ISRA Journal - Volume 2

ISRA International Journal of Islamic Finance
Volume 2, Issue 2
December 2010

Volume 2 of the ISRA journal is now available online, you can find the table of contents here and download individual articles directly from their site, these include:

Academic Articles:

Juristic Analysis of the Profit Distribution Method
New Musharakah Model in Managing Islamic Investment
An Overview of Shari'ah Issues Regarding the Application of the Islamic Letter of Credit Practice in Malaysia
Case Studies of the Practice of Nomination and Hibah by Malaysian Takaful Operators
An Empirical Investigation into SMEs’ Perceptions of Credit Guarantee Corporation (CGC) Malaysia Berhad: A Case Study of the Islamic Guarantee Scheme in Malaysia

Practitioner's Articles:

Islamic Liquidity Management – The Malaysian Experience

Research Notes:

Shari'ah Parameters of Hiyal in Islamic Finance
Analytical Study of the Interaction Between Fatawa, Shari'ah Rulings, Resolutions and Conventional Laws in Contemporary Islamic Finance in Malaysia with Cross Reference to the Practices in Saudi Arabia, Pakistan and the Sudan
Capital Requirements and Banking Behaviour for Islamic Banks

ISRA Journal - Volume 2

Opalesque Islamic Finance Intelligence - Twelfth Issue

Welcome to the twelfth edition of OIFI (download PDF version), where we dig deep to uncover the hidden gems of Islamic finance. Sometimes it seems we might not be able to see the forest for the trees, and our editorial section takes a different angle with respects to Shariah supervision and its overall role within the corporate walls. Our Featured Resource compiles a large selection of research papers from the International Shari'ah Research Academy for Islamic Finance (ISRA), which might not be widely disseminated but prove to be excellent reading.

Istijrar is a financial instrument that is seldom talked about in Islamic finance but which contains some intriguing characteristics, Nikan dissects it in the Featured Structure segment. For our Allocator Interview we hear from Chaaban Omran of Crescent Investments Australasia, as we discuss the investment rationale for Australia (which could be regraded as a frontier market for Islamic finance).

Furthermore, Abdulkhaliq Elshayyal takes on Lex Islamicus where he delves into how Islamic financial institutions manage the risk of non-compliance with Shariah, with some very interesting insights. The Industry Snapshot section sees Mobasher Zein tackle the topic of an Islamic currency, both revisiting the historical background as well as analyzing the various pieces of the puzzle that needs to be put together to support an Islamic economy. In addition, Mohammed Amin shares with us his review of the book "Islamic Banking and Finance: What It Is and What It Could Be" and we hope to bring more book reviews in the future.

As always, we are keen to hear your comments & suggestions and remember that you can visit our online archive (see reference link) for access to our ever-growing databank of Opalesque Islamic Finance Briefing as well as all of the back issues of Opalesque Islamic Finance Intelligence.

Download the complete issue of Opalesque Islamic Finance Intelligence here.

Alternatively you can read each article separately in the OIFI Archive:
Editor’s Note: The Shariah Compliance of Teldar Paper
Featured Resource: ISRA Research Papers
Featured Structure: Istijrar - How does it really work?
Lex Islamicus: A Brief Look at Ikhtilaf - Diversity of Ijtihad in Islamic Finance
Allocator Interview: Crescent Investments Australasia
Industry Snapshot: Islamic Dinar Reloaded
Book Review: Islamic Banking and Finance: What It Is and What It Could Be

Opalesque Islamic Finance Intelligence - Twelfth Issue

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers
Dr. Rusni & Reasearch team
ISRA Research Paper (No. 18/2010)

Abstract: "IFSB’s Guiding Principles on Shari'ah Governance Systems for Institutions Offering Islamic Financial Services defines “Shari'ah governance system” as the set of institutional and organisational arrangements through which an institution offering Islamic financial services oversees Shari'ah compliance, i.e., that Islamic banking products and operations are in accord with Shari'ah principles. This requires the establishment of a Shari'ah advisory board. The Shari'ah governance of Islamic financial institutions (IFIs) in Malaysia consists of two components: the Shari'ah apex body, which is the Shari'ah Advisory Council (SAC) established by the Commission, and the Shari'ah advisors appointed by the respective institutions (Shari'ah Committees). Their roles are directing, reviewing, supervising and approving or rejecting the activities of IFIs in order to ensure compliance with Shari'ah rules and principles. The extent to which Islamic banks comply with Shari'ah principles is, to a great extent, determined by the role of such boards. Consequently, this body needs sufficient authority to enable its members to perform their functions effectively. However, many issues have arisen about the role and competency of Shari'ah advisors. This research aims to examine the current practice of Shari'ah advisory in Malaysia from the perspectives of advisors, bankers and regulators. The research focuses on the roles and functions practically played by the Shari'ah advisors and the IFIs’ expectations of them. Problems faced by the Shari'ah advisors, bankers and regulators need to be specifically identified so that measures to bridge the gaps between them may be proposed. This will ensure a harmonious relationship between all stakeholders as well as ensuring that the dayto-day running of IFIs will be compliant with Islamic law."

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers

An Islamic Pricing Benchmark

An Islamic Pricing Benchmark
Prof. Dato' Dr. Mohd Azmi Omar, Asst. Prof. Dr. Azman Md Noor, Prof. Dr. Ahamed Kameel Mydin Meera & Research Team
ISRA Research Paper (No. 17/2010)

Abstract: "The Islamic finance and banking industry has developed tremendously in recent years. The viability of this industry as an alternative method of investment can no longer be denied. As the current global economic and financial crisis laid bare the systemic problems of conventional finance, the Islamic financial system has been offered as a solution by its proponents. However, Islamic finance has been using conventional finance benchmarks, such as KLIBOR, COFI, LIBOR, etc. to determine its own cost of funds, and hence its return on financial investments. This is so because Islamic finance, if not part of the existing conventional finance, has always served as a financial intermediary for surplus and deficit units. Islamic banking, as the dominant institution in the Islamic finance industry, has gone beyond the function of a financial intermediary, for it also serves as a wakil, custodian, partner, entrepreneur, and guarantor. Nonetheless, Islamic finance has yet to come up with an alternative Islamic Pricing Benchmark (IPB) to determine its cost of capital. The need for having such an IPB for Islamic finance cannot be overemphasized; that would make it more comprehensive and independent from the conventional benchmarks that rely on interest rates, the very thing that Islamic finance abhors. Therefore, this project aims to develop an Islamic pricing benchmark model for the Islamic banking industry, more specifically for Malaysia, given its prominence in the Islamic finance industry. The project has reviewed the Shari'ah perspective on an Islamic pricing benchmark and has also examined the conventional pricing benchmark being used by banks. The paper further discusses the theoretical formulation of an Islamic benchmark. Thereafter, using sectoral industry and macroeconomic data, it tests the viability of the benchmark using simulation."

An Islamic Pricing Benchmark

The Concept and Operations of Swap as a Hedging Mechanism for Islamic Financial Institutions

The Concept and Operations of Swap as a Hedging Mechanism for Islamic Financial Institutions

Assoc. Prof. Dr. Asyraf Wajdi Dusuki & Shabnam Mokhtar
ISRA Research Paper (No. 14/2010)

"This paper has been prepared to discuss the concept and operations of the swap instrument as a hedging mechanism in the Islamic financial system. The main objective of this paper is to give a clearer picture of the swap mechanism as offered by the international Islamic financial institutions and how its operations are structured in accordance with Shariah principles and contracts. In preparing this paper, ISRA has held a series of internal discussions as well as with outside parties, including Shariah experts and operating officers from international banks directly involved in the structuring of Shariah-compliant swap products. Documents related to the products and related academic materials were also referred to, giving a wider and thorough perspective on the issue."

The Concept and Operations of Swap as a Hedging Mechanism for Islamic Financial Institutions

Tools For Controlling Monetary Variables in the Islamic Banking System

Tools For Controlling Monetary Variables in the Islamic Banking System
Prof. Dr. Abdul Ghafar Ismail
ISRA Research Paper (No. 13/2010)

Tools For Controlling Monetary Variables in the Islamic Banking System

ISRA Journal - Volume 1

The inaugural issue of the ISRA International Journal of Islamic Finance (ISRA journal) has been available since December so we are unsure how we could miss it! The journal can be downloaded for free (no registration required) but it is the academic rigor and second-to-none peer review process that makes it really impressive. Take note that "the practitioner’s article discusses cases studies from the real life experience of the practitioner author. The Journal also highlights select currently ongoing research projects conducted by ISRA’s researchers under ‘Research Notes’. Though the research projects are not complete its introduction to the outside will engage those who may be doing parallel or similar research".

ISRA International Journal of Islamic Finance
Volume 1, Issue 1

December 2009

Academic Articles
Financial Crisis: Risks and Lessons for Islamic Finance
- Habib Ahmed
The Global Financial Crisis, Risk Management and Social Justice in Islamic Finance
- M. Kabir Hassan and Rasem N. Kayed
Shari'ah Governance for Islamic Financial Institutions
- Rodney Wilson
Shari'ah Parameters on the Islamic Foreign Exchange Swap as a Hedging Mechanism in Islamic Finance
- Asyraf Wajdi Dusuki

Practitioners' Articles
From “Asset-backed” to “Asset-light” Structures: The Intricate History of Sukuk
- Rafe Haneef

Research Notes
Islamic Pricing Benchmark
- Edib Smolo
Alternative Dispute Resolution in Islamic Finance: Legal Challenges and the Way Forward
- Hakimah Yaacob
A Synthesis of Shari'ah Issues and Market Challenges in the Application of Wa'ad in Equity-based Sukuk
- Shabnam Mokhtar
Shari'ah Parameters of Islamic Derivatives in Islamic Banking and Finance
- Sherin Kunhibava

ISRA Journal - Volume 1

The Issue of sequence and Pre-Signingin Contract Execution: A Comparison of Shari'ah Rules and Current Practice

The Issue of sequence and Pre-Signingin Contract Execution : A Comparison of Shari'ah Rules and Current Practice
Assoc. Prof. Dr. Asmadi Mohamed Naim, Islamic Finance and Banking Unit, College of Business, Universiti Utara Malaysia (UUM)
ISRA Research Paper (No. 12/2010)

"Pre-signing refers to the event in which the customer signs a series of Shari'ah transactional documents (including legal documents) at a single sitting; and, thereafter, the bank shall sign the same documents at a separate sitting on a later date. Pre-signing of all the transaction documents is a questionable issue, as it represents a departure from the familiar sequence of offer and acceptance. The aim of this paper is to evaluate the current practices of Islamic banks in conducting pre-signing and analyze the Shariah implications. In doing this, the paper first discusses the pillars of contracts in the Shari'ah and reviews some fatwas on pre-signing. It then shares the findings from a survey conducted on pre-signing practices by Islamic banks in Malaysia. In the analysis section, four situations of pre-signing are highlighted and the Shariah implication of each is discussed."

The Issue of sequence and Pre-Signingin Contract Execution: A Comparison of Shari'ah Rules and Current Practice

Reshaping the Islamic Finance Industry Applying the Lessons Learnt from the Global Financial Crisis

Reshaping the Islamic Finance Industry Applying the Lessons Learnt from the Global Financial Crisis
Rafe Haneef, Research Fellow, ISRA & Edib Smolo, Researcher, ISRA
ISRA Research Paper (No. 11/2010)

"In the last 27 years, the world has witnessed more than 124 distinct financial crises. The financial meltdown caused by the current global financial crisis brought the financial world to its knees. This paper aims to discuss how the Islamic finance industry can reshape itself by learning lessons from the global financial crisis. To achieve this aim, the paper first identifies the lessons that can be learnt from the crisis including risk transfer & imprudent credit growth, failure of risk management, liquidity and leverage, lax regulation and opaque disclosure. The paper then suggests how the economic agents’ behavior and responsibilities could be reshaped by highlighting the sellers’ standard of care and regulatory responsibility. The paper concludes that the global financial crisis revealed the weaknesses of the global financial architecture on one side and provided an opportunity for Islamic finance to show its inherent strengths and qualities on the other. To facilitate this, the paper offers some possible Shari‘ah-based solutions that can help the financial world avoid similar crises in the future."

Reshaping the Islamic Finance Industry Applying the Lessons Learnt from the Global Financial Crisis

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA
ISRA Research Paper (No. 10/2010)

"In 2009, Bursa Malaysia launched a new trading platform called Suq al-Sila’ or Commodity Murabahah House. It was introduced to facilitate certain Islamic financial transactions, particularly commodity murabahah based on tawarruq. This platform is claimed to provide genuine commodity transactions where possession and delivery of the commodity can take place without any hindrance, as opposed to the controversial widespread form of tawarruq that uses platforms like the London Metal Exchange (LME). This paper discusses the practice of tawarruq using Bursa Malaysia’s Commodity Murabahah House. In particular the paper comprehensively examines the debates over tawarruq which eventually lead to the OIC Fiqh Academy’s declaration that organized tawarruq is impermissible. This paper concludes that despite the criticisms and some unresolved Shari‘ah matters entangling the practice of tawarruq, the effort made by Bursa Malaysia to introduce a platform such as Commodity Murabahah House is commendable. Furthermore, since the nature of modern organized tawarruq may not strictly comply with Shari‘ah principles, the reasons behind using this facility should be carefully taken into consideration, especially situations of real urgency and cases of need."

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?

Islamic Banks and Wealth Creation

Islamic Banks and Wealth Creation
Prof. Dr. Abdul Ghafar Ismail
ISRA Research Paper (No. 9/2010)

"This paper aims to examine how Islamic banks create wealth: how customers as depositors invest their money through the banks; how the banks invest the funds at their disposal; and how economic agents such as individuals, firms and government use these funds. It also examines how this money generates profit, which is then distributed to Islamic banks and depositors, and hence preserves and develops the wealth (mal) of economic agents. It also raises the larger question of whether Islamic banks contribute to the well-being of society by focusing on return to depositors and to shareholders."

Islamic Banks and Wealth Creation

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA & Shabnam Mokhtar, Researcher, ISRA
ISRA Research Paper (No. 8/2010)

"Sukuk comprise one of the fastest-growing segments of the Islamic debt capital market. This paper aims to shed light on Shari‘ah issues that arise in asset-based sukuk structures and operations. It first discusses the concept of sukuk and delineates the difference between asset-based and asset-backed sukuk. It then discusses Shari‘ah issues with regards to ownership (qabd). From the analysis of case studies conducted, three major issues were identified in the operation of asset-based sukuk. They are sukuk-holders’ interest in the underlying assets, restrictions on asset disposal, and due diligence regarding sukuk assets. The paper concludes that restriction of the right of disposal poses a serious doubt whether asset-based sukuk structures truly comply with Shari‘ah principles. Furthermore, the coupling of this restriction of disposal with the purchase undertaking at par effectively turns sukuk into a debt instrument. Hence the paper suggests that there is a need to move towards asset-backed sukuk that clearly fulfils the Shari‘ah requirement. Nonetheless the paper recognizes that the current legal framework impedes the issuance of asset-backed sukuk. Instead of making overnight changes to the sukuk market, the paper highlights the need for all stakeholders to come together and thoroughly discuss measures needed for a transition to an improved market."

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market

Derivatives in Islamic Finance

Derivatives in Islamic Finance
Dr. Sherin Kunhibava, Researcher, ISRA
ISRA Research Paper (No. 7/2010)

"The main objective of this paper is to review the use and status of derivatives in Islamic finance. This is done by first explaining the basic derivative contracts of forwards, futures, options and swaps. Thereafter, the discussion turns to the use of derivatives with sukuk. The paper then explores the debate between scholars on the admissibility or otherwise of forwards, futures and options in Islamic finance. It then examines contracts in Islamic finance that have derivative-like features and which can be used for the same purposes of hedging as forwards, futures, options and swaps. It concludes by highlighting areas for future research."

Derivatives in Islamic Finance

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance
Hakimah Yaacob, Researcher, ISRA
ISRA Research Paper (No. 6/2010)

"The new Central Bank of Malaysia Act 2009, known as Act 701, was gazetted on the 3rd of September 2009. Anything related to Islamic finance is thoroughly discussed in Part VII of the Act. The previous Central Bank of Malaysia Act 1958 (Act 519) only discussed the Shariah Advisory Council in one section of Part II under the heading of establishment, capital and administration of the bank, whereas the new Act provides comprehensive details for the function of the Shariah Advisory Council in Part VII. The paper reviews the anomalies surrounding the Shariah Advisory Council (SAC) prior to the amendment of the Central Bank Act and highlights the nature of the amendements made. The paper also elaborates the role of expert opinion (al-ra’yu al-khabir) from an Islamic perspective before concluding by summarizing the effect of the amendment on the industry as a whole."

The New Central Bank Act 2009 (Act 701): Enhancing the Integrity and Role of the Shari'ah Advisory Council (SAC) in Islamic Finance

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA
ISRA Research Paper (No. 5/2009)

"One of the most popular instruments used today in the Islamic Capital Market is sukuk. Various sukuk structures based on ijarah, musharakah, mudharabah and hybrid forms have evolved. However, these innovations have raised many Shari‘ah issues and controversies. This paper argues that some innovations which try to achieve the same economic outcome as conventional instruments distort the vision of Islamic economics based on justice and equitability. This vision is deeply inscribed in the objectives of the Shari‘ah (Maqasid al-Shari‘ah). The distortion stems from a restricted understanding of the Shari‘ah that focuses on the legal forms of contracts rather than their substance, especially when structuring financial products. The overemphasis on form over substance may lead to abuse of Shari‘ah principles in justifying certain contracts that are, in fact, contradictory to one or more Shari‘ah texts and that ultimately undermine the higher objectives of the Shari‘ah. The paper concludes that the substance of a contract, which has greater implications for the realisation of Maqasid al-Shari‘ah should be equally looked into."

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective
Assoc. Prof. Dr. Mohamad Akram Laldin, Executive Director, ISRA
ISRA Research Paper (No. 4/2009)

"The topic of promises needs clarification and precise determination. It is vitally important because promises are relevant to a great number of contemporary issues. The paper thus reviews the types of promises in the Shari’ah and juristic opinion as to whether promises are legally binding. It concludes by highlighting nine (9) Shariah parameters that must be applied in allowing promises. It argues that if fulfilling promises is a binding obligation, then promises should be not be used indiscriminately; rather, parameters must be laid down to govern their use. Among the suggested parameters are that promises should not displace and impede the objectives of contracts. For example, partnership contracts are intended to make the contracting parties share in the profit and loss; therefore, promises should not be used to negate this essential feature. For the remaining 8 parameters, download the paper!"

The Concept of Promise and Bilateral Promise in Financial Contracts : A Fiqhi Perspective

Insurable Interest in Takaful Pracitices: An Analysis

Insurable Interest in Takaful Pracitices: An Analysis
Nusaibah Mohd Parid, Researcher, ISRA
ISRA Research Paper (No. 3/2009)

"This paper seeks to examine the application of insurable interest to takaful practices in general, with special reference to section 152 of the Insurance Act 1996. It is found that the unique features of takaful do allow for the application of insurable interest, but section 152 should be adopted in the Takaful Act only with certain modifications and guidelines, as have been discussed in the paper. However, it was found that there are still some unresolved issues in current takaful practice that require significant attention, issues related to the fundamental principles underlying takaful practices, such as the contract itself. It must be stressed, once again, that this paper only intends to bring forward a perspective or view on insurable interest in takaful practice, especially from the perspective of the Shari’ah, which can be further discussed, examined and modified, if necessary."

Insurable Interest in Takaful Pracitices: An Analysis

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?
Rafe Haneef, Research Fellow, ISRA
ISRA Research Paper (No. 2/2009)

"The paper discusses and analyses the perspectives of both opponents and proponents of tawarruq with the view of ascertaining the soundness of the Fiqh Academy ruling. Interestingly, the tawarruq ruling epitomizes the growing divide between proponents and opponents of the contemporary Islamic finance industry as a whole. Generally, those who oppose tawarruq also abhor murabahah lil amir bi shira’, Ijarah muntahiah bittamlik, contemporary sukuk al-mudharabah, musharakah and wakalah and many other contemporary Islamic finance products. The critics view the ban on tawarruq as the tip of the iceberg. The critics want the whole iceberg, the contemporary Islamic finance industry itself, to be exposed and transformed in its totality. Many of the critics believe that the transformation can only be realized by banning all the contemporary contracts mentioned above and rejuvenating the classical mudharabah and musharakah contract. Hence, it is important to discuss the tawarruq ban within the overall Islamic Finance context."

Is the Ban on "Organised Tawarruq" The Tip of The Iceberg?

Banking for the Poor : The Role of Islamic Banking in Microfinance Initiatives

Banking for the Poor : The Role of Islamic Banking in Microfinance Initiatives
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department
ISRA Research Paper (No. 1/2009)

"The main purpose of this paper is to review the microfinance scheme and discuss how Islamic banks can participate in such an endeavor without compromising institutional viability and sustainability. The paper conducts an extensive review of microfinance to build a case that Islamic banking should participate in a microfinance initiative. It concludes with a proposal to use a special purpose vehicle (SPV) as one of the possible means for Islamic banks to channel funds to the poor. It is worth mentioning that this paper won the Emerald Literati Network 2009 Outstanding Paper Award."

Banking for the Poor : The Role of Islamic Banking in Microfinance Initiatives