Sharīʿah-compliance ratings of the Islamic financial services industry: a quantitative approach

Abstract

Purpose This study aims to develop a Sharīʿah-compliance rating mechanism for the Islamic financial services industry (IFSI), with a special focus on banking. The banking sector is taken as the area of focus due to its leadership role in the volume of global Sharīʿah-compliant assets. Design/methodology/approach The objectives of the Islamic financial system (IFS) are selected as the basis for ratings. A range of performance indicators (leading to achievement of the objectives) is grouped into four broader categories and used in the study to allocate scores with a sum total of 100. Special considerations – including the amount of resources required in performing an activity, suitability of prevailing business conditions, the degree of compulsion/discretion in performing a task and linkage with the essence of the IFS – were taken into account in the allocation of scores. Findings This study groups multiple performance measures into four categories, including portfolio construction (deposits mechanism, participatory and asset-based modes of financing), access to finance (service to the less-privileged and sector screening), reputation (disclosures and stakeholders’ survey) and Sharīʿah governance (Sharīʿah supervision and controls, charitable operations, human resources, product development and organization). The Portfolio, Audit, Reputation and System (PARS) rating system is then developed. Practical implications A Sharīʿah-compliance rating system is helpful in measuring the progress towards goal achievement of the IFS and in gaining stakeholders’ trust. It is also important for Sharīʿah boards and regulators in policy formulation, for management in addressing weaknesses and taking corrective measures and potentially for standard-setting bodies. Originality/value This study presents a comprehensive quantitative Sharīʿah-compliance rating mechanism, taking into consideration the objectives of the IFS – equitable distribution of wealth and financial stability, in addition to Sharīʿah-compliance in operations. Development of Sharīʿah-compliance quality ratings for Islamic banking is essential to gain customers’ trust; the suggested methodology is thus a contribution to the literature on Islamic finance.

Islamic Banking Performance: A Bibliometric Review

“…The presence of IBs is expected to articulate Sharīʿah (Islamic law) into practice in the banking industry (Hassan and Lewis 2007;Ashraf and Lahsasna 2017;Hanif 2018;Hudaefi and Noordin 2019). It brings philosophical consequences beyond a mere commercial transaction.…”

“…Practically, IBs products are often characterized as Sharīʿah-based and Sharīʿah-compliant (Hassan and Lewis 2007;Ashraf and Lahsasna 2017;Hanif 2018). Sharīʿah-based refers to IBs products utilizing the contracts of mushārakah (capital partnership) and muḍārabah (a partnership of capital and labor) that create economic substance as both involve risk and reward (Hassan and Lewis 2007;Ashraf and Lahsasna 2017;Hanif 2018).…”

Analysis of Corporate Governance on Islamic Bank in Indonesia

“…e concept of Corporate Governance (CG) in Islamic perspective has a similar meaning with "shari'ah governance" which is the vital and core aspect in implementing shari'ah principles in Islamic banking. Hanif (2018) argues that the scope of shari'ah governance covers shari'ah supervision and control, charitable operations, human resources, product development and organisation. Besides, Darmadi (2013) argues that it is important for certain rm or organisation to implement the principles of CG following organizational aspects such as transparency and responsibility.…”

“…e previous study suggests that the position of DPS, as the highest approval authority for business system and products, requires skills and knowledge in both areas, conventional and Islamic approach (Hanif, 2018). e regulation maker has not been thinking about the implication of selecting a director of Islamic bank from a non-Islamic educational background.…”

Factors Influencing Customers Loyalty Towards Islamic Banking: A Case Study in Gombak, Selangor

“…& Iqbal (2013), stated that all Islamic financial contracts and transactions must get approval from Shariah board and the contract must minimize the risk of asymmetry information and moral hazard. Shariah experts were highly essential in handling mixture of business or finance professionals to helps in giving opinion from Shariah perspectives, which leads to smooth Islamic policy making (Hanif, 2018).…”