The study found that Islamic banking scheme (IBS) banks have recorded higher return on assets (ROA) as they are able to utilize existing overheads carried by mainstream banks. As this lowers their overhead expenses, it is found that the higher ROA ratio for IBS banks does not imply efficiency. It is also inconsistent with their relatively low asset utilization and investment margin ratios. This finding confirmed our contention that Islamic banking that thrives on interest‐like products (credit finance) is less likely to outshine mainstream banks on efficiency terms. Although Islamic credit finance products may have complied with Shariah rules, their lack of ethical content is not expected to motivate IBS banks to strive for efficiency through scale and scope economies.
Purpose -The purpose of this paper is to explain three additional parameters, namely maqasid al-Shariah, financial reporting, and legal documentation of contract for determining Shariah legitimacy of financial instruments in Islamic financial institutions. Currently, contract ('aqd ) is the only parameter recognized by Shariah scholars at the supervisory level. Design/methodology/approach -This analysis begins with examining the pitfalls of the contract approach and proceeds to present the maqasid, financial reporting and legal documentation approaches in ascertaining absolute Shariah compliant of financial products. Findings -The paper argues that the four approaches must be applied in package in determining Shariah compliant status to avoid costly errors that might lead to litigations and loss of competitiveness in the Islamic financing business. Originality/value -The paper provides new insights and integrated analysis of Shariah auditing where knowledge clusters concerning the Shariah, economics, finance and accountancy, and law are algamated to ascertain wholesome Shariah viewpoint.
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