Measuring Shariah non-compliance risk (SNCR): claw-out effect of al-bai-bithaman ajil in default

Saiful Azhar Rosly, Muhammad Arzim Naim, Ahcene Lahsasna

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Purpose: The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks. Design/methodology/approach: Al-bai-bithaman ajil (BBA) contract documentation is analyzed in the light of the legal environment in Malaysia and measurement of Shariah non-compliant risk based on constructed or hypothetical cases. Findings: Shariah non-compliant risk will adversely affect bank’s earnings when BBA contracts are deemed invalid in the court of law, either in a foreclosure or ruling via court declaration. Research limitations/implications: The paper is written based on content analysis, Malaysian legal cases with hypothetical examples for better understanding. Practical implications: Islamic banking should be able to use the findings to estimate potential loss from Shariah non-compliant risk and make the necessary provisions. Originality/value: This paper provides new insights of risks faced by credit-intensive Islamic banks, that when relinquishing critical requirement of Islamic contract such as ownership risk will suffer loss.

Original languageEnglish
Pages (from-to)272-283
Number of pages12
JournalJournal of Islamic Accounting and Business Research
Volume8
Issue number3
DOIs
Publication statusPublished - 2017

Fingerprint

Noncompliance
Islamic financial institutions
Content analysis
Documentation
Islamic banking
Malaysia
Design methodology
Credit
Ownership
Legal environment
Foreclosure

Keywords

  • Al-bai-bithaman ajil
  • Claw-out effect
  • Foreclosure
  • Profit-in-suspense
  • Shariah non-compliance risk

ASJC Scopus subject areas

  • Accounting
  • Business and International Management
  • Strategy and Management

Cite this

Measuring Shariah non-compliance risk (SNCR) : claw-out effect of al-bai-bithaman ajil in default. / Rosly, Saiful Azhar; Naim, Muhammad Arzim; Lahsasna, Ahcene.

In: Journal of Islamic Accounting and Business Research, Vol. 8, No. 3, 2017, p. 272-283.

Research output: Contribution to journalArticle

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