Islamic takaful: Business models,Shariah concerns,and proposed solutions

Islamic insurance (takaful) is nearly as old as the Islamic banking system and dates back to 1979, when the concept was launched in Sudan and later in Saudi Arabia. Yet, unlike its banking counterpart, takaful has been covered less in the literature on Islamic finance, and its workings are not fully understood. Shariah scholars have raised a num‐ber of concerns about the Shariah permissibility of the business models employed in the industry. This article examines the basic principles of takaful and then analyzes the mechanics of the two models most commonly used in the industry— namely, the mudarabah system that was developed by the Malaysians and the wakala (agency) system that is now being used by most takaful operators and has achieved tremendous popularity and acceptance in recent years even in countries where the mudarabah model was earlier implemented. Shariah scholars have, however, expressed some misgivings about both approaches, but because of its wider acceptability among Shariah scholars in the case of the wakala approach, this is more urgent. With regards to the mudarabah model for risk management, there are major discrepancies that have been highlighted by Shariah scholars effec‐tively rendering it inappropriate to apply this for insurance contracts. For this reason, the article outlines a third model, a wakala with waqf fund, that seeks to remain within the wakala framework while incorpo‐rating modifications that may render it more acceptable from a Shariah perspective. © 2007 Wiley Periodicals, Inc.     

The role of Islamic asset classes in the diversified portfolios: Mean variance spanning test

This study investigates both conventional and Islamic investors' problems as to whether the inclusion of Islamic and conventional asset classes may expand the frontier of their respective portfolios. Our sample covers the global U.S. portfolios and Malaysian portfolios with multiple asset classes, as well as the portfolios with a specific asset class in several regions. This study uses the recent mean variance spanning test in multiple regimes, which not only accounts for tail risk but also identifies the source of value added (tangency portfolio or global minimum variance).For intra-asset allocation, our findings tend to show that both Islamic and conventional fund managers of a specific asset class can benefit from conventional and Islamic asset classes, respectively, in several regimes. For inter-asset allocation, conventional institutional investors cannot obtain any value added from Islamic asset classes. On the contrary, the U.S. Islamic institutional investors can expand their tangency portfolio by investing in U.S. TIPSs and REITs, and reduce their global minimum variance by allocating in U.S. high-yield bonds. Moreover, the Malaysian Islamic institutional investors can obtain risk reduction by investing in conventional bonds only in the high term premium regime. For the remaining asset classes, the opportunity sets are sufficient for Islamic investors to invest complying with Shariah rules. We provide some policy implications for the global Islamic financial industry.     

The impact of proximity within elite corporate networks on the Shariah governance-firm performance nexus: Evidence from the global Shariah elite

Research shows the importance of social networks in the generation of valuable firm resources through informational flows. We extend this conceptualization to Shariah governance and the global Shariah elite as embodied by the Shariah supervisory board. Utilizing a unique dataset of 140 Islamic financial institutions over 2011–2015, across 16 nations, we find that interlocking behavior amongst Shariah supervisory boards is time-invariant and network proximity has an inverted U-shaped curvilinear impact on the performance of Islamic financial institutions. Our findings extend the academic literature on SSB interlocking behavior by disentangling the impact of network proximity on the Shariah governance-firm performance nexus.     

Religion and the Clash of “Ideals” and “Realities” in Business: The Case of Islamic Bonds (Sukuk)

Fueled by an increasing demand for investments that comply with Shariah (Islamic law), sukuk (Islamic investment certificates or participation certificates) have developed as one of the main components of the Islamic finance industry. In general, sukuk can be structured as asset based or asset backed, yielding wholly different risk profiles in the event of default and liquidation. However, given that the sukuk market is dominated by asset‐based sukuk, this article examines the motivation for greater interest in this specific sukuk structure. It also analyzes the challenges facing the regulatory framework and tax implemented for Islamic securitization in various jurisdictions. Then, it further evaluates, from the perspective of credit rating agencies, the importance of purchase undertakings in the structure and some controversies on this very point. The main issue that emerges is the difficulty of resolving the clash between the ideals of Islam and the realities of the marketplace. © 2015 Wiley Periodicals, Inc.     

The pre‐eminence of gold and silver as Shariah money

Shariah money is gold and silver, supplied by the market on profit criterion. Everywhere, government inconvertible paper money arose from bankruptcy. A government with balanced budgets would never need it. Imposed by force, inconvertible paper is a taxation mean, highly inflationary, and causes impoverishment. Unjust and bankrupt governments will continue to force this despotic money. Islamic Monetary Economics refutes the idea of money as a policy tool. Fully convertible paper is Shariah compliant. Shariah requires a just government to balance its budgets and restore fully gold and silver as lawful money.     

Grappling with Globalisation: Challenges for Economic Governance

This paper examines the key domestic institutional challenges posed by globalisation in terms of the following questions: how does economic globalisation differ from other types of economic integration, what is its impact on the extant national institutions of economic governance, what institutional innovations are required to cope with the challenges, and how can institutional change be made politically feasible? It identifies three perspectives on how national governments may respond – retreat, hold fort, or rearticulate. It concludes that though governments need to devise policies to attract MNEs, indulging in races‐to the‐bottom is not the only route, perhaps not even a desirable route. Second, to attract FDI, governments must afford labor flexibility. How they actually implement it will vary within and across countries, depending on the capacities and the willingness of governments to undertake institutional reform. Labour flexibility can be made politically feasible by increasing the levels of social insurance to protect displaced labour and by instituting programmes that increase their skills and employability.     

The combination of contracts in Shariah: A possible mechanism for product development in Islamic banking and finance

The combination of contracts is a potential mechanism of product development in Islamic finance. However, this concept encounters legal issues due to ahadith that prohibit two contracts in one deal. The article argues for the validity of combining two or more contracts to structure Shariah‐compliant products. It discusses many aspects of combination of contracts, including terminologies and purposes of the con‐tracts, the degree of uncertainty and ambiguity, and the nature of the bargain in the contracts combined. If the contracts combined pass the tests established by legal prin‐ciples, there will be no legal objection to combine such contracts into one deal. © 2007 Wiley Periodicals, Inc.     

Permissibility and use of options for hedging purposes in Islamic Finance

The debate concerning permissibility and use of options in Islamic finance is ongoing, and the issue is far from settled. Current analyses on this issue appear to focus on taking of unnecessary risks ( gharar), the perceived lack of a physical asset in an options contract, and the possibility of exploitation of the ignorant. To the extent that these factors are involved, options are not permitted under Islamic teachings (the Shariah). In this article, we investigate whether options may be permitted for hedging purposes in Islamic finance. We use equity options as an example in our analysis. After providing a brief overview of options markets, we review the existing literature and critically examine other work such as the religious decrees (fatwas). We also provide two examples, one each of call and put options, to illustrate the managerial issue of use of options for hedging purposes. Our analysis shows that options may be permitted for hedging purposes in Islamic finance as long as the underlying economic activities are themselves permissible (halal) from an Islamic point of view. The analysis also indicates that one of the key issues is related to unnecessary risk taking. The avoidance or reduction of such risks in hedging situations is largely dependent on the settlement and clearing function of the exchanges trading options, which effectively provides a guarantee of delivery. Mutual consent for entering into or canceling contracts and the issue of intangible assets also play a role in determining if options are permissible under the Shariah. We conclude the article by urging experts of Islamic jurisprudence to understand the theory and mechanics of options and use group ijitihad (consensus opinion of Islamic scholars) in conjunction with academics and experts in financial markets and instruments on this vital issue in contemporary finance for the benefit of the Islamic world as well as those trading with the Islamic world. © 2006 Wiley Periodicals, Inc.     

How Islamic banks deal with problem business situations: Islamic banking as a potential model for emerging markets

Models of emerging markets often ignore corporate crises and business failure and are based on research in western economic situations, assuming western institutional patterns and attitudes. This study is based on an empirical analysis of companies in the GCC region of companies within the Islamic Banking System. A “sharp‐bending” orientation model is used to review the role of banks and their methods of managing difficult client situations, triggering early problem‐recognition, and the sequence of recovery. As many emerging markets have large Moslem populations and as Islamic banking continues to be a vibrant growth sector, these findings have wider implications. © 2005 Wiley Periodicals, Inc.     

Principles,problems and perspectives of Islamic banking

Since the late 1970s, financial institutions (banks, investment companies, insurance companies) have grown up in many countries in the Moslem world with the intention of conducting their business in accordance with Islamic, or Shariah, law. Above all else, this means business involving no interest payments. The following article explains the most important principles of Islamic banking and outlines some of the problems which appear to be most central to this sphere.     

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 the rapid pace of financial engineering, which created complex and opaque financial instruments used for risk transfer. There was a breakdown of the lender‐borrower relationship and informational problems caused by a 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 underpricing of risk. Such a 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 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. © 2011 Wiley Periodicals, Inc.     

Intellectual capital reporting practices in an Islamic bank: A case study

Given the nature and importance of Islamic banks in recent times, we can expect them to have significant intellectual capital anchored in their Sharia‐based knowledge and expertise. However, we know very little or nothing about how and why intellectual capital‐related information is provided in their corporate reports. We fill this gap in our existing knowledge of the field with a view to enhance relevant literature. As far as we know, this article is one of the earliest exploratory attempts to examine intellectual capital reporting practices of an Islamic bank. We have undertaken a longitudinal (2001–2015) case study related to the intellectual capital reporting practices of an Islamic bank. Key results include significant rise of intellectual capital reporting over time, dominance of internal capital‐related items in intellectual capital reporting profile and the dynamics of changes in intellectual capital reporting practices over time. Through an institutional theory lens, we explain that this is due to the changes in the external institutional environment and various intra‐organisational factors such as strong ethical culture, unique knowledge base (Sharia), and corporate governance regime.     

Western Financial Agents and Islamic Ethics

This paper investigates Western professional bankers’ perceptions of Islamic finance. Exploiting data from an original survey, we carry out a principal component analysis (PCA) to characterize the main dimensions on which financial agents diverge. The PCA extracts five dimensions—accounting for 61 % of the variance in the agents’ answers—that we interpret with the help of a pilot field survey. In addition to confirm the increased association of Islamic financial values with ethical practices in the West, our results allow us to understand how the observed growth of the industry has been conceptualized by conventional agents. The five dimensions identified shed light on the multitude of constructs that have informed the diffusion of Islamic financial ideas to international markets. This supports the fact that Islamic finance cannot be seen as a single movement but is characterized by opposing and concurrent logics in global markets.     

UNDERSTANDING AND MEASURING MACRO‐INSTITUTIONAL COMPLEXITY OF LOGISTICS SYSTEMS ENVIRONMENT

We explore the concept of macro‐institutional environmental complexity surrounding logistics systems. Macro‐institutional environmental complexity is formulated as the complexity posed by the diversity of macro‐institutions and infrastructural capabilities of external environments involved in global supply chain logistics operations. This concept is then translated into a simple Analytic Hierarchy Process (AHP) model evaluating the macro‐institutional logistics systems environmental complexity of the four Nordic countries.     

Islamic business research

The Islamic finance industry, which is deeply rooted in Islamic law (Sharia), will undoubtedly have an increasingly large impact on modern finance in the years to come. Since its formal establishment in the 1970s, the industry has already grown to US$2.2 trillion, with a growth rate that outpaces that of conventional finance. The purpose of this special issue is to inspire academic researchers, regulators and standard setters, and providers and users of Islamic funding to advance the research of critical issues related to the efficiency of Islamic finance.     

Conceptualization of the real economy and Islamic finance: Transformation beyond the asset‐link rhetoric

A key factor behind the chronic crises in modern economies is the growing dominance of financialization and the resulting disconnect between the real economy and the financial sector, to which conventional financial industry is a key contributor. In contrast, Islamic finance claims to be real‐economy‐oriented, as all transactions must be asset‐linked (asset‐backed or asset‐based). However, is Islamic Finance based on proper conceptualization of the real economy? What is the real economy and its dynamics? How Islamic finance is interfaced with the real economy? In this article, the claimed real‐economy‐orientation is examined by presenting a conceptualization of the real economy and then evaluating the related discourse accordingly. The analysis presented, especially for noneconomists, exposes a serious gap between the claims about Islamic finance and the real economy it is supposed to advance. Appropriate conceptualization of the real economy can help the industry to be relevant and effective for broader socioeconomic transformation.     

Protect,profit, profess,promote: Establishing legitimacy through logics of diversity in Canadian accounting firm recruitment documents

Prospective accounting recruits are increasingly diverse. Drawing on a theoretical framework that combines legitimacy theory, impression management, and institutional logics, we use content analysis to examine how the eight largest Canadian accounting firms refer to diversity in their recruitment websites. Our analysis reveals accounting firms adopt multiple institutional logics and various impression management strategies to enhance legitimacy in the eyes of prospective diversity‐sensitive employees. We find four “Ps” of diversity‐related institutional logics—protect, profit, profess, and promote—all of which are at play in accounting firms' websites. Further, we find that diversity is far from being an institutionalized concept. Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd.     

Whither Islamic Banking?

Islamic banking is visibly on the rise across the globe, supported by a growing clientele, both Muslim and non‐Muslim, although it has yet to demonstrate that it is a viable alternative to conventional banking. Islamic banking is still under the shadow of conventional banking, not only with products that are strikingly similar to those offered by conventional banks, but also with conventional banks having a strong presence as stakeholders in the Islamic banking industry. Islamic banking is still in the early phase of a presumably long evolutionary process, apparently stuck in the initial phase of product differentiation. Islamic banks are competing with conventional banks rather than among themselves, which does not augur well for innovations and creativity, as it tends to keep them preoccupied with modifications of conventional products with Shari'ah compliance. Islamic banks have arrived at a new crossroads. They could either continue on the same path of what may be termed as ‘head‐on competition’ with conventional banks or change their direction in favour of a ‘niche market’ strategy.     

Effects of communication and financial concerns on banking attitude-behaviour relations

Despite extensive discussion of the concept of Islamic banking, which is based on the fundamental doctrines of Islamic law (Shariah) and Islamic economics (prohibition of interest and profit-loss sharing), few studies have explored the factors that potentially affect behaviour intentions among customers. This study investigates direct and moderating effects of communication and financial factors on customer attitudes and behavioural intentions towards Islamic banking. Data were collected from the customers of Islamic banks and the Islamic banking divisions of conventional banks in Malaysia using online surveys. The hypotheses were tested using hierarchical regression analysis. The results suggest that relationship marketing, informative advertising, perceived benefits, and profit-loss sharing are important determinants of behavioural intentions among both Muslim and non-Muslim customer groups. This study also found moderating effects for most of the conceptualized moderating variables, particularly attitude interactions with informative advertising, ease of online banking, and the principle of profit-loss sharing. There are both notable similarities and differences in the results for the two customer groups. The findings imply that different strategies should be used both to retain existing customers and attract new ones.     

Problems and challenges facing the islamic banking system in the west: The case of the UK

This study investigates the main problems, challenges, and opportunities facing Islamic banking in the United Kingdom. The study reports the results of interviews that were undertaken with senior officials of several key financial institutions who have had many years of experience in dealing with Islamic banking. Our interviews revealed that, although by strict definition Islamic banks do not currently exist in the UK, London is one of the major centers for Islamic banking and finance. It is apparent that the experience of previously established Islamic institutions, such as Al‐Baraka, has made other institutions realize that it is possible to provide Islamic banking services in the UK under nonbanking regulations. The interviews also revealed that the main problem that Islamic banking faces in the UK is heterogeneous clients and potential clients. Moreover, regulatory hurdles, competition from conventional banks, and lack of adequately qualified and trained personnel exacerbate the situation. The study concludes by identifying opportunities such as e‐banking that may have a significant impact on the future of Islamic banking in the UK. © 2004 Wiley Periodicals, Inc.