Sharīʿahissues ontaʿwidhin Malaysia

Muhammad Shahrul Ifwat Ishak

International Journal of Islamic and Middle Eastern Finance and Management, 2019, vol. 12, issue 4, 523-531

Abstract: Purpose - This paper aims to investigate the current mechanism oftaʿwidh(compensation) from the perspective ofShariīʿah, which is used by Islamic banking in Malaysia to deal with the issue of late payment. Design/methodology/approach - This study is qualitative in nature, using semi-structured interviews carried out with two types of informant – members of the NationalSharīʿahAdvisory Council (SAC) and the InternalSharīʿahcommittee (SC) – with regard to practicingtaʿwidh. Findings - The findings revealtaʿwidhis an alternative to the interest-based late payment penalty, which is prohibited in Islam. Whiletaʿwidhfinds justification in the hadith andmaʿlaʿah, in respect of sustaining the competitiveness of the Islamic banking operation, its practice is still debatable because it is determined by a special rate instead of the actual loss. This paper addresses this issue by suggesting that even though the central bank has allowed Islamic banks to regard 1 per cent as their income, they should review that amount, and claim only the actual loss. The remaining money could be used for charitable purposes, which can be conducted by Islamic banks themselves. Research limitations/implications - This study is limited because it focusses on the extent to which the current practice oftaʿwidhin Malaysia has complied withShariīʿahprinciples. It does not focus ongharamah(penalty), which is considered to be the second late payment penalty mechanism. Moreover, data are collected from nine interviewees from SAC and SC from different Islamic banks. Thus, the results cannot be generalised to other countries. Originality/value - This paper highlightsShariīʿahconcerns regarding the current application oftaʿwidh. Moreover, as it uses primary data, it provides a fresh discussion oftaʿwidh, from both the perspective of regulators in Malaysia and the experience of practitioners, particularly in terms ofShariīʿahcompliance.

Keywords: Islamic banking; Maslahah; Taʿwidh; Late payment penalty (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-03-2018-0117

DOI: 10.1108/IMEFM-03-2018-0117

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