Islamic Banking Practices Research Articles

Compatibility of the CSR practices of Islamic banks with the United Nations SDGs amidst COVID-19: a documentary evidence

PurposeThis study aims to establish whether the corporate social responsibilities (CSR) practices of Islamic banks are compatible with the sustainable development goals (SDGs) of the United Nations.Design/methodology/approachA documentary research method was applied by examining the annual reports of selected Islamic banks from Bangladesh, Indonesia, Pakistan, the UAE and Malaysia for 2020, which coincided with the COVID-19 pandemic.FindingsThe results indicate that Islamic banks discharged various CSR activities and contributed huge funds toward achieving the SDGs of the United Nations. Specifically, the banks prioritized the following CSR sectors: education, health, environmental protection and disaster relief and management. Besides, they provided support to micro and small businesses toward poverty alleviation.Research limitations/implicationsThis study examined only CSR reports of the selected Islamic banks for 2020.Practical implicationsThe findings have practical implications that may enable Islamic banks across the globe to improve their CSR initiatives, activities and reporting toward realizing the SDGs. They are also helpful to policymakers and regulators for the provisions of policies and regulations to motivate or mandate Islamic banks to effectively improve their CSR practices.Social implicationsCSR practices of Islamic banks can significantly support the SDGs toward mitigating many economic and social problems.Originality/valueThis study applied a relevant but rarely used method to explore the role of CSR practices of Islamic banks in achieving the SDGs.

INTELLECTUAL CAPITAL DISCLOSURE AND CORPORATE GOVERNANCE: EMPIRICAL EVIDENCE FROM A CROSS COUNTRY THAT OFFERING ISLAMIC BANK SERVICES

Intellectual capital is imperative for Islamic banks given their unique characterisctiscs in that they offer innovative Shariah-based solutions to the modern financial problems. This study therefore examined the influence of corporate goverance on intellectual capital disclosure (ICD) practices of Islamic banks. Data from a sample of 33 Islamic banks for the period 2012 to 2018 were collected. A self-developed ICD checklist was used to measure the extent of IC information disclosed in the annual report. This paper also examines the relationship between ICD practices and several corporate governance components which includes board size, board meeting, board independence, board gender, board expertise, audit committee size, audit committee meeting, audit committee independence, audit committee gender and audit committee expertise. Our results revealed that having an effective corporate governance structure is essential, as it is able to influence the ICD practices of Islamic banks. However, instead of focusing on the role of the board, our paper highlights the importance role of audit committee functions. Specifically, the results suggest that larger or reasonable audit committee size tends to have varied skills and expertise among the audit committee members, resulting in more information by allowing for greater diversity of backgrounds and viewpoints. Gender diversity in audit members’ profiles will also encourage the board to be more effective and creative in generating innovative ideas, hence more IC will be created. This study adds to the empirical studies on corporate governance from Islamic banks’ perspectives covering several countries. It also introduce the Shariah capital, as one of components in the IC index to respond to the peculiarities of Islamic on intellectual capital. Keywords: Islamic banks; intellectual capital disclosure; corporate governance.

اسلامی بنکاری میں عقدِشراکت سے حصول ِملکیت کا شرعی طریقہ

This paper intends to discuss the mode of Mushārkah to that of ownership in the light of Islamic Sharī‘ah considering current practice of Islamic Banking. There are opinions of scholars regarding this step of possession from partnership exercising agreement based upon partnership. This study incorporates different dimensions of partnership highlighting its various types and different juristic opinions in this regard either in the favor of execution of this financial mode or rejecting partially or otherwise. Employing analytical method, it has been visited number of traditional and modern view regarding the subject matter. As in diminishing Mushārkah contract, the client pays all expenses that consequent to ownership. It is concluded that the modern method of partnership, which is a new form of participation, is consistent with its origin and traditional permissible mode with particular conditions, so it is included in the financing issues of Islamic banks.

Qualitative Analysis of Maqasid Al Shariah Based Model in Islamic Banks: A Way Forward

Islamic banking has made tremendous growth in the last few years all over the world. However, people are not satisfied with the performance of Islamic banks with respect to their contribution to alleviating poverty and equitable distribution of wealth, achievement of socio-economic welfare, and human well-being. Therefore there is a need to critically review the current practices of Islamic banks and assess the need to develop a model of Islamic banking in the light of Maqasid al Shariah which can contribute to socio-economic welfare and human well-being of people by eradicating poverty and concentration of wealth. For this purpose, this study employs exploratory, qualitative research in which semi-structured face-to-face interviews are conducted with renowned Shariah scholars, Shariah Supervisory Board (SBB) members of Islamic banks, and renowned academicians. The grounded theory research approach is used in this study using NVIVO data analysis software. The results of this study show there is a dire need to develop a model of Islamic banking in the light of Maqasid al Shariah for the socio-economic welfare of the people. Both Islamic and conventional banks are in a capitalistic paradigm. Hurdles created due to a capitalistic mindset should be removed. Islamic banks could not bring a visible change in society with respect to the alleviation of poverty and the social well-being of the people. A new model focusing on achieving Maqasid al Shariah for the welfare of not only Muslims but all human beings on earth is the need of the hour in which socio-economic welfare should be given the primary role in the current practices of Islamic banks.

KÜRESEL EKONOMİK KRİZLERİN KATILIM BANKALARININ PERFORMANSI ÜZERİNDEKİ ETKİLERİ: COVID-19 SALGINI ÖRNEĞİ

The efficiency of Islamic banking practices operating under the name of Participation Banks in Turkey and their share in the financial system have gradually increased, and thanks to the products offered by these banks, significant progress has been made in bringing savings into the financial system, in obtaining resources from abroad as well as from within the country, and in the diversification of resources. Determining the impact level of global crises to the Islamic banking system, which is built on interest-free transactions, will enable the efficiency of the system to be determined and the necessary improvements to be made for the faulty aspects. In this context, in our study, the developments in the performance of participation banks operating in Turkey in the face of global economic/financial problems caused by the 2008 global financial crisis and the Covid-19 pandemic are discussed in comparison with deposit banks. By using the Gregory-Hansen cointegration test, which considers the structural breaks in the system, the effects of the ratio of operating expenses to assets, financing-deposit (participation fund) ratio, non-performing financing ratio, and capital adequacy ratio indicators on the return on assets were analyzed. According to the findings, there was a break in the performance of participation banks in 2010 (the period when the crisis turned into a debt crisis in Europe) after the 2008 global financial crisis, but no break in the pandemic process. In terms of deposit banks, a break occurred in 2009, right after the global financial crisis. Other findings of the study include that the Covid-19 process did not create a break on deposit banks.

IFSB Standards Adoption and Its Impact on Islamic Banking Practices

The adoption of the Islamic Financial Services Board (IFSB) criteria for Islamic banks is more challenging for a bigger number of supervisory and regulatory authorities than for conventional banks.

The need for social theology to strengthen the social functions of Islamic banking in Indonesia

This study is based on the objective conditions of Islamic banking in Indonesia, which have not carried out their social functions optimally. Based on reports from the financial services authority, Indonesia bank and several related research, the efforts to optimise the social function of Islamic banking still encounters several problems related to the distribution of banking funds that are more focused on business interests, lack of real business run by Islamic banks, customer funds that are mostly deposited in Indonesia bank and have not been distributed to the real sector effectively, to banking activities by referring to the capitalistic economic paradigm and not fully referring to sharia guidelines. The results of the study of documents, literature and actual phenomena using descriptive and holistic analysis methods indicate that the degradation of the social function of Islamic banking appears as a result of a lack of understanding of the concept of Islamic economics based on the construction of Islamic social theology. The lack of understanding of banking management towards Islamic social theology has created a gap between the practical and conceptual sides of Islamic social theology, which in turn has an impact on the lack of social commitment from related parties in the implementation of Islamic banking activities. Strengthening the practical side of Islamic social theology is a necessity to overcome the existing problems.Contribution: The article contributes to the discourse on the application of Islamic social theology to Islamic banking practices. It aims to contribute to theological thought in Islam in order to strengthen the social function of Islamic banking, by focusing on the main objective of Islamic economics: al-falah or the achievement of spiritual and material prosperity.

Examining sustainable Shari’ah compliance under shirkah-ul-milk: does Shari’ah-compliant risk matter

PurposeShari’ah compliance has been a subject of debate to academics, Islamic scholars and practitioners since its inception in 1983. Besides a wide range of publications in Shari’ah compliance, only a few studies have examined Shari’ah-compliant risks especially among the Islamic banks. This paper aims to investigate the factors of Shari’ah-compliant risks in Shari’ah compliance under the Shirkah-ul-milk (hire purchase) in Bangladesh.Design/methodology/approachThe investigation of Shari’ah compliant risks from both bankers and clients were gained via a structured questionnaire to acquire a better understanding of Islamic banking practices in Bangladesh. In analyzing the data, two empirical tests were used to draw inferences on Shari’ah-compliant risks–Shari’ah compliance relationship: the measurement model, a diagnostic test, was used to justify the reliability and validity of constructs, and the partial least squares structural equation modeling was applied to examine the hypotheses on the existent links between Shari’ah-compliant risks and Shari’ah compliance under Shirkahul-milk.FindingsUnlike previous studies, the empirical evidence provides the pertinent attributes of Shari’ah-compliant risks, which are more significant in avoidance of the compliance of Shari’ah laws in banking operations. Such Shari’ah-compliant risks are significantly raised by various comprehensive, operational, environmental and distributional risks in banking that have failed to address fairness, justice and economic well-being at the transactional level.Originality/valueA new empirical evidence focusing on the propagation of Shari’ah-compliant risks is preferred for effective Shari’ah compliance in operations as being an original structure of Islamic banks.

THE IMPURITY OF SHARIAH BANKING IN INDONESIA

The practice of Islamic banking should run accordingly with the rule of sharia. Islamic banking aimed to overcome conventional banking problems, which are often profit-driven and benefit only a particular party. In Indonesia, where the majority of the population is Muslims, Islamic banking runs together with conventional banking and creates a dual-banking system. This dual-banking system seems fair on the one hand. However, it causes challenges in terms of the pure practice of Islamic banking, on the other hand. This research analyses the implementation of Islamic banking in Indonesia within the dual-banking system through three main frameworks: the regulation of Islamic banking, Islamic banking’s product to compete with the conventional ones, and the government regulation regarding this matter. The research shows that Indonesia has not been able to implement Islamic banking in accordance with the sharia rules fully. Instead, some principles are adapted according to the dual-banking system and are aligned with the interest of various parties such as the government and central bank of Indonesia.

WHY DOES BANGLADESH REQUIRE A CENTRALIZED SHARIAH GOVERNANCE FRAMEWORK FOR ISLAMIC BANKS?

The main objective of this article is to describe the logical reasons why a Centralized Shariah Governance Framework (CSGF) provided by the Central Bank of Bangladesh (Bangladesh Bank) is essential for the country’s Islamic banks. In doing so, it identifies the major regulatory challenges (self-developed and disparate use of Shariah Governance (SG) practices) faced by Islamic banks in Bangladesh. It considers an analytical approach to explore the significance of a CSGF for Islamic banks in Bangladesh and examines the current diversified procedures of SG practices. This article reveals that the self-developed SG practices of Islamic banks in Bangladesh have created confusion and pessimism among the practitioners, bankers and even to the general people and regulators which is negatively affecting the overall image of Islamic banks. Such incongruent governance practices have led to inconsistencies in SG structures, implementation procedures, monitoring activities. In addition, this article reveals that these deficiencies usually exist due to weak monitoring systems of the Central Bank, ineffective functioning of individual Shariah Supervisory Boards (SSB) and the absence of comprehensive SGF. The article argues that the Central Bank of Bangladesh should initiate to reform its Islamic banking industry by introducing a CSGF aimed to identify the roles, responsibilities, powers, and functions of SSB; thereby improving governance, accountability, and overall Shariah compliance quality. This article is hoped to be beneficial for the regulators and practitioners to consider revising current practices.
 
 Keywords: Centralization, Bangladesh Bank, Islamic banks, Shariah governance framework.
 
 Cite as: Alam, M. K., & Thakur, O. A. (2022). Why does Bangladesh require a centralized Shariah governance framework for Islamic banks? Journal of Nusantara Studies, 7(1), 24-42. http://dx.doi.org/10.24200/jonus.vol7iss1pp24-42

Islamsko centralno bankarstvo u teoriji i praksi

Thanks to their role as creators and implementers of monetary policy, central banks in most modern countries have the status of key financial institutions and pivots of financial system stability. During the centuries of evolution of central banking, numerous models and instruments of monetary policy were developed, the application of which depended largely on the political environment and the dominant economic model in specific countries. Unlike conventional central banking, Islamic central banking has been in global economic practice for only a few decades. An authentic and Shariah-compliant model of Islamic central banking is still in its infancy. Therefore, the practice of Islamic central banking is largely based on the application of instruments of conventional central banking, which, according to Shariah compliance, are used in their original or modified form or are excluded from use. In this paper, we will present the development path of Islamic central banking, the goals and obligations of Islamic central banks, a set of Shariah-compliant monetary policy instruments, the practice of Islamic central banking in certain countries, and limitations for the efficient functioning of Islamic central banks in practice.

The Salam transaction in the Islamic tradition and its application in Islamic banking

This article reveals some features of the “Salam” contract which refers to the purchase of a commodity for deferred delivery in exchange for immediate payment. The structure of the Salam Contract changes the logic of ordinary sales contracts, hereby article focuses on differentiation between pre-paid Salam Contract on the one hand and the sales of goods contract (bay’) and the concept of advanced payment on the other hand. Part 2 of the article highlights the Salam Contract as a type of pre-delivery finance instrument based on the Islamic banking theory and practice. As a banking instrument, the salam agreement is primarily aimed at implementing pre-delivery financing of the real sector of the economy, which makes it possible to adjust, plan, replenish and accelerate the turnover of funds of both Islamic banks themselves and their counterparties. Nevertheless, the mechanism of implementing salam in the activities of Islamic banks is primarily aimed at forming contractual relations with reliable and financially stable counterparties. With the help of salam, the Islamic bank acts as a participant in trade in the domestic and foreign markets. Under the Salam agreement, the Islamic bank mainly buys goods whose prices are quoted on international commodity exchanges or on Islamic financial and trading platforms. Along with cooperation with companies operating in the export-import industry, this type of purchase and sale is an effective way of pre-delivery financing of agricultural producers. The article observes also a discussion over Salam Contract application for the market of shares. One point of view on this issue is that the shares have the signs of the individually defined things and thus do not meet the mandatory feature of the salam transaction. Another opinion insists that the shares correspond to all the characteristics of generic items, including the ability to determine their properties and the ability to order (deliver) them. There are also other intermediate points of view.

RISK MANAGEMENT PRACTICES OF ISLAMIC AND CONVENTIONAL BANKS OF PAKISTAN: A COMPARATIVE STUDY

This paper is the report of a study that has investigated the impact of the risk management process, including liquidity and operational risk, on the risk management practices of Islamic banks and conventional banks in Pakistan. The study compared the risk management practices of both types of banks. Data was collected through the 200 self- administered questionnaires distributed to senior managers and risk officials of both types of banks. The data was analyzed using basic descriptive statistics, One-way ANOVA and Multiple regression analysis. The empirical results showed that risk assessment and analysis, risk monitoring and liquidity risk analysis were the most influential determinants of the risk management practices of conventional banks, whereas risk identification, risk assessment and analysis, credit risk analysis, liquidity risk analysis and operational risk analysis had influenced the risk management practices of Islamic banks. Overall, Islamic banks were better in terms of understanding risk management, risk identification, risk assessment and analysis, risk monitoring and operational risk analysis, while conventional banks were ahead of Islamic banks in credit risk analysis, liquidity risk analysis, and risk management practices. In the context of the emerging economy of Pakistan, the study outcomes can be helpful for investors, potential and existing customers to make prudent investment decisions. Findings are also helpful for strategy managers and regulators in policy formulation, elevation, and implementation of risk management regulations.

Marketing Ethics At Islamic Banks: Principles And Practices

This article highlights the principles and implementation of Islamic banking marketing ethics. Ethics based on sharia principles are an essential differentiator from their competitors. It begins from the 4 P's marketing mix framework, namely product, price, promotion, and place. This article is qualitative descriptive research using literature review. This article employs secondary data from 11 articles. The data that has been collected then analyzed with descriptive information. Therefore, through 4 P's marketing mix lens, this article finds a lack of ethical marketing practices in Islamic Banking from the ethical ideals espoused in the literature. This study analyzes the ethical marketing practices of Islamic banks which can be used as an evaluation of policies in the Islamic financial industry.

Portraying ethical reasoning in Islamic banking: Addressing the role of work experience

AbstractThis study aims to examine the ethical dimensions of Islamic bankers, with a reference to the factors influencing decision‐making behavior related to ethical issues based on al‐Ghazali's ethical philosophy. The findings reveal the manner in which Islamic banking practitioners brace themselves into situations that warrant the use of reason in making decisions related to ethical issues, where desires tend to dominate human choices. While the guidance of divine knowledge has been found to be ineffective in decision‐making, the element of satanic force was found to significantly influence this process. The insignificant heterogeneous effect of work experience suggests that banking authorities should intensify the capacity building in the area of ethical teachings and the foundation of Islamic faith, regardless of the job tenure of employees. This study contributes to the growing literature on the ethical aspects in Islamic banking and organizational behavior by offering important implications for understanding and refining the ethical stance related to Islamic banking practices based on the Islamic perspective.

An Analytical Review of the Influence of Regulatory and Supervisory Bodies on the Business of the Islamic Financial Institutions (IFIs) in Pakistan

Islamic financial market in Pakistan comprises Islamic banking, Takaful and Islamic capital market. It is regulated and supervised by the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP). Despite the regulatory and supervisory mechanism crafted by these authorities, there are other institutions such as the Council of Islamic Ideology (CII), Federal Shariat Court (FSC) and international institutions such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) which intervene and influence the Islamic banking practices. Based on an analytical approach, the current study found an overlapping situation in the authority exercised by these bodies over the business of the IFIs in Pakistan. Hence, a distinctive regulatory authority based on an adequate legal foundation should be created to watch over the business of the IFIs in Pakistan. The supreme authority can be conferred to the Shariah Advisory Committee (SAC) of the SBP or to a separate body in the current judicial infrastructure of the country in order to overview, harmonize and resolve the issues related to the business of the IFIs.

Comparative analysis of customers’ awareness toward CSR practices of Islamic banks: Bahrain vs Saudi Arabia

PurposeThis study aims to analyze the level of customer awareness of Islamic Banks’ activities toward corporate social responsibility (CSR) in the Kingdoms of Bahrain and Saudi Arabia and test whether both groups have similarities or not. The outcome of this study determines the extent to which customer awareness regarding Islamic banking activities furthering the betterment of society and achieving socioeconomic goals beyond their financial objectives.Design/methodology/approachQuantitative methods are used in this study covering Islamic Banks in both the Kingdoms of Bahrain and Saudi Arabia; using a survey questionnaire distributed to a total of 150 customers in the Kingdom of Bahrain and 100 customers in the Kingdom of Saudi Arabia. The weighted means are calculated, and statistical tests are used, such as, Kruskal–Wallis H and independent sample tests, in analyzing the data.FindingsThe results of the survey reveal that the level of customer awareness is generally low in terms of the pursuit of corporate social responsibilities by the Islamic Banks. The significant statistical difference in the data gathered from the sample is highlighted when they are grouped according to their respective banks. It proves that the level of customer awareness varies considerably among the Islamic banks in the survey. It was also found that there is no significant difference between the two groups of Islamic banks’ customers in the two countries in terms of their awareness toward the CSR practices of the Islamic banks.Originality/valueThe findings of this study could be used to aid policymakers in the field of CSR of Islamic banks to formulate a more efficient set of CSR activities that are better aligned with the ultimate goal of achieving society’s betterment. This study may also facilitate Islamic banks in the region to set up strategies that highlight their CSR efforts and raise the awareness levels of their customers.

Towards the Implementation of Monetary Management in Islamic Economic System Based on Recent Developments

Monetary management is an essential part of the objectives of Shari’ah under the umbrella of the preservation of wealth (Ma’al). Our primary sources: Qur’an and Sunn’ah, provide divine legislation on the prohibition of Riba to manage bases of monetary transaction. Further, the juristic tools facilitate scholars to propose solutions to meet the emerging issues on diversified aspects of society. Muslim scholars have always adapted and contributed to the Islamic finance system and regulation, theoretically and practically. In recent decades, Islamic banking and finance has seen strong momentum with double digit growth, fulfilling the monetary requirement of depositors on the liability side along with industry on the asset side. We seek to review the theoretical and empirical literature on Islamic monetary mangement. Monetary management in the Islamic economic context is still an area that needs more research. This paper examines how literature has been developed over time up until modern Islamic economic and banking practices. The findings suggest that Islamic monetary management has been gradually developed in recent years and such development is remarkable steps forward in pursuing Islamic monetary policy independently. In addition, Islamic monetary policy is proved to be relatively more effective compared to interest based conventional monetary policy. The implications of such findings have established new milestones for the central banks of all the countries, including the muslim majority countries for pursuing interest free Islamic monetary policy with full confidence. Furthermore, there are four major views on Islamic monetary policy and the central banks of the world should choose one of the best methods and views for the greater effectiveness of monetary policy because conventional monetary policy has been less effective in bringing full employment and price stability in recent years and financial crisis has crippled the interest based conventional economic systems quite badly.

A Comparative Analysis of DSN-MUI Fatwas Regarding Murabahah Contract and the Real Context Application (A study at Islamic Banking in Aceh)

The National Sharia Council-Indonesian Ulama Council (DSN-MUI) has issued 11 fatwas (a formal ruling on a point of Islamic law) related to murabahah for parties in economic transactions. However, in the initial study, several indications of the dissonance between the clauses in the fatwa and the practice of Islamic banking were found. This study aims to analyze the application of murabahah contracts in Islamic banking in Aceh. Several Fatwas declared by the National Sharia Council - Indonesian Ulama Council (DSN-MUI) that are related to murabahah were used as an analytical tool to assess the shariah value of the contract in financing practice at Islamic banking in Aceh. This study used a descriptive qualitative method, particularly, a critical study approach. Data were collected using: 1) interviews with bank employees and customers, 2) participant observation in which researchers were directly involved in the process of financing application at several Islamic banks, and 3) documentation studies of resources related to the fatwas. The results showed that the practice of murabahah financing conducted by Islamic banking in Aceh was not fully in accordance with the fatwas stipulated by the DSN-MUI. The results of the analysis showed that the discrepancy lies in the following matters such as ownership of goods, 'coercion' in the use of murabahah contracts, and the inappropriate use of 'wakalah'or contract assistant. The study also revealed that the practice of murabahah in this method has both positive and negative economic implications for banking customers and the banks, especially with regards to profits, calculations of credit ceiling, and customers’ image and trust.

KETETAPAN HUKUM DAN REKONSTRUKSI PARAMETER HILAH PADA PRAKTIK PERBANKAN SYARIAH

Many Islamic bank products and contracts are not in accordance with sharia principles. This research will discuss in detail the related hilah in Islamic banking practices and the differences in bank interest with margins, fees, and profit sharing on Islamic bank financing. This research is a qualitative research which is literature study. The results showed that the use and parameters of hilah in syari'ah banking were different and it could be measured to what extent the practice violated the principles of syari'ah or not. Basically, the profit-sharing system, fees and margins are designed to bridge anti-usury groups, but not a few of the syari'ah banks use law to wrap a product or contract with the syari'ah label because in practice it is far from theory and principle. shari'ah. The standard of hilah, where a contract or product must meet Qasd al-shari ', Qasd al-mukallaf, Wasa'il, Maslahah, Rukhsoh and Azimah. If a contract or product meets the five parameters above then it is categorized as masyru'ah (which is permissible), but if it does not fulfill it, even the opposite, it is classified as mazmumah (which is prohibited).