Islamic Financial Services Industry Research Articles

An exploratory study on the issues in weightages-based profit distribution mechanism in Islamic banking institutions: the case of Pakistan

Purpose This study aims to explore and analyze the issues in weightages-based profit distribution mechanism in Islamic banks from Shari’ah, practical and regulatory perspectives. Design/methodology/approach A qualitative research approach was used in this study based on primary data collected through semi-structured interviews from Shari’ah practitioners and senior industry experts in the field of pool management in the Islamic Financial Services Industry of Pakistan. Findings The current study found that the weightages-based mechanism conforms to the rules of Mudarabah and; therefore, permissible. However, the elements of exploitation, transparency and fairness require further research, as these elements seem to exist in this mechanism. It was also found that there are many loopholes in the regulatory guidelines for pool management in Islamic banking institutions (IBIs) in Pakistan resulting in practical issues. Practical implications The findings of this study may help improve pool management in IBIs, which in turn may cater the objections raised by academicians, customers and industry experts. Moreover, the alternative solution based on the findings of this study can be transformed into a proposal for regulators to take necessary actions against unfair profit distribution and issue further improved guidelines for IBIs in Pakistan. Originality/value To the best of the authors’ knowledge, very limited studies have been conducted on pool management particularly with issues from different perspectives and alternative solutions have been suggested that may act as a proposal for IBIs as well as regulatory authorities.

Islamic finance and economic growth: Global evidence

AbstractWe document the contribution of Islamic finance development to economic growth by studying a global sample of countries engaged in providing Islamic financial services. Fifteen countries are included in the sample based on significant Islamic banking share in total domestic banking assets. Results are documented through the application of the Panel regression (EGLS) method for the period 2001–2020. Findings suggest a positive contribution of the Islamic Financial Services Industry (IFSI) to economic growth in sample countries in multiple regression settings. Additionally, a range of control variables, including domestic credit to the private sector, inflation, and trade openness, contribute significantly to economic growth. We recommend the creation of a conducive environment for the promotion of IFSI on account of the built‐in stability feature and positive contribution to economic growth. We also recommend overall development in the financial sector of selected economies, including credit availability to the private sector and trade openness. Our study helps in understanding the dynamics of economic growth in economies with a dual banking system (conventional & Islamic). This article contributes to the literature by studying a larger sample of countries engaged in the practice of Islamic finance and considering the significance of the market share of assets under IFSI.

Exploring the Nexus of Financial Technologies, Financial Inclusion, and Blockchain in Islamic Finance within Digital Transformation

Financial technology and continuous digital growth are having an influence on financial inclusion which has significant ramifications for the faith-based financial paradigm. The objective of this research is to investigate the relationships and effects of financial technologies in Islamic financing inside financial institutions within the framework of digital transformation and blockchain technology. The use of these advancements will significantly affect Sharia-compliant Islamic finance. This paper critically investigates the historical and current implications of Financial Technologies, financial inclusion, and Blockchain in Islamic Finance worldwide with a focus on banking, investing, and compliance with regulations. Using a comprehensive review of the literature, indexing journals, and empirical case studies, this research seeks to provide significant new insights on the development and status of several areas within the Islamic financial industry. In order to make Sharia compatible, it also examines how digitalization has altered the landscape. Furthermore, before they can considerably promote financial inclusion in many countries, the Islamic financial services industry and the junction of technology and Islamic finance still have a ways to go due to the scale necessary. The study's findings may serve as a guide for financial institutions, decision-makers, and other interested parties in order to maximise the potential of blockchain technology and other financial innovations in Islamic finance across a range of Islamic nations. Long-term, equitable economic growth will result from this.

Do Islamic Financial Industry Players Implement Islamic Values in Their Business?

This study aims to identify Islamic values in Islamic financial industry players in Indonesia. The development of the Islamic financial services industry in 2021 showed positive growth with an increase in assets of 13.8% (Rp2.05 trillion) compared to 2020 which only reached Rp1.80 trillion. Meanwhile, the results of the study revealed that Islamic financial industry players organizationally commit many violations or fraud both organizationally and individually. Islamic values derived from the Quran and Hadith are a guide and reference for all Muslims, including Islamic financial industry players. There are four criteria of Islamic fundamental values and nine of Islamic value principles in business. Research methods were conducted through quantitative research with the distribution of questionnaires. The population of Islamic financial industry players are Islamic banking, Islamic insurance, Islamic capital markets, and non-bank financial institutions. The results show that Islamic values have not been fully implemented by Islamic financial industry players.

SHARIAH-COMPLIANT FINANCE: AN ANALYSIS OF THE ISLAMIC FINANCIAL SERVICES INDUSTRY

A study on the Islamic financial services industry is a comprehensive analysis of the financial sector that operates in accordance with Islamic principles, also known as Shariah-compliant finance. Shariah is Islamic law and code of conduct derived from the divine principles mentioned in primary sources of Islam i.e., Quran and Sunnah. Islamic finance is guided by the principles of Islamic law (Shariah), which prohibit activities such as charging or paying interest (usury) and engaging in speculative transactions. Instead, Islamic finance promotes ethical and equitable financial practices. This research highlights the substantial growth and financial soundness of the Islamic financial services industry, and it suggests a positive outlook for the sector's future. Islamic finance has gained momentum globally, attracting both Islamic and non-Islamic investors who are interested in ethical and Shariah-compliant financial solutions.

Opportunities and Challenges of Using FinTech in Takaful Financial Services

Fintech is currently part of the development of takaful, the results of research and studies related to this problem are still very limited, on the other hand all financial services industries are starting to shift to fintech, including the Islamic financial services industry. So it is necessary to explore the potential use of fintech in the sharia insurance industry, especially in terms of opportunities and challenges in the future. In particular, big data analytics and robo-advisory are explored and how takaful operators can combine them for better customer experience and gathering competitive intelligence. To stay competitive in a rapidly changing business environment, takaful operators need to identify and adopt fintechs that can positively impact customer experience and optimize cost efficiency.

Analysis of Corporate Governance, Intellectual Capital, and Financial Performance Using Conventional Methods and Maqashid Sharia Index (MSI) on the Implementation of Sustainable Finance in Sharia Banking in Indonesia

The banking industry certainly has a role to play in the success of this initiative through a sustainable finance program. Sustainable finance is a global trend that represents a new paradigm in the world of banking and other financial institutions that help implement sustainable development. Sustainable development is a development effort based on three directions: benefits, society, and protection of natural resources and the environment. In this study, the authors use traditional methods and the Makassid Shariah Index (MSI) to assess the impact of corporate governance, intellectual capital, and financial performance on sustainable financial practices in the Indonesian Islamic financial services industry. 2017-2021 (5 years). The sample of this research is processed from the annual report data of Islamic banks in Indonesia by using the panel data regression analysis method. Based on this research, the influence of corporate governance, intellectual capital, and financial performance using traditional methods and the Makassid Shariah Index (MSI) is shown in the practice of sustainable finance. The independent variable, GCG, is determined by the composite self-assessment score of each Islamic bank, value added intellectual capital (VAIC), financial performance and return on investment (ROA), net funding (NPF), and the Makassid Shariah Index (MSI) and the dependent variable, sustainable financing, is approximated by the Financial Sustainability Ratio (FSR). A study of Islamic banks in Indonesia also shows that the GCG, VAIC, ROA, NPF, and MSI variables all have a positive effect on the FSR variable, with an R-squared model value of 0.9959. variables in this study.

Synergy Improves Literature and Inclusion Indonesian Islamic Bank

Based on OJK data, the literacy index ranges from 8.93% or far below the conventional bank index, which is 38.03%. Meanwhile, the Islamic financial inclusion index only reached 9.1% or below the conventional bank index of 76.19%. Low financial literacy results in the development of the stock market of the Islamic financial services industry being relatively small, which is only 9.9% of the assets of the national financial industry. Therefore, by looking at the literacy and inclusion index problem of Bank Syari^ah Indonesia, in this study the researcher aims to find out what synergy is being done in increasing financial literacy and inclusion of Bank Syari^ah Indonesia.
 The type of research used is qualitative research, using descriptive methods. In this research, the data collection technique used is observation and literature study and the data presented in descriptive form without being processed by data reduction analysis techniques, data presentation, and drawing conclusions. This research is expected to provide information about the synergy to increase financial literacy and inclusion at Bank Syari’ah Indonesia.

The Role of Islamic Finance in Achieving the SDG Number 9: Build Resilient Infrastructure, Promote Sustainable Industrialization and Foster Innovation

<span>The purpose of this research is to investigate the role of Islamic financing in achieving the Sustainable Development Goals (SDGs), specifically Goal 9: develop resilient infrastructure, promote sustainable industrialization, and foster innovation</span><span lang="EN-US">. U</span><span>s</span><span lang="EN-US">ing</span><span> qualitative approaches to integrate data from secondary sources such as the Islamic Financial Services Industry Stability Report</span><span lang="EN-US">, t</span><span>his paper demonstrates how sukuk</span><span lang="EN-US"> can</span><span> be considered as one of the alternative strategies capable of mobilizing financial resources and encouraging investment in infrastructure development projects.</span><span lang="EN-US"> The finding shows that sukuk is a crucial factor in supporting the SGDs number 9 by financing infrastructure development projects that might result in sustainable industrialization and foster innovation that focuses on keeping up with technological advancement.</span>

Notes on banking activity from islamic law perspective

The Islamic financial services industry, where the banking sector is most important, has experienced exponential growth, arousing a growing interest in its study. Such interest lies on the fact that the respective activity is carried out in accordance with the dictates of Shariah, which largely depart from the principles underlying the exercise of banking activity in the conventional way. Islamic financial activity emphasizes the use of risk-sharing financial instruments, a fact that has proved to be of great importance as it has helped to avert many of the most severe consequences of recent financial crises, for example by preventing Islamic banks exposure to subprime or toxic assets. The deepening of information on the structuring rules and principles that shape Islamic finance is a relevant and current subject, with a view to highlighting its fundamental differences in relation to conventional financial activity and to investigating the possibility of that approach being alternative, or complementary, with respect to conventional systems.

Islamic financial services industry: Aspirations and achievements

AbstractIslamic Financial Services Industry (IFSI) crosses the age of 40 years, and sufficient empirical evidence exists to evaluate in light of the distinctive aspirations. This study fills the gap in the literature by evaluating the performance of IFSI in light of Islamic finance objectives—financial stability, equitable distribution of wealth and social responsibility; Shari’ah principles, and professional practices. Our investigation documents the achievements based on real accounting data from 23 countries, and the suitability of tools in practice to achieve the stated objectives by promotors of IFSI. Findings suggest that the objectives of IFSI have been achieved to an extent. However, visible contribution to the achievement of socio‐economic justice is yet to emerge. Practical application of tools shows divergence (in spirit) from the original design, primarily to achieve integration and coherence with the prevailing conventional financial system. IFSI needs collaborative efforts to overcome the challenges at hand.

Why CEOs invest in Corporate Social Responsibility initiatives: evidence on Shariah compliant firms

ABSTRACT The aim of this article is to investigate the motivation of CEOs to invest in Corporate Social Responsibility (CSR) activities. To carry out this analysis, we assess a sample of US conventional and Shariah Compliant (SC) firms, from Dow Jones Indices. As SC firms undergo business and financial screening, they are expected to follow different managerial styles and capital structures as compared to conventional firms. This comparison is important in view of the growing size of the Islamic Financial Services Industry that has surpassed total asset values of USD 2.00 Trillion. Existing literature argues that, for conventional firms, CEOs spend on CSR either to promote their private benefits (agency view) or to reduce conflicts among shareholders (conflict resolution view). Our results provide evidence that across both types of firms, CEOs do not invest in CSR initiatives to pursue selfish motives but to resolve conflicts among stakeholders to maximize firm value. The findings are also robust across different specifications and methods in order to address endogeneity issues. This article contributes to the growing literature on managerial styles, capital structure and Islamic Finance, carrying out important implications for the investment industry and for the long-term value of the firm.

Judicial Support for the Islamic Financial Services Industry: Towards Reform-oriented Interpretive Approaches

Abstract This study examines different dimensions and permutations of invaluable judicial support to Islamic financial services and products and identifies specific areas where the judiciary has helped to shape the industry in line with the original value proposition of Islamic financial intermediation. While relying on qualitative legal methods with comparative case analysis from different jurisdictions, this study conducts cross-jurisdiction case analyses and identifies the role of judiciary in introducing sustainable practices. It concludes that the judicial function has played a significant role in ensuring justice and fairness through purposive interpretation of contracts, recognition and enforcement of foreign arbitral awards and judgments, consistency and predictability of outcomes, legal risk mitigation, and facilitation of mediation and arbitral proceedings, thereby positively reshaping the future of Islamic financial services industry. Above all, the availability of binding judicial precedents, which is hitherto not common for Islamic law matters, is a welcome development in the Islamic financial services industry.

Salam for import operations: mitigating commodity macro risk

Purpose This paper aims to present the idea of using classic Islamic finance instrument Salam to conduct import transactions. It documents the complete framework of the proposed model. At present, this mode is not used by Islamic Financial Services Industry although it is capable of becoming a viable risk-sharing instrument. Design/methodology/approach First, the features of existing import financing products are explored and compared with various contractual features of Salam. Second, a discussion on why banks are reluctant in practicing Salam is included. Third, the pricing techniques, accounting treatment and collateral arrangements related to proposed product are discussed. Finally, the feasibility of this product in present industry environment is assessed. Findings The proposed model carries certain features that make it a true risk-sharing product. For example, it suggests changing bank’s role from intermediary to entrepreneur and favours better alignment of risk between the related parties. This work has also proposed using market-based returns, instead of the existing interest-based benchmarks, for pricing the contract. To practice this product, a dedicated effort of all the stakeholders is required. The product features can contribute to the goal of practicing responsible financing, engrained in true economic reality. Research limitations/implications The present work is a technical paper, and the product features may be improved in the light of feedback from the industry and academia. Practical implications The proposed model views Islamic bank as a trader instead of a lender, who will assume the effective ownership of imported goods before selling them to the customers. The pricing structure will also be unique, as the margins will be decided upon the basis of market-driven returns of the underlying assets. Indeed, by entering into such contract, Islamic Banks will be exposed to market-related risks. They will be required to design their risk management frameworks accordingly. Originality/value It is widely argued that many Islamic finance products are similar to their conventional counterparts in substance. There is a need for the instruments that carry risk sharing attributes. This paper aims to bridge this gap by investigating the potential of classical Islamic finance product Salam for conducting foreign trade transactions.

Standardisation of legal documentation in Islamic home financing in Malaysia

PurposeThis paper aims to provide an analytical literature survey of selective studies on legal documentation in Islamic home financing with particular reference to Malaysia.Design/methodology/approachThis study adopts the legal positivist methodology, with particular reference to inclusive legal positivism which takes into consideration the possibility of moral values challenging positive law. Within the context of this study, though positive law provides for rules that govern contractual matters in Islamic home financing, standardisation is a functionality of maslahah (or public interest) which transcends the mandatory provisions of positive law but helps to protect the interest of all stakeholders. This is analysed through a systematic literature review which aims to provide practical insights into industry practices relating to Islamic home financing in Malaysia.FindingsThis paper provides information on the standard documentation used by conventional banks and existing practices of diverse models of legal documentation in the home financing sector within the Islamic financial services industry in Malaysia. It also recognises the need for standard documentation that is not only Sharīʿah-compliant but also consumer-friendly, as the terms of any standard financing agreement ought to ensure consumer protection. There is also the need for a Shari’ah-compliant Sales and Purchase Agreement, as it forms part of the complete set of legal documentation for Islamic home financing.Research limitations/implicationsIt is not an exhaustive study, as it did not consider practices in other jurisdictions offering Islamic financial services and products but only focusses on Malaysia. Though one may not generalise the findings of this study, Malaysia remains a leading model and a global hub for Islamic financial services and products.Practical implicationsA very useful source of information on the current state of legal documentation in Islamic home financing in Malaysia and the prevailing practices in the industry, which may serve as a guide for policymakers such as the Association of Islamic Banks in Malaysia (AIBIM) to embark on a full scale project of standardisation of all the legal documentation used in Islamic home financing.Originality/valueThis study fulfils an identified need of standardisation of legal documentation used in Islamic home financing in Malaysia and offers practical help to policymakers and future researchers starting out on systemic reforms.

Sharīʿah-compliance ratings of the Islamic financial services industry: a quantitative approach

Purpose This study aims to develop a Sharīʿah-compliance rating mechanism for the Islamic financial services industry (IFSI), with a special focus on banking. The banking sector is taken as the area of focus due to its leadership role in the volume of global Sharīʿah-compliant assets. Design/methodology/approach The objectives of the Islamic financial system (IFS) are selected as the basis for ratings. A range of performance indicators (leading to achievement of the objectives) is grouped into four broader categories and used in the study to allocate scores with a sum total of 100. Special considerations – including the amount of resources required in performing an activity, suitability of prevailing business conditions, the degree of compulsion/discretion in performing a task and linkage with the essence of the IFS – were taken into account in the allocation of scores. Findings This study groups multiple performance measures into four categories, including portfolio construction (deposits mechanism, participatory and asset-based modes of financing), access to finance (service to the less-privileged and sector screening), reputation (disclosures and stakeholders’ survey) and Sharīʿah governance (Sharīʿah supervision and controls, charitable operations, human resources, product development and organization). The Portfolio, Audit, Reputation and System (PARS) rating system is then developed. Practical implications A Sharīʿah-compliance rating system is helpful in measuring the progress towards goal achievement of the IFS and in gaining stakeholders’ trust. It is also important for Sharīʿah boards and regulators in policy formulation, for management in addressing weaknesses and taking corrective measures and potentially for standard-setting bodies. Originality/value This study presents a comprehensive quantitative Sharīʿah-compliance rating mechanism, taking into consideration the objectives of the IFS – equitable distribution of wealth and financial stability, in addition to Sharīʿah-compliance in operations. Development of Sharīʿah-compliance quality ratings for Islamic banking is essential to gain customers’ trust; the suggested methodology is thus a contribution to the literature on Islamic finance.

Interbank offered rates in Islamic countries: Is the Islamic benchmark different from the conventional benchmarks?

Motivated by the size and the growth of the global Islamic financial services industry, 17 Islamic Banks in six Islamic countries, in conjunction with Thompson Reuters, developed an Islamic Interbank Benchmark Rate (IIBR, hereafter) to address the Sharia compliance requirements of Islamic banks in the money market. This paper examines to what extent this newly introduced monetary tool differs from the conventional interbank rates used in the countries of contributing banks to the IIBR. We use cointegration analysis, Granger causality tests and Vector Autoregressive Models to investigate the dynamics and the inter-temporal linkages between the Islamic and conventional interbank benchmarks in five countries from Gulf Cooperation Council (GCC, hereafter) region. Results show that the IIBR exhibits a long-run relationship with the conventional rates and fails to be independently determined. Our findings advocate also that market conditions such as oil prices and inflation do not contribute to the dynamics between the IIBR and the conventional interest-based interbank benchmarks.

Lowly or Negative Benchmark Rates Bandwagon: Any Risk Implications for Islamic banks?

To stimulate the economy, regulators across all jurisdictions have been taking unconventional approaches. Thus, in recent years, the management of benchmark rates (or interest rates) has received considerable prominence in the banking sector due to some reasons including supervision banks' benchmark rates under Basel II. This paper reviews the possible dysfunctional implications of lowly and/or negative rates and provides a risk management and regulatory perspective for Islamic banks. These consequences call for a better risk management with appropriate tools and effective supervisory oversight. It hoped that the initial discussion presented in this paper on the implications and controls invites a broader debate on this issue in the Islamic financial services industry. DOI: 10.15408/aiq.v10i1.6121

The Global Financial Crisis and Islamic Finance

The conventional view holds that the current global financial crisis was caused by extraordinarily high liquidity, reckless lending practices, and rapid pace of financial engineering which created complex and opaque financial instruments used for risk transfer. There was break down of lender borrower relationship, informational problems caused by lack of transparency in asset market prices, particularly in the market for structured credit instruments. There was outdated, lax or absent regulatory-supervisory oversight, faulty risk management and accounting models; and the emergence of an incentive structure that not only encouraged excessive risk taking but also created a complicit coalition of financial institutions, real estate developers and appraisers, insurance companies and credit rating agencies whose actions led to a deliberate under pricing of risk. Such crisis would not have occurred under an Islamic financial system – due to the fact that most, if not all, of the factors that have caused or contributed to the development and the spread of the crisis are not allowed under the rules and guidance of Shariah. The current global financial crisis is largely seen as a real test of the resilience of the Islamic financial services industry and its ability to present itself as a more reliable alternative to the conventional financial system.

Basel III's New Precautionary Measures are Adapted to the Regulatory and Regulatory Requirements of Islamic Banks and Banks to Reduce Risk

The Islamic financial services industry has grown significantly over the last two decades to the point that it is today an important player in the international financial system. The absence of regulation, regulation and control of these financial services, especially after the shocks caused by the recent financial crises, has become a great risk, and this is because of the nature of deposits in the Islamic financial system and ways of financing. For this reason, it became imperative to know whether traditional standards or so-called protective precautionary regimes could protect and ensure the stability of international financial systems. As Islamic banks have become the largest share of the Islamic financial industry, it is necessary to study how Islamic banks operate to what extent they can apply new prudential standards. The main objective of this research study falls within one of the most important steps to develop and modernize the Islamic banking system to become more competitive in an environment that requires transparency and requires integration and integration with international financial markets. In order to raise the level of its activities and away from investment risks or reduce them .. Which requires to achieve this goal to study the effects and the possibility of applying new standards of precautionary Islamic banks, in particular: "the impact of Basel III."