5th INTERNATIONAL CONFERENCE ON ISLAMIC FINANCE

SESSION 1: FRAMING THE NEXT DECADE OF ISLAMIC ECONOMY AND FINANCE: VISION, POLICY, AND ETHICAL FOUNDATIONS

Crypto Assets as Property (Mal): Islamic Legal and Ethical Foundations and Evaluative Framework

Dr. Habib Ahmed

Professor and Sharjah Chair in Islamic Law & Finance, Durham University Business School, United Kingdom

While most discussions on crypto assets from Islamic perspectives have been on their legality, this paper presents a framework to assess their status from legal and ethical attributes of property (mal). The key attributes of mal from an Islamic perspective are identified as permissible, desirability, ownership, storability, beneficial, transferability, material value and measurability. Using the evaluative framework, the research compares the status of property attributes of cryptocurrencies and exchange tokens with their real economy counterparts of fiat currency and ijarah based sukuk. The results indicate that the compliance of crypto assets with the attributes of mal is relatively weaker compared to real economy products. This is mainly due to the technology related factors that introduces risks and constrain the compliance with certain attributes. If property attributes of crypto assets with weaker compliance can be enhanced by mitigating the constraints and risks arising from technology and market infrastructure, then they can become more acceptable from Islamic legal and ethical perspectives. This can be done by strengthening the market infrastructure and introducing enabling laws and regulations that facilitate transactions of crypto assets in a secured and risk-free manner.

Al-Iqtisad Al-Wasati: A Finance Vision for The Ummah

Dr. Mohamed Aslam Haneef

Professor, Department of Economics, International Islamic University Malaysia

Dr. Riasat Amin Imon

Assistant Professor, Department of Economics, International Islamic University Malaysia

The existing global economy has seen increasing crises over the last few decades. Reasons for this are both economic and ideological. Huge paradoxes abound- together with growth and material progress, we have growing poverty amidst the plenty; despite rising income levels of the rich and famous, there are increasing levels of inequality- both inter-country as well as intra country; while material progress is there, one can also witness record levels of debt- both national as well as household; while GDP levels are at its highest, one sees happiness as elusive. Islamic economics pioneers tried to put forward a holistic alternative to the capitalist and socialist systems since the 1970s. One domain that has received the most attention is Islamic Banking since the mid-1980s. This mainstream Islamic Banking school, while contributing to the development of an alternative banking and finance has not been spared from criticism- often been seen as a ‘fiqh-compliant replica’ of mainstream banking. This paper argues that one of the fundamental reasons for the Islamic banking and finance (IBF) sector’s present orientation is the way the problem that the IB sector was created to solve, was ‘framed’. This framing-problem is addressed by applying a Futures approach to reorient IBF by situating Islamic Banking and Finance as part of a more holistic Islamic economics framework. Islamic economics- seen as part of a genuine ‘reform-renewal’ (Islah- tajdid) effort- tries to situate the future of Islamic Finance as part of a holistic future Vision for the ummah termed as ‘Al-Iqtisad al-Wasati’ (AIAW). Fundamental reforms are called for. A new vision for the Muslim ummah based on a ‘social market’ option is argued for. Section 1 of the paper presents the serious paradoxes of the current liberal market system and identifies some contributing factors; Section 2 puts forward Al-Iqtisad al-Wasati (AIAW) as a manifestation of a social market system, describing its foundations and briefly outlining its features. Utilizing a Futures Studies approach and tools of analyses, Section 3 of the paper then identifies major trends, emerging issues and the challenges faced in the Finance domain at present. Section 4 highlights the preferred future for Islamic Finance and elaborates on its features and provides some guidelines on what steps need to be taken in the next 10-20 years to materialize Al-Iqtisad al-Wasati in the Ummah- in the finance domain. The conclusion will highlight some policy related initiatives that need to be adopted to realize a meaningful and sustainable Islamic finance going forward.

Scarcity or Abundance: Why Having So Much Means Too Little – Islamic Economics and The Search for Its Epistemology

Dr. Wahabalbari Amir Ahmed

Lecturer, Department of Finance and Economics, Faculty of Law and Social Sciences, Birmingham City University, United Kingdom

In his book Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir show that scarcity captures the mind, it focuses people attention on using what they have most effectively. They call this state of focus as the focus dividend which according to them is the positive outcome of scarcity capturing the mind. In contrast, in one of our previous studies, we found that scarcity thinking enhances human wants and as a consequence scarcity diminishes the altruistic and cooperation behaviour. This paper aims to resolve one of the unresolved issues in Islamic economics which is how should we define Islamic economics? Should we define Islamic economics from the perspective of scarcity in line with how mainstream economics is defined or should we search for an alternative definition? This paper attributes the unresolved issue of scarcity in Islamic economics to the absence of methodological and epistemological discourse in Islamic economics. Therefore, this paper aims to explore the relevance of scarcity and abundance in Islamic economics based on the epistemology of critical realism. In contrast to positivism that relies on sensible observation, critical realism goes beyond the Seen phenomena to include elements from the Un-Seen reality. One major implication of this study is that the scarcity postulate of mainstream economics is a manifestation of a positivist ideology that relies on the Seen phenomena. However, if economics is to be viewed from a different epistemology, the concept of scarcity might not be the central concept in the discourse of economics. Therefore, Islamic economics could be defined based on the epistemology that it adopts.

Social Footprint of Monetary Policy: A Conceptual Framework and Preliminary Evidence

Dr. Sajid Amin Javed

Deputy Executive Director, Sustainable Development Policy Institute, Pakistan

Debates on inclusive central banking and critical role of central banking in supporting inclusive development is increasing again. Social implications of monetary policy, particularly its impact on inequality, have garnered a great deal of attention since the global financial crisis of 2008, with a key focus on income, consumption, and wealth inequality. This paper intends to make some very original contributions to central banking and monetary policy literature. First, it aims to develop conceptual framework to understand social footprint of monetary policy. to best of my knowledge, no such framework exists so far. Having standard conceptual framework will help promote research and debate on social dimensions of central banking in general and monetary policy in particular. This, in turn, will help improve the integration of social dimensions in monetary policy frameworks of central banks.

Second, this work--particularly the framework--can help bridge the gap between monetary policy and public at large. So far, the research on social footprint of monetary policy is very scant. Inquiry around monetary policy is mostly limited to aggregate macroeconomic data, such as GDP growth, inflation, trade, and exchange rate, while ignoring the possible consequences of monetary policy interventions for income distribution-consumption, income and wealth inequality and poverty.

This has worked to delink monetary policy outcomes from the common man, who looks towards the government and its fiscal policy to control even inflation. Particularly, research in this area has failed to incorporate the post-COVID agenda of monetary policy and central banks.

This gap needs to be bridged, if the effectiveness of monetary policy is to be increased, by creating a mass audience for the central banks policies. Fostering a debate on how monetary policy decisions can affect the poor and rich differently, will not only reduce this gap, but will also help design an optimal monetary policy with improved welfare considerations. Third, such debates and findings can help the central banks update the monetary policy interventions needed to achieve its objective of price stability without compromising other social outcomes, such as equality. Importantly, steps need to be taken to upgrade and update the existing framework and monetary policy tools, in order to address associated social implications.

Fourth, the distributional impacts of monetary policy which are perceived to be short term in nature for developed countries, may create long-term structural inequalities of access to education, health, and skills development for developing countries. It can lead to long-term effects in countries which have lower financial inclusion, poor social- spending and an overwhelming informal economy. Together, these characteristics can convert an otherwise short-term distributional impact, into long-term structural inequalities.

Do Regulatory Sandboxes Help Achieve the Goals (Maqasid) of Al-Shariah Better – Case of the Islamic Fintech Sector

Dr. Mohamed Obaidullah

Lead Research Economist, Islamic Development Bank Institute, Saudi Arabia

Regulations are rules concerning what individuals, businesses, and organizations can and cannot do. With innovation taking place at a breakneck speed in the financial services sector, regulatory agencies need to understand the benefits and risks of innovation, while developing appropriate policies, guidance, and/or regulations to reap those benefits, protect consumers, and safeguard the financial system. A fintech regulatory sandbox is a legal classification that creates a space where participating businesses won’t be subject to onerous regulations - usually for a limited amount of time – long enough for the regulators to identify the appropriate and perhaps reduced number of regulations for the sector. Since the UK pioneered the idea in 2014, several other countries have adopted similar sandbox policies, including Abu Dhabi, Denmark, Canada, Hong Kong, and Singapore.

In the Islamic fintech sector, as in other parts of the economy, it is the goals (maqasid) of Al- Shariah (MaS) that should drive the formulation of regulations and rules of behavior of individuals and firms. The present study aims to revisit the process of rulemaking in Shariah to examine the possibility of adopting a sand-box approach while setting rules for the sector. To what extent the “competition-enhancing” and “innovation-facilitating” arguments weigh in favor of temporary regulatory relief to firm to run experiments during the process of ijtihad? Or can we take a much broader view of a sandbox in Shariah, one that includes not only testing and piloting but also focuses on knowledge building and innovation-friendly policymaking? While there may be benefits, there may also be costs in the form of certain major irregularities and illegal activities being permitted to pass through the regulatory hole created by the sandbox. Further, certain types of laws and regulations, such as, the rules of riba and gharar (deceit and deception; those intended for consumer and investor protection) may not be relaxed under any circumstances. The present study undertakes a comprehensive analysis of the idea of sandbox regulation from Shariah perspective. It also undertakes a comparative analysis of fintech sandbox regulations in various countries to identify critical success factors in them.

SESSION 2: NEXUS OF TECHNOLOGY ADVANCEMENT AND ISLAMIC FINANCE: EMERGING SHARIAH ISSUES

The Theory of Money: An Analysis of Crypto Currency in a Faith-Based Finance Paradigm

Dr. Samir Alamad

Lecturer, School of Economics, Finance and Accounting, Coventry University, United Kingdom

This paper explores the way in which religious rules act as a directive for accounting and auditing practices in Islamic Financial Institutions (IFIs). Through which the paper examines the concept of money and digital currency within the theory of money and how it is enacted in a faith-based context amid differences of opinions among its actors. Additionally, the paper contributes to studies of money, accounting, and auditing in faith-based organizations, by identifying two core concepts of today’s money as not being a commodity in contrast to the capitalist theory of money, and how this outcome would shape the faith-based view regarding the new phenomenon of digital currency (DC). The concept of money and how DCs are viewed by faith-based rules would allow coordination among various global actors with intersecting religious values, logics, and interests. IFIs ensure that their faith-based accounting and auditing of financial transactions become an integral part of and as compatible as possible with the logics of global financial markets.

Financial Applications of Artificial Intelligence: Shariah Issues and Maqasid Considerations

Dr. Abdulazeem Abozaid

Professor of Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

The paper treats some of the most important Shariah issues involved in the financial applications of artificial intelligence, which have witnessed a significant development recently after new applications have emerged with a notable increase in their complexity. The Fiqh discussion comes after the necessary introductions to clarify the concept of artificial intelligence and to highlight its levels and challenges. The Shariah issues presented in the paper are Fiqh issues with Maqasid dimensions, which the paper tackles them from a macroeconomic perspective. However, the Shariah issues involved in the financial applications of artificial intelligence do not stop at what is presented in this paper, but the paper attempts to lay the foundations of the Fiqh and Maqasid discussions of whatever financial applications the artificial intelligence may yield and introduce in the future.

Islamic Crypto Asset: Model Structure, Operational Mechanisms and Shariah Review

Dr. Mohd Ma’Sum Billah

Senior Professor, Islamic Economics Institute, King Abdulaziz University, Saudi Arabia

In today’s advanced-technology and particularly in the fintech environment, crypto-currency is among the rising issues vibrating the global eco-culture. There are mixed views within the ambit of shariah on the existing floating models of crypto currencies bearing a common confusion on one’s intrinsic value and thus, whether they are compliant with shariah If not, what and how the shariah alternative solution may be in meeting the global Halal sentiment? The idea of crypto-asset is a new dimension with hypothetical discovery, which is quite different in nature as to crypto-currency. The existing model of crypto-currency does not require an underlying asset to back the operation, while a crypto-asset in contrast, requires an underlying valued asset to back the operation and thus, positioning one bearing own intrinsic value. This short research, however, seeks to analyze the model structure, operational mechanisms and possible shariah review of crypto-asset within the principle of Maqasid al-Shariah. The research is expected to adapt hypothetical and META approaches by concluding with possible shariah compliant strategic solution to crypto asset in harmonizing with the contemporary eco- appreciation. The final result of this research may be an added value to the current post-COVID eco-paradigm in creating an eco-opportunity for every level of people within the spirit of Maqasid al-Shariah.

Crypto Staking from The Shariah Perspective

Dr. Farukh Habib

Co-Founder and Director, Alif Technologies, United Arab Emirates

Mr. Ahmed Jawa

Founding Member and Head of Marketing and Program, MRHB DeFi, Australia

Proof of Stake (PoS) is one of the many consensus methods for a blockchain platform that are proposed as alternatives to proof-of-work (PoW) mechanisms, as being used in the Bitcoin blockchain system. Their objective is to achieve agreement on a distributed network. Particularly, the consensus mechanism is a vital component of a blockchain system to validate transactions or confirm on-chain data as true. The act of providing proof of stake is called ‘staking’. However, this concept has much wider application now because locking funds in a smart contract for any purpose is also considered as ‘staking’. The users who stake their funds are incentivized in either newly minted crypto assets from the blockchain system and/or transaction fees and other rewards. That is why staking has become a popular investment activity in the crypto space for many users. For the Islamic faith-based users, this presents a unique challenge as well as a point of disagreement whether to engage in this activity while remaining within the bounds of halal. Meanwhile, there is a bigger question that can an Islamic crypto project have such a mechanism, or even the Islamic financial institutions (like banks) can benefit from this investment product or develop a similar product. There is a huge research gap in this area because this area is new and rapidly evolving, while on the other hand, shariah scholars are still evaluating this phenomenon from a Fiqh perspective. The answer lies not only in understanding the relevant Fiqh principles and rulings, but also in comprehending the technical and operational aspects of staking. There is a great confusion about whether crypto staking is halal or not. This paper is one of the very initial research projects on this crucial topic that aims at addressing the issue of staking from a shariah perspective. It identifies mainly two types of staking: (1) staking on a proof-of-stake (PoS) blockchain, which has further types, and (2) staking as locking funds in a smart contract for a specific purpose. Then it discusses the shariah compliance of both types.

Non-Fungible Tokens (NFTs) from The Perspective of Fiqh and Maqasid

Dr. Oziev Gapur

Associate Professor, Department of Economics, International Islamic University Malaysia

Dr. Abdulazeem Abozaid

Professor of Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

The evolution of Non-Fungible Tokens (NFT) market has grabbed mainstream attention worldwide attracting tremendous capital from investors. Similar to Ethereum, NFT transactions take place via blockchain-based technology which protects digital identity of digital assets from counterfeit and cannot be exchanged. These assets can be in a form of an image, video, drawing, music clip, or even a tweet. Experts estimate the investments in NFT market between 2022-2026 to be close to 14 billion USD. The objective of this study is to uncover the underlying concept of NFT concurrently with outlining the relevant Sharia provisions of NFTs using both descriptive and analytic Shariah approach. This study conducts a review of the financial nature of NFTs, their potential benefit and impact, and their economic value and expected evolution. The research also addresses the issue of cyber security to verify the authenticity of the claim that NFT products are protected from counterfeiting or hacking.

SESSION 3: LINKING VALUE AND IMPACT THROUGH DIGITAL SOLUTIONS

Financing The Social Infrastructure: The Case for Inclusive Digital Islamic Financial Solutions

Dr. Hatim El Tahir

Director, Islamic Finance Knowledge Centre, Deloitte, Bahrain

This research paper examines the recent trends and structural features of the Islamic digital economy and attempts to assess the potentials of developing common practices around financing the social financial infrastructure: the priority social sectors such as health care, housing, education and other core social activities of the society. The research scope will focus on the Organization of Islamic Cooperation (OIC) marketplace and provides analysis of the increasing social financing digital solutions and underpins the factors of its growth and prospects of streamlining this trend with need to finance other social sectors in our societies. The paper is structured around three main sections. Section I addresses the wider Islamic digital economy and recent policy and regulatory development to augment this industry. Section II emphasizes on business value proposition of digital financial solutions and discuss the key business mode differentiates and the Islamic structures and solutions could be used such as Waqf, Zakat, Sadaqat, to design innovative products. Section III concludes with mapping out potential digital products and services with the digital Islamic sectors identified and look at the value added of achieving some of the global leading practices in areas of Environment, Social and Governance (ESG), and the United Nation’s Sustainable Development Goals (SDGs) and the fundamental objective of achieving ‘Maqasid Al Shariah’.

Digital Islamic Social Finance in Indonesia: An Intergenerational Analysis

Dr. Rahmatina Kasri

Director, Centre for Islamic Economics and Business, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Meis Winih Sosianti

Faculty Member, Faculty of Economics and Business, University of Indonesia, Indonesia

Despite the huge potential of Islamic social finance, especially zakat, in Indonesia, studies found that the actual zakat collection was very low. One of the possible reasons is low usage of digital zakat payment services across different Muslim generations. As such, this study aims to examine and compare the intention of generation X and Y to use digital zakat payment services by utilizing and enriching the Unified Theory of Acceptance and Use of Technology (UTAUT). More specifically, it compares the influence of performance expectancy, effort expectancy, social influence, facilitating conditions, zakat literacy, trust in zakat institutions, and Islamic religiosity on intention of generation X and Y to pay online zakat in Indonesia. It collected primary data from 734 respondents and analyzed it using Structural Equation Modeling (SEM) method. The findings suggest that the intention of generation X to pay zakat online is influenced by facilitating conditions, performance expectancy, and social influence. Meanwhile, the intention of generation Y to use the digital zakat payment is influenced by trust in zakat institutions, performance expectancy, facilitating conditions, and social influence. These imply that while the technology variables equally influences both generations, more social factors such as trust, and social influence are influencing the older generation’s (gen X) behavior. Therefore, zakat institutions are expected to implement more comprehensive strategies for different Muslim generations in Indonesia. They must also consistently improve quality of online zakat services, highlight the benefits of online zakat, optimize social media, intensify education about zakat, and improve their reputation. Overall, the findings and implications could provide important insights for zakat institutions and authorities in Indonesia as well as other Muslim countries and communities.

Digital Financial Inclusion and The Islamic Financial Industry: Current Status and Future Challenges

Dr. Abderrahman Bensania

Chairman, Ethics Committee, Ghardaia University, Algeria

Dr. Slimane Bellouar

Professor, Faculty of Economics Business and Management, Ghardaia University, Algeria

The concept of financial inclusion is known for its implication of enabling individuals to access financial services that fulfill their needs at affordable prices and in a sustainable manner. In recent years, more specifically in the late nineties of the last century and early twenty-first century, this concept thrived under the auspices of international institutions coupled with the vision of promoting it as a catalyst of economic development and poverty reduction, which justify why it is considered as a crucial enabler of seven of the 2030 seventeen Sustainable Development Goals (SDGs) set by the United Nations in which poverty reduction comes at the forefront of the 17 goals.

Financial technology companies have been operating tirelessly in the field of financial technology, where the evolution and acceleration of this space is credited to the COVID-19 pandemic and the conditions imposed by the crises such as lockdown, social distancing leading to a global economic recession. This inspired companies to be innovative in business operations and promoted the widespread use of digitization in financial services to facilitate execution of transactions, reduce their costs and keep pace with the aspirations of millennials who are familiar with technology and the use of the Internet widely in their daily lives. This phenomenon prompted financial institutions to embrace a digital transformation, innovate and overcome the challenges of competition to reach a wider segment of customers, particularly those who are financially excluded, under what is known as ‘digital financial inclusion’.

The rapid growth of Islamic banks and Islamic financial institutions distinguished these institutions in the international banking arena and allowed them to keep pace with the growing demand of Islamic products as a result of its financial stability and resilience to the 2008 crisis in comparison to its conventional counterparts. Historically, crisis can either be an opportunity for the emergence and growth of entities (the case of Islamic financial institutions) or a threat to the atrophy and demise of others on the international business scene.

In light of the rapid digital development in the field of financial technology, Islamic banks today must base their strategies on a clear vision of the existing opportunities in the torrent of digital transformation imposed on them in order to seize these opportunities and overcome the challenges and risks of this transformation on one hand, and maintain their position and competitiveness, or even ensure wider growth and spread to new customers on the other.

A Critical Appraisal of Sovereign Green Islamic Bond: Case Study in Indonesia

Dr. Nisful Laila

Associate Professor and Vice Dean for Resources, Faculty of Economics and Business, Airlangga University, Indonesia

Dr. Raditya Sukmana

Professor of Islamic Economics, Faculty of Economics and Business, Airlangga University, Indonesia

Dr. Dwi Irianti Hadiningdyah

Director of Islamic Financing Directorate, Ministry of Finance, Indonesia

Dr. Dian Agustia

Professor of Accounting, Faculty of Economics and Business, Airlangga University, Indonesia

Ms. Indah Rahmawati

BSc of Islamic Economics Student, Faculty of Economics and Business, Airlangga University, Indonesia

The goal of this paper is to critically assess the first ever Green Islamic Bond issued by the Indonesian government. It caters for the green environmental related issue including climate change. In order to provide the analysis of Sovereign Green Islamic Bond from various aspects. This study adopts qualitative method combining literature studies and in-depth interview with the relevant person from Ministry of Finance as the Islamic Bond issuer. The finding suggests that the Indonesian Green Sovereign Islamic Bond provides great benefits for investors, such as competitive rates, risk free investment, and also can be bought by individual investors in the domestic market (for retail series) and in the global market (for global Islamic Bond series). This study shall be the main reference for the other governments to adopt the similar instrument. Using green financing framework, this Islamic bond may lead to achieve Sustainable Development Goals (SDGs).

Gig/Platform Economy: The Next Big Opportunity for Takaful?

Dr. Shariq Nisar

Professor, Rizvi Institute of Management Studies and Research, India

Mr. Umar Farooq Patel

Research Fellow, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

The World Bank recently released “The Global Findex Database 2021: Financial Inclusion, Digital Payments, and Resilience in the Age of Covid-19” which shows that 76 percent of adults globally have access to an account with a bank or a regulated financial institution. The rise in the past decade has been the fastest ever with over a 50 percent jump in the population with access to banking accounts and this was largely possible due to rapid advances in technology and digital infrastructure for financial services. An access to an account is the first and the most crucial step in the journey towards financial inclusion, the other services like insurance and risk management, wealth management, etc. are critical too. With rapid progress on access to an account, the focus is now shifting towards insurance and risk management services/solution and similar success should be envisaged by employing a multi-pronged strategy of varied solutions ranging from conventional insurance to mutuals and cooperative, and takaful among others.

This paper will explore how mutual care model can ride the growth in the platform economy across the world and offer suggestions to the pressing issues concerning health and economic well-being of a large segment of the population which would be without access to the social security benefits in an informal work structure. Some use cases will be presented where technology has enabled faster penetration, reduced cost and scaling of operations along with addressing issues of fraud and moral hazard. The paper, relying on real life cases from India, will explore how gig economy workers can create a self-sustainable mutual healthcare model for themselves without relying on financial support from the state. Governance issues revolving around establishing and scaling up mutuals will also be highlighted. This mutual model with some tweak will be a good example of Takaful for Shariah conscious gig workers.

SESSION 4: DE-CENTRALIZED FINANCE: PROSPECTS AND CHALLENGES FOR ISLAMIC ECONOMY AND FINANCE

An Empirical Evaluation of Blockchain Technology: Challenges and Opportunities for Islamic Crypto Assets

Dr. Asif Zaman

Professor, Cardiff School of Management, United Kingdom

The global conventional crypto space has exponentially proliferated despite its associated controversies and challenges of regulatory concerns, stability, and monetary policies. Amidst these controversies the silver lining for Islamic Finance was the development of blockchain technology providing transparency, facilitating peer-peer lending and the emergence of de-centralized finance. This research intents to critically explore the use to blockchain technology in the development of Islamic finance based crypto assets and will explore its long-term viability. Moreover, it will (1) analyze the architecture and legality of Islamic Crypto assets under the Islamic Finance principles; (2) evaluate the regulatory, jurisdiction challenges and opportunities for using blockchain technology in the development and proliferation of Islamic crypto assets; and (3) assess the impact and role of Islamic crypto assets on the global Muslim majority emerging economies.

Decentralized Islamic Finance: The Blockchain as a Cure to the Murabaha Syndrome

Dr. Youcef Maouchi

Assistant Professor of Economics, Department of Economics and Finance, College of Business and Economics, Qatar University, Qatar

At the core of the Islamic finance ideal models, the profit and loss sharing (PLS) contracts (Mudaraba and Musharaka) have been avoided in practice by Islamic Financial Institutions who, since their inception, are suffering from a Murabaha Syndrome by relying on debt-like instruments, i.e., Murabaha, as their main financing tools. While the literature focuses on moral hazard and adverse selection as the main reasons for the underuse of PLS, we show that these asymmetric information issues are not a cause but a consequence of a deeper problem that existing scholarship has overlooked. The main barrier to using PLS is the difference between the institutional framework that once enabled traders to use Mudaraba and Musharaka to finance their business ventures, and the impersonal exchange framework in which modern Islamic Financial Institutions operate. In this paper, we assess the main challenges to the Mudaraba and Musharaka financing application and explore the solutions offered by the blockchain and the nascent Decentralized Finance (DeFi) that are relevant to Islamic Finance. We argue that the blockchain can offer an institutional solution to the Murabaha Syndrome and help reduce the gap between Islamic finance ideals and practices.

Islamic Compliant Frameworks for the Metaverse – an Opportunity for More Equitable Finance in the Metaverse

Dr. Klemens Katterbauer

Associate Professor of Earth Science and Global Management, EUCLID (Pôle Universitaire EUCLIDE / Euclid University)

Dr. Syed Hassan

Faculty Member, EUCLID (Pôle Universitaire EUCLIDE / Euclid University)

The metaverse has become of paramount importance within the last several years, being a virtual universe where individuals and companies can interact. While the metaverses are still in their nascent stage, there has been increasing interest and capital inflow into these universes. For Shariah-compliant focused financial investors and participants, this represents a considerable challenge given the existing lack of Islamic financing frameworks for the metaverses. This chapter outlines options for providing Shariah-compliant financing in the metaverse, outlining the challenges and aspects that have to be taken into account for creating Shariah-compliant financing forms in the metaverse. The framework adapts conventional Islamic financing options, such as Murabaha and Sukuk, to the metaverse, ensuring that both the contracting and crypto-payments are Shariah-compliant and supportive in the metaverse. The framework provides an important step towards the development of Shariah-compliant financing forms within the metaverse.

How Islamic are the Services Offered by Islamic P2P Financing FinTech Companies? An Observation from Indonesia

Dr. Miranti Kartika Dewi

Lecturer, Department of Accounting, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Wasilah

Lecturer, Department of Accounting, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Evony Silvino Violita

Lecturer and Researcher, Department of Accounting, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Miranti Kartika Dewi

Lecturer, Department of Accounting, Faculty of Economics and Business, University of Indonesia, Indonesia

Peer-to-peer (P2P) financing is the most common service provided by Islamic Financial Technology (IFinTech) companies operating in recent days. By connecting capital providers and users through technical assistance, these Islamic P2P financing companies play a strategic role in supporting the initiatives to boost the deficient level of financial inclusion in OIC countries, including Indonesia. As a country with the largest Muslim population, Indonesia is also the home to the world's innovative Islamic fintech. However, how compliant are their services? This study aims to examine address such a question. It applies a qualitative method based on document analysis and observation of several Indonesian Islamic P2P financing companies. The authors found that several practices of Islamic P2P financing companies have the potential to conflict with sharia provisions. This study offers actionable solutions to assist the Islamic P2P financing practitioners in handling this concern. Therefore, it is hoped that this study not only fulfills a recognized necessity to examine how sharia principles can be applied in the operation of Islamic P2P financing companies but also bring practical implications to the relevant practitioners.

Central Bank Digital Currencies, Internet of Things, and Blockchain: Prospects and Challenges for Islamic Finance

Mr. Khalid Al-Ansari

PhD Student of Islamic Finance and Economy, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

Dr. Ahmet Faruk Aysan

Professor of Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

This paper introduces the need for blockchain technology integration for Islamic financial institutions. The paper presents three main applications of blockchain technology. It explains how such technology can be used in the banking and financial sectors by providing examples for each application. Given its relevancy, the paper expands on Central Bank Digital Currencies (CBDCs) as one of the blockchain applications. The paper then discusses salient points on how the banking sector would be affected by what is described as the future of money. Subsequently, an analysis of the use of blockchain in financial services and, in particular, the use for Islamic financial services is provided by examining examples of past successful implementations. The paper then introduces the Internet of Things (IoT) and illustrates the possible technology implementation in financial institutions. The inherent security weakness of IoT is summarized by the potential elimination of that weakness if combined with blockchain (BIoT). The paper concludes by providing a handful of suggestions and recommendations on the urgency of considering CBDCs for future daily operations, integrating Distributed Ledger technology, and using BIoT to safeguard the financial and clients' transaction records.

SESSION 5: IMPACT OF COMPLIANCE ON ISLAMIC ECONOMY AND FINANACE

Religiosity Compliance Impact and Theological Risk: Evidence from Bursa Malaysia

Dr. Murat Yas

Assistant Professor, Marmara University, Turkey

Dr. Ahmet Faruk Aysan

Professor of Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

Dr. Mohamed Eskandar Shah Mohd Rasid

Associate Professor of Islamic Economics and Finance, College of Islamic Studies, Hamad Bin Khalifa University, Qatar

The study aims to understand the financial impact of religious restrictions by investigating how changes in Shariah compliance status of a stock may affect its stock prices and trading volume. We use data from Malaysian firms for the period 2000 to 2016. The data contains 30 announcements from the Security Commission Malaysia’s List of Shariah Compliant Securities (LSCS) which result in a total of 370 additions and 284 deletions to the Shariah compliance list. The study employs the market model as a part of the event study methodology to analyze the impact of announcements about Shariah compliant status of listed securities on stock trading volume and price in short- and long-term horizons. Our findings show that Islamic institutional and Muslim retail investors increase demand for added stocks in the long term and cause a permanent increase in abnormal returns and trading volume. Meanwhile, the pressure to sell removed stocks leads to negative abnormal returns and an increase in trading volume in the short term.

Islamic Banks Journey Towards Digitalization: Requirements and Regulations – Case Study of Islamic Digital Banks

Dr. Souheila Bara

Lecturer, Badji Mokhtar University, Algeria

Dr. Djaber Mehdi

Lecturer, University of Souk Ahras Mohamed Chérif Messaadia, Algeria

Many banks in the world are developing digital banking services, including a shift to digital banks. Many central banks seek to encourage this trend to keep pace with digital financial developments, develop services that meet customers' needs, and increase financial inclusion rates, as well as the possibility of monitoring funds made in terms of receipt or transfer within the banking sector on a spot basis. This wave has reached the Islamic banking sector, and its features have been the creation of digital banks characterized by their adherence to legitimate rules. These digital banks provide financial products and services exclusively through digital channels, through an innovative banking business model. Digital transformation, especially digital bank models supported by modern technologies, raises the issues of the regulatory framework and how to regulate these services, here highlights the role of central banks and other regulatory and supervisory authorities by assessing whether the current regulatory digital banking framework needs to be modified. It therefore highlights the importance of establishing the appropriate legislative and regulatory framework to support the activities of digital banks in order to safeguard clients' interests, the financial stability of service providers and the integrity of the financial system as a whole. The legislative and regulatory frameworks governing the provision of digital banking services differ between specific instructions for licensing such services at the financial industry level, as well as the current governing frameworks for the operation of traditional banks, or temporary regulatory frameworks during the early stages of these entities to authorize the provision of specific services, or subject digital banking providers to the existing legal frameworks governing the functioning of traditional banks. Therefore, the lack of regulated legislative and regulatory frameworks, the maturity of the technologies used, are challenges facing Islamic digital banking services, and pose risks to the functioning of digital banks, in particular technical risks, accompanying data governance frameworks, and financial and non-financial licensing requirements, including the promotion of digital banking business models that provide sharia-compliant financial services. The paper therefore reviews a general framework for the life cycle of digital banks, and the most important strategies and actions to adopt the activation of digital banking services in a way that preserves customers' interests and the financial sustainability of service providers. In addition to the framework for the implementation of these strategies at the level of Islamic banks. Through a review of a number of practical experiences and situations at the global and Arab levels, lessons are provided.

Corporate Governance and Performance of Conventional and Islamic Financial Institutions in Pakistan: Does Good Quality Institutional Environment Matter?

Dr. Abdul Rashid

Director General, International Institute of Islamic Economics, International Islamic University Islamabad, Pakistan

Dr. Muhammad Akmal

PhD Scholar of Islamic Banking and Finance, International Islamic University Islamabad, Pakistan

Dr. Syed Muhammad Abdul Rehman Shah

Lecturer, University of Engineering and Technology Taxila, Pakistan

This paper examines the differential effects of corporate governance (CG) on the financial performance of conventional and Islamic financial institutions using annual panel dataset covering the period 2006-2017 in Pakistan. It also examines whether institution quality (IQ) has a role to play in formulating the impact of CG on performance. The GMM estimation results depict a positive and significant relationship between CG (board size, board composition, ownership concentration, CEO remuneration, CEO duality, and Shariah board size) and financial institutions’ performance (ROE, ROA, operational efficiency (CTI), and Tobin (Q)). The results also provide strong evidence that corporate governance affects the performance measures differently between Islamic and conventional financial institutions, mainly owing to the differences in the nature of operations of both types of institutions. Finally, the results of the augmented model show that IQ substantially moderates the relationship between CG indicators and the performance of both categories of financial institutions. These findings suggest that the governance setup of financial institutions would be more effective in overall good quality institutional environment.

Should Islamic Banks Implement the Same Strategy to Attract Customers? A Comparative Analysis between Millennials and Generation Z

Dr. Tika Arundina Aswin

Lecturer and Senior Researcher, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Kenny Devita Indraswari

Lecturer, Faculty of Economics and Business, University of Indonesia, Indonesia

Dr. Azizon

Lecturer, Faculty of Economics and Business, University of Indonesia, Indonesia

To create organic market share growth, Islamic banks should attempt to expand their market share toward the younger generations, such as millennials and Generation Z, who are known to have solid aspirations toward ethical and social issues. Moreover, the values held by younger generations are compatible with the raison d'etre of Islamic banking in fulfilling religious, social, and ethical values. This study examines and compares Islamic banking patronizing behavior between these two generations. By employing mixed-methods research (Multi-Group Analysis with SEM-PLS and confirmatory analysis of a focus group discussion), this study investigates the factors that influence behavioral intentions toward the adoption of Islamic banks by 617 millennials and members of Generation Z in Indonesia. The study’s findings show that the behavior towards adopting Islamic banks varies between millennials and Generation Z. This variation also occurs within each generation when it is classified into customer and non-customer groups.

Revisiting Local Religiosity and its Impact to Risk-Taking Behavior in Dual Banking System

Mr. Wachid Muslimin

PhD Student, Lancaster University, United Kingdom

Dr. Marwan Izzeldin

Professor of Financial Econometrics, Lancaster University, United Kingdom

The question of whether risk preferences of key stakeholders influence bank risk taking behavior is an empirical issue. This study introduces religious values as a novel religiosity proxy, to provide alternative to current measurement especially post Covid-19 pandemic where religious activities have been minimized. We have identified Anti-hedonism values, Metaphysical commitment and Associationism to represent religiosity values worldwide. Also, in responding to the new phenomenon of Islamic banking which imbued with religious significance, we investigate whether the level of local religiosity matters for their risk-taking activities and compare the results with their counterpart’s world- wide. Using a fixed effect model, we have found banks located in a more religious areas (regardless of the religion) will negatively predict financial statement-based internal measure. Similar relationships evidenced with the stock return-based measures of risks in conventional banks. While Islamic banks located in a more religious areas will have a positive impact to stock return-based measures of bank risks. But no significant difference to the impact of these values with risk-taking behavior of both Islamic banks and their counterparts.