2

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)

-------------------------------------------------------------------

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
4

Journal of
Islamic Banking and Finance
Volume 39 July-Sept 2022 No. 3
Founding Chairman Academic Advisory Board
Muazzam Ali (Late) Dr. Mohd. Ma’sum Billah
Former –Vice Chairman Professor IEI, KingAbdulAzizUniversity,
Dar Al-Maal Al-Islami Kingdom of Saudi Arabia.
Trust, Geneva, Dr. Zubair Hasan,
Switzerland Professor Emeritus INCEIF
Global University of Islamic Finance, Malaysia.
Chairman
Basheer Ahmed Chowdry Dr. Mehboob ul Hassan
Professor, Department of Economics, (CBA)
Shariah Advisor King Saud University, Saudi Arabia.
Uzair Ashraf Usmani Dr. Manzoor Ahmed Al-Azhari,
Editorial Board Associate Professor (Islamic Law)
Ph.D, Legal Policy, Fac. Shariah & Law.
Ahmed Ali Siddiqui Alazhar University, Egypt.
Mufti Bilal Qazi Post Doc. Fac. of Law, Univ.of Oxford, UK.
S. A. Q. Haqqani Dr. Mohammad Kabir Hassan
Altaf Noor Ali (ACA) Professor of Economics & Finance
Chief Editor University of New Orleans, USA.
Aftab Ahmad Siddiqi Dr. M. Ishaq Bhatti
Associate Professor of Finance and Financial
Associate Editor Economics, LA TROBE University, Australia.
Dr. Salman Ahmed Shaikh
Dr. Riham Rizk,
Seemin Shafi Associate Professor in Accounting
Manager Publication Durham University Business School, UK
Mohammad Farhan Dr. Rodney Wilson
Professor Emeritus, INCEIF, Lorong Universiti
Published by: A Malaysia/France.
International Association of
Islamic Banks Dr. S. Nazim Ali,
Karachi, Pakistan. Professor and Director,
Center for Islamic Economics and Finance,
Ph: +92 (021)35837315 HamadBinKhalifaUniversity, Doha, Qatar.
Fax: +92 (021)35837315
Email: ia _ ib @ yahoo.com Dr, R. Ibrahim Adebayo
[email protected] Department of Religions, University of Ilorin,
Nigeria.
Registration No. 0154
Printed at M/S Maaz Prints, Karachi Dr. Huud Shittu
Associate Professor
Website: www.islamicbanking.asia Department of Religion and Philosophy, Faculty of
ArtUniversity of Jos – Plateau State, Nigeria.
Follow us on Facebook: Dr. Waheed Akhtar
http://www.facebook.com/JIBFK Assistant Professor, Comsats Institute of
Information Technology (CIIT), Lahore, Pakistan.
http://external.worldbankimflib.org/uhtbin/ Dr. Muhammad Zubair Usmani
cgisirsi/x/0/0/5/?searchdata1=37177{ckey} Jamia Daraluloom Karachi.
 Journal of
Islamic Banking and Finance
Volume 39 July-Sept 2022 No. 3

CONTENTS

1. Editor Note ................................................................................................................07

2. Islamic Banking Operation Special Reference to Malaysian Case Study --------11

By Prof. Dr. Ma’sum Billah

3. Corporate Social Responsibility Activities and Disclosures by -------------------- 23

Islamic Banks in South Africa
By Dr. Riyad Moosa

4. Risks And Risk Management In Family Takaful -------------------------------------37

By Nor RazinahMohd Zain, Farhad Ahmed Bhatti & Syed Ahmed Salman

5. Carbon Credits Trading and its Role in Infrastructure Power --------------------55

Purchase Agreements from a Shariah Perspective
By Shakir Siddiq Jakhura

6. Service Quality And Customer Satisfaction Of Islamic Micro Finance ---------65

Bank In Ogun State, Nigeria
By I. Akintan M. Dabiri A. Ogunbode

7. Islamic Finance in Africa: Challenges and Opportunities --------------------------83

“A Experience with North African Countries"
By Fadul Abdel Karim Al Bashir, PhD
6
 7

Editor’s Note
Mohd. Ma’SumBillah, Professor of Finance and Insurance, Islamic Economics
Institute, King Abdul Aziz University, Kingdom of Saudi Arabia, in his article
“ISLAMIC BANKING OPERATION-Special Reference to Malaysian Case Study”
discusses the shortcoming of Islamic banks being subject to same banking rules as
conventional banking with some adjustments to comply with Shariah. This, he says
causes confusion where any transaction is referred to court of law as it is then decided as
per normal English law rather than shariah law. He cites specific cases and the legal
standing in them and his interpretation of the situation.
The article “Corporate Social Responsibility Activities and Disclosures by
Islamic Banks in South Africa” contributed by By Dr. Riyad Moosa, is based on a
quantitative research and touches on a relevant point of ethics in Islamic Banks in South
African context – CSR Activities carried out by these banks and the disclosures about
these activities and of shariah matters in banking in their annual reports. The article
discusses firstly what CSR activities should Islamic banks provide, secondly, what
disclosures about CSR should Islamic banks provide and lastly to what extent do CSR
activities predict CSR disclosures. This is a good read and provides insights into what the
banking public expects from an Islamic Bank in South Africa and to what extent are such
expectations being fulfilled.
The article entitled “Risks and Risk Management in Family Takaful”jointly
contributed by Nor RazinahMohd Zain - Assistant Professor at IIUM, Farhad Ahmed
Bhatti an independent researcher and Syed Ahmed Salman - Senior Lecturer at Lincoln
University College Malaysia, discusses in detail the various risks associated with Takaful
business with special emphasis on the Malaysian financial market and Family Takaful.
They outline the difference between conventional insurance and Takaful, identify the
different risks associated with the Takaful business and operations and also suggest the
mitigants that can help overcome these risks. This is a good read to understand the
concept and business of Takaful and reTakaful as supported by Shariah rulings.
An article on Carbon Credits Trading and its Role in Infrastructure Power
Purchase Agreements from a Shariah Perspective, contributed by Shakir Siddiq
Jakhura, discusses the Shariah admissibility of trading carbon credit allowances between
industries and countries. He defines the nature of these allowances in light of Koyoto
Protocols and how these compare as a right under Shariah and concludes that it is
permissible to trade such allowances under rules of Islamic Shariah. Mr. Jhakura lays
8

down the subject clearly and concisely and presents scholarly opinions to support his
conclusion.
The article “Service Quality and Customer Satisfaction of Islamic Micro
Finance Bank in Ogun State, Nigeria”, contributed by I. Akintan, M. Dabiri and A.
Ogunbode, all associated with Department of Business and Finance, Crescent University,
Abeokuta, Nigeria is based on their research conducted to assess the effect of service
quality dimensions on choice and use of Islamic microfinance banking in Nigeria. The
dimensions specifically researched were compliance with Islamic principles in finance,
assurance, reliability, tangibles, responsiveness and empathy that the bank offers its
customers. The study used service quality measures on the dimensions impacting
customer preference in usage of Islamic micro finance banks and arrived at the strong and
moderate dimensions. They compared their findings with other research findings done
previously and suggest that Islamic banks work towards improving their service in order
to attract and keep clientele.

In his article “Islamic Finance in Africa: Challenges and Opportunities An

Experience with North African Countries" Fadul Abdel Karim Al Bashir, PhD,
Associate Professor of Economics and Finance, Islamic Economics Institute, King
Abdulaziz University, Kingdom of Saudi Arabia discusses the status and progress of
Islamic banking institutions, takaful companies and Sukuk issuance in 6 Islamic
African countries viz. Egypt, Sudan, Morocco, Algeria, Tunisia, and Libya. He traces
the emergence, the challenges, the opportunities and future of Islamic finance in each
of these countries individually referring to legal and political challenges, the efforts
of central banks of these countries in organizing the regulatory environment for
Islamic financial institutions and how the banking market has received them and its
expectations from such institutions. He concludes that while Islamic finance has
made inroads in all six countries, there is still a lot to be done to make Islamic
banking, Takaful and Sukuk stand up against conventional counterparts.

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: [email protected] / facebook link: http://www.facebook.com/JIBFK
 Islamic Banking Operation Special Reference to Malaysian Case Study. 11

Islamic Banking Operation

Special Reference to Malaysian Case Study
By
*
Mohd Ma’Sum Billah
Abstract
Shari‘ah principles are the backbone of Islamic banking laws. Hence there is
a clear distinguish between Islamic banking laws and conventional banking
laws. Islamic banking laws have been enacted by many Islamic and non-
Islamic countries, in order to regulate and supervise Islamic banks in their
respective countries. Islamic commercial law is closely related to Islamic
banking law and practice. Governments of states around the world have
passed special laws that govern the operations of Islamic banks in their
respective countries. These laws became necessary in the wake of growth of
Islamic banking system and its posture of making radical changes in the
world financial system. Following from the influential voice of Muslim
Brotherhood criticism of the interest-based financial system in Egypt and
other parts of the Muslim world around 1930s onwards, and the earlier
experiment of Islamic banking in Malaysia in the mid-1940s, the idea of
Islamic banking began to take its root in the 1950s in Pakistan. Thereafter,
the first trial of application of Allah's directives in such institutions
reforming the community was represented in a local Egyptian saving bank in
Egypt in 1963.
Keywords: Islamic Banking, Shari’ah, Bank Negara, Malaysia, Investment,
Instrument, Cases

Islamic Banking Act (Malaysia) 1983 (IBA):

Islamic banking in Malaysia began in September 1963 when Perbadanan Wang
SimpananBakal-Bakal Haji (PWSBH) was established. PWSBH was set up as an
institution for Muslims to save for their Hajj (pilgrimage to Mecca) expenses. In 1969,

*
Professor of finance & insurance, Islamic Economics Institute, King Abdul Aziz University,
Kingdom of Saudi Arabia. [email protected]. It is acknowledged here that;
this manuscript is the revised version of the original work of the author and is published
here due to market demands and added benefits.
12 Journal of Islamic Banking and Finance July -Sept 2022

PWSBH merged with PejabatUrusan Haji to form Lembaga Urusan dan Tabung Haji
(now known as Lembaga Tabung Haji). 1
The first Islamic bank in Malaysia was established in 1983. In 1993, commercial
banks, merchant banks and finance companies were allowed to offer Islamic banking
products and services under the Islamic Banking Scheme (IBS). These institutions
however, are required to separate the funds and activities of Islamic banking transactions
from that of the conventional banking business to ensure that there would not be any co-
mingling of funds. 2
In Malaysia, the National Syariah Advisory Council additionally set up at Bank
Negara Malaysia (BNM) advises BNM on the Shariah aspects of the operations of these
institutions, as well as on their products and services. In 2006, Bank Negara
Malaysia setup International Centre for Education in Islamic Finance(INCEIF) a
dedicated University to provide skilled and certified personnel for Islamic Finance in
Malaysia. The university was established as part of the Malaysian Government's initiative
to further strengthen the country’s position as an international Islamic finance centre. It is
the only university in the world that is wholly dedicated to postgraduate study in Islamic
Finance. 3
In June 2005, Dow Jones and Company of New York and RHB Securities of Kuala
Lumpur, teamed up to launch a new "Islamic Malaysia Index" — a collection of 45
stocks representing Malaysian companies that comply with a variety of Sharia-based
criteria. Three variables (the total debt of an indexed company, its total cash plus interest-
bearing securities and its accounts receivables) must each be less than 33% of the trailing
12-month average. 4
Islamic banking first emerged in the early 1970s. Islamic banks are commercial
banks although they differ in operation from normal commercial banks, in that they are
based on Islamic principles. In Malaysia, the -Muslim population has long desired the
practice the Shari’ah laws in banking and finance. In 1980 (Bumiputra Economic
Congress passed a resolution for the government to allow the setting up of an Islamic
bank to mobilize and invest funds of the Muslims according to Shari’ah laws. The
establishment of Islamic bank was aimed at filling this economic gap and complementing
the existing bank services in Malaysia. In March 1983, the Act (which came into force on
7 April was enacted to provide for the licensing and regulation of Islamic banking
business in Malaysia. Several other regulations were also amended so that Islamic banks
can operate by the rules imposed on commercial banks and yet do not be against the
Islamic principles. 5

1
https://en.wikipedia.org/wiki/Islamic_banking_in_Malaysia
2
Ibid
3
Ibid
4
Ibid
5
Ibid
 Islamic Banking Operation Special Reference to Malaysian Case Study. 13

For example, as Islamic banks cannot own, sell or purchase government securities
which are interest-based, the government issued, in the same year, investment certificates
for Islamic banks to conform to liquidity requirements. Bank Islam Malaysia Berhad was
set up as a limited company on 1 March 1983. It commenced operations as a commercial
bank in July 1983. It is the only fully Islamic bank in country, serving Muslims in
particular and theen tire population ingeneral. Currently, an increasing number of other
commercial banks are offering interest-free banking services which are based on Islamic
principles.
Islamic Banking Act 1983 (Act 276): The IBA 1983 of Malaysia has been modeled
on the country’s existing Banking Act 1973 with modifications and amendments as are
necessary to conform with Islamic banking practices. It seeks to provide for the licensing
and regulating of Islamic banking business. The Act applies throughout Malaysia.
Basically it rationalizes the normal practices of prudent banking contained in the Banking
Act 1973 and vests the Central Bank with similar powers of supervision and regulation
over Islamic banks as in the case with other licensed banks.
The definition of Islamic banking business is over simplified although in reality it
may not be so. Modern Banks are classified according to the purpose and function which
they are performing. Furthermore, the expression “any element which is not approved by
the Religion of Islam” is too broad and requires explanation Anyone with even a basic
knowledge of Islamic Law will know that there are even in the Sunni branch of Islam (as
opposed to the Shi’a branch) 4 madhabs (Schools of Islamic Jurisprudence). And
opinions among the four do vary on many aspects of the law. In the event of differences
in opinion on the law applicable in respect of any particular matter the law of which
madhab is to be applied?
It might be thought that it would perhaps have been more certain if the definition
had been more precise, such as providing that in the event of a difference the law to be
applied is to be the law in accordance with, say, the Shafi’e madhab. Nevertheless, the
general definition may have some positive aspects. It would allow, for instance, for the
reception and application of the law from any of the madhabs or even from the Shi’a
branch, thus making it broader-based and the resulting proposition of the law more
widely acceptable. The Act by not defining banking business has either left it to be
implied by the Courts that the meaning of the term is to be the same as that applied in
conventional banking or, alternatively, left the term to acquire a meaning by custom and
usage over the years.
The setting up of a Shari’ah advisory body is a statutory requirement and its
function is “to ensure that [the operations of the bank do not involve any element which
is not approved by the Religion of Islam”. The ambit of this section is questionable
because if a particular document used in banking transactions by a bank licensed under
the IBA has been approved by its Shari’ah advisory body, can it then be challenged in
Court as being contrary to Shari’ah? Can the Court find such a document to be not in
accordance with the Shari’ah? If it does so, what is the effect of it on the decision of the
Shari’ah advisory body? In other words, are decisions of the Shrari’ah advisory body
open to review by the Courts? This is by no means an easy question to answer. And it is
not easy either to venture an opinion on the issue since any opinion has to be relative to
14 Journal of Islamic Banking and Finance July -Sept 2022

particular factual situations. The question is best left to be answered at the appropriate
time by the appropriate forum.
Basically these provisions relate to the supervision of Islamic banks by the Central
Bank. The question then arises whether the Central Bank has implemented all its affairs
according to Islamic Principles or not. The Central Bank is vested with power to make
regulations “for carrying into effect the objects of this Act”. Islamic Bank shall be subject
to the provisions of the Companies Act, 1965 and that where there is a conflict between
that Act and the IBA the provisions of the IBA shall prevail. But it does not deal with
other Acts, the provisions of which may conflict with those of the IBA. There seems to
have been an oversight in this respect which needs to be remedied.
Critical Analysis towards Reforming the Islamic Banking Act 1983 (Act
276) of Malaysia.
The Islamic Banking Act 1983 (Act 276) or IBA of Malaysia has been modeled on
the country’s existing Banking Act 1973 with modifications and amendments as are
necessary to conform with Islamic banking practices. It seeks to provide for the licensing
and regulating of Islamic banking business. Basically it rations the normal practices of
prudent banking contained in the Banking Act 1973 and vests the Central Bank with
similar powers of supervision and regulation over Islamic banks as in the case with other
licensed banks.
Nevertheless, the Islamic Banking Act 1983 (“IBA”) of Malaysia, which was
gazetted on 10th March 1983 is too simple and the brevity of it is not a guarantee of its
clarity. 6 Any such law should be fully elaborative and unambiguously lay down the
principles without having to completely rely on other sources for authority. This has not
been done by IBA, and thus, an attempt is made here to critically analyze the Legal and
Shari’ah issues arising from the simplicity and lack of clarity of IBA, in the light of the
following three fundamental roles of Islamic financial Institutions:
(1) Islamic banks are financial Institutions whose objective is development. They
operate within the framework of Islamic Shari’ah. Abide by all moral values
which are preached by religious and they are always catering to reform the
function of capital in the society.
(2) Islamic banks are established to apply new banking practices that are
different from conventional banking.
(3) Islamic banks must abide by the principles and injunction, which are laid
down by the Shari’ah.

6
Salient Features of Islamic Banking Act 1983 & banking And Financial Institutions Act
1989. Paper Presented by Mohamed Ismail bin Mohamed Shariff.LL.B(Hons) (S’pore),
LL.M(Lond); Advocate& Solicitor of the High Court of Malaya and of the Supreme Court
of Singapore, to the Seminar on Shariah and Legal Aspects of Islamic Banking Practices,
Organized by BIMB Institute of Research and Training SDN BHD (BIRT) from 29-30 May
1996 Holiday Inn City Center Kula Lumpur.
 Islamic Banking Operation Special Reference to Malaysian Case Study. 15

In fact, the law should be able to guide people in the most comprehensive manner,
rather than leave the public with a bigger burden of choosing between the various
interpretations of the law. It must also be remembered that a banking system is not
independent to the economic system in which it operates. A banking system based on
Islamic principles shall suffer from severe limitations if it has to operate in an
environment which does not show consideration for the other principles of Islam. 7
Therefore, in order to make IBA a better piece of legislation for better implementation
of Islamic banking in Malaysia, following issues should be notified:

Part I contains the short title, commencement, application and

interpretation.
Section 2 - Interpretation
Section 2 defines “Islamic Bank” as “any company which carries on Islamic
banking business and holds a valid license;…” and “Islamic banking business” as
“banking business whose aims and operations do not involve any element which is not
approved by the Religion of Islam”. Thus, we could observe that “banking business” is
not defined.
The definition of Islamic banking business is over simplified although in reality it
may not be so. Modern Banks are classified according to the purpose and function which
they are performing. Banks could also be categorized into the following: 1 – Commercial
Banks, 2 – Saving Banks, 3 – Mortgage Banks, 4 – Investment Banks, 5 – Agricultural
Banks, 6 – Cooperative Banks, 7 – Industrial Banks etc.
Furthermore, the expression “any element which is not approved by the Religion of
Islam” is too broad and requires clarity. Anyone with even a basic knowledge of Islamic
Law will know that there are even in the Sunni branch of Islam (as opposed to the Shi’a
branch) 4 madhabs. And opinions among the four do vary on many aspects of the law. In
the event of differences in opinion on the law applicable in respect of any particular
matter the law of which madhab is to be applied?
legal definition of Riba is needed.
In the absence of a legal definition of Riba it has been noticed that even senior
people in authority have been voicing their personal opinion as to what constitutes Riba.
They show no respect for the decision given by legally constituted bodies.
As a result there is every likelihood that various other issues related to Islamic
Banking might be referred to the courts, and unless various other related legislations are
amended, the courts may not be able to do justice in the most fair and equitable manner.
To date, there are only a few reported cases involving Islamic banking in Malaysia. A
noted case would be the case of Tinta Press SdnBhd v Bank Islam MalasiaBhd 8where the
Supreme Court held that the Bank Islam Malaysia Bhd, as owner of the equipment.

7
Nawazish Ali Zaidi- Executive Vice President & Head of Islamic Banking Division, United
Bank Limited, Head Office, Karachi.
8
[1987]2MLJ 192,
16 Journal of Islamic Banking and Finance July -Sept 2022

Another frequently referred case is Bank Islam Malaysia Berhad v Adnan bin Omar
[19941 3 CLJ 735 9, where the bank’s application for order for sale was granted. The
High Court held that the facility granted by the bank under the Islamic Bai-
BalthamanAjil loan scheme was intended to bring the loan transaction within the limits of
Islamic law. Therefore, the defendant cannot challenge the bank's right to apply for an
order for sale of the land charged to the bank. In Bank Islam Malaysia Berhad v. Adnan
b. Omar 10, the following five legal issues arise from this case:
i. whether civil courts have jurisdiction over Islamic banking;
ii. whether the bank can claim the full selling price upon default;
iii. whether the bank’s customer is entitled to a ‘muqasah’ (rebate);
iv. whether Islamic banking documents need also to comply with civil law;
v. whether civil courts can make necessary modifications to the procedural law
to accommodate Islamic banking.
Whether civil courts have jurisdiction over Islamic banking
The defendant argued that since BIMB is an Islamic bank, the civil court has no
jurisdiction to hear the case in view of article 121 (1A) of the Federal Constitution. The
judge, NH Chan J (as he then was) overruled that objection and held that the matter was
rightly brought before the civil court. It was submitted that List I of the Ninth Schedule
enumerates the various matters on which parliament can enact laws. The scope is very
comprehensive and includes banking and the constitution, organization, jurisdiction and
powers of all courts other than Shariah courts and native customary courts. List II in the
State List provides for the constitution, organization and procedure of Shariah courts,
which shall have jurisdiction only over persons professing the religion of Islam and in
respect only of any of the matters included which exclude Islamic banking. It was further
argued that since BIMB is a corporate body, therefore it does not have a religion, and as
such, it is not within the jurisdiction of the Shariah courts .
As such, civil courts have jurisdiction to hear Islamic banking and other Islamic
commercial cases based on the following grounds:

9
A discussion on the above cases may be found in an article by MohdIlliayaslslamic Interest-
Free Banking in Malaysia: Some Legal Considerations [19951 3 MLJ cxlix.
10
[1994] 3 AMR 2291; the plaintiff (BIMB) had granted to the defendant (Adnan) a
facility amounting to RM583,000/- under the Islamic concept of Bai BithamanAjil
involving three simultaneous transactions whereby the defendant (Adnan) had sold to
the plaintiff (BIMB) on 2nd March 1984 a piece of land for RM265,000/-. On the same
day the plaintiff resold the said land to the defendant for RM583,000/- payable by the
defendant in 180 monthly installments. [Thus with a mark-up of RM 318,000]. At the
same time the defendant charged the land to the plaintiff as security for the debt. As
with normal charge documents, there was a clause that any default in the repayment of
the loan installments would result in the plaintiff being entitled to sell the charged land.
The defendant had defaulted in the loan repayment since April 1985. The plaintiff filed
the originating summons seeking an order for the sale of the charged land. The High
Court gave judgment for the plaintiff.
 Islamic Banking Operation Special Reference to Malaysian Case Study. 17

(a)- the Shariah courts can only decide the case that fall under the estate List that
excludes any cases relating to commercial laws such as Islamic banking.
(b)- the Shariah courts can only decide the case when all the parties are Muslims.
As such, Islamic institutions such as BIMB and Syarikat Takaful are
corporate institutions created by statute and do not have a religion and
(c)- currently, the application of English law in Malaysia is based on the
provisions of ss3 and 5 of the Civil Law Act 1956
Therefore, in matters relating to mercantile law or commerce, English law is to be
applied and the jurisdiction is certainly vested in the civil courts. In addition, s 3 of the
CLA provides for the application of English law and rules of equity when there is a
vacum in the provisions of any written law.

Whether the bank can claim the full selling price upon default.
This issue was raised by the defendant in his appeal (in April 1996) to the Supreme
Court against the decision of the High Court in favor of BIMB. In his affidavit, the
appellant (Adnan) criticized BIMB for insisting on the full amount of the selling price, ie.
RM583,000 on default of monthly installments by him. He submitted that for the bank to
demand the full selling price on default of payments in the form of installments is
manifestly unjust and as such un-Islamic.
However, the settlement of full selling price was categorically laid down in the
charge (annexure) document as follows: “Then, and in any of such cases, all monies and
liabilities and other dues covenanted to be paid by the charge under this shall be
immediately payable by the chargor to the bank and the bank shall forthwith become
entitled to recover the same and to exercise the rights and powers upon default under this
charge and as provided by the law without any previous notice to or concurrence on the
part of the chargor.” 11
Therefore, incorporation of such a provision is inconsistent with the very nature of
a BBA transaction. Its opponents argue that the bank should be stopped from recovering
the full balance of the sale price before the expiry of the stipulated period and should be
permitted to make a claim only for unpaid installments (arrears of installment due).

Whether the bank’s customer is entitled to a ‘muqasah’ (rebate)

In modern Islamic Banking practice, ‘muqasah’ refers to a rebate or discount given
by the bank to a customer who chooses to settle his/her debt arising from a Bba
agreement prematurely, ie before the expiry of a stipulated repayment period. It is the
policy of BIMB to give its customers a muqasah even though it is stated to be

11
BIMB, Charge Dcoument (Annexure), BahagaianUndang- Undang&UrusetiaKorporat,
BU/Gadaian/96
18 Journal of Islamic Banking and Finance July -Sept 2022

discretionary. 12 As far as Islamic definition is concerned, the word muqasah does not
imply rebate. Accurately, it refers to a ‘setting off’ of the debt between two debtors with
an equivalent amount of debt. As such, muqasah in modern banking practice should be
re-termed as ‘ibra’.
In Adnan’s case, his defense counsel argued that Adnan is not obliged to pay the
selling price amounting to RM583,000 as he was entitled to muqasah. This line of
argument is vexatious and frivolous and should be considered as misleading the court.
This is because muqasah is only granted when a customer chooses to settle the debt
prematurely. Now in this case, muqasah cannot be invoked at all as there is no question
of early settlement whatsoever, but a default on the agreed monthly installments instead.
whether Islamic banking documents need also to comply with civil law
As far as Islamic legal documentation is concerned, it is submitted that the two
following things need to be satisfied: 13(a)- the document must be valid according to
Islamic law; and (b)- that document must also comply with civil law, (i.e various laws
applicable to it.) Therefore, Islamic documents must satisfy all the requirements of a sale
contract.

Whether civil courts can make necessary modifications to the

procedural law to accommodate Islamic banking.
This issue is more related to Procedural law rather than BBA transaction itself.
However, this was the main issue that Adnan’s case revolved around. The defendant
argued that the relevant document (affidavit) does not comply with the related law, i.e
Order 83 of the Rules of the High Court 1980 (‘the RHC’). This order applies to any
action (whether begun by writ or originating summons) by a chargee or chargor or by any
person having the right to foreclose or redeem any charge being an action in which there
is a claim for the sale of charged property. As such the defendant had challenged the
plaintiff’ right to obtain an order of sale.

Ranita Hussein J.C in her judgment said: “At the hearing of the summons the
defendant challenged the plaintiff’s right to relief under Order 83 of the High Court Rules
1980, on the following grounds:

i. The amount of RM583,000/- which was stated as a loan in the charge

document was never received by him as a loan; it was just a facility amount

12
Information obtained from En Ahmad Sansui bin Husain, Co0ordinator, Seminar and
Conferences, BIRT on 27 January 1997
13
Supported by En Ismail Mohd Sharif, Manager, Legal Department BIMB on an interview
session conducted at his office on 14 January 1997.
 Islamic Banking Operation Special Reference to Malaysian Case Study. 19

and he only received RM265,000/-. There was thus no compliance with

Order 83 r 3(3)(a);
ii. There was no compliance with Order 83 r3(3)© in that the plaintiffs claim
did not include a claim for interest; in this respect the plaintiff also did not
comply with Order 83 r 3 (7);
iii. There was no compliance with Order 83 r 3(3)(d) 14 because the amount
which remained unpaid under the charge was not RM543,995.89 or any
definite amount as it was subject to rebate (muqassah) as stated by the
plaintiff in paragraph 16(iv) of his affidavit of March 9, 1991.
With due respect to the learned Judicial Commissioner having given a correct
decision on the facts, unfortunately there was no attempt to deal with the matter from the
point of view of Islamic Law. 15 To regard the transaction between the parties as “the
grant of a loan to the defendant by the Bank, the repayment of that loan inclusive of a
profit margin by him and the charge of his land as security for the loan” would make the
transaction illegal under Islamic Law as it would involve the payment of interest. Bai
BithamanAjil is as the names suggest, a transaction of sale and not a transaction of loan
and should be treated in that manner.

In the case of Dato’ haji Nik Mahmud v Bank Islam Malaysia 16, the facts were that
the plaintiff on May 6, 1984 had executed two agreements namely the “property purchase
agreement” and the “property sale agreement” with the defendant. Through the first
agreement the defendant purchased the property of the plaintiff for RM520,000/- which
was then resold through the second agreement to the plaintiff for RM629,200/-. Both
agreements were signed contemporaneously. On May 8, 1984 the plaintiff’s attorney
executed two charges of the said property in favor of the defendant as securities for a loan
of RM 629,200 which loan was purportedly granted under the Islamic banking concept of
Al Bai bithamanajil. There are three issues that warrant attention in this case:
(i) - Whether the sale is invalid since it violated the relevant law.
(ii)- It is important to look at the intention of the contracting parties.
14
Order 83 Rule 3(3)(d): The defendant averred that the statement of balance due was not the
correct amount because the maturity date of the loan is March 2, 1999, and any payment
which he makes now would entitle him to rebate in the total sum owed on account of early
recovery, as stated in the plaintiff’s affidavit of March 9, 1991. However, as explained by
the plaintiff, the relevant agreements five the defendant no right to rebate. This rebate or
“muqassah” is practiced by the plaintiff on a discretionary basis. In any event, there was no
question of early repayment as the loan was a breach of the agreement which has invoked
the plaintiff’s right to terminate of facility and demand for immediate full repayment of the
loan. I found that the defendant has failed in his defense on all courts and I accordingly
make an order for the plaintiff as prayed.
15
Legal Framework of Islamic Banking- Ahmad Mohamed Ibrahim- IKIM Law Journal Vol.1
No.1 July- Dec1997
16
[1996] 4 MLJ 295
20 Journal of Islamic Banking and Finance July -Sept 2022

(iii)- The law is an organic piece of legislation that needs present/modern

application.
Issue-(i) :Whether the sale is invalid since it violated the relevant law.
The Plaintiff brought an action against the defendant for an order that the charges,
the property purchase agreement and the property sale agreement be declared void and of
no effect. It was contended by the plaintiff that the execution of the property purchase
agreement, the property sale agreement and the charge documents was tantamount to an
exercise to defeat the purpose and intention of the Kelantan Malay Reservation
Enactment as section 7(1) of the Enactment prohibits any transfer or transmission or
vesting of any right or interest of a Malay in reservation land to or in any person who is
not a Malay. Counsel for the defendant raised the various issues to resist the motion, inter
alia, the indefeasibility of the charges under section 340 of the National Land Code and
the interpretation of the Enactments in relation to the Bai BithamanAjil transactions. The
High Court dismissed the application of the plaintiff. Idris Yusoff J in his judgment said:

The concept of al Bai bithaminajil involves, as prerequisites, the purchase of the

said property by the defendant from the plaintiff and the immediate resale of same to the
plaintiff. The question that requires to be determined is the effect of such sale in the eyes
of the law – such determination requires to be guided by the provision of the [Kelantan
Malay Reservation] Enactment and the [national Land] Code – It is manifestly clear that
section 791 [of the Enactment ] prohibits any transfer or transmission or vesting of any
right or interest of a Malay in reservation land to or in any person not being a Malay. In
the circumstances what would be the effect of the property purchase agreement in terms
of section 7(1) – does the said agreement per se confer on the defendant any registered
title in the said land? The crucial point is whether the execution of the property purchase
agreement comes within the context of “transfer” or a “vesting” of right or interest; on
the present facts suffice is to say that the question as to transmission is of no relevance.

To my mind when the purchase agreement was signed the right could be acquired
under the agreement at that point of time since the agreement being still executory, was
only a right to a registrable interest which right is yet to crystallize into a registrable
interest. The acquisition of such right, however, would confer on the defendant an in
persona right against the plaintiff which would entitle the former to bring an action for
specific performance in the event of the latter refusing to go along with the agreement.
And assuming that a decree of specific performance would be granted by the court, such
decree would be effective to achieve a statutory title only upon the appropriate
instrument, that is the instrument of transfer being registered as required under the Code
as otherwise the decree would remain ineffective….

I must say that in this case there is no evidence to show that there was at any time a
change in the resisted proprietorship of the said lands pursuant to the execution of the
 Islamic Banking Operation Special Reference to Malaysian Case Study. 21

property purchase agreement. All along the plaintiff was and is the registered proprietor
of the said lands. That being the case I hold that there was no transfer being effected and
the proprietorship still remains with the plaintiff. And I would add that neither was there
any vesting of right or interest in the said lands in the defendant…

Issue - (ii) : It is important to look at the intention of the contracting parties.

Having held that there was no dealing contrary to section 7 (of the Enactment) the
next question that has to be addressed is whether the execution of the property purchase
agreement or the property sale agreement is in purport and effect an attempt to deal in
reservation land contrary to the provisions of section 12 of the Enactment. It is the
defendant’s contention that the circumstances of the instant case are such that they could
not even be said to amount to an attempt to deal in reservation lands… in the instant case
it was never the intention of the parties, in as much as it can ever be said to be in their
contemplation, to involve any transfer of proprietorship. It so happened that the execution
of the property purchase agreement and the property sale agreement constituted part of
the process required by the Islamic banking procedure before a party can avail himself of
the financial facilities provided by the defendant. Hence that could account for the
contemporaneous execution of the two agreements and in fact it would be observed that
the property purchase agreement would be rendered otiose bereft of any consequential
value the moment the property sale agreement was signed. For my part I would say that
was what both parties had bargained for an they too had agreed that beyond this to
proceed no more. These prerequisites had been well understood by the plaintiff.
Accordingly in my judgment the execution of the property purchase agreement had not
transgressed the provisions of section 7 and 12 of the Enactment since there was no
dealing or attempt to deal in the said lands contrary to the provisions thereof.

Counsel for the plaintiff seems to allege that the registration of the charges was
obtained by means of an “insufficient or void instrument” which is contrary to section
340(2)(b) of the National Land Code, hence the interest of the defendant as chargee is not
indefeasible… A scrutiny of the charge documents does not disclose any form of defect
or illegality. The charge documents are registered in accordance with the procedure laid
down by the Code and such registration does not run counter to the Enactment either and
this is by virtue of section 9A and with the inclusion of the defendant in Schedule D of
the Enactment by virtue of section 104(1) and also with the inclusion of the defendant in
Schedule 26A(s.104 is one of the sections in the Enactment that has been saved upon the
coming into force of the Code. I am satisfied that there is nothing in law and in fact that
could deny the indefeasibility accorded by section 340 of the Code to the two charges
registered on 8 May 1984 by the plaintiff’s attorney in favor of the defendant. As
22 Journal of Islamic Banking and Finance July -Sept 2022

evidenced by the charge documents, the defendant’s right and interest therein only accrue
as registered chargee and that is the extent of what the defendant claims.

(iii)- The law is an organic piece of legislation that needs present/modern

application.
The final issue raised by the counsel for the defendant is the applicability of
equitable principles on the facts of the instant case. Counsel said that: “in interpreting and
analyzing the documents before you Lordship, equity requires your Lordship to look into
the true intention of the parties, as envisaged therein. I wish to say that the question of
intention of both parties in signing the property purchase agreement has already been
discussed in the earlier part of this judgment, which I consider is sufficient to cover the
case raised by Counsel.
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 23

Corporate Social Responsibility Activities

and Disclosures by Islamic Banks in South
Africa
By
∗
Dr. Riyad Moosa
ABSTRACT
This paper aims to understand the CSR activities and related CSR disclosures
required by customers of Islamic banks in South Africa and if CSR activities
predict CSR disclosures.The study employs a non-probability sampling
technique by administering an online questionnaire to 163 participants.
Statistical analysis of the data included factor analysis and regression
analysis. The results indicate that in the context of CSR activities, customers
prefer that the Islamic banks invest in ethical and Sharia-compliant products.
The Islamic bank should also provide bursaries to students and charity to
communities. Regarding CSR disclosures, customers prefer disclosures
relating to the Islamic values of the bank, any unlawful transactions entered
into during the year, and information on the Sharia Supervisory Board. The
results also show that CSR activities predict CSR disclosures. This is the first
study to explore concepts about CSR for Islamic banks in the South African
context. The findings can assist managers of Islamic banks to tailor their CSR
activities and CSR disclosures according to their customer’s preferences.
This study also provides empirical data to support the relationship between
CSR activities and CSR disclosures.
Keywords: Corporate social responsibility, Activities, Disclosures, Islamic
banking, South Africa
1. Introduction
Corporate Social Responsibility (CSR) is a prominent feature of modern business
(Khurshid et al., 2014). It refers to the relationship and responsibility placed on
organizations to uphold the interests of society, and in doingso; organizations protect
their interests because they continuously develop due to their practice of CSR (Aribi&
∗
Author: Dr. Riyad Moosa is an academic affiliated with the Department of Accountancy at
the University of Johannesburg in South Africa. E-mail: [email protected]
24 Journal of Islamic Banking and Finance July – Sept 2022

Gao, 2011; Di Bella & Al-Fayoumi, 2016; Migdad, 2017). Several unique definitions
exist for CSR as they encompass various factors such as time, country, social activities,
and religious and cultural norms (Jaiyeobaet al.,2018; Khurshid et al., 2014; Koku &
Savas, 2014). The concept is open to many understandings and interpretations but has a
general meaning of business activity undertaken for purposes beyond profit-making
(Dusuki& Yusof, 2008). The term CSR can refer to how a business manages its ethics,
governance processes, and its ability to invest in a socially responsible manner, taking
into account the environment and stakeholder needs (Bakar & Yusof, 2015; Siwar&
Hossain, 2009).
CSR, as viewed through an Islamic lens, entails ensuring Sharia (Islamic law)
compliance; as such, it is not similar to CSR as practiced by non-Islamic counterparts
(Aribi& Gao, 2010; Di Bella & Al-Fayoumi, 2016; Dusuki, 2008; Ismail &Muqorobin,
2017; Khurshid et al., 2014).Regardless of these differences, similarities exist related to
responsibilities towards ethical, economic, discretionary, legal, and sustainable
development (Franzoni&Allali, 2018; Nathan&Ribiere, 2007; Shifa, 2012).
Consequently, insights gained from the practice of CSR by Islamic and non-Islamic
organizations can benefit each other due to the similarities (Jaiyeobaet al., 2018;
Khurshid et al., 2014).
All activities put in place by the Islamic bank to improve the welfare of society will
receive support from the Sharia,if such activities do not exploit the various stakeholder
groups (Khurshid et al., 2014). In this way, CSR activities must be ethical and comply
with the Sharia (Hamdan, 2014; Mostafa &Elsahn, 2016). The scope for CSR activities
remains undefined; nevertheless, it can include activities such as Sharia compliance,
responsibility towards staff, education schemes, environmental protection, poverty
eradication, and community engagement, to name a few (Ilyas, 2018; Yusuf &Bahari,
2011).
The Islamic bank must disclose information to its stakeholders about complying
with the Sharia (Farook &Shikoh, 2011). Disclosures provided must be complete, aligned
with the social philosophy of the religion and support the objective of social
accountability to stakeholders (Baydoun& Willett, 2000). In this way, disclosures made
by Islamic banks also serve to promote their corporate ethical identity (Haniffa&Hudaib,
2007). Maaliet al.,(2006) provide three broad objectives as a basis for disclosure by
Islamic banks. These objectives include, 1) showing compliance with the Sharia, 2)
showing how the Islamic bank has affected stakeholder well-being and, 3) to assist
Muslims in their religious duties such as the payment of zakah (mandatory alms tax).
The literature highlights that Islamic banks practice CSR as a secondary activity
(Sairally, 2013). Moreover, Wan Jusoh and Ibrahim (2020), report, that Islamic banks are
in need of a CSR framework. Consequently,CSR disclosures provided by Islamic banks
are erratic as they provide varying degrees of information to stakeholders (Amran et al.,
2017; El-Halaby &Hussainey, 2015; Lewis, 2001;Said et al., 2018). In Pakistan, Zafar
and Sulaiman (2022) report that CSR disclosures by Islamic banks are below expected
levels even though banks that are established, large or local Islamic banks provide more
information. In South Africa, the Islamic banking industry is categorized as an emerging
market (Muhammad, 2019). However, the literature is scant about the types of CSR
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 25

activities and related CSR disclosures preferred by customers of Islamic banks in South
Africa. In this context, this study aims to address these gaps by investigating the
following research questions:
1. What CSR activities should Islamic banks provide?
2. What disclosures about CSR should Islamic banks provide?
3. To what extent do CSR activities predict CSR disclosures?
The remainder of this paper is structured as follows: Section 2 provides a review of
the relevant literature; after that, section 3 describes the methodology followed for this
study. Sections 4 and 5 include a discussion of the results, and thereafter, the study's
conclusion follows in section 6.

2. Literature Review
CSR Activities
Some researchers have attempted to frame CSR activities into various dimensions.
Dusuki and Dar (2005) postulate that CSR activities, comprising human resources,
environmental, human rights, and philanthropic dimensions derived from Western
literatureare compatible with Islamic teachings and suitable to be employed by Islamic
banks. Others have framed CSR activities as being either mandatory or recommended to
maintain the legitimacy of the Islamic bank (Farook &Shikoh, 2011). Mandatory
activities ensure compliance with the rule of law in the country the Islamic banks are
domiciled, while recommended activities are encouraged as they promote the realization
of good, according to the Sharia. Ismail and Muqorobin (2017) take a similar position as
they categorize CSR activities as either essential activities, complementary activities, or
embellishment activities that support society under Sharia ruling.
CSR activities should focus on creating a better and just society and not merely be
implemented for the sake of cultivating a positive corporate image (Yusuf, 2012). Farook
(2007) explains that Muslims are God’s vicegerents on earth, and as such, they are
commanded to enjoin good and forbid evil per Sharia guidance. The CSR programs
followed by an Islamic bank serve to fulfil a communal religious responsibility towards
the greater society, which may not be possible for Muslims in their individual capacities.
Bakar and Yusof (2015) state that CSR programs, whether religious, social, or economic,
aim to secure God's blessing through deliberate efforts to enhance the well-being of
stakeholders. Therefore, CSR initiatives must be a priority for those charged with
governance to attract and meet customer expectations and validate the Islamic bank's
operations (Dusuki, 2008). Despite this, Islamic banks have been criticized for their CSR
activities, as there has been no significant socio-economic impact resulting from it
(Shifa& Hashim, 2015; Sofian & Muhamad, 2016).
Shifa (2012) surveyed 477 customers and staff at 17 Islamic banks in Malaysia.
The respondents were asked to rank the type of CSR activities they expect of an Islamic
bank. The results emphasized moral and ethical values, investing in ethical and Sharia-
compliant products, educational sponsorships, alignment with charitable organizations,
and zakah collection and distribution. Furthermore, only sixty percent of those surveyed
26 Journal of Islamic Banking and Finance July – Sept 2022

believe that their Islamic bank actively engages in such activities. Azamet al., (2019)
report that a high level of Sharia compliance coupled with having a diverse board in
terms of education and gender significantly promoted CSR activities at Islamic banks.
CSR Disclosures
This section of the literature review presents the findings related to the CSR
disclosures of Islamic banks, as available in the extant literature.
CSR Disclosure Checklist
Several studies have developed disclosure checklists to benchmark the CSR
disclosures made by Islamic banks when communicating their social accountability to
stakeholders. For instance, the studies by Haniffa and Hudaib (2007) and Maaliet al.,
(2006) identified significant themes as part of the social accountability and responsibility
to be disclosed by the Islamic banks. These themes include the vision and mission
statement, the Board of Directors and top management, products and services, zakah,
charity, benevolent loans, employees, debtors including info on late repayments and
insolvent clients, community involvement, the Sharia Supervisory Board, unlawful
transactions and the environment.
Content Analysis
The literature abounds with studies that have used content analysis to examine the
CSR disclosures made by Islamic banks. In general, the findings indicate that CSR
disclosures are not necessary, fall short of expected outcomes, and are devoid of Islamic
values and Sharia compliance (Ahmed& El-Belihy, 2017; Arsad et al., 2014; El-Halaby
&Hussainey, 2015; Harun, 2016; Hassan &Harahap, 2010; Rashid & Hassan, 2014).
Other findings reveal that some Islamic banks do not disclose transactions if those
transactions are contrary to the Sharia, as it could result in potential criticism towards the
bank (Maaliet al., 2006). Others have found the disclosures to beerratic (Hassan et al.,
2010) as some banks focused on the Sharia Supervisory Board (SSB) while others
focused on workplace and community dimensions (Amranet al., 2017, Aribi& Gao,
2011).
Studies also used content analysis to compare the CSR disclosures made by Islamic
banks and conventional banks. The differences in disclosures provided were found to be
insignificant; however, the Islamic bank provided more disclosures related to religion
including more disclosures of a negative nature (Aribi& Goa, 2010). Douissa and Azrak
(2017) assessed the CSR disclosures made by Islamic and conventional banks in the
United Arab Emirates before and after the global financial crises covering 2006 to 2014.
Their findings indicate that conventional banks integrated CSR disclosures into their
strategy to improve their image and brand after 2009, while Islamic banks did not change
their approach when providing disclosures after the crises.
Hypotheses Development
Farooket al., (2011) reviewed the social disclosures in the annual reports of 47
Islamic banks across 14 countries and then used regression analysis to analyze the data.
They found that the variation in CSR disclosures is best explained by the variables,
influence of the relevant publics, Sharia Supervisory Board, level of social and political
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 27

freedom, and the proportion of investment account deposits to total assets. Rahman and
Bukair (2013) found a positive and significant relationship between CSR disclosures and
the Sharia Supervisory Board, particularly for large banks that have members with
adequate knowledge on matters of Sharia compliance.
Arshad, Othman, and Othman (2012) found a significant positive relationship
between CSR disclosures that meet stakeholder needs and the corporate reputation of
Malaysian Islamic banks. CSR disclosures also had a positive and significant impact on
the performance of the Islamic bank when considering indicators such as return on assets
and return of equity. Santosoet al.,(2018) conducted a study by using panel data
regression methods to understand the factors that influence the social reporting
disclosures of public companies on the Jakarta Islamic Index. Their findings reveal that
the age and size of a company do influence social disclosures, while factors such as
profitability, the board size, and public ownership had no influence.
Many factors have been considered in the extant literature on the determinants of
CSR disclosures. However, the relationship between CSR activities and their ability to
predict CSR disclosures has not been considered, especially within South Africa. We,
therefore, hypothesize the following:
H1: There is a positive and significant relationship between the CSR activities
performed and the CSR disclosures provided by the Islamic banks in South Africa.

3. Methodology
Research design
This study followed a quantitative approach to address the research questions. The
research approach was chosen to identify customers' preferences regarding CSR activities
and CSR disclosures expected of the Islamic banks. This approach also allowed for a
determination of the impact of CSR activities on CSR disclosures. A cross-sectional
online survey was used to collect the data.
Population and sampling
The population in this study included all Muslims residing in South Africa aged 18
and above and who were customers of Islamic banks. As the size of the population was
unknown, the study employed a combination of non-probability sampling techniques that
included purposive sampling and snowball sampling. The study was advertised on three
Islamic radio stations that broadcast nationally in South Africa to reach the intended
participants. In total, 173 respondents participated in the study; however, ten respondents
were removed after data cleaning as they indicated that they were not customers of an
Islamic bank; therefore, the final sample included 163 respondents.
Research instrument
The questionnaire developed for this study was divided into two parts. The first
part was designed to collect socio-demographic information such as age, gender,
education, and monthly income using a nominal scale. The second part of the
questionnaire measured customer preferences using interval scales for CSR activities and
CSR disclosures by Islamic banks in South Africa. Six items were adapted from Dusuki
28 Journal of Islamic Banking and Finance July – Sept 2022

(2005) and Shifa (2012) to measure CSR activities, and seven items were adapted from
Haniffa and Hudaib (2007) and Maaliet al.,(2006) to measure CSR Disclosure. A 4-point
Likert Scale was used according to the following descriptions, Strongly Disagree (SD),
Disagree (D), Agree(A), and Strongly Agree (SA) for all of the constructs. In this study,
we define CSR activities as all Sharia-compliant activities undertaken by the Islamic
bank to improve society's welfare. CSR disclosures are defined as disclosures
demonstrating Sharia compliance and disclosures showing customers how the Islamic
bank has affected their well-being.
Statistical analysis
The data analysis was conducted using the Statistical Package for Social Sciences,
version 27 (SPSS 27). The validity of the constructs was assessed using exploratory
factor analysis, whereas reliability was assessed using Cronbach's alpha. After that,
descriptive statistics were used to measure the respondent's preferences, and finally,
regression analysis was performed amongst the constructs in the study.

4. RESULTS
Demographics of Respondents
As shown in Table 1, respondents' demographic data indicate that the age for a
majority of respondents was between 18 to 55 years (92 percent). Male and female
respondents represented 50 percent for each group. A large portion of respondents
obtained either an undergraduate education (36 percent) or postgraduate education (37
percent), while 21 percent had an education up to grade 12. Regarding their monthly
income, respondents who earn less than R20,001 represent 47 percent, whereas
respondents who earn R20,001 and above represent 53 percent.

Table 1: Respondents Demographic Profile

Variable Frequency Percentage
Age
18 to 55 years 150 92
56 and older 13 8
Gender
Male 81 50
Female 82 50
Education
No education 9 6
Grade 12 education 35 21
Undergraduate education 58 36
Postgraduate education 61 37
Monthly income
Less than R20 000 77 47
R20 001 and above 86 53
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 29

Descriptive Statistics
As shown in Table 2, descriptive statistics are presented for each construct and
include the minimum and maximum scoring by the respondents, including the mean
values in ranked order and standard deviation. The essential CSR activities (in terms of
mean scores)include investing in ethical and Sharia-compliant products (3.52), providing
bursaries and scholarships to students (3.33), charity to the community (3.25), assisting in
creating or securing jobs (3.16), caring for the environment (3.12) and the collection and
disbursement of zakah (2.90). Respondents indicated their preference (in terms of mean
scores) concerning CSR disclosures, which includes disclosures about Islamic values
(3.41), unlawful transactions (3.39), the Sharia Supervisory Board (3.38),community
information (3.01), environmental information (2.98), customer information (2.76) and
employee information (2.57).
Table 2: Mean and Standard Deviation

Construct and Items Std.

Min Max Mean
Dev

CSR Activities

The bank invests in ethical and Sharia compliant products 1 4 3.52 0.60

The bank provides bursaries and scholarships to students 1 4 3.33 0.62

The bank provides charity to the community 1 4 3.25 0.65

The bank is proactive in assisting to create or secure jobs 1 4 3.16 0.65

The bank is proactive in caring for the environment 1 4 3.12 0.67

The bank assists in the collection and disbursement of zakah 1 4 2.90 0.91

CSR Disclosure
The bank provides disclosures on their Islamic values 1 4 3.41 0.64

The bank provides disclosures on unlawful (haram) 1 4 3.39 0.68

i
The bank provides disclosures on the Sharia Supervisory 1 4 3.38 0.63
B d
The bank provides disclosures on community information 1 4 3.01 0.71
The bank provides disclosures on environmental information 1 4 2.98 0.69
The bank provides disclosures on customer information 1 4 2.76 0.93
The bank provides disclosures on employee information 1 4 2.57 0.83

Validity and Reliability of Constructs

An exploratory factor analysis (EFA) using principal component analysis and
varimax factor loading techniques was performed to establish the validity of the items
within the constructs to measure CSR activities and CSR disclosures. Three factors were
identified; namely, 1) CSR activities, 2) CSR disclosure of activities, and 3) CSR
30 Journal of Islamic Banking and Finance July – Sept 2022

disclosure of Sharia, as each factor had an eigenvalue exceeding 1, thus explaining

66.3% of the total variance. As shown in Table 3, factor scores according to the rotated
component matrix for each construct were above the threshold of 0.4 as recommended by
(Watkins, 2021).The results for the Kaiser-Meyer-Olkin measure were 0.833, which is
above the acceptable value of 0.7. The Bartletts test of specificity being significant at
.000 (P<0.05) indicates that good correlations for factor analysis were present. Thus,
given these results, the validity of the constructs has been established for this study. Each
construct, as shown in Table 3, was also found to be reliable according to the Cronbach
Alpha criterion as all of the results for CSR activities (α=0.823), CSR disclosure of
activities (α=0.759), and CSR disclosure of Sharia (α=0.914) exceed the recommended
threshold of 0.7 (Johnson, 2018).
Table 3: Results of Factor Analysis and Cronbach’s Alpha
Construct and Items Loading Variance Eigenval Alpha
explained ue
(%)
CSR Activities 24.356 5.617 0.823
Charity to the community 0.701
Caring for the environment 0.657
Bursaries and scholarships to students 0.817
Assisting to create or secure jobs 0.746
Invests in ethical and Sharia compliant 0.614
products
Collection and disbursement of zakah 0.650
CSR Disclosure of Activities 19.405 1.127 0.759
Employee information 0.812
Community information 0.630
Environmental information 0.646
Customer information 0.636
CSR Disclosure of Sharia 22.531 1.874 0.914
Sharia Supervisory Board 0.854
Islamic values 0.882
Unlawful (haram) transactions 0.873

Results from Regression Analysis

As shown in Table 4, a linear regression analysis was carried out to investigate the
relationship between CSR activities and CSR disclosure of activities. The results from the
Pearson correlation coefficient provide evidence for a linear relationship amongst the
constructs as CSR activities and CSR disclosure of activities were found to have a
positive but moderate correlation( r=.481, P<0.05). The results from the regression
analysis indicate a statistically significant relationship (P<0.05) between CSR activities
and CSR disclosure of activities. The slope coefficient for CSR activities was 0.623,
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 31

so,CSR disclosure of activities increases by 0.623 for each additional CSR activity. The
R² value was 0.481, so the model pertaining only to CSR activities explains 48 percent of
the variation in CSR disclosure of activities. All data used in the model met the
assumptions of homogeneity of variance and linearity, and the residuals were
approximately normally distributed.
Table 4: Regression Results for CSR Activities and CSR Disclosure of
Activities
Unstandardised Standardised
Model Coefficients Coefficients t-value Sig.
B Std. Error Beta
(Constant) 1.119 0.427 2.620 0.10
CSR-activities 0.623 0.090 0.481 6.956 .000

Following this, Table 5 shows another linear regression analysis to investigate the
relationship between CSR activities and CSR disclosure of Sharia. The results from the
Pearson correlation coefficient provide evidence for a linear relationship amongst the
constructs as CSR activities and CSR disclosure of Sharia was found to have a positive
but low correlation(r=.347, P<0.05). The results from the regression analysis indicate a
statistically significant relationship (P<0.05) between CSR activities and CSR disclosure
of Sharia. The slope coefficient for CSR activities was 0.444, so,CSR disclosure of
Sharia increases by 0.444 for each additional CSR activity. The R² value was 0.347, so
the model containing only CSR activities can explain 34.7 percent of the variation in
CSR disclosure of Sharia. Again, all data used in the model met the assumptions of
homogeneity of variance and linearity, and the residuals were approximately normally
distributed.
Table 5: Regression Results for CSR Activities and CSR Disclosure of
Sharia
Unstandardised Standardised
Model Coefficients Coefficients t-value Sig.
B Std. Beta
Error
(Constant) 2.048 0.290 7.063 .000
CSR-activities 0.444 0.095 0.347 4.693 .000

5. DISCUSSION
The results for the first research question shows that customers place the highest
importance on the following CSR activities (in terms of mean scores), investing in ethical
and Sharia-compliant products (3.52), providing bursaries and scholarships to students
(3.33), and providing charity to the community (3.25). In the Malaysian context, Shifa
(2012) reports that customers emphasize CSR activities by Islamic banks to include,
moral and ethical values, investing in ethical and Sharia-compliant products, and
32 Journal of Islamic Banking and Finance July – Sept 2022

providing educational sponsorships. The results of both studies indicate the importance of
the Islamic banks performing CSR activities related to investing in ethical and Sharia-
compliant products and the need to provide bursaries and scholarships to students as
these were deemed necessary in both the South African and Malaysian environment.
The results for the second research question are discussed according to CSR
disclosure of activities and CSR disclosure of Sharia as identified in the EFA. Regarding
CSR disclosure of activities, customers seek disclosures about community information
(3.01), environmental information (2.98), customer information (2.76), and employee
information (2.57). In terms of the CSR disclosure of Sharia, customers placed the
highest emphasis on disclosures related to Islamic values (3.41), unlawful transactions
(3.39), and the Sharia Supervisory Board (3.38).Notwithstanding customer preferences,
disclosures by Islamic banks related to these items are scant (Arsadet
al.,2014;Haniffa&Hudaib, 2007; Maaliet al., 2006; Rashid & Hassan, 2014).However,
the studies by Aribi and Gao (2011) and Kamla and Rammal (2013) found that the CSR
disclosures by Islamic banks focused mainly on issues related to the Sharia Supervisory
Board and compliance with the Sharia.
Finally, the results for the third research question shows a significant and positive
relationship between CSR activities and CSR disclosure of activities. Further, a
significant and positive relationship exists between CSR activities and CSR disclosure of
Sharia. These results indicate that CSR activities are a factor that contributes to CSR
disclosures, in addition to other factors such as the Sharia Supervisory Board,
profitability, age, and the size of the Islamic bank (El-Halaby &Hussainey, 2015; Farook
et al., 2011; Hussain et al., 2021; Rahman &Bukair, 2013).
6. CONCLUSION
This research attempts to establish the types of CSR activities and related CSR
disclosures required by customers of Islamic banks in South Africa and if CSR activities
predict CSR disclosures. This type of research is important as it explores customer
preferences for CSR expected from Islamic banks. The results indicate that Islamic banks
should focus on CSR activities relating to investing in ethical and Sharia-compliant
products, providing bursaries and scholarships to students, and providing charity to the
community because these activities received the highest mean scores. As far as the results
relate to CSR disclosure of activities, Islamic banks in South Africa should disclose
community information, environmental information, customer information, and employee
information in their annual reports. CSR disclosure of Shari should focus on informing
customers about the Islamic values, unlawful transactions, and the Sharia Supervisory
Board of the Islamic bank. The study contributes to the existing body of knowledge as the
results establish CSR activities as a factor that predicts CSR disclosures by Islamic banks
in South Africa.
These results have several managerial implications. Customers expect that the
Islamic bank is Sharia-compliant. One way of demonstrating compliance with the Shari
is through being actively involved in CSR. In doing this, customers should be engaged
yearly to identify the types of CSR activities and CSR disclosures required. The CSR
disclosures should have a dedicated space in the annual reports and be disclosed yearly.
These disclosures should highlight areas of excellence, such as how the Islamic bank has
improved the well-being of stakeholders and the wider community and areas that need
 Corporate Social Responsibility Activities and disclosures by Islamic Banks 33

improvement. Furthermore, the responsibilities placed on the Islamic banks for socio-
economic justice should be marketed in the form of the CSR engagements undertaken to
both current and prospective customers.
Despite the findings above, the study is not without its limitations. The sampling
techniques used do not allow the findings to be generalized to the entire population. In
addition, because the study is cross-sectional, the findings are limited to a point in time.
Future studies should employ probability techniques when selecting the sample. A study
can also be performed on a longitudinal basis to ascertain which indicators related to CSR
activities and CSR disclosures are consistently preferred by customers. A study can also
identify additional factors that predict CSR disclosures in the South African context.
Lastly, this study can be repeated using qualitative techniques to understand the reasons
behind a customer's preference for CSR activities and CSR disclosures undertaken by
Islamic banks.
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 Risks and Risk Management in Family Takaful 37

Risks and Risk Management in Family

Takaful
By
Nor RazinahMohd Zain *, Farhad Ahmed Bhatti **,
Syed Ahmed Salman ***
Abstract
Takaful is a financial planning tool that can be used as an alternative for
conventional insurance. Generally, takaful products are divided into general
Takaful and family takaful. A feature of the General Takaful is that it has a short-
term policy and that its liabilities coverage is limited to material losses only. On
the other hand, family takaful is a long-term policy that includes savings and an
investing component. Although the tabarru' fund protects them, the participants
can also benefit from the investment returns and savings generated by Shariah-
compliant assets. The primary objective of this article is to identify the many types
of risks that Family Takaful operators in Malaysia are exposed to and their
methods of dealing with and managing these risks. This article is based on a
method of library research. In addition, the article highlights the difficulties that
Family Takaful operators in Malaysia are confronted with. The hazards associated
with running a family takaful business are usually related to operations and
investment. Non-compliance risk with Shariah laws, underwriting risk, human
resource risks, and fiduciary risks are all risks that exist on the operational side of
the business. These risks might occur at any point during the business process. The
takaful operator may encounter market, credit, liquidity concerns, and other risks
commonly associated with investment on the investment side of the equation. In
addition, the researcher offered suggestions on how to mitigate these dangers.
Keywords: Takaful, Family Takaful, Risk and Risk Management
1. Introduction
Takaful is a financial planning tool that can be used as an alternative for
conventional insurance. The risks are transferred from the policyholders to the insurance

*
She is an Assistant Professor at IIUM Institute of Islamic Banking and Finance
**
Independent Researcher
***
Senior Lecturer, Faculty of Business and Accountancy at Lincoln University College,
Malaysia. [email protected]
38 Journal of Islamic Banking and Finance July – Sept 2022

companies regarding conventional insurance. In exchange for paying a premium, the

insurance operator offers to assume the other party's risk and pledges to repay the other
party in the event of a loss or the insured's death. On the other hand, Takaful emphasizes
the importance of togetherness and cooperation among its participants. It is founded on
cooperation, protection, and assistance among the participants. By pooling their donation
(Tabarru') in the Takaful funds, members agree to jointly guarantee one another against
loss or damage that may occur to any of them (Arifin, Yazid, &Sulong, 2013).
Takaful goods are classified into two categories: general and family takaful. The
short-term nature of general Takaful means that liabilities are restricted to significant
losses, participant payments are credited to the general takaful fund, and there are no
savings components. On the other side, family takaful is a long-term approach that
includes an element of savings and investment. While participants benefit from the
tabarru' fund's protection, they can earn and save money through Shariah-compliant
investments (Insurance Info, 2012).
Apart from suffering emotionally, when a family Takaful plan participant suffers
from a total and permanent disability (TPD) or death, his or her family members and
dependents would also suffer financially due to the event. It is shared with other
participants who have contributed to the Tabarru' or risk fund to mitigate the risk. When
catastrophes occur, the Tabarru fund will reimburse those who have filed claims for
compensation. By the agreement, participants in the Family Takaful scheme will share
the risk with other participants and alleviate their dependents' burden in certain
circumstances.
Participants save and invest for long-term goals such as their children's education,
retirement, and spousal support in the event of death or total and permanent disability. In
general, a family Takaful plan aims to save regularly over a specified length of time,
enjoy investment gains while complying with Shariah rules; and lastly to acquire
coverage in the event of death or total permanent disability (TPD) before the maturity of
the scheme (Laldin, 2008). Contributions from family members are separated into two
accounts: the Participants' Special Account (PSA) and the Participants' account (PA). A
portion of the contribution is credited to PSA based onTabarru', while the remainder is
credited to PA for savings and investment purposes.
Family takaful accounts for 17% of the worldwide takaful market, with a 2015
GWC of US$ 2.6 billion. South-east Asia, particularly Malaysia and Indonesia, dominate
the family takaful market, accounting for 57% of the global market. Between 2012 and
2015, the region's family takaful industry grew at a CAGR of (4) percent, with a GWC of
US$ 1.5 billion in 2015. In 2015, the GCC area, which accounted for 27% of worldwide
market share, achieved a GWC of US$ 0.7 billion, less than half that of Southeast Asia,
but with a higher CAGR of 13% over the same time.
Africa recorded the most significant compound annual growth rate of 22% between
2012 and 2015. It is unsurprising given the market's recent introduction of Takaful and its
comparatively low GWC of US$ 0.2 billion. Similarly, other nations such as Bangladesh,
Pakistan, and Turkey contribute minor amounts to the global takaful market, with an
aggregated GWC of US$ 0.3 billion, but continue to develop rapidly, with an 11 percent
compound annual growth rate from 2012 to 2015.
 Risks and Risk Management in Family Takaful 39

This paper aims to examine the risk related to family Takaful and discuss how to
manage these risks.

2. Risks and the Management of Risks

There are many different interpretations of the term risk. Generally speaking, the
risk characterizes any circumstance with a high degree of uncertainty about the result.
According to Jorion and Khoury (1996), risk is the variability or volatility of
unanticipated events. In the insurance industry, the term risk is frequently used to refer to
the possibility of future losses linked with a condition. A high-risk policyholder has a
high estimated value of losses that the insurers will be required to pay (Niehaus &
Harrington, 2004).
Regardless of the range of connotations associated with risk, more risks imply
higher costs or losses that financial institutions incur. As a result, risk management is
applied to manage the risks that financial institutions are exposed to. Rsk management
can be defined as the process of finding, assessing, and responding to risks and ensuring
that the outcomes of these procedures are communicated to the relevant stakeholders
promptly (Queensland Treasury, 2011). A systematic application of management policies
and procedures to duties such as risk evaluation, risk control and risk communication is
also included in this process (APEGGA, 2006). The primary goal of risk management is
to keep the cost of risk as low as possible (Niehaus & Harrington, 2004). On the other
hand, risk management is not about minimizing losses but optimizing the risk-reward
relationship (Laldin, 2012).
2.1 The Islamic Perspective on Risk Management
There are numerous examples of risk management in the Quran and Sunnah. For
instance, in Surah Yusuf, Yusuf peace be upon him, interprets a dream from the King of
Egypt, included in the Quran.
"And [subsequently] the king said, "Indeed, I have seen [in a dream] seven fat
cows being eaten by seven [that were] lean, and seven green spikes [of grain] and others
[that were] dry. O eminent ones, explain to me my vision if you should interpret visions."
(Yusuf:43)
The Prophet Yusuf (AS) then interpreted the king's dream, predicting that Egypt
would experience seven years of drought followed by seven years of prosperity. Based on
this interpretation, Prophet Yusuf (AS) devised a strategy for averting the disaster. The
Egyptian people are to cultivate crops during the first years actively and then sell or
conserve the harvests for use during the long draught period predicted in the future.
Another source of the Islamic perspective on risk management is found in the same
Surah:
And he said, "O my sons, do not enter from one gate but enter from different gates;
and I cannot avail you against [the decree of] Allah at all. The decision is only for Allah;
upon Him, I have relied, and upon Him let those who would rely [indeed] rely." (Yusuf:
67)
40 Journal of Islamic Banking and Finance July – Sept 2022

In the preceding verse, Prophet Yaqub (AS) instructs his sons, bringing Prophet
Yusuf's brother, Benyamin, to see Prophet Yusuf (AS) and enter Egypt by several gates.
It is to shield them from evil's gaze, as Prophet Yaqub did not wish for them to suffer any
harm (Ibn Kathir, 1370).
Another Islamic stance on risk management is from a hadith which Anas Bin Malik
reported; the Prophet SAW asked a Bedouin who had left his camel untied, "Why do you
not tether your camel?" The Bedouin then said, "I put my trust in God." The Prophet
SAW then remarked, "Tie up your camel first, then put your trust in God." (Tirmidhi)
Here, we are instructed to expend some effort initially in preserving ourselves from risks
before leaving everything in God's hands.

3. Literature Review
Risk management is a process in the Takaful sector that involves recognizing
prospective losses for an operator and selecting the most appropriate strategies for
dealing with those potential losses when they arise (Aris, Tapsir, & Talib, 2012). Among
the most critical areas of risk management for takaful operations are Shariah compliance,
investment activities management, and human resources administration. Ineffective risk
management may result in liquidity problems, unsuccessful procedures, and the
likelihood of continuing the firm in the future. It is frequently the result of a lack of
structured risk management practices, including risk detection, analysis, and control
(Tah&Carr, 2001). Failure to follow up on risks across the various stages of risk
management and a lack of communication among the different partners could result in
ineffective risk management (Liu, Li, Lin, & Nguyen, 2007).
The risks posed by the Takaful company are classified into five categories,
according to Akhter (2010): operational risk, market risk, credit risk, underwriting risk,
and liquidity risk. There are specific methods for dealing with each category of risk. To
learn more about these methods. For example, in the case of operational risk,
strengthening the company's corporate governance framework can help mitigate the risk's
impact. Appropriate training and ethical corporate practices would also help alleviate the
consequences of this risk. Because being Shariah-compliant is also included in the
operational risk, Takaful operators must verify compliance through Shariah auditing.
Failure to do so would result in other risks, such as reputational risk. In addition, the
author asks for the independence of the Board of Directors to develop policies for
effective risk management. Also suggested by the author is the establishment of private
rating organizations to evaluate the investment opportunities available to Takaful
operators, who are also having difficulty obtaining Islamic instruments for their
investment funds.
Ahmed and Khan (2001) outline several risks that Islamic financial organizations
confront that are similar to these. Market risk is derived from the instruments and assets
exchanged on the market. The fluctuation of the price in the market can impact the value
of an investment in either a positive or negative way. According to the Takaful operators,
this risk is inherent in the assets they invest in, on behalf of the participants, using the
proceeds of the investing firm. According to the authors, credit risk is defined as the
failure of a counterparty to meet its commitments on time and follow the agreement's
 Risks and Risk Management in Family Takaful 41

terms. If this risk is not managed correctly, it will eventually result in liquidity risk.
Liquidity risk emerges due to financial institutions' inability to meet their liquidity
requirements. To mitigate this risk, the authors recommend that financial institutions
diversify their asset investments into various forms of investments while also limiting
their exposure to illiquid investment channels. The writers also discussed operational
risk, which is defined as the risk that develops due to a process, technology, or person's
failure to operate effectively and efficiently. Operational costs rise when institutions
experience operational shortcomings, and their net income is negatively affected.
In his article, Azman (2010) discusses the practice of underwriting and the risks
that are tolerated under Shariah regulations. To assist its underwriters in determining
whether or not the company should accept the risks, Takaful operators develop their own
underwriting rules. In the author's opinion, it is permissible to use standard insurance
underwriting techniques so long as they do not conflict with Islamic law. There are
hazards acceptable to Shariah, and risks that are not acceptable to Shariah must be
considered. Shariah does not accept companies whose primary activities are interest-
based, gambling, and liquor and should be excluded from the risks covered by Takaful
operators and should be avoided while performing investment activities for investment
funds, according to a guideline issued by the Malaysian Securities Commission on Non-
Shariah compliant businesses. Takaful operators are responsible for guaranteeing that
their assets are handled and invested according to Shariah principles because they are the
custodians of the funds.
Like Islamic banks, Takaful operators, according to Haron and Taylor (2009), are
exposed to the same risks. According to the authors, the risks Takaful operators face, and
their respective undertakings are investment risks, liquidity concerns, and operational
risks. Even though the risks associated with Takaful funds and Takaful operators may
overlap, the management of each risk can be accomplished via the use of unique
procedures. Furthermore, the risk management approaches used by asset management
organizations may be adapted for use in Takaful enterprises to reduce their risk exposure.
Their conclusion stated that the Takaful Operators should incorporate their 'lessons
learned' into their ongoing risk management operations, which is a critical component of
best practice in risk management in Takaful.
4. Risks in Family Takaful
Risk Management in Islamic Finance is not much different from risk management in
conventional finance in scope and scale. However, additional risks specific to Islamic
Finance, notably in the case of Takaful, must be considered. A Takaful Operator is
expected to manage risks in two primary areas: the investment aspect, where hazards
such as underwriting and investment risks occur. Participants' Risk Funds and
Participants' Investment Funds are two types of funds subject to these risks in general.
Second, Takaful operators must be prepared to deal with the risks associated with their
day-to-day operations, which encompass practically all aspects of the business. The
Takaful Operators are subject to several risks, including fiduciary risk, business risk, and
operational hazards. These risks are in addition to the risks connected with investments in
the shareholders' assets (Haron& Taylor, 2009).
42 Journal of Islamic Banking and Finance July – Sept 2022

4.1 The Risks Involved with Investing Activities

In contrast to General Takaful, Family Takaful has two independent funds, the
Participant's Risk Fund and the Participant's Investment Fund. Because the objectives of
each of these funds are distinct, each of these funds has a different investment strategy.
Considering that the Participant's Risk Fund provides Takaful coverage for the
participants, the investment should be sufficient to allow the fund to meet its Takaful
obligations. Participants' Investment Fund will be utilized to meet expectations of return
on investment as well as the prospect of covering future tabarru' deductions while this is
being worked out.
In addition to the investment risks linked with the investment products, Takaful
operators are also exposed to the risks associated with the fund's investments. The types
and levels of investment risks they are exposed to are determined by the kind of products
they invest in.
i. Market Risk
When there are variations in the price or value of the assets that Takaful operators
invest in, such as Sukuk, there is the danger of a loss resulting from the price swings
(Islamic Financial Services Board, 2012).
Another form of market risk is the difference between the actual rate of return and
the expected rate of return. According to Prudential BSN Family Takaful, the company's
primary market risk exposure is the decline in the value of the company's stock market
holdings. The change of market prices, such as stock prices and profit rates, can hurt the
company's financial assets and obligations. However, not all price swings are harmful; in
fact, price movements can be beneficial to participants and shareholders in the
achievement of the financial objectives of the operators.

ii. Credit Risk

Credit risk is the possibility that a counterparty may fail to fulfill its commitments
in line with the terms of the agreement (Islamic Financial Services Board, 2012).
Participant's Risk Fund, Participant's Investment Fund, and Shareholder's Fund are all
exposed to this type of risk if the assets they hold as investments fail to perform as
expected. According to an examination of their annual reports, most Takaful operators in
Malaysia believe that their credit risk is predominantly derived from Retakaful
transactions.
According to Bank Negara Malaysia's governance and business policy, takaful
operators purchase corporate bonds rated by recognized rating agencies to reduce the
default risk. Participants' Investment Funds are liable for the liabilities of investment-
linked goods, and the participants themselves bear the risk associated with these products.
iii. Risk of Liquidity
A liquidity risk, according to the Islamic Financial Services Board (2012), is
defined as "the risk of financial loss to a Takaful undertaking arising from the
undertaking's inability either to meet its obligations or to fund increases in assets as they
 Risks and Risk Management in Family Takaful 43

become due without incurring unacceptable costs or losses." All three Funds — the
Participant's Investment Fund, the Participants' Risk Fund, and the Shareholder's Fund —
may be subject to liquidity risk at some point in the future. PIF and PRF may experience
liquidity problems due to their inability to satisfy claims obligations owed to participants
or even due to excess distributions from the funds. If this occurs, the PRF can recover its
deficits from the Shareholders' Fund, which Qardhul Hasan administers.
On the other hand, there is a possibility that SHF would experience liquidity
challenges, which will negatively impact its ability to supply Qard to PRF when required.
Failing to meet the claims responsibilities of Takaful operators may result in other issues
such as loss of confidence, loss of clients, and damage to the company's reputation, which
may result in the Takaful Operators being unable to continue operations (Ahmed & Khan,
2001).

5. Operational Risks
Operational risk is the possibility of financial loss due to insufficient or failed
internal processes or external occurrences. Operational risk, in contrast to market and
credit risk, which are typically confined in certain sections of the firm, is inherent in all
corporate processes. Internal procedures that are ineffective, incompetent human capital,
and an incapable information technology system are all potential reasons for operational
failure. This also covers the risk of loss stemming from non-compliance with Shariah
regulations and failing to fulfill a TO's fiduciary responsibilities (Islamic Financial
Services Board, 2012).

i. Risk of Shariah Non-Compliance

Shariah's non-compliance risk is an operational risk that processes and controls
must mitigate. The danger of loss arises from Takaful operations' internal and external
variables. In contrast to its conventional counterparts, Takaful operators must comply
with Shariah regulations, limiting their investments to Islamic financial instruments. As a
result, their investing possibilities are limited. This is much more difficult for Family
Takaful, given the nature of the business necessitates long-term savings and investment.
Due to scarcity of investment-grade instruments affects Takaful enterprises globally,
including Malaysia, while specific locations struggle more than others (Islamic Finance
News, 2013).
Regardless of the lack of Shariah-compliant financial products, Takaful Operators
must adhere to Shariah standards established by local and international authorities.
Failure to adhere to the requirements may result in legal action, client loss, and potential
reputational harm. While screening for suitable investments may cost time and money in
the short term, it increases the Takaful Operators' credibility over time.
Shariah's non-compliance in investments can also result in income purification,
including charitable donations, which means owners will lose some of their money.
Despite exercising caution in selecting Shariah-compliant investments, the
investment instrument may become inadmissible due to the latest review by authorities,
44 Journal of Islamic Banking and Finance July – Sept 2022

requiring Takaful operators to terminate the transaction. As with Shariah's non-

compliance in investment, this risk may also occur in the underwriting process. For
instance, the risks taken before may prove unacceptable afterward, requiring the operator
to terminate the contract or donate the proceeds to charity. Constantly shifting legislation
might also contribute to industry instability. While new rules are a healthy development,
the growing range of regulations between countries may make it more difficult for
Takaful operators to operate across borders and confuse clients and other market
participants (Miliman, 2013).
ii. Risks in Underwriting
The IFSB defines underwriting risk as 'the risk of loss resulting from underwriting
activities linked to the Participants' Risk Fund.' This risk arises from pricing assumptions
or erroneous evaluations made during claim settlement. This form of risk is strongly tied
to the operational features of Takaful Operators. Underwriters are responsible for
assessing the risk that their prospective clients face. Underwriters will determine how
much contribution a potential participant should make and how much coverage they
should obtain during this procedure. Finally, their responsibility is to shield Takaful
operators from financial loss due to participant claims. Underwriting for Family Takaful
often includes medical examinations in addition to an assessment of age, lifestyle, and
occupation.
Some consumers will enroll in the Takaful plan without notifying the operators that
they require medical care for a recognized condition regardless of the medical
underwriting process. This phenomenon is referred to as 'adverse selection.' The
Actuarial Standard Board defines adverse selection in its Actuarial Standard of Practice
No. 12 as "actions taken by one party based on risk characteristics or other information
known to or suspected by that party that result in a financial disadvantage to the financial
or personal security system." When such participants purchase Takaful insurance at a
discounted or average rate, the claim ratio increases; this results in severe financial
limitations for Takaful operators and detrimental effects on their stability (Islamic
Financial Services Board, 2012).
Provisioning risk is connected to underwriting risk since it involves the risk of
underestimating the amount put aside to cover claims that have been incurred or have not
yet occurred but are projected to occur under contracts in force at the time in question.
Depending on the complexity of the claim, it may take some time before it is finally
calculated. Economic developments, discount rates, and court rulings all affect the
claims. As a result, this computation is always fraught with ambiguity (Islamic Financial
Services Board, 2012).
iii. Risk to Human Resources
Ernst & Young identified human resource risk as a critical business risk for many
Takaful operators worldwide in its 2012 World Takaful Report. According to their
analysis, there is a crucial scarcity of skilled human resources, notably in Family Takaful,
risk management, and Shariah compliance. Inadequate knowledge about Takaful
products also contributes to the risk element since players cannot distinguish Takaful
goods from insurance, preventing them from being adequately marketed. Due to a
 Risks and Risk Management in Family Takaful 45

scarcity of qualified human resources, aggressive recruitment accompanied by an

enticing salary is expected in the business, as Takaful operators battle to keep their best
employees.
iv. Fiduciary Risk
According to Investopedia, a fiduciary is a person who has been legally appointed
and authorized to hold another person's assets in the trust. Takaful Operators are the
entities designated by participants to manage their funds on their behalf. The fiduciary
risk might occur due to the manager's misbehavior or neglect in performing his or her
duties (Haron& Taylor, 2009).
As trustee of a public fund, a Takaful operator is responsible for investing the funds
under its administration prudently and prudently to avoid loss or excessive risk. They are
tasked with managing participant contributions and ensuring that claim obligations are
met, as stipulated in the takaful contract. While participants face the investment risks
associated with the Participants' Investment Fund and Participants' Risk Fund, the
Takaful operators also bear the responsibility to act diligently in the best interests of
Shareholders. When managing PIF and PRF, Takaful operators must remember that any
risks associated with fund management may also affect the Shareholders' Fund.

6. Risk Management in Family Takaful

6.1 Investment Risk Management
Contributions to family takaful are pooled into two types of funds. Depending on
the takaful plan selected by the participant, a portion of the donation will be invested in
the participants' risk fund (PRF). In contrast, the remainder will be invested in the
participants' investment fund (PIF). Depending on the takaful plan's structure,
contributions may be pooled in the PIF first for investment purposes and then dripped
into the PRF regularly for claim purposes. In some systems, dripping may operate
conversely, with contributions initially parked in the PRF and then dripped into the PIF
for investment in Shariah-compliant avenues (ISRA, 2013).
The PRF and PIF are typically invested in separate accounts because the risks
connected with the funds are distinct. The PRF is the tabarru' fund, and it is from this
fund that claims are made. It is also invested to create money to pay claims from it. Any
surplus remaining after all claims have been processed is given to the participants.
Although the PRF fund is at risk of losing money due to its investment decisions, fund
managers must take necessary precautions to guarantee that their investments are made
with due diligence.
The PIF is the designated investment account for regular family takaful and
investment-linked products. A takaful cover with an investment unit connected is an
investment-linked product. It is decided on the investment's unit price by dividing it into
units of equal value. The unit price is then invested from the PIF into a selection of
Shariah-compliant mutual funds. Due to the nature of the risks, the investment in general
Takaful is typically channeled into short- to medium-term investments; on the other hand,
the investment in family takaful is generally directed into medium- to long-term
46 Journal of Islamic Banking and Finance July – Sept 2022

investments due to the nature of the dangers. The participants in the PIF are fully
responsible for the investment risk, and the pre-agreed profit distribution ratio distributes
the profits.
Typically, the takaful operator will designate a fund manager to oversee the PIF's
administration. It is critical for the fund manager to invest in Shariah-compliant
investments; otherwise, the investment will suffer from Shariah non-compliance risk,
which will result in reputational risk for the fund management. Consequently, the
investing operations of the takaful company should be overseen by the Shariah advisory
council of that organization. An experienced investment manager who knows how to
manage funds on behalf of participants should be chosen by the Takaful operator. The
takaful operator must also report the performance of the investment as well as the
expenses incurred in connection with the acquisition, among other things.
Because of the differences in risks associated with the PRF and PIF, it is
recommended that takaful operators avoid combining the two funds to invest in them.
The takaful fund manager must have a comprehensive risk management structure that
addresses the primary risks typically associated with investments, including market,
credit, and liquidity risks, among others. The investment strategies must sustain the
takaful funds for claims while also providing returns to the investment-linked takaful
holders. The framework must also include a method for monitoring, controlling, and
enforcing investment risk restrictions.
i. Management of market risks
In the stock market, market risk is created by fluctuations in the price of
investments or commodities traded. Even though takaful operators are not exposed to
interest rate risk, they are exposed to rate of return risk, equity price changes, and
exchange rate risk. Diverse investments with varying degrees of risk are best gathered
together in a portfolio to reduce risk exposure. Using correlation analysis, fund managers
can lower the risks in their portfolios.
Takaful operators cannot hedge market risk because they cannot use traditional
derivatives products. However, a few hedging instruments such as futures, swaps, and
options offered by financial institutions in the Islamic derivatives market are still in their
infancy (Syed Alwi, 2012). Alternative risk mitigation approaches such as stress tests and
Value at Risk (VaR) techniques are available to takaful enterprises. VaR is a measure of
expected loss when keeping a portfolio for a certain amount of time and is appropriate
when the market is in a normal state of operation. In addition, fund managers can develop
scenarios that reflect the volatility of the market circumstances and use them to measure
the predicted performance of their portfolios in a stress test.
ii. Credit risk management
When one party fails to perform his or her share of the contract, a takaful operator
has a credit risk, which fails to obtain cashflows or assets from the other. Because
payment for family takaful is usually accepted ahead or quarterly, the credit risk
associated with participation can be maintained to a bare minimum. Otherwise, the
coverage will lapse. Credit risk associated with investment operations emerges when the
 Risks and Risk Management in Family Takaful 47

takaful operator is exposed to default risk if the investment does not provide the desired
profits. It will impact both the participants' risk and investment funds, respectively.
Takaful operators can reduce their investment risk exposure by diversifying their
portfolios based on the issuer, industry, and geographical location they operate in. It is
also necessary to conduct evaluations of the creditworthiness of the counterparties
offering equities or Sukuk for investment to assess whether the investment will be
profitable. Another crucial feature is the existence of a robust internal control mechanism
to ensure that credit risk exposures are kept within the limits of prudential norms at all
times.
Credit risk might also occur due to retakaful arrangements if the retakaful firms
cannot pay claims to the takaful operators. In this case, the takaful operator's job is to
select retakaful arrangements with retakaful operators who have a good rating,
credibility, and the ability to provide complete retakaful coverage.

iii. Management of liquidity risks

In a takaful company, liquidity risk might arise due to insufficient cash to pay
claims and the policy maturity price when they are due. It is caused by a lack of sufficient
liquid assets or a high amount of obligations on the balance sheet. When investment
assets such as stocks, bonds, Sukuk, real estate, or other non-cash forms are not readily
convertible into cash, the takaful operator will have difficulties if the need arises to
convert the assets into cash. To build diversified portfolios, takaful operators should
consider investing in stocks and Sukuk from well-established companies. The
management of cashflow and liquidity ratios can also help reduce the risk of liquidity
occurrence. Cashflow projections will necessitate the use of a minimum amount of cash
to cover anticipated outflows of funds. The liquidity ratio is calculated by comparing the
number of liquid assets to liquid liabilities. As a result, an excellent asset-liability
management structure and a risk-based capital framework are required.

iv. Management of Assets and Liabilities

Takaful operators must have robust asset-liability management (ALM) system in
place to limit the risks connected with their takaful funds and investment funds. ALM is a
critical component in the process of mitigating liquidity risk. As a result of adverse
market moves, ALM ensures the availability of surplus capital to absorb liabilities.
The nature of family takaful necessitates the accumulation of long-term assets to
satisfy the obligations of the policy's liabilities when they become due. According to the
Guidelines on Valuation Basis for Liabilities of Family Takaful Business (BNM/RH/GL
004-20), a complete description of the liabilities of the family takaful fund may be found.
The issuance of long-term Sukuk on the Islamic capital market is many, although they are
few and far between. In addition, the secondary market is operational, but there are few
tradable instruments available because investors prefer to retain their assets until they
reach maturity.
According to BNM, family takaful funds invest around 60% of their assets in
Islamic Private Debt Securities and Equities with maturities ranging from short- to
48 Journal of Islamic Banking and Finance July – Sept 2022

medium-term. Takaful operators must have an asset mix that includes a variety of various
risk levels for each form of takaful fund, as well as the necessary liabilities. Takaful
operators must maintain a proper balance between their assets and liabilities at all times.
v. Framework for risk-based capital formation
BNM introduced the Risk-Based Capital Framework for Takaful Operators
(RBCT) (BNM/RH/GL 004-23), which is part of the solvency requirements for takaful
operators. The BNM issued this framework on October 30, 2012, and it became effective
on January 1, 2014.
This framework provides instructions to takaful operators regarding the minimum
amount of capital that must be maintained to operate a takaful operation. Takaful
companies are exposed to many risks that might affect their assets and liabilities. Every
asset and liability item in the RBC framework is valued at fair value, and a risk
weightage percentage is assigned to each item to reflect the risk. The higher the level of
risk, the higher the level of capital charges (Frenz and Soualhi, 2010).
The RBC framework is intended to assist regulators in identifying takaful
enterprises experiencing financial difficulties and taking corrective action to keep them
from going bankrupt. The amount of capital necessary reflects the risks associated with
the shareholders' fund and the takaful funds, respectively.
This framework applies to retakaful operators registered under the Takaful Act
1984 and other parties. Essentially, the capital adequacy ratio (CAR) determines the
required quantity of capital, with a target capital level of at least 130 percent as a
minimum (Milliman, 2011).
BNM has issued Guidelines on Investment Management for Takaful Operators
(BNM/RH/GL 004-19), which will take effect on April 20, 2009. This guideline places a
strong focus on the board of directors' responsibility for ensuring that proper investment
and risk management procedures are implemented, regardless of whether the investment
operations are delegated or outsourced to other parties. The senior management team is in
charge of implementing and monitoring the investment policy set by the board of
directors and ensuring that subordinates carry out their responsibilities by the plan.
Suppose the takaful operator decides to outsource the investment management
activities to a third party. In that case, the engagement contract must specify the policies,
methods, and limits that the third party will follow. The takaful operator must maintain
sufficient employees to monitor the third party and ensure that successful investment
management objectives are carried out. If a third party hurts the management of the
takaful fund investment, the appropriate actions must be taken immediately.
6.2 Risk Management in the Underwriting Process
As a result of the decision to purchase family takaful insurance, the takaful operator
will be subjected to various levels of adverse selection. Combinations of high-risk
participants who have a higher possibility of claiming from the takaful fund due to health
concerns vs. individuals who are healthy and have a lower chance of claiming from the
 Risks and Risk Management in Family Takaful 49

fund. High claims from the takaful fund increase the likelihood of the takaful fund
experiencing severe liquidity shortages. The fact that family takaful focuses primarily on
life expectancy and health means that the takaful operator must have a mechanism to
assess the possibility of death or permanent disability occurring in a family. Individuals at
high risk of contracting a disease are expected to undertake medical examinations as part
of the standard measures of participant selection.
Regarding family takaful, mortality and morbidity rates are pretty steady, which
means that underwriting risks are somewhat predictable. To be successful, the takaful
operator will need to follow the same principles as traditional life insurers, founded on
actuarial methods and statistical approaches. The takaful operators are expected to have a
wide range of information about the loss expectation and will be able to price their
premiums adequately based on this knowledge. It is essential to avoid a deficiency in the
takaful fund and the need for an interest-free loan or qard from the shareholders' fund.
i. Risk Management in the Operational Domain
Internal system weaknesses, such as mishandling cash and personnel and erroneous
decision-making, are frequently the fundamental cause of operational failures. An
organization's processes are slowed down by an out-of-date information system, which
increases the likelihood of internal collapse.
People, process, and technology, being the three primary drivers of operational risk
in an organization must be handled effectively and efficiently. The takaful operator must
make significant investments in acquiring highly qualified and experienced employees
and enriching their employment experiences through appropriate training. With the
progress of technology today, information systems are essential elements that cannot be
overlooked. Although the need for complex computerized systems is not as critical as in
the banking industry, an effective computerized system is essential for screening potential
takaful members and processing claims. As a continuous measure, the internal audit
committee is vital for providing a comprehensive picture of the entire system and process
and highlighting the need to correct errors and strengthen existing deficiencies. External
auditors are also acceptable for providing unbiased opinions and making
recommendations for improvement.
ii. Reputational Risk Assessment and Management
In this case, the risk is related to the takaful operator's fiduciary duty or governance
obligations towards the takaful fund and the takaful participants. In Malaysia, the hybrid
takaful model exists, and the takaful operator, who serves as both agent and mudharib for
managing the takaful fund, is responsible for ensuring due diligence. One of the most
significant components is to carry out the responsibilities by the principles of Shariah;
otherwise, the risk of Shariah non-compliance would be triggered. Failure to adhere to
this requirement will jeopardize the relationship between the takaful operator and the
takaful fund and expose the takaful operator to reputational damage.
When it comes to investing in takaful funds, the highest level of care must be taken.
To conform with Shariah principles and conduct ethical business, the takaful operator's
employees must receive appropriate training. It is critical to conduct periodic internal
assessments to control reputational risk. The Shariah advisors are responsible for
50 Journal of Islamic Banking and Finance July – Sept 2022

ensuring that Shariah compliance processes are followed. When it comes to maintaining
the reputation of a takaful operator, the internal risk management committee plays a
critical role.
6.3 Retakaful
When it comes to conventional insurance, insurance operators may choose not to
cover specific types of risks as part of their risk management plans and instead transfer
them to a giant insurance operator. Reinsurance is the term used to describe this process.
In Islamic insurance, it is referred to as retakaful or a takaful for takaful operators,
depending on the context. Retakaful is one of the risk mitigation strategies that may be
used to reduce underwriting risk (IFSB-ED14).
Concerning the concepts and operations of retakaful, the operator is virtually
identical to a takaful operator, with the only difference being the participant's
participation. A takaful operator is a party to a retakaful operator's transaction and
participates in that transaction. To diversify risk portfolios, lower the likelihood of
financial devastation when huge genuine risks materialize, and enhance capital to meet
regulatory requirements, takaful operators have turned to retakaful as a primary means of
doing so (Mahomed Akoob, 2009; Rosmi, 2011). Takaful operators must ensure that
risks are homogeneous across their portfolios and that financial portfolios do not fluctuate
(Asmak, 2011). The retakaful operators will be given access to the portfolio of
unaffordable risks.
A takaful operator and a retakaful operator with a distinct operational model may
also enter into a retakaful contract. For instance, one side is a wakalah-based firm, while
the other is a mudharabah-based one. General and family Takaful's nature and risk
characteristics may necessitate that various organizations use distinct models (Rosmi,
2011).
Due to the small number of retakaful businesses in Malaysia. If local retakaful
companies cannot provide retakaful cover, takaful operators may choose a Shariah-
compliant international retakaful company. If the risks transferred to a retakaful company
may hurt the takaful operator's entire business, the takaful operator may seek reinsurance
from a reinsurance company. However, the takaful operator must justify his or her
actions to the Shariah committee and obtain clearance from the company's Board of
Directors (BNM/RH/GL 004-22). This permission is founded on the concept of darurah
and is only transitory. It is no longer applicable if other alternatives exist, such as risk
pooling with other takaful operators or the emergence of new retakaful companies.
5.4 Risk Management in the Enterprise (ERM)
Enterprise Risk Management (ERM) is a holistic approach to risk management that
encompasses planning methods, leading, and managing an organization's activities to
mitigate risk's effects (Baranoff, 2004). ERM incorporates comprehensive strategies into
a risk management framework tailored to the business's nature and objectives. ERM may
be used in a takaful business to control various sorts of risks inherent in the takaful fund
and risks posed by the takaful operators. The critical component in implementing ERM is
determining the multiple stakeholders' monies (IFSB ED-14). The risk appetite must be
 Risks and Risk Management in Family Takaful 51

documented clearly, precisely, and easily understood by the reader and then conveyed to
the organization's entire workforce. To ensure the effectiveness of ERM, the following
procedures must be completed: risk identification, risk assessment, response, control, risk
monitoring, and risk reporting.
There are two types of funds available for family takaful: the Participants' Risk
Fund (PRF) and the Participants' Investment Fund (PIF) (PIF). The takaful operator must
identify and analyze various risks associated with the money, not to mention operational
and business risks associated with his or her role as manager of the funds and takaful
firm. The capacity to manage risks effectively avoids financial losses that damage
shareholders' funds. In a shortfall in the PRF, the shareholder's fund will provide qard to
the PRF, and the takaful management must guarantee that this risk is minimized.

In Malaysia, Islamic financial institutions, banks, and non-banks are strictly

controlled. The Takaful Act 1984 regulates the industry, which is now overseen by the
Islamic Financial Services Act 2013. (IFSA 2013). As organizations become more
regulated, the level of risk management required by regulators increases proportionately.
Nor Amalina (2012) revealed that firms more exposed to risks and uncertainties are better
off implementing ERM as part of their risk management strategy. ERM adoption is still
low among Malaysia's publicly traded enterprises (Wan Norhayate, 2011). Most
businesses that use ERM are well-established and overseen by an experienced Chief Risk
Officer (CRO) and Board of Directors.

Additionally, Ahmad Shukri (2012) found seven characteristics that influenced

ERM implementation. They include the appointment of a chief risk officer (CRO),
leverage, profitability, foreign diversification, majority shareholders, scale, and revenue.
Businesses with a decisive edge in certain areas can use ERM more effectively than
others. As Gatzert and Martin (2013) noted in their numerous research studies, ERM
demonstrates a significant association between the capital model of life insurers and cost
efficiency, but not with the capital model of property-liability insurers. Additionally, they
discovered the significance and necessity of holistic risk management systems, notably in
the banking and insurance sectors, which regulators constantly monitor.

Standard and Poor's rating service relies on ERM when reviewing and rating global
insurance companies. It demonstrates the critical nature of ERM in determining whether
insurance companies operate within a risk management framework designed to avert
future losses. However, implementing ERM is hampered primarily by a firm's financial,
human resource, and information technology capabilities (as quoted by Gatzert and
Martin 2013). The implementation's performance has been inconsistent in other
industries; however, this could be attributed to a lack of data and empirical research.
Most studies are conducted in developed countries, and additional analysis on the success
rate is required for developing countries.
52 Journal of Islamic Banking and Finance July – Sept 2022

Takaful Malaysia and Takaful Ikhlas are among the takaful firms in Malaysia and
several other publicly traded companies that use ERM as part of their risk management
strategy.

Conclusion
Family takaful focuses on providing participants with both takaful coverage and
investment or savings opportunities. Therefore, Takaful businesses must have good risk
management techniques to limit the risks inherent in family takaful. The risks associated
with family takaful products are substantially distinct from those related to general
takaful goods. Whereas the claims in available takaful goods are often of short duration,
the claims in family takaful products are of a medium to lengthy period. As a result, risk
management solutions vary according to the maturity and occurrence of risks.
Additionally, the risks associated with family takaful products are relatively constant and
predictable.
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 Carbon Credits Trading and its Role in Infrastructure Power Purchase ...... 55

Carbon Credits Trading and its Role in

Infrastructure Power Purchase Agreements
from a Shariah Perspective
By
Shakir Siddiq Jakhura *

Abstract
The Emissions Trading market has grown considerably in the last decade.
Utilizing this growth potential in a Shariah compliant manner may prove to
be beneficial for the Islamic Finance Industry, particularly in its
contribution to the macro-economy through the financing of government-
level infrastructure projects.
It is aimed to discuss the Jurisprudential Categorization (FiqhiTakyif) of
various Emissions’ Units chartered in the Kyoto Protocol, and to reach a
conclusion of which of these units constitute a right (Haqq) whose trading is
allowed in the Shariah. This discussion also covers the Shariah parameters
for such trading that mitigate or nullify the numerous imbalances found in
the conventional emission trading markets, which rely considerably on the
impermissible future sales of Emission Units. The research is intended to
culminate on discussing the possible and practicable Shariah Compliant
integration of such units into infrastructure projects through Power
Purchase Agreements.

Part I
Background to the Kyoto Protocol and Its Significance There have been various
steps taken to deal with the issue of pollution of the atmosphere with green-house gasses
and the consequent phenomenon of “Global Warming.” However, the initiative which
*
Author: Shakir Siddiq Jakhura: Research Fellow, Centre for Islamic Economics, Pakistan;
Director, Centre for Islamic Economics and Finance South Africa; Aalamiyyah and Ifta
(Jamia Darul Uloom Karachi) CSAA (AAOIFI); MIFP (INCEIF); PG Cert. in Common
Law: University of London.
56 Journal of Islamic Banking and Finance July - Sept 2022

may arguably be regarded as the most extensive in this regard is that of the United
Nations Framework Convention for Climate Change (UNFCCC). In its meeting of 1994,
the UNFCCC proposed a framework for decreasing the concentration of green-house
gasses in the atmosphere to a level that does not pose a threat to global weather. 1 Over
150 countries have ratified this framework and subsequent agreement. 2 Countries that are
party to this agreement have been categorized into Annex I, Annex II and non-Annex I
Parties, as per the degree of their responsibilities based on the prevalent type of economy
and general economic condition in that country. 3
In order to practically execute this agreement, numerous Conferences of the Parties
(COP) were convened. COP 3 that took place in Kyoto, Japan is one of the most
significant conferences, as it lead to member countries agreeing to bind themselves to
reducing green-house gas emissions within their borders by a quantifiable amount. 4
After careful consideration of various factors, each member country was assigned
an amount of allowable green-house gas emissions within its borders that was a
percentage less than its historical emissions. A period of time for these allowable
emissions was also stipulated. The allowable amount was further formalized by assigning
the member countries units of allowable emissions each representing permission to emit
one ton of green-house gas. These units were officially named, “Assigned Amount Unit”
and each bears a unique serial number. 5

Kyoto Units
Background
The agreement of the parties as per the Kyoto Protocol fundamentally binds them
to keep their green-house gas emissions within the assigned limit. No specific method for
fulfilment of this responsibility has been stipulated in the agreement, and thus the parties
should adopt appropriate fundamental means, like legislation, to ensure compliance with
the agreement. However, the Protocol suggests a few auxiliary methods of ensuring
compliance. The underlying philosophy of these methods is that a country which has
been able to keep its emissions below its allowed amount may benefit by transferring its
excess units to a country that needs to emit more green-house gasses than it was initially
allowed to. These methods, therefore employ the influence of supply and demand, such
that each country will endeavor to keep its emissions at a minimum in order for it to
benefit by being able to transfer its excess units in lieu of a consideration. 7
A discussion of the auxiliary compliance methods suggested by the Kyoto Protocol
ensues:

1
http://unfccc.int/essential_background/convention/items/2627.php
2
http://unfccc.int/essential_background/convention/status_of_ratification/items/2631.php
3
http://unfccc.int/parties_and_observers/items/2704.php
4
http://unfccc.int/kyoto_protocol/status_of_ratification/items/2613.php
5
The official Kyoto Protocol Reference Manual, Chapter 7, pg 77.
7
Adapted from the official Kyoto Protocol Reference Manual, section 2.3, pg 15
 Carbon Credits Trading and its Role in Infrastructure Power Purchase ...... 57

Emissions Trading
Arguably the most significant of the auxiliary compliance methods suggested by
the Protocol, Emissions Trading entails simply the selling of one country’s excess
emission units to another country in need of them. Such sale is recorded in an official
registry as per the requirements of the Protocol, such that after the sale the purchasing
country earns the extra right to emit green-house gasses to the extent of its purchased
units. 17

It is apparent therefore that such transactions fundamentally are effected at

government level between countries. However, the Protocol also allows that the Assigned
Amount Units (AAU) of a country be traded within its borders, by the government
allocating these units to the industry sector, and allowing factories to buy and sell them as
per their emission requirements. The Protocol allows for a similar arrangement between
an alliance of a few countries. 18

Joint Implementation
Similar to Emissions trading, Joint Implementation also involves the transfer of one
country’s units to another, albeit in a somewhat different manner. Here an Annexure One
country invests in a verified project that reduces emissions or enhances sequestration in
another Annexure One country, and thereby receives credit for emission reductions or
removals achieved through such project, by means of Emission Reduction Units (ERU).
ERUs are converted from the project hosting country’s Assigned Amount Units before
being transferred to the investing country. Thus, Joint Implementation does not affect the
total assigned amount of Annexure I Parties collectively; rather it redistributes the
assigned amount among them, such that the investing country increases its allowable
emissions amount by the amount of ERUs it acquires through the Joint Implementation
initiative. 19

Clean Development Mechanism

This is also a project based mechanism, wherein the project host is a non-Annex I
Party. Credits known as Certified Emission Reductions (CER) may be generated from
emission reduction projects or from afforestation and reforestation projects. Unlike
emissions trading and Joint Implementation, projects under CDM create new Kyoto units,
and their acquisition by Annex I Parties increases both the total assigned amount
available for those Annex I Parties collectively and their allowable level of emissions. As
a result, CDM projects must meet detailed requirements and follow exact procedures and

17
The official Kyoto Protocol Reference Manual, section 2.3.1 ,pg 16
18
The official Kyoto Protocol Reference Manual, section 2.3.1 ,pg 16
19
See the Official Kyoto Protocol Reference Manual, section 2.3.2, pg 17 and “What is an
Emission Reduction Purchase Agreement?” prepared by the Overseas Development Institute
58 Journal of Islamic Banking and Finance July - Sept 2022

steps for the validation and registration of projects and the verification and certification
of emission reductions and removals. 20

Part II
Kyoto Units from the Shariah Perspective

This part entails the following discussions:

The Conventional Legal Classification of Kyoto Units

The Shar’ee Classification of Kyoto Units

The Shar’ee Position on Trading Kyoto Units

The Conventional Legal Classification of Kyoto Units

The Official Kyoto Protocol Reference Manual defines the Assigned Amount Unit, which
is the arguably the most significant of the Kyoto Units, in the following words:

“A Kyoto unit representing an allowance to emit one metric tonne of carbon

dioxide equivalent (CO2 eq). AAUs are created (issued) up to the level of a Party’s
initial assigned amount.” 8

An intriguing feature of this definition is that it has not afforded the status of a
“right” to the Kyoto Units. In fact, in an official draft document supplementing the
Protocol, the status of a “right” has been explicitly negated thus:

“Further recognizing that the Kyoto Protocol has not created or bestowed any right,
title or entitlement to emissions of any kind on Parties included in Annex I.” 9

From a conventional legal perspective, it is therefore apparent that the Kyoto Units
do not constitute a “right” in its technical sense.

Shar’ee Classification of Kyoto Units

It is obvious that the Shar’ee classification of the Kyoto Units will stem from an
accurate understanding of them from the legal perspective. The preceding
discussion holds that these units have not been afforded the status of a “right” in its

20
Official Kyoto Protocol Reference Manual, section 2.3.3, pg 18 and “What is an Emission
Reduction Purchase Agreement?” prepared by the Overseas Development Institute
[email protected]
8
Official Kyoto Protocol Reference Manual, Appendix V, pg 118
9
Marrakesh Accords to the Kyoto Protocol, Advance unedited version, Section J, WORK
PROGRAMME ON MECHANISMS (DECISIONS 7/CP.4 AND 14/CP.4)
 Carbon Credits Trading and its Role in Infrastructure Power Purchase ...... 59

technical sense. However, a deeper understanding of the legal and technical reasons
behind this negation is necessary in order to ascertain whether or not the Shari’ah
also upholds this stance.

Legal experts have discussed at length, the reasons for classifying emission units,
whether of the Kyoto Protocol or other schemes, as “allowances” rather than
“rights.” One expert writes regarding a similar Sulphur Dioxide unit scheme in the
United States:

“In the trading for SO2 in the US, however, a legal provision was adopted
that an emission right, called an “allowance”, does not constitute a property
right (in section 403(f) of the CAAA). The legislator chose this formulation
to avoid that the government would have to compensate polluters for
“taking” allowances when the authorities lower the annual emission caps.” 10

He further states:
“ Both in this scheme and in the European CO2 emissions trading system, an
emission right is basically defined, in legal terms, as an allowance that authorizes a
legal entity to emit a certain amount of pollution during a specified period. This is
not so much a permanent, private property right, but rather an authorization that can
be terminated or limited by the government.” 11

However, the expert then clarifies:

“.... although these entitlements are not property rights in themselves, property
rights in such entitlements are in fact recognized as emitters can receive, hold and
transfer them, while excluding all others.” 12

Another expert writes more lucidly:

“But just what are these emissions "allowances?" Do they constitute conveyances
of "property" from the government to regulated utilities? Well, yes and no.
According to the terms of § 403(f) of the 1990 Clean Air Act Amendments:

‘An allowance allocated under this subchapter is a limited authorization to emit

sulfur dioxide . . . . Such allowance does not constitute a property right. Nothing in
this subchapter or in any other provision of law shall be construed to limit the
authority of the United States to terminate or limit such authorization . . . .

10
Edwin Woerdman,The Institutional Economics of Market-based Climate Policy, Pg 10
11
Ibid.
12
Ibid, Pg 11
60 Journal of Islamic Banking and Finance July - Sept 2022

Allowances, once allocated to a person by the Administrator, may be received,

held, and temporarily or permanently transferred in accordance with this
subchapter and the regulations of the Administrator . . . .’

‘This provision has two purposes. One is to placate environmentalists, many of

whom are offended by the very notion of "rights" to pollute (let alone the idea that
firms might actually profit from selling excess "rights" to pollute). Even more
importantly, Congress wanted to ensure that the program's pollution-reduction
goals would ultimately be achieved. By specifying that allowances are not property
rights and by expressly authorizing the EPA to terminate or limit allowances,
Congress empowered the agency to implement the program without fear of having
to compensate utilities for "taking" their allowances.

But § 403(f) is premised on the confusion between property rights in something and
the thing itself. It provides that an emissions allowance is not "a property right" but
expressly recognizes property rights in emission allowances. According to the
section's express terms, utilities can receive, hold (i.e., possess), and transfer (i.e.,
alienate) allowances. And although the statute does not expressly say so, the
utilities can exclude all others besides the government from interfering with their
possession, use, and disposition of allowances. These are certainly valuable
property rights in emission allowances. Indeed, there already has been litigation
over disputed "ownership" of emission allowances.

The Clean Air Act's acid rain program mixes public and private property rights in
emission allowances. The allocation of allowances constitutes a conveyance by the
government of some, but not all, of the public's property rights in the atmosphere to
the regulated utilities. The specific property rights conveyed include limited rights
to possess, use, and exclude. Meanwhile, pursuant to § 403(f) the government
expressly reserves the right to terminate or limit the allowances.” 13

We understand from the preceding excerpts that regulators have recognized the
necessary ingredients of property rights in emissions units. However, they have resorted
to defining emissions units as “allowances” rather than “rights” in order to avoid
secondary repercussions like the responsibility of reimbursing unit holders for units
cancelled due to the government reducing the allowable emission level; and avoiding the
criticism of environmentalists who are not prepared to accept the nomenclature of
affording a “right to pollute” to the emissions unit holder.

13
Daniel H. Cole, Clearing The Air: Four Propositions About Property Rights And
Environmental Protection. (Source: http://www.law.duke.edu/shell/ cite.p l?10+
Duke+Envtl.+L.+&+Pol'y+F.+103#F46; accessed on 30/11/2010)
 Carbon Credits Trading and its Role in Infrastructure Power Purchase ...... 61

Since the Shari’ah bases its stance on the factual and not on nomenclature the
above justification of terming them “allowances” rather than “rights” will not have a
bearing on the Shar’ee stance towards these units; particularly when the basic
constituents of property rights have been recognized in them by the law itself.

Therefore, a dedicated discussion of what constitutes a right in the Shari’ah and its
application to emissions units follows.

The Haqq (Right) in the Shari’ah

Various Fuqaha (Jurists) have discussed the necessary constituents of a right in
specific contexts. An analysis of their discussions seems to culminate in the following
necessary ingredients of a Shar’ee right:
Maslahah, meaning that the right be for the benefit of the right holder. 14
Ta’alluqulIkhtisas, meaning a relationship of exclusivity should be established for
the right holder by virtue of the right. This should distinguish a non-right holder
from a right holder. If a right does not establish exclusivity for the right holder and
non-right holders also enjoy the same facility, then it is not a right; rather it may be
deemed as a “permission” or “allowance.” 15
Haajiz, that is, it should allow the right holder to restrict access.16
Honourable Shaykh Mustafa azZarqa has further refined the attributes of a right
when he defined it in the following words:
ً ٔ ً ّ ‫"اﳊﻖ ﻫﻮ اﺧﺘﺼﺎص‬
17
"‫ﯾﻘﺮر ﺑﻪ اﻟﴩع ﺳﻠﻄﺔ أو ﺗﳫﯿﻔﺎ‬
“A right is exclusivity through which the Shari’ah establishes an authority or
responsibility.”
We may add to the above attributes the following, based on this comprehensive
definition:
1. This exclusivity should be established through any of the Sources of
Sharia’ah: Qur’an, Sunnah, Ijma’ and Qiyas. 18
2. It should create “authority” to use the right or “responsibility” in favour of
the right holder, like the responsibility created by the right of a person who
hires the services of a person upon such hired person. 19

14
See Taftazani, ‫ﺷﺮح اﻟﺘﻠﻮﯾﺢ ﻋﻠﻰ اﻟﺘﻮﺿﯿﺢ‬, v 2 pg 315
15
See Ibn Nujaim, ‫اﻟﺒﺤﺮ اﻟﺮاﺋﻖ‬, v 8 pg 97 and WahbahazZuhayli, ‫ﺑﯿﻊ اﻻﺳﻢ اﻟﺘﺠﺎري واﻟﺘﺮﺧﯿﺺ‬, ‫ﻣﺠﻠﺔ‬
‫ﻣﺠﻤﻊ اﻟﻔﻘﮫ اﻹﺳﻼﻣﻲ‬, ‫اﻟﻌﺪد اﻟﺨﺎﻣﺲ‬, 5:1954, ‫اﻟﻤﻜﺘﺒﺔ اﻟﺸﺎﻣﻠﺔ‬
16
See Ibn Nujaim, ‫اﻷﺷﺒﺎه واﻟﻨﻈﺎﺋﺮ‬, v1 pg 346 and Kasani, ‫ﺑﺪاﺋﻊ اﻟﺼﻨﺎﺋﻊ‬, v2 pg 331
Mustafa azZarqa, ّ‫اﻟﻤﺪﺧﻼﻟﻔﻘﻬﻴّﺎﻟﻌﺎم‬, v 3 pg 10
17

Adapted from Mustafa azZarqa, ّ‫اﻟﻤﺪﺧﻼﻟﻔﻘﻬﻴّﺎﻟﻌﺎم‬, v 3 pp 10, 11

18
62 Journal of Islamic Banking and Finance July - Sept 2022

3. ShaykhazZarqa further expounds the concept of authority in the context of

Haqq al Milkiyyah (ownership right) in the following words:
ً ً َ ُ
‫ﺻﺎﺣﺒﻪ ﺳﻠﻄﺔ ﲆﻋ اﻟﺸﺊﯿ ﲡﻌﻞ ﻟﻪ ﻓﯿﻪ وﻻﯾﺔ وﻣﻜﻨﺔ‬ ‫ﻌﻲﻄ‬
ِ ‫"وﻫﻮ ﰲ ﻧﻈﺮ اﻟﻔﻘﻬﺎء ﺣﻖ ﯾ‬
‫وﳜﻮﻟﻪ ﻓﯿﻪ ﲨﯿﻊ وﺟﻮﻩ اﻻﺳتﻌﻤﺎل واﻻﻧﺘﻔﺎع واﻻﺳﳤﻼك ﻣﺎ ﱂ ﯾﻠﺰم � ذﻟﻚ‬ ّ ،‫ﻣﻄﻠﻘﺔ‬
20
".‫ﴐر �ﻟﻐﲑ‬
“According to the jurists [an ownership right] is a right that confers upon its
holder an authority over something, and grants him the full eligibility and
ability in it, and confers upon him [the right] to put it to use, to take benefit
from it or to expend it in every way, provided that [such use] does not
necessitate harm to another person.”

From the preceding discussions, we may draw the conclusion that Kyoto Units
confer a recognized Shar’ee right (Haqq) to its holder to emit a specific amount of green-
house gasses into the atmosphere. These units do not a merely constitute a “permission”
or “allowance” in which right-holders and non-right holders are equal. This is because all
the above-mentioned necessary constituents of a Shar’ee right are found in these units.

Is Trading in Kyoto Units Permitted in the Shari’ah?

After concluding that Kyoto Units constitute a Shar’ee right, it is pertinent to
discuss whether they constitute such a Shar’ee right whose buying and selling is
permitted by the Shari’ah. Honourable Shaykh Mufti Muhammad TaqiUsmani (May
Allah ta’ala protect him) has discussed the subject of tradeable rights in his ground-
breaking paper, ‫ﺑﯿﻊ اﻟﺤﻘﻮق اﻟﻤﺠﺮدة‬. The gist of his detailed discussion is that in the Shari’ah
the following conditions are necessary for the permissibility of the sale of a right:

1) Such a right should be established in some tangible entity.

2) It should exist currently, and its existence should not be merely expected at
some future date.

3) It should be established for its owner ً‫( أﺻﺎﻟﺔ‬originally) and not to ward off a
harm.

4) It should be transferrable from one person to another.

5) It should be measurable and its sale should not involve any Gharar
(uncertainty) or Jahalah (ignorance).

Adapted from Mustafa azZarqa, ّ‫اﻟﻤﺪﺧﻼﻟﻔﻘﻬﻴّﺎﻟﻌﺎم‬, v 3 pp 10, 11

19

Mustafa azZarqa,ّ‫ اﻟﻤﺪﺧﻼﻟﻔﻘﻬىّﺎﻟﻌﺎم‬, v3 p 33

20
 Carbon Credits Trading and its Role in Infrastructure Power Purchase ...... 63

6) Such rights should be dealt with in the custom and practice of the business
fraternity in a similar manner that commodities are dealt with in that they
could be exchanged and traded in as commodities are. 21

These conditions are apparently fulfilled in the Kyoto Units because the right to
emit carbon exists currently; it is established for the right-holder originally and not to
ward off harm; it is transferrable from one person to another – as is evident from the fact
that the legislation bodies regulating these credits allow this right; it is measurable
because it is possible to accurately measure the amount of carbon that a factory emits and
such rights are dealt with by the business community as commodities are dealt with, as is
evident from the widespread trade that takes place in them.

As far as the condition of such right being established in a tangible asset is

concerned then although the Kyoto Units are apparently not attached to a tangible asset,
yet since it is a right that has been registered and issued by the relevant authorities, and
gaining such right requires spending much effort and finances which then afford this right
a legal characterization that is represented by a tangible certificate in the right-holder’s
possession, and in the relevant government offices, this right resembles a right that is
established in and attached to a tangible entity. This is why the business community also
deals with this right in a similar manner that it deals with tangible assets and there is no
doubt in the fact that there is scope for the general practice and custom of the people to be
a means of including some things in the definition of tangible assets just as electricity and
gas have been included in the definition of Mal (wealth) due to the fact that the people
have, through their practice, afforded it value, and have invented ways of storing and
preserving it just as wealth is preserved and stored. Thus, it does seem to be permissible
to trade in the mentioned carbon credits.

This is the conclusion that the writer had reached in an answer written for the
DarulIfta of JamiahDarulUloom Karachi, which was endorsed by Honourable Shaykh
Mufti Muhammad TaqiUsmani (May Allah ta’ala protect him). 22

However, it should be noted that this ruling is applicable to the Kyoto Units or
other similar emissions rights fulfilling all the above conditions. Private schemes, like the
Chicago Climate Exchange, do not confer a recognized right that distinguishes a right
holder from a non-right holder in the emissions of green-house gasses and thus, the above
ruling of permissibility to trade in them does not apply there. 23

Muhammad TaqiUsmani, ‫ﺑﺤﻮﺛﻔىﻘﻀﺎﻳﺎﻓﻘﻬﻴﺔﻣﻌﺎﺻﺮة‬،‫ﺑﻴﻌﺎﻟﺤﻘﻮﻗﺎﻟﻤﺠﺮدة‬, v1 pp76-126

21
22
See Fatwa number 36 of Volume 1396
23
Ibid.
64 Journal of Islamic Banking and Finance July - Sept 2022

Part III
The Role of Emissions Units in Power Purchase Agreements
A study of various sample Power Purchase Agreements from the World Bank’s
website for Public-Private Partnership for Infrastructure 21 reveals that such agreements
contain a provision that ascertains the owner of credits generated through a renewable
energy generating power plant.
Islamic financial institutions who are a party to such infrastructure financing as a
partner (Shareek) or Rabbul Mal (in Mudarabah) may benefit from such a provision by
negotiating that a specified proportion of the generated units be allocated to it as part of
its share of the profit. Similarly, the concessionaire may gift such units to the Islamic
finance institution, provided such gift is not stipulated as a condition in the contract, and
does not entail any other Shar’ee impermissibility. The Islamic financial institute may
then trade in these units and earn a profit.
This is a mere suggestion which should be deliberated further in appropriate forums
of contemporary experts of Islamic finance.
Allah ta’ala Knows Best
"An ending note: This paper has endeavored to discuss just the permissibility or
otherwise of the right to sell Carbon emissions units, as a means to counter the dangerous
effects of greenhouse gasses at a macro level. To make such units the subject matter of
investment schemes based on the conclusions reached in this paper will obviously be
against the very purpose of why these mitigation efforts have been initiated at the global
level, in the first place."

21
https://ppp.worldbank.org/public-private-partnership/
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 65

Service Quality And Customer Satisfaction

Of Islamic Micro Finance Bank In Ogun
State,Nigeria
By
I. Akintan ∗ M. Dabiri A. Ogunbode
Abstract
This study assesses the effect of service quality dimensions on customer
satisfaction of AL-HAYAT Islamic Micro Finance Bank in Ogun State. It
investigates the relationship between service quality dimensions of
compliance with Islamic principles, assurance, reliability, tangibles,
empathy, responsiveness and customer satisfaction. The survey research
design was adopted and questionnaire used as an instrument of data
collection. Convenience sampling method was used to select 150 customers
of AL-HAYAT Islamic Micro Finance Bank. The data collected was analysed
using descriptive statistics methods of frequency and simple percentages
while Pearson’s correlation co-efficient and multiple regression analysis
were used to test the hypotheses formulated whether significant relationship
exist between service quality dimensions and customers’ patronage. Result of
the findings revealed that there were positive relationships between the six
service quality dimensions measured with compliance with Islamic
principles, assurance, reliability, tangibles, empathy and responsiveness,
with co-efficients of 0.490, 0.642, 0.356, 0.470, 0.580 and 0.624 respectively
at 1% level of significance. Out of the six independent variables used for
measuring service quality dimensions, only two namely, empathy (0.838) and
tangibles (0.750) have strong significant relationships, while reliability
(0.641), assurance (0.590), responsiveness (0.543) and compliance with
Islamic principles,(0.504) shows moderately significant relationships with
customer satisfaction. The study concluded that overall, service quality has a
significant relationship on customer satisfaction of Islamic Micro finance
banks and therefore, recommended that the management should comply with
the directives of the regulatory body, operate according to the Islamic
Banking principles, establish more branches fortified with qualified staff,

∗
Authors: I. Akintan, M. Dabiri & A. Ogunbode are Affiliated with Department of
Business and Finance, Crescent University, Abeokuta, Nigeria. E -mails:
[email protected], [email protected]
66 Journal of Islamic Banking and Finance July - Sept 2022

deploy more Auto Teller Machines, engage in aggressive advertisement and

marketing in print, media houses and Social Media Platforms, upgrade
Physical facilities and equipment, improve network connectivity and ensure
that customers complaints are treated promptly.
Keywords: Service Quality, Compliance, Assurance, Reliability, Tangibles,
Empathy, Customer Satisfaction.

1. Introduction
The current business environment is very dynamic and fast changing which
necessitates banks significantly expanding their financial services for their clients and
governments around the world in the banking business(Nushrat,2019).Today’s banking
sector is highly competitive and one of the tools banks use to maintain competitive
advantage in the marketplace is service quality. (Logasvathi and Haitham, 2015).
Saghier, and Nathan (2013), posited that service quality is an important concept in
the service industry, and vital for financial service providers who have difficulty in
identifying their customers product differentiation. Raza et al. (2020) equally observed
that high service quality demonstrated through customer satisfaction suggests the healthy
and smooth functioning of the banking sector. Furthermore, the issue of service quality in
Islamic microfinance institution must be considered as very vital by the bank’s
practitioners in order to increase the volume of banks depositor and maintain its
sustainability (Dety et al.,2018);Sivaraman (2013),indicated that delivering quality
service to customers is one of the avenue for Islamic microfinance banks to respond and
compete for success and survival where other deposit money banks are vying with one
another to win customer satisfaction.
Further, customer satisfaction is one of the important factors of a company’s
success. To achieve high customer satisfaction, a company must understand when and
how to satisfy customers through their products and services (Syauqi et al., 2018).
Ratnasariet al.(2020), opined that achieving customer satisfaction is not an easy
task for a company because of the subjective evaluation involved and this poses a main
problem in understanding, achieving, and maintaining satisfaction among its customers.
The growth of microfinance institutions has helped in promoting economic growth
and trying to reduce unemployment and poverty levels. It also focuses on providing an
ethical financial system with a motive of wealth redistribution, which will have a long
term effect on poverty alleviation (Hayat, 2009). Islamic Microfinance has been growing
progressively in the world, particularly in poor countries, as credible alternative which
allows poor people living below the poverty line to have access to basic financial services
at low cost and interest free loans. The integration of Islamic finance concepts to
microfinance was one of the valuable reasons in attracting poor to get advantage of these
services. Islamic microfinance can be defined as an investment of capital (in cash or in
kind), based on Islamic modes of finance, to the low-income clients- low-income
entrepreneurs in order to help them start or maintain their businesses (Mid-Term Project
MS-IBF 2013).Similarly, Islamic microfinance institutions play a major role in the
provision of financial services to the poor and underprivileged through non-interest,
equity-based products and services (Abdurrahman.,and Anwar.,2021) Islamic micro
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 67

finance institution is an alternative financial institution for people who have a low income
to obtain financing in order to improve the standard of living and decrease poverty,
Khadijah, et al. (2013).In Nigeria, the Central Bank of Nigeria in 2017, released the
“Guidelines on the Regulation and Supervision of Non-interest (Islamic) Microfinance
Banks (NIMFBs).” The aim is to provide a level playing field between conventional and
NIMFBs. Furthermore, it was envisioned to provide an alternative mode of microfinance
operation based on profit-sharing and loss-bearing principles. This is in line with the
National Financial Inclusion Strategy that intends to take financial services to
“individuals, communities, and corporations that may not be captured by conventional
MFBs.” The target clients of these banks are the poor and low-income, unbanked and the
under-served, as well as other microenterprises (Central Bank of Nigeria, 2017).The main
objective of this study is to assess the relationship between service quality dimensions
and customer's satisfaction of Islamic microfinance bank in Ogun State. Besides, this
study intends to identify whichof the service quality dimension is mainly considered by
customers of the Islamic microfinance bank.
This study provides information and knowledge for the practitioners in Islamic
microfinance banks such as board of directors, management teams about understanding
customer perception of service quality in Islamic microfinance institutions. This research
is expected to assist managers in employing CARTER model with a view to increase the
customer’s satisfaction about Islamic bank products.
Furthermore, this study will also serve as a reference document due to limited
studies in assessing service quality of Islamic microfinance banks through the use of
CARTER model in Nigeria.
This study is organized into five sections The first section, presents the introduction
and objectives of the study, the second section deals with the related literature and the
hypotheses development, the third section presents the methodological framework, while
section four presents the results of study. Finally, the conclusions, managerial
implications, and future research are presented in section five.

1.0 Literature Review

Service quality is a dynamic, multidimensional concept, incorporating a number of
aspects of both past and present service experiences (Abdul Aziz et al., 2014). Service
quality can be defined as the overall evaluation of a specific service firm that results from
comparing that firm’s performance with the customer’s general expectations of how
firms in that industry should perform (Chidambaram, and Ramachandvan, 2012).
Masinaei (2011), opined that service quality is an important tool for measuring customer
satisfaction and also influences performance of companies. High service quality leads to
competitive advantage as customers feel satisfied and thus are more probable to further
buy the company's services, recommend them to others and also ignore competitors'
offers (Radomir et al., 2011).
Researches from relevant literature using different industries concerning the
suitability of SERVQUAL have been a subject of criticism such as (Arasli et al. 2005;
Njau et al. 2019; Afifah et al 2021). Despite its widespread use, SERVQUAL is being
criticized specifically with regard to its reliability and validity, the use of different scores
68 Journal of Islamic Banking and Finance July - Sept 2022

and the stability of its factor structure (Ladhari et al., 2011; Njau, 2019). SERVQUAL
needs to be customized by adding items or changing the wording of the items (Njau,
2019). Furthermore, Lewis and Soureli (2006) argued that SERVQUAL is not a reliable
model to employ in different cultural settings as customers’ perceptions on quality vary
and the extent to which cultures are individualistic and significant impacts customers’
evaluation on service providers. This study intends to employ CARTER model developed
by Othman and Owen (2001)as a valid instrument of measuring service quality of Islamic
micro finance banks than SERVQUAL Model.
Meanwhile, researchers are also divided on which of the service a quality
dimension has greater influence on the satisfaction of customers that patronize Islamic
banking services especially in several countries with Muslim majority populations.
The compliance dimension is considered as the most determinant factor by Islamic
banking customers in Kuwait (Othman., and Owen., 2001), Malaysia (Shafie et al., 2004)
and Indonesia (Ciptono and Sofiyanti, 2007; Ramdhani et al., 2011).
However, other findings reported that reliability dimension is the most influential
service quality dimension in Malaysia (Amin dan Isa, 2008; Osman et al., 2009),
responsiveness dimension was identified as the most influential in Indonesia (Misbach, I.
and Hadiwidjojo, D.,2013).Similarly, in other countries such as Pakistan, England,
United Arab Emirates (Rehman., and Khattak., 2010) and Bahrain (Janahi., and
Almubarak., 2015), assurance dimension is a major factor that influence customer
satisfaction of Islamic banking services. Therefore, this study intends to conduct research
on service quality and customer satisfaction of Islamic Banks in Nigeria, a study of AL-
HAYAT Microfinance Bank in Ogun State with a view to determine which of the service
quality dimension has greater influence on the satisfaction of customers that patronize
Islamic banking services. The relevance of the study also hinges on the premise that
majority of the reviewed literatures concentrated on commercial banks while this study is
focusing on Islamic micro finance bank.
The following hypotheses are proposed:
H01: Service quality dimension does not have significant relationship on customer's
satisfaction of Islamic microfinance bank.
H02: Service quality dimension does not have significant effect on customer's
satisfaction of Islamic microfinance bank.
2.1 Service Quality Models
ii. SERVQUAL Model
Based on disconfirmation paradigm, Parasuraman, Zeithaml, and Berry (1985)
made the new model of service quality measurement. They try to cover the weakness of
Nordic model by offering a new way for measuring service quality. In SERVQUAL
model, they use the gap or difference between expected level of service and delivered
level of service for measuring service quality perception with five dimensions:
Reliability, Responsiveness, Assurances, Empathy, and Tangibility. SERVQUAL is an
analytical tool, which can help managers to identifying the gaps between variables
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 69

affecting the quality of the offered services (Seth, Deshmukh., and Vrat, 2005). This
model is the most used by marketing researchers and scientists, although it is an
exploratory study and does not offer a clear measurement method for measuring gaps at
different levels. This model has been refined during the years and some believe that only
performances needed to be measured as SERVPERF model in order to find perception of
service quality (Cronin and Taylor, 1992). Finding in years of using this model shows
SERVQUAL factors are inconsistent and not comprehensive for different applications
(Dabholkar, et al., 1996; Shahinand Samea, 2010).

iii. CARTER Model

Othman and Owen (2001) developed an instrument called CARTER based on 35
items having six dimensions in a paper titled developing an instrument to measure
customer service quality in Islamic banking. The SERVQUAL model was considered
inappropriate to be applied in Islamic banking because there is a compliance dimension
that must be upheld by Islamic banking as its economic activities are applied based on
Islamic principles. The added compliance dimension defines the bank’s ability to operate
in compliance with the principles of Islamic banking and economy (Abedniya and Zaeim,
2011). The CARTER dimensions include the following:
i. Compliance dimension is the ability to apply Islamic principles in Islamic
banking operations (Othman., and Owen., 2001). This means that all products or services
developed and offered by Islamic banks must follow Islamic law. In addition, all business
transactions must use a profit sharing system and prohibit interest on funding and loans.
ii. Assurance is knowledge and politeness of Islamic banking employees as well as
their communication skills to provide trust and conviction to customers (Othman., and
Owen., 2001). Therefore, excellent service quality requires Islamic bank employees who
are polite, skilled and competent, and it also requires them to work and provide solutions
of financial problems experienced by customers (Othman., and Owen., 2001)
iii. Reliability dimension is the ability to provide services which are suitably
promised, reliable, accurate, and trustworthy by customers (Othman., and Owen., 2001).
Reliability can make Islamic banks more efficient and create a higher level of customer
satisfaction (Othman., and Owen., 2001).
iv. Tangibility dimension consists of the physical appearance, equipment,
personnel, and communication material, and it can also be related to a company’s ability
to show its existence to external parties (Lupiyoadi, 2001). Janahi and Almubarak (2015)
argues that tangible includes convenience of location, design of physical facilities,
materials, and uses of communication equipment.
v. Empathy dimension captures aspects of service quality that are directly
influenced by service provider’s policy such as good customer service, convenience of
parking and operating hours (Butcher, 2001; Ndubisi, 2006; Ehigie, 2006).
vi. Responsiveness dimension involves understanding needs and wants of the
customers, convenient operating hours, individual attention given by the staff, attention to
problems and customers’ safety in their transaction (Kumar et al., 2009).Consequently,
70 Journal of Islamic Banking and Finance July - Sept 2022

the usage of CARTER instrument is an appropriate model to measure the service quality
of Islamic banking services, hence its adoption for this study.
2.2 Empirical review
Some studies have found a positive relationship between service quality provided
by Islamic banks and customer satisfaction (Afifah, and Alfiah., 2021:Slack et al., 2020;
Khamis and AbRashid., 2018).They asserted that service quality plays an important role
in customer satisfaction and as a result, company can increase its market share by
improving it service quality.
The suitability of SERVQUAL Model as appropriate measurement of service
quality has been a subject of criticism from researchers (Afifah, and Alfiah., 2021; Njau
et al. 2019;Arasli et al.2005 ).and concluded that SERVQUAL does not include a
dimension that Islamic banking activities are based on Islamic principles.
Other studies validated the measurement of service quality by employing CARTER
model is appropriate and concluded that there is a relationship between service quality
and customer satisfaction of Islamic banks (Afifah, and Alfiah., 2021: Janahi and
Almubarak.,2017; Mohamed and Muneer 2017; Maswadeh 2015).However they differ on
which dimension greatly influence customer satisfaction based on cultures and countries
where the studies were conducted.
Thaker, Khaliq, and Thaker (2016) conducted a study about the service quality of
Islamic banks in Malaysia using the IPA approach and results showed that six attributes -
sharia requirement, tangibility, assurance, reliability, and responsiveness - play an
important role in determining customer satisfaction.
Ali and Ali (2015) researched how to measure the relationship between service
quality and customer satisfaction among the customers of Pakistani Islamic banks.
Results revealed that the multidimensional service quality scale is positively and
significantly associated with the un-dimensional scale of customer satisfaction. In
addition, the compliance dimension of the SERVQUAL model proved its importance by
showing the highest contributing factor in the overall model.

FIGURE 1: CARTER Conceptual Model of Service Quality

Source: (Adapted from Othman and Owen (2001)
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 71

3.0 MethodologyMeth
This study used cross sectional survey design to examine the effectiveness of
service quality delivery of Islamic Microfinance Banking as perceived by customers in
Ogun State. The population of the study was made up of all the customers who
patronized AL-HAYAT Microfinance Bank in Ogun State. Convenience sampling
method was used to select 150 customers of the bank.Customers' responses regarding
service quality were collected using the CARTER model as developed by Othman and
Owen (2001). The developed CARTER model included five items for compliance, four
items constituting the tangibles dimension; responsiveness four items, four items
corresponding to the reliability dimension, four items to the assurance dimensions, and
four items to empathy dimensions respectively. The respondents were interviewed using
a structured questionnaires administered to the respondents over a period of four months
(July,2020 to November, 2020).A five-point Likert scale (1 strongly disagree to 5
strongly agree) was used in the questionnaire to measure responses to the relevant
questions.
3.1. Model Development
The model for this study was presented as follows:

The correlation co-efficient model is specified as;

r =√ (n∑x2 – (∑x)2) (n∑y2 – (∑y)2) …………………….. …….(3.1)

Where r could either be positive or negative, and ranges between the limits of -1
and +1.

The functional form of the regression model adopted in the study is given as;

Y= (F)…………………… (3.2)

Equation (3.2) can then be transformed by introducing the dependent and

independent variables to be used in the estimation as;

Customer Satisfaction=F (Service quality dimension)…………………(3.3)

The estimated econometric form of (3.4) is given as;

CSAT =α̥ +αı SERV_QTY+ut …………………………………………………(3.4)

Service Quality is (3.4) above can be explicitly stated as shown below

CSAT=α˳+α1 COM+α2 ACC+α3 REL+α4+ TAN +α5 EMP+ α6 RES+ ut

Where:
CSAT= Customer satisfaction
COM= Compliance
72 Journal of Islamic Banking and Finance July - Sept 2022

ACC= Assessibility
REL= Reliability
TAN= Tangibility
EMP= Empathy
RES= Responsiveness
α˳, α1, α2, α3, α4, α5 and α6 = Coefficients estimated
ut = Error term.
3.2 Validity and Reliability of the Study
The research instrument’s content validity was assessed using expert judgment by
two faculty academic staff experts in the Department of Business and Finance, Crescent
University, Abeokuta. Furthermore, a measure of co-efficient reliability (Cronbach’s
Alpha) was computed for each dimension to assess the reliability of the set of items
forming that dimension. (See Table1.below). The co-efficient range from 0.70 to 0.80. As
a rule; 0.70 and above co-efficient means that the collected responses through
questionnaires have good reliability and level consistency.

Table 1.0. Reliability Test to Measure Service Quality Dimensions Using

CRONBACH’S Alpha(α)
DIMENSIONS CRONBACH’S ALPHA(α)
Compliance 0.703
Assurance 0.796
Responsiveness 0.742
Tangibles 0.701
Reliability 0.732
Empathy 0.80
Customer Satisfaction 0.782
Source : Field Data July,2020

4. Results and Analysis

4.1. Analysis of Socio-Demographic Characteristics of Respondents
The Socio-demographic characteristic of respondents reveals that male and female
customers accounted for 40% and 60% of respondents respectively. The research, also
shows that 16.67% of the respondents were below the age 18, 20% were between ages
19-25, 30% were between ages 26-35, 14.67% were between ages 36-45 and 18.66%
were from ages 46 and above. This indicates that majority of the customers belongs to the
active labour force who contributes immensely to the growth of the country. Similarly, it
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 73

can be seen from this research that 40% and 33.3% represents married and single
respondents, while widows accounted for 16.67%and the remaining 10% were divorced.
In relation to the customer’s level of education, it shows that 28.67% of the
respondents were Masters Degree holders, (20%) for B.Sc. and HND holders, OND/NCE
20% while the remaining 18% were holders of Vocational certificates. Regarding
customer’s occupation, this research reveals that about 30% of the respondents indicated
that they were in private employment. This was followed by 36.7 % respondents in the
public sector, Job Seekers 23.3% and remaining 10% being students. Similarly, it can be
seen from this research that 44.4% and 43.4% represents married and single respondents,
while the remaining12.1% were widows. This study also shows that 6.67% of the
respondents have been patronizing the AL-HAYAT Microfinance Bank for below 1 year,
26.67 % of the respondents had been patronizing the bank between 2 years to 3 years,
57.3% of the respondents maintained their patronage of the bank from 3 to 5 years while
the remaining 9.33 accounting for customers banking with the bank over five years.
Concerning account operated by respondents, this study reveals that 40% of respondents
operates savings account,26.67% were current account holders, 12% operated investment
accounts, fixed deposits were operated by 1% of respondents, domiciliary and loan
accounts accounted for 7.33% and 8 % of the respondents respectively and the remaining
6% operated other accounts.
Lastly, regarding product and services rendered to customers, it indicated that 27%
of the respondents prefer Mudarabah products. 17.33% liked Musharakah, 16% were
interested in Istisna, 15.33% prefers Murababah, 14.67% liked Salam, while 10%
preferred other kinds of products and services.
4.2 Hypotheses testing
4.2.1 Hypothesis One
H01: The service quality dimension does not have a significant relationship with the
customers’ satisfaction with Islamic microfinance banks.
Table 2.0 Correlations Analysis
Com Acc Rel Tan Emp Res CSat
Com Pearson 1 .582** .198** .358** .396** .368** .157**
Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
Acc Pearson .582** 1 .422** .520** .594** .517** .234**
Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
Rel Pearson .198** .422** 1 .411** .435** .416** .171**
Correlation
Sig. (two-tailed) .006 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
Tan Pearson .358** .520** .411** 1 .585** .537** .160**
Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
74 Journal of Islamic Banking and Finance July - Sept 2022

Emp Pearson .396** .594** .435** .585** 1 .634** .261**

Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
Res Pearson .368** .517** .416** .537** .634** 1 .323**
Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150
CSat Pearson .490** .642** .356** .470** .580** .624** .326**
Correlation
Sig. (two-tailed) .000 .000 .000 .000 .000 .000 .000
N 150 150 150 150 150 150 150

A correlation analysis was conducted to test the hypothesis by adding all the survey
items for each construct and taking the mean. The results in Table 4.16 revealed that
there was a significant and positive relationship between compliance and customer
satisfaction (r = 0.490, n = 150, p< .000). The finding implied that as the bank products
complies with shariah and other regulations, customers become satisfied by 49%.
Similarly, there was a significant and positive relationship between accessibility
and customer satisfaction (r = 0.642, n = 150, p< .000). The finding implied that as
accessibility to the bank branches increases, customer satisfaction would increase by
64%.
Also, there was a significant and positive relationship between reliability and
customer satisfaction (r = 0.356, n = 150, p< .000). The finding implied that as the banks’
products and services become more reliable, customer satisfaction would increase by
approximately 36%.
There was a significant and positive relationship between tangibility and customer
satisfaction (r = 0.470, n = 150, p< .000). The result implies that an increase in visible
aspects of services like buildings increases, customer satisfaction will also increase by
47%.
There was a significant and positive relationship between empathy and customer
satisfaction (r = 0.580, n = 150, p< .000). The result implied that if the bank allowed the
customers to feel heard by acknowledging their feelings and responding quickly to their
complaints, customer satisfaction will increase by 58%.
Lastly, there was a significant and positive relationship between responsiveness
and customer satisfaction (r = .624, n = 150, p< .000). The result implied that if the bank
pays prompt attention to customers’ needs, customer satisfaction will increase by 62.4%.
Overall, the null hypothesis was rejected, and it was concluded that service quality
dimensions had a significant and positive relationship with customers’ satisfaction of
Islamic microfinance bank.
4.2.2 Hypothesis Two
H02: service quality dimension does not have significantly effect on customers’
satisfaction in Islamic microfinance banks.
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 75

Table 3.0 Model Summary

Standard Error of the
Model R R Square Adjusted R Square Estimate
1 .747 .659 .632 5.955
Predictors: (Constant), Com, Acc, Rel, Tan, Emp, Res
Notes: Com = compliance, Acc = accessibility, Rel = Reliability, Tan =
Tangibility, Emp = Empathy, Res = Responsiveness,CSat =customer satisfaction.
A regression analysis was conducted to test the hypothesis. The results were
presented in Tables 4.17, 4.18, and 4.19, respectively. As can be seen in Table 3.0, the R-
square was 0.659. It implied that the independent variables accounted for approximately
66% of the changes in the dependent variable. In comparison, the remaining 34% were
other variables not included in this model, predicting customers’ satisfaction.
Table 4.0 ANOVA
Sum of
Model Squares df Mean Square F Sig.
1 Regression 8301.138 6 1185.877 33.443 .000
Residual 6560.116 143 35.460
Total 14861.254 149
Dependent Variable: CSat
Predictors: (Constant), Com, Acc, Rel, Tan, Emp, Res
The Analysis of Variance result in Table 4.0 revealed that the overall model was
significant; that is, the independent variables contributed significantly to the model with
an F-value of 33.443 and a probability value of 0.000.
Table 5.0 Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 10.358 2.448 4.231 .000
Com .504 .041 .131 7.415 .000
Acc .590 .139 .307 4.244 .000
Rel .641 .165 .388 3.884 .000
Tan .750 .195 .217 3.456 .000
Emp .838 .143 .221 3.792 .000
Res .543 .125 .298 4.344 .000
Dependent Variable: CSat

The result in Table 5.0 showed each independent variable's contribution to the
dependent variable, which was examined using a significance level of 0.05 (two-tailed).
As can be seen, compliance statistically significant and positive (β = 0.504, t = 7.415, p
76 Journal of Islamic Banking and Finance July - Sept 2022

<0.001). The result implied that with a one percent increase in the Islamic microfinance
bank's compliance level, customers’ satisfaction would increase by approximately 50%.
The coefficient of accessibility was statistically significant and positive (β = 0.590,
t = 4.244, p <0.001). The result implied that a one percent increase in accessibility of
Islamic banks would result in a precisely 59% increase in customers’ satisfaction.
The coefficient of reliability was statistically significant and positive (β = 0.641, t =
3.884, p < 0.001). The result implied that a one percent increase in the Islamic bank's
reliability would result in a 64% increase in customers’ satisfaction.
The coefficient of tangibles statistically significant and positive (β = 0.750, t =
3.456, p >0.001). The result implied that a one percent increase in Islamic banks'
tangibles would result in a 75% increase in customers’ satisfaction.
The coefficient of empathy statistically significant and positive (β = 0.838, t =
3.792, p > 0.001). The result implied that a one percent increase in Islamic bank empathy
would result in an 84% increase in customer satisfaction.
Lastly, the coefficient of responsiveness statistically significant and positive (β =
0.543, t = 4.344, p > 0.001). The result implied that a one percent increase in the
responsiveness of Islamic bank would result in an approximately 54% increase in
customers’ satisfaction
The linear hypothesis test function was used to test the overall significance of the
model. The result revealed an overall t-test value of 15.002 with a probability value of
0.000. Because the probability level was less than 5%, the null hypothesis was rejected. It
was concluded that service quality had a significant effect on customer satisfaction in
Islamic banks.
4.3 Discussion of Findings
This study examined the effect of service quality on customers’ satisfaction in
Islamic microfinance bank in Ogun State. The study successfully provided evidence that
service quality significantly and positively influenced customers’ satisfaction based on
the correlation and regression results. First, the study's finding revealed that service
quality's compliance dimension had a statistically significant and positive effect on
customer satisfaction. The result indicated that the Islamic microfinance banks offered
products and services that comply with Shari’ah principles and operate under Islamic
banking rules. The finding was in line with the results of past studies such as (Afifah et
al 2021; Khamis., and AbRashid., 2018; Asnawi et al.,2018). They found in their studies
that compliance has a significant effect on customer satisfaction. In contrast, ( Prastiwi,
Ridwan, and Ujianto.,2017; Loone., Aldawood., and Bhat, 2017) found that compliance
has low influence on customer satisfaction in Islamic banking services .
Secondly, the study's finding revealed that accessibility dimension had a
statistically significant and positive effect on customer satisfaction. This finding indicated
that Islamic microfinance banks have a sufficient number of ATMs per branch and used
the latest technology and modern equipment, resulting in customers’ satisfaction. The
result of this study was consistent with the results of previous studies of Khalif and Al-
 Service Quality and Customer Satisfaction of Islamic Micro Finance Bank 77

Zubi (2011), Ogunlowore and Oladele (2014). Their study found that service quality's
accessibility dimension had a significant and positive effect on customers’ satisfaction.
On the contrary, Prastiwi, Ridwan, and Ujianto (2017) found in their study that service
quality’s accessibility dimension does not influence customers’ satisfaction.
Thirdly, the study's finding revealed that reliability dimension had a statistically
significant and positive effect on customers’ satisfaction. This finding indicated that
Islamic microfinance banks served their customers as promised, solved every challenge
encountered by customers, and kept error-free records at all times, which sustained
customers’ satisfaction. The discovery was in line with the result of previous studies like,
Anane and Poku (2015);Munusamy, et al., 2012). They found out in their studies that
reliability significantly influenced customers’ satisfaction. In contrast, the result does not
support Abdullahi et al., 2018).
Fourthly, the study's finding revealed that tangibility dimension has a statistically
significant and positive effect on customers’ satisfaction. This finding indicated that
Islamic microfinance banks had up-to-date equipment, visually appealing buildings, and
the provision of valuable information to customers, which sustained customers’
satisfaction. The discovery was in line with previous studies like Rahman and Jabid
(2016) and Hammoud and Bittar (2016). They found out in their studies that tangibility
significantly influenced customers’ satisfaction. In contrast, the result does not support
the result of Mustapha et al. (2017).
Fifthly, the study's finding revealed that empathy dimension had a statistically
significant and positive effect on customers’ satisfaction. This finding indicated that
Islamic microfinance banks gave their customers’ attention, had their customers' interest
at heart, and understood their customers’ specific needs, sustained customers’
satisfaction. The discovery was in line with the result of previous studies like Rahman
and Jabid (2016), Hammoud and Bittar (2016), and Akhtar et al. (2011). They found out
in their studies that empathy significantly influenced customers’ satisfaction. In contrast,
the result does not support the result of Mustapha et al. (2017).
Lastly, the study's finding revealed that responsiveness dimension had a statistically
significant and positive effect on customers’ satisfaction. This finding indicated that the
customers of Islamic microfinance banks received prompt services, always willing and
not too busy to help their customers whenever in need. The discovery was in line with
previous studies like Rahman and Jabid (2016),Akhtar et al. (2011). They found out in
their studies that tangibility significantly influenced customers’ satisfaction. In contrast,
the result does not support the result of Mustapha et al. (2017).

5.0 Conclusion
The study examined the effect of service quality on customers’ satisfaction of
Islamic microfinance bank in Ogun State.The result of the study indicated that the
customers are overall satisfied with the services offered by the Islamic micro finance
bank. The result of this study further confirmed the findings of Ghani and Said, (2011);
Janahi and Almubarak.,( 2017) that all the six dimensions of CARTER model have
significant positive relationship on the customers’ satisfaction of Islamic banks.
However, empathy is the most important dimension that has greater influence on
78 Journal of Islamic Banking and Finance July - Sept 2022

customers satisfaction followed by tangibility, and reliability while assurance,

responsiveness and compliance revealed moderatly significant relationships with
customer satisfaction.

Managerial implications
The first implication of this study is that the management of the Islamic micro
finance bank need to focus more on other service quality dimensions such as empathy
and tangibility than compliance for them to record high level of customer satisfaction.
The second implication of this finding is that Islamic micro finance banks management
should not shirk in offering excellent customer service to their customers by ensuring that
they feel heard and acknowledged, thereby responding quickly to their complaints,
creating effective communication channels for dissemination of valuable information to
customers, provide convenience parking space and implement flexible operation hours if
they desire greater level of customer satisfaction.

This study recommends that the management of the Islamic micro finance bank
should comply with the directives of the regulatory body, operate according to the
Islamic principles, establish more branches fortified with qualified staff, deploy more
Auto Teller Machines, engage in aggressive advertisement and marketing in print, media
and Social Media Platforms, upgrade their physical facilities and equipment, improve
their network interconnectivity and ensure that customers complaints are addressed
promptly.

5.1 Limitation and future research

The study is limited to one state in Nigeria that operates Islamic micro finance
banking services and therefore lacks generalization and relies on low sample size. The
study should be extended to other states where Islamic micro finance banks exist in
Nigeria. Similar studies should also be conducted to cover service quality and customer
satisfaction of Islamic micro finance banks in different countries using other service
quality models.

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 Islamic Finance in Africa: Challenges and Opportunities ..... 83

Islamic Finance in Africa: Challenges and

Opportunities “An Experience with North
African Countries" *

By
Fadul Abdel Karim Al Bashir, PhD **

Abstract:
North African countries are the leading incubators of Islamic finance,
despite their humble enlargement and the decline of this industry in
many countries. This study aims to track and assess the situation of the
Islamic finance industry in this region of the world to identify the
reasons for the decline, focusing on the reality of Islamic finance origins
and evolution, considering the available opportunities and the
challenges that increase the need to rethink the existing experience of
the Islamic finance industry in some of those countries. Two scientific
methodological approaches applied to enrich this study are descriptive
analytical and historical approaches to address the situation of different
components of the Islamic financial industry, including Islamic banks,
Islamic Sukuk, and Takaful insurance, in terms of size, status,
opportunities, and challenges. This study will scientifically contribute to
understanding this neglecting area of research by exploring the
accurate situation of the African Islamic financial industry, other than a
considerable literature that grew up around the topic in different ways
that often contradict the scientific methodologies. The study provided a
situation assessment and concluded that many opportunities are
available for Islamic finance in those countries as well as challenges of
the legislation Acts, and governing laws. and recommended further
investigation of the declining reasons.

Keywords: North African countries, Africa, opportunities and challenges,

Islamic finance
*
This Paper Funded By: The Deanship of Scientific Research at King Abdul-Aziz
University,Grant NoG:714-121-1441.
**
Associate Professor of, Islamic Economics and Finance, Islamic Economics Institute, King
Abdulaziz University, Kingdom of Saudi Arabia. [email protected]
84 Journal of Islamic Banking and Finance July - Sept 2022

JEL Classification: G21.G22.G23

KAUJIE Classification: G2.G3.G41.G42

Introduction
Main and sub-title addressed this study, to organize and explore the status of
Islamic finance initiatives and challenges facing, in six North African countries, Egypt,
Sudan, Morocco, Algeria, Tunisia, and Libya. The selection criteria of these specific
countries; backs to their many common characteristics, including a variety of
geographical characteristics, and other factors based on historical Islamic banking, which
has early emerged in some of these countries, as well as religions and socio cultural
factors.

Research Problem
The problem of the humble growth of the study originates from the Islamic
financial industry in North African countries compared to Asian countries, despite the
early beginnings of Islamic banking in North African countries, such as Egypt, where
reports indicate that the Islamic finance share of the Egyptian market reached 5.3% by
the end of March 2021 of the total market share. Also, the retreat of Sudanese experience
in Islamic finance occurred when banks had to select working under an Islamic or
traditional system after the political change in December 2019. While In Algeria, the
appeal of establishing an Islamic bank began in 1928 but didn’t provide a license.
Therefore, the contribution of Islamic banks there does not exceed 3% of the total
financial sector till now. Whilst in 1981 The invitation to establish Islamic banks in
Morocco, unfortunately, authorities didn't provide a license to any Islamic financial
institutions. In Tunisian Islamic banking reached 5% of the total financial sector. In
Libya, Islamic banking began in 1985 with the establishment of Al Baraka Islamic Bank,
but the shift toward Islamic banking declined due to political instability.
Over time, the roots of this problem embedded accordingly the considerable growth
of traditional banks and financial institutions acquired these countries' financial markets,
as well as the fact that "legal regulations of Islamic finance remain unchanged", which
led to losses of many opportunities and increases of challenges for Islamic finance.
Therefore, this study is prepared to discover these available opportunities and challenges
facing the Islamic finance industry.
The main topic of this study focused on is the situation of the Islamic financial
industry in the specified North African countries mentioned earlier, this will be addressed
by the following questions:
• How did Islamic finance start and develop in these North African
countries?
• What is the percentage of Islamic finance in these countries?
• What are the opportunities and challenges facing Islamic finance
instructions there?
 Islamic Finance in Africa: Challenges and Opportunities ..... 85

Research Objectives and Methodology

This study attempts to determine and assess the situation of Islamic finance in six
countries in North Africa; to highlight the significant opportunities and challenges facing
this industry. For that purpose, two scientific approaches have been used in this study,
they are Analytical descriptive, and the Historical method, focusing on specific aspects of
Islamic finance Banking, such as Sukuk, and Takaful insurance.

Literature review
The scientific contribution is significant due to the willingness of the author to
benefit various parties. Most scientific studies documented Islamic finance in North
Africa, with numerous articles and scattered reports. has different methodologies, and
most attention has been directed to Islamic finance in the north African countries as part
of the broader scope of Islamic finance in the continent.
There have been a few researchers who have conducted historical studies in this
field including:
1. Kunduz and Qaloul study. “Islamic financial industry in the Maghreb countries:
Reality, challenges, and prospects ". he addressed the reality of the Islamic
financial industry in several Arab Maghreb countries such as Algeria, Morocco,
Libya, and Mauritania; he focused on reviewing all types of Islamic finance
components, including Islamic banks, Takaful insurance companies, and Islamic
Sukuk. The study concluded that the features of Islamic finance are not clear in
Libya and Mauritania because of the prevailing instability there. (Kunduz,2020)
2- Dubai Chamber study, " growth trends, challenges and proposed measures to
strengthen the Islamic Economy sector in Sub-Saharan Africa " focused on the
status of Islamic finance in many African markets, such as the east, south, and west
of Africa. where 21 African countries opened their doors to the Islamic financial
industry, whereas some Western countries did not show a keen interest in this type
of financial activity. (Dubai Chamber, 2015)
3- Al-Aqeed article, " Islamic Finance in Africa future vision." Several aspects were
discussed, including the internal dynamics of the Islamic market forces and the
demographic composition of the continent, particularly the high rate of youth. As
well as the religious factor, and Islamic values in shaping the lifestyle and business
practices. (Alaqeed, 2014)
4- Kuwait finance house KFH Report titled "38 Islamic Financial and Banking
Institutions working in Africa" The report evaluated the reality of the financial
services industry in Africa and stated that the growth opportunities for this industry
are promising and varied, particularly in North Africa countries.(Kuwait Finance
House, 2012)

Summary of Literature Review

The overall objectives of the study are consistent with the documentation of Islamic
finance experience in that region and vary with time and location, as well as a scientific
86 Journal of Islamic Banking and Finance July - Sept 2022

methodology. The Literature review also didn't conduct deepening studies in North
Africa region, other than Kunduz and Qallul 2020, which agreed with this study in many
ways like the conceptual framework, general objective, methodological approach, and
spatial boundaries that focused on the Maghreb, whereas the current study covered a
different geographic scope that Except for Mauritania, this category includes Egypt and
Sudan. As a result, this study contributes significantly to scientific knowledge.

Islamic Finance in North Africa Six Countries.

The North African countries included in this study are Egypt, Sudan, Algeria,
Tunisia, Morocco, and Libya. This region of the continent constitutes one of the world's
largest geographical areas, and Numerous studies identified some of its countries as
incubators for the Islamic finance industry, such as Egypt being the first country to
establish an Islamic bank in 1963.

1- The Islamic Finance in Egypt: Historical Background.

Despite the early beginnings of Islamic banking in Egypt, the share of Islamic
finance does not match its leadership in this field, as the share of Islamic banking
transactions in 2019 just exceeded 5.5% of the total market. (Egyptian Islamic Finance
Association, 2020, p. 6).
In 1963, Al-Najjar established MitGhamr Savings Bank, where peasants constituted
86% of the population. (Al-Najjar, 1994, p. 47), and the investors were enthusiastic about
the successful implementation of the new financial model. This experiment lasted only
four years, although it was successful until the government merged savings banks with
the National Bank of Egypt in 1967.
Then in 1971, Nasser Social Bank was established and began after a year as the
first bank to provide free-banking interest classified as a state-owned social bank.
Unfortunately, it was canceled of political orientations. A while later, Saudi Prince
Mohammed Al-Faisal suggested to Egyptian authorities the idea of establishing an
Islamic bank in Egypt and there are agreed to open the first Islamic bank, the Faisal
Islamic Bank of Egypt.

1/1. The current situation of Islamic finance in Egypt

According to the published statistics, the historical establishing trails of Islamic
banks in Egypt did not attract the attention of financial institutions, as confirmed by the
report of the Egyptian Islamic Finance Association indicating that the number of Islamic
banks offering Islamic products at these study time, does not exceed 14 banks. Three of
them are fully Islamic: Faisal Islamic Bank, Al Baraka Bank Egypt, and Abu Dhabi
Islamic Bank -Egypt (ADIB-Egypt) in addition to 11 banks that provide a variety of
Islamic products. With 238 branches, representing 6.4% of the total branches. (Egyptian
Islamic Finance Association, 2020, p. 6). The same report also showed that the volume
of Islamic transactions reached 378 billion EGP by the end of March 2021,
approximately 5.3% of the total banking market, within a 47 billion EGP increase over
the year (2020) and a 14.3% growth rate.
 Islamic Finance in Africa: Challenges and Opportunities ..... 87

Figure (1) Share of Islamic Banking in Egypt 2020-2021 (Billions of EGP)

Source: prepared according to reports of the Egyptian Islamic Finance Association.

This report ranked Faisal Islamic Bank of Egypt first with 119 billion EGP total
assets, representing 31.4% of the market, while Banque Misr (BM) ranked second, in
Islamic products volume reached 78.7 billion EGP, representing 20.8% of the market,
and the third was Abu Dhabi Islamic Bank -Egypt (ADIB-Egypt) with 76.8 billion
EGP or 20.8% transaction volume. flowed by Al-Baraka Bank-Egypt with a volume of
76.5 billion EGP, about 20.2% of the total Islamic trade in the Egyptian market (Egyptian
Islamic Finance Association, 2020, p. 6)
1.2 Islamic Sukuk market in Egypt
Despite its early consideration of establishing the Islamic Sukuk market in Egypt, it
is facing difficulties with Sukuk governing laws adopting, as has been the case for many
years. However, recent improvements were observed when the Egyptian parliament and
financial authorities considered merging the Sukuk issuance legislation, within the
general framework of the 2018financial market act. Paving the way to the final release of
the executive regulations of the Sukuk.
several practices and procedures have already been approved to regulate Sukuk
issuance: rather than Sukuk companies, such as Sarwa, the first licensed Sukuk issuer in
the Egyptian market
(Financial Supervisory Authority, 2019) cooperates with Misr Capital Company,
‘the investment arm of Banque Misr’with a total value of 2.5 billion EGP, in the Sukuk
Modaraba formula, to finance the activities of the Group (Misr capital 2020). which is
considered the first issue compiled with Modaraba formula for nonbank financial
institutions.
The Financial Supervisory Authority issued a Sukuk Guide based on the
amendment of the Capital Market Act of 2018, to amend executive regulations including
provisions related to Sukuk, accordingly in 2020, Sharia-compliant Sukuk Ijara worth 6.2
billion EGP was issued, and Sukuks Modaraba worth 6.2 billion EGP (Egyptian Islamic
Finance Association, 2020, p. 6)
88 Journal of Islamic Banking and Finance July - Sept 2022

1/3/- Takaful Insurance Market in Egypt

In addition to the African Takaful Reinsurance Company, ten Takaful insurance
companies are working in the Egyptian market now including four companies offering
Takaful insurance and six providing general Takaful insurance, approximately 32.2% of
the 31 total commercial insurance companies. ( Financial Supervisory Authority,
2020, p. 20). While there were 25 insurance of public property companies, by the end of
March 2021, and 16 companies owned by the private sector. (Financial Supervisory
Authority, 2020, p.23) and 10 Takaful insurance companies, except for the African
Retakaful Company.
1/4/- Islamic finance in Egypt opportunities and challenges
First: Opportunities
There are numerous indicators of opportunities that can be utilized to improve the
Islamic finance situation in Egypt, such as the supportive desire of Al-Azhar University
toward Islamic finance, by launching Saleh Kamel Center for Islamic Economics. As
well as other organizations concerned with the Islamic financial industry. In addition to
the successful Sukuk issuance experiment, there are many business and economics
faculties in the Egyptian universities, which might help by introducing Islamic finance
courses into their syllabuses to encourage personnel to study Islamic finance and qualify
them to lead the Islamic banking business.
Besides the Egyptian society segment that doesn't prefer traditional banks, could
serve the Islamic banks customers orientation. As well as the Egyptian governmental
tendency for the Sovereign Sukuk Issuance may be a suitable entry for using Islamic
bonds on the Egyptian market, the success of such initiatives may increase trust in
Islamic finance tools, and encourage authorities to grant more licenses for Islamic
institutions.
All these opportunities are enforced by the power of the Egyptian economy; which
ranked in 2020 as the second highest positive growth rate in the world, reaching 3.6 %
(Arab Monetary Fund, 2021, p. 2).

Second: Challenges
Despite Egypt's superiority in the field of Islamic banking, the actual size of the
Islamic market does not reflect that position. Published statistics explained the limited
infrastructure allocated for that industry as a poor financial authority enthusiasm. As
much as the political complications have a significant impact on several aspects, such as
missing laws and regulations governing Islamic banking. And lack of qualified
employees in this financial industry.
Even though many reinsurance companies have opened retakaful branches, there
are still many obstacles facing Takaful insurance, including the limited retakaful
Companies. In addition, the number of Takaful investment channels is declining due to
the Insurance Control Authority mandatory funding rules, committing that insured and
shareholders revenues must be invested only according to Islamic finance formulas.
(Zia,2018 p.10)
 Islamic Finance in Africa: Challenges and Opportunities ..... 89

Finally, when it comes to the challenges facing Sukuk; There are many regulatory
aspects, in particular with the governing laws. In addition to unavailable specialized
information systems, manage Sukuk issuance processes and exchange procedures.
2. Islamic Finance in Sudan
There was an early initiative for Islamic finance in Sudan back to 1926, according
to Mohamed Hashim Awad research. indicated that Mr. Abdul Rahman Al-Mahdi agreed
with Kinto Mokhlison a decreasing partnership formula to provide funding for Al Jazeera
Agricultural Project. ( Awad, 2002, p. 200) then shortly Al-Mahdi acquired his partner
shares and owned the entire project and continued providing farmers with funds in the
same way (Al-Bashir, 2017, p. 33), This experience endorsed the government interest in
the Islamic banking industry during the President al-Bashir period when the banking
system transferred to the Islamic system.
Development of Islamic Banking in Sudan
Islamic banking in Sudan passed through four stages: the first was in 1978 when
authorities there licensed some Islamic banks to work, and the second stage main feature
was the cancellation of usurious interest in banks, when the Central Bank of Sudan
decided in December 1983 to forbid usury, and the third one started after the political
change in 1989, by the issuance of Banking Act in 1991, and the mortgaged funds selling
in exchange for financing Law. flowed by the forming of the highest Shariah Board for
Banking System and Financial Institutions in 1992, in addition to the promulgation of the
Khartoum Stock Exchange Act, and Bank Deposit Guarantee Fund Act (Al-Hassan,
2004).Also, regarding the administrative and financial policies, in 1994 authorities
aligned Sudanese banks with the Basel Committee's capital adequacy requirements(Al-
Hassan, 2004. p. 24). The last of these stages was in December 2019 after the recent
political change, which is still in progress, but its early orientation trends appeared when
the current government adopted a dual banking system (Islamic and traditional) and gave
banks the right of choice.(Central Bank of Sudan).
Transforming Toward Islamic Banking's Main Features
Each one of the stages addressed earlier has unique characteristics, as in the first
stage, the government allowed six banks to Initiate their activities, such as Faisal Islamic
Bank (SUDAN), Tadamon Islamic bank, Sudanese Islamic Bank, and Albaraka bank
Sudan. The striking feature of the second stage was the prohibition of usury transactions
and merging the investment formulas into macroeconomic policies, and the development
of contract models & procedures to suit various banking activities, this stage lasted until
April 1985. Then the government let the banks operate according to traditional or Islamic
formulas, in one of the most difficult periods in the history of the Sudanese banking
system, which faced many violations. (Al-Bashir, 2001). The third stage began in 1989,
characterized by deep Islamization activities in the central bank, commercial, and
specialized banks, in addition to the activities of insurance and finance companies,
flowed laws and policies amended to forbid usury and instruction on creating an
independent Shariah Supervisory Authority in each financial institution. This stage
continued to 2005, when the Peace Agreement between the Government and their
opposition made magnificent changes in the banking system lows, as follows:
90 Journal of Islamic Banking and Finance July - Sept 2022

1. Applied a traditional banking system in the south and an Islamic system

in the north as was existing.
2. Establishing a branch for the Central Bank of Sudan in the South.
3. The Central Bank of Sudan issued a mandatory monetary policy to the
stakeholder.
4. The Central Bank of Sudan has fully independent in the formulating and
implementing of the monetary policy.
5. It is the central bank’s responsibility to maintain the banking system
efficiently and currency issues (Central Bank of Sudan).
Following this Convention; A branch of the Central Bank opened in the South
managed by the deputy governor. After South Sudan split, this branch became the central
bank of the new country, and the agreements were reviewed to amend again according to
the new situation. And the central bank act in the north was also amended in 2012 to
restore the previous situation before the peace agreement.
Regarding the distinctive features of the fourth stage, the current transitional
government decided to implement a dual banking system that combines Islamic and
traditional systems, allowing Islamic banks to choose their system. (Central Bank of
Sudan). This transition was approved at a joint meeting between the two councils of
sovereignty and ministers within Acts revisions in 2021.
2/3. Sudanese Takaful Insurance Market
Insurance companies were licensed to offer their products from an Islamic
perspective, after the issue of insurance supervision practices law in 1992, when the
practices against Sharia nullified. and the establishment of The General Authority for
Insurance practices supervision in 1992, to transform the commercial insurance market
pattern toward a cooperative model.
The Islamic Insurance Company, owned by Faisal Islamic Bank (SUDAN), was
one of the regional pioneer insurance companies established in January 1979 as a limited
liability private company, under exceptional laws of that time. (Islamic Insurance
Company Limited), this company faced a great stumble of missing suitable legislation for
their business practices; because the insurance law of that time was the Sudanese
Companies Act, derived from British law. Therefore, the company has to register as a
Shareholding company with two main accounts; one for capital investment, and another
independent for the insurance premium funds investment. (Ahmad, 1997, p. 43)
After the Islamic insurance company was established, banks were encouraged to
open many companies. Today14 insurance companies are working in Sudan.
In order to support takaful insurance activities, Sudanese financial authorities are
trying to build an appropriate environment for the insurance industry, through legislation
developing the establishment contracts reviewing, and evaluation of insurance
companies' statutes to remove regularization conflict.(Ahmad, 1997. p. 92).
 Islamic Finance in Africa: Challenges and Opportunities ..... 91

Islamic Sukuk Market in Sudan

In 1995, the Sudanese government released its first Islamic Sukuk, which was
considered a pioneering experience. As such Sukuk Act was the first step in developing
alternatives to usurious bonds used in liquidity management and government projects.
This was done by cooperating with the Central Bank and the Finance Ministry to
find legally Shariah-compatible financial tools. Then Shamam Certificates issued in June
1998 (Al-Hassan, 2004, p. 13) flowed by Shamam Certificates in May 1999, released by
Sudan Financial Services Company, which initiated to provide the Central Bank with a
liquidity control mechanism, before becoming a state financing instrument (Al-Hassan,
2004, p. 14)
According to Central Bank reports, this Sukuk successfully Overcame many
difficulties, including its high issuance cost for the government; in some cases, its profit
may reach 30% per year, as well as the complicated exchange procedures. Despite these
obstacles, the Central Bank expanded the issuance of different types of Sukuk, such as
second-generation Islamic stocks like Sukuk Ijaraha, Sukuk development, and short-term
salam.

Islamic Finance in Sudan Opportunities and Challenges

First: Opportunities
The Sudanese experience with Islamic finance was exceptional; because the
government's willingness to Islamization the entire financial sector made this experience
unique, as well as the creation of takaful insurance companies and the Sukuk market.
Despite the recent decline in this experience, it is easy to restore that trend as soon
as the economy recovers, and sanctions lifted to improve the investment climate, which
may attract new investors, and improve the working environment, which represents
perfect opportunities for Islamic finance.
Second: Challenges
The Central Bank of Sudan has been working to reform the banking system since
the 1970s and faced many obstacles, including imbalances in the economic environment.
Therefore In 1998, the Central Bank prepared a bank reform program during 1999-2002,
as part of a comprehensive economic reform program.
Despite the success of this program, the banking sector still faces many other
challenges, caused by the economic update, requiring creation of large financial bodies
capable of competence locally and regional. (Al-Hassan, 2004, p.7); increases the
necessity of merging banks to raise their financial capabilities and technology update
challenges for those banks. As a result of banks' Sharia supervisory boards incapability in
this technical field, may restrict the Central Bank efforts in the Integration reform
programs, within the international banking industry (Mustafa 2008, p. 12).
Furthermore, there are challenges facing the Islamic Sukuk market, as the
Sudanese Sukuk experience depended on the forms of Musharakah(Shihama
Certificates), Mudarabah (SarhCertificates), and investment funds. The Sudanese
92 Journal of Islamic Banking and Finance July - Sept 2022

experiment is characterized by small issuance volumes approximately 180-200 million

US dollars, compared to the volume of Sukuk issuances in many other countries.
((Mustafa 2008, p. 12).), addition to the attempts of the government to introduce a new
type of Sukuk called a collective foreign currency investment certificate.
In addition, Sukuk financing laws did not cover Sukuk asset operations related to
Special Purpose Vehicle. (SPV) adaptation and the actual asset sale investment
regulations, as well as aspects of managing surpluses rather than liquidity deficits in the
case of issuer retention.
Furthermore, the status of certified assets issued (Shihamah), as well as the status
of funded projects (Sarh), is not reported, as this information helps predict income as well
as determine the appropriate exit point when the performance is expected to be impaired;
Moreover, this will improve issuance organizational efficiency and combine the functions
of accounting, auditing and asset evaluation under the General Audit Bureau.
This may have an impact on the credibility of the issuance structure if it is reviewed
independently or individually. ((Mustafa 2008, p. 12))
3/ Islamic Finance in Algiers.
The first attempt of Algeria in the Islamic banking was in 1928 when the calls for
establishing an Islamic bank raised. flowed by law preparation, as its initial capital was
collected by some Algerian merchants, however, this initiative was aborted by the French
authorities. (Bel-Abbas, 2014, p. 5)
Despite early thinking about Islamic finance when compared with other Maghreb
countries, Algeria lags in the Islamic banking industry, affected by its long history of
traditional systems, until the Act of money and Loan issued in 1990 which transformed
the financial system. and distinguished banks from financial institutions and handed the
Central Bank extensive powers to manage money and credit (Kunduz, 2020, p. 27) that
allowed domestic and international banks to grow, resulting in the establishment of new
banks. Especially the Islamic ones, which contributed to that growth.
Al Baraka Algeria is one of the first Islamic banks. Established on 20 May 1991
after the issuance of the Monetary and Loan Act No 10/90. in the form of a partnership
with BADR Banque Bank, and Al Baraka Banking Group of Bahrain, (Al Baraka Bank,
Algeria, 2022). The second Islamic bank opened was Alsalam bank Algeria on 20
October 2008, and two other banks opened windows for Islamic services: Gulf Bank
Algeria and Trust bank Algeria.
After nearly ten years of the Monetary and Loan Act, a new decree repealed it and
incorporated many regulatory directions for banking, and regulation on Musharakah
finance, as the first system, for Islamic banking was issued in November 2019.and one of
the limitations of the new law is that banks willing to offer Islamic products must explain
the difference between these products and other banks' products. However, this Act did
not last as long as it was amended by new legislation in March 2020.
In general, the contribution of Islamic banks in Algeria does not exceed 3% of the
traditional banks at the time of the study. Due to many factors, including their
 Islamic Finance in Africa: Challenges and Opportunities ..... 93

specialization Being subjected to traditional banking laws when their products are
different, rather than liquidity obtaining difficulty whenever needed, which forces them
to deal with traditional banks, as well as the lack of qualified employees in Islamic
finance, which led to the enlargement constrain of Islamic branches in many Algerian
regions.
Despite these hurdles, there are improvement signs as the financial authorities
established the “National Shariah Authority for Islamic Finance Industry” to monitor and
approve financial products according to Shariah, additionally the issuance of the Islamic
banking regulations Act in December 2018, which includes Musharakah practices rules.
also, the issuance of the Islamic Products Act for Murabaha, Mudarabah, and others, in
March 2020. Kunduz and gAloul p. 42)
Algeria's Takaful Insurance Market
Algerian Takaful insurance market is small when compared to their neighboring
markets and has the same beginning as the Islamic banks. After nearly a half-century of
independence, Algeria's insurance sector is still suffering from topical imbalances, with
GDP contribution below 1% by the end of 2018. and Algerian household insurance
expenditure doesn't exceed 3250 DZD (Tawfiq, 2021, p.). property and casualty
insurance percentages are higher compared to personal insurance, with a significant
increase in compulsory insurance over voluntary. Due to the weakness of the insurance
density indicators.
At the end of 2015, there were 26 working insurance companies in Algeria,
including 4 public and 7 private companies, one reinsurance company, two supporting
institutions, and two specialized companies. Upon Insurance Law No. 04/06 issued on
February 20, the country sought to improve and support the insurance sector by allowing
banks to distribute some insurance products, as well as many takaful insurance
companies.
In general, the contribution of insurance in the financial sector is small, as the
statistics of the Algerian insurance market, revealed the proceeds of direct premiums and
reinsurance grew by 6.1% at the end of 2019 to reach 152.1 billion Algerian dinars (1.271
billion US dollars), from 143.3 billion Algerian dinars (1.2 billion dollars), with an
increase of 8.8 billion Algerian dinars.
To develop the insurance market, the government entrusted the insurance market
organization to the National Insurance Council. aimed to improve the working
environment and ensure those companies solvency and participation of other state
institutions in legislation drafting and setting risk regulatory standards to encourage
investment(Abu Al-Fadl, 2020).
Islamic Sukuk Market in Algeria
There is weak growth in the Algerian Islamic banking and takaful insurance
market, as well as the Sukuk market, and there have been attempts to draft legislation that
organizes the Islamic Sukuk practices but needed some time to complete. This effort
began when the Algerian stock market formed a joint venture with the private companies,
some Algerian banks such as al-Salam Bank, and National Fund for Savings and Reserve,
to issue Islamic Sukuk.
94 Journal of Islamic Banking and Finance July - Sept 2022

3-3. Islamic Finance in Algeria Opportunities and Challenges

First: Opportunities
There are numerous opportunities for Islamic finance in Algeria, including the
interests of the government in Islamic financial products, which appeared in the taxation
exemption for products such as real estate( Hagar, 2019, p.259) which encouraged many
banks such as Al Baraka Bank and al Arabi Bank to offer these products. Which resulted
in the improvement of Islamic banking expansion opportunities in the context of financial
liberalization policy, which required improving the banking sector in many indicators,
including developing Islamic banking institutions expansion.
Undoubtedly, these opportunities may be a chance for Islamic finance to expand its
activities and branches ( Tapfsast, 2018, p. 350), as eleven banks licensed by the higher
Islamic Council to work per Sharia and obtain the approval of the National Islamic Sharia
authority for Islamic Financial. Among other Opportunities of teaching Islamic
economics programs in Algerian universities, such as Constantin University, Batna
University “El hadj El khedr” as well as other universities, can provide the banking sector
with Islamic finance experts.
Second: Challenges
Algerian experience in the Islamic finance field is still in its early stages. Thus, it
would face many legislative challenges, rather than reviewing Islamic financial
transaction formulas by the Sharia Supervisory Board, that need to be formed in each
bank. The government has entrusted the contracts approval to the National Fatwa
Authority, which had difficulties in this manner; confirmed when banks offered Islamic
real-estate finance, the owner didn't get a subscription contract instead of a property
contract, leading banks to stop this type of finance. Relative to the high margin of Islamic
finance formulas compared to traditional ones, this poses a new obstacle for financiers in
a society trying to understand the value of products in the Islamic banking system.
4: Islamic Finance in Tunisia
Tunisia started Islamic finance after Egypt and Sudan but performed better than
Algeria and Morocco. while Islamic financial assets don't exceed 5% of the total banking
sector according to the report of Al Zaytoonah Bank issued in 2019 (Al ZaytoonahBank,
2019, p. 13).
The Tunisian Al-Baraka Bank was the first launcher of Islamic finance in 1983,
which was named Tunisian-Saudi Finance House, changed in 2009. ( Al Baraka
Bank Tunisia, 2022). flowed by the establishment of another three banks including
Tunisian Saudi Bank in 1981, which was named "STOSID Bank", the Bank of Tunisia
and the Emirates (UAE)for investment, in 1982, and Banque Zitounain October 2009,
and started working in May 2010. These three banks together had 219 branches out of a
total of 964 branches, representing 22.7%. with estimated assets between 25% and 40%
of the total banks' assets. (Union of Arab banks, p1)
Al Baraka Bank Tunisia ranks first among all Islamic banks, with 3.598 million US
dollars total assets by the end of 2020, representing a 12% increase over the previous
 Islamic Finance in Africa: Challenges and Opportunities ..... 95

year's assets of 6.533 million US dollars. This growth is the result of increasing the
number of accounts opened. While Banque Zitouna, ranked as the second largest
Tunisian bank, adopted the Islamic system and provided financial products, which was
acquired by the Qatar-based Majida Group in Tunisia.
4/1- The Tunisian Central Bank's Interest in Islamic Banking
The Islamic banking systems attracted the Central Bank of Tunisia to draft Islamic
banking regulating laws, including allowing banks to operate without Islamic sharia
violations, and entrusted this to the Fatwa Council. also, assigned Islamic Financial
Sharia Control Authority, for each bank formed by its general assembly, and define its
monitoring functions for the activity of those banks and other financial institutions
to ensure Sharia compliance.
Therefore, in May 2010, the Tunisian parliament approved a draft law allowing the
Central Bank to exert its supervisory prerogatives over banking and financial institutions,
as well as allowing banks to form Sharia Supervisory Boards.
4/2. The Takaful Insurance Market in Tunisia
The Tunisian insurance industry comprises 22 resident institutions, divided into 20
anonymous companies and two cooperative companies, which are divided according to
specialty, as follows: 10 general insurance companies, 7 life insurance, 3 takaful
insurance institutions, one institution specialist in export and loan insurance, and one
institution specialist in reinsurance. (General Insurance Authority, 2020, p. 96)
Takaful Insurance Institutions have successfully increased their share of total sector
transactions to 5.1% in 2020. Compared to 4.9% in 2019 (General Insurance Authority,
2020p.109), the Car Insurance Branch took the lead with more than 57.7 %, compared to
58.6 % in 2019, and 52.1 % in 2017. The share of life insurance and funds in 2020 was
17.7 %. Following a drop of 17.3 % in the previous year, the same applies to the health
Insurance Branch's share, which reached 7.3% in 2020 compared to 6.5% in 2019, and
the decline in transportation insurance, which fell to 3.3% in 2020 compared to 3.8% in
2019, while natural hazards & fire Insurance reached 4.1% in 2020. (General Insurance
Authority, 2020., p. 109).

Figure (2) distribution of Takaful Insurance institutions by types of Insurance

in 2020

Source: General Authority for Insurance; the Insurance sector Annual Report 2020, p110.
96 Journal of Islamic Banking and Finance July - Sept 2022

As part of the general insurance authority support, they enacted and published
legislation, that aims to organize takaful insurance practices Banque Zitouna issued its
first bonds on the Tunisian stock market, of 45 million TND, exceeding the 40 million
TND target.

The Islamic Sukuk market in Tunisia

The Sukuk market in Tunisia has just been establishedand is still in the legislative
stage. For that, the country enacted many laws to regulate Islamic banking, such as laws
that prevent double taxation, such as the Islamic Investment funds Act of 2013, the
Takaful Insurance Companies Act of 2014, and the Islamic banking practice Act of 2016.
There are several reasons for stumbling, including lack of political will, the weak
institutional capacity of Sukuk issuance, and the absence of legislative oversight and
monitoring. (Al-Nouri, 2020)

4- Islamic finance in Tunisia Opportunities and challenges

First: Opportunities
Although Tunisia's legislative system for Islamic financial institutions isn’t
completed yet, there is a government tangible tendency toward Islamic banking and
stimulating traditional financial institutions to open Islamic windows, in addition to
supporting the Sukuk market. which may represent an opportunity for Islamic finance,
combined with the population's desire to rely on Islamic financial institutions. This
presents a perfect situation for the Islamic finance sector to expand within a few
years(Thomson Reuters).
Second: Challenges
Tunisian Islamic finance sector experiencing numerous challenges. including the
obscurity around the Islamic financial banking model for many people; due to the lack of
awareness about its products, as well as the lack of a regulatory system governing this
type of finance. In addition to the absence of strategic visions, for the role of Islamic
financial institutions in the Tunisian financial sector, and missing coordination between
stakeholders in front of domestic and global challenges (Arab Monetary Fund, 2021, P. 8)

5: Islamic Finance in Morocco

The calls for establishing Islamic banks in Morocco back to 1981, when an article
in Dawa Al-Haq magazine titled "the need for establishing an Islamic bank in Morocco"
was published. as a sign of Moroccan scholars' interest in Islamic finance, reflected in
their participation in the first World Conference for Islamic Economics in Mecca in 1976.
Besides their attendance at the Second Islamic Economics Conference in Pakistan in
1983, (Dawa Al-Haq, 1982, P 222).
On the other hand, practically in 1985, Dar Al-Mal Al-Islami and Dalla Al-Baraka
group asked Moroccan authorities to license an Islamic bank, but the authorities did not
respond to their request. ( Lahlou, 2017, P. 42). Moreover, Moroccan professors and
professionals organized the Moroccan Society for Studies and Research in 1987 in order
to present Islamic economics to the public.
 Islamic Finance in Africa: Challenges and Opportunities ..... 97

Al Taqwa Bank based in Nassau-Bahamas, also attempted to open an Islamic

branch in Tangiers' free zone in 1988, political reasons, unfortunately, prevented this
from being accomplished (Lahlou, p. 42).
A report recently released by Bank Al-Maghrib (central bank) stated that 11
requests for Islamic banking licenses were received from many banks. However, they
were not approved by the financial authorities on the pretext that the Moroccan market
cannot accommodate new actors.
Despite this reluctance, as a result of Bank Al-Maghrib's recommendation, some
banks began marketing Islamic financial products. Like Musharakah, Ijara, and
Murabaha, which were allowed to be offered by traditional banks in 2010 (Union of Arab
banks,2018, p1).
In November 2014, the Moroccan Parliament passed a draft law on Tasharuk banks
(Islamic). Then after three years, Bank Al-Maghrib allowed these banks to commence
operations and allowed traditional ones to offer limited Islamic products. also licensed
three other banks to offer Islamic products Union of Arab banks., p.1).
According to Crean mention, allowing Islamic financial products was motivated by
two factors: first, Morocco's economic weight in the region and the government's
ambition to capitalize on the geographic location. by developing "alternative" financial
practices that make Casablanca a regional financial center. The second factor was the
desire of the large Moroccan population segment to transact with Islamic financial
institutions.
5/1- Current Status of Tasharuk Banks in Morocco
During the time of this study, five Tasharuk (Islamic) banks are working in
Morocco they are Omnia Bank, which is the first Tasharuk bank, Al-Safa Bank, Finance
and Development Bank, Al-Yisar Bank, and Al-Akhdar Bank (Union of Arab banks,
2018, p. 7). These banks work under the directives of several bodies, such as the Bank
of Morocco, the supreme Scientific Council, Supervisory Authority of Insurance and
Social Welfare, and the Moroccan capital Market Authority.
Despite the late start of Tasharuk banks in Morocco, the Moroccan authorities
recently became more assiduous to these banks, reflected in the establishment of the
Shariah Committee for Tasharuk (Islamic) Finance, in addition to the legislative support
of the Moroccan parliament which approved the Act of Tasharuk banks. include five
Islamic banking products; they are: Ijara, Murabaha, Mudarabah, Musharakah, and Salm.
((Union of Arab banks, 2018, p. 7).
According to the Bank of Morocco's 2019 annual report, the Tasharuk banking
sector has made progress, as its outstanding loans reached 6.4 billion MAD at the end of
2018. This performance is a result of launching five banks and three Tasharuk windows.
5/2- Takaful Insurance Market in Morocco
At the end of 2016, there were 21 active companies in the Moroccan insurance
market, including 4 takaful companies and 17 commercial companies including 7 for
98 Journal of Islamic Banking and Finance July - Sept 2022

various types of insurance, 4 companies specializing in nonlife insurance, 2 companies

specialized in life insurance, and 4 insurance companies that provide ambulance service.
Two companies provide the exclusive loans securing, and two reinsurance companies.
Indicators of Moroccan insurance sector improvement emerged, based on the report of
the Insurance and the Social Reserve Council, the transaction volume of insurance
premiums issued by insurance and reinsurance companies increased to reach 36.4
billion MAD (4 billion US dollars) at the end of August 2021, by 13% increase over the
same period in 2020. (Moroccan capital Market.4) Despite this progress, the Takaful
insurance market faces a variety of challenges, including the absence of insurance
legislation, duplication and intervention between sharia and traditional insurance
regulations, and inadequate sharia control supervisory systems. Moreover, Islamic
products are more expensive than traditional products due to 20% taxation.
5/3- Islamic Sukuk Market in Morocco
Morocco's Sukuk market is still lagging and has numerous legislative issues.
Perhaps signs of sovereign Sukuk issuance will lead to regulating the Sukuk market,
thereby adopting a legal framework to regulate issuance.
5/4- Opportunities and Challenges Facing Islamic Finance in Morocco
Despite the late emergence of Islamic banking in Morocco, the situation
has recently begun to change, and many opportunities are looming, as well as many
challenges facing Islamic finance.

First: Opportunities
The Moroccan banking sector is promising, with 88 financial and commercial
institutions at the time of study, divided into traditional and free banks, 33 financial
companies and five Islamic banks, with 6,309 branches at the end of June 2017. ((Union
of Arab banks, 2018 p. 1).
According to Bank Al-Maghrib statistics, there was a demand for banking services
(Union of Arab banks, 2018 p. 1ibid.), as the number of personal bank accounts in
Morocco increased to 4% at the end of 2010, ranking first in North Africa. and the
number of these accounts reached 24 million, equivalent to 69% of the total population,
compared to 57% in 2012.
There is no doubt that this expansion will increase competition and improve the
working environment (Union of Arab banks, 2018) and promote the development of
Islamic finance institutions. Also, expansion opportunities of Islamic financing in
Morocco can benefit from the spread of Moroccan banking groups in Africa, Europe, and
the other continents, as Moroccan banks had 41 active companies in the African continent
in 2016, in addition to 1400 banking agencies. (Union of Arab banks, 2018, p. 2)
These opportunities are bolstered further by legislative support, as well as recent
financial authorities' interest in establishing functional economics under the sponsorship
of Bank Al-Maghrib, and the creation of a higher Authority of Scientists directed by King
Mohammed VI to monitor the validity of transactions at these banks.
 Islamic Finance in Africa: Challenges and Opportunities ..... 99

The Moroccan government has worked hard to consolidate Islamic banking,

emphasizing the formation of Shariah regulations. Furthermore, Bank Al-Maghrib has
reviewed and updated its monetary policy. All these efforts launched to meet the
requirements of Tasharuk (Islamic) banks demonstrate the country's commitment to the
continuity of Tasharuk (Islamic) banks.
These efforts provided an incentive for many traditional banks to engage in Islamic
banking when Bank Al-Maghrib announced that 11 requests were received from banking
institutions to license for opening Islamic windows after the French SocieteGenerale and
the Bank of Morocco were allowed to open Islamic windows. In addition to the
Moroccan Bank for Trade and Industry, which has begun to practice Islamic banking and
opened Islamic windows. Bank Al-Maghrib has also completed the framework of
Tasharuk (Islamic) financing and supervisory framework of new players in the banking
market as a part of its strategy. (Bank Al-Maghrib, 2019, p.23)

Second: Challenges
Tasharuk banks today face a variety of challenges, one of which is identity disguise
by avoiding the word Islamic, and this concealment may act as protection, as well as
customers attracting barriers, despite the common argument that it is just an attributive
metaphor. It can be overcome by clarifying terms in issued regulations and practice
guides.
Islamic Finance in Libya
The birth of Islamic banking in Libya was in 1985, with the establishment of Al
Baraka Libyan Islamic Bank had faced many difficulties in its early days, but things
rebounded when Islamic financial transactions were used by many other traditional
banks, such as the National Bank for transactions and others. In this regard, Islamic
finance has not yet been widely adopted in the banking sector acquired more than 80% of
Libyan financial assets.
According to most studies, there is a high demand for Islamic finance in Libya,
except the World Bank study of business facilities in 2015, which stated that the
transition for Islamic banking in Libya runs differently than other many countries and
called for coexistence between traditional and Islamic banks. (The World Bank, 2020, p.
55). This statement hasn't impacted the transition to Islamic finance, and efforts
continued rapidly. after the political change, when the Transitional Council issued a
directive to convert the Libyan banking system to Islamic and the committee formed by
the Central Bank of Libya to supervise this process. Therefore, this committee firstly
issued the practices guide for Islamic products and the Islamic Sharia committee for the
Central Bank of Libya has also been formed.
Then a decision was made by the largest Libyan bank Al Jumhouria Bank, for the
first time to transform into an Islamic banking system within 500-day plan started with
the assistance of experts in December 2013.despite the formation of the central bank
committees being delayed, there was enthusiasm from Libyan financial authorities for
shifting, combined with several pre-transform acts issued to prohibit usury benefits.
After the formation of the Islamic Sharia Council, many traditional banks tried to
adopt the Islamic system, as 14 banks began the process of transforming their operations
100 Journal of Islamic Banking and Finance July - Sept 2022

until the financial sector was adversely affected by the split of the Central Bank between
Tripoli and Al-Baida after the political turbulence.
6/1- Takaful Insurance Market in Libya
Libya's insurance industry began in 1971 with the establishment of Libya Insurance
Company. When the Authorities there licensed many companies in the first decade of the
century, leading to an increase in the number of working companies to 22 in 2018,
despite these early beginnings, the Libyan insurance market is still described as an
emerging market. because the insurance culture is still uncommon among the population.
Except for car insurance. (The World Bank, p. 53). The act of takaful insurance is still
missing legislation that governs its practice, even though some companies offer takaful
insurance products.
Overall, the Libyan insurance industry is still in its early stages of development and
requires a significant effort to flourish. (The World Bank p. 58).

The Islamic Sukuk Market in Libya

Libya established a stock exchange market in 2006, but it was suspended in 2014
due to political instability. Then in 2016, the Sukuk law was issued, and the legal
framework was built to address the capital Market Authority, the role of Sharia
Supervisory councils, as well as the general structure for five types of Sukuk. Investment
portfolios, Finance, Investment, Musharakah, and Ijarah. (The World Bank. p. 57)

The Opportunities and Challenges Facing Islamic Finance in

Libya
First: Opportunities
The collaboration between the World Bank, the Central Bank of Libya, and the
current government provided developmental opportunities for Islamic finance to expand,
which resulted in some positive outcomes, including identifying strategies and preparing
plans to implement the transformation of the Islamic financial system, resulting in the
creation of the dual banking system (traditional and Islamic), in addition, to form
committees in the Central Bank to provide oversight of these plans, besides the set of the
regulatory framework for some practices such as risk management and liquidity. There is
no doubt that we will support the appearance of Islamic finance.
Second: Challenges
Political instability in Libya represents the greatest threat to Islamic finance. Under
these circumstances, the financial sector can't develop, as many banks have begun
shifting to the Islamic system but have not completed the process. Other challenges
include inadequate supportive environments, possess in the lack of qualified experts in
the Islamic banking system, and the absenteeism of specific laws governing the
relationship between Islamic and traditional institutions. Additionally, the lack of
adequate financial technologies and software may be a reason for the decline of the
financial sector, despite the recent efforts by Fintech Sealkit with the razeed Libyan
company in this field.
 Islamic Finance in Africa: Challenges and Opportunities .....
101

Despite all these challenges, the Central Bank of Libya is making efforts to
improve the situation of Islamic finance and to develop its regulatory
framework. Thus, the Libyan Islamic financial experience needs to stabilize
in the first place; then, directed toward development.
Conclusion
This study reviewed the status of Islamic financing in six north African countries
and concluded that many opportunities are available for Islamic finance, including the
interest and desire of these country's populations for interest-free Islamic finance, as well
as the emerging economies of Egypt, Morocco, and Tunisia, lead to predicting that
Islamic finance will gain a significant situation to enhance its presence driven by its high
demand.
The study also provided an assessment of Sudan’s situation, which has a retreat in
Islamic finance performance, as a result of allowing banks to choose between Islamic and
traditional systems after the political transition in 2019. Other findings are that Egypt's
Islamic finance situation does not match its leadership practices in the field of Islamic
banking. In addition, Libya has made little progress in Islamic banking, halted by
political instability.
These results provide an important overview of the common challenges facing
North African countries, leading to a declining trend in the Islamic finance industry, in
some of these countries, affected by the absence of legislation acts, and regulations that
govern Islamic finance, accompanied by the financial authorities’ reluctance to enact
them. In fact, there is no doubt that Islamic financial markets are still weak as well as the
Takaful insurance market, which is also insufficiently developed, and require substantial
efforts to grow and expand.
Recommendations
The study recommends the following.
• To emphasize the importance of postgraduate students and researchers
in Islamic finance documenting the opportunities and challenges facing
Islamic finance in East, West, South, and Central Africa
• A further study needs to discover the relationship between the spread of
Islam in many African countries and the extent of its contribution to the
popular demand for financial services offered by Islamic financial
institutions.
• An investigation into the Islamic finance decline factors in some parts of
the continent, and the Factors that enhance its performance in other
countries yet persists to be conducted.
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Note to Contributors
Journal of Islamic Banking and Finance is an official publication of International
Association of Islamic Banks Karachi, Pakistan. It is a refereed quarterly journal, as well as a
pioneer in the field of Islamic banking and finance being published since 1984. It provides a
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and financial industry specially from Islamic perspective; (ii) Empirical studies about the
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The contributors are requested to observe the following rules.
• Articles should be typed in M.S. Word and restricted to 10 to 15 pages of A-4 size
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All communications should be addressed to the editor.
106 Journal of Islamic Banking and Finance July - Sept 2022

Journal Of
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Publication Date: 1984 (Pioneer in field of Islamic Banking & Finance in Pakistan)
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108 Journal of Islamic Banking and Finance July - Sept 2022