Islamic Banking and Shari'ah Compliance: A Product Development Perspective
DOI:
https://doi.org/10.31436/jif.v3i2.45Abstract
The key difference between Islamic banks and their conventional counterparts is that the former abides by the principles of Islamic law (Shari’ah). However, some Islamic banking products are criticized for not fulfilling the Shari’ah requirements as these closely mimic conventional products. The article discusses how traditional Islamic contracts are used to structure Islamic modes of financing during contemporary times. To understand the choice of financing modes used by Islamic banks, the product development process is examined and the role of Shari’ah related bodies in these institutions (Shari’ah unit/department and Shari’ah supervisory board/committee) in this process is outlined. The article contends that the choice of modes of financing used by Islamic financial institutions depend on external and internal factors. In some cases Islamic banks choose controversial modes of financing as these are the only ones that are feasible under the legal and regulatory regimes they operate under. In other cases the choice of inferior modes may result from competing internal organizational considerations whereby economic factors overshadow Shari’ah requirements. The article highlights the role of Shari’ah related bodies within a bank in ensuring Shari’ah compliance of products.
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References
Ahmed, Habib. 2011. Product Development in Islamic Banks. Edinburgh: Edinburgh University Press.
Ahmed, Habib and Tariqullah Khan. 2007. “Risk management in Islamic banking.†in Handbook of Islamic Banking. Edited by M. Kabir Hassan and Mervyn K. Lewis, 144-158. Cheltenham: Edward Elgar.
Al-Zuhayli, Wahba. 2003. Financial Transactions in Islamic Jurisprudence. Beirut: Dar al-Fikr al-Mouaser.
Al-Dhareer, S. M. Al-Amin. 1997. Al-Gharar in Contracts and its Effect on Contemporary Transactions. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Amin, Mohammed. 2010a. “Shari’ah-compliant finance: UK regulation.†New Horizon. Issue No. 174. January-March 2010. [http://www.newhorizon-islamicbanking.com/index.cfm?action=view&id=10934§ion=academicarticle]
Amin, Mohammed. 2010b. “Islamic financial products and their challenge to taxation systems.†in Chancellor Guide to the Legal and Shari’ah Aspects of Islamic Finance. Edited by Humayon Dar and Umer F. Mughal. London: Chancellor Publications Ltd.
Ainley, Michael, Ali Mashayekhi, Robert Hicks, ArshadurRahman and Ali Ravalia. 2007. Islamic Finance Regulation in the UK: Regulation and Challenges. London: Financial Services Authority.
Avlonitis, George J., Paulina G. Papastathopoulou, Spiros P. Gounaris. 2001. “An empirically-based typology of product innovations for new financial services: Success and failure scenarios.†The Journal of Product Innovation Management. 18: 324-42.
Ayub, Muhammad. 2007. Understanding Islamic Finance. West Sussex: John Wiley & Sons.
Chapra, Umer. 2008, Islamic Vision of Development in the Light of Maqasid al Shari’ah. London: International Institute of Islamic Thought.
Chapra, M. Umer and Habib Ahmed. 2002. Corporate Governance in Islamic Financial Institutions. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Cooper, Robert G. 1994. “Perspective: Third Generation New Product Development Process.†The Journal of Product Innovation Management 11: 3-14.
Cooper, Robert G. and Scott J. Edgett. 1999. Product Development for the Service Sector: Lessons from Market Leaders. New York: Basic Books.
Cooper, Robert G., Christopher J. Easingwood, Scott Edgett, Elko J. Klienschmidt, and Chris Story. 1994. “What Distinguishes the Top Performing New Products in Financial Services.†The Journal of Product Innovation Management 11: 281-99.
Dar, Humayon. 2007. "A Matter of Principle: BMB Islamic Structuring Shariah Solutions." Business Islamica. 31 October 2007.
De Brentani, Ulricke. 1991. “Success Factors in Developing New Business Services.†European Journal of Marketing 25 (2): 33-59.
DeLorenzo, Yusuf Talal. 2007. "The Total Returns Swap and the Shariah Conversion Technology Strategy," available at http://www.failaka.com/customer/resources.html
Djojosugito, Reza Adirahman. 2005. "Relative Stability of Civil and Common Law Regimes for Islamic Banking." in Islamic Financial Architecture: Risk Management and Financial Stability. Edited by Tariqullah Khan and DadangMuljawan, 549-565. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Edgett, Scott J. 1996. “The New Product Development Process for Commercial Financial Services.†Industrial Marketing Management 25: 507-15.
Edgett, Scott J. and Steven Parkinson. 1994. “The Development of New Financial Services: Identifying Determinants of Success and Failure.†International Journal of Service Industry Management 5 (4): 24-38.
ElGamal, Mahmoud A. 2001. “An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence.†Islamic Economic Studies 8 (2): 29-58.
ElGamal, Mahmoud A. 2007. "Mutuality as an Antidote to Rent Seeking Shari'a-Arbitrage in Islamic Finance." Thunderbird International Business Review 49(2): 187–202 .
ElGamal, Mahmoud A. 2008. "Incoherence of Contract-based Islamic Financial Jurisprudence in the Age of Financial Engineering." Wisconsin International Law Journal 25(4): 605-623.
Ernst & Young. 2011. A Brave New World of Sustainable Growth, The World Islamic Banking Competitiveness Report 2011-2012, Dubai: Ernst & Young.
Fadel, Mohammad H. 2008. “Riba, Efficiency, and Prudential Regulation: Preliminary Thoughts.†Wisconsin International Law Journal 25 (4): 655-702.
Fuller, Gordon W. 2005. New Food Product Development: From Concept to Marketplace. Boca Raton: CRC Press LLC.
Grais, W. and M. Pellegrini. 2006. ‘Corporate governance and Shariah compliance in Institutions offering Islamic financial servicesâ€, World Bank Policy Research Working Paper 4054. Washington DC: World Bank.
Hamoudi, Haider Ala. 2007. “Jurisprudential Schizophrenia: On Form and Function in Islamic Finance.†Chicago Journal of International Law 7 (2): 605-22.
Holden, Kelly. 2007. “Islamic Finance: ‘Legal Hypocrisy’ Moot Point, Problematic Future Bigger Concern.†Boston University International Law Journal 25: 341-68.
IBB. 2012. On Demand Savings Account Special Conditions.http://www.islamic-bank.com/personal-banking/savings-products/demand-savings-account/ (accessed 25 September 2012)
IFSB. 2005. Capital Adequacy Standard for Institutions (other than Insurance Institutions) Offering Only Islamic Financial Services. Islamic Financial Services Board, December 2005.
Iqbal, Munawar, Ausaf Ahmad, and Tariqullah Khan. 1998. Challenges facing Islamic Banking. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Johne, F. Axel and P. Harborne. 1985. “How Large Commercial Banks Manage Product Innovation.†International Journal of Bank Marketing 3: 54-71.
Kahf, Monzer. 2004. “Islamic Banks: The Rise of a New Power Alliance of Wealth and Shari’ah Scholarshipâ€, in The Politics of Islamic Finance. Edited by Clement M. Henry and Rodney Wilson, 17-36. Edinburgh: Edinburgh University Press.
Kahf, Monzer. 2006. "Maqasid al Shariah in the Prohibition of Riba and their Implications for Modern Islamic Finance", Paper presented at IIUM International Conference on Maqasid al Shari'ah, Malaysia, August 8-10, 2006.
Kahf, Monzer and Tariqullah Khan. 1988. Principles of Islamic Financing: A Survey. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Kamali, Mohammad Hashim. 2000. Isalmic Commercial Law: An Introduction. Oxford: Oneworld Publications.
Kamali, Mohammad Hashim. 2003. Principles of Islamic Jurisprudence. Cambridge: The Islamic Texts Society.
Kamali, Mohammad Hashim. 2006. “Legal Maxims and other Genres of Literature in Islamic Jurisprudence.†Arab Law Quarterly 20 (1): 77-101.
Kelly, David and Chris Storey. 2000. “New Service Development: Initiation Strategies.†International Journal of Service Industry Management 11 (1): 45-62.
Khan, Feisal. 2010. “How ‘Islamic’ is Islamic Bankingâ€, Journal of Economic Behavior& Organization 76: 805-820.
Khan, Mohsin S. 1987. "Islamic Interest-free Banking: A Theoretical Analysis." in Theoretical Studies in Islamic Banking and Finance. Edited by Mohsin S. Khan and Abbas Mirakhor, 15-35.Houston: The Institute for Research and Islamic Studies.
Khan, Mohsin S. and Abbas Mirakhor. 1989. Islamic Banking: Experiences in the Islamic Republic of Iran and Pakistan, International Monetary Fund Working Paper WP/89/12.
Lovelock, Christopher H. 1984. “Developing and Implementing New Services.†in Developing New Services. Edited by William R. George and Claudia E. Marshall. Chicago: American Marketing Association.
Majallah. 2001. The Majelle: Being an English Translation of Majallah el-Ahkam-i-Adliya and a Complete Code of Islamic Civil Law, Kuala Lumpur: The Other Press.
Qattan, Muhammad A. 2006. “Shari’ah Supervision: The Unique Building Block of Islamic Financial Architecture.†Pp. 273-87 in: Islamic Financial Architecture: Risk Management and Financial Stabilit. Edited by Tariqullah Khan and DadangMuljawan, 273-87. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Reinertsen, Donald G. 1997. Managing the Design Factory: A Product Developer’s Toolkit. New York: The Free Press.
Saleem, Muhammad. 2006a. Islamic Banking- A $300 Billion Deception, Xlibris Corporation.
Saleem, Muhammad. 2006b. Islamic Banking: A Charade: Call for Enlightenment, BookSurgePublishing.
Scheuing, Eberhard and Eugene M. Johnson. 1989a. “New Product Development and Management in Financial Institutions.†International Journal of Bank Marketing 7: 17-21.
Scheuing, Eberhard and Eugene M. Johnson. 1989b. “A Proposed Model for New Service Development.†The Journal of Services Marketing 3: 25-34.
Seniawski, Barbara L. 2001. “Riba Today: Social Equity, the Economy and Doing Business Under Islamic Law.†Columbia Journal of Transnational Law 39: 700-728.
Shostack, G. Lynn. 1982. “How to Design a Service.†European Journal of Marketing 16 (1): 19-63.
Shostack, G. Lynn. 1984. “Designing Services that Deliver.†Harvard Business Review 62 (1): 133-9.
Sfeir, G.N. 1998. Modernization of the Law in Arab States: An Investigation into Civil Criminal and Constitutional Law in the Arab World. Bethesda: Austin and Winfield Publishers.
Siddiqi, M. Nejatuallah. 1981. Banking without Interest. Lahore: Islamic Publications Ltd.
Siddiqi, M. Nejatuallah. 1983. Issues in Islamic Banking, Leicester: The Islamic Foundation.
Siddidi, M. Nejatuallah. 2004. Riba, Bank Interest and the Rationale of its Prohibition Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Siddiqi, M. Nejatuallah. 2006. "Islamic Banking and Finance in Theory and Practice: A Survey of State of Art." Islamic Economic Studies 13 (2): 1-48.
Smith, Presten G. And Donald G. Reinertsen. 1998. Developing Products in Half the Time: New Rules, New Tools. New York: John Wiley and Sons, Inc.
Sultan, Syed Alwi Mohamed. 2006. A Mini Guide to Accounting for Islamic Financial Products-A Primer. Kuala Lumpur: CERT Publications Sdn. Bhd.
Ulrich, Karl T. and Steven D. Eppinger. 2008. Product Development and Design, New York: McGraw-Hill.
Usmani, Taqi. 1999. An Introduction to Islamic Finance. Karachi: IdaratulMa’arif.
Usmani, Taqi. 2007. “Sukuk and their Contemporary Applicationsâ€, available at http://www.failaka.com/customer/resources.html
Vogel, Frank E. 2000. Islamic Law and Legal System: Studies of Saudi Arabia. Leiden: Brill.
World Bank. 2004. Doing Business in 2004: Understanding Regulation. Washington D.C.: Oxford University Press.
Ahmed, Habib and Tariqullah Khan. 2007. “Risk management in Islamic banking.†in Handbook of Islamic Banking. Edited by M. Kabir Hassan and Mervyn K. Lewis, 144-158. Cheltenham: Edward Elgar.
Al-Zuhayli, Wahba. 2003. Financial Transactions in Islamic Jurisprudence. Beirut: Dar al-Fikr al-Mouaser.
Al-Dhareer, S. M. Al-Amin. 1997. Al-Gharar in Contracts and its Effect on Contemporary Transactions. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Amin, Mohammed. 2010a. “Shari’ah-compliant finance: UK regulation.†New Horizon. Issue No. 174. January-March 2010. [http://www.newhorizon-islamicbanking.com/index.cfm?action=view&id=10934§ion=academicarticle]
Amin, Mohammed. 2010b. “Islamic financial products and their challenge to taxation systems.†in Chancellor Guide to the Legal and Shari’ah Aspects of Islamic Finance. Edited by Humayon Dar and Umer F. Mughal. London: Chancellor Publications Ltd.
Ainley, Michael, Ali Mashayekhi, Robert Hicks, ArshadurRahman and Ali Ravalia. 2007. Islamic Finance Regulation in the UK: Regulation and Challenges. London: Financial Services Authority.
Avlonitis, George J., Paulina G. Papastathopoulou, Spiros P. Gounaris. 2001. “An empirically-based typology of product innovations for new financial services: Success and failure scenarios.†The Journal of Product Innovation Management. 18: 324-42.
Ayub, Muhammad. 2007. Understanding Islamic Finance. West Sussex: John Wiley & Sons.
Chapra, Umer. 2008, Islamic Vision of Development in the Light of Maqasid al Shari’ah. London: International Institute of Islamic Thought.
Chapra, M. Umer and Habib Ahmed. 2002. Corporate Governance in Islamic Financial Institutions. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Cooper, Robert G. 1994. “Perspective: Third Generation New Product Development Process.†The Journal of Product Innovation Management 11: 3-14.
Cooper, Robert G. and Scott J. Edgett. 1999. Product Development for the Service Sector: Lessons from Market Leaders. New York: Basic Books.
Cooper, Robert G., Christopher J. Easingwood, Scott Edgett, Elko J. Klienschmidt, and Chris Story. 1994. “What Distinguishes the Top Performing New Products in Financial Services.†The Journal of Product Innovation Management 11: 281-99.
Dar, Humayon. 2007. "A Matter of Principle: BMB Islamic Structuring Shariah Solutions." Business Islamica. 31 October 2007.
De Brentani, Ulricke. 1991. “Success Factors in Developing New Business Services.†European Journal of Marketing 25 (2): 33-59.
DeLorenzo, Yusuf Talal. 2007. "The Total Returns Swap and the Shariah Conversion Technology Strategy," available at http://www.failaka.com/customer/resources.html
Djojosugito, Reza Adirahman. 2005. "Relative Stability of Civil and Common Law Regimes for Islamic Banking." in Islamic Financial Architecture: Risk Management and Financial Stability. Edited by Tariqullah Khan and DadangMuljawan, 549-565. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Edgett, Scott J. 1996. “The New Product Development Process for Commercial Financial Services.†Industrial Marketing Management 25: 507-15.
Edgett, Scott J. and Steven Parkinson. 1994. “The Development of New Financial Services: Identifying Determinants of Success and Failure.†International Journal of Service Industry Management 5 (4): 24-38.
ElGamal, Mahmoud A. 2001. “An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence.†Islamic Economic Studies 8 (2): 29-58.
ElGamal, Mahmoud A. 2007. "Mutuality as an Antidote to Rent Seeking Shari'a-Arbitrage in Islamic Finance." Thunderbird International Business Review 49(2): 187–202 .
ElGamal, Mahmoud A. 2008. "Incoherence of Contract-based Islamic Financial Jurisprudence in the Age of Financial Engineering." Wisconsin International Law Journal 25(4): 605-623.
Ernst & Young. 2011. A Brave New World of Sustainable Growth, The World Islamic Banking Competitiveness Report 2011-2012, Dubai: Ernst & Young.
Fadel, Mohammad H. 2008. “Riba, Efficiency, and Prudential Regulation: Preliminary Thoughts.†Wisconsin International Law Journal 25 (4): 655-702.
Fuller, Gordon W. 2005. New Food Product Development: From Concept to Marketplace. Boca Raton: CRC Press LLC.
Grais, W. and M. Pellegrini. 2006. ‘Corporate governance and Shariah compliance in Institutions offering Islamic financial servicesâ€, World Bank Policy Research Working Paper 4054. Washington DC: World Bank.
Hamoudi, Haider Ala. 2007. “Jurisprudential Schizophrenia: On Form and Function in Islamic Finance.†Chicago Journal of International Law 7 (2): 605-22.
Holden, Kelly. 2007. “Islamic Finance: ‘Legal Hypocrisy’ Moot Point, Problematic Future Bigger Concern.†Boston University International Law Journal 25: 341-68.
IBB. 2012. On Demand Savings Account Special Conditions.http://www.islamic-bank.com/personal-banking/savings-products/demand-savings-account/ (accessed 25 September 2012)
IFSB. 2005. Capital Adequacy Standard for Institutions (other than Insurance Institutions) Offering Only Islamic Financial Services. Islamic Financial Services Board, December 2005.
Iqbal, Munawar, Ausaf Ahmad, and Tariqullah Khan. 1998. Challenges facing Islamic Banking. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Johne, F. Axel and P. Harborne. 1985. “How Large Commercial Banks Manage Product Innovation.†International Journal of Bank Marketing 3: 54-71.
Kahf, Monzer. 2004. “Islamic Banks: The Rise of a New Power Alliance of Wealth and Shari’ah Scholarshipâ€, in The Politics of Islamic Finance. Edited by Clement M. Henry and Rodney Wilson, 17-36. Edinburgh: Edinburgh University Press.
Kahf, Monzer. 2006. "Maqasid al Shariah in the Prohibition of Riba and their Implications for Modern Islamic Finance", Paper presented at IIUM International Conference on Maqasid al Shari'ah, Malaysia, August 8-10, 2006.
Kahf, Monzer and Tariqullah Khan. 1988. Principles of Islamic Financing: A Survey. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Kamali, Mohammad Hashim. 2000. Isalmic Commercial Law: An Introduction. Oxford: Oneworld Publications.
Kamali, Mohammad Hashim. 2003. Principles of Islamic Jurisprudence. Cambridge: The Islamic Texts Society.
Kamali, Mohammad Hashim. 2006. “Legal Maxims and other Genres of Literature in Islamic Jurisprudence.†Arab Law Quarterly 20 (1): 77-101.
Kelly, David and Chris Storey. 2000. “New Service Development: Initiation Strategies.†International Journal of Service Industry Management 11 (1): 45-62.
Khan, Feisal. 2010. “How ‘Islamic’ is Islamic Bankingâ€, Journal of Economic Behavior& Organization 76: 805-820.
Khan, Mohsin S. 1987. "Islamic Interest-free Banking: A Theoretical Analysis." in Theoretical Studies in Islamic Banking and Finance. Edited by Mohsin S. Khan and Abbas Mirakhor, 15-35.Houston: The Institute for Research and Islamic Studies.
Khan, Mohsin S. and Abbas Mirakhor. 1989. Islamic Banking: Experiences in the Islamic Republic of Iran and Pakistan, International Monetary Fund Working Paper WP/89/12.
Lovelock, Christopher H. 1984. “Developing and Implementing New Services.†in Developing New Services. Edited by William R. George and Claudia E. Marshall. Chicago: American Marketing Association.
Majallah. 2001. The Majelle: Being an English Translation of Majallah el-Ahkam-i-Adliya and a Complete Code of Islamic Civil Law, Kuala Lumpur: The Other Press.
Qattan, Muhammad A. 2006. “Shari’ah Supervision: The Unique Building Block of Islamic Financial Architecture.†Pp. 273-87 in: Islamic Financial Architecture: Risk Management and Financial Stabilit. Edited by Tariqullah Khan and DadangMuljawan, 273-87. Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Reinertsen, Donald G. 1997. Managing the Design Factory: A Product Developer’s Toolkit. New York: The Free Press.
Saleem, Muhammad. 2006a. Islamic Banking- A $300 Billion Deception, Xlibris Corporation.
Saleem, Muhammad. 2006b. Islamic Banking: A Charade: Call for Enlightenment, BookSurgePublishing.
Scheuing, Eberhard and Eugene M. Johnson. 1989a. “New Product Development and Management in Financial Institutions.†International Journal of Bank Marketing 7: 17-21.
Scheuing, Eberhard and Eugene M. Johnson. 1989b. “A Proposed Model for New Service Development.†The Journal of Services Marketing 3: 25-34.
Seniawski, Barbara L. 2001. “Riba Today: Social Equity, the Economy and Doing Business Under Islamic Law.†Columbia Journal of Transnational Law 39: 700-728.
Shostack, G. Lynn. 1982. “How to Design a Service.†European Journal of Marketing 16 (1): 19-63.
Shostack, G. Lynn. 1984. “Designing Services that Deliver.†Harvard Business Review 62 (1): 133-9.
Sfeir, G.N. 1998. Modernization of the Law in Arab States: An Investigation into Civil Criminal and Constitutional Law in the Arab World. Bethesda: Austin and Winfield Publishers.
Siddiqi, M. Nejatuallah. 1981. Banking without Interest. Lahore: Islamic Publications Ltd.
Siddiqi, M. Nejatuallah. 1983. Issues in Islamic Banking, Leicester: The Islamic Foundation.
Siddidi, M. Nejatuallah. 2004. Riba, Bank Interest and the Rationale of its Prohibition Jeddah: Islamic Research and Training Institute, Islamic Development Bank.
Siddiqi, M. Nejatuallah. 2006. "Islamic Banking and Finance in Theory and Practice: A Survey of State of Art." Islamic Economic Studies 13 (2): 1-48.
Smith, Presten G. And Donald G. Reinertsen. 1998. Developing Products in Half the Time: New Rules, New Tools. New York: John Wiley and Sons, Inc.
Sultan, Syed Alwi Mohamed. 2006. A Mini Guide to Accounting for Islamic Financial Products-A Primer. Kuala Lumpur: CERT Publications Sdn. Bhd.
Ulrich, Karl T. and Steven D. Eppinger. 2008. Product Development and Design, New York: McGraw-Hill.
Usmani, Taqi. 1999. An Introduction to Islamic Finance. Karachi: IdaratulMa’arif.
Usmani, Taqi. 2007. “Sukuk and their Contemporary Applicationsâ€, available at http://www.failaka.com/customer/resources.html
Vogel, Frank E. 2000. Islamic Law and Legal System: Studies of Saudi Arabia. Leiden: Brill.
World Bank. 2004. Doing Business in 2004: Understanding Regulation. Washington D.C.: Oxford University Press.
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Published
2014-11-30
How to Cite
Ahmed, H. (2014). Islamic Banking and Shari’ah Compliance: A Product Development Perspective. Journal of Islamic Finance, 3(2), 15–29. https://doi.org/10.31436/jif.v3i2.45
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