Property rights and shariah non-compliance risk

Saiful A. Rosly

Chapter 6 in Islamic Wealth Management, 2017, pp 83-102 from Edward Elgar Publishing

Abstract: The concept of trading/commerce (al-bay) as opposed to trading in money with usury (riba) requires Islamic banks to take ownership of goods it intends to sell on credit. However, doing so will result in higher capital charges and tax overheads that could adversely affect banking profitability. Due to these rigidities in the modern financial infrastructure, Islamic banks have avoided taking ownership risk in the credit sale transaction which can expose them to Shariah non-compliance risk. The landmark court judgement in 2008 was one critical milestone, where true sale bearing property rights by way of ownership transfer was found non-existent in a credit sale contract: a violation of Sale Agreement. Several pre-emptive actions were sought by regulators to contain the problem including the cancellation of the inter-conditionality clause in credit sales, the tightening of shariah governance process and imposition of monetary penalties for non-compliance transactions. With the introduction of an amendment in investment account rule in IFSA 2014, ownership risk from credit sale contracts become absorbed by the investment account holders, thus relieving Islamic banks from the unwarranted stress on capital.

Keywords: Asian Studies; Economics and Finance (search for similar items in EconPapers)
Date: 2017
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