Financial Contracts Research Articles

Measuring Optimal Portfolio for Selected Financing Contracts of Islamic Banks in Indonesia

Financing is the primary factor in boosting the operational performance of Islamic banks. Financing is a productive asset that is susceptible to risk. The research mainly aims to find the optimal limit that can be tolerated in order to improve the operational performance of Islamic banks. The research objects cover Mudharabah, Musharakah, Murabahah, and Istishna financing contracts. This study shows the optimal level of Mudharabah growth should be between 1% and 4%, Musharakah growth should be between 3% and 6%, Murabahah growth should be between 2% and 3.6%, and Istishna growth should be between 1% and 3.7%.

Contractual Howlers: A Russian Bond Case Study

Both theorists and courts commonly assume that high-dollar financial contracts between sophisticated parties are free of linguistic errors: sophisticated parties, the thinking goes, will carefully express their shared intentions and eliminate any troublesome gaps and glitches. Consistent with this assumption, most courts interpret the language of commercial contracts literally according to the plain or ordinary meaning of the words in the agreement. An examination of contracts governing Russian bonds outstanding in 2022, however, reveals a large number of potentially troublesome contractual gaps and glitches. We refer to these linguistic irregularities as ‘howlers’ in order to highlight the significant litigation risks they create. In this article, we use interviews with market participants to assess the causes of the contractual howlers we observe in the Russian bonds. The presence of howlers undermines the core assumption that justifies the literal interpretive approach used by courts for contracts between sophisticated parties.

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

This study aims to investigate various examples of the implementation of al-`urf as a source of law in Islamic economy. The study used qualitative approach, which involves a review of relevant literature and an analysis of primary sources. The findings of this study suggest that the use of `urf in various practices of Islamic financial contracts including bai’ mu’atah, istishna, and profit-sharing arrangements in mudharabah or musharakah contracts is a long-lasting application that has become staple in modern banking products. However, we also discovered some challenges in these practices such as the lack of contract standardization, the absence of clear guidelines for the calculation of profits and losses, and the lack of awareness among the general public about the contracts. Future research could explore these issues to offer new standards and guidelines, or suggest ways to arise awareness of Islamic contracts. Penelitian ini bertujuan untuk menyelidiki berbagai contoh implementasi al-‘urf sebagai sumber hukum dalam ekonomi Islam. Pendekatan yang digunakan dalam studi ini adalah kualitatif, yang melibatkan tinjauan terhadap literatur yang relevan dan analisis terhadap sumber-sumber utama. Temuan dari penelitian ini menunjukkan bahwa penggunaan ‘urf dalam berbagai praktik kontrak keuangan Islam, seperti bai' mu'atah, istishna, dan pengaturan bagi hasil dalam kontrak mudharabah atau musyarakah, merupakan aplikasi yang sudah lama digunakan dan menjadi bagian penting dalam produk perbankan modern. Namun, kami juga menemukan beberapa tantangan dalam praktik-praktik ini, seperti kurangnya standarisasi kontrak, ketidakjelasan panduan untuk perhitungan keuntungan dan kerugian, dan kurangnya kesadaran di kalangan masyarakat umum tentang kontrak-kontrak tersebut. Penelitian yang akan datang dapat mengeksplorasi isu-isu ini untuk memberikan standar dan panduan baru, atau memberikan saran tentang cara meningkatkan pengetahuan publik tentang kontrak-kontrak Islam.

The metaverse and Islamic financial contracts: The case of Ijarah

The metaverse is a virtual world that exists alongside the actual world. While the actual world refers to the real, physical world, the metaverse is a digital world that is accessed through technology. Evidently, several international brands have integrated their businesses with the virtual metaverse providing business opportunities. However, there are currently several gaps in the sector of Shariah finance that need to be addressed in order to take full advantage of the potential of the metaverse. For instance, rare studies enlighten the concept of Ijarah, a substitute for conventional leasing in the metaverse virtual world. Undoubtedly, the metaverse has the potential to revolutionize the Shariah finance industry by providing new opportunities for financial inclusion and innovation. Therefore, for the readiness of Islamic finance institutions, this study is an attempt to explore the possibility of executing Shariah principles that could be utilized in the metaverse. More specifically, this study is an endeavor to explore and discuss how Shariah-based leasing i.e., Ijarah integrates with the recent metaverse technologies. Additionally, this study also discusses the metaverse evolution and its integration into international business brands, the metaverse virtual assets ownership, the metaverse virtual leasing, non-fungible tokens (NFTs), and virtual real estate in the metaverse. Indeed, this study is a novel addition to the Shariah finance literature, which helps policymakers to generate new strategies that guide the execution of Ijarah contracts in the virtual universe of the metaverse.

Islamic Finance: Fit for Purpose or Mere Replication?

The form versus substance issue is not a new phenomenon in Islamic finance. Beyond question, one of the verses emphasising the superiority of substance over form is surah al-Baqarah: ‘Righteousness is not that you turn your faces toward the east or the west, but righteousness is one who believes in Allah, the last day, the angels, the Book, and the prophets and gives wealth, in spite of love for it, to relatives, orphans, the needy, the traveller, the who ask for help, and freeing slaves…’(2:177) In the verse, it is stated that the true goodness and respect for Allah is not to turn its face towards east or west during the worship. Put differently, the Qur’an idealises an understanding wider than a mere formalism that is not based on the virtues of faith, religion, and morality. In this article, it is discussed whether the understanding of the substance over form, which is adopted in the sources of Islam, is fully implemented or not. 
 In this article, first, prohibitions against riba (as a guiding principle of Islamic finance) in the Quran and its historical roots are examined to understand what the purpose of these restrictions is by looking at Islamic finance philosophy. Second, various contract types which have been used to circumvent the prohibition of riba through hilah and their historical origins are also be criticised. Lastly, some Islamic finance contracts, which are frequently used in Islamic finance, and which are similar to the contracts in conventional finance in terms of economic outcome, are examined. It is also evaluated to what extent the Islamic finance sector, which is structured in line with the classical view on riba, is unique. Also, the criticism of Islamic finance being same as conventional finance both economically and legally is examined.
 Islamic finance contributes to the expansion of financial inclusion and the growth of the financial industry. Islamic finance may enhance financial access by broadening the scope of available financial products and promoting the inclusion of individuals who lack access to financial services. Islamic banking has a strong emphasis on partnership-style financing, which may be helpful in enhancing access to capital for small businesses. It also contributes to enhancing financial stability due to its relatively uncorrelated financial products operating in line with the risk-sharing and avoidance of leverage principles. However, the Islamic finance industry needs to develop new innovative products to differentiate itself from conventional banking and accommodate the concerns of investors regarding the authenticity of the system.

Pengaruh Pembiayaan Murabahah, Pembiayaan Mudharabah, dan Pembiayaan Musyarakah pada Profitabilitas Bank Perkreditan Rakyat Syariah

This research was conducted to test the effect of sharia financing contracts (Murabaha, Mudharabah, and Musyarakah Financing) on Profitability (ROA) of Harta Insan Karimah Sharia Rural Banks in 2018-2022. The data of Financial Services Authority (OJK) is used as the population with a sample of the financial statements of the Harta Insan Karimah Sharia Rural Bank for the period 2018-2022 (17 samples). The research method in this study is the Ordinary Least Square (OLS) method with quantitative research using multiple linear regression analysis techniques using SPSS version 25 software. The independent variable (X) tested in this study consists of Murabahah, Mudharabah, and Musyarakah Financing. The dependent variable (Y) used in this study is Return on Assets (ROA). The results of the study show that simultaneously, X variables (Murabaha, Mudharabah, and Musyarakah Financing) has no effect on variable Y, namely profitability (ROA) of BPRS Harta Insan Karimah in 2018-2022. Partially, Musyarakah Financing has a positive and significant impact on the profitability (ROA) of Harta Insan Karimah Sharia Rural Banks in 2018–2022, whereas Murabahah Financing and Mudharabah Financing each have a positive and insignificant impact on the Return on Assets (ROA) of BPRS Harta Insan Karimah in 2018–2022.

Model of Sharia Financing Contract in the Form of Notary Deed According to the Perspective of Islamic Law

<em>The practice of developing sharia financing has actually experienced massive developments, especially in ensuring the existence of legal certainty in transactions. One of the developmental practices of sharia financing is the existence of a contract formulated in the form of a notarial deed. This research focuses on the legal vacuum related to the arrangement of making a shari'ah financing contract in the form of a notarial deed. This research is a normative legal research with a concept and statutory approach. The results of the study show that a sharia financing contract made in the form of a notarial deed according to Islamic law must still refer to the provisions of syar'i law. In the process of shari'ah financing contracts, it is necessary to refer to several syar'i aspects, such as paying attention to the provisions contained in the Qur'an and sunnah, the Sharia Banking Law, to the JN Law. The model for making sharia financing contracts in the form of a notary deed based on the principles of agreement in Islamic law places the position of a notary to guarantee neutrality, professionalism and integrity including fulfilling and complying with the code of ethics. Notaries need to understand the provisions of syar'i or Islamic law in formulating a syari'ah financing contract requiring certification and special training in making sharia banking contracts for notaries</em>

Collateral Functions In Baitulmal Wal Tamwil (BMT) Positive Legal Perspective and Sharia Economic Law

Microfinance institutions in Indonesia are experiencing very rapid development with the existence of the Baitulmal Wal Tamwil (BMT) as a new breakthrough by offering financing products that are present in the midst of a lower-class economic society. The development of Baitulmal Wal Tamwil (BMT) today offers many products in financing. At Baitulmal Wal Tamwil (BMT) the financing offered includes: mudharabah financing (youth cheerful), mudharabah financing (equally cheerful), murobahah ceria, services (hiwalah Ceria), services (Ihrom Ceria), and policies (qord Ceria). This type of research belongs to the Normative Juridical type of research. This research aims to find out how the legal position of guarantees/collaterals in Baitulmal Wat Tamwil, Every financing in Baitulmal Wal Tamwil (BMT) requires collateral where the collateral is one of the legal conditions in the Baitulmal Wat Tamwil financing contract. This type of research belongs to the Normative Juridical type of research. This research aims to find out how the legal position of guarantees/collaterals in Baitulmal Wat Tamwil, Every financing in Baitulmal Wal Tamwil (BMT) requires collateral where the collateral is one of the legal conditions in the Baitulmal Wat Tamwil financing contract. So researchers want to examine the function of collateral in Baitulmal Wal Tamwil (BMT) in sharia economic law and positive law where collateral is often used as a problem and its legal requirements in financing transactions in the Baitulmal Wat Tamwil (BMT) microfinance institution.

Some Reflections on “Sharīʿah Clauses” of Islamic Finance Contracts

This study delves into resolving financial disputes on Shar'ah contract clauses involving parties from different jurisdictions. There is a lack of explicit references to Shar'ah law in the choice of law clauses in financial contracts. The study emphasizes the complexity of applying Sharīʿah principles due to different interpretations. The jurisdictions lacking Shar'ah law expertise on Islamic finance disputes may set unfavorable precedents. The recommendations include strengthening local jurisdictions in Shar'ah-based legal systems by training judges and arbitrators. Encouraging Islamic Financial Institutions (IFIs) to adopt Shar'ah compliance procedures, collaboratively developing unified IB&F Law, offering mechanisms of comprehensive training of legal practitioners, promoting confidence in local courts, creating a collaboration platform, and developing a comprehensive handbook for adjudicators, etc. are recommended measures to enhance Shar'ah-based dispute resolution and maintain credibility, stability & growth of Islamic finance sector.

ANALYSIS OF ACAD CONSTRUCTION ON SHARIA ONLINE LOANS AT PT DUHA MADANI SYARIAH

Technological developments in the field of information and communication have had a major impact on the digitalization of finance, especially with the presence of a new innovation called financial technology. One such fintech is Duha Syariah. This study aims to analyze the construct of sharia online financing contracts at PT Duha Madani Syariah from the perspective of Sharia Economic Law. While this research uses library research. Normative juridical approach. Source of data using primary data and secondary data. Data collection techniques using documentation. Data analysis consists of data reduction, data categorization, and data synthesis.The construct analysis of the sharia online financing contract at PT Duha Madani Syariah uses a Murabahah contract, Duha Syariah gives a certain amount of money to the customer to buy the desired item, then Duha Syariah gets a margin from the purchase of the item, and the customer makes installment payments to Duha Syariah.

ANALYSIS OF THE FINANCIAL SYSTEM MANAGEMENT OF MURABAHAH FINANCING PRODUCTS IN SHARIA PEOPLE'S FINANCING BANK (BPRS) CIVIL SYARIKAT IN BATAM CITY

Murabaha financing is one of the financing programs for the community. The existence of murabaha financing provides financial support for people in need. The purpose of this research is to study the financial system related to the financial management of the Murabahah contract financing products offered by BPRS Syarikat Madani, Batam City. This research is a type of qualitative research or also known as case study research. Data collection tool is done through observation, interviews and documentation. The data analysis technique used is a qualitative data analysis technique. The results of the study show that the Syarikat Madani Islamic People's Financing Bank (BPRS) in Batam City uses a Murabahah contract as one of its main financing products. The management of Murabahah contract financing products is carried out in accordance with sharia principles. The Bank provides clear information to customers regarding the selling price, markup, tenor and terms of financing using the principles of transparency, fairness and sustainability.

Fundamental theorem of asset pricing with acceptable risk in markets with frictions

We study the range of prices at which a rational agent should contemplate transacting a financial contract outside a given market. Trading is subject to nonproportional transaction costs and portfolio constraints, and full replication by way of market instruments is not always possible. Rationality is defined in terms of consistency with market prices and acceptable risk thresholds. We obtain a direct and a dual description of market-consistent prices with acceptable risk. The dual characterisation requires an appropriate extension of the classical fundamental theorem of asset pricing where the role of arbitrage opportunities is played by good deals, i.e., costless investment opportunities with acceptable risk–reward tradeoff. In particular, we highlight the importance of scalable good deals, i.e., investment opportunities that are good deals regardless of their volume.

Sharia Banking Disputes Settlement: Analysis of Religious Court Decisions in Indonesia

This study aims to analyze Sharia banking dispute settlements in Religious Courts regarding Sharia compliance and state regulations. The data is collected from the Supreme Court of the Republic of Indonesia website on Profit Sharing (PLS) financing, musyarakah, and non-profit Sharing (non-PLS) financing, murabahah. It is legal empirical research with a comparative approach. The results of this study indicate that Sharia banking disputes occur partly because there are still legal loopholes due to the general nature of the existing rules leading to multiple interpretations. The disputes are contributed mainly by default and unlawful acts. There are differences in the judge's decisions in the two case studies related to the fulfillment of legal principles in the form of benefits, justice, and legal certainty in the decisions made. Regarding the suitability of the contract, in the murabahah case, the pillars and conditions have been fulfilled, but there are other things that damage the contract. There has been an urgent need to strengthen regulations related to more detailed financing contracts. The regulators should promote an Islamic banking regulatory framework that guarantees legal certainty for both parties, the customers and Islamic financial institutions, as well as provide a stronger legal basis for dispute settlements.

ANALYSIS OF JUDGE'S DECISION NO. 319/PDT.G/2017 ON DEFAULT LAWSUIT ON MURABAHAH BI AL-WAKALAH CONTRACT

The implementation of murabahah bi al-wakalah conducted by BRI Syariah bank branch Banda Aceh has caused disputes because the customers did not fully accept the representation for the house purchase that had been delegated in the financing contract. This has led to conflicts between the bank, customers, and developers. The aim of this thesis research is to examine the opinion of the Sharia Court of Banda Aceh City in decision No.319/Pdt.G/2017, which rejected the plaintiff's lawsuit and also dismissed the defendant's exception, and to analyze the judge's considerations in the default lawsuit on murabahah bi al-wakalah financing at BRI Syariah KCP Banda Aceh. To obtain objective and valid data, the author used a research design with a normative juridical approach, qualitative research type (qualitative research), exclusively (content analysis), and data collection techniques through documentation. The results of the author's research are that in the trial process, the panel of judges of the Sharia Court of Banda Aceh City rejected the defendant's lawsuit because it was not proven that the defendant had committed default and explicitly rejected all of the plaintiff's claims, stating that the murabahah bi al-wakalah financing agreement had been fully implemented by the defendant and everything was in accordance with the agreement contained in the contract. However, in this decision, there is a part that was not disclosed, especially regarding the defendant's reason for directly disbursing the second stage of financing to the developer, which should have been based on the second-stage disbursement agreement and still had to be carried out by the debtor customer. Thus, the decision made by the panel of judges needs to be reviewed, especially to reveal the fact of the second-stage fund transfer directly to the developer before the house ordered by the debtor customer was completed and handed over to the plaintiff.

EFFECTIVENESS OF COMMUNICATION PLAN IN SMALL TO MEDIUM ENTERPRISES’ PROJECTS SUPPORTED BY THE DEPARTMENT OF TRANSPORT IN SOUTH AFRICA

The South African Government, through the Department of Transport (DoT), offers financial support to various engineering companies to use in their road construction projects to improve the country’s road infrastructure. However, many road projects allocated to Small and Medium Enterprises (SMEs) are not completed on schedule. Communication plan was used as a lens to track essential elements involved in ensuring project success. A probability stratified random sampling method was used to select 34 respondents from the DOT who completed questionnaires as part of this quantitative study. Employees of the DoT’s Finance department in KwaZulu-Natal province were chosen because they were well placed to highlight the communication plan followed and challenges experienced in handling financial contracts and monitoring of such between themselves and the SMEs. On the one hand, the respondents generally claimed to have sound measures to monitor the progress of funded projects and apply appropriate techniques to cope with awarded contracts. On the other hand, they conceded that poor planning and poor communication management were the main challenges facing the department. The study calls for regular, open communication to enhance the success of projects which should be monitored in every phase following clear performance indicators. If problems are identified, a communication strategy to resolve them should be established; this strategy should be evaluated against its objectives.

ADAPTED PRESTON’S CURVE: A PROXY METHOD FOR LONGEVITY RISK ANALYSIS ON INDONESIAN PENSION PLAN

Future lifetime will increase as both the standard of living and the health insurance system develop. This increase will have an effect on financial contracts' actuarial present values, particularly the liabilities of pension funds. Longer-lived retirees will have more financial obligations to the pension plan in the future. Preston established a link between GDP and life expectancy at birth, which served as the inspiration for this paper's concept. We strive to advance Preston's work on longevity analysis, particularly how to create a proxy approach for capturing the dynamic of the mortality model with other data. In this case, we utilize Lee-Carter model to capture the long-term dynamics of mortality rate, and our GDP-related measure will be based on the model's parameters. We use the Human MortD data to gather the longevity parameter’s estimate and fit the relationships using linear, local linear, and and kernel regressions. Since the long-term goal of this study is longevity risk management in Indonesia, hence the model's applicability is assessed by how closely it resembles Indonesia's mortality models. We discovered that the linear model, which has an RMSE of 2.19234, has the lowest RMSE, then we conclude that the long term relationships between longevity parameters and GDP can be explained by linear model.

The Principle of Reciprocal Justice in Murabahah Financing at Sharia Rural Financing Banks

This article aims to explore the dominance of murabahah financing contracts based on reciprocity justice at BPRS Magetan and BPRS Mitra Mentari Sejahtera Ponorogo. Murabahah is a form of financing with a selling price that is determined from the start so that it can facilitate the community in fulfilling their needs without usury and gharar. In this study, the focus is given to the determination of price difference and risk coverage in murabahah financing. The analysis method used is a multicriteria analysis with two stages. The first stage is a personal case analysis of each research object, and the second stage is a cross-case multisite data analysis to compare data from both research objects. The dominance of reciprocity justice-based contracts in determining the price difference is seen in the equality of rights and obligations between BPRS and customers. The sharing of price differences provides benefits for both parties. For BPRS, the division of price difference can increase profit value and meet OJK standardization requirements. For customers, price difference sharing can facilitate installment payments and ensure the quality of the goods purchased. However, the management of financing contracts also has a high risk. The risk of BPRS income and the risk of returning obligations by customers must be borne together proportionally and resolved through deliberation. Therefore, this research seeks to find a basis for the domination of murabahah financing contracts based on reciprocity justice to optimize benefits and minimize risks in murabahah financing.

FINANCING AND CAPITAL STRUCTURE

The capital structure denotes the composite blend of debt and equity utilized by a business entity.In the past, the concept of capital structure was commonly categorized as a highly specialized and technical aspect of corporate management that pertained to a limited number of individuals within an organization.In the perspective of a conventional business individual, the likelihood of this vicinity to produce ample profits was rather low.The generation of considerable revenue is observed to be comparatively pronounced in certain financial domains, such as appropriately identified investment initiatives, when juxtaposed with other areas of financial pursuits.In recent times, there has been a substantial transformation in the prevailing circumstance.The area of capital structure has garnered significant attention and interest within academic discourse.The present discourse concerns both the theoretical and practical aspects of finance.The utilization of said funds may be extended towards facilitating the comprehensive functioning of the enterprise and executing investment operations. The various forms of capital structure commonly recognized include equity share capital, debt financing, preference share capital, and vendor financing.The present study aims to examine various aspects related to capital structure, including the challenges associated with the precise measurement of capital structure. Additionally, individual authors suggest that there exist numerous intriguing areas for future exploration in this domain.Anticipated outcomes encompass factors such as the provision of capital from the supply side, the correlations between capital structure and labor agreements, financial contracting, the dynamic trade-off theory, and the rate of capital structure adjustments. The aforementioned concepts will be subjected to scrutiny to evaluate their potential applicability as findings for research purposes.Some emphasis is also placed on the issue of asymmetric information and moral hazard that may arise between the parties involved in a given scenarioThe role of investors and issuers of diverse securities is fundamental in the financial domain.In the following, we also examine the three fundamental principles underlying the concept of capital structure in the realm of finance. The concept of capital structure irrelevance, the significance of the debt tax shield, and the interrelationship between the financing decisions and firm value represent essential themes in the field of finance.Attention is also focused on the expected financial costs associated with insolvency and their impact on determining the optimal capital structure.These ideas try to figure out if a firm can make more money by changing how it gets its money. Each idea has a unique answer, which means capital structure is a complex but interesting subject.

Objective Performance Evaluation of the Islamic Banking Services Industry: Evidence from Pakistan

Purpose — The study documents the performance of the Islamic banking services industry (IBSI) in light of the Islamic finance objectives, notably financial stability, equitable distribution of wealth, and social responsibility. Design/Methodology/Approach — After drawing the performance evaluation framework based on the objectives, the research conducts a balance sheet analysis of the IBSI in Pakistan for 32 quarters (2013Q4–2021Q3). The analysis examines sources and uses of funds by looking at the application of financial contracts and sectoral distribution of financing. Objectively classified data trends are reported through graphs. Findings — Findings suggest that the domestic IBSI has shown progress in achieving primary and intermediate objectives, including commercial performance, contribution to equitable wealth distribution, and financial stability. However, the industry’s in-practice business models lack any significant contribution to the social sector, which represents a more advanced objective. Originality/Value — The contributions to the literature include development of a performance evaluation framework based on Islamic finance objectives, and documentation of findings on the IBSI’s achievements in Pakistan. Research Implications — The study recommends that regulators develop a legal framework for business models of the IBSI. It also recommends that managers of domestic Islamic banks include the social sector as well as agricultural and rural areas in financing and investment portfolios. Article Classification — Research paper

Limited Nominal Indexation of Optimal Financial Contracts

Abstract When financial contracts are not fully enforceable and firms observe their own nominal sales before the observation of the aggregate nominal price, the optimal financial contract is not fully indexed to inflation. Because of the limited nominal indexation, which is endogenous in the model, unanticipated inflation affects aggregate investment and future economic activity. The macroeconomic volatility induced by price uncertainty, however, is not monotone: It first increases and then decreases with nominal price uncertainty. We also show that the degree of nominal indexation declines with real idiosyncratic volatility and the impact of an inflation shock decreases with nominal indexation. Using firm-level data from Canada, we find that both predictions are supported by the data.