Survey on Sharīʿah non-compliant events in Islamic banks in the practice of tawarruq financing in Malaysia

Abstract

Purpose Tawarruq (Islamic commodity financing) has evolved as the most ubiquitous concept in Malaysia’s Islamic banking industry. Nevertheless, the extensive use of tawarruq has invoked a number of Sharīʿah (Islamic law) concerns in its practice. This study aims to investigate the Sharīʿah non-compliant (SNC) phenomena in the practice of tawarruq financing in Malaysia. Design/methodology/approach This study adopts qualitative research methodology, combining both descriptive and content analysis. A self-administered questionnaire was distributed to 16 Malaysian Islamic commercial banks to unveil the Sharīʿah non-compliance issues in the application of tawarruq in Islamic banks (IBs) in Malaysia. Findings This study found that some practices of tawarruq in Malaysia might not comply with Shari’ah, mainly because of the improper sequencing of contracts. The study also discovered that IBs adopt different approaches in dealing with SNC events and the income derived therefrom. Finally, the study noted the influence of board of director/management on certain Sharīʿah decisions particularly about the treatment of non-halal income. Research limitations/implications The findings of the study serve as a reference to industry players and regulators in formulating Shari’ah non-compliance risk management framework for tawarruq practices. Originality/value The survey on SNC issues in tawarruq practice constitutes the first of its kind in the existing literature.

Sharīʿah non-compliant income disclosures and the moral legitimacy strategies of Islamic banks

“…The findings from these studies above show that there are different patterns of SNCI disclosures and extensiveness of SNCI reporting amongst Islamic banks in Malaysia. These studies (Mat Nor and Md Sawari, 2020;Ali and Hassan, 2020;Basiruddin and Ahmed, 2019) The asset is sold to the customer before the bank purchases the asset from the broker/platform The facility is disbursed before the contract is executed There is no agency (i.e. wakalah) arrangement involved in the tawarruq transaction The price is mistakenly disclosed to the customer The legal document involves a provision that restricts the customer, as the purchaser, from taking delivery of the commodity The financing facility is used for Sharīʿah's non-compliant purposes There is no evidence of commodity trading Bay' al-Inah [a] The two contracts involve an inter-conditionality element to repurchase the asset The underlying sale contract has not been executed.…”

“…The study adopted a qualitative approach and found that 9 out of 16 Islamic commercial banks Sharīʿah noncompliant income disclosures in Malaysia have fulfilled the standard provided by the Bank Negara Malaysia in reporting the SNCI, however, the remainder of the Islamic commercial banks did not properly disclose the SNCI in their reports. Meanwhile, another study by Ali and Hassan (2020) which focusses on Sharīʿah non-compliant events in Islamic banks, the practice of tawarruq financing, found that Islamic banks adopt different approaches in dealing with Sharīʿah non-compliant events and the income derived from those transactions. Also, the study noted the influence of the board of directors or management on certain Sharīʿah decisions in the treatment of SNCI.…”

“…Several studies (Mat Nor and Md Sawari, 2020;Ali and Hassan, 2020;Basiruddin and Ahmed, 2019;Rosman et al, 2017) have looked at SNCI practices in terms of amounts and disclosures. Rosman et al, 2017 found a pattern of non-disclosure of SNCI items by some banks and more detailed disclosure of SNCI by others.…”

The substance and form of Islamic Finance instruments: an accounting perspective

“…It is used as a short-term financing instrument that includes monetization in the form of a commodity purchase for a deferred price determined usually through a mark-up sale (Murabaha) and then selling it to a third party for a spot price to obtain cash. It is currently the most common mode of providing cash facility financing in the IF industry as an alternative to conventional interest-based commercial loans (Ahmad et al, 2020;Ali and Hassan, 2020). The Tawarruq instrument is conducted as follows (Alamad, 2019):…”

Maqasid-based Consumer Preference Index for Tawarruq Personal Financing (TPF)

“…Although tawarruq personal financing earned improved Shariah compliancy and being innovative, still there are misconceptions sourced from poor mindsets by laymen who are steering the facility flaws and associated them with the earlier practice of bay al-inah -sale and buy-back arrangement (Ali and Hassan, 2016). Firstly, there is a negative word of mouth, which are somewhat shared on social media platforms and even worse, they were suggesting a total improvement in terms of products' novelty -to be novel without mimicking their conventional peers even this is claimed to be a sentiment and being groundless to be taken.…”