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

The study aims to provide a comprehensive analysis of the bindingness and enforceability of a unilateral promise (wa'd) from both the Islamic law and legal perspectives. At the outset, the research also addresses the Shari'ah rulings of some related principles, namely two-way unilateral promise (wa'dan) and bilateral promise (muwa'adah). Studying these aforementioned principles is vital as it helps to further comprehend the application of wa'd in modern Islamic banking and finance practices. The research also undertakes a case study, analysing some sukuk purchase and sale undertaking clauses found in offering circulars. This is to identify the application of two-way undertakings in sukuk structures, with a critical examination of the Shari'ah compliance of these structures with regard to the related principles mentioned above. Besides that, the research elaborates on the possibility of enforcing binding wa'd from various legal positions, particularly the Malaysian Contract Act 1950, the equitable doctrine of promissory estoppel and the principles of undertaking. The research finds that the majority of contemporary Muslim scholars recognize wa'd in Islamic financial transactions to be binding on the promisor if it is contingent and related to a cause. Nevertheless, Malaysian legal provisions, especially the Contract Act 1950, are silent on the enforceability of wa'd in a court of law. Therefore, the study proposes that a separate clause on wa'd, defining its meaning and outlining the main characteristics or conditions of binding wa'd, should be incorporated in the Act.

Global Islamic finance is faced with many unresolved issues that demand urgent attention from all parties involved. One of the pressing issues is the lack of standardisation to face globalisation within the industry. An attempt is made herein to examine the subject with an aim to clarify the rationale for having an international treaty for standardisation. Uniformity and standardisation incorporated in a treaty form a basis for consensus among the state parties that will not only promote a sound and stable Islamic financial system but also prove its viability and credibility to the global financial world. This paper proposes that, as the global market continues to increase and as interest in Islamic finance grows around the world, there is a compelling need to make future development of the industry smoother by standardizing, at the very least, the basic financial instruments in order to avoid possible conflicts.

As institutions that are governed by the principles of the Shari’ah, Islamic financial institutions should depart significantly from their conventional counterparts. The intense commitment of Islam to brotherhood, morality and justice makes the well-being of all human beings the principal goal of Islamic financial institutions. This well-being includes both material and spiritual satisfaction encompassing considerations of the present world and the hereafter. Thus, while ordinary business institutions are likely to make profit their primary objective, Islamic banks have to incorporate both profit and social responsibility into their objectives, as Islam strives for a balance between profit and social objectives. Scholars have noted, however, that constructing a model that provides clear parameters for how to make trade-offs among diverse stakeholders is one of the most difficult problems of business ethics. For Islamic financial institutions, this issue becomes more acute, especially when their business objectives include reassuring stakeholders that they are likely to receive a fair return on their investments, while at the same time they are bound to maintain conformity with the Shari’ah. This paper, therefore, attempts to address this issue by putting forward a Shari’ah prescription that provides a framework for managers to resolve problems arising from potentially conflicting responsibilities towards various stakeholders. In particular, the pyramid of maslahah may serve as a viable and effective model for a decision framework to manage conflicts between the interests of various stakeholder groups.

The emergence of Islamic economics, banking and finance as a system of thought and practice is timely in the midst of world crisis and the uncertain proposals for solving it. It is hoped that Islamic economics, banking and finance (IEBF) offer a coherent perspective for understanding real economic problems as well as a genuine alternative to the very foundations of how economics and finance should be managed to actualise human prosperity. It is believed that IEBF will continuously evolve into a more sophisticated form and structure in the next decade. Some, however, question whether the development is moving on the right track to realise the hopes pinned on it at the time of its initial establishment. The points of discussion range from technical issues related to the appropriate products, mechanisms and policies to serve the goals; to the human capital requirements; to the systemic issues of paradigm, structure and goals of an Islamic economic and financial system. In this research we argue that it is only with a sound philosophical base for Islamic economics, banking and finance that the body of knowledge can sustain itself or provide genuine Islamic alternatives to contemporary economic and financial practices. Therefore, to resolve the tensions in the development of Islamic economics and finance and to guide it in the proper direction, greater concern should be given to the foundations. Likewise, to provide for meaningful development in the twenty-first century, IEBF must realise its full potential as a system, not merely a stopgap means of surviving the crisis. It must go beyond that to provide the guidelines for managing a good economy, stimulating growth and development, realising socio-economic justice and promoting employment and stability. It cannot limit itself to merely offering economic and financial practices that satisfy the minimum standard of legal requirements.

One of the major contentious areas within the Islamic finance industry is the sale or tradability of debt and debt-based instruments, the issue revolving around the principle of bay' al-dayn. Jurisdictions which permit bay' al-dayn have experienced tremendous growth, particularly with regards to transactions involving financing assets, and liquidity management and debt capital market instruments such as commodity murabahah sukuk. In other jurisdictions, the prohibition of bay' al-dayn has inevitably somewhat constrained the development of their Islamic finance industries.

This paper seeks to bridge the gap between the two contrasting views by introducing the pioneering concept of commodity hawalah. The proposed commodity hawalah mechanism is a combination of debt and commodity trading, which are underpinned by the principle of hawalah al-haqq (i.e., transfer of the rights to a debt). It is hoped that the proposed commodity hawalah mechanism could set the foundation or benchmark for the trading of debt and debt-based instruments across all Islamic jurisdictions.

The main objective of this paper is to examine the disputed issues in the cases examined by the Muamalat Court. The study also aims at studying the legal impediments in the current provisions that hamper the growth of mumalat law. The study is divided into five parts. Part 1 is a brief introduction. Historical development of the legal framework is briefly described in Part 2. Part 3 describes the distribution of disputed cases in Islamic finance (IF). Part 4 analyses disputed cases according to the products offered from the structural and legal framework perspectives. In Part 5, the discussion focuses mainly on the pertinent issues raised in the cases analysed. Finally, Part 6 concludes with some recommendations for future research and reforms. Through examining the above, the paper proposes regulatory changes to the existing legal framework to meet the needs of the industry. The paper concentrates on examining the regulation and legal framework of IF in Malaysia. It is supplemented by statistics on products and issues that most affect the market. It is hoped that this effort to examine the challenges will promote the way forward for the IF industry in Malaysia. The paper sheds new light on how challenges to IF in Malaysia’s legal framework can be met in order to lay the foundations for substantial growth.

Penglibatan pelabur-pelabur runcit dalam pasaran forex, terutamanya daripada kalangan individu persendirian, telah meningkat secara drastik dalam beberapa tahun kebelakangan ini. Golongan ini mengambil pendekatan melakukan perdagangan harian (day trading) matawang asing secara lani (spot forex) melalui platform elektronik yang disediakan oleh pihak broker. Masyarakat Malaysia khususnya umat Islam tidak terkecuali daripada terlibat dalam kegiatan perdagangan secara moden ini. Objektif utama kertas kerja ini disediakan adalah bagi meneliti secara lebih mendalam mengenai operasi dan perjalanan perdagangan spot forex yang dijalankan oleh individu-individu melalui platform internet dan mengkaji sejauh mana pandangan syarak mengenainya. Umumnya, susunan penulisan akan dibuat dalam tiga bahagian utama; bahagian pertama akan memberi pengenalan umum mengenai forex; bahagian kedua akan memaparkan operasi perdagangan spot forex melalui platform internet; dan bahagian ketiga akan menyorot pandangan syarak mengenai transaksi spot forex ini, dengan mengetengahkan konsep bay‘ al-sarf dalam Islam dan lima isu syariah yang utama. Kertas kerja ini mencadangkan supaya kaedah siyasah shar‘iyyah juga perlu diambil kira dalam menentukan kesahihan hukum perdagangan ini dari sudut syarak.

Hiyal mempunyai peranan yang penting dalam kewangan Islam hari ini. Melalui aplikasi Hiyal, kebanyakan kekangan kewangan dalam produk-produk dapat di atasi. Walau bagaimanapun, penggunaan Hiyal yang keterlaluan tanpa batasan dan garis panduan yang tepat boleh membawa kepada pembatalan hukum (ibtal al-Hukm) dan ketetapan syara’. Objektif utama kertas kerja ini adalah untuk menentukan bentuk Hiyal yang dibenarkan oleh syara’ dan menggariskan beberapa parameter yang perlu digunapakai dalam aplikasi Hiyal dalam produk-produk kewangan Islam. Kertas kerja ini membincangkan secara terperinci konsep Hiyal termasuk jenis-jenisnya, petunjuk-petunjuk dan pendapat-pendapat fuqaha’ mengenai Hiyal. Kertas kerja ini juga mengetengahkan beberapa isu utama yang menjadi asas kepada pembentukan parameter Hiyal yang dicadangkan, antaranya isu motif individu (qasd al-mukallaf), objektif Syariah (qasd al-Shari‘), jalan yang digunapakai (wasa’il), kemaslahatan umum (maslahah), hukum asal (‘azimah) dan hukum yang berbentuk meringankan beban (rukhsah). Di samping itu, kertas kerja ini mencadangkan lima parameter penggunaan Hiyal yang perlu diambil kira dalam penstrukturan produk-produk perbankan dan kewangan Islam.

This article examines the concept of maqasid al-Shari'ah in Islamic jurisprudence in order to highlight its contribution to more comprehensive, rational and realistic answers to contemporary financial issues and to thereby increase awareness of the maqasid approach in structuring and developing Islamic finance products. For this purpose, the authors examine the literal and technical meanings of maqasid al-Shari'ah and scrutinise the position of the concept in Islamic law. They also present the essential elements of maqasid al-Shari'ah and explain how this approach may contribute to better solutions for various Islamic finance issues and challenges. Islamic finance has experienced phenomenal growth and success in the last three decades. It has expanded beyond its traditional markets to become a global phenomenon. Despite this encouraging development, skeptics continuously allege that Islamic finance is failing to fulfill its objectives as defined by the maqasid al-Shari'ah. These objectives, which prevail within the ambit of the Shari'ah, are to be expressed not only in the minutiae of Islamic finance operations but in the breadth of Islamic finance’s role to the Ummah as a whole. Indeed maqasid al-Shari'ah reflects the holistic view of Islam, which has to be looked at as a whole, not in parts, for Islam is a complete and integrated code of life, and its goals encompass all of life, including the individual and society, in this world and the hereafter.

Shari'ah compliance is the unique feature of Islamic financial services (IFS) and is, therefore, a very critical process for Islamic financial institutions (IFIs). This study focuses on the compliancy process conducted in Islamic banking institutions (IBIs), as the sector is considered one of the most established IFIs. Shari'ah non-compliance is considered damaging to an Islamic bank’s reputation. But the main issue is whether or not consumers at large or a particular group of consumers consider Shari'ah compliance as critical in their purchase decision. Therefore, the main objective of this study is twofold: to explore the possible consumer segments from the managerial perspective, and to conduct a case study on the applicability of a proposed Shari'ah compliance framework. The analysis of interviews made with selected key market players reveals four consumer segments: Religious Conviction Group; Religious Conviction and Economic Rationality Group; Ethical Observance Group and Economic Rationality Group. Theoretically, the closest possible market segmentation basis for these groups are, values (psychographic segmentation), which also emphasises opinions and attitudes, activities and lifestyles, and benefits sought from products or product attributes. The study’s initial finding could serve as an aid to guide product/brand positioning strategies for IBIs when designing their marketing communication. The analysis of the case study conducted shows that proper Shari'ah governance was in place and that appropriate steps are being taken to ensure these mechanisms work as intended. In addition, the process was clearly elaborated and disclosed in the bank’s annual report. Although the detailed process is not explained, we may conclude that what is being practiced by the bank under study is in line with what we have proposed in our framework, thus validating the applicability of the proposed framework.

The AAOIFI pronouncement on Sukuk issued in February 2008 reiterated its strong view against the application of purchase undertaking (PU) at par in equity-based Sukuk, namely musharakah, mudarabah and wakalah. The main research question that this study attempts to answer is whether the purchase undertaking (at par) guarantees principal in the equity-based Sukuk. This paper aims to provide empirical evidence on actual application of wa'd in equity-based Sukuk in the market to answer the research question. We utilized two main methodologies to answer the research question: a detailed term-sheet analysis, and interviews with market players. We studied 11 pre-AAOIFI deals and 4 post-AAOIFI deals. We examined two main features of wa'd: the trigger event and the price. With regards to the main trigger events for PU, both the pre- and post-AAOIFI Sukuk that used PU had maturity and default as the main trigger events. With regards to price, the PUs in pre-AAOIFI equity-based Sukuk are priced not only at principal but also include expected profit (not realized profit) that has not yet been paid. The price for post-AAOIFI deals differed from pre-AAOIFI deals, as Sorouh used a conditional PU priced at par while PLSA used a PU priced at market value or value to be agreed in future. Besides the case studies, we also conducted interviews with different market players (bankers, lawyers, rating bodies, regulators and Shari'ah scholars). We interviewed 42 respondents in all. The final usable respondents were 34 persons. The main question covered in the analysis section is about the function of PU. The top two functions of PU identified from the interviews is guarantee and recourse to the obligor. The scholars and the regulators had the highest percentage of respondents who viewed PU as a guarantee. Also, in IDB 2005 Sukuk, the scholars clearly stated that the PU functions as a guarantee of capital and return. Nonetheless, this was allowed in the deal, which was considered a mudharabah Sukuk, because the obligor (IDB) and the issuer (SPV) were viewed as independent parties.

This research attempts to critically analyse selected reported Islamic finance cases that were decided in the English courts. In addition, cases related to Islamic finance from other jurisdictions will also be analysed for comparative purposes. In doing so, the scope of the discussion will focus on the brief facts of each case, the main issues before the court and the judgment delivered by the court. A few issues regarding the international conflict of laws will be highlighted, particularly application of English law principles to Islamic contracts by civil judges. The research concludes with recommendations for ways to resolve international disputes in Islamic finance, highlights the international legal framework for Islamic finance and proposes directions for future research.