Exploring Compliance of AAOIFI Shariah Standard on Ijarah Financing: Analysis on the Practices of Islamic Banks in Malaysia

Shujaat Saleem,Fadillah Mansor

doi:10.3390/jrfm13020029

Abstract

This paper aims to explore whether the practices of Ijarah financing by Islamic banks in Malaysia are in line with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No: (9) on Ijarah financing. Semi- structured interviews based on open-ended questionnaires were conducted, recorded verbatim, and transcribed for content analysis. Our study revealed flaws in the contemporary practice of Ijarah financing and indicated that it was slightly out of line with the AAOIFI Shariah standard. The study will not only help the Islamic banking industry of Malaysia to reduce, if not eliminate the gap between the practices of Bank Negara Malaysia (BNM) and AAOIFI Shariah standards pertaining to Ijarah financing but also create novel literature due to the fact that, no study has been undertaken to date, which analyzes the practices of Ijarah financing by Malaysian Islamic banks in the light of the AAOIFI Shariah standards.

Highlights

According to the teachings of Islam, money is a medium of exchange and should be treated differently from a commodity e.g., a commodity can be sold out or rented out but, money cannot be sold out or rented out1 money should be used to buy the commodity and, is not used to buy money (Ahmad and Hassan 2007)
As the main intent of the study is to explore as to whether or not the practices of Ijarah financing of the contemporary Islamic banks in Malaysia are in compliance with the Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard:9 on Ijarah financing, the study adopts a qualitative approach with semi- structured interviews using open-ended questions by applying an inductive approach
In order to explore the compliance in the practices of Malaysian Islamic banks pertaining to the AAOIFI Shariah standard on Ijarah financing, we used an open-ended questionnaire which was utilized to conduct semi-structured interviews from the respondents of Islamic banks in Malaysia

Summary

Introduction

According to the teachings of Islam, money is a medium of exchange and should be treated differently from a commodity e.g., a commodity can be sold out or rented out but, money cannot be sold out or rented out money should be used to buy the commodity and, is not used to buy money (Ahmad and Hassan 2007). The main differentiating point between Islamic and conventional banks is the treatment of money and commodities. Conventional banks treat money equal to commodities on both the deposit and financing side of the transactions as each and every product of a conventional bank is based on a contract of loan which demands fixed interest payments analogous to rent of any asset or property. Islamic banks treat money as a medium of exchange as no contract of Islamic banks is based on a contract of loan which results in economic activity flourishing and economic growth (Maulidizen 2017; ‘Usmanı 2002)

Objectives

Methods

Results

Conclusion