Oct Dec 2016 2 1

Journal of Islamic Banking and Finance Oct – Dec 2016 1
2 Journal of Islamic Banking and Finance Oct – Dec 2016

In The Name of Allah,
The most Beneficent, The most Merciful
“O Believers: devour not Riba, doubled and redoubled;
and fear Allah, in the hope that you may get prosperity.”
Sura Ale-Imran (verse No. 130)

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The articles published in this Journal contain references from the

sacred verses of Holy Qur’an and Traditions of the prophet
(p.b.u.h) printed for the understanding and the benefit of our
readers. Please maintain their due sanctity and ensure that the
pages on which these are printed should be disposed of in the
proper Islamic manner
Journal of
Islamic Banking and Finance
Volume 33 Oct - Dec. 2016 No. 4
Founding Chairman International Academic Advisory Panel
Muazzam Ali (Late)
Former –Vice Chairman Dr. Mohammad Kabir Hassan
Dar Al-Maal Al-Islami Professor of Economics & Finance
University of New Orleans, USA.
Trust, Geneva,
Switzerland Dr. Zubair Hasan,
Professor Emeritus INCEIF
Chairman Global University of Islamic Finance, Malaysia.
Basheer Ahmed Chowdry Dr. Rodney Wilson
Shariah Advisor Emeritus Professor, INCEIF, Lorong Universiti A
Uzair Ashraf Usmani Malaysia/France.
Board of Editorial Advisors Dr. S. Nazim Ali,

Professor and Director,
Ahmed Ali Siddiqui Center for Islamic Economics and Finance,
Mufti Bilal Qazi Hamad Bin Khalifa University, Doha, Qatar.
S. A. Q. Haqqani
Dr. Hasan uz Zaman Professor Dr. Mohd. Ma’sum Billah
Dr. Mohammad Uzair IEI, King Abdul Aziz University,
Altaf Noor Ali (ACA) Kingdom of Saudi Arabia.
Dr. Mehboob ul Hassan
Editor Professor, Department of Economics, (CBA)
Aftab Ahmad Siddiqi King Saud University, Saudi Arabia.
Associate Editor Dr, R. Ibrahim Adebayo
Seemin Shafi Department of Religions, University of Ilorin, Nigeria.
Salman Ahmed Shaikh
Dr. Huud Shittu
Manager Publication Department of Religion and Philosophy, Faculty of
Mohammad Farhan Art University of Jos – Plateau State, Nigeria.
Published by: National Academic Advisory Panel
International Association of
Islamic Banks Dr. Waheed Akhtar
Assistant Professor, Comsats Institute of Information
Karachi, Pakistan. Technology (CIIT), Lahore, Pakistan.
Ph: +92 (021) 35837315
Fax: +92 (021) 35837315 Dr. Manzoor Ahmed Al-Azhari,
Email: ia _ ib @ yahoo.com Associate Professor (Islamic Law)
editor@islamicbanking.asia Ph.D, Legal Policy, Fac. Shariah & Law.
Website: www.islamicbanking.asia Alazhar University, Egypt.
Post Doc. Fac. of Law, Univ.of Oxford, UK.
Follow us on Facebook:
http://www.facebook.com/JIBFK Dr. Muhammad Zubair Usmani
Jamia Daraluloom Karachi.
http://external.worldbankimflib.org/uhtbin/
cgisirsi/x/0/0/5/?searchdata1=37177{ckey} Muhammad Zeeshan Farrukh (MBA CPIF)
Islamic Banking Group of National Bank of
Registration No. 0154 Pakistan Team Leader-Training & Development
Printed at M/S Maaz Prints, Karachi. Unit, Karachi.
Journal of
Volume 33 Oct - Dec. 2016 No. 4
CONTENTS
1. Editor’s Note .......................................................................................................... 7
2. Shari’ah Mechanisms of Audit ............................................................................ 11

By Yousef A Basodan & Prof. Dr. Mohd Ma'Sum Billah
3. The Significance of Faith-based Ethical Principles in

Responding to the Recurring Financial Crises .................................................. 26
By S Nazim Ali, Ph.D. and Shariq Nisar, Ph.D.
4. The Impact of Sukuk investment in Developing UAE Economy ..................... 38

By Dr. Abdussalam Ismail Onagun
5. Objectivising the Social Justice Paradigm in Islamic Finance: ....................... 55

[An Appraisal]
By Abdul Azeez Maruf Olayemi, Siti Mashitoh Mahamood
Marifatul Haq Yasini, Ahmad Hidayah Buang
6. Crowdfunding and the Opportunity Presented in

the American Islamic Financial Sphere.............................................................. 61
By Husam Suleiman
7. Macro-prudential Supervision in the Indonesia Financial

Services Authority (OJK) and the Role of Sharia Board:
A Proposed Framework ....................................................................................... 72
By Muhammad Iman
8. Effect of Quality of Services, Bank Image, Religious

Perspective on Bank Customer Loyalty (A mediator role of
customer satisfaction)........................................................................................... 86
By Amin Ur Rahman
9. Country Model: Iraq .......................................................................................... 106
10. Book Review: Adam Smith’s The Wealth of Nations: ...................................... 107
A Modern-day Interpretation
11. Islamic Capital Market Indicators ................................................................... 109
Editor’s Note
Ever since 2002, Islamic banking has seen impressive and consistent growth in
Pakistan. Now, Islamic banking in Pakistan is an established industry with 12% market
share achieved in just over a decade. By year-end 2015, total Islamic banking assets in
Pakistan stood at Rs 1.3 trillion while total Islamic banking deposits stood at Rs 1.1
trillion.
In a recently held global conference in Karachi organized by Institution of Business
Administration (IBA) Karachi, a roadmap for the future of the industry took the centre of
discussions and sessions. This was a mega event in the country and global academic
laureates and corporate executives of some of the distinguished institutions from around
the world participated in the event from East Asia, GCC, Europe and America. The
speech by respected Shaikh Mufti Taqi Usmani was a relevant reality check for the
industry from the perspective of regulators. The respected scholar highlighted that
Pakistan as the only country which is created on the ideology of Islam and to realize the
true practical virtues of Islamic institutions in all fields of the society should have done
much better than the current state of affairs.
The country’s banking industry is still being dominated by conventional banks
which are explicitly involved in Riba, which is prohibited in Islam. It is unlike the
situation in GCC and Malaysia where the Islamic banking industry has more than 25%
share. Thus, Islamic banking regulators and patrons in the country must bear in mind that
Islamic banking in Pakistan should lift from a small niche for faith-conscious target
market to become a key player in the banking industry. Only by doing this, the country
could hold onto the promise of being an ideological beacon for the Muslim world.
According to respected Shaikh Mufti Taqi Usmani, this requires concrete and objective
targets with clear time frames so that a direction is set and the performance could be
reevaluated in different phases.
As a nascent industry, Islamic banking would require incentives and equal tax
treatment. Islamic banks are required to undertake additional steps, procedures and
unique ownership risks in order to offer Shari’ah compliant products. It is important that
double taxation on asset ownership transfers and disposals is avoided. Furthermore, the
government should provide strong incentives for the expansion of Sukuk market. This
step could increase the investment class securities for effective liquidity management of
Islamic banks.
Appreciably, with innovative product structures like running Musharakah, the
Islamic banking industry has improved its finance to deposit ratio impressively. The
recent step to introduce a 2 percent tax rebate for Shariah-compliant manufacturing firms
to encourage them to eliminate interest-bearing debt from their capital structure is a
welcome step. The central bank has also exempted Islamic banks from using interest-
based benchmarks for some equity based financing products. The central bank has also
helped by lowering Islamic banks' statutory liquidity requirement to 14 percent of total
demand liabilities from 19 percent, reducing the amount of liquid assets which banks
must maintain as reserves. For conventional banks, the required ratio is 15 percent.
Going forward, there is a need to focus on resolving energy crisis which can
improve competitiveness of the manufacturing sector. The recent decline in international
oil prices and cut in policy rate by the central bank due to significant decline in inflation
bodes well for Islamic banking financing operations in the future.
This issue of Journal of Islamic Banking & Finance documents scholarly
contributions from authors around the globe. Contributions in this current issue
discuss the theoretical underpinnings of an Islamic economy, contemporary issues in
Islamic finance and performance based empirical studies on Islamic banking and
finance. Below, we introduce the research contributions with their key findings that
are selected for inclusion in this issue.
In their paper “ Shariah Mechanisms of Audit – Saudi Arabia and Malaysian
Experiences”, Assistant Professor Yousef A. Basodan and Professor Mohd. Ma’Sum
Billah, both associated with King Abdul Aziz Univeristy, Kingdom of Saudi Arabia, put
forth at the role that audit plays in establishing the legitimacy of any business and discuss
at length the ethical standards and values that an external auditor of an Islamic Bank must
display. While these standards and traits should be present in all auditors, they become
more important in context of a religion based business such as an Islamic Bank.
The two Phds., Dr. Nizam Ali, Research Professor at Centre for Islamic Economics
and Finance, Hamad bin Khalifa University, Doha, Qatar and Shariq Nisar, Professor at
Rizvi Institute of Management Studies and Research, Mumbai, India have co-authored a
well articulated argument in their paper “The Significance of Faith-based Ethical
Principles in Responding to the Recurring Financial Crises”. They present that
financial crises have resulted from lack of access to financial information by customers
and the regulatory gap which lets greed guide the institutions to make money at the
expense of its customers and investors. They put forth their argument in the light of
common ethical standards set by major world religions and how these should be built into
the financial systems ethics.
In the article “The Impact of Sukuk investment in Developing UAE Economy”
Dr. Abdussalam Ismail Onagun, Assistant Professor in the University of Modern
Sciences, College of Business, discusses in detail the utility of Sukuk as an alternate to
the conventional bond and a Shariah approved tradable instrument. He explains the
different structures that Sukuk can take and the reasons that these are acceptable under
the Islamic Shariah. He further presents the importance and acceptability of Sukuk in the
UAE and other Islamic countries as well as its increasing popularity in western financial
markets.
“Objectivising the Social Justice Paradigm in Islamic Finance” co-authored by
Abdul Azeez Maruf Olayemi, Siti Mashitoh Mahamood, Marifatul Haq Yasini, Ahmad
Hidayah Buang, scholars and faculty at Malaysian universities examine the extent to
which the acclaimed social justice objective is innate to the services of the Islamic
financial institutions. The focal areas they discuss include the provision of benevolent
loan, corporate social responsibility, the duty of the payment of Zakat, extermination of
debt based instruments, total elimination of interest, gambling and uncertainty from the
financial system. However, is it concluded that, although, Islamic finance strives to
realize its social justice objective, nevertheless, the institution needs to raise the bar of its
acclaimed financial egalitarianism further higher.
The paper “Crowdfunding and the Opportunity Presented in the American
Islamic Financial Sphere” by Husam Suleiman explores the next paradigm of evolution
regarding Islamic finance products in light of the development and vast success of
crowdfunding platforms. The paper examines the shifting paradigm of the Islamic
finance lending product in America; the Islamic finance mortgage product. Each
subsequent shift in lending procedure has removed Islamic attributes associated therein;
resulting with current products that have lost the substance of Islamic teachings and have
fundamentally converged to the conventional product in function and form. The paper
reviews the methodology and practice of crowdfunding in the current financial landscape.
It discusses the advantages and attributes of crowdfunding and Islamic finance,
highlighting the overwhelming similarities. The article concludes by calling upon
Islamic financial product developers to explore and pursue the current opportunity
presented by the natural pairing of crowdfunding and Islamic finance products.
The paper “Macro-prudential Supervision in the Indonesia Financial Services
Authority (OJK) and the Role of Shari’ah Board: A Proposed Framework” by
Muhammad Iman Sastra Mihajat recommends a more macro prudential framework to
address systemic risks and Shari’ah risks. The paper proposes a new macro prudential
framework by involving a new Shari’ah Board Authority (DPSN) under the
Commissioners of OJK to regulate and supervise the Shari’ah matters for Islamic
financial institutions in Indonesia. The paper discusses the challenges in adopting this
new framework. The paper concludes that the current shortcomings of the macro
prudential approach for Shari’ah supervision and regulation require a new Shari’ah Board
Authority under the commissioners of OJK who has full authority over Shari’ah matters.
Amin-ur Rahman, an MS scholar at the International Islamic University,
Islamabad, in his paper “Effect of Quality of Service, Bank Image, Religious
Perspective on Bank Customer Loyalty” discussed his study on how these variables
effect create customer satisfaction which in turn leads to loyalty on part of customer
towards the product or service offered. He relates these aspects to banking business and
how Islamic Banks can induce customer loyalty through offering good service in order to
differentiate their service offering in a more or less homogenous product market.
Readers Comments
Dr. Zubair Hasan, Professor Emeritus INCEIF, Global University of Islamic

Finance, Malaysia.
“The Book Review ‘The Great Escape: Health, Wealth, and the Origins of
Inequality’ was brief but relevant. There is a continuing improvement in get
up of the journal and the quality of the published material. Congratulations
to your team.”
Disclaimer
The authors themselves are responsible for the views and opinions
expressed by them in their articles published in this Journal.
The opinions, suggestions from our worthy readers are welcome, may be communicated
on
E-mail: ia_ib@yahoo.com,
Facebook: http://www.facebook.com/JIBFK, Website: www.islamicbanking.asia
Shari’ah Mechanisms of Audit

Saudi Arabian and Malaysian Experiences
By
Yousef A Basodan*
Mohd Ma'Sum Billah**
Abstract
It is the common regulatory culture that, an annual audit is mandatory for
every company, regardless of size, that is registered under the Saudi and
Malaysian Companies Act1. For this reason, the term ‘auditing’ is most
commonly associated with the statutory audit of a company’s accounts or
financial statements as provided under the Acts. The Acts also stipulate that
an external independent auditor referred to in the Act as ‘approved company
auditor’ must perform a company’s annual audit. An audit of financial
statements increases the reliability of financial information for users (e.g.:
managers, investors, creditors and regulatory agencies). An auditor plays an
important role in this process by providing objective and independent reports
on the reliability of information2. By adding the audit function in the business
environment, the users of the financial statements have reasonable assurance
that the financial statements do not contain material misstatements or
omissions. The auditing profession is currently operating in a very dynamic
environment as numerous forces are affecting the responsibilities and
activities of the public accountants. Lately, critics have charged that the
current audit has failed to meet user expectations (e.g.: Enron case).
Therefore it is important for the profession to reflect as to the nature and
ethics of auditing in hope that by practicing ethically this will restore the
*
Assistant Professor of Accounting, Dept. of Accounting, Faculty of Economics .&
Administration, King Abdulaziz University, Kingdom of Saudi Arabia.
www.ybasudan.kau.edu.sa
**
Professor (finance, insurance, investment, capital market & petroleum finance), Islamic
Economics Institute, King Abdulaziz University, Kingdom of Saudi Arabia.
www.drmasumbillah.blogspot.com
1
Companies Act 2015, Ministry of Commerce and Industry, Saudi Arabia. Companies Act
1965, Malaysia.
2
Auditing and Assurance services in Malaysia, William F.Messier, Jr. Margaret Boh,
McGraw Hill, Malaysia Edition, 2002, Pg 3
confidence of the public. The purpose of this term paper is to explore

auditing under the Shari’ah guidelines. Perhaps the best solution to the
above critics is by developing an auditing standard and guidelines with
reference to the Shari’ah rulings.
Keywords: audit, Shari’ah, compliance, standard, corporation
Introduction
Annual audit has been made compulsory for every company, which is registered
under the Companies Act, both in Saudi Arabia and Malaysia3. In contrast, a business
registered as a sole proprietorship or partnership is not required to audit its annual
statements annually. In addition, the acts also require that company’s annual audit must
be performed by an external independent auditor. This is where the credibility of an
auditor is enhanced through the public reliance on the professionalism of audit
profession. Traditionally, the essence of auditing is to provide financial control and risk
management. The Auditor is deemed to work on the interest of shareholders, by which
he/she needs to carry out a systematic process with the objective of accumulating and
evaluating evidences regarding the management assertions contained in the financial
statements4. Hence, the auditor’s assurance depends on the level of collaborative
evidences found during the audit process. However, there’s an increase in audit need
since the corporate sector has expanded in parallel to the changes in business activity.
Thus, audit provides not only control on financial aspects but furnishes top management
with analysis, appraisals, recommendations and advices regarding the company‘s
performance and profitability as well5. Moreover, it identifies business opportunities,
which will then contribute to adding value across the business. Hence, the most important
aspect is that audit serves as a method of corporate governance since audit analytical
procedures provide extensive control on the correspondence between management
assertions, its authenticity and financial reporting framework6.
3
Companies Act 2015, Ministry of Commerce and Industry, Saudi Arabia. Companies Act
1965, Malaysia.
4
Principles of Auditing: An Introduction to International Standards of Auditing, Rick Hayes,
Philip Wallage, Hans Gortemaker, Third Ed., Pearson Education Limited, United Kingdom,
2014.
5
Accountability, Corporate Social Reporting and the External Social Audit, Gray, R., D.
Owen and K. Maunders (1991), iC.R. Lehman (ed.) Advances in Public Sector Accounting,
Vol 4., 1991, pg 21.
6
OP. cit, Pg 23
Journal of Islamic Banking
Shari’ah and Finance
Mechanisms of AuditOct – Dec 2016 13
Audit Function at Glance
Adapted from: Auditing and Assurance services in Malaysia, William F.Messier,

Jr. Margaret Boh, McGraw Hill, Malaysia Edition, 2002 pg 4
Rational Outlook
Auditing plays an important role in the process of providing objective and
independent reports on the reliability of information. Generally, by adding the audit
function in business activity the users of the financial statements have reasonable
assurance that the financial statements do not contain material misstatement. Hence, the
users can rely on the assertions made by manager, while making any judgments or
decisions. As mentioned earlier, auditing profession is operating in a very dynamic
environment. There are many forces, which influence the responsibilities and activities of
an auditor. Thus, complying to general accounting and auditing standards as well as
Shari’ah rulings while expressing a reasonable assurance to the financial statements
become the most important objective of an audit. Apart from complying with the
aforesaid standards, there are some other standards, which an auditor has to keenly keep
under observation; i.e.: Accounting & Auditing Organization for Islamic Financial
Institutions (AAOIFI).7 This is to ensure that the activities carried are not in breach of the
Shari’ah requirements. Ultimately, an audit on financial statements enhances the
reliability of management assertions and enables auditor to communicate his true and fair
opinion on the financial statements to the interested users or parties.
7
Accounting, Auditing and Governance Standards, Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI), 2015.
Organizational Structure of a Financial Statement Audit
Auditor’s Duty
Auditing plays an important role in the principal-agent relationship, by which
auditor has a responsibility of determining whether the financial reports prepared by the
manager conform to the approved accounting standards and comply with Companies Act.
In general, audit is to enable the auditor “ to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework”. This is stated in ISA 200, “Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance With International
Standards on Auditing” (Para. 3)8. Thus, auditor’s opinion towards the financial
statements adds credibility to the report. Auditing requires auditor to engage in a
systematic process of accumulating and evaluating evidences, which relate to the
management assertions in the financial statements. Auditor’s reliance on collaborative
evidences will influence the auditor’s opinion towards the financial statements.
8
International Standards on Auditing (ISA), ISA 200, Para 3
Shari’ah
Journal of Islamic Mechanisms
Banking of AuditOct – Dec 2016
and Finance 15
Performing professional duties entails a lot of ethical procedural activities. It requires

some commitments towards the responsibility, which is shouldered by an auditor.
Serving clients to the best and offer management some valuable advices have been
highlighted as the primary responsibilities of auditors. This includes a discussion on the
current system used by the client. Auditor, who observes and evaluates the management
system and control used, may provide value-added advices to his client. For instance,
auditor may suggest the use of certain accounting software to the client who is using
manual accounting system. To maintain the perception that auditors are credibly reliable
in their profession, they should observe ethical values in their duty apart from providing
the highest level of trustworthiness, integrity and truthfulness. All information should be
disclosed and communicated to the related parties so that it will not reflect any wrong
judgments. In addition, auditors should avoid themselves from taking any advantages of
the client’s confidentiality of information, either for personal or third party’s interest.
The question of complying with professional ethics depends on the principle of
religious legitimacy. Responsibility towards God (Allah) should be put as the priority in
one’s consideration followed by responsibility towards society, profession, superiors,
client and he himself. Commitment towards Allah generates good ethical appearance,
diligent and proper work with high quality, which complies with Shari’ah rules and
principles. This applies especially to the auditor, who is Muslim in religion. The
emphasis on Shari’ah adherence provides good audit work through the sincerity while
performing professional duties. Seeking Allah’s satisfaction becomes a due to good job
fulfillment by way of being conscious to the accountability before Allah and the Day of
Judgment. For instance, a good auditor will refrain himself from committing any
corruption or convicting to any fraudulent activities such as accepting gift, favor or
hospitality that would influence his judgment on the assertions contained in the financial
statement.
Moreover, auditor is responsible to preserve his independence in either fact (mind)
or appearance. Auditor should maintain his mental attitude of being fair and portray his
independency. ISA 200 stated that, “the auditor be independent of the entity subject to
the audit. . . . The auditor’s independence from the entity safeguards the auditor’s ability
to form an audit opinion without being affected by influences that might compromise that
opinion. Independence enhances the auditor’s ability to act with integrity, to be objective
and to maintain an attitude of professional skepticism”9. This indicates that
independence can be in term of mind as well as appearance. The earlier type of
independence includes freeing an auditor’s mind from any factors, which will influence
or affect his professional judgment. While the later type of independent refers to holding
official position which disqualifies a person from being auditor for the particular
company as stated in the Company Act. Apart, holding financial interest or having family
relationship in the client’s company will disregard one to be the auditor of that company.
In addition, auditor should adhere to general accounting and auditing standards while
conducting any audit work, even up to the process of evaluating evidences and providing
reasonable assurance to the financial statements. Besides, auditor should observe their
competency and due care in the profession. It can be attained through updating his
technical services and keeping his knowledge up to date.
9
International Standards on Auditing (ISA), ISA 200, Para A16
In conclusion, in the expanse of audit profession, auditor should continuously be

aware and observe his function and responsibility towards Allah, society, profession and
client in providing a true and fair view on the financial statements through serving client
to the best and with the most ethical conduct, which should not contravene the underlying
principles.
In short, auditor’s responsibilities include to:
• Determine whether the financial reports prepared by the manager conform to
the approved accounting standards and comply with Companies Act.
• Add credibility to the report of financial statements.
• Engage in a systematic process of accumulating and evaluating evidences,
which relate to the management assertions in the financial statements.
• Serve clients to the best and offering management valuable advices.
• Observe ethical values in their duty apart from providing the highest level of
trustworthiness, integrity and truthfulness.
• Put emphasis on Shari’ah adherence to provide good audit work through the
sincerity while performing professional duties.
• Preserve his independence in either fact (mind) or appearance.
• Adhere to general accounting and auditing standards while conducting any
audit work, even up to the process of evaluating evidences and providing
reasonable assurance to the financial statements.
Auditor should continuously be aware and observe his function and responsibility
towards Allah (swt), society, profession and client in providing a true and fair view on the
financial statements through serving client to the best and with the most ethical conduct.
Agency Relationship Affecting Audit*
*Source : Auditing and Assurance services in Malaysia, William F.Messier, Jr. Margaret
Boh, McGraw Hill, Malaysia Edition, 2002 pg 16
Audit and its Shari’ah Guidelines

Islam is a comprehensive religion. It provides guidance in all aspects of life
including economics, social, political and cultural. Accounting and auditing are parts of
economy, which are professions that are required by Shari’ah as Fard kifayah. Both
accounting and auditing provide the concept of fairness as they show where the resources
have been allocated. The realization of this concept is closely related to the code of ethics
for accountant in performing their professional duties and responsibilities. From the
Islamic point of view, the ethics of accountants and auditors depend primarily on the
principles of Islamic faith and Shari’ah. As ethics are an integral part of Islamic Shari’ah,
therefore, Islam strongly emphasizes on that and considers them as one of the objectives
of legislation. In short, Islamic Shari’ah provides some foundations of auditors and
accountants’ ethics. The major Shari’ah foundations of auditors and accountants’ ethics
are as the followings: -
Integrity10
Integrity is an act of honesty and having strong moral principle. In Islam, integrity
is highly valued as it governs all acts. It requires accountants and auditors to perform
their duties and responsibilities with competency and adequacy. Allah says in the Qur’an,
“Truly the best of men for thee to employ is the man who is strong and trusty”.
(Surah Al- Qasas: 26)
Principle of Vicegerency11
Man is the best creation of God (Allah) and Allah has bestowed us with mind (al-
aql). Thus, we serve as vicegerent of Allah. We are entrusted to develop the earth.
However, it is important to be aware that the supreme authority belongs to Allah, and that
man’s ownership of property is not absolute. We must always observe the orders and
prohibitions of Allah regarding property. Objectives in Shari’ah are pervasive and this
includes property. Thus, auditors have big roles in making sure that property and funds
are not squandered and wasted uselessly or used in prohibited matters (e.g. usurious
transactions) or traded unjustly or by denying the rights established in it for Allah.
Anything that is prohibited in Shari’ah should not be given neither verbal nor
documentary support in anyway whatsoever. Allah says in the Qur’an;
“Behold, thy Lord said to the angles: “I will create a vicegerent on earth”.
(Surah Al Baqarah: 30)
“It is He who hath made you (His) agents, inheritors of the earth”. (Surah Al
An’am: 165)
10
for Islamic Financial Institutions (AAOIFI), 2015, Pg 1010
11
Sincerity12
The Qur’an and Sunnah stress that in what ever we do, we must have good
intentions. Good intentions will lead to good performances and commitments in work as
they also promote sincerity and avoid hypocrisy. Auditors are not to perform work
because of fame, flattery and boasting. Instead, he should regard his work as a religious
commitment as well as a performance of his professional duty. This will eventually turn
his duty into a form of worship. This is line with the fundamental established in Shari’ah
that good intention turns a habit into worship. Subsequently, the auditor becomes worthy
of reward from Allah.
Piety13
Piety is refers to a strong belief in religion. It means fearing Allah to protect one’s
self from adverse consequences with rules of Shari’ah. This is done by observing Allah’s
commandment and to forbid oneself from His prohibitions. Therefore, auditor has to fear
Allah in performing his duty especially when dealing with property as it diverts man’s
attention and leads him into transgression. As Allah says:
“Let there arise out of you a band of people inviting to all that is good, enjoying
what is right and forbidding what is wrong”. (Surah Al- Imran: 104)
Then the Holy Prophet also mentioned that,
“Fear Allah wherever you are, and follow the evil with good to obliterate it, and
deal with people in good conduct”.
Righteousness and making one’s work perfect14

According to this principle, one should perform his duties that have been assigned
to him in the best manner and that is to attain perfection in his work. This can be
achieved through academic qualifications, practical experience and acquisition of
religious knowledge. Therefore, auditors must always strive to acquire the above. Allah
promotes this principle in the Qur’an:
“And spend of your substance in the cause of God, and make not your own hands
contribute to (your) destruction; but do good, for God Loveth those who do good”.
(Surah Al Baqarah: 195)
Besides that, Prophet (saw) also mentioned that;
“Allah likes when someone performs his work to do it perfectly and Allah has
described righteousness in everything”.
12
13
Ibid, Pg 1012
14
Allah-fearing conduct in everything15

This implies that Allah is constantly watching the acts of His servants. Therefore,
it is Allah that the auditors should be afraid of regardless of the opinion of people, which
includes his superiors. This principle is absolute and will never change from time to
time. Hence, auditors should always practice self-monitoring. And this may weaken
unless it is tied to both faith and feeling that one is being observed by Allah. Allah says;
‘Allah ever watches over you” (Surah Al Nisa’: 1)
For verily He knoweth what is secret and what is yet more hidden” (Surah
Taha: 7)
Men’s accountability before Allah16

Since Allah is observing all the acts of an auditor, therefore, he will be accountable
to Him on the Day of Judgment for all his deeds. Thus, auditors should always be aware
and to avoid doing things that may incur Allah’s punishment. The auditor should always
remember that he is accountable before Allah, and before his society, profession,
superiors and finally before himself.
“Then shall anyone who has done an atom’s weight of good, see it. And anyone
who has done an atom’s weight of evil, shall see it” (Surah Al Zalzalah: 7-8)
Shari’ah’s Code of Ethics in Auditing

Auditing is one of the branches of accounting. It is associated with examination of
accounting data. It is a professional service which people put high reliability on. Hence,
audit needs to be performed in the most ethical manner since the auditors provide
reasonable assurance to the company’s stakeholders. Therefore, based on the ethical
principles highlighted in the Qur’an and Sunnah, the following ethical principles for
accountants and auditors are derived17: -
Trustworthiness
Accountants and auditors should be trustworthy and honest in conducting their
professional duties. However, they are said to be trustworthy by conducting their
responsibilities with high degree of integrity and honesty. One way to show their integrity
is by protecting client’s interest, which is related to the confidentiality of the information
of the clients. For example; they cannot use such confidential information for their
personal gain and third party. Besides that, the auditors have to present and provide
factual and truthful report so that others can rely on the information while making
judgement and decision.
15
16
17
for Islamic Financial Institutions (AAOIFI), 2015, Pg 1016-1017
Legitimacy
Besides being truthful and honest, auditors also have to comply with certain legal
requirements and procedures including the Shari’ah rules and principles. They have to act
and conduct according to the guidelines of Shari’ah principle. Moreover, they also have
to comply with standards provided by professional bodies.
Objectivity
In conducting an audit work, auditors have to be objective. They have to perform
their professional duties in fair, impartial and unbiased ways. They also have to be free
from any conflict of interest in order to ensure their independence. Since independence is
a fundamental characteristic and key point of auditing profession, auditors should be
independent both in mind and appearance. If the auditor is a member of the board of
directors of the auditee company, then, he should not perform or conduct any audit work
for that company. This is because he could be involved in providing bias information, as
now he is no longer an independent party.
Professional competence and diligence

Since auditing is a professional service, it should be conducted in professional
ways. Therefore, auditors should show their credibility in realizing these duties. To
ensure work is done in proper manner, they should be professionally competent and well-
equipped in carrying out the task assigned. Hence, professional competence can be
achieved or obtained through ways like formal education, training, experience and
professional education. Besides that, they have to be duly diligent in discharging their
responsibilities as they are not only responsible to the stakeholders but ultimately also to
Allah the Al-Mighty.
Faith-driven conduct
Auditors should behave and conduct his duties in line with the faith values derived
from Shari’ah rules and principles.
Applications
Application of ethical conduct based on the principle of trustworthiness
An auditor should refrain oneself from engaging in any activity that would
jeopardize the attainment of the institution’s religious and ethical objective. Therefore,
an auditor should present and communicate favourable as well as adverse information
honestly with complete transparency. He should not disclose confidential information
acquired in the course of performing professional duties unless required to do so by the
law. He also should not use the information acquired in the course of his duties for the
advantage of himself or third parties.
Application of ethical conduct based on the principle of religious

legitimacy
An auditor should always remember his responsibilities towards Allah, and towards
his society, profession, superior and himself. Therefore, it is his responsibility to verify
Shari’ahBanking
Journal of Islamic Mechanisms of Audit Oct – Dec 2016
and Finance 21
the religious legitimacy of everything relating to his duties. He should be aware of

Shari’ah rules and principles relating to jurisprudence of financial transactions. Thus, he
should receive formal, adequate training in jurisprudence of financial dealings. He must
make sure that he performs his duties in conformity with such rules and principles.
Anything that is not in conformity with Shari’ah should be considered illegitimate.
Application of ethical conduct based on the objectivity principle

An auditor should be independent in fact as well as appearance. Therefore, he
should not involve himself in a situation whereby there is a conflict of interest. This is
because it will threaten his judgment in expressing his opinion. He should also avoid
from being influenced by others to ensure he could present information truthfully. In his
course of duties, he should refuse any gift or favor. Contingent fees (defining the fees as
a percentage of the income number) should also be avoided as it might affect the
independence and objectivity of the auditors.
Application of ethical conduct based on the professional competence

and diligence principle
An auditor has a responsibility to possess an appropriate level of academic and
professional competence. He should uphold his competence by going through skills
development constantly and keeping himself updated with the new developments in the
auditing as well as accounting profession. Most importantly, he should acquire sufficient
working knowledge of Shari’ah aspects relating to financial transactions.
Application of ethical conduct based on the principle of faith-driven

conduct
An auditor’s behavior should always be in line with religious values derived from
Shari’ah rules and principles. Particularly, he should consistently do self-monitoring
(that is always being aware of the existence of Allah (swt). He should be conscious that
he is accountable before Allah on the Day of Judgment. Therefore, in his course of
duties, he should be seeking Allah’s satisfaction and not to submit to the pressures of
others. He also should show love and brotherhood as well as be merciful to the rest of
the staffs and whomever he deals with.
Auditor’s Report
The auditor’s report is the expression of opinion of the auditor whether the
financial statements audited present fairly the financial position and the result of
operations, and have been prepared in accordance with the applicable accounting
standards. It is also important to note whether the financial statements comply with the
statutory requirements.
The auditor’s report consists of:18

Title
E.g. Reports of the Auditors
Addressee
The report should be addressed mainly to the shareholders/members of the
company audited (as required by the engagement and laws).
Introduction
The report needs to identify the financial statements that have been audited and its
notes as well as the date and period covered. There should also be statements regarding
the responsibilities of the management and those of the auditors. The management’s
responsibility is towards the preparation of the financial statements. Meanwhile, the
auditor’s responsibility is to express an opinion on the financial statements.
Scope Paragraph
The reports should narrate that the audit was conducted in accordance with the
relevant auditing standards and accounting principles, which do not contravene the
Shari’ah Rules, and Principles. The report should also indicate that the audit was planned
and performed to obtain reasonable assurance and not an absolute one. The audit also
evaluates the overall financial statement presentation.
Opinion Paragraph
The auditor’s report must state the auditor’s opinion as to whether the financial
statements give a true and fair view in accordance with the appropriate standards that do
not contravene with the Shari’ah rules and principles and statutory requirements.
Auditor’s Address and Signature

The report should name the audit firm, personal name of auditor and address of the
audit firm. The report should be signed.
Date of Report
The auditor should date the report at the date when the audit was completed. The
date should not be earlier than the date on which the statements are signed or approved by
management.
18
Auditing and Assurance services in Malaysia, William F.Messier, Jr. Margaret Boh,
McGraw Hill, Malaysia Edition, 2002, Pg 503
Audit Process
Recommendations
Lately, critics have charged that the current audit has failed to meet user
expectations. It is important for the profession to reflect as to the nature and ethics of
auditing in hope that by practicing ethically this will restore the confidence of the public.
In order to uphold the integrity of auditors, a separate body should govern ethical
principles governing the auditor’s professional responsibilities. Therefore, the best
solution is to form the Shari'ah Supervisory Board to govern the ethics of auditors. The
ethical principles that should be included are:
• integrity
• trustworthiness
• confidentiality
• professional behavior
• honesty
• righteousness
• fairness
• objectivity
• professional competence
• due care
• independence etc
The question of complying with professional ethics depends on the principle of

religious legitimacy. Responsibility towards Allah should be put as the priority in one’s
consideration. Commitment towards Allah generates good ethical appearance, diligent
and proper work with high quality, which complies with Shariah rules and principles. The
emphasis on Shari’ah adherence provides good audit work through the sincerity while
performing professional duties. Seeking Allah’s satisfaction becomes a due to good job
fulfillment by way of being conscious to the accountability before Allah on the Day of
Judgment.
Conclusion
Annual audit is mandatory for every company, regardless of size, that is registered
under the Companies Act. An auditing plays an important role in this process by
providing objective and independent reports on the reliability of information.
Traditionally, the essence of auditing is to provide financial control and risk management.
Auditor is deemed to work on the interest of shareholders, by which he/she need to carry
out a systematic process with the objective of accumulating and evaluating evidences
regarding the management assertions contained in the financial statements. However,
there’s an increase in audit need since the corporate sector has expanded in parallel to the
changes in business activity. Thus, audit provides not only control on financial aspects
but furnishes top management with analysis, appraisals, recommendations and advices
regarding the company‘s performance and profitability as well. Thus, complying to
general accounting and auditing standards as well as rulings issued by Shari’ah
Supervisory Board while expressing a reasonable assurance to the financial statements
become the most important objective of an audit. This is to ensure that the activities
carried out are not in breach of the Shari’ah requirements. Ultimately, an audit on
financial statements enhances the reliability of management assertions and enables
auditor to communicate his true and fair opinion on the financial statements to the
interested users or parties. To maintain the perception that auditors are credibly reliable
in their profession, they should observe ethical values in their duty apart from providing
the highest level of trustworthiness, integrity and truthfulness
Shari’ah
Journal of Islamic Mechanisms
Banking of AuditOct – Dec 2016
and Finance 25
References
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
(2015) Accounting, Auditing and Governance Standards, Dar AlMaiman for
Publishing & Distributing.
Companies Act (1965), Malaysia.
Gray, R., Owen, D. and Maunders, K. (1991) “Accountability, Corporate Social
Reporting and the External Social Audit”, I.C.R. Lehman (ed.) Advances in Public
Sector Accounting, Vol 4, pg 21.
Hayes, Rick, Wallage, Philip, Gortemaker, Hans (2014) Principles of Auditing: An
Introduction to International Standards of Auditing, Third Ed., Pearson Education
Limited, United Kingdom.
International Standards on Auditing (ISA), ISA 200.
Messier, William, Boh, , Jr. Margaret (2002) Auditing and Assurance services in
Malaysia , McGraw Hill, Malaysian Edition.
Ministry of Commerce and Industry (2015), Companies Act, Saudi Arabia.
The Significance of Faith-based Ethical

Principles in Responding to the
Recurring Financial Crises
By
Dr. S Nazim Ali,Ph.D*.
Professor Shariq Nisar,Ph.D
Abstract:
The global financial system has been under tremendous pressure due to
recurring financial crises. With nearly every major economy affected, the
cost of managing these crises has been enormous. Some studies have
identified ethical failure as the root cause of these financial crises, while
others have focused on the structural flaws in the system. While both the
diagnoses may be correct, the prescription for handling the crises lacks clear
direction and consideration for its applicability over the long run. This paper
focuses mainly on the ethical aspects and recommends a few long-term
measures that seek to improve moral behavior. Few suggestions have also
been made to improve financial inclusion based on common religious, social
and moral values.
Key Words: Islamic Finance and Stability; Faith-Based Finance: Ethics

and Morality
1. introduction
The global financial system has been under tremendous pressure in recent years,
affecting many major economies of the world. Due to the interconnected nature of the
world economy today, financial crises occurring at one place can quickly engulf other
economies. As a result, many economies have suffered enormously due to diversion of
precious financial resources to keep the financial system working, not to mention the
tremendous suffering and the loss of opportunity. Many can recall when similar crises
struck less developed or developing countries (like the four “Asian Tigers”), most
financial gurus deemed it a symbol of the structural weakness of those economies. We
started taking these challenges seriously only when big and developed economies started
*
Authors: Dr. S. Nazim Ali, Ph.D., Research Professor & Director, Center for Islamic
Economics &Finance, Hamad Bin Khalifa University, Doha Qatar.
Professor Shariq Nisar, Ph.D., Professor,Rizvi Institute of Management Studies and
Research, Mumbai, India
The Significance
Journal of Faith-based
of Islamic Banking EthicalOct
and Finance Principles….
– Dec 2016 27
feeling the dominant effect of such crises despite strong regulations in place. The period
following the 2008 financial crisis witnessed decelerating growth in many developed
economies (US economy contracted by -0.7% in 2009 while the UK was the worst
affected of Western European countries with a contraction of -1.3%). We have seen how
even strong regulations are not sufficient to insulate economies from being impacted by
economic shocks.
A number of structural causes have been identified by various experts (Rajan,
2010). This paper concentrates on the ethical aspect, in particular on dealing with human
greed and mischief. The importance of an ethical compass is emphasized by recognizing
the fact that after the crisis, the alpha of Social Responsible Investments(SRI) funds,
compared to other mutual funds, turned positive(Nieuwenburg,2013).The culture of greed
is believed to be one of the main causes leading to financial mischief and ultimately to
financial crises over time. Policy makers have to address the fallout of unlimited greed,
lack of honesty, selfishness, among others which the recurrent financial crises have
revealed. The ‘greed-is-good, greed is right, greed works’ mentality is encouraged in
modern financial institutions, but it comes mainly at the expense of consumers and
suppliers and the society at large. Customers tend to be the most exposed to risk as they
rely almost entirely on the financial service providers. Contrary to their interests, we
observe concerted efforts by many stakeholders in the financial system to lure customers
into making risky investments. Banks employ shadow banking strategies; rating agencies
have often missed the bigger picture, focusing on the wrong metrics; and regulators are
found wanting in discharging their responsibilities as the market achieves greater
sophistication. According to the Financial Stability Board, shadow banking has become
an increasingly popular phenomenon with assets mounting to over $80 trillion as at 2014
with nearly 200% growth between 2002 and 2014(FSB,2015). Another case in point of
this phenomenon was clearly evident in the case of the Subprime Mortgage Crises (SMC)
in 2008. It is well known now that home loan seekers were tricked into housing
mortgage. . Art Perlowrites, “the subprime mortgage crisis is the trigger that has set off a
whole number of financial imbalances — it triggered the whole pile to start falling. This
crisis was caused by incredible greed and looting by the financial sector….” (Webb,
2007).
The World Economic Forum Report on Faith and the Global Agenda: Values for
the Post-Crisis Economy reported, “the majority of people across the globe believe the
global economic crisis is related to ethics and values” (World Economic Forum, 2010). In
addition, it has been shown that religiosity, ethics and values among corporate workers
mitigate unethical behavior of a Corporation as a whole (Grullon, Gustavo, Kanatas,
George, and Weston, James, 2009).
This paper is organized into four sections. After this introduction, section 2
attempts to diagnose the causes of recurring financial crises. Section 3 explores the
significance of common platforms in reshaping and enhancing best practices in the global
financial system. The final section concludes with some policy recommendations.
2. Diagnosing The Causes Of Recurring Financial Crises

While many studies have focused on the probable causes of financial crises, this
paper identifies two major factors that are directly related to the central hypothesis of this
paper. Lack of access to financial information for consumers, and regulatory gaps and
loopholes in the penalty systems for financial misconduct are the two important causes.
2.1 Lack of access to financial information for consumers
Poor financial choices due to lack of relevant information has been a major
contributing factor to financial crises (European Commission, 2010). Unequal access to
information in respect of financial products constrains use and development of a just and
stable economy (Lumpkin, 2010). Consumers may not be well-educated or well versed in
financial matters to comprehend financial innovations. As Organization for Economic
Co-operation and Development (OECD) points out:
“With the rapid pace of financial innovation, the growing complexity of financial
products, and the increasing amount and size of financial risks and
responsibilities transferred to households, it has become very difficult for the
average consumer to successfully navigate the financial marketplace, let alone
for poorly informed individuals” (OECD, 2009).
Financial institutions are also criticized for lacking a sense of social responsibility.
Their focus on the profit maximization comes at the expense of consumers, as the
disclosures are either insufficient or too complex (Brix et al, 2010). Financial institutions
should be required by law to remain transparent. . Regulatory authorities should intervene
to ensure that no deception or tricks are used to unfairly attract consumers and key
features including the risk factors are revealed to consumers in the language that is
understandable for ensuring transparency and clarity.
2.2 Regulatory Gap/Overlap and Loopholes in Penalty Systems for

Financial Misconduct
Penalties, though in place, have been inadequate in curbing fraud and misconduct.
This poses serious problems for the checks and balances mechanism. Firms have become
more sophisticated in their dealings with the penalty systems, implementing a cost-
benefit analysis, to get their way around the system. Many big companies consciously
violate the law because the profits they reap in doing so are far greater than the fines they
might have to pay in case they get caught. (Durden, 2013) (Raice, 2013).
3. EXPLORING COMMON PLATFORMS

3.1 Ethics and Morality
Historically most financial crises exhibit similar patterns and are triggered by
almost the same factors (Mian, Atif and Sufi, Amir, 2014). Structural flaws in the financial
system as argued by many experts are no doubt inherent which to a large extent could be
addressed by policymakers and regulators (IMF, 2012). Masses in general have little role
to play in that, but efforts to improve financial literacy with high emphasis on morality in
financial systems will go a long way in addressing the challenges of morality in the
financial world. Inculcation of good moral values and conduct, developing a sense of
social responsibility, transforming the culture and instilling the right type of education
among the budding entrepreneurs and financial players could help the future of the
financial system in a very positive way.
The of
Journal Significance of Faith-based
Islamic Banking Ethical
and Finance Principles….
Oct – Dec 2016 29
The most important challenge in this regard is how to encourage people to behave
ethically and morally. Very often we notice the lack of incentives for those who behave
well. Contrarily, those who cross the line are often seen climbing the ranks rather
quickly. There is a need for an effective mechanism to address this anomaly. A system is
needed where good behavior can be objectively measured and appropriately rewarded at
the same time any type of malfeasance is not only restricted but also punished.
Transformation of beliefs, attitudes and mindsets of financial participants across all
levels are hoped to bring about greater financial stability. On the other hand provision of
rewards and penalties hope to bring greater coherence in compliance with law in its true
spirit. Moreover it is felt that the main reason for financial exclusion of a vast majority of
people across the globe is not really the lack of resources but the lack of spirit and
motivation. Unfortunately, it is generally believed that the current financial system has
led to more exploitation and misallocation of financial resources thereby making the rich
the greatest beneficiaries (Oxfam 2015).
One cannot ignore the fact that despite having the best of infrastructures ever in
human history, modern economy has not been able to show compassion towards the poor,
vulnerable and marginalized.
3.2 Ethics, Religious Teachings and Faith

Ethics form a greater part of religion and most of the religious beliefs today have
enormous ethical injunctions that followers must adhere to (Dhand, 2002 and Akpinar,
2010). Virtues of loving, kindness, compassion, abstinence from killing, stealing or lying
are sacrosanct in Buddhism. In Christianity similar ethical values such as love, mercy,
and forgiveness and virtuousness in thoughts and actions are emphasized. Islamic
teachings hold high the ethical ethos of justice, mercy, goodness, compassion, avoidance
of wastefulness, forbiddance of evil, etc. It is observed that there is good overlap of the
ethical values among religions pointing to the universal nature of ethical behavior.
All the Major religions of the world recognize the role of ethical behavior in
practice by sharing almost a similar stance on the areas of SRIs. (Bhatt, Sultan, Shah,
2014).
There is a need to establish a common ground that will spell out a code of conduct
and establish an agreed-upon ethical system in financial dealings. One way this could be
done is by basing it on religious teaching and values which enforces a code of conduct on
its followers. A case in this regard that is worth mentioning is the Emotional and Spiritual
Quotient (ESQ) training program in Indonesia introduced in the early 2000s. The idea is
the combination of business management, life-coaching, and self-help principles with
Islamic history and examples from the life of the Prophet Muhammad (Rudnyckyj, 2009).
The ESQ is designed to realize a form of effective self-management by making ‘people
better from the inside’. Similar actions were taken by some movements who cited
separation of religious ethics from economic practice as the main cause of the economic
‘crises’ in Indonesia. They opined that this demerger has resulted in rampant corruption,
inefficiency, collusion and a lack of discipline in the workplace. This phenomenon is not
limited only to Indonesia, but is increasingly found elsewhere in the world (Haenni 2005
and Wise 2003).
There are two competing theories regarding the link between economic growth and
religion. The first, known as the secularization hypothesis, (Weber, 1930) postulates that
greater economic development causes individuals to abandon their faith and become less
religious. This hypothesis also claims that economy as it becomes stronger plays a larger
role in the governance of the country than religion. The other theory (Smith, 1790)
claims that as a society becomes religiously diverse, the different religions compete
which results in stimulating more interest in religion. The latter hypothesis is
strengthened by the study of Chaves and Cann (n.d.) who have shown that greater
governmental sponsorship of religion paradoxically decreases the individual’s interest in
religion. A survey conducted in the United States shows positive relationship between
religiosity and poverty.
On the other hand, in some societies, notably among the communist societies,
religion is considered as “the opium of the masses”, and thus religious freedom and
diversity are suppressed by state as a policy. The above mentioned theories examine
religion as an outcome of economic development or policy; comparatively little research
(Barro and McCleary, 2013) has been done on religion as an antecedent to economic
growth. Alon and Chase (2005) examined political and economic freedoms alongside
religious freedom in explaining economic prosperity and found that religious freedom is a
significant antecedent of economic prosperity.
Adding to the points on overlap of religious values, it is argued that most of the
faith based financial models, be it, Judaism, Christianity, Islam, Hinduism or Budhism,
share common goals such as the upliftment of labor and the downtrodden sections of
society, abhorring violence, shunning vulgar entertainment etc. These common goals can
be conveniently converted into actionable plans in the form of Corporate Social
Responsibility, Corporate Governance, Human rights and the care for Environment.
Indeed, there have been clear calls advocating financial regulators to revisit the
teachings and wisdom of various faith based traditions in staving off future financial
crisis (Steele, 2010). Across religions there are activities which are prohibited or abhorred
like interest, gambling and businesses which are discouraged for causing harms to
society. At the same time, there are also activities which are encouraged like sharing of
risk, helping the poor and needy and donating to charities to help the underprivileged.
There are also religiously sensitive investment strategies that are important in
creating a common platform based on religious teaching and values. For example, the
practice of excessive and highly speculative risk taking, especially in as much as they
are of such a scale that they increase the level of systemic risk, must be examined and
monitored in terms of their potential impacts on the common good. In the same way
the impacts of the use of derivatives, credit default swaps and other activities such as
short selling on the stability and soundness of the financial system and therefore the
well-being of communities across the world must be examined and evaluated.
The question one may ask is: How will faith and religion play a part in fostering a
common platform in the financial industry? There are several ways this can be achieved.
Firstly, faith-based teachings reintroduce the foundational belief and value that gives
more emphasis on sustainability than short term profit (Kaye, 2012).A system that has its
priorities set over serving the needs of all communities before enriching executives,
The Significance
Journal of Islamic of Faith-based
Banking Ethical Principles
and Finance Oct – Dec….2016 31
traders and shareowners will be consistent with the vision of the faith traditions. This
system will earn confidence of people and hence is more inclusive.
Secondly, faith and religion serve as a reminder to the business and investment
community of their responsibility toward the future of Earth and its sustainability for
future generations. Financial and economic decisions based on values taught by the
religious systems will serve as a moral compass for business community and investors
(Chapra, 1995).
Thirdly, religion allows their followers to integrate their beliefs into the
management of their financial and commercial affairs. In this innovative space many
faith traditions have established funds and innovative credit mechanisms that reflect more
faithfully their foundational principles on the practice of credit, borrowing and lending
while preserving wealth and posterity. The National Council of Churches, for example,
has undertaken shareholder activism, social-purpose mutual funds and the like since the
1970s. Such initiatives are pertinent examples of the integration of Christian beliefs into
the financial and commercial aspects in the lives of believers.
Fourthly, religious faiths working together can draw on the principles they hold in
common to promote a more humane system and reform the dominant financial system.
By working together, they can bring the values of sustainability, social responsibility, and
solidarity into a vibrant debate and conversation about the kind of economic model that is
consistent with the vision of their beliefs. In the post-World War II period, for instance,
we have examples of the modification of a free market individualistic capitalism to a
more socially oriented market economy, especially European markets where mutual and
cooperatives are more prominent (DGRV Die Genossenshaften, 2016.). Mutual and
cooperative insurance accounts for over a quarter of the global market, and is the fastest
growing sector of the market (ICIMF, 2014).
Finally, the faiths can likewise find common ground with others in the ongoing
process of evaluating the tools and innovations that are introduced into financial system
by using the wisdom in their traditions and the environmental, social and governance
(ESG) criteria that have been established. For example, using the precautionary principle
from risk management in a financial setting may be useful (Schettler, Barrett and
Raffensperger, 2002).
As argued above, religious teachings and faith can facilitate the creation of
common grounds for financial stability, inclusiveness and sustainability by establishing a
more inclusive and morally conscious system rather than conducting financial
transactions that merely adopt a legalistic attitude to financial regulation. The idea of
faith-based ethical economies has now been espoused by all major faiths. Below we
quote various religious experts which clearly indicates the commonality of thoughts on
the subject.
Leading Islamic finance expert, Justice Muhammad Taqi Usmani argues:
“The crisis we are facing is not caused by some regulatory mishaps
only; there are some systemic errors in our conceptual framework. This
framework needs a revival of some noble values and a serious review of
some basic principles on which we have constructed the whole edifice
of our economy. There are two basic values of foremost importance that
must be reflected in a balanced, sustainable and just economy. First, the
common welfare of the society should take precedence over individuals’
selfish objectives. Second, the profit motive should not be extended to
unlimited greed of wealth” (Usmani, 2009).
The element of social welfare based on common good as espoused above is also
emphasised by Lesley-Anne Knight, Caritasof theVatican City, who contends that:
“During the course of the 20th century, the Catholic Church elaborated a
clear set of social values that are increasingly relevant today as we
consider the kinds of institutions and governance mechanisms we need
to ensure a more humane global economy” (Knight, 2010).
Ensuring a more humane global economy requires sustainable practices that
promote equity, fairness and justice without compromising the aspects of environmental
conservation. YukeiMatsunaga of the Japan Buddhist Federation argues that:
“….an emphasis on the interdependence of all living things—the vision
of life taught in Japanese Buddhism—may provide effective suggestions
for handling such pressing issues of modern society as human alienation
and environmental destruction”(Matsunaga, 2010)
Rabbi David Rosen of the American Jewish Committee contends:
“If enterprise and industry are detached from the human connection,
then they will not be sustainable in the long term. Moreover, in order for
there to be a common language—in the deeper sense of the term—that
connects the various components of society, it is necessary for the
members of that society to have a sense of the transcendent, a sense that
there is something more to their existence and activity than purely “the
edifice itself”” (Rosen, 2010).
This eschatological basis should be the driving force that will trigger a sense of
care and common good in the society. Rev. Katharine JeffertsSchori, the Presiding
Bishop of the Episcopal Church believes that:
“this ethics of care for the least applies to all the major issues facing us:
local, national and international economic praxis; ecological and
climatic concerns; and the structure of the global market” (Schori,
2010).
The way forward requires concerted efforts among all the stakeholders in
promoting shared human values in financial matters. To this end, Sri Ravi Shankar argues
that:
“the implementation of these human values in the corporate
program…has to be developed holistically by including society’s four
pillars: its economic establishments, its faith-based organizations, its
political institutions and its social sector…Faith-based institutions can
catalyze a huge transformation and engender much needed integrity in
people” (Shankar, 2010).
The Significance and Finance
of Faith-based EthicalOct – Dec 2016
Principles …. 33
There should be a way of minimizing the effect of greed in personal behavior.

Reverend Dr Olav FykseTveit, the General Secretary of the World Council of Churches
explains:
“Economic laws and principles from beginning to end are also a matter
of personal behaviour. Because of the financial crisis, the attitude of
greed now has a new face and new dimensions…We will never
experience the total disappearance of greed. However, we can work
together to define what kinds of attitudes build a sustainable global
economy in a sustainable global community” (Tveit, 2010).
Building a sustainable global economy requires long-term plan that will take into
consideration several factors, particularly the shared values. This is expected to transform
the current socioeconomic model and make it more productive. Kirill I, Patriarch of
Russia contends:
“without a solid basis in values, however, any transformation of the
existing socioeconomic model cannot be productive. A feasible new
model of global development should be based on the principles of
justice, efficiency and social solidarity” (Kirill, 2010).
3.3 Culture and Society
Various cultures and societies have inherited common values imbibed from their
religious teachings. The way of life, system of beliefs and thoughts of every society
forms the social fabric of the community. Creating awareness of cultures around the
world helps to build mutual respect and a sense of social responsibility amongst people.
Many multinational corporations today tend to adopt the culture of the local environment
they are operating in as they recognize how useful these values are for their business
prospects. This idea is captured in The Business of Humanity project currently
undertaken by the University of Pittsburgh, which seeks to improve strategic decisions
made in organizations. It proposes that:
“Strategic decision making that employs criteria falling under the rubric of
"humanity" - in its two dimensions of "humaneness" and "humankind" - leads to
superior economic performance. Humaneness in business decision-making focuses
on criteria and programs related to safety, quality, diversity, environmental
sustainability, gender equality, social sustainability, integrity, ergonomics and good
design”(University of Pittsburgh, n.d.).
3.4 Education
Advancement in education and technology is leading to greater awareness about
environment and inspiring people to adopt more environmentally friendly mechanisms
such as ethical, green and SRI movements, etc. Besides the focus on management
processes and the technicalities of finance, an integrated education system which
inculcates values and ethics to students is also important (Mian and Sufi, 2014).
Excellence in business and finance education is about creating value not only to the
economy and financial industry, but also to society and contributing to sound economic
growth, improving human conditions and balancing between social and economic needs.
Management education should focus on deep study of universal laws, philosophy and
ethics.
In addition, the syllabus taught in educational institutions should be reviewed to

include a component of ethics and morality (Kabir, Rasem, Oseni, 2013). For example,
since September 2014 financial education has formed part of the compulsory national
curriculum for all maintained schools in England. Students of finance are usually taught
the subject with focus on how they could maximize returns. It is not wrong to pursue
profit but it should always be reinforced upon them to look at their role and responsibility
as financial intermediaries for the general sections of the population who are financially
less educated and more vulnerable.
3.5 Environment
Nowadays investors do not just look at their cash flows, but are also concerned for
how these cash flows are generated. Many investors abstain from investing in firms that
use child labor or adopt heavily polluting technologies (Schwegler and Reutimann,
2014).The investors today distinguish between “sin stocks” and clean investment
opportunities (Hong, Kacperczyk, 2009).
There is also an increasing level of awareness of firms to engage in socially-
responsible and environmentally-friendly business practices. There have been widespread
efforts in the incorporation of sustainability in the strategic vision of many financial
institutions, realizing the importance of enabling the future generations to also benefit.
For example, The World Bank has already established its own sustainability initiative
called Wealth Accounting and the Valuation of Ecosystem Services (WAVES), which
seeks to promote accounting methodologies that place value on the environment. Many
ecosystems have placed tangible value in the form of tourism, drug development, natural
disaster prevention, etc. In new methodologies, environmental assets would be included
when calculating GDP.
3.6 Socially Responsible Investments
Socially responsible investing, also known as “sustainable”, “socially conscious”,
“green” or “ethical investing”, is a kind of investment strategy which seeks to consider
both financial return and social good. These investors encourage corporate practices that
promote environmental stewardship, consumer protection and human rights. They avoid
businesses that sell or promote alcohol, tobacco, gambling, pornography, weapons,
contraception/abortion, fossil fuel production, etc. According to data from the Social
Investment Forum Foundation.socially responsible investing nearly quintupled in the
U.S. from 1995 to 2010 as measured by the amount of professionally managed dollars
invested, growing from 9 percent to 12 percent of the national total. The rise of socially
responsible investments could be an indicator of the growing importance of ethics and
other social aspects in finance and Statman (2004) and Bollen (2007) opined that
investors benefit from some utility from the externalities of investing in a way that is
consistent with their beliefs.
4. Conclusion And Policy Recommendations

Financial crises have been primarily a result of the personal, organizational and
ethical failures of not only financial players but also of the regulators and other players in
the financial system. This paper attempted to highlight some of the important common
teachings of various religious communities and how some emphasis on them could help
to shape a better financial system that is more inclusive, stable and efficient.
The Significance
Journal of IslamicofBanking
Faith-based
and Ethical
FinancePrinciples
Oct – Dec ….2016 35
Ethical values represent a general theme that runs across various faith based
communities, which eventually led to the introduction of SRIs. Similarly, the Islamic
concept of economics is built on ethical business practices that promote justice, equity,
and fair distribution of economic and financial resources.
Incentivizing good behaviour is a way of rewarding firms which practice
sustainable and socially responsible decision making. One such measure of incentives is
by creating public ratings of well-performing and outstanding companies, which have
been serving their clients well, on a fair and transparent basis, and avoiding any acts of
malfeasance as far as possible. Such ratings are intended to give these companies a better
business standing and increased business prospects.
Financial crises may be as a result of financial mischief and criminal acts that go
unnoticed over extended periods of time. This financial misconduct will be controlled by
creating awareness and setting strong precedents of exemplary punishment to the guilty.
To address this problem, we could create a rating database for financial executives just
like the database for borrowers for analyzing their credit history.
Rating is a public good just like regulation; leaving it in private hands creates a
strong conflict-of-interest situation. Therefore, rating systems should be publicly funded
and executives made accountable for their actions. They should work in tandem with
regulators. Also, companies engaged in financial businesses should be rated based on
their compliance performance. A company or its shareholders/employees/directors
punished for any misconduct should not go unnoticed for the purpose of regulatory
compliance and cumulative rating. Companies falling short of the minimum cumulative
rating should not be allowed access to public funds.
Central Banks are better equipped to deal with macro prudential regulation. Their
intimate knowledge and experience provides them the ability to understand the impact of
the failure of individual institutions on the financial system. However, there are also
concerns over the conflicting targets that arise when central banks are mandated with
responsibilities that are in conflict with their primary task. It is therefore necessary that
independent regulatory bodies arise to supplement the regulatory role of central banks.
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The Impact of Sukuk investment in

Developing UAE Economy 1
By
*
Dr. Abdussalam Ismail Onagun
Abstract
Purpose: Sukuk (Islamic bonds) is an integral part of Islamic economics and
finance. It is an excellent source of funding for governments or companies
who are craving for Shariah compliant tools which can foster the economic
growth. The governments around the globe have taken deep interest in
issuing and promoting Sukuk investment as the mainstream financial tools
and the government of UAE particularly Dubai government has taken the
lead in ensuring the Emirate being one of the first adapters of Sukuk in order
to diversify its economy.
Design/methodology: A survey/interviews was conducted with Islamic
banking professionals and investors The Data helped to examine the impact
of Sukuk investment in diversifying UAE economy as the UAE possesses
nearly 10 per cent of the world’s total reserves, and there is no doubt that oil
will continue to provide the income for both economic growth and the
expansion of social services for several more decades.
Findings:The Sukuk investment has always been preferred by the people who
have preferences for the Islamic financial Systems. Thus it is imperative that
the target market should be identified and the most attractive location has
been identified as UAE as it has developed a strong market for Sukuk
investment.
Originality/value: This research is to highlight the impact of Sukuk issued by
Nasdaq Dubai on the UAE economy as one of the fastest growing financial
products in Islamic Financial Institutions (IFIs). Finally, this research will
analyze the potential of making Dubai as the centre of Islamic economics in
*
Author: Dr. Abussalam Ismail Onagun is an Assistant Professor in the University of Modern
Sciences, College of Business. He has wide exposure in practical and academic research in
Islamic Economic & Finance. Email: i.abdussalam@ums.ae / abdussalam3@yahoo.com
1
This paper has been presented in the international Conference on innovation Arabia 2015
organized by Hamdan bin Muhammad Smart University (HBMSU) Dubai, UAE.
Journal of Islamic
The Impact of SukukBanking andinFinance
Investment Oct UAE
Developing – DecEconomy
2016 39
line with the vision of Dubai government and foreseeable of economy growth
opportunities in the Dubai Expo 2020.
Key words: Sukuk, UAE Economy, Financial Products, Economic Growth,
Diversification and Securitization
Introduction
This research paper aims to study the impact of the fastest growing product in
Islamic finance and its role in developing UAE economy. Sukuk (Islamic bond) is an
alternative to interest bearing investment certificates or fixed income securities as it is
Shariah compliance product. Sukuk offers investors a means of subscribing to certificates
which give them a right to receive a share of profits generated by an underlying asset that
is capable of being traded on the secondary market (Dubai International Financial Center,
2009).Due to this, Sukuk has become a very attractive product to sovereign and corporate
issuers alike. They have used sukuk to get into a wider range of financing sources
because of the increasing sophisticated financing and investment purposes. The usage of
the word “sukuk” can also be traced back to the classical commercial Islamic literature. It
was used to refer to the certificates for goods or groceries as the method of paying the
salaries of government officers. These officers could later redeem such certificates
according to their day to day consumption of goods or groceries.
In the wake of a rapidly growing Islamic economy, recent years have witnessed a
surge in the issuance of Islamic capital market securities (Sukuk ) by corporate and public
sector entities amid greater demand for alternative investments. As the Sukuk market
continues to develop, new challenges and opportunities for debt managers arise as
structured finance instruments are receiving increasing attention owing in large part to
enabling capital market regulations and financial innovation aimed at establishing greater
inclusiveness of Shariah compliance. These few lines will seek to explain and analyze
definition of Sukuk development. The paper will analyse the NASDAQ Dubai Sukuk
structure, and will provide the details steps of impact of Sukuk in developing UAE
economy.
Definition of Sukuk
Sukūk (plural of sakk), frequently referred to as “Islamic bonds”. It is an Arabic
word referred to as ‘certificates’, ‘Islamic bonds’ and ‘Islamic security’. But a more
accurate translation of the Arabic word would be Islamic investment certificates. The
distinction being that, at its simplest, a bond is a contractual debt obligation whereby the
issuer is contractually obliged to pay to bond holders on certain dates. However, the
process of pooling assets or issuance of the certificate is called (Taskik) Islamic
Securitization. The Basel II defined securitization as “a structure with at least two
different stratified risk positions or tranches that reflect different degrees of credit risk,
where credit risk of an underlying pool of exposures is transferred in whole or in part”. It
is also the process of gathering a group of debt obligations such as mortgages into a pool,
and then dividing that pool into portions that can be sold as securities in the secondary
market.
According to Suleiman (1998) securitization is the process of pooling assets, the

process of packing them into securities, and the process of distributing securities to
investors. As Islamic financial Institutions are more concerned with the Islamic
acceptable of the securitization business, their focus is more on the content of the Sukuk
or package rather than the process of packaging. Therefore, they tend to ensure that the
assets in the package – and not the package alone are Shariah compliant.
The IFSB(2009) in its standard on Sukuk, defined Sukuk as certificates representing

a proportional undivided ownership right in tangible assets, or a pool of predominantly
tangible assets, or a business venture (such as a muḍārabah). These assets may be in a
specific project or investment activity in accordance with Sharī`ah rules and principles.
However, Sukuk are certificates of equal value representing undivided shares in

ownership of tangible assets, usufruct and services or (in the ownership of) the assets of
particular projects or special investment activity. Zohra Jabeen defined Sukuk as asset-
based investments where the returns come from the underlying assets. The underlying
assets may be ijarah, Murabahah, Istisna’ or a combination of these.
From the above definition the standard makes it clear that Sukuk must be backed
by assets that are subject to Shariah compliant contract; for example, an ijarah contract
which is similar to a conventional lease. Furthermore, the standard makes it clear that the
Sukuk documentation must demonstrate that any income arising must be derived from the
underlying activities for which the funding has been used, and not simply comprise
interest. The Sukuk must be backed by real underlying assets and these assets must be
compatible with the Shariah principles. However, there must be full transparency as to
rights and obligations of all parties.
It could be stated that securitization is the process of transforming an illiquid asset

into a marketable security thereby rendering it liquid by the deployment or reaction of
some market mechanism. Thus, borrowers in this way have access to the capital markets
and lenders are able to liquidate their positions and opt for better investment
opportunities.
It is important to clarify that, based on the definition of Basel II, there are great
differences between the system of securitization in conventional financial institutions and
Islamic financial institutions. For example, in the conventional system the tradable
certificates or securities are issued out of interest-based loans in which case they are
called promissory notes. Alternatively, they are issued for the raising of funds without
any underlying facility or transaction in which is called bonds.
Difference between Sukuk and Bonds

The principal difference between Sukuk and conventional securitization (bonds) is
that sukuk leads to the creation of Islamic Promissory Notes (IPN) or it requires the
existence of an underlying financial asset. For example, Shariah encourages the
documentation of contracts, after which these documents can play the role of securities
and thereby become financial assets. Thus, a security cannot be considered as totally or
The Impact of Sukuk Investment in Developing UAE Economy
completely separable from the assets it represents which means that there is no Sukuk
without first being a contract.
In this context, Sukuk certainly cannot be used as a means of raising funds simply
with the issue of a document without any underlying assets, as it is in the conventional
bonds issue. In the issuance of zero-coupon bonds, for example, the bonds are issued,
under the system of Sukuk, prior to the receipt of proceeds, i.e., creation of debt.
Furthermore, conventional investors in corporate and government bonds hope to
capitalize on favourable developments in interest rates. Capital gains are accumulated
when fixed-rate bond prices rise as variable market indices fall. The legitimacy of Sukuk
structures in the Shari’ah lie in the fact that they do not take advantage of interest rate
movements.
Investing in Sukuk issuances involves the funding of trade or production of tangible
assets. Sukuk are directly linked with real sector activities. Hence these will not create
short-term speculative movement of funds and potential financial crises. Sukuk investors
have an inherent right to information on the use of their investments, nature of the
underlying assets and other particulars that would otherwise be considered redundant in
conventional investments. This will help introduce discipline in the market.
It appears from the above analysis that there are two major or principal criteria in
the creation of Sukuk. First there must not be any interest rate attached to it, be it fixed
interest or floating interest. Secondly, it must arise out of an underlying Islamic
transaction. However, the following step will discuss some aspects of enhancing the
competitiveness of Sukuk structures by overcoming some of the undesirable underlying
risks. Therefore, we will like to explain Sukuk al-ijarah, its features and steps to be
follow in the documentation of this Sukuk structure.
Parties in a Securitization Structure

A key principle of Islamic finance is that financing schemes should be asset
backed. In the context of a Shariah-compliant securitization structure, this means that
some degree of ownership in the underlying assets should be transferred to the Issuer
(rather than a mere assignment of the cash flows). A transfer of absolute registered title
in the underlying assets is not necessary and would prohibit securitizations of Middle
Eastern assets as legislation in a number of Middle Eastern countries bars non-resident
entities from purchasing or leasing certain locally domiciled assets and local entities from
issuing debt securities.
Assets in Sukuk Securitization
Assets in Sukuk structure must comply with Shariah, the assets being securitized
must themselves also comply with Shariah; that is, they must not offend the rules and
principles of Shariah (such as being a securitization of pools of interest bearing loans,
being uncertain in nature or being a securitization of prohibited items such as alcohol,
pork, gambling or illicit activities). In addition, the relationship between an underlying
obligor and the originator should fall within one of the accepted Islamic financing
schemes e.g Murabahah, Mudarabah, Ijarah and Istisna'a. For example, when structuring
a Shariah-compliant mortgage securitization, the underlying assets must be Shariah-
compliant mortgages usually structured around Ijarah (the typical Islamic mortgage
structure) or Istisna'a (mortgages over properties that are being constructed). The Shariah
requirement is that the assets back securitization must be linked to ownership of the
Asset.
Transfer of rights in Sukuk
The transfer to the issuer (from the originator) of a package of rights similar to
ownership that allows the issuer to participate in the revenues generated by the
underlying assets and this is a general Shariah consensus that ownership of an asset is
possible under a sale transaction. Most of the contemporary Shariah scholars in Islamic
finance are satisfied that the risk and reward associated with the Sukuk assets is vested
with the issuer of the Sukuk certificates. The Shariah scholars are also generally satisfied
that the structure is in conformity with Shariah rules and principles. However, it is
imperative that sufficient documentation is made to establish the actual transfer of
ownership of asset. This principle has apparently been upheld in almost all the sale and
lease-back sukuk structures so far executed. While appropriate purchase agreements were
executed, the common practice has been to transfer only the beneficial title in the assets
as opposed to actual legal title, but different sukuk structures raised different Shariah
points of view regarding to risks and rewards of ownership of the assets based on the
following:
• In Sukuk Ijarah, the owner of leasehold rights of an asset to be acquired and

subject to lease contract may sell the usufruct of such an asset through sukuk
issues (sukuk manfaa ijarah), and Sukuk owner wishing to undertake specific
services may mobilize the cost of such services by pre-selling the services
and their expected benefits through sukuk issued (sukuk milkiyat al-
khidmat).
• The risks go to the originator in Sukuk al Ijarah based on their agreement in

the beginning of the contract (‘Aqd). This is originated from the Shariah
principle: al muslimun ala shurutihin (the Muslims are bound by their
conditions). The same rule also applies to Sukuk al-salam, Sukuk al-istisna’a
and Sukuk al-murabahah.
• But it is differed in Sukuk al mudarabah whereby the entrepreneur (mudarib)

with a good business idea but without capital or little capital may mobilize
sufficient fund for a proposed business/ project from capital providers
through Sukuk issues (Sukuk al-mudaraba). The Sukuk holders share in the
risks and rewards of the mudarabah.
• The same thing applies to Sukuk al musharakah. It is observed in sukuk

musharakah where the owner of a business partnership may seek capital
participations into the partnership through Sukuk issues (Sukuk al-
musharaka). The sukuk holders share in the risks and rewards of the
partnership.
• Shariah scholars have differing views on sukuk al wakalah which means that
the capital may be raised through Sukuk issued to acquire certain assets or
goods or services which are then entrusted to an agent (wakil) for
Journal
The ofofIslamic
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Economy 43
management of the same on behalf of the owners (sukuk al-wakala). The

sukuk holders here take the risk of the underlying assets or goods or services
and are entitled to any profits generated from the same.
• On the control of assets the contemporary Shariah scholars in Islamic finance

unanimously agree that special purpose vehicle has the right to control and
manage the assets or control of the assets
NASDAQ Dubai Sukuk Structure

NASDAQ Dubai is the international financial exchange in the Middle East. It
allows companies to benefit from a unique investor pool that combines regional and
international wealth, making it a globally unique platform for companies to raise money
and for investors to find exciting opportunities. Dubai bridges the east and west and
excels in areas such as trade, transport, tourism and real estate as well as financial
services. In NASDAQ Dubai, it brings together the best of international standards with
regional knowledge and understanding, supporting the growth of listed companies in the
region and beyond.
The exchange’s broad investor base sets it apart from others. As well as investors in
the UAE and the region, those in the US, Europe, Asia and elsewhere can easily trade its
securities. This gives its listed companies instant recognition and visibility around the
world, supported by the international NASDAQ brand name. Company owners have
freedom to raise capital in the way that suits them. They can choose the price at which to
sell shares in an IPO, and keep control of the company afterwards. Underpinning the
exchange is a regulatory framework that is second to none, giving confidence to issuers
and investors alike that their interests are being looked after.
As a leader in innovation, NASDAQ Dubai offers a wide product
range. Companies can raise capital through shares, Sukuk and bonds. Exchange-traded
funds, derivatives, exchange-traded commodities as well as Real Estate Investment
Trusts (REITs) can be listed and traded too. NASDAQ Dubai is ideal for many types of
companies, from family businesses to conglomerates, government entities and high
growth businesses.
NASDAQ Dubai Sukuk al Ijarah Structure

Most of the sukuk issuances in the UAE which have impact on its economy are
sukuk al ijarah, Sukuk al Musharakah and Sukuk Mudarabah. The lease or lease back
agreement should be executed separately from the initial asset purchase agreement and
according to Shariah the two should not be conditioned one upon the other. Any such
conditionality of entering into the purchase of the assets so as to lease them back to the
seller is not acceptable to the majority of Islamic jurists based on the hadith of the
prophet “the prophet peace be upon him prohibited sale and (overriding) condition”. This
equated to two agreements in one.
Sukuk al Ijarah is divided into purchase agreement, lease agreement, service
agreement and purchase undertaking. This sukuk is based on property right to some other
benefit based on the agreed price. Sukuk al Ijarah is generally issued on a sale and
leaseback arrangement of real estate. This type of sukuk is generally a popular structure
with sovereign issuers. The proceeds from the sukuk are generally applied by the issuer
to purchase real estate from the Originator and then the issuer leases it back to the
originator. The Originator accepts to repurchase the real estate upon maturity or early
settlement at the original purchase price. It is required by Shariah law for the issuer to
undertake the major maintenance of the asset. However, most of the times an Obligor is
appointed to take charge of those activities on behalf of the issuer(IFSB, 2009).The Sukuk
issuance by the IDB, through NASDAC Dubai platform, serves as an excellent and
promising example for future arrangements. The prospectus contained clear and precise
Shari’ah considerations outlined by numerous leading scholars and it involved an
innovative portfolio combination of Ijarah, Murabahah and Istisna projects (see figure
1). Also, returns were not ambiguously related to market benchmarks but were agreed
upon a fixed rate of return on the relevant contracts and assets. However, some of the
corporate and sovereign Sukuk prospectuses have come under increased scrutiny for their
Shariah suitability. The predominant feature of several of the prospectuses is the floating
rate return distributed to the Sukuk holders.
Figure 1 NASDAC Dubai Sukuk al-Ijarah structure (DIFC, 2010)
NASDAQ Dubai Sukuk Mudarabah Structure

This sukuk is divided into Mudarabah agreement and purchase undertaking. This is
a cooperation agreement between the two parties; investors and managers of capital. This
sukuk is an investment sukuk which denotes the common ownership of equally valued
units in the Mudarabah equity. The holders of the Sukuk al Mudarabah are the suppliers
of capital. They would own shares in the Mudarabah equity and its returns according to
the percentage of ownership share (NASDAC Dubai 2011). The holders of Sukuk
Mudarabah hold the right to transfer ownership by selling the deeds in the securities
market.
TheJournal
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– Dec 2016 45
Figure 2 NASDAQ Structure of Sukuk al- Mudarabah (DIFC, 2009)
NASDAQ Dubai Sukuk Musharakah Structure

This type of Sukuk is divided into Musharakah agreement, management agreement,
and purchase undertaking. This usually involves two parties cooperating to install a
capital for motivation. One of the structures that is popular among corporate issuers is
Sukuk al-Musharakah. This was until the Accounting and Auditing Organization for
Islamic Financial Institutions ruling on Sukuk at the beginning of the year
2008(NASDAC Dubai 2011). These rulings have prohibited the use of nominal value
purchase undertakings in such sukuk. In Sukuk al-Musharakah, the subscription proceeds
are contributed by the issuer to enter a joint venture with the Originator who contributes
either his own capital/asset or makes a contribution of some type. The profits are shared
between the Issuer and the Originator based on an agreement. However, Shariah requires
that any losses should be shared between them according to the ratio of capital
contributed (NASDAC Dubai 2011). See the figure below for more details.
Figure 3: NASDAQ Structure of Sukuk al- Musharakah (DIFC, 2009)
Impact of Sukuk in Developing UAE Economy

It has been estimated by Standard and Poor that 20 percent of investors who are
willing to invest billions would now opt for an Islamic financial product spontaneously
over a conventional financial product with similar risk-return profile. This means that
there has been an increasing amount of use of the Sukuk. This is especially common in
the United Arab Emirates and other GCC countries. In the year 2006, Sukuks worth $20
billion have hit the market. They were in varied structures and sizes. The companies have
started to seek methods to diversify their sources of financing with Sukuk. Even though
Sukuk have been actively used by companies in Kuwait, Bahrain, Saudi Arabia, and
Qatar. Although in 2006, Malaysia has led the Sukuk issue market. NASDAQ Dubai had
issue sukuk which has impact on the UAE economy. There have been a wide range of
purposes for sukuk structures and they are evolving rapidly based on the needs and
demands of issuers and investors.
They could be simple sale and leaseback structures like the $1 billion Dubai
Department of Civil Aviation Sukuk which was issued in the year 2004, or it could be the
$2.53 billion trust finance Sukuk structure issued by Aldar Properties in March 2007
which demonstrated the flexibility of Islamic finance principles (NASDAQ Dubai, 2014).
Sukuk have been used to raise corporate finance for acquisitions or working capital
purposes. There are several examples which show that Sukuk has evolved into a
diversified, internationally acceptable instrument.
Due to the development of sukuk market, the UAE economy has transformed to
become more diversified and is more driven by private sector. NASDAQ Dubai has used
sukuk development to diversify the UAE economy in creating a platform for the global
financial capital market with the hope to make UAE a center for Islamic economy. The
presence of the deep and liquid sukuk market offers stability to the financial system in
this highly competitive environment. It is also proven that sukuk can be implemented
during the economic downturn. One of the examples for this was in 2005, the World
Journal
The ofofIslamic
Impact Banking and
Sukuk Investment in Finance OctUAE
Developing – Dec 2016
Economy 47
Bank has issued a Sukuk or Islamic bond for the redevelopment of Acheh after the
tsunami of 2004 (ZetiAkhtar, 2010).
SukukNASDAQ Dubai and its impact on UAE Economy

NASDAQ Dubai is a leading venue for the listing of Sukuk and bonds. Dubai being
the third largest Sukuk venue globally, it currently has a listing of a total nominal value
of USD 24.05 billion. The exchange intends to expand its role as a global centre for
Sukuk listings, in line with the Dubai government's intention to be the international
centre of the Islamic economy. The following are the list of Sukuk issued by NASDAQ
which helps the United Arab Emirates economy:
Table 1: List of sukuk in NASDAQ Dubai
List of Sukuk in NASDAQ Dubai

1. Al ShindaghaSukuk Limited (flydubai)
2. Alpha Star Holding Limited (DamacSukuk)
3. Dar Al-ArkanSukuk Company Ltd Trust Certificates 2016
6. DEWA Sukuk 2013 Limited
7. DIB Tier 1 Sukuk Ltd.
8. DIFC Sukuk Limited
9. DIP Sukuk Limited
10. DP World Sukuk Limited
11. EIB Sukuk Company Ltd Trust Certificates 2017
12. EIB Sukuk Company Ltd Trust Certificates 2018
13. Emaar Sukuk Limited Trust Certificates 2016
14. Emaar Sukuk Limited Trust Certificates 2019
15. EMG Sukuk Limited
16. GEMS MEA Sukuk Limited
17. Hong Kong Sukuk 2014 Ltd - 144 A
18. Hong Kong Sukuk 2014 Ltd - Reg S
19. ICD Sukuk Company Limited Trust Certificates 2020
20. IDB Trust Services Limited Trust Certificates 2015

25. IDB Trust Services Limited Trust Certificates Sept 2019
26. JAFZ Sukuk (2019) Limited
27. MAF Sukuk Ltd
28. Medjool Limited (Emirates Airline)
29. RAK Capital
30. Sharjah Sukuk Ltd
31. SIB Sukuk Company III Limited
Based on the list of Sukuk above, there is no doubt that Sukuk issue by NASDAQ
Dubai has impact on UAE economy. A good example of this is the Dubai Islamic Bank.
Dubai Islamic Bank issues Sukuk which is an Islamic bond; the Bank is a global leader in
managing Sukuk that covers assets from aircraft to property. It uses many types of Sukuk
that includes Murabahah, Istisna, Ijarah, Musharakah and Mudarabah (DIB, 2014).
The Sukuk Ijarah employed by the Bank is a lease contract between the Bank and
the customer where the former is the lessor and the latter is the lessee. This contract is
maintained for a certain period of time and the title of the property is transferred to the
customer at the end of the period if the bank receives all payments properly. The period
typically includes 3 to 7 years. Thus, the Bank helps its customers to lower their capital
expenditure by acquiring the required machinery on leases instead of buying it. (DIB,
2014).
The Sukuk finance instruments of the Bank in 2013 are AED 2,807,603,000. The
agreements are Shariah compliant. In 2008, one of the Bank’s subsidiaries issued a
convertible Sukuk that meets the Shariah requirements by expecting a profit of 4.31% per
annum. It was listed on NASDAQ Dubai which was completely redeemed in the month
of January 2013. A non-convertible Sukuk also issued in 2008 in the form of Trust
Certificates which were listed on NASDAQ Dubai which was completely redeemed in
the month of July 2013. The profits that were identified on these Sukuk are expected to
pay quarterly in arrears (Dubai Islamic Bank, 2013). In 2012, Trust Certificates were
issued by the Bank by expecting 5.15% profit per annum. The profits that were identified
on these Sukuk are expected to pay semi-annually in arrears. These were listed on Irish
Stock Exchange that will mature in 2017. Dubai Islamic Bank issued Tier 1 Sukuk
amounting to AED 3,673 million (DIB, 2013). Tier 1 Sukuk is a continuous security and
does not have any fixed date for its redemption. Tier 1 Sukuk is listed on the Irish Stock
Exchange and callable after the six years of period by the Bank in 2019. The net proceeds
of the Bank are invested in the form of Mudarabah. The expected profit is 6.25% per
annum and payable semi-annually (DIB, 2013).
Findings & Data analysis:

Survey was conducted among a number of Sukuk investors' who already invest in
Islamic bonds in order to identify the opinions of the respondents and also studying the
The ImpactofofIslamic
Journal Sukuk Investment in Developing
Banking and Finance OctUAE Economy
– Dec 2016 49
relevant literature and phenomena. Below there are different bar-charts, pie-charts and
Pareto diagram that illustrate Sukuk investors responses:
The following pie-charts show that more than half of respondents were
Muslims, Educated people and male gender.
Sukuk demand is mostly driven by Shariah requirement
The survey results shows that 62% of investors invest in sukuk due to religious
mandate to only invest in Islamic instruments; these investors are mainly Muslims.
Diversification is the second primary reason for investing in sukuk; these are mainly by
non-Muslims that are looking to diversify their investment portfolio given the attractive
yields offered by sukuk.
UAE, Malaysia and Saudi Arabia are the top Sukuk investment locations for 2014
and 2015. There is a growing appetite towards the United States from investors and
traders who may be looking to diversify their risk into developed economies. Investors
show a preference for existing markets that are witnessing sharp Sukuk growth such as
Turkey
UAE 25
Malaysia 18
Saudi Arabia 12
Qatar 9
Turkey 5
Bahrain 3
Singapore 3
United kingdom 1
United state 1
France 0
Investors and traders in UAE prefer to invest in sovereign issuances, then

financial services, followed by Oil &Gas due to their solid credit and high
cash inflow.
Sovereign 20
Financial Services 18
Oil & Gas 16
Power & Utilities 15
Construction 7
Real Estate 4
Services 5
Telecommunication 3
Transport 1
Most of arrangers agree that the cost of issuing sukuk is either the same or more
expensive than conventional bonds.
Around 28 of investors believe that the liquidity and tradability drives the price gap
between Sukuk and bonds. The main reason behind the lack of liquidity and tradability is
the relatively smaller size of the Sukuk market compared to bonds. In addition, there is
Journal
The of Islamic
Impact of SukukBanking andinFinance
Investment OctUAE
Developing – DecEconomy
2016 51
also the lack of shorter term Sukuk for treasuries to reinvest their short term deposits to
meet their short term obligations.
Liquidity & Tradability 28

Sharia noncompliance 8
risk
Sukuk paper scarcity 5
Sukuk structure 3
The majority of Sukuk investors' in UAE prefer shorter terms of 1 to 3 years.

Less than 1 1
year
1 - 3 years 26
3 - 5 years 8
5 - 10 years 1
10 - 20 years 1
20 years and 0
above
Lead arrangers and investors agree that global market interest rates are the most
important factor affecting sukuk pricing. Markets have been put under pressure by the
U.S.
Global market interest 20

rates
Investor business 3
structure/diversity
Purpose of sukuk 4
issuance
Size of sukuk 5
Sukuk rating 15
Type of currency 3
Type of issuer 3
Type of market 5
(international or domestic)
Type of sukuk –
assetbased or
assetbacked
Sukuk pricing 4
Investors believe that the yield on Sukuk would rise more than 1% if there were a
1% rise in global interest rates.
Most of arrangers and investors believe that regional distribution in the sukuk
primary market affects Sukuk tradability and liquidity. 82% of investors say that
distribution allocation in the primary market between the different types of investors
(banks, government, funds. etc) affects tradability and liquidity.
Most of investors believe that the lack of global international Islamic banks with
wide networks, such as HSBC, JP Morgan, and Citi Bank, is the most significant setback
for sukuk tradability and liquidity.
JournalofofSukuk
The Impact Islamic Bankinginand
Investment Finance UAE
Developing Oct –Economy
Dec 2016 53
It is noticeable that in all international and big sukuk issuance, conventional banks
are the main lead arrangers and book runners of sukuk while Islamic banks only play a
secondary role by being a support to the issuance distribution limited to local markets.
Conclusion
The Sukuk investment has always been preferred by the people who have
preferences for the Islamic financial systems. Thus it is imperative that the target market
should be identified. The most attractive location has been identified as UAE as it has
developed a strong market for Sukuk. The cost of issuing Sukuk is more or at least the
same as the conventional bonds. This is affecting the success of sukuk as a whole. Sukuk
is also facing tremendous issues in terms of marketability. It is being affected as the
investors are not in a position to trade when compared to the conventional bonds.
The market for Sukuk is now maturing and there is an increasing momentum in the
wake of interest from issuers and investors. Sukuk have confirmed their viability as an
alternative means to mobilize medium to long-term investments from a huge investor
base. Different Sukuk structures have been emerging over the years but most of the
Sukuk issuance to date has been Sukuk al-Ijarah, since they are based on the undivided
pro-rata ownership of the underlying leased asset, it is freely tradable at par, premium or
discount. Tradability of the Sukuk in the secondary market makes them more attractive.
Although less common than Sukuk al-Ijarah, other types of Sukuk are also playing
significant role in emerging markets to help issuers and investors alike to participate in
major projects, including airports, bridges, power plants etc.
This paper concluded that the sukuk issuance by NASDAQ Dubai has an impact on
the UAE economy. This is as a result of the development of sukuk market, which has
transform the UAE economy into a more diversify and driven by private sector. This in
turn creates a platform for the global financial capital market in supporting initiatives by
Dubai Government to make UAE a center for Islamic economy.
References
Abdulkader T,& others,(2005).Structuring Islamic Finance Transactions, London:
Euromoney Books, p 154,
Sano, K. M,(2004).Sukuk al ijarah, a paper presented at the 15 meeting of Islamic Fiqh
Academy Council, Sultanate of Oman, p 10-12.
Suleiman Abdi Dualeh,(1998). Islamic Securitization: Practical Aspects. A paper
presented at the International World Conference on Islamic Banking, Geneva July
8-9, p2-3.
IFSB-7. (2009). Capital Adequacy Requirements for Sukuk, Securitization and Real
estate investment, Malaysia: Kuala Lumpur, pp 3-4.
AAOIFI, (2003). Sharia Standards. Accounting and Auditing Organization for Islamic
financial Institutions, Kingdom of Bahrain, p 298
Zohra J. (2006).Sukuk Structures – A Comparative Study from a Regulatory perspective,
Islamic financial news, Vol 3, issue 18.
MonzerKahf, (1997).The use of Assets Sukuk al-Ijarah for bridging the Budget Gap,
Islamic Economic Studies, vol4, pp 75-92.
http://www.nasdaqdubai.com/listing/listing-criteria#sukuk: Visited on 02
January, 2015
Sano, K.M,(2001). The Sale of debt as implemented by the Islamic Financial Institutions
in Malaysia, Research Centre: IIUM press International Islamic University
Malaysia, 1st ed, pp 20-25.
The council of Islamic Fiqh Academy, in its sixth session held in Jeddah, Kingdom of
Saudi Arabia from 14-20 March 1990, resolved that Assets back securitization is
permissible.
Sahih Bukhari
Ali A.T, (2004).Managing Financial Risks of Sukuk Structures, A dissertation submitted
in partial fulfillment of the requirements for the degree of Masters of Science at
Loughborough University, UK,.p 40.42.
Abozaid, A. and Al-JarhiMabid, (2010). Reasons for Failure of Some Sukuk Issuances.
IRTI Islamic Economics Research Center Conference, King Abdul Aziz
University, Saudi Arabia.
Afshar, T. A, (2013). Compare and Contrast Sukuk (Islamic Bonds) with Conventional
Bonds, Are they Compatible? The Journal of Global Business Management, Vol9,
(1), 44-52.
Ahmed, K, (2011). Sukuk: Definition, Structure and Accounting Issues. Visited
November 2, 2014,
http://mpra.ub.unimuenchen.de/33675/1/MPRA_paper_33675.pdf
Objectivising the Social Justice Paradigm

in Islamic Finance: [An Appraisal]
By
Abdul Azeez Maruf Olayemi,* Siti Mashitoh Mahamood,**
Marifatul Haq Yasini,*** Ahmad Hidayah Buang****
Abstract
Islamic finance is hyposthasised as the avatar of egalitarianism, equity
and the zenith of social justice. Nevertheless, some scholars argue that
the social justice objective of the Islamic finance is idealistic. This paper
examines the extent to which the acclaimed social justice objective is
innate to the services of the institutions. The focal areas include the
provision of benevolent loan, corporate social responsibility, the duty of
the payment of Zakat, extermination of debt based instruments, total
elimination of interest, gambling and uncertainty from the financial
system. However, is it concluded that, although, Islamic finance strives
to realize its social justice objective, nevertheless, the institution needs
to lift the bar of its acclaimed financial egalitarianism further higher.
Keywords: Islamic Finance, Social Justice

Introduction
The modern Islamic finance is projected as a financial system with the aim of
realizing social justice, in variance with that of the conventional finance. The major end
of the conventional finance is seen to be the maximization of the net income of its
capitalist stakeholders. This objective of Islamic finance strengthens its appealing
outlook across religions and regions. ‘Interest, gambling and uncertainty which are the
underlying principles of the operations of the conventional system are eliminated from its
*
Abdul AzeezMarufOlayemi, PhD, Post-Doctoral Research Fellow, Department of Shariah
and Law, API -IPPP, University of Malaya, Malaysia
**
Siti Mashitoh Mahamood, PhD, Associate Professor, Department of Shariah and Law, API
/IPPP, University of Malaya, Malaysia.
***
Marifatul Haq Yasini, M.Sc. Islamic Banking and Finance, International Centre for
Education in Islamic Finance (INCEIF), Kuala Lumpur, Malaysia.
****
Ahmad HidayahBuang PhD, Professor, Department of Shariah and Law, API /IPPP,
University of Malaya, Malaysia.
practices. Its operations are structured on the mechanisms of sales, partnership or leases
in order to guarantee its social justice objective in the financial system. This is, in
addition to its promise of the assuaging of the conditions of the less privileged and the
poor through the duty of payment of Zakat, provision of benevolent loan for business
creation, corporate social responsibilities etc. Although, this is the light in which the
modern Islamic financial system is projected, nevertheless, the aim has been reckoned as
merely idealistic. This study surveyed some of the scholarly articles on the topic. The
approach of the study is qualitative and narrative. It, thus, concluded that although there
are a few misconceptions about the operations of Islamic finance, however, the criticisms
are objectively constructive.
Importance of Social Justice in Islamic Finance

To start with, the phenomenal disparity between the Islamic finance and the
conventional financial system is the emphasis of the former on the need for social justice
in the financial system while the latter considers it as moralistic and unnecessary. Islamic
finance operates on the principles that can ensure justice and equity in the distribution of
wealth, opportunities, and privileges within a society through the financial system.
However the conventional system is designed in such a manner in which, the capitalist
stakeholders will move onwards to make more wealth through the financial system, while
the working class and the less privileged will languish in economic demand. The
operation of the conventional system on the basis of interest subjugates the larger world
to eternal servitude to the very few capitalists. Therefore, the opening between the
socioeconomic classes continue to expand, and there appear inequality in the attainment
of education, wellness maintenance and living standards between the several economic
strata. The modern Islamic financial system emerges as a universal remedy to the
socioeconomic disparity. The operating mechanism of the Islamic finance, which is based
on sale, partnership and lease is viewed as a promising method for the refurbishment of
social justice if it is properly enforced. Nevertheless, the proper implementation of the
mechanism by the players remains essentially questionable.
The review of the activities of the Islamic financial institutions shows that the
institutions are yet to wholly uphold their acclaimed ethical identity (Hudaib, 2007). For
instance, although, most of the Islamic financial institutions rely on common stock,
which is considered acceptable under the Islamic law of transaction, given the inherent
element of profit and risk sharing in it (Naughton, 2000). However, the trading of the
stocks is still based on the conventional methods that include speculation which is
considered as gambling and prohibited by the Islamic law of transaction. Other disputed
practices in the system are the practices of short selling, margin trading, the use of stock
index and equity futures and options which are purely conventional practices and are not
compatible with the Islamic commercial law. Islamic finance needs to improve on these
areas in its stock trading. Thus, the development of holistic Shariah compliant stock
market is imperative for the industry to fulfil its social justice objective.
In the same vein, a survey that was conducted on the cost and profit efficiency of
the Islamic financial institutions in some GCC countries shows that the efficiency of the
institution is more centered to the generating of profits than the controlling of costs,
which is an ethical matter (Mariani Abdul-Majid, 2010). This is the practice in the formal
institutions that is thought immoral for Islamic finance. It will be erroneous for the
Journal the
Objectivising of Islamic Banking
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in Islamic Dec 2016 57
players of Islamic finance to believe that the institution can accomplish its social justice
objective on that foundation. Such practice does not portray the institution positively in
the area of its efficiency due to the gain in high loan activities (Abderrazek Srairi, 2010).
Hence, since the founding stone of the practice of the Islamic financial institutions is the
upholding of the Islamic ethic that is embodied in abstinence from interest based practise,
uncertainty and gambling, there is a need for concerted efforts in the part of the
participants to ensure that the principles are put into practice to attain the social justice
objective.
In the other hand, only few Islamic financial institutions are complying with the
requirement of the payment of Zakat which is meant to bridge the gap between the rich
and the poor in the society. The commitment of the institution to the provision of
benevolent loan and charity for the purpose of the microfinancing of the less privileged
and for creating jobs is very slim. An investigation into the ethical identity index (EII) of
seven Islamic financial institutions over the period of three years, in terms of
microfinancing shows that only one of the institutions was above average. The remaining
six institutions fall below average. This shows that the goal of the institution is to
maximize profits, which is the same practice in the conventional financial institution.
Furthermore, Islamic finance has not reciprocated the patronage of the society,
despite its social justice mantra. For example, the precept of corporate social
responsibility is nonetheless to be adequately put into exercise by the institutions. The
directors of the Islamic finance institutions need to shift their perception toward corporate
social responsibility and fully stand by it to realize the social justice objective of the
foundation. It is really clear that Islamic finance is lagging behind the conventional
finance in this respect. A survey indicates that the contribution of the Islamic financial
institutions to the creation of welfare through charity is really petite in comparison to the
patronage it receives from the public (Thankom Arun, 2013).
Another affair that suggests the elusiveness of social justice in the practices of the
modern Islamic finance is the reluctance of the institution toward creation of effective
accessible platform for microfinance. The conventional microfinance is more accessible
to the people round the world to a greater extent than the Islamic microfinance. This
constitutes an impediment to the development of the Islamic institution at the grassroot
level. A study of the condition of Islamic macrofinance in ten countries from the years
1996 to 2002 shows that Islamic finance needs to ameliorate its public acceptability
through microfinance. Therefore, the objective of Islamic finance should not be just about
profits. The social justice aspect should be brought to the forefront.
Additionally, since the debt based method of financing in the conventional system
is considered as the obstacle to realization of social injustice in its practices, Islamic
finance ought to wholly embrace the risk-sharing techniques rather than the risk-shifting
methods in its practices to accomplish its social justice objective. The institution must
completely refrain from the use of debt based instruments in its activities. Debt based
instruments are the bane of all financial crises and social iniquity. In addition, there is a
need for the creation of Shariah compliant pricing model for Islamic finance institution
(Naifar, 2013).
On the other hand, the above argument does not suggest that Islamic finance has
completely abandoned its social justice objective. The criticism is meant for the spuring
of the institution to progress on its obligation toward the society. Islamic finance has
contributed significantly toward the realization of the social justice objective in some
jurisdictions. For example, a survey of the ethical practices of the Bangladeshi Islamic
financial institutions between 1983 and 2010 shows that there is improvement in its
relationship with the society, due to the advance in its sustainable development
programme, charity and employee wellbeing. The improvement is attributed to the
acceptance of the method of wider stakeholders’ approach in the services Islamic finance
in the rural area. Therefore, the bank adjusted from the pattern of dependence on debt-
based method for the management of their investment portfolio to the method of
socioeconomic development which is the mission of the Islamic finance in the society
(Ataur Rahman Belal, ‘n.d.’).
Another good example in this context is that of the Islamic finance in Malaysia.
The Malaysian Islamic financial institutions diverted a favourable output of its financial
market toward the funding of projects which in turn contributed to the creation of
businesses, in fulfilment of the social justice objective. Thus, the public participation in
the macroeconomic augments and the financial stability became formidable. That is due
to the development of Islamic financial institutions in the country, as a result of the
obligation to the execution of the social justice objective through Islamic microfinance
(Ibrahim, 2007).
Toward the Social Justice Objective

Last of all, as Islamic finance is becoming increasingly acceptable across the
western oriented societies, in Africa, Asia, Europe and etc. The institution needs to shore
up the acceptability with a dynamic implementation of the social justice objective to
establish its uniqueness, and dissimilarity to the prevalent capitalist conventional finance.
One of the major issues hitherto was the challenge of the acceptability of the institution in
the western oriented world. Nevertheless, the opponents of Islamic finance in the
jurisdictions have now come to terms with the reality that the principle of prohibition of
interest and usurious practices, upon which Islamic finance operates, is actually in
conformity with the financial doctrine of all the three Abrahamic religions of Judaism,
Christianity and Islam (Foucart, 2013). This perception gives the Islamic finance a
supplementing opportunity of acceptability in the Christian western world.
Moreover, although, there appears to be a slight disparity between the concepts of
usury and interest in the Christian faith, (Abraham, 2007), that is to say that, while
Christianity forbids usury for the reason of being an excessive increase on actual loan and
disruption of equity between the loan provider and the beneficiary, it does not forbid
interest. The faith permits interest on the basis of its interpretation as a mere
compensation to a loan provider. Conversely, the Islamic financial law does not
differentiate between interest and usury. Both are considered as the prohibited ‘riba’
which is an increase on a loan or debt. Nonetheless, the slight difference in the
interpretation is no more than elucidation. The reality is that all the religions do not
accept usurious practices. This aids the perception of the western oriented societies to
change positively toward Islamic finance. For that reason, the positive perception ought
Journalthe
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Social Justice and Finance
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in Islamic – Dec 2016 59
to be complemented with the social justice objective to speed the development of the
institution in the jurisdictions.
Thus, it can be reasoned that the development of Islamic finance currently rests on
its dedication to the pastime of its social justice objective as contrary to the line of
reasoning that the Shariah requirement policy is an obstruction to its growth (Zarrokh,
2009). The main obstacle to its growth is its ineptitudeness toward the realization of its
social justice objective. In fact, Islamic finance is being perceived as a parallel financial
system to the conventional system in the setting of worldwide business operations
(Foucart, Western Financial Agents, and Islamic Ethics, 2013). It has come out as an
alternative to the conventional capitalist system. The western financial managers have
jettisoned the negative prejudices (Rice, 1999). Thus, it is up to the system to maintain
itself as a viable alternative by catering for the needs of the less privilege and those at the
grassroots through a vigorous pursuit of the social justice objective of the scheme.
Conclusion
To sum up, it can be deduced from the available literatures that Islamic finance is
far from carrying out its social justice objective. There is a need of the institution to
recommit itself to its acclaimed ethical identity to achieve the social justice objective.
Therefore, with the positive perception and the acceptability that the Islamic finance is
garnering across the world, having proved itself as a buffer against any financial crisis,
the institution needs to improve in the contentious areas in its practices. One of such areas
is that of the its equity market. Although common stock is supposed to be acceptable to
the Islamic commercial law, nevertheless, matters of speculation, short and margin
trading, the use of line index, equity futures etc. are however questionable. The
deficiency of difference between Islamic and conventional stock markets does not portray
the Shariah compliant stock market in the light of pursuing its social justice objective.
The realisation of the social justice objective of the Islamic finance takes a breather on
the total compliance of the establishment with the ethical demands of the Islamic
commercial law. The requirements are embodied in the elimination of usury or interest
(riba), gambling or speculation (Maysar) and uncertainty or speculation (ghara) from the
financial system in totality. Additionally, Islamic finance needs to recommit itself to the
obligations of payment of Zakat, provision of benevolent loan, socioeconomic
development and corporate social responsibility (CSR). This is the only approach in
which the social justice objective of the Islamic finance can be realized.
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Crowdfunding and the Opportunity

Presented in the American Islamic Financial
Sphere
By
∗
Husam Suleiman
Abstract
This paper serves to explore the next paradigm of evolution regarding
Islamic finance products in light of the development and vast success of
crowdfunding platforms1. The first section examines the shifting paradigm of
the Islamic finance lending product in America; the Islamic finance mortgage
product. Demonstrated is that each subsequent shift in lending procedure
has removed Islamic attributes associated therein, resulting with current
products that have lost the substance of Islamic teachings and have
fundamentally converged to the conventional product in function and form.
The second section then reviews the methodology and practice of
crowdfunding in the current financial landscape. Thereupon, juxtaposed are
the advantages and attributes of crowdfunding and Islamic finance,
highlighting the overwhelming similarities. The third section accordingly
considers the current opportunity presented with crowdfunding, outlining
additional attributes that must be present in an Islamic finance product. The
article ultimately concludes by calling upon Islamic financial product
developers to explore and pursue the current opportunity presented by the
natural pairing of crowdfunding and Islamic finance products.
Keywords: Crowdfunding, Alternative Finance, Cooperative Finance,

Islamic Finance
1. Introduction
Critical examination of the paradigmatic history of the American Islamic mortgage
Islam is a complete and integrated code of life encompassing all the affairs and
∗
Author: Inland Empire Zakat Cooperative, 11478 Southampton Court, Rancho Cucamonga,
CA 91730, United States of America, 01 818 522 7266, Husam22@gmail.com
1
Although this paper aims solely to discuss the American Islamic Mortgage, the relevancies
can easily be extrapolated to other segments of finance.
interactions between individual and society, manifesting itself, in the communal aspect,
as justice, brotherhood, and social welfare.
Narrowing the focus, Islamic finance aspires to create the conditions which
maximize the success of the individual, and society, by the incorporation of ethical
values; such as justice, benevolence, moderation, sacrifice, consideration, and
cooperation2. The Islamic approach to charitable givings, cooperative business
agreements and the mandating of disclosure exemplifies the application of such
attributes.
Conversely, dealings [and contracts] that exploit, deceive, hoard resources or
guaranteed gain without liability are Islamically unlawful.
In the dominant method of Islamic finance demonstrated in America, the Islamic
finance mortgage product, there has been a steady regression towards the conventional
counterparts.
A brief summary will show that the early methods of finance implemented were
highly altruistic, cooperative and conforming to the character of Islamic finance. The
subsequent shifts slowly removed attributes of Islamic finance and introduced prohibited
items into the transaction. Ultimately, the current products resemble, in form and
function, that of the conventional product, ladden with prohibited issues and not
consistent with the spirit of Islamic finance.
The shifting of the Islamic finance paradigm has seen several definitive stages.
1.1 Immigrant Lending Model
Immigration of Muslims to America increased rapidly following the adoption of the
Immigration and Nationality Act of 1965 [Hart-Cellar Act]3.
Having no established credit or employment, obtaining financing using traditional
methods would prove to be difficult for newly immigrated Muslim. As a result, to
facilitate financing, immigrants would simply borrow from family and friends [often
referred to as intra-family loan/mortgage]. Intra-family lending was not inordinately
novel as it was a prevalent method of finance in the respective home countries of the
immigrants. Such loans enabled immigrants to purchase businesses and homes in lieu of
traditional bank financing. The terms of lending were typically very short and interest
was low, or for the Islamically inclined, not present. This method encapsulates the crux
of Islamic Finance, as described above by Chaudhry.
The benefits of such intra-family lending were considerable for borrower as the
process was relatively straightforward and did not consider typical bank requirements
such as credit scores and debt to value ratios. Underwriting consisted of the assessment
of character [status], relative financial aptitude, and relevant payment history of the
borrower. If the loan pertained to a business, assessment of the feasibility was conducted
by the lender, as both parties shared a vested interested in the entrepreneur's success.
2
Chaudhry, Muhammad Sharif. "Fundamentals of Islamic economic system."Burhan
Education and Welfare Trust 198 (1999).
3
Arab Americans an integral part of American society. Dearborn: Arab American National
Museum, 2010. Print.
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Simply written contracts were utilized, if any, which contained no ambiguity. Unsecured
by nature, recourse methods would be limited to social pressure by family to influence
repayment.
The degree of success of obtaining finance ultimately depended upon the network
[family and friends] of the borrower. The proximity of new immigrants, geographically
and ideologically, helped facilitate cooperation and support. However, the foundation of
intra-family lending revolved around the beneficent nature of the lender, as well as a
desire for the success of their fellow compatriot.
Although not as commonplace as the past, Americans continue to utilize intra-
family lending as a method of finance4.
1.2 Community Bank Loans / Relationship Banking
As immigrants settled and assimilated, they established accounts and relationships
with [Thrift and Community] banks. Banks originated Interest bearing [commercial,
industrial and consumer] loans based on the private information gathered through such
long-term relationships. These loans were often intermediary and collateralized. Banks
usually did not face much competition in making such loans, which kept the interest rates
relatively high5.
This shift in financing not only introduced interest but other factors associated with
borrowing funds, such as excess leverage, an increase of spending and a reduction of
savings31.
Permissibility out of necessity (Ruling of the Fiqh Council of North America)
The ensuing shift came about as immigrants built up suitable credit, commercial
lending intermediation declined in favor of conventional real estate loans, which offered
more favorable rates, longer terms and higher LTV’s. This trend continues to this day as
the percentage of commercial and consumer loans continue to decrease while real estate
loans increase6.
Subsequently, Muslims [conscious of interest] sought clarification from scholars
regarding the permissibility of conventional mortgages.
As a direct result, in late 1999, the Concluding Declaration of the First Fiqh
Conference of the Fiqh Council affiliated to the League of Shari’ah Scholars of North
America stated that, ‘where a Shari’ah compliant alternative is not available, and a
Muslim wants to own a house, via a bank mortgage, most of the participants take the
view that it is allowed to own the house via a mortgage from the bank, due to the need,
which is treated as a necessity7.’
4
2013 Survey of Consumer Finance Chartbook, Board of Governors of the Federal Reserve
System, Washington. 2013.
‘ Other’ lending amounts to over 6%, part of which would constitute loans between friends
and family
5
Hubbard, R. Glenn, and Anthony Patrick O'Brien. "Money, banking, and the financial
system Pearson." (2012)., p. 286
6
Reserve, Federal. "FEDERAL RESERVE statistical release." (2010).
7
Al-Sawi, Dr Salah, ‘A Polite reconsideration of the fatwa permitting interest-based
mortgages for buying homes in Western societies,’ 2001
The council acknowledged the prohibition of interest; however, based on necessity,

most participants permitted the adoption of a conventional mortgage. Further
recommended was that effort continue to create Islamically acceptable alternatives and to
support and strengthen Islamic groups, banks, and organizations working to do so8.
The opinion of the council did not convince the staunch opponents of interest. As a
result, individuals who did not feel comfortable with the ruling continued to avoid
conventional mortgages. Those who felt comfortable, or indifferent, generally obtained a
conventional mortgage with the associated attributes.
1.4 Islamic Contracts
Following the recommendation of the First Fiqh Conference, the next phase of
evolution focused on the methodology of the loan. The formation of Islamically
‘compliant’ method, based on contracts, followed. Most common were forms of ijara
(lease to purchase), Murabaha (cost-plus sale) and Musharakah (partnership). Such
contracts existed elsewhere before gaining traction in the US [such as Al-Baraka Bank in
London] after notable scholars, such as Qaradawi, issued rulings in favor of the
mechanism implemented9.
The pioneers were financial intermediaries. Funds borrowed would correspond
directly with the amount of capital [deposits in forms as profit sharing accounts] raised
and obtained from investors. The Islamic banks would then purchase real estate with the
homebuyer, based on the acceptable methodology, in which there was no mention of
interest10.
The amount of loans written were directly correlated to the finite working capital.
As a result, a severe bottleneck developed as the products gained more popularity.
Further detrimental was that the cost of obtaining Islamic contract mortgages was greater;
as additional administrative costs encircled the Islamic contract. The contracts also
required a higher down payment versus conventional loans. Consequently, scholars
[circa 2001] issued opinions permitting conventional versus Islamic financing as
‘reasonable’ alternatives were not available; if Islamic mortgage were unattainable for a
potential homeowner, or the Islamic finance providers were so few that dealing with them
would be more risky, it would be permissible for the Muslim consumer to utilize
conventional finance11.
8
“ To work to provide Islamic alternatives to solve the problem of financing residences by
creating a sufficient number of Islamic financial institutions or co-operative housing
associations (which it is hoped will consider the circumstances and needs of those with
limited income), in order to move from the situation of concessions and necessity to one of
determination and choice.”
9
ElGamal, Mahmoud (1990) Translation of Selected Fatwa of Al-Baraka Seminars - Seminar
6 [text]. Retrieved from http://www.lariba.com/fatwas/qaradawi.htm
10
Zyp, Victoria Lynn. Islamic finance in the United States: Product development and
regulatory adoption. Diss. Georgetown University, 2009.
11
Delorenzo, Yusuf Talal. "Mortgages for a Home." Http://muslim-
investor.com/answers/mortgage-for-a-home.html. Muslim-Investor, 13 Mar. 2001. Web. 23
Feb. 2016. <http%3A%2F%2Fmuslim-investor.com%2Fanswers%2Fmortgage-for-a-
home.html>.
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Although mortgages took a clear step in the Islamic direction [via acceptable
contracts and intermediation], limiting factors, such as capital and higher cost, made it
difficult to increase market share.
1.5 Securitization of Islamic Mortgages
The most recent shift of the lending paradigm took place in order to resolve the
capital influx conundrum. Strategic alliances developed with Government-Sponsored
Enterprises [GSE’s]. Subsequently, this translated to unlimited funds, lower costs, and
larger product selection for the providers of Islamic mortgages when securitized in the
secondary market.
Following the GSE alliance, LaRiba, a pioneer of the contract method, expanded its
market share from 2-3 homes per month to more than 50 per month! In addition, the
product base also expanded to include lower down payment options. Meanwhile,
companies that evaded the secondary market affiliations retained a limited market share.
Ameen Housing, a successful mortgage co-operative, can only support approximately 20
homes per year due to the dependence on deposits.
The increase in market share, for Islamic providers, came at a cost of sharp
criticism as the product highly resembled the conventional market alternatives12. As the
method of affiliation with the GSE’s became better understood, scholars reconsidered the
involvements of the GSE’s and advised borrowers to find an alternative. This view
became more mainstream following the release of the opinion of the Assembly of
Muslim Jurists of America [AMJA] in October of 201413.
The AMJA opinion [regarding all current mortgages involved with the GSE’s] is
quite clear; to fully avoid the contracts as they do not differ from the conventional
contracts, or to use said contracts in the presence of need [as there are contractual
deficiencies]. The one provider that did receive a favorable rating, Ameen Housing, does
not involve itself with the GSE’s. However the adherence to the standard conventional
benchmarks [not addressed in the AMJA opinion], and subsequent negative attributes,
should be noted32.
Even prior to the AMJA opinion, the American Muslim masses had yet to endorse
Islamic Mortgages. A survey by HBSC [2002] showed that less than 10% of US
Muslims used Islamic based services; and only 4% had Islamic mortgages - while 64%
identified as not having Islamic mortgages. Mahmoud El-Gamal, chair professor of
Islamic economics at Rice University in Houston, commented, "I will be among the first
to admit that the terms 'Islamic banking' or 'Islamic finance' can be quite misleading,
given the many similarities between Islamic and conventional financial contract14."
The net effect of the respective paradigm shifts of the lending model is that from
one of an altruistic nature to that of the convention. The next phase of evolution of the
12
Abdul-Rahman, Yahia. The Art of RF (Riba-Free) Islamic Banking and Finance: Tools and
Techniques for Community-Based Banking. John Wiley & Sons, 2014.(198)
13
AMJA Resident Fatwa Committee resolution about Islamic Home Financing Companies in the
US, Oct 14, 2014.
14
Malik, Naureen S. "Interest-Free Financing for U.S. Muslims." ABC News. ABC News Network,
1 July 2002. Web. 12 Sep. 2015.
Islamic lending model must focus on evolving Islamic finance out of the futile exercise of
developing products that remove interest from the primary transaction, and into one that
aims for the instituting of Islamic ideals into the fabric of the product. A trend
developing in the financial sphere could pose a significant opportunity for product
developers to create the next paradigm Islamic lending.
2. The Crowdfunding Effect on the Current American Finance

Landscape
Often attributed as a recent phenomenon, the ‘sharing economy’ [sharing economy
is the larger concept involving resources, vs. crowdfunding; a subset which specifically
deals with funding] is a methodology built around the sharing of resources. Such sharing
can take place in the form of renting, shared ownership, exchanging and trading with the
emphasis on sharing of physical, human and economic resources15.
The utilization of this methodology promoted the building of one of America’s
greatest icons; the Statue of Liberty. In 1885, Joseph Pulitzer raised over $100,000, for
the pedestal of the icon, from over 125,000 people by public plea through his newspaper;
‘New York World.’ This enormous amount of money [over $2M equivalency today]
raised remained the largest amount crowdfunded for nearly 130 years16.
In recent financial terminology, crowdfunding methodology developed into an
organized industry in the mid 2000’s. Leveraged by a technology platform facilitated
through the internet, borrowers could now connect directly with lenders to finance in
aggregate from individual lender funds as modest as $5.. Banking intermediaries could
now be eliminated as borrowers connected directly with lenders at agreed upon terms.
Ultimately, borrowers were provided with an alternative to commercial bank financing.
The sharing economy methodology possesses attributes that are fully in line with
Islamic concepts and ultimately Islamic business and social principles. Such interlinked
attributes can be summarized as follows:
1. Cooperation. Fundamental to the sharing economy is the collaboration and
participation of individuals with identified resources. The syncing, sharing and
distribution of the respective resources and assets, benefit both parties. The
fostering of such mutual cooperation is the nature of Islamic teaching and business
practice. Conversely, there is a stern warning relayed, in the Quran, to one who
chooses not to promote mutual cooperation; It is He who made you the vicegerents
of the earth and raised some of you in ranks over others so that He may test you in
what He has given you. Surely, your Lord is swift in punishing, and surely He is
Most-Forgiving, Very-Merciful [6:185].
2. Consultation. A benefit of mutual cooperation and active involvement is the
support and assistance of others. Such vested interest transpires with the
15
Sundararajan, Arun. "Peer-to-peer businesses and the sharing (collaborative) economy:
Overview, economic effects and regulatory issues." Written testimony for the hearing titled
The Power of Connection: Peer to Peer Businesses, January (2014).
16
Dehner, Joseph J., and Jin Kong. "Equity-Based Crowdfunding outside the USA." U. Cin. L.
Rev. 83 (2014): 413.
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consultation of others who may possess an innate ability required for the success of
an endeavor. Accordingly, the contribution of the business and intellectual
resource is an attribute of those who believe and place their trust in Allah17.
3. Altruism [benevolence]. An additional benefit of mutual cooperation in the sharing
economy is the endorsing of an altruistic culture. Such altruism is the ‘Golden
Rule’ shared by Muslims18 as well as many faiths and philosophies19. An added
benefit of said altruism is multiple health benefits and happiness20.
4. Individual Empowerment. The culmination of cooperation, consultation and
altruism lead to individual empowerment towards striving for success and self-
actualization. The fulfillment of self-actualization is incumbent upon individuals in
order to reach their given potential. This concept is consistent with Islam, and
other religions, as man is a vicegerent on the Earth21. Said fulfillment of this
responsibility requires individuals to reach their given potential.
5. Spawning Enterprise. Moving beyond individual development, the sharing
economy affects the much larger community. Small businesses are key players in
regional and national economies as they generate employment, increase tax
revenue, raise the standard of local living and fostering innovation. They also
counter the effects of monopolistic enterprises by offering higher quality, greater
efficiency, and improved customer service. Along with the economic benefits, the
creation of business, via cooperation and consultation, establishes an alternative to
interest; as exhibited by the final stage of the ban on interest 32.
6. Circulation of Wealth. Circulating wealth, and expanding said circulation,
increases the health of an economy, improves the life of the citizens and invigorates
the economy22. This hedge against hoarding transforms idle resource into a usable
resource, which is a concept that is the crux of Islamic financial teachings23.
7. Bank Detachment. Crowdfunding, coupled with technology, has removed
corporate banks, and the respective negative attributes, from the lending equation
17
And those who have responded to their Lord (in submission to Him), and have established
Salah, and whose affairs are (settled) with mutual consultation between them, and who
spend out of what We have given to them, (42:38)
18
“ None of you truly believes until he loves for his brother what he loves for himself.” (Saheeh
Al-Bukhari)
19
Antony, Flew. "A Dictionary of Philosophy." Pan Books in association with The
MacMillan Press.(1979) p. 134.
20
Post, Stephen, and Jill Neimark. Why good things happen to good people: How to live a
longer, healthier, happier life by the simple act of giving. Harmony Books, 2008.
21
Ozsoy, Zekeriya. "A True Understanding of Self for Self-Actualization." (2010) The
Fountain Magazine, Issue 74, March - April 2010.
22
Wen, Yi & Arias, Maria A, “What does money velocity tell us about low inflation in the
U.S.” Federal Reserve Bank of St. Louis (2014)
23
Ahmad Asad Ibrahim , Radwan Jamal Elatrash , Mohammad Omar Farooq , (2014)
"Hoarding versus circulation of wealth from the perspective of maqasid al-Shari'ah",
International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 Iss: 1,
pp.6 - 21
by unifying the lender and creditor directly. The removal of intermediaries has
increased efficiency and reduce the cost by 60%24.
Currently, there are several models of crowdfunding in the financial sphere; the
reward, lending, and equity models25. All models require the entrepreneur [seeker of
funds] to create a profile on the respective technology platform. The profile introduces
and outlines the purpose of the request, e.g., production of a product, social cause or
activity. Included in the profile would be any relevant business documents; business
plan, background information, and industry experience. Lenders consequently browse
the listing on the respective technology platforms and select ventures to engage with.
2.1 Reward Model26
In this model, the entrepreneur sets a target amount and duration for the solicitation
of funds. Donors commit to a monetary contribution in the form of a grant, pre-purchase
or in lieu of a reward. The grant variation is an unadulterated gift. The pre-purchase
variation is simply a pre-purchase of the product upon successful completion. The
reward variations offer rewards such as intangible items [early access to an event] but
often include the item being produced, and/or a discount on the product. Contributors do
not receive any financial return or equity in the venture. Typically the facilitator charges
a fee ranging from 3-5%. Kickstarter.com and IndieGoGo.com are successful examples
of this model type.
2.2 Lending Model
There are two variations of this model; interest and non-interest based.
With the Interest Based model [often referred to as peer to peer lending; p2p], the
technology provider [intermediary/originator] assesses the financial feasibility of the
entrepreneur/borrower and subsequently adjust the interest rate in accordance with risk.
Investors purchase segments of the respective loan with the anticipated rate of return, and
can diversify their investments by purchasing a wide array of loans across different
investment grades, in amounts as low as $25. Loans typically range from $500 to
$35,000. Loans created are unsecured [personal loans with no collateral] with little or no
recourse [recourse does exist with civil enforcement methods, however is circumventable
by the proper council]. The originator charges a fee for formation and service;
underwriting [3-5%] and servicing [1%]. Pioneers in this model are such sites as
LendingClub.com and Prosper.com whose largest segment are loans consolidating debt.
Non-Interest Based Models operate similarly, however, are limited to socially
beneficial and/or responsible ventures. Dollar ranges are lower and origination expenses
are often offset by the lender or donations. Similar to the Reward Model, loans are
unsecured and lenders do not receive any financial return or equity, and in this case, no
interest, of the venture. Kiva.org fits in the non-interest model, however, they
consolidate investor funds and lend them to microfinance ventures which extend interest
bearing loans to individuals.
24
Leech, Cormac, et al. “P2P Lending: Opportunity & how to invest.” Liberum Capital
Limited (2014)
25
Bannerman, Sara. "Crowdfunding culture." Wi Journal of Mobile Media 7.1 (2013).
26
Donation, reward & pre-purchase models are often separated, however grouped here
together for simplicity
Journal ofand
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2.3 Equity Model

Small business and start-ups solicit funds from investors in the form of an equity
stake [it could also be straight debt, a convertible note or revenue sharing] in the venture.
This model is regulated under securities laws if the dollar amount exceeds a certain
threshold27. Similar to the other models, the technology provider charges a percentage
upon successful funding. Sites of this model type are Crowdfunder.com and
EquityNet.com.
With the exception of interest in the lending model, all the characteristics
demonstrated ultimately highlight the beneficial and humanistic properties of lending.
There has yet to be a mainstream lending platform with Islamic ideals, and specifically an
option, albeit Islamic or not, to challenge the current conventional mortgage paradigm.
3. The Opportunity
The [American] borrower and lender have embraced the above crowdfunding
models and methodology as evident by the numbers; 2014 crowdfunding totals nearly
$9.5B in America [over $16.2 globally], with business and entrepreneurship claiming
65% and social causes at 32%. Total estimated figures for 2015 are over
$34B28increasing at a steady compound annual growth rate [CAGR] of over 130%29.
The pairing of Islamic finance and crowdfunding could quite possibly evolve the
current American Islamic mortgage product from that whose emphasis is almost entirely
focused on interest aversion into a product that embraces Islamic fundamentals. Such an
Islamic finance product, consistent with the sharing economy methodology, could
conform with ALL Islamic financial teachings; versus focusing on a few. The
encapsulating of the entirety is reflective of the command, “Oh you who believe, enter
into Islam in its entirety [completely and perfectly]30.
In addition to the characteristics currently demonstrated with crowdfunding, an
Islamic mortgage option should conceptually also manifest the following attributes;
1. Remove all traces of interest, or rate of return, if collateralized. The current Islamic
mortgage paradigm of loan collateralization, which guarantees the bank in the
event of a default, while making a profit [as a business partner], violates the
essence of the Islamic legal maxim of profit and risk sharing; Al-Ghunmu bil
Ghurmi - Entitlement to profit with accompanying risk31.
2. Dissuade the culture of debt. Contentment and moderation are analogous with an
Islamic lifestyle. In lieu of such moderation, the cultivation of charitable spending
becomes difficult. Education is the key to counter the conceptions of consumerism
and the culture of borrowing that constitute the backbone of capitalism. Islam
27
Bradford, C. Steven. "Crowdfunding and the federal securities laws."Columbia Business
Law Review 2012.1 (2012).
28
“2015CF Crowdfunding Industry Report.” Massolution, (2015)
29
Moldow, Charles, (2014) “A trillion dollar market by the people, for the people”,
Foundation Capital
30
Quran 2:208
31
. Ayub, Muhammad, “Understanding Islamic Finance.” John Wiley & Sons (2009) p. 81
engages in moral education and training in order to create a spirit of cooperation,

mutual love, and self-help among its followers.
3. Short-term. Consistent with the above aspiration, the short-term concept is nothing
new to Americans, as short-term loans were the norm prior to the formation of the
GSE’s. An additional attribute of the short-term model was that the borrower
typically needed a sizable down payment, which was indicative of lower default
rates.
4. Remove all traces of ambiguity and deception. Current bank financing agreements
can be in excess of ten pages. As a result, banks have capitalized on the
opportunity to bury details and practices that are deceptive and illegal, and as a
result have faced billion dollar settlements32.
5. Not necessarily competitive. Competitive products pose an interesting dilemma;
How can you compete with a product that incorporates Islamically forbidden
elements? More importantly, should you attempt to compete with such a product?
Consumers who are in search of more money to borrow will base their product
choice on ease of access and amount of funds. As a result, Muslims have obtained
conventional financing ‘against their will.’33When presented with an Islamic
option, not all consumers would opt for it due to the ease of access of the
convention34. The current driving factor behind product development has shifted
towards capitalization of market share in lieu of the development of an organic
Islamic product. The result of the market share increase comes at the expense of
regressing toward the conventional counterpart, as noted in the prior section.
Correspondingly, the detrimental effects of the conventional products ensue35.
Notwithstanding the hindrances of changing an industry fully entrenched in the
American society, Islamic influence will continue to impact the financial sector.
However, the design of influence is slow implementation coinciding with education36.
Such large paradigmatic shifts may seem daunting, nonetheless, they have
historically taken place in the American financial sector; the establishment of Credit
32
`Barnett, Harold C., And Some with a Fountain Pen: Mortgage Fraud, Securitization and the
Subprime Bubble (November 19, 2010). HOW THEY GOT AWAY WITH IT: WHITE-
COLLAR CRIME AND THE FINANCIAL MELTDOWN, Columbia University Press,
Forthcoming.
33
Abdul-Rahman, Yahia K., and Abdullah S. Tug. "Towards a LARIBA (Islamic) Mortgage
Financing in the United States Providing an Alternative to Traditional Mortgages."
International Journal of Islamic Financial Services1.2 (1999): 29-36.
34
Hisham, S., et al. "The Concept and Challenges of Islamic Pawn Broking (Ar-Rahnu)."
Middle-East Journal of Scientific Research 13 (2013): 98-102.
35
Suleiman, Husam. "The Islamic Implication of the Standard Benchmarks in the American
Islamic Mortgage Product." Journal of Islamic Banking and Finance, (Dec. 2015): p 25-29.
36
Evolution of the banning of Riba in the Quran as an example
Critical Issues on Islamic Banking and Financial Markets, Saiful Azhar Rosly,
1st stage; moral censure of Riba (30:39)
2nd stage; consuming of wealth unjustly (4:161)
3rd stage; prohibition of multiplied usury (3:130)
4th stage; Alternative to Riba provided (2:275-281)
Crowdfunding
Journal ofand the Opportunity
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Unions were to change the paradigm of the role of the traditional brick and mortar bank.
As a result, they became successful in their niche29.
4. Conclusion
Often overlooked, in the initial mainstream ruling pertaining to mortgages, was the
recommendation to continue to work to create and support Islamic alternatives for
financing. The last significant development [intro of Shari’ah-compliant contracts]
brought to the market was over 15 years ago. This stagnation has allowed Islamic
scholars to better understand the mortgaging mechanism, and as a result, issue a negative
opinion concerning the GSE affiliated Islamic mortgages.
The current antipathy of the banking sector in America has resulted in American’s
exploring alternative methods of finance. As a result, crowdfunding has emerged as a
front-runner innovating the way Americans lend and borrow funds. Similarly, the
upsurge in Islamic finance over the past decade is a direct result of discontentment with
the conventional economic products37.
With the current rise and success of crowdfunding and the inherent Islamic
attributes associated, the critical mass now exists to create the next paradigm of the
American Islamic mortgages by pairing with crowdfunding.
Islamic finance product developers now have an opportunity to overcome the
conundrum of creating products that merely mimics the competition [in substance and
capacity], and create products that encapsulate Islamic principles such as altruism and
mutuality. The opportunity does now exist to create a platform that embodies Islamic
ideals which will have the potential to influence areas beyond that of economic activities.
37
Khan, Muhammad Akram. An introduction to Islamic Economics. Vol. 15. IIIT, 1994. p.30
Macro-prudential Supervision in the

Indonesia Financial Services Authority
(OJK) and the Role of Sharia Board: A
Proposed Framework
By
Muhammad Iman Sastra Mihajat*
Abstract
Recent global financial crisis has intensified the official sector’s interest in
strengthening the macro-prudential orientation of current policy
arrangements in particular for Islamic banking and finance sector. The crisis
also has highlighted the issues in quality of regulation and supervision in the
financial sector, and tested the effectiveness of current regulation and
supervision in identifying and mitigating the risks faced by the conventional
systems in various jurisdictions. With increasing complexity and the
uniqueness of Islamic banking and finance, OJK has to adopt a more macro
prudential framework to address systemic risks and Shari’ah risks. The paper
proposes a new macro prudential framework by involving a new Shari’ah
Board Authority (DPSN) under the Commissioners of OJK to regulate and
supervise the Shari’ah matters for Islamic financial institutions in Indonesia.
The paper discusses the challenges in adopting this new framework. The
paper concludes that the current shortcomings of the macro prudential
approach for Shari’ah supervision and regulation require a new Shari’ah
Board Authority under the commissioners of OJK who has full authority over
Shari’ah matters.
Keywords: Macro prudential, Islamic banking and finance, DPSN-OJK
1. Introduction
Financial crisis in the last two decades (Asian financial crisis in 1997, subprime
mortgage crisis in 2008, and Yunani crisis in 2015) have intensified the official sector’s
interest in strengthening the macro-prudential orientation of current policy arrangements
*
Author: Muhammad Iman Sastra Mihajat, Head of Shari’ah Audit and Shari’ah Compliance,
Islamic Banking Unit, Oman Arab Bank, Muscat, Sultanate of Oman.
E-mail: Muhammad.Iman@oman-arabbank.com
Macro-prudential
Journal ofSupervision in the and
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Finance Services…….
Oct – Dec 2016 73
in particular for Islamic banking and finance sector. These crises have highlighted the
weaknesses and limitations of current supervisory and regulatory frameworks globally to
predict the build-up of imbalances in the real sector and their resulting adverse impact on
the conventional financial system. The recent financial crisis has signaled the need for
Islamic financial system in particular in in the era of OJK for identifying and assessing a
robust system and modifying the regulatory and supervisory framework for Islamic
financial services to mitigate risks through macro prudential and micro prudential
frameworks to ensure the stability.
Generally, micro prudential policy focuses to achieve the stability over the financial
system through soundness and safety of individual financial institutions which is proven
as not sufficient instrument. This approach only overlooks the interconnectivity of
financial institutions and the complexity of financial transactions that arises through
innovative financial products to allocate the risks across various market participants
(Kardar, 2011).
Currently, in Indonesia, supervision and regulation of banking, capital market,
insurance and other financial institutions are regulated and supervised by OJK
(Indonesian Financial Services Authority) under Legal Act of OJK No 21 2011. There is
an urgent need to develop effective macro prudential policies and frameworks in the
arena of Shari’ah regulation and supervision as a tool to strengthen the resilience of
Islamic financial system in Indonesia. Therefore, this paper will focus on the proposal of
a new Shari’ah Supervisory Board Authority under the commissioners of OJK namely
National Shari’ah Supervisory Board (DPSN-OJK, Dewan Pengawas Syariah Nasional
Otoritas Jasa Keuangan). The paper also gives the comparison over the function of
National Shari’ah Board Indonesian Council of Ulama (DSN-MUI), Shari’ah Supervisory
Board in each individual Islamic financial institution and DPSN-OJK.
2. The Role of Macro prudential Policy and Supervision in the

Era of OJK
The huge tasks of OJK in supervising the multidimensional institutions has to come
with a new supervisory framework not only ensures the prudence, discipline and
transparency in individual financial institutions, but also is able to identify system-wide
risks including the Shari’ah and reputation risk of Islamic financial institutions.
According to Kardar (2011), the overall of macro prudential approach is to limit the
incidence of financial crisis and minimize the related costs to economy and the national
exchequer. He further explained that the key components of a viable macro prudential
framework comprise: a) a system-wide review of the risks to the stability of the financial
system, and identification and analysis of the risks posed by the interconnectivity of
financial institutions and market; b) analysis of business cycle to identify and address the
risks from the procyclical and herd mentality tendencies of the financial system; c)
identification of market failures that could result in financial crisis; d) definition of the
specific roles of all key stakeholders, regulators and parallel institutions, government,
central banks/OJK, and non-banking finance companies regulators in maintaining system
stability on an ongoing basis.
There are several understanding and definition over the term macro prudential. The
FSB, IMF, and BIS (2011) define macro prudential policy as a policy that uses primarily
prudential tools to limit systemic or system-wide financial risk and limit the incidence of
disruptions in the provision of key financial services that can have serious consequences
for the real economy, by:
- Dampening the build-up of financial imbalances and building defences that
contain the speed and sharpness of subsequent downswings and their effects
on the economy;
- Identifying and addressing common exposures, risk concentrations, linkages
and interdependencies that sources of contagion and spillover risks that may
jeopardize the functioning if the system as a whole.
The FSB, IMF, and BIS (2011) further explain that macro prudential policy is a
complement to micro prudential policy and it interacts with other types of public policy
that have an impact on financial stability. Although there are many policies that impact
into financial stability, but not all such policies should considered macro prudential
policy.
Therefore, macro prudential policy focuses on the soundness and stability of the
financial system as a whole while micro prudential policy only focuses on the risk of
each individual institution. Carosio (2010) explains that macro prudential policy proposes
to limit the incidence of financial crisis, promote financial stability and preserve the
integrity of financial markets by mitigating systemic risk, protecting and safeguarding the
whole financial system, and maintaining the flow of financial services and payment
systems. He further elaborate that since the systemic risks are classified as negative
externalities, therefore these risks are not internalized and have tendency to disrupt
financial services and create spillover effects in the real economy. This risk is imperative
to be seen in a dynamic context for financial stability not only at each point in time. Borio
(2003) laid down differentiation between the micro prudential and macro prudential
perspective in terms of objectives and the model used to describe risks (Table 1).
Table 1
Macro prudential versus Micro prudential Policies
Macro prudential Policy Micro prudential Policy
Limit financial system-wide Limit distress of individual
Proximate objective.
distress. institutions.
Avoid macroeconomic
Ultimate objective. costs linked to financial Characterization of risk.
instability.
“Exogenous” (Independent
“Endogenous” (dependent
Characterization of risk. of individual agents’
on collective behavior).
behavior).
Correlation and common
exposures across Important. Irrelevant.
institutions.
In terms of risks of
Calibration of prudential In terms of system-wide
individual institutions:
controls. risk: top-down.
bottom-up.
Source: Borio (2003)
As explained above, the macro prudential policy considered as early warning
signals that will assist OJK/regulators to adopt countercyclical credit and monetary
Macro-prudential
Oct – Dec 2016 75
policies to avoid the build-up bubbles in boom periods and helps to check credit crunch
and supply shocks in deteriorating economic conditions. However, OJK need to set what
are the policy tools in carrying such supervision and surveillance in which sometime
requires changes in current prudential regulation, monetary policy conduct, and the
banking law.
The Basel Committee on Banking Supervision (BCBS) proposes to change the
capital requirements to provide a buffer in a countercyclical manner for prudential
regulations of OJK for Islamic financial institutions that may be determined on the basis
of size, complexity, and connectivity with the rest of financial system and the real
economy. This regulation has the objective to minimize the spillover effects, building of
credit bubbles, asses the preparedness and resilience of the financial system to real sector
shocks resulting impacts on the financial sector and the impact to the real sector. The
changing capital requirement can be enhanced during credit booms and relaxed during
crunch times.
There are many macroprudnetial instruments that are found to be effective in
mitigating systemic risk. C. Lim et al (2011) suggest the following instruments based on
the experience of 49 countries that may help dampen procyclicality including; caps on the
loan-to-value ratio, caps on the debt-to-income ratio, ceilings on credit or credit growth,
reserve requirements, countercyclical capital requirements and time-varying / dynamic
provisioning. Committee on the Global Financial System (CGFS) (2010) provides on a
limited basis in the region a macro prudential policy tools as being used by Asian Countries
as a macro approach to minimize the wide-risk during 1997-1998 crisis (Table 2).
Table 2
Macro prudential Tools: Experience of Asian Economies
Objective Tools Countries
Countercylical capital
buffers linked to credit China.
growth.
Countercylical
China and India.
provisioning.
Manage risk over time Financing (Loan) to value China, Hong Kong, Korea,
(procylicality) Singapore, Philippines, and
(FTV) ratios.
Malaysia.
Direct Controls on lending
Singapore.
to specific sectors.
Capital surcharges for
systemically Important China, India, Philippines,
Financial Institutions and Singapore.
(SIFI).
Caps on leveraging, levy on
Korea.
non-core liabilities.
Liquidity / funding Korea, Philippines and
Manage aggregate risk at
requirements. Singapore.
every point in time
Limits on currency India, Malaysia and
(systemic oversight).
mismatches. Philippines.
Financing (Loan) to deposit
China and Korea.
or income.
Source: CGFS (2010)
The above table shows how macro prudential tools and instruments may be used
for any regulators to play a role in enhancing the resilience of the financial system against
vulnerabilities. Since every crisis has its own idiosyncrasies on the impact on different
sectors and its causes and causes, therefore, the regulators shall now how to use the above
tool, what kind the appropriate tools to use so as to strike the right balance between risk
mitigation and efficiency and when to activate the tool in each national jurisdiction. This
has been emphasized by the BIS, IMF and BIS (2011) that the existence of macro
prudential policy not to substitute the current micro prudential policy. It means macro
prudential policy complements current micro prudential policy.
The role of OJK in this macro prudential policy arena is of critical importance, as it
has mandate to maintain financial and payment system stability. Moreover, since the
macro prudential framework has the objective to achieve financial stability overtime, it
would assist OJK not only to ensure financial stability, but also to support price stability
over a long-term horizon by maintaining the supply of credit during various phases of
business cycle (Kardar, 2011).
In addition to OJK, the Ministry of Finance (MoF) is also considered as a major
player in the design and monitoring of a macro prudential framework. MoF as a
representative of the government is one of the biggest stakeholders in the financial
system which can be borrower, depositor, policy maker, and lender of last resort (in case
of a large system-wide crisis). One of it is a fiscal policy, this policy if not design
properly, poor decision and manage it in appropriate manner will undermine financial
stability since it is one of risk in the financial system. The role of MoF as a government
institution can become an automatic stabilizer and financial supporter during distress
period for financial institutions to minimize the cost of economy such as fiscal buffers,
reduction level of debt, bailing out mechanism and expansionary fiscal policies during
demand period.
Therefore, it is important to have an academic research and discussion among the
supervisory authorities to design the effective mechanisms in stabilizing the financial
system. Although the macro prudential policy is still being debated, the need for a new
Shari’ah framework in the new era of OJK in Indonesia is an urgent demand to maintain
the robustness of Islamic financial institutions.
3. The Future of Islamic Banking and Finance in Indonesia in

the era of OJK
The Islamic financial system in Indonesia has grown substantially in the last
decade, benefiting from multi-dimensional financial reforms that were initiated in 2008.
This reform shows the commitment of Indonesian government to support the
development of Islamic banking and finance in the country. This is the first time while
the word “Shari’ah” is written in the legal act of Indonesia since the establishment of the
first Islamic banking in Indonesia in 1992. In 2011, the Indonesian parliament has been
endorsed the new Act No 21 2011 regarding the supervision of financial institution would
be took over by a new authority namely OJK (Otoritas Jasa Keuangan, Indonesian
Financial Services Authority) from Bank Indonesia (Central Bank of Indonesia).
Prior to endorsement of this act, the regulation and supervision of banking
institution would be under Bank Indonesia, however after this endorsement, OJK will
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take over the supervision which not only cover Islamic banking institution but also
Takaful (Islamic Insurance) company, Islamic capital market, and non-financial
institution like Islamic leasing company, BMT and cooperative. These reforms aims to
enhance the soundness of financial system, improving quality of supervision, broadening
and deepening the financial system.
Although the specific regulation and supervision of Islamic financial institutions in
the Act No 21 2011 on financial services authority does not mentioned specifically. Many
people are questioning the commitment of Indonesian government in supporting the
Islamic finance industry in the country. However, under the supervision of OJK after its
establishment since 2011, start operation in 2012, the Islamic financial system in
Indonesia has grown substantially in this era, the total Indonesia’s Islamic Financial
assets as per December 2013 reached Rp.576 trillion or about US $414.4 billion with
composition of ± 52% of Islamic banking, ± 35% of sovereign Sukuk (SBSN) and ±
8.8% of Islamic non-bank financial industry, with Indonesia’s Islamic finance market
share still below 10% (OJK, 2012).
In addition, according to E&Y (2013), a report related to the development of global
Islamic finance, Indonesia with Malaysia, Saudi Arabia and the UAE, are among few
countries which will become the driving factors behind the next big wave in Islamic
finance in the world as well as in the position to offer lessons to other nations seeking to
build their own Islamic Finance capacity. With the big of Muslims’ population in the
world, many countries in particular Muslim Countries expect Indonesia can become an
Islamic Finance Hub in the global.
4. A New Proposal for Shari’ah Regulatory Framework in the Era
of OJK
In the era of OJK, it is important to have Shari’ah Board under the commissioners
of OJK that have full authority on Shari’ah matters that regulate and supervise Islamic
Financial Institutions (IFIs). The existing framework of Islamic finance in Indonesia is
each Islamic financial institution obliged to appoint Shari’ah Supervisory Board (SSB,
Dewan Pengawas Syariah, DPS). The SSB is appointed by the general assembly of
shareholders and recommended by the Board of Commissioners meeting, SSB candidates
shall get approval from OJK (previously Bank Indonesia) and recommended by National
Shari’ah Board Indonesian Council of Ulama (Dewan Syariah Nasional Majlis Ulama
Indonesia, DSN-MUI). The SSB is the extension of the hand of DSN-MUI in maintaining
and supervising the Shari’ah matters in each individual Islamic financial institution. The
SSB is not only independent from the Board of Commissioners but also allowed to attend
the Board of Commisioners’ meeting to discuss the Shari’ah aspects of their decisions
(AAOIFI, 2005).
In general, the aims of SSB are to guide the IFIs in the setting of Shari’ah policies
and regulations, to approve Islamic banking and finance products and policies that in
accordance with Shari’ah, and proposed a proper Islamic contract that can be used by
Islamic bank (Daoud, 1996; Hassan and Chachi, 2007). The SSB members represent the
IFIs in the general meeting and explain any Shari’ah matters to the stakeholders. In
addition, the SSB members will provide advice to the Board of commissioners and the
top management on Shari’ah issues.
In brief, the existing Governance Framework for Islamic financial institutions does
state Shari’ah Governance Framework in a specific manner. Bank Indonesia only
circulate one circular letter that regulate Good Corporate Governance for Full-fledged
Islamic bank and Islamic windows No. 11/33/PBI/2009 that cover 6 points including: i)
duty and responsibilities of Board of Commissioners and Board of Directors; ii)
completed committee and function for internal control; iii) duty and responsibilities of
Shari’ah Supervisory Boards; iv) application of compliance, internal audit and external
audit function; v) maximum limit to distribute fund; vi) financial and non-financial
transparency.
The good point in the era of OJK is that, all Islamic financial institutions regulated
and supervised under one umbrella, OJK not only regulate and supervise Islamic banking
like in the era of Bank Indonesia, but also Islamic capital market, Islamic insurance,
BMT, Islamic cooperative, venture capital etc. In the era of OJK, there are three points
that author expected to happen, first, the development of Islamic financial institutions
would be more optimal, second, Indonesia can become International hub for Islamic
finance in Asian and Middle East Countries (AMED) and third, Indonesia has to be a
trendsetter for Islamic finance industries globally.
Therefore, the paper suggested that OJK shall set up the Shari’ah body that regulate
and supervise the Shari’ah matters for Islamic financial institutions in Indonesia namely
National Shari’ah Supervisory Board of OJK (NSSB-OJK, Dewan Pengawas Syariah
Nasional, DPSN-OJK) under Board of Commissioners of OJK.
What is DPSN-OJK? What are the differentiations between DPSN-OJK and SSB
and DSN-MUI? According to Mihajat (2011), DPSN-OJK is National Shari’ah
Supervisory Board in Indonesia Financial Services Authority framework. This body is
under line of the Board of Commissioners of OJK that has the duty to supervise and
regulate Islamic finance products that have been circulated in the market or propose a
Shari’ah regulation for a new product in Islamic financial institutions (IFIs). The DPSN-
OJK has the right to review the existing products of IFIs in the market and decide either it
is complied with Shari’ah, or has the authority to stop the marketing of the existing
product that is not Shari’ah compliance.
The role of DPSN-OJK is to help the development of Islamic finance industry in
Indonesia, DPSN-OJK also has to conduct a meeting on weekly or monthly basis as per
required, there are several point of discussions as the role and responsibilities of OJK
including as follows:
1. Review existing products in IFIs, either Islamic bank, Islamic insurance,
Islamic capital market, and other IFIs under supervision of OJK, to maintain
Shari’ah-based product. To decide either Shari’ah compliance or not it has to
be based on 2/3 decision of the DPSN-OJK members (ijtihad jama’i).
2. Review existing products that has been complied with Shari’ah to see either
this product is able to disrupt economic system in general or kill the real
sector of economy. DPSN-OJK will decide Such as Gold Pawn Broking in
Islamic banks that merely lead to speculation rather than investment.
3. Discuss the proposed products by IFIs either has been complied with the
Shari’ah rules. If the proposed product is normal product and easily
understood, the DPSN-OJK will endorse quickly. If the proposed product is
relatively new and using a new structure of ‘aqad, DPSN-OJK will take time
to endorse the proposed product, this endorsement shall be based on research
a proper instinbatul ahkam (deriving a Shari’ah rule from its sources) that
refer to a Shari’ah sources such as al-quran, al-hadith, ijma’, qiyas, istihsan,
Macro-prudential
Oct – Dec 2016 79
masalih mursalah, saddu al-dzariiah, qaulus shahabi, and syar’un man

qablana).
4. Proposed a new product with a proper Shari’ah structure that demanded by
the Islamic finance market so that IFIs can be a competitive nationally and
internationally. By endorsement of this product, international investor such as
Asia, Europe, and Africa will invest their fund in Indonesia as Indonesia
well-known as International hub in Islamic finance.
5. Establish cooperation with Internal Shari’ah Standard such AAOIFI, IFSB,
ISRA and International Shari’ah Board Association to exchange an idea and
sharing idea among the Shari’ah Scholars in developing IFIs in Indonesia so
that become a trendsetter and international center for Islamic finance.
From above duties and responsibilities, Indonesia can expect Islamic finance
market share will grow better than before. This regulation has to have a support from
Government of Indonesia so that a proper proposed framework is not useless.
The paper suggested a new Shari’ah Governance Framework of OJk as described in
the figure 1. From the figure we can see that the position of DPSN-OJK is under line of
Board of Commissioners of OJK which has full authority in determining the Shari’ah
aspect of the products and the institutions. This framework shall support by special
Government Regulations (PP, Peraturan Pemerintah) that describe the authority of
DPSN-OJK so that any decision issued by them is binding and far from the conflict of
interest. The figure also explain that DPSN-OJK oversees the Department of Islamic
Capital Market, Islamic Banking, Islamic Insurance and other IFIs. Each department will
regulate and take care the IFIs under its line including product development. If one
Islamic bank proposed one product to OJK, this product shall go first to Islamic Banking
Department in OJK, Islamic Banking department will review either the product is
possible to go to the upper lever (DPSN-OJK). If the product is worthy, the Islamic
banking department will pass to DPSN-OJK, otherwise, it will return back to the
respected IFI who proposed the product to revise back and send back to Islamic banking
department of OJK.
Figure 1
Shari’ah Regulatory Framework of Islamic Finance in the Era of OJK
a) Top Down Approach Model

The first model, the product normally proposed by DSPN-OJK where they see that
the product is seen to be important for development of Islamic finance in Indonesia. First
step, DPSN-OJK will proposed in the weekly/monthly meeting among the members and
design the product so that can be applied. For example, DPSN-OJK proposed Islamic
structured product instrument that can be used by Islamic banks, Islamic capital market
entities, Takaful companies to diversify their investment portfolio. If it is approved
among the members, this product will be circulated among the IFIs. The IFIs can start to
use the product without any new approval from DPSN-OJK, IFIs just need to inform to
OJK to get his approval.
b) Bottom-Up Approach Model

The second model is that bottom-up approach model, this model normally used by
Islamic banking industries to Bank Indonesia. Shari’ah compliance unit will coordinate
with product development unit to structure a new product as per demanded by the market.
If Shari’ah compliance has been discussed and approved the product, this product will go
to Shari’ah Supervisory Board for their discussion and approval. If in the SSB meeting
the SSB members approved the product, this product will go to Islamic banking
department of OJK, Islamic banking department of OJK will review the proposed
product, if they see this product is possible to bring it to DPSN-OJK meeting. The
product will go to the higher level of meeting and go to the DPSN-OJK meeting. DPSN-
OJK will review and decide either the product is Shari’ah compliance or it will return
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back to Islamic bank for their rectification and revision in case if there is a Shari’ah
issues. Islamic bank will submit back the proposed product until it is complied with
Shari’ah and approved by DPSN-OJK.
Is it possible for DPSN-OJK become A SSB in Islamic Financial

Institutions?
There are would a lot of question come up from the Islamic finance stakeholders, is
it permissible for DPSN-OJK members to become a SSB members in Islamic Financial
Institution such as Islamic bank, Takaful companies, Islamic capital market entities and
other IFIs. Therefore, the paper suggest that the government has to issue the regulation
saying that it is not permissible for DPSN-OJK members to become a member of SSB in
IFIs to avoid a conflict of interest among DPSN-OJK members due to that one of them is
representing one of IFI.
Who is the right Person to be a Member of DPSN-OJK?
OJK is expected to regulate what are the requirements to become a member of
DPSN-OJK so that only a qualified person who appointed to seat in this position. The
criteria for the members of DPSN-OJK are including as follow:
1. Members of the DPSN-OJK have to be Muslim individuals.

2. Members of the DPSN-OJK with Shari’ah background must be holders of
academic qualifications in the field of Shari’ah –minimum bachelor degree-
that include study in Ushul Fiqh (Rules of Islamic Jurisprudence) and Fiqh al
Muamalat (Islamic Commercial Transactions) from a recognized institution.
They should be able to demonstrate an adequate understanding of Islamic
banking, Islamic capital market, Takaful and other IFIs.
3. Members of DPSN-OJK must have more than 2-5 year experience in Islamic
finance industries (teaching, research and fatwa issuance). They should be
able to demonstrate strong proficiency in Arabic, since most literature of
Islamic banking and finance are written in Arabic.
4. Members of DPSN-OJK must have a respectable character and be of good
conduct and moral values, particularly in terms of honesty, integrity and
reputation in their professional business and financial dealings.
5. Members of DPSN-OJK must have commitment to develop Islamic financial
institutions industry.
The above requirements are proposed to maintain the reputation of OJK as the
regulator of Islamic financial institutions so that the credibility of OJK will be maintained
in a proper manner.
The Role of DPSN-OJK, DSN-MUI, SSB in the Era of OJK
As elaborate in the above discussion, the role of DPSN-OJK is different with DSN-
MUI and SSB in each of Islamic financial institution. DPSN-OJK has the authority to
decide either the product in IFIs in compliance with Shari’ah, review the proposed
product form IFIs either to reject or to approve and the regulation issued by them are
binding to all IFIs. While DSN-MUI is still stick with their rule which is issuing the
Fatwa for IFIs, and SSB is responsible to maintain the Shari’ah compliance of business
activities, transactions and product in which they seat in a particular IFIs (please see
Table 3).
Table 3: The Different between DPSN-OJK, DSN-MUI and SSB
Fatwa/Regulation
Institution Authority
Issued
Decide to approve or
DPSN-
OJK. reject a proposed product Binding to all IFIs.
OJK.
from IFIs.
DSN- Not binding in
Independent. Issue the Fatwa of IFIs.
MUI. nature.
- Approve a proposed
IFIs (Islamic Bank,
product in a particular Binding to a
Islamic Capital
IFI. particular IFI where
SSB. Market Entities,
- Ensure that a particular they seat as a SSB
Takaful Companies or
IFI is in a compliance Members.
other IFIs.).
with Shari’ah.
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In general, the roles and responsibilities of DPSN-OJK are clear and different with
DSN-MUI. Among the duties of DPSN-OJK are:
1. Grow and develop the implementation of the Shari’ah values in economic
activity in general and finance in particular.
2. Issuing fatwa on the aspect of financial activities.
3. Issuing a fatwa on Islamic financial products and services.
4. Oversee the implementation of the fatwa has been issued.
While the role of DSN-MUI are:
1. Issue a binding fatwa to Sharia Supervisory Board in the respective Islamic
financial institutions and the basis of legal action related parties.
2. Issuing fatwas that became the basis for the provisions / regulations issued by the
competent authority, such as the Ministry of Finance and Bank Indonesia/Indonesia
Financial Services Authority.
3. Provide recommendations and / or revoke recommendation names that will sit as
Sharia Supervisory Board at an Islamic financial institution.
4. Inviting experts to explain a problem that is necessary in the discussion of Islamic
economics, including monetary authorities / financial institutions within and
outside the country.
5. Provide a warning to the Islamic financial institutions to stop the irregularities of
the fatwa issued by the National Shari’ah Council.
6. Propose to the relevant authorities to take action if the warnings are not heeded
(DSN-MUI, 2012).
From the above of roles and responsibilities, each DSN-MUI and DPSN-OJK have
their respective roles in the development of the Islamic finance industry without overlap
one another. Thus, the emergence of DPSN-OJK is not something that needs to be
debatable.
Sharia Supervisory Board
The next issues arise is that whether the existence of DPSN-OJK will affect the role
and responsibility of SSB in every Islamic financial institution? Surely not, because their
respective institution is very different one another, where SSB in each Islamic financial
institution only entitled to supervise the products and regulations relating to Shari’ah of a
particular Islamic financial institution, while DPSN-OJK has the authority to impose
regulations generally for all Islamic financial institutions in Indonesia.
As we know, in general, it is has been mentioned that the role of SSB in each
Islamic financial institution are:
1. The Sharia Supervisory Board has to perform periodic
monitoring/supervision on Islamic financial institutions in which they are
seated.
2. The Shari’ah Supervisory Board is obliged to submit product proposals to the

BOD or BOC of that institution and report to DSN-MUI.
3. The Sharia Supervisory Board reported on the development of products and
operations of Islamic financial institutions that under their supervision to the
DSN-MUI at least twice in one budget year.
4. The Sharia Supervisory Board formulates the problems that need to be
discussed in National Sharia Council.
From the explanation above, it is clear that DPSN-OJK with the DPS in Islamic
financial institutions is quite different in the roles and responsibilities to one another.
Conclusion
The primary aim of macro prudential supervision in the era of OJK is to mitigate
the stress on the entire financial system, which could have a heavy macroeconomic cost
in the form of expensive bank-bailouts. The current Islamic financial system in Indonesia
in the era of OJK has changed in a way that all IFIs including Islamic banks, Islamic
capital market entities, Takaful companies, and other IFIs are supervised and regulated by
Indonesia Financial Services Authority. There is strong recognition that some of the risks
faced by the financial system are different from those faced by an individual institution.
In particular, IFIs have unique risks compared to conventional entities. Therefore, the
Shari’ah governance framework system in Indonesia in the era of OJK needs to be
reformed.
The paper has given one proposed Shari’ah Governance Framework by adding
DPSN-OJK (National Shari’ah Supervisory Board) under Board of Commissioners of
OJK who has the full authority in Islamic finance industries on the Shari’ah matters.
Since the role of Shari’ah board in ensuring the Shari’ah compliance of the IFIs is very
important, the existence of DPSN in OJK would be more helpful for OJK to supervise
and regulate the IFIs so that the members of DPSN-OJK can decide a Shari’ah matter
based on a majority basis which is tantamount to collective ijtihad.
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Ernst & Young. The World Islamic Banking Competitiveness Report, 2013 - 2014,
Transition Begins, GIFR report 2013.
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Finance Minister and Central Governors.” BIS (14 February 2011).
Hassan, Abul & Chachi, Abdelkader. “Corporate Governance of the Islamic Financial
Services Industry in Brunei Darussalam.” Journal of Islamic Economics, Banking
and Finance (2007).
Mihajat, Muhammad Iman Sastra. “Masa Depan Industri keuangan Syariah di Era OJK,
A New Proposal.” Article published in Sharing Magazine (March 2012).
OJK. Press Release Indonesia International Conference on Islamic Finance 2014,
Surabaya, 3 - 4 November 2014.
Effect of Quality of Services, Bank Image,

Religious Perspective on Bank Customer
Loyalty (A mediator role of customer
satisfaction)
By
Amin Ur Rahman∗
Abstract
with the liberalization of economic sector of Pakistan and introduction
of Islamic banking system, the industry become more competitive as the
consumers have more choices and thus their preference changed toward
banking. In this increasing high competitive industry, Bankers are more
focus on customer loyalty to win market share and thus gain competitive
advantages. The purpose of this paper is to identify those core factors
that influence customer loyalty in the banking sector of Pakistan.
The paper examines three independent factors i.e. Bank services, Bank
reputation and religious perspective along with a mediator factor which
is customer satisfaction that ultimately results in gaining customer
loyalty. This study was carried out by taking a sample size of 260
participants and a structured questionnaire of 35 items was used to
collect data and analysis was done using SPSS (edition 22) software.
The Result of the study shows that there is a positive relation amongst
Bank Services, Bank Image and Religious Perspective on customer
satisfaction which directly leads to customer loyalty. With the help of
this study we found that Bank service is considered as a most prominent
factor that leads to customer satisfaction and customer satisfaction
leads to customer loyalty. This study is helpful for policy makers and
bank managers to know customer satisfaction thus they can earn more
customer loyalty.
Key words: Customer Loyalty, Customer Satisfaction, Bank Services,
Bank Image, Islamic Bank
∗
Author: Amin Ur Rahman , MS scholar, Faculty of Management science, International
Islamic University Islamabad. Email: aminrahman42@gmail.com
EffectJournal
of Quality of Services,
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Finance Oct Perspective
– Dec 2016…….. 87
Introduction
Economic liberalization and advancement in technology like cell phones, internet
and all other means of communication brought tough competition among the companies
and especially in the banking sector. As we all know that there is a little difference
between product and services which are provided by the banks,therefore it is a big
concern for a banks to get competitive advantage in this highly competitive environment.
In this high competitive industry, customers’ needs are critical, so companies always try
to keep their product and services according to the requirement of their customer. They
cannot afford losing even a single customer because losing a customer means gaining of a
customer by your rival, hence in this market competition aggressive strategies for
attracting new customers and defensive strategies in order to establish customer loyalty
become vital (Miles, 1994). Thus financial institution should be more careful and more
aware about all those factor that lead to customer satisfaction in order to attain Customer
Loyalty (Pont and Mcquilken, 2005).
Customer loyalty is an important factor for any business and especially in high
competitive industry. Oliver (1999) defines customer loyalty as extensively held
commitment to repurchase a preferred product or services regularly in future. It is
actually an emotional attachment of the customer toward a particular company's product
and service that arises when product or service are according to the customer demand and
requirement. Loyalty has been a real concern in banking industry because of high
expectation of the client and tough rivalry (Rasheed, Sajid, Shahid & Ahmad, 2015).
Customer Loyalty is the result of customer satisfaction. Customer satisfaction is a
marketing terminology that explains to what extend a firm’s product or service fulfills the
need of its customers. It is a key factor for an organization when it faces competition in
the industry. According to Hassan, Chachi & Abdul Latiff (2008), when an organization
is unable to meet the customer needs, it will cause huge fall in profitability as well as
decrease in market share.
Researchers have identified various factors that effects bank selection and customer
satisfaction. When we are talking about service industry like banking, the quality of
service is most important factor that s customer satisfaction or dissatisfaction. According
to Ahmossawi (2001), quality is key factor in banking business as it leads to high level of
customer satisfaction. Bei and Ciao (2001), identified that service quality has positive
association with customer which mean that to satisfy customer needs will get you loyalty.
In addition to quality of services, bank image and reputation also influence customer
satisfaction which is also considered in the study. Empirical studies have confirmed that
bank image effects customer satisfaction and as a result leads to customer loyalty
(Bloemer and Ruyter, 1998). Another Important factor in Islamic world is Islamic mode
of banking that attracts huge number of customer. As per Islamic rule, Interest is
prohibited in Islam and all convention banks are working on interest base. So Islamic
banking is much more acceptable banking system for Muslim and that is why key
international banks are interested in operating Islamic banking because Muslims are one
fifth of total world population (Ashraf, 2014). In addition, majority of Non-Muslims are
using Islamic banks (Ngui 2004; saifuddin, 2003). So besides religious factors bankers
should adopt other factors that influence customer satisfaction in order to survive in the
competition with conventional banks.
With that much competition on going, the bankers are very much concerned about
retaining their old customers and as well as attracting new clients. According to a
research attracting new customer is about five times more expensive than keep existing
one because for new customer they have to advertise themselves through banner,
television commercials, internet which cost them more. On the other hand existing
customer just need better services. Previous literature shows that a lot of work has
already been done in respect of customer satisfaction and customer loyalty but there are
limited studies found of religious perspective particularly in context of Pakistan (Abduh
& Alobaad, 2015). In addition Awan and Mazhar(2014), reveal that many customer
criteria of selection of bank is influence by religious perspective. To fill the gap we added
religious perception factor in our study and tried to find its relation on customer
satisfaction and customer loyalty. Previous studies are narrowly focused on relation
between customer satisfaction and customer loyalty so here we tried to explain our study
in broader terms i.e. explain factors that affecting customer satisfaction and then explain
the relationship of customer satisfaction and customer loyalty. The study will increase
present literature because it shows clearer picture regarding customer satisfaction and
thus will help the policy makers and banker to get better knowledge about customer
satisfaction and customer loyalty.
The objective of this paper is to identify those factors that affect customer
satisfaction in banking industry e.g. quality of services, bank image and religious
perception. And also explain the combined effect of these factors on customer loyalty by
keeping mediator role of customer satisfaction. In this research we considered different
banks of twin cities i.e. Rawalpindi and Islamabad of Pakistan and a 35 items
questionnaire survey of 260 respondent was conducted to collect data for our analysis.
The basic question of study is what are the most influencing factors that lead to customer
satisfaction and customer loyalty?
Literature Review
Customer Loyalty
In current competitive business conditions and especially in case of banking sector,
maintaining customer loyalty is big concern because it becomes deciding factor to win
over competition. Customer loyalty is actually customer's deeply held commitment to re-
purchase particular products and services from the same firm and organization in future.
It is actually strong affiliation of the customer with the firm when the firm is constantly
fulfilling the customer requirement and needs. According to Oliver's ( 1999,p.34)
definition of customer loyalty is; " a deeply held commitment to rebuy or patronize a
preferred product/service consistently in the future, thereby causing repetitive same-brand
or same brand-set purchasing, despite situational influences and marketing efforts having
the potential to cause switching behaviour”.
Recent researches classify customer loyalty into different marketing feature i.e.
product loyalty, service loyalty, brand loyalty and chain & store loyalty. Many previous
published literature define three basic dimensions of loyalty (Filip and Anghe 2009).
These dimensions include: behavioural loyalty, attitude loyalty and composite loyalty
(integrated loyalty). Krisnamuthi & Raj, (1991) measure Behavioural dimensions that
explain those customers who are habitually loyal. These customers are loyal to a
company when they buy from it and continue to rebuy in future because switching from
Effect ofJournal
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Perspective …….. 89
one brand to another brand is a problem for these kind of customers. According to these
researchers, behavioural loyalty defines narrow understanding of the underlying re-
buying factors. Another drawback of this approach is that repeat purchase does not
always happen as the result of emotional commitment toward the brand (Tepeci, 1999).
The outcomes of behavioural loyalty is repurchasing the same brand (Zeitham et al.
2006; jones et al. 2000) and as the result lower chance switching behaviour of the
customer (Bansal and Taylor, 1999). On the other hand attitudinal loyalty define loyalty
as state of mind. These researchers explain that a customer is called to be "loyal" when
they have optimistic attitude toward product or company. Attitudinal loyalty is loyalty
that arises because of positive attitude of the customer toward brand and as a result
customers develop trust in that brand which means that they are happy to be loyal
customer of that company and brand
Composite loyalty is actually composition of both attitude and behavioural
dimensions and this dimension measures loyalty by customer preferences toward brand,
tendency of brand switching, and frequency of purchase (Pritchard and Howard, 1997;
wong at al., 1999).
In Pakistan banking scenario, where numerous private and public banks are doing
business in the industry with similar product characteristics, it is a difficult for bankers to
get market share and competitive advantages. So customer loyalty in this kind of industry
is key factor to retain old customer as well as attract new customer.
Customer Satisfaction and Customer Loyalty:

Customer satisfaction is a frequently used marketing terminology which means to
what extend product and service offered by a firm or company fulfil customer
expectations. According to Ashraf (2014) customer satisfaction is actual feelings or
attitude that a customer possess when their needs and expectation are satisfied by
superior quantity that lead to overall service satisfaction. Kotler (2013, p. 13) defines
customer satisfaction as “customer satisfaction depends on the product's perceived
performance, relative to buyer expectations. If the product's performance falls short of
expectations, the customer is dissatisfied. If performance matches expectations, the
customer is satisfied, if the performance exceeds expectation, the customer is highly
satisfied or delighted”. Oliver (1980) stated that customer satisfaction is actually a model
that explains the comparison of customer’s actual perceived product and services
performance with their expectation then the feeling of satisfaction or dissatisfaction arise.
Any difference between expectation and performance will generate
disconfirmation. Oliver (1980) identified three types of disconfirmations. When actual
product and services outperform the customer's original expectation, the disconfirmation
is positive and results in positive disconfirmation and customer satisfaction and post-
purchase of that product and service. Negative disconfirmation arise when actual offered
product and services disappoint the customer's anticipation which causes customer
dissatisfaction and decreases future purchase of that product and services. The last
disconfirmation is when actual product and service performance is equal to customer
expectation.
If a firm is looking to achieve customer loyalty, it should first satisfy customer
demands and needs because in current economic environment and particularly in banking
sector where the products are almost the same,the only way to win the customer is to
offer best level services that meet customer expectations. In this kind of industry gaining
new customer is too costly because of advertisement and promotion expenses where
existing customers just need better services. Research show that it is 5 times more
expensive to attract new customer. Past literature shows that there is significant positive
relation between customer satisfaction and customer loyalty. According to these studies,
customer satisfaction by providing better quality services leads to customer loyalty.
According to Horstmann (1998), there is positive relationship between customer
satisfaction and customer loyalty. A customer is loyal when he is satisfied by product and
service provided. Other studies (Ismail, Hasnah, Ibrahim, & Isa, 2006; Da Silva & Alwi,
2006; Huat et al. (2012); He and Song, 2009) also identified customer satisfaction as
defining factor of customer loyalty. These studies found that there is strong positive
association prevailing between customer satisfaction and customer loyalty which leads to
customer rebuy intention, positive word of mouth and ultimately increase in profitability.
This leads to the following hypothesis
H1: there is positive relationship between customer satisfaction and customer loyalty
Quality of services, Customer satisfaction and Customer loyalty:

Service quality is considered as a key factor in the success of any tangible or
intangible product offered by businesses particularly in service industries like banking,
health and insurance.The competition among these industries is very high and the only
factor to win customers is to provide better service quality which differentiates an
organization from its competitors. Kotler and Armstrong 2013 define services as “an
activity, benefit, or satisfaction offered for sale that is essentially intangible and does not
result in the ownership of anything". Service quality is defined as to what extend your
perceived service meet customer expectation. It is actually functioning like a bridge
between customer and the organization which involves internal organizational policies
and practices that lead to customer satisfaction and customer loyalty. The more a
company provide better quality services than its competitors, the more its customer will
be satisfied and loyal to the company and result would be an increase in profitability and
victory of market share in the industry. According to Rust, Zahorik&Keiningham (1997),
the best way to increase a company’s profitability is to develop better long run customer
relations to make them loyal by investing in service quality.
Now the question is how we can examine our service quality is satisfying customer
or not? The answer is explained by SERVQUAL model that is presented by Parasuramna
et al. 1988 which defines five dimensions of services that is Tangibility, Reliability,
Responsiveness, Assurance and Empathy. Tangibility means tangible components like
appearance of equipment, physical facilities and personnel. Reliability means ability to
deliver services correctly. Responsiveness is willingness of employees to help customer
and deliver swift services, Assurance means that employees have relevant knowledge and
provide services in polite and courteous manner. Empathy focuses on taking good care of
customer. Unlike manufacturing business, banking sector has direct interaction with
customer, so satisfaction or dissatisfaction is determined by quality of services. Cronin
and Taylor 1992 has identified four services offering business where perceived service
quality has positive influence on customer satisfaction i.e. banking, dry cleaning, pest
control and fast foods. Customer satisfaction is a broader term that effects service quality
(Ziethaml and Bitner, 2002). Services quality is an antecedent of customer satisfaction
Effect ofJournal
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(Gotlieb et al., 1994; Buttle, 1996; Zeithaml and Bitner, 1996; Lee et al., 2000) and
customer satisfaction mediate the relationship between customer loyalty and service
quality (Caruana, 2002; Fullerton and Taylor 2002). Service quality defines customer
satisfaction or dissatisfaction; if a customer is satisfied, he will consume the services in
future or otherwise he will switch off. However Jamal and Anatassiaduo (2007), Rizan
(2010), Clottey et al. ( 2008) and Kheng et al. (2010) also revealed direct positive
relationship existing between service quality and customer loyalty. In this regard, various
studies identified positive relationship between customer satisfaction and service quality
however some studies recommend that services quality is a part of customer satisfaction
(Fornellet all. 2004). For banking industry and other service offering business, service
quality is an important factor to differentiate one organization from another and help
them to earn competitive advantages in the industry.
H2: Bank service quality has positive effect on customer loyalty
H3: Service quality has positive effect on customer satisfaction
H4: Customer satisfaction mediates the relationship between customer loyalty and
service quality
Religious perspective, customer satisfaction and customer

loyalty:
Islamic banking can be defined as “A banking system which works on the basic
principles of Islamic law which are called Shariah and direct Islamic economics. A
definition which is presented by Ali & Sarkar (1995) and also approved by OIC explains
Islamic banking in following manner " An Islamic Bank is a financial institution whose
status, rules and procedures expressly state its commitment to the principle of Islamic
Shariah and to the banning of the receipt and payment of interest on any of its
operations". Islamic banks are working on two basic principles i.e. doing their business
on profit and loss sharing principle and avoiding interest in making receipt and payment
in their business transaction. The first Islamic banking experiment was observed in 1963
by an Egyptian bank “MytGhamr" but in Pakistan a full fledge Islamic banks were
establish in 2003 when Meezan Bank start working as a first Islamic bank of Pakistan.
Currently 7 pure Islamic banks with 482 total braches and 13 conventional bank that have
Islamic window with total 202 branches working all over the country.
Islamic banking is as important invention in the banking industry because majority
of Muslims are not willing to work with conventional bank as interest is prohibited in
Islam and conventional bank offer interest base banking. This new banking system was
more acceptable for Muslims . Due to the achievements of Islamic banks, other key
international banks also started Islamic banking windows to attract new customer.
In order to satisfy your customer, a banker should know what the customers want
from them. Customer satisfaction is nothing but just feelings held by customer when their
needs are fulfilled as a customer. Religious perspective is also an important factor
identify customer satisfaction. Previous research regarding selection of bank, shows that
while selecting a bank, most of the customer’s take religious perspective as a selecting
factor of any bank. A study conducted by Metawa and Almossawi (1988) found that
people take two main factors into consideration while selecting a bank. 1) Bank working
on Islamic law 2) rate of return and profitability. Dasuki and Abdullah (2006) has also
found religious factor as key factor in bank selection process of a customer. Previous
studies such as .Rizwan et al. (2014); Ashraf (2014) also found positive effect of religious
perspective on customer satisfaction and loyalty. However it is also observed that only
religious perspective alone is not important for customer satisfaction. A bank working on
Islamic law and having superior quality service and cooperative staff will lead to
customer satisfaction and will win customer loyalty. So on the basis of above discussion
we can conclude the following hypothesis.
H5: religious perspective has positive effect on customer satisfaction
H6: religious perspective has positive effect on customer loyalty
H7: Customer satisfaction mediate the relationship between religious perspective
and customer loyalty
Bank image, customer satisfaction and customer loyalty:

Bank image is a view which is held by customer for that particular bank. It
represents the overall assessment of an organization that comes into our mind when we
hear about a particular firm or organization. It is actually peoples perceptions about firms,
a positive brand image, perception of service quality that make a brand always attractive.
Kotler (2001, p. 273) defined image as "the set of beliefs, ideas, and impression that a
person holds regarding an object". Brand image is defined by Biel (1992) as a set of traits
and associations that customers hold related to a brand name. A firm or its
product/service with positive and favourable image in the mind of customer would
certainly achieve market advantages over the competition and would have a better
position in the industry that would increase company performance and profitability (Park,
Jaworski, &MacInnis, 1986). Furthermore numerous past studies have found that positive
image helps firms to make customers more loyal (e.g. Koo, 2003;
Kandampully&Suhartanto, 2000). Brand image become more important when we talk
about banking sector. Harwood (2002) stated that it is critical for bankers to build
favourable image and to differentiate itself from other banks as every bank offers same
kind of product in the industry.
Past branding studies suggested that there is positive effect of favourable brand
image on customer satisfaction. Dacies &Chun (2002), there is positive association
between brand image and customer satisfaction. Further some studies (Afsar et al. 2010;
Patawayati et al. 2013; Rehman & Afsar 2012) have found strong and positive effect of
bank image in customer loyalty. However Chun (2002) found indirect relationship
between loyalty and brand image where brand image is mediated by customer
satisfaction. Based on above literature we can make the following hypothesis for our
studies.
H8: Bank image has positive effect on customer satisfaction
H9: Bank image has positive effect on customer loyalty
H10: Customer satisfaction mediate the relationship between bank image and
customer loyalty
Effect of Journal of Services,
Quality of Islamic Banking and Finance
Bank Image, ReligiousOct – Dec 2016
Research Framework:
The main objective of this study is to identify the effect of service quality, religious
perspective and bank image on customer loyalty where customer satisfaction also plays
its role as a mediator. Research model of the study is given below
Service Quality
Religious Customer Customer

Perspective Satisfaction Loyalty
\
Bank Image
Methodology:
Sample and data collection:
In order to achieve the purpose of this study, a structured questionnaire was
designed to collect data for further statistical testing. The target population for our
research was people of twin cities i.e. Rawalpindi and Islamabad who have bank accounts
either in Islamic bank or conventional bank, or conventional bank with Islamic window.
The sampling technique we used in our research to collect information from people who
were most appropriately available is non probabilistic method. The reason to use this
technique is to gather large number of information more swiftly and also the cost is very
low. The respondents participate voluntarily and it was assured their responses will be
keep confidential and only will be used for this research.
Keeping 5% error margin and 95 confidence level, a total 260 sample size was
selected and questionnaires were distributed. From 260 distributed questionnaires, 212
were received back and out of them 15 questionnaires were not filled properly and 206
were useable for our research. So the respondent rate is 79%. The questionnaires were
distributed by hand to different universities and organization and from some users online
data was collected who had access to internet.
Demographic detail of the respondents:

As mention above total response of sample size was 206. Out of these major
portion consisted of males, which is 156 (76% of total sample size) and 50 respondents
were female which is 24%. We divided our population into three main groups; one that is
using Islamic banks. They were assignde code 1. And those who are using conventional
banks with Islamic window they were assigned code 2 and the third one are those
respondent who are using conventional banks they were given code 3. Majority of the
responded fell in class 2 that is 79% of the total population and 33% of respondents are
using Islamic banking whereas 29% are those respondent who are using conventional
banks. Majority of the respondent that was 83%, were below age 30. 15% of the
respondent were 30 to 40 years old and only 3% fall in the 40 to 50 years category. As
majority fall below 30 years of age so most of our respondent were unmarried that were
80% of the total sample size and only 20% respondent were married persons. 47% of the
participants were having college level qualification whereas 52% were having master or
above master degree. 2 participants were below secondary school level. 58% of the
participant were either students or were jobless. 34% of the sample were serving in
different organization where 8.3% respondent were businessman and running their own
businesses.
Questionnaires and scale:

The designed questionnaire has been divided into six main sections The first five
sections are related to our main study which explains the effect of three independent
variables i.e. service quality, religious perspective and bank image, on dependent variable
which is customer loyalty while customer satisfaction is playing a mediating role in this
study. The last section recognizes the demographic features of the respondents like bank
name, gender, age, marital status, education and profession. First five sections of the
questionnaires contain thirty five (35) items. We use five point Likert scale to measure
the relationship between independent and dependent variable where 1= strongly disagree
and 5 for strongly agree representing the series of opinion from strongly dissatisfied 1 to
strongly satisfied 5. The language we used for our research is English as English it is
taught from very beginning in Pakistani schools.
Out of these thirty five (35) items that were used in our questionnaire, scale of
service quality having 19 items were adopted from SERVQUAL as suggested by
Parasuraman et al. (1988). Service quality is comprised of 5 dimensions which are
Tangibility, Reliability, Responsiveness, Assurance and Empathy. One sample item is
“Are you satisfied with the premises of the bank? Is it visually appealing?” The scale
containing 5 items of second independent variable i.e. religious perspective is adopted as
suggested by Rehman (2012). One sample item is “To what extent you believe that you
choose Islamic banking system because of religious reasons only? The third scale is bank
image and it comprises 4 items. This scale was adopted from Rehman, (2012) and one
sample item is “To what extent do you think that the Islamic bank’s reputation and image
plays a key role in Islamic bank’s selection? The scale of customer satisfaction (3 items)
and customer loyalty (4 items) was adopted from Mohsin et al. (2011) and one sample
item from this scale is “I am satisfied with staff’s response and prompt services provided
by my bank? For customer satisfaction and “I often tell positive things about my bank to
other people” for customer loyalty.
Reliability:
Reliability Analysis is used to examine internal consistency of the observed factors.
This analysis is measured by Cronbach’s alpha. According to Swkaran (2000) Cronbach
alfa is actually a reliability measure that is used to identify the relationship of different
items to one another. Above 6 scale is considered as acceptable scale for reliability
analysis. In our study we have 5 different variable having 35 items. Cronbach alfa of all
these variables were above 7 which means that there is strong internal reliability among
the items. For 19 items of service quality the scale was observed at 0.918, for 5 items of
religious perspective it was 0.849, bank image include 4 items and the reliability scale
Effect ofJournal
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was 0.735, for 3 items of customer satisfaction it was 0.754 and rest of 4 items belonging
to customer loyalty reliability observed was 0.852.
Control variables:
Bank type and qualification was considered as control variable while running
regression test. These variables were found from ANOVA as we observed P <.05 or T >2
so it suggests significant effect of these variables on independent and dependent
variables. For dependent variable that is customer loyalty, bank type playing control
variable role while for mediator i.e. customer satisfaction both bank type and
qualification are control variables.
Results:
Correlation
Table 1 show the Mean, Standard deviation, Correlation and reliability of the
factors. Mean of Service quality is 3.4568 which means that on average customer are
satisfied with their banks services. Mean score of Religious Perspective is 3.2777, Bank
Image was 3.4260, Customer Satisfaction was 3.5469 and customer Loyalty was 3.3968.
It means on average respondents response is satisfaction to all the factors.
Pearson correlation was used to find the relationship between independent variables
( Service Quality, Religious Perspective and Bank Image), mediator customer and
dependent variable Customer Loyalty and Table 1 suggest us that Service Quality has
significant positive relation with Customer Loyalty (r = .553, P =0.000). Similarly
Religious Perspective has also significant positive relationship with Customer Loyalty (r
= .289, P= 0.000).
Table 1
Means, Standard Deviations, Correlations, and Reliabilities
Std. 1 2 3 4 5 6 7 8
Mean Deviation
1. Bank Name 1.9563 .7858 --
2. Gender
1.2427 .4297 -.026 --
3. Age 1.1942 .4539 -.017 -.018 --

4. Service
Quality
3.4568 .6429 -.256** .148* .020 (.918)
5. Religious
3.2777 .9116 -.257** .211** -.091 .290** (.849)
Perspective
6. Bank Image 3.4284 .7710 -.176* .170* -.019 .355** .652** (.744)
7. Customer
Satisfaction
3.5469 .8209 -.293** .120 -.059 .645** .353** .425** (.754)
8. Customer
Loyalty
3.3968 .8855 -.208** .050 .074 .553** .289** .382** .514** (.852)
Note. N = 206; alpha reliabilities are presented in parentheses
**p < .01. , *p < 05.
Again, Bank Image has a significant positive relation with Customer Loyalty (r =
.383, P =0.000). Similar kind of significant positive relation has also been found between
Customer Satisfaction with Customer Loyalty as P = 0.000 and r = .514. Similarly
significant positive correlation is also observed between independent variables i.e.
Service Quality, Religious Perspective and Bank Image and Customer Satisfaction as P
=0.000 for all variables. Relevant Cronbach Alfa is presented in s parentheses for each
variable in the table.
Regression:
In order to test the mediating role of customer satisfaction, Baron and Kenny’s
(1986) technique of mediation was followed. Baron and Kenney 1986 suggest a certain
procedure that there are four requirements to mediating effect: 1) the effect of
Independent variable (Service Quality, Religious Perspective and Bank Image) on
dependent variable (Customer loyalty) must be significant. 2) The Independent variable
should have significant effect on mediator (Customer Satisfaction). 3) The Mediator
variable must have significant effect on dependent variable. 4) The Direct effect of
Independent variable and dependent variable is insignificant when mediation plays its
role in the regression. In simple words, when we use independent variables and mediator
all together in regression model, the effect of independent variable on dependent variable
become insignificant while the mediator is still significant. This method was used and
regression was used to identify the significant level of all these variables. Table 2 explain
the first three (3) steps of the Baron and Kenny procedure. This table 2 explain the effect
of independent variable (Service Quality, Religious Perspective and Bank Image) on
dependent variable (Customer Loyalty) and mediator (Customer Satisfaction) and also
explains the effect mediator has on dependent variable. The first model explains the
effect of customer satisfaction and service quality on customer loyalty and service quality
effect on customer satisfaction. The result show that there is a strong positive effect of
customer satisfaction on customer loyalty (β= .534, P< .001) and thus our hypothesis 1 is
accepted. Furthermore service quality has also strong positive effect on customer loyalty
(β= .737, P< .001) and thus our hypothesis 2 is also supported by this result. The service
quality also has positive effect on customer satisfaction (β= .767 p<.001) and accepts our
Hypothesis 3. Model 2 explain the relationship between religious perspective, customer
satisfaction and customer loyalty. Result show that religious perspective has strong
positive effect on customer loyalty (β= .245 p<.001) and Hypothesis 5 is also accepted on
basis that this result show similarly religious perspective has a positive impact on
customer satisfaction (β= .283 p<.001) and hypothesis 6 is also supported. Model 3
explain the effect of bank image on customer satisfaction and customer loyalty. Result
show that bank image has strongly positive effect on customer satisfaction and customer
loyalty (β= .411 p<.001 and β= .399 p<.001 respectively) thus the hypothesis 8 and 9 are
also accepted on the basis these results.
Effect of Journal ofServices,
Quality of Islamic Banking and Religious
Bank Image, Finance Oct – Dec 2016
Table 2
Result of Regression analysis of independent variables with customer satisfaction
and customer Loyalty
Independent
Dependent Variable β R² ∆R²
Variable
Model 1
Bank Type (Control Variable) -.234 .043
Customer Loyalty CS .534*** .267*** .224
Customer Loyalty SQ .737*** .310*** .267

Bank Type -.296
Qualification .220 .112
Customer Satisfaction SQ .767*** .446*** .334
Model 2
Bank Type (Control Variable) -.234** .043

Customer Loyalty .245*** .103*** .059
Bank Type -.296***
Qualification .,220** .112
Customer Satisfaction RP .283*** .203 .091
Model 3 BI .445***
Bank Type (Control Variable)
.- .234**
.043
Customer Loyalty BI .411 .167*** .124
Bank Type -.296***
Qualification .,220** .112
Customer Satisfaction BI .135
.399*** .147***
Note: n = 206, CL= Customer Loyalty, CS= Customer Satisfaction RP= Religious
Perspective and BI = Bank Image, Control variables were Bank type and Qualification
P < .05. **p < .01. ***p < .001.
Table 3 explain the 4th step of Baron and Kenny procedure. This table shows the results
of mediation regression. Firstly we use control variable and second mediator (customer
satisfaction) is given and in last step the effect of all independent variables (service
quality, religious perspective and bank image) are given. In step two (2), it was observed
that customer satisfaction has a strong positive effect on customer loyalty (from β= .534,
P< .001 to β= .545, P< .001). In order to check Hypothesis 4, 7 and 10 we should study
step 3. In third step, results indicate that service quality has still significant positive effect
on customer loyalty but due to mediating role of customer satisfaction its magnitude is
decreasing (from β= .737, P< .001 β= .515, P< .001) so on the basis of these result
Hypothesis 4 is supported as to that customer satisfaction partially mediate the relation
between service quality and customer satisfaction. The effect of religious perspective on
customer loyalty becomes insignificant (P>.05) in presence of mediation of customer
satisfaction (from β= .245 p<.001 to β= .106 P>.05). So full mediation is existing and
supports our hypothesis 7. In step 3 the magnitude effect of bank image on customer
loyalty is decreasing (from β= .411 p<.001 to = .229 p<.001) with the existence of
mediator of customer satisfaction and thus Hypothesis 10 is supported and partial
mediation exists.
Table 3
Results of mediation regression Analyses
Customer Loyalty
β R² ∆R²
Step 1
Bank Type -.233**
Qualification .036 .044
Step 2
Control Variables .044
Customer Satisfaction .545*** .271*** .227
Step 3
Control Variables .044
Customer Satisfaction .545*** .271*** .272
Service Quality .515*** .351*** .081
Religious Perspective .106 .280* .099
Bank Image .229** .303** .003
n=206 Control Variables = Bank Type and Qualification
*P < .05. **p < .01. ***p < .001.
Discussion:
The purpose of our study was to identify the effect of service quality, religious
perspective and bank image on customer satisfaction as well as the effect of these factor
on customer loyalty. The results of this study clarify important factors that lead to
customer satisfaction and customer loyalty in banking industry
The result of this study confirms that there is positive relationship between
customer satisfaction and customer loyalty and customer satisfaction have significant
Effect ofJournal
Qualityof
ofIslamic
Services,Banking and Finance
Bank Image, Oct
positive impact on customer loyalty. It explains that when the customers are satisfied they
eventually convert into loyal customer and work as non-paid advertisement for the
company. Past studies (Ismail, Hasnah, Ibrahim, & Isa, 2006; Da Silva & Alwi, 2006;
Huat et al. (2012); Mensah, 2010; He and Song, 2009) also confirm our findings that
there is significant positive relationship between customer satisfaction and customer
loyalty.
Our first hypothesis was that there is significant positive relationship between
service quality and customer loyalty: In this study we found that services quality has
direct and indirect impact by partial mediation of customer satisfaction on customer
loyalty. Customers will rebuy only when the actual services meet their expectation and
they are satisfied with the services. The second hypothesis was that there is significant
positive effect of service quality on customer satisfaction. This hypothesis was supported
by our results. Many researcher also studied the positive effect of service quality on
customer loyalty. Rousan and Mohamed 2010 in their study on hotel industry found that
quality of service results in customer loyalty. Similar kind of result was found in Chen
and Lee 2008 when he identified that there is significant positive relation between service
quality and customer satisfaction. Other researcher like Jamal and Anatassiaduo (2007);
Rizan(2010); Clottey et al. (2008) and Kheng et al. (2010) also revealed in their studied
that positive relationship exist in service quality and customer loyalty. The third
hypothesis was service quality having significant positive relation with customer
satisfaction. Again this hypothesis is supported by our study results. Past literature also
shows direct and positive relationship between service quality and customer satisfaction.
Akbar and Parvez (2009); Munusamy et al. (2010); Hossain and Leo (2008); Jamal and
Anatassiadou (2007) and Chen & Lee (2008) also found similar positive relationship
between service quality and customer satisfaction.
The fourth hypothesis was the customer satisfaction mediates service quality and
customer loyalty. In this study we found that customer satisfaction partially mediates
service quality and customer loyalty and thus the result also support our hypothesis.
Different past literature found that customer satisfaction mediate the relationship between
customer loyalty and service quality. Ismail et al. (2006) and Khen et al. (2010) have also
found partial mediation of customer satisfaction on service quality and customer loyalty.
However some studies (Akbar &Parvez, 2009; Chen &Lee 2008) also found full
mediation of customer satisfaction between service quality and customer loyalty.
5th and 6th hypothesis, effect of religious perspective on customer loyalty and
customer satisfaction. Both of these two hypothesis were supported by our study.
Previous studies also confirm our hypothesis. Rizwan et al. (2014) found positive
customer attitude toward Islamic banking. Another study presented by Ashraf (2014) also
found positive effect of religious perspective on customer satisfaction and loyalty. The 7th
hypothesis explains the mediating role of customer satisfaction between religious
perspective and customer loyalty. Various studies found that customer while choosing a
bank, rely on religious perspective for their decision but literature also found that
religious factor is not the only factor of customer satisfaction. Researcher found that
better service quality with Islamic mode of banking will satisfy their customer and
ultimately make them loyal (Echchabi, Nafiu 2012; Metawa and Almossawi, 1988;
Dasuki and Abdullah, 2006).
Next hypothesis was bank image has positive effect on customer loyalty. Again this
hypothesis was supported by our result. Previous literature also suggest that there is
positive relation between positive image and customer loyalty. Koo, 2003; Kandampully
& Suhartanto, 2000 suggest strong brand image increase customer loyalty. Hypothesis 9
explains that there is positive effect of bank image on customer satisfaction. This
hypothesis was also supported by our results. Many researchers studied positive effect of
bank image on customer satisfaction. Bloemer et al, (1998) urged that there is significant
relationship between positive brand image and customer satisfaction in banking sector.
Other studies Andreassen and Lindestad(1998); Davies et al. (2003) also found similar
kind of relation. Next hypothesis was to check the relationship between bank image and
customer loyalty by keep customer satisfaction as a mediator. We found partial mediation
of customer satisfaction between bank image and customer loyalty which supports our
hypothesis. Many past literature also enlighten this hypothesis and found mediating role
of customer satisfaction between bank image and customer satisfaction. Chun (2002)
found that brand image has indirect relationship with loyalty via customer satisfaction.
Another study that was established by Tu, Wang and Chang stated that brand image
influenced customer satisfaction and customer satisfaction ultimately effect customer
loyalty .
Practical implementation and recommendation:

In banking industry where there is always high competition among public and
private banks and products and services are not that much different from the products and
services provided by other banks so the only way to win the customers is to follow the
policy of “Customers are always right”. They should follow the customers need and
provide services according to their requirements. This study will help managers of the
bank to track customer satisfaction and customer loyalty. This study will help them to
understand the customer preferences that lead to customer satisfaction and customer
loyalty. This study explains the relationship between service quality, religious
perspective, bank image, customer satisfaction and customer loyalty and reveals that
these factors have strong positive correlation with each other. So manager should
concentrate on these factors while making policy regarding their customer satisfaction. It
was also found that strong positive relation exists between customer satisfaction and
customer loyalty. Beside of current service, it must also be kept in mind that these
services also meet the customer requirements. Furthermore the conventional banks
should adopt Islamic banking system in order to attract more customers because of
religious perspective to gain more profitability and market share.
A general perception of people about Islamic banking is that there is no difference
between Islamic banking system and other conventional banking system, the only change
is different name for same product and services. Therefore Islamic banking should create
awareness about their products and services among the people by arranging different
seminar and workshops. Similarly banks should also assure that relevant officers have
sufficient Islamic banking knowledge in order to satisfy customer questions.
Conventional banks should also open Islamic banking windows as many of them are
already operating for example Habib Bank to attract more customers particularly in
Islamic world where people hesitate to do transaction with interest base banking system.
Effect ofJournal
QualityofofIslamic Banking
Services, and Finance
Bank Image, Oct
Limitation and direction for future research:

The data was collected on the basis of convenient sampling, because of time constraint it was
not possible to collect data from customers of all banks so sample size of 206 respondents was
collected. A large and more diverse represented sample size is recommended for further
research in order to get more generalized results. Other important factors are switching
behavior of customer due to financial benefits and customer awareness regarding Islamic
banking etc. which should also be included for further research.
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Country Model
Iraq*
Islamic banking started in Iraq in 1993 with the establishment of Iraqi Islamic Bank
for Investment and Development. At present, more than fifteen Islamic banking
institutions are providing services in the country including eight full-fledged local Islamic
banks and four foreign Islamic banks. Central Bank of Iraq (CBI) also allowed opening
of Islamic banking windows in 2011. Islamic banking windows work as a separate
department within a conventional bank and operate under guidance of an independent
Shariah Advisory board of the bank.
Legal Framework for Islamic Banks in Iraq:

CBI regulates both conventional and Islamic banking institutions through a single
regulatory framework and Islamic banking activities fall under framework of the Banking
Law 2004. In the year 2011, CBI issued new regulations addressing issues surrounding
Islamic banking institutions. These regulations specified the activities that can be
performed by Islamic banking institutions. Further, these regulations also illustrate
funding and dealing mechanisms regarding the purchase of foreign currencies, foreign
currency exchange companies, commercial papers and stock market etc.
Shariah Board:
In terms of regulations issued by CBI in 2011, each Islamic banking institution is
required to establish Shariah board which is responsible for providing a Shariah view on
operations of the bank in order to ensure its compliance with Shariah Law. One of the
main responsibilities of Shariah Board of each bank is to suggest to General Assembly/
Board of Directors of the bank all necessary steps that need to be taken or carried out to
achieve compliance with Shariah Laws. The decisions of the Shariah board are binding
on the executive management of the bank.
Sources
• Central Bank of Iraq website http://www.cbi.iq/
• http://www.islamicfinancenews.com (Country Analysis)
• http://www.iraqdailyjournal.com
• http://www.tamimi.com
*
Source: State Bank of Pakistan, Quarterly Islamic Banking Bulletin Sept 2016
Book Review *
Adam Smith’s The Wealth of Nations: A Modern-day Interpretation

Karen McCreadie
Adam Smith’s The Wealth of Nations: A Modern-day Interpretation by

Karen McCreadie is a short but incisive attempt to explain the relevance of economic
concepts identified and explained by Adam Smith almost two and half centuries ago.
Adam Smith’s “The Wealth of Nations” was the first comprehensive treatment of
political economy. Karen McCreadie illustrates the timeless nature of Smith’s insights
by bringing them to life through 21st century examples.
The idea of division of labour has resulted in enormous increase in productivity,
especially in manufacturing industries. The idea which Adam Smith put forward from
keenly observing operations in a pins making factory during the early years of industrial
revolution has withstood the test of time and is still prominently visible in the
productivity explosion in knowledge economies of 21st century. However, it is pertinent
to point out that the idea of division of labour was discussed by Ibn-e-Khudun, a great
Muslim sociologist and historian many centuries earlier than Adam Smith.
Smith’s second major idea of efficient allocative prowess of market forces also has
had success against outright command economies in Western economic history. Given
the pre-requisite conditions, market mechanism has proven to allocate resources much
better than through government intervention. The adoption of market principles by
countries like China and Russia in the 1980s and 1990s respectively vindicate Adam
Smith and his fervour for market mechanism. Adam Smith writes that the baker’s bread
is obtained by the society at a cheaper cost not because the baker is benevolent, but
because making and selling that bread enables the baker to purchase things in which he
himself is not good at producing at a lower cost.
However, the baker himself does not exist out of nowhere. His ability to bake is
also not naturally existing or gifted. It requires learning and that learning of arts and skills
has an opportunity cost, both explicit and implicit. The explicit cost is the cost of
education which can be very high in professions like engineering and medicine. The
implicit cost is the time lost in earning which is not available for wage based work.
Indeed, the empirical evidence from Africa, South Asia and Latin America highlights that
*
Book Reviewed by Salman Ahmed Shaikh is pursuing PhD Economics at National
University of Malaysia.
E-mail: salman@siswa.ukm.edu.my
poverty and hunger along with infant mortality results in loss of human lives and the
diminishing capability to work in others who survive. What if a person does not possess
any skills which the firms in the labour market demand? That is where; the role of public
support programs and social support institutions becomes vital.
Adam Smith pays little emphasis on the role of ethics in economic organization.
Colonization, slavery, decimation of traditional societies and native population seem to
have been overlooked by the great author. What if the poor people cannot afford food
even if they principally produce it from their own hard work, toil and labour? Food and
Agriculture Organization estimates that food per capita availability has increased since
the 1970s, but still a billion people suffer from hunger. That is where; the distributional
apathy of unfettered market mechanism becomes all the more prominent. Following the
idol of self-pursuit and greed in basic necessities has inevitably resulted in few countries
dumping their crops as waste to keep prices high. It is striking, but perhaps inevitable that
such an ethically neutral approach results in pharmaceutical companies complain about
lower prices in essential medicines or the bottling companies of essential water argue for
complete privatization. Does animal instincts of pleasure-pain, greed and self-interest the
only driving force behind economic actions?
The under-provision of public goods, negative externality costs, over-exploitation
of common property resources and increased use of environmental resources beyond their
regeneration capacity are inevitable results of this uni-centric approach. The recent
financial crisis and the hugely expensive bailouts from public money highlight the
incentive and agency problem where greed can undermine the need for shared
responsibility and socially desirable choices and outcomes.
One final point where unfettered market mechanism has come short is the rise in
income and wealth inequality. According to Institute of Policy Studies, the real wealth
gap in America is not between the 99 percent and the 1 percent. It is between the 0.00001
percent and everybody else. The richest 400 Americans have a combined net worth of
$2.34 trillion, equal to that of the bottom 61 percent of the U.S. population, or about 194
million people. Even among the top 400, there is a great divide. The richest 20
billionaires in America have a combined net worth of $732 billion. That is more than the
bottom half of the American population, or 152 million people.
Wealth inequality partly results from and is worsened by the institution of usury
and no broad based wealth tax. Islamic economic framework suggests a broad based
wealth levy in the form of Zakat and prohibits Riba. This ensures that wealth
accumulation can only result from labour income or putting wealth as equity investments
in entrepreneurial projects. This can ensure a-cyclical redistribution without putting
liquidity out of equity financial investments. Hence, the religious institutions can enable
to fill the ethical void towards a more equitable world and enable us to have shared
prosperity.
World Economic Development Indicators

Top 10 OIC Countries on Per Capita GDP
Country GDP Per Capita (US$)
Qatar 93,352
Kuwait 52,198
UAE 43,049
Brunei 38,563
Saudi Arabia 25,962
Bahrain 24,695
Oman 21,929
Kazakhstan 13,172
Libya 12,029
Turkey 10,972
Bottom 10 OIC Countries on Per Capita GDP

Country GDP Per Capita (US$)
Somalia 133
Niger 415
Gambia 488
Mozambique 605
Guinea-Bissau 608
Togo 610
Guinea 615
Uganda 704
Afghanistan 708
Mali 715
Source: World Bank’s World Development Indicators
Islamic Indices Indicators
Islamic Indices Performance (Return Percent Per Annum)
Name of Index 2010 2011 2012 2013 2014
FTSE Shariah All-World 13.10 -6.00 13.40 20.40 3.90
FTSE Shariah Developed 12.60 -4.10 13.30 23.70 4.70
FTSE Shariah Emerging 17.00 -18.60 14.20 -6.40 -3.90
FTSE SGX Asia Shariah 100 15.90 -12.40 15.40 12.60 2.10
FTSE Shariah Japan 100 -1.00 -15.40 13.50 54.80 17.60
FTSE Bursa Malaysia EMAS Shariah 21.60 5.60 15.50 16.40 -1.40
FTSE SET Shariah (Thailand) 37.30 3.30 22.10 -3.50 9.30
FTSE TWSE Taiwan Shariah 10.10 -9.20 15.00 7.00 19.50
FTSE/JSE Shariah Top 40 (South Africa) 14.20 -2.90 16.50 17.30 -7.10
Source: FTSE
Islamic Capital Market Indicators

Return Metrics DJI DJIM DWEM DJIETLS W3DOW DJIDEV
Average Annual Return
Pre-Crisis (2003-2006) 10.06% 14.31% 31.38% 30.87% 13.62% 10.35%
Crisis (2007-2009) -2.86% 3.77% 20.86% 3.31% -2.21% 2.55%
Post-Crisis (2010-2015) 9.27% 6.38% -2.25% -1.52% 6.83% 7.33%
Overall (2003-2015) 6.71% 8.22% 11.94% 7.79% 6.27% 6.89%
CAGR (2003-2015) 5.58% 6.58% 5.81% 5.05% 4.41% 5.40%
S. D. (2003-2015) 14.85% 17.73% 35.56% 23.82% 18.48% 16.84%
Reward to Variability 0.45 0.46 0.34 0.33 0.34 0.41
Source: Dow Jones
Legends:
• Dow Jones Industrial Average (DJI)
• Dow Jones Islamic Market Index (DJIM)
• Dow Jones Emerging Markets (DWEM)
• Dow Jones Islamic Emerging Market Index (DJIETLS)
• Dow Jones Developed Market Index (W3DOW)
• Dow Jones Islamic Developed Market Index (DJIDEV) for Islamic index.
• CAGR: Compound Annual Growth Rate.
• S.D. Standard Deviation.

Top 10 Countries with Highest Rate of Adults with Bank Accounts
Account at a Financial Institution

Country
Overall Male Female
Iran 92.18 97.14 87.11
United Arab Emirates 83.20 89.76 66.32
Bahrain 81.94 90.25 66.74
Malaysia 80.67 83.01 78.09
Oman 73.60 83.75 63.53
Kuwait 72.91 79.30 64.00
Saudi Arabia 69.41 75.33 61.15
Qatar 65.88 68.57 61.57
Turkey 56.51 69.00 44.28
Source: FINDEX, World Bank 2014
----------------------------- x -----------------------------
Bottom 10 Countries with Lowest Rate of Adults with Bank Accounts
Account at a Financial Institution

Country
Overall Male Female
Turkmenistan 1.79 2.02 1.56
Niger 3.49 4.42 2.55
Guinea 6.17 8.54 3.79
Yemen. 6.45 11.39 1.67
Chad 7.70 11.74 4.00
Somalia 7.86 9.64 6.04
Pakistan 8.71 14.21 3.02
Afghanistan 9.96 15.78 3.81
Iraq 10.97 14.57 7.44
Source: FINDEX, World Bank 2014

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2 Journal of Islamic Banking and Finance Oct – Dec 2016

In The Name of Allah,

The most Beneficent, The most Merciful

“O Believers: devour not Riba, doubled and redoubled;

Sura Ale-Imran (verse No. 130)

The articles published in this Journal contain references from the

Board of Editorial Advisors Dr. S. Nazim Ali,

2. Shari’ah Mechanisms of Audit ............................................................................ 11

3. The Significance of Faith-based Ethical Principles in

4. The Impact of Sukuk investment in Developing UAE Economy ..................... 38

5. Objectivising the Social Justice Paradigm in Islamic Finance: ....................... 55

6. Crowdfunding and the Opportunity Presented in

7. Macro-prudential Supervision in the Indonesia Financial

8. Effect of Quality of Services, Bank Image, Religious

9. Country Model: Iraq .......................................................................................... 106

Dr. Zubair Hasan, Professor Emeritus INCEIF, Global University of Islamic

Shari’ah Mechanisms of Audit

confidence of the public. The purpose of this term paper is to explore

Audit Function at Glance

Adapted from: Auditing and Assurance services in Malaysia, William F.Messier,

Organizational Structure of a Financial Statement Audit

Performing professional duties entails a lot of ethical procedural activities. It requires

In conclusion, in the expanse of audit profession, auditor should continuously be

Audit and its Shari’ah Guidelines

Then the Holy Prophet also mentioned that,

Righteousness and making one’s work perfect14

Besides that, Prophet (saw) also mentioned that;

Allah-fearing conduct in everything15

Men’s accountability before Allah16

Shari’ah’s Code of Ethics in Auditing

Professional competence and diligence

Application of ethical conduct based on the principle of religious

the religious legitimacy of everything relating to his duties. He should be aware of

Application of ethical conduct based on the objectivity principle

Application of ethical conduct based on the professional competence

Application of ethical conduct based on the principle of faith-driven

The auditor’s report consists of:18

Auditor’s Address and Signature

The question of complying with professional ethics depends on the principle of

The Significance of Faith-based Ethical

Key Words: Islamic Finance and Stability; Faith-Based Finance: Ethics

2. Diagnosing The Causes Of Recurring Financial Crises

2.2 Regulatory Gap/Overlap and Loopholes in Penalty Systems for

3. EXPLORING COMMON PLATFORMS

3.2 Ethics, Religious Teachings and Faith

There should be a way of minimizing the effect of greed in personal behavior.

In addition, the syllabus taught in educational institutions should be reviewed to

4. Conclusion And Policy Recommendations

Bollen, N. (2007).“Mutual Fund Attributes and Investor Behavior.” Journal of Financial

The Impact of Sukuk investment in

According to Suleiman (1998) securitization is the process of pooling assets, the

The IFSB(2009) in its standard on Sukuk, defined Sukuk as certificates representing

However, Sukuk are certificates of equal value representing undivided shares in

It could be stated that securitization is the process of transforming an illiquid asset

Difference between Sukuk and Bonds

Parties in a Securitization Structure

• In Sukuk Ijarah, the owner of leasehold rights of an asset to be acquired and

• The risks go to the originator in Sukuk al Ijarah based on their agreement in

• But it is differed in Sukuk al mudarabah whereby the entrepreneur (mudarib)

• The same thing applies to Sukuk al musharakah. It is observed in sukuk

management of the same on behalf of the owners (sukuk al-wakala). The

• On the control of assets the contemporary Shariah scholars in Islamic finance

Customer Loyalty SQ .737* .310* .267