis of charitable spirit.

This research examines zakah obligations on Islamic financial institutions in order to explore the relationship between the legal status of Islamic financial institutions and zakah obligations. For this purpose, the paper first examines definitions of legal entity in both common and Islamic law, analyses jurists’ opinions on its legality and examines the applicability of jurists’ views to IFIs. The second part focuses on Muslim jurists’ rulings on IFIs paying zakah. In this respect, views on zakah obligations on different types of Islamic financial institutions are comparatively examined. The research concludes with certain recommendations to enhance understanding of this issue and help achieve better adherence to the Shari'ah with regards to zakah payment.

This research paper examines the enforceability of international Islamic financial contracts in secular jurisdictions with a specific reference to England and Malaysia. English law and court are commonly categorized as the choice of law and choice of court preferred by the contracting parties in cross-border transactions due to their reputation for integrity and the resultant respect they enjoy. However, past experience shows that English courts are reluctant to recognize the underlying Shari'ah nature of Islamic financial contracts. The paper will discuss relevant cases in which these issues have been raised with a view of finding a viable solution. Furthermore, the paper will explore relevant Private International Law principles with a special reference to a “proper law of contract” principle, as well as the Rome Convention and Rome I Regulation. One of the solutions could be found in “doctrine of incorporation” where clearly identified Shari'ah principles of a contract could be enforced as contractual terms. Alternatively, the paper is proposing the Malaysian law and court as the choice of law and the forum for settlement of disputes where effective legislative and judicial mechanisms have been developed for the recognition and enforcement of both conventional and Islamic aspects of the contracts.

Islamic finance attempts to rearrange modern financial practices in line with Shari'ah principles and requirements. The industry has grown considerably over the last three decades and has a global reach. As it rapidly develops in Muslim countries, it is also penetrating the Western world. We contend that this trend is being driven not only by operational compliance with the requirements of Islamic law but also because of the objectives and values it promotes. Islamic banking and finance (IBF) was intended to bring an Islamic vision of the economy to the financial sphere in an effort to realize human wellbeing (maslahah) and a just and fair order of society. Financial practices are to be arranged to meet those objectives. Recently, interest has been growing in the industry regarding the objectives (maqasid) of the Shari'ah. This interest has been driven by the perception that satisfying the minimum legal requirements of Shari'ah compliance may not be sufficient. The paper attempts to elaborate the concept of maqasid al-Shari'ah and its application in the financial sphere. This is done by investigating the ends (maqasid) that ought to be realized and the means (wasa'il) employed to realize those goals.

Inconsistency in Shari'ah interpretation is one of the most pressing concerns in the Islamic financial industry. Many parties have called for serious efforts to solve it, and some have suggested applying standardization. In light of that, we have conducted a comparative study between fatwas issued by Shari'ah boards of the two main arenas of Islamic finance today, namely Malaysia and the GCC countries, in order to determine the magnitude of the inconsistencies. Malaysia is represented by the Shari'ah Advisory Council of Bank Negara Malaysia (SAC BNM) while the GCC countries are represented by five fatwa-issuing bodies: 1) Dallah al-Barakah Bank (DAB), 2) Kuwait Finance House (KFH), 3) the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 4) Majma' al-Fiqh al-Islami (MF) and 5) Dubai Islamic Bank (DIB). This study is limited to a comparison of resolutions issued by Malaysia’s SAC BNM with those issued by the abovementioned organizations with reference to twelve Islamic principles applied in banking. The study begins with a brief explanation of the Shari'ah perspective on fatwa and divergence of opinion and then focuses on the applied comparison methods as well as the findings of the research. It was found that a true understanding of the peculiar nature of fatwa and differences of opinion of scholars demonstrates that inconsistency is common and natural. The most important finding of the study is that the fatwas of both regions have more similarities than differences and that a clear difference is only evident in relation to certain Islamic principles. Nevertheless, most resolutions did not provide the Shari'ah justifications that are necessary to nurture mutual respect.