Examining the Application of Al-'Urf in Islamic Financial Contracts: Insights and Implications for Modern Banking Products

Purpose – This research aims to explore the possibility of raising and adjudicating Shari'ah issues in Islamic financial contracts before the secular courts with specific reference to the UK and Malaysia. Design/methodology/approach – This is a legal research, and therefore, the paper uses the qualitative research methodology whereby a content analysis, in-depth case study, and library-based research were mainly used. Findings – Shari'ah issues raised before the UK courts, and arguably, before the secular courts in other Western jurisdictions, would not be adjudicated and enforced. English courts, in particular, would decide Islamic financial contracts according to the English law, disregarding Shari'ah issues. Conversely, Shari'ah issues raised before Malaysian civil courts would be duly adjudicated and enforced. The civil court is bound, by the new Central Bank of Malaysia Act 2009, to refer those issues to the Shari'ah Advisory Council of the Central Bank of Malaysia for them to be ascertained. The subsequent ruling of the SAC is binding on the courts. Originality/value – The Malaysian model for the adjudication of Shari'ah issues in Islamic financial contracts is very effective. Therefore, the research proposes to the parties in international Islamic financial contracts to choose Malaysian law as the law of reference and Malaysian courts as the forum for settlement of disputes. The Malaysian model, being already tested, can also be successfully exported to other countries wishing to introduce or develop Islamic finance.

Customers' perceptions on the dispute resolution clauses in Islamic finance contracts in Malaysia

Impact of Asymmetric Information in Islamic Financial contract: An Empirical Analysis

Is optimal Islamic financial contract stabilizing? The perspective of a New Keynesian model with the financial accelerator

A primary source of asymmetric information arises from banks’ uncertainty about borrowers’Creditworthiness. This can generate two types of barriers to efficient credit allocation in the loan market: ad-verse selection in the likelihood of repayment and moral hazard in the riskiness of firms’ business decisions, also affecting repayment. This study investigated the consequences of asymmetric information on Islamic financial contracts in the Pakistani market for small and medium enterprise (SME) business lines of credit. Islamic bank’s main financial contracts were discuss the two of them which are Istisna and Murabah .The methods of’ T test’ was conducted to ascertain the difference in means of both forms of financing, whereas Multiple Regression Analysis using panel data to assess the relationship of critical variables with Disbursed amount, profit rate, spread, tenor. Data of three year i.e. from 2016 to2018 of 35 firms, with 105 number of observations having istisna and murabah contract, were taken. The results suggested that both the means of murabah and istisna financing are significantly different in major performance indicators, implicating companies that have taken these two financing have performed differently. Secondly, in most of the ratio that mattered like efficiency and profitability, murabah based financing have yielded more efficient results and better performed as compared to istisna.

Risks are part and parcel of financial intermediation. The survival and success of a financial organisation depends on the efficiency with which it can manage its risks. Risk management is one of the critical factors in providing better returns to the shareholders. It is also a necessity for stability of the overall financial system. This chapter is an attempt to understand various risks associated with Islamic finance in general and Islamic banking products in particular. Increasing complexity and convergence of financial activities has resulted in multiplicity of risks. The three most common forms of risks — credit, market and operational, which occupy the maximum attention of the financial community — are explained in brief in this chapter. The Islamic financial industry has a different orientation towards risks. The risks are more aligned on the basis of contract types as a result of the special structuring of the contracts in Islamic banking. Profit and loss sharing is the nature of some of the Islamic financial contracts, along with the changing relationships of parties during the lifetime of the contract. These expose them to specific types of risks. These risks are specific to the contract types. This chapter thus presents and explains the different types of risks arising from the Mushãrakah, Murãbaha, Murãbaha, Salam, Istisnã, and Ijãrah Islamic financial products, elaborated with the help of graphs and examples. Furthermore, it highlights how financial institutions that provide such Islamic financial contracts are exposed to these corresponding underlying risks, as well as how they can manage them.KeywordsFinancial InstitutionCredit RiskOperational RiskRisk IssueMarket RiskThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

In this paper, we explore the concept of agency theory in a conventional perspective, to understand the types of agency problems emerging in the contractual relationship context. However, many agency contracts that have been observed are incomplete. Completeness in the contractual agency relationship contributes to th e reduction of the monitoring cost of contracting parties and there is a scarcity of literature which has fueled the effort to discuss agency relationship in Islamic financial contracts and agency problems. For such contract to succeed, the paper provides an initial baseline to understand how Tawhid epistemology elements can be used to facilitate and deter different goals, different levels of information, also the opportunism behavior in Islamic financial contracts.

The adoption of the doctrine of secularism in the United States of America (USA) and the United Kingdom (UK) is clear. Secularism separates human activities in the public sphere from religion. In Western countries, the development of Islamic finance, which stands on the principles of Shariah, could be impeded due to this doctrine. This is because, in Islam, religion is part and parcel of human life. Unlike the US, the UK has made certain efforts to accommodate Islamic finance needs by amending its regulatory structure. Adequate regulatory set ups for Islamic finance in both countries are very crucial, particularly in the UK, since its government aims to promote London as the hub for Islamic finance in Europe. Therefore, in view of the importance of these two giant financial jurisdictions, this study aims to provide a comparative legal analysis of the position of Shariah in Islamic financial contracts in the UK and the US. In particular, this study highlights the legal and judicial treatments made by the courts in both countries pertaining to the subject matter. This study concludes by highlighting the present position of the subject matter.

Despite the prominent role that the Islamic faith plays in shaping the social and regulatory aspects of Arab countries and the constitutional recognition of Islamic law (Sharīʿah) as a main source of legislation in most of these countries, judicial precedents regarding Islamic finance contracts remain scarce in the Arab world. This article sheds light on the judicial treatment of the validity and characterisation of Islamic finance contracts. It examines the economic and regulatory backgrounds of the Islamic finance industry in Egypt, Kuwait, and Oman. This examination provides a necessary prelude to the article’s discussion of the Islamic finance contract from jurisprudential and regulatory standpoints. It also provides a foundation for the analysis of noteworthy judicial precedents on the validity and characterisation of the Islamic finance contract. Following such analysis, this article makes recommendations to enhance the regulatory and judicial appreciation for the distinctiveness of Islamic finance.

In this paper, I show two mechanisms of the emergence of non-Western organizations: demonstration of contracts and cultural resurgence. For illustration, I use the case of Islamic finance, an alternative economic organization for Muslims who are about 24% of the world population. With additional transaction costs and illegitimacy concerns, Islamic finance contracts do not usually take a formal form. However, my analyses with duration models, regressions, and semi- natural experiments over 1948 - 2016 and in 186 countries suggest that the Islamic finance contracts between national and supranational authorities inspired confidence among entrepreneurs and stakeholders that Islamic finance is socially and economically appropriate. This gave rise to Islamic finance organizations to enact such contracts, reducing the transaction costs for realizing Islamic principles in financial transactions. Also, Islamic finance organizations grew earlier in countries with aspirations for Muslim cultural resurgence in the post British colonial times.

'Effective Profit Rate Methodd and Revenue Recognition of Islamic Banks: Risk Sharing or Risk Transfer?

This research examines the adequacy of financial inclusion in the northwest and northeast of Nigeria and the role of Islamic finance in deepening financial inclusion in those identified regions. By adopting qualitative analysis, content analysis is used to determine the status of financial inclusion in Nigeria. The study relies on secondary data collected from official documents, working papers, articles, e-books, relevant websites, and online resources. From this study, it is found that providing all necessary accesses to financial products and services to all members of Nigerian society is important for financial inclusion. Such accesses must be done in an efficient, effective and sustainable manner. Based on the findings, it is recommended for Islamic banks in Nigeria to provide more allocations for equity-based Islamic financial contracts in their financing activities. Moreover, it is necessary for the Central Bank of Nigeria (CBN) as the main regulator of banking and finance industry in Nigeria to consider and issue guidelines and regulations that can expand the country’s financial inclusion through Islamic equity-based financial contracts and products.KeywordsFinancial inclusionIslamic financeNigeriaEquity-based Islamic financial contracts

This chapter shows farmers’ pre-harvest and post-harvest financing through a case study of an agricultural cotton cooperative in West Africa. Cooperatives would be essential in safeguarding smallholder farmers against unfair input and output prices. It is better to finance agricultural production via cooperatives and economic empowerment programs. Islamic finance contracts with embedded asset-based and asset-backed features can better suit agricultural production financing. The chapter presents a case of structured finance for an agricultural cooperative for the pre-harvest and post-harvest phases. One of the major confusions in Islamic finance is using contracts intended for resource mobilization or lending across all sectors. For instance, the asset production finance contract of Islamic finance is Istisna, while in practice, Murabaha contracts are often used for the housing sector. The same holds for agricultural production finance. Agricultural production should be financed with a Salam contract, not Murabaha. In this regard, Salam's contract for a structured finance markup calculation for the to-be structure is presented as a more appropriate method of financing than as-is Murabaha-based financing in a case study.

The financial position and performance for any company are translated into the financial statements which form part of the Annual Report of the company. Information in the financial statements of Islamic financial institutions (IFIs) is important for stakeholders to make economic and investment decisions as well as to assess the IFIs’ extent of compliance with the Shariah principles and whether or not they have completed their duty in contributing to socioeconomic justice and stability. This paper aims to examine the differences between the financial statements of Islamic and conventional banks in order to highlight the differences of operations of both types. Although both types of banks are using the same accounting standards, there are issues unique to Islamic banks that require the management to provide different types of information in addition to the standard information found in conventional banks’annual reports. In this study, we have conducted a comparative analysis using qualitative method by the way of content analysis to examine the differences between financial statements of Islamic banks and their conventional counterparts. The study found that the difference of disclosure of financial information in the two types of banks is due to the different nature of Islamic banks’ operation as compared to the conventional banks especially in investment management and the use of its Islamic financial contracts. As for the components of annual report, little differences were found from the content analysis of the banks underanalysis. This study recommends some improvements for the Islamic bank’s financial reporting so that they would provide more transparency in a fair and equitable manner to the users view of observing Islamic principles and making economic decisions. Detailed future work could be done to study the usefulness of additional information on financial statements of Islamic banks from the perspectives of stakeholders.

Islamic Financial Contracts