Qualitative Research in Financial MarketsShari’ah issues in Islamic banking: a qualitative survey in MalaysiaAbdelghani Echchabi Hassanuddeen Abd. Aziz

Article information:To cite this document:Abdelghani Echchabi Hassanuddeen Abd. Aziz , (2014)," Shari’ah issues in Islamic banking: a qualitativesurvey in Malaysia", Qualitative Research in Financial Markets, Vol. 6 Iss 2 pp. 198 - 210Permanent link to this document:http://dx.doi.org/10.1108/QRFM-12-2012-0035

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Users who downloaded this article also downloaded:Sulaiman Abdullah Saif Al Nasser, Datin, Joriah Muhammed, (2013),"Introduction to history of Islamicbanking in Malaysia", Humanomics, Vol. 29 Iss 2 pp. 80-87 http://dx.doi.org/10.1108/08288661311319157Farhana Ismail, M. Shabri Abd. Majid, Rossazana Ab. Rahim, (2013),"Efficiency of Islamic and conventionalbanks in Malaysia", Journal of Financial Reporting and Accounting, Vol. 11 Iss 1 pp. 92-107 http://dx.doi.org/10.1108/JFRA-03-2013-0011Saiful Azhar Rosly, Mohd Afandi Abu Bakar, (2003),"Performance of Islamic and mainstreambanks in Malaysia", International Journal of Social Economics, Vol. 30 Iss 12 pp. 1249-1265 http://dx.doi.org/10.1108/03068290310500652

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Shari’ah issues in Islamicbanking: a qualitative survey

in MalaysiaAbdelghani Echchabi

Department of Business Administration,International Islamic University Malaysia, Kuala Lumpur, Malaysia, and

Hassanuddeen Abd. AzizDepartment of Finance, International Islamic University Malaysia,

Kuala Lumpur, Malaysia

AbstractPurpose – The purpose of this paper is to examine the customers’ perception regarding the currentshari’ah issues of Islamic banks in Malaysia. Specifically, the study attempts to examine the awarenessof the current criticisms of the main shari’ah issues in Islamic finance, and the perception of the selectedcustomers towards these criticisms.Design/methodology/approach – The study uses a qualitative approach to understand in detail thecustomers’ perception and experiences about shari’ah compliance of Islamic banks. Semi-structuredinterview is used with ten Islamic banks’ customers in Malaysia. The study also used phenomenologicaltechniques to analyse the data.Findings – The findings revealed that the interviewees have considerable exposure and awareness ofthe current criticisms of the shari’ah compliance of Islamic banks.Originality/value – This research is the first to study the shari’ah issues of Islamic banks in Malaysiafrom the customers’ perspective, by using a qualitative research approach. The findings of this studyare of original importance, because they unveil the customers’ experience in an area that has beenseverely looked at from the professional and experts’ point of view only.

Keywords Malaysia, Islamic banks, shari’ah

Paper type Research paper

IntroductionIslamic banking has been defined as banking in consonance with the ethos and value systemof Islam and governed, in addition to the conventional good governance and risk managementrules, by the principles laid down by Islamic Shari’ah (Said et al., 2010, p. 1).

It involves wider ethical and moral issues than simply interest-free transactions, which makesit more economically efficient than conventional banking and which promotes greatereconomic equity and justice (Khan, 2010, p. 1).

In countries where Islamic banks co-exist together with conventional banks, animportant criterion that differentiates the former from the latter is its compliance withthe Islamic rules or its shari’ah compliance. In the current practice of Islamic banking,many issues have been raised regarding the compliance of the existing Islamic bankswith shari’ah or Islamic law, and this threatens the success of the Islamic banking

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1755-4179.htm

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Received 24 December 2012Revised 10 March 201318 April 2013Accepted 24 April 2013

Qualitative Research in FinancialMarketsVol. 6 No. 2, 2014pp. 198-210© Emerald Group Publishing Limited1755-4179DOI 10.1108/QRFM-12-2012-0035

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system not only in countries where it simultaneously exists with the conventionalbanking system, but also in a full Islamic banking system.

Furthermore, in a dual banking system, the patronisation of a certain bank wouldbe more challenging, in the sense that Islamic banks are relatively new. Thus, theservices offered by the long existing conventional banks and the magnitude of theoperations would be more elaborate. Thus, it is very crucial to examine theperception of the Islamic banks’ customers in Malaysia about the shari’ahcompliance of their Islamic banks.

Hence, the aim of this research is to study the perception of Islamic banks’customers regarding the compliance of their respective banks to shari’ah. As part ofthe specific objectives, the study attempts also to examine the exposure of theIslamic banks’ customers to the current criticisms of the shari’ah compliance ofIslamic banks, and their perception about these criticisms.

Correspondingly, the current study is an attempt to answer the following tworesearch questions:

(1) Are the Malaysian Islamic banks’ customers aware of the current criticismsto the shari’ah compliance of Islamic banks?

(2) What are the perceptions of the Islamic banks’ customers about thecriticisms of shari’ah compliance of Islamic banks?

Following this introduction is a brief overview on the development of the Islamicbanking industry in Malaysia. Thereafter, a review of the previous studies will bepresented, focusing on the criticisms of the shari’ah compliance of Islamic banks.Then the methodology, the findings, the discussions and conclusions will bepresented sequentially.

Brief overview on Islamic banking development in MalaysiaAccording to Mokhtar et al. (2008), the history of Islamic banking in Malaysia can betraced back to the establishment of Tabung Haji in 1963. The idea was mooted outof the necessity to develop a mechanism to encourage the Muslims to save for theirpilgrimage, as the Malaysian Muslims in the past had resorted to various traditionalmeans of saving and keeping their money for the sacred journey (Laldin, 2008, p. 3).

In this regard, Sufian (2007) argues that the establishment of Islamic banking inMalaysia was mainly affected by its prior implementation in the Middle East.Notably, in 1980, the Bumiputera Economic Congress requested the Malaysiangovernment to allow the establishment of an Islamic bank in the country.Subsequently, the National Steering Committee was set up in 1981 to study thisproposal in its different aspects. The conclusions of the study suggested that it willbe viable to establish an Islamic bank in Malaysia. In fact, this marked theestablishment of the first Islamic bank in the country, namely, Bank Islam MalaysiaBerhad in 1983.

Laldin (2008) considers that the bank’s progress was very encouraging, with itsactivity rapidly expanding throughout the country. This has prompted thegovernment to further develop the Islamic banking industry in Malaysia.

As a result of the government’s efforts, Malaysia has emerged as the first countryto implement a dual banking system where Islamic banking system operatesside-by-side with the conventional banking system. The Malaysian model has been

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recognised by many Islamic countries as the model of the future, and many countrieshave shown interest in adopting the Malaysian system in their respective countries(Mokhtar et al., 2008).

The Malaysian Islamic banking system is currently made up of 15 bankinginstitutions comprising nine domestic commercial banks, four foreign commercialbanks and two Islamic banks offering Islamic banking products and services underthe Islamic Banking Scheme. These Islamic banking institutions offer acomprehensive and broad range of Islamic financial products and services rangingfrom savings, current and investment deposit products to finance products such asproperty financing, working capital financing, project financing, plant andmachinery financing, etc. (Sufian, 2007).

Literature reviewThe Islamic aspect of the Islamic banking practice is considered one of the mostimportant factors differentiating it from its conventional counterpart. Thus, for theIslamic banks to compete in the current dual markets, it is important for them tokeep aligned with the shari’ah requirements that represent the very essence of thereligious rules of Islam. In fact, banks looking to move into the Islamic bankingmarket first need to appoint a shari’ah board or a shari’ah counsellor to ensureconformity and minimise shari’ah risk (Sungard, 2008).

Generally speaking, shari’ah compliance means the conformity of the Islamicbanking transactions to the Islamic law or shari’ah. In elaborating further aboutshari’ah compliance, Dusuki and Abozaid (2007) distinguished between hukm qada’iand hukm diani. The former consists of the compliance with all the shari’ahconditions and requirements pertaining to a contract in its form and structure, whilethe latter is related to the purpose of the contract which must be in line with theshari’ah. It is important to note that the intention as well as the form and structureof the Islamic products should be in total compliance with shari’ah, for the Islamicbanks to be qualified as full shari’ah-compliant.

Shari’ah compliance of Islamic banks has been severely criticised especially inthe current era, where the industry is in a “between the hammer and the anvil”situation, i.e. faced with the innovation obligation to satisfy commercial objectivesthat are restricted by the shari’ah requirements, which makes the Islamic juristsexposed to the possibility of issuing fatwas that may run in conflict with theirlucrative position (Rosly, 2010). This actually gives a comparative advantage to theconventional banks that can be more innovative and competitive, as they have noother restriction except the banking acts.

Ownership is one of the issues that have evoked so many criticisms as to theshari’ah compliance of Islamic banks (Sairally, 2002). The rule of ownership heremeans that the Islamic banks should hold ownership of the asset, which isequivalent to taking risk and liability as well, following alkharaj bi daman oralghurmo bil ghunmi principle in Islam, that is there is no return without risk andliability. As such, Rosly (2010) argues that the rule of ownership must prevail in allthe sales bearing the contract of Al bay’.

However, in practice, Jarrar (2009) discovers that the Islamic banks transfer theownership to the customers, so that the latter will bear the risks as well as theliabilities involved. And this view was further supported by Dusuki and Abozaid

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(2007), who argue that the Islamic banks do not hold any liability. In fact, the bankstransfer all the risks to the customer leaving the bank without any undertaken risk(Kamali, 2007). This is done through what is commonly called beneficial ownership,while the customer will have his name on the official documents as legal owner(El-Din and Abdullah, 2007).

Though the Islamic banks attempted to resolve the ownership issue by resortingto the beneficial ownership, the latter is still not acceptable from shari’ah point ofview. This is because it is simply a modified version of the conventional practice(El-Din and Abdullah, 2007).

In the same context, the Islamic banks practice the sale of assets before acquiringthem (Sairally, 2002; Rosly, 2010), and this is strictly prohibited in Islam, as theprophet pbuh warned from selling something that one does not own. As such,Kamali (2007) came to the conclusion that the transfer of assets without transfer ofownership is not valid, and this view was consolidated by Rosly (2010) concerningsukuk, whereby he considered it to be non-shari’ah-compliant if the special purposevehicle fails to transfer the asset ownership to the holders or investors.

The criticisms addressed to Islamic banks include also that of penalty payment(Jarrar, 2009; Rosly, 2010). In practice, Islamic banks usually charge a penalty fee of1 per cent on the late repayment of the customers. El-Din and Abdullah (2007)highlight the majority view of the scholars stating that this penalty charge from thedebtor for the late payment is similar to riba prohibited by the holy Qur’an.Therefore, the owner cannot charge an additional amount if the hirer delays thepayment. This view was supported by Al-Omar and Iqbal (2000) confirming thatIslamic banks cannot charge anything extra if the buyer defaults or settles hispayment lately, because that would be a serious riba. As such, Usmani (1999) arguesthat the penalty stipulated, for instance, in case of financial lease agreement is notvalid in an Islamic lease. On the other hand, Meenai (2001 cited in Sairally, 2002)argues that in murabahah financing, once the contract is finalised, a fixed liability iscreated, implying that the price once agreed upon cannot be increased or decreasedin relation to time. Hence, clients who pay early cannot be rewarded, and those whodefault in making payments on time cannot be penalised.

Nevertheless, some of the scholars consider that the penalty payment ispermissible in some instances. For example, Baharum (2004, cited in El-Din andAbdullah, 2007) argues that when two parties or more enter into a valid contract,they will be bound by terms and conditions in the contract. As such, breaching anyof these terms will cause the innocent party to suffer a loss, which needs to becompensated.

Similar to the penalty payment, Dusuki and Abozaid (2007) considered thecustodial fee in the case of rahn or Islamic pawn broking to be equivalent to theinterest rate used in conventional banking. More importantly, Sairally (2002)highlights the value of time compensation, the use of interest rate to discount futurecash flows as well as the fact to include default risk margin with the mark-upmargin, as against the shari’ah rules. In this context, Kamali (2007) asserts thatsome aspects of Ijarah, for example, are not fully shari’ah-compliant. This includesthe maintenance and insurance fees that are solely borne by the customers (El-Dinand Abdullah, 2007), hence contradicting with the concept of justice in Islam.

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Moreover, the current debate on the shari’ah compliance of Islamic banks iscrucial regarding the benchmarking of the Islamic profit rate to the conventionalinterest rate (Rosly, 2010). This is quite different from the implementation ofconventional-like instruments, in the sense that some of the instruments aretheoretically and practically compliant with the shari’ah requirements; however, inthe profit rate determination, the Islamic banks use the conventional interest rate asa proxy or benchmark. At that level, this is considered as making conventional andIslamic banking operations similar (Yusof and Fahmy, 2008).

In addition, Islamic banks are perceived to have used various conventional-likeinstruments such as term charges in the case of hire purchase agreement. Theseinstruments are mostly based on market interest rate; making instruments likeAl-Ijarah Thumma al-Bay (AITAB), for instance, look like conventional hirepurchase agreement (El-Din and Abdullah, 2007). This argument is similar to that ofSairally (2002) concerning liquidated damages as well as the mark-down approachused by Islamic banks to give rebates to customers. In the same context, Rosly (2010)considered profit rate swap with upfront profit and profit made by Islamic banks forlate payment as conventional-like instruments.

Islamic banks are equally reproached the large reliance on Bay’ al ‘inah (Sairally,2002) and tawarruq, which is a direct instrument of debt creation (Siddiqi, 2007) andthat do not conceptually and practically differ much from the conventional. Inaddition, it is an indirect way of obtaining funds without involving in saletransactions and their implications (Sairally, 2002).

Bay’ al ‘inah is generally known as sale based on the transaction of Nasi’ah. Thedebtor sells to the creditor some object for cash which is payable immediately; thedebtor immediately buys simultaneously the same object for a greater amount for afuture date. Thus the transaction amounts to a loan. The difference between the twoprices represents the interest. Such contract was evolved in the early period of Islam,and it exists for the fundamental reason that a loan for interest is forbidden becauseit is equivalent to usury. In this contract, there is an economic interest for both theborrower and the lender, which at the same time circumvents the prohibition ofusury (Rosly, 2010, p. 8). This view is supported by that of Dusuki and Abozaid(2007) stating that Bay’ ‘inah-based and riba-based transactions are actually same.Rosly and Bakar (2003) also described ‘inah as a way of legitimising interest orinterest-like financing.

Another issue related to the shari’ah compliance of Islamic banks is thenon-existence of a written shari’ah law (Abdullah and Dusuki, 2004) as well asaccounting standards specific to the Islamic banking industry (Rosly, 2010). Assuch, some instruments like Al Ijaraha Thumma Al Bay’, Musharakah, Murabahah,etc. are entertained on the basis of conventional regulations and are recorded andtreated as financing rather than leasing (Abdullah and Dusuki, 2004; Rosly, 2010;El-Din and Abdullah, 2007). As such, El-Din and Abdullah (2007) argue that theabove matters can only be resolved by having shari’ah regulations and of courseaccounting standards specific to the Islamic banking principles. And as these arenot currently available, then Islamic banks are still not compliant with shari’ah.

Furthermore, there is an argument that touches the essence of the Islamicbanking practice today. That is the use of money in its current form, i.e. fiat moneyor debt money (Siddiqi, 2007; Meera, 2002, Meera and Larbani, 2009). This argument

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states that the use of money in its current form contributes to the unattainablenessof maqasid shari’ah, which represents the core of shari’ah itself. The use of thecurrent fiat money has also created a huge gap between the real market and thefinancial market, because of the exponential increase of debt.

Based on the above arguments, a number of researchers have reached a seriousassessment of the Islamic banking practice in terms of shari’ah compliance. Sairally(2002) came to the conclusion that Murabahah is a good way of charging interest, byreferring to the artificial transformation of the initial financing transaction. Dusukiand Abozaid (2007) supported this argument by stressing that the only differencethat exists between the Islamic and conventional banking systems is in thetechnicalities and legal forms, while, in essence, the substance is the same. Theauthors backed their argument by putting forward the statement of AhmadAl-Naggar that “Islamic banking operations differ only cosmetically fromconventional banking operations”.

From the customers’ point of view, Abdullah and Dusuki (2004) found thatIslamic banks’ customers perceive that there is no difference between AITAB andconventional hire purchase agreement. In the same context, Yusof and Fahmy (2008)argued that Islamic banks are seen by customers as just a change in names. Thetendency of Islamic banks to be modelled after the conventional banking system(Dusuki and Abozaid, 2007) is considered to be due to the eagerness of the Islamicbanks to participate and compete in the banking industry (Yusuf and Fahmy, 2008).Rosly (2010) supports this view and concludes that Islamic banks close the frontdoor to riba while opening the back door of riba.

MethodologyApproachIn line with the objectives abovementioned, a qualitative research approach wasapplied. According to Merriam (2009), qualitative research allows the researcher tounderstand how people interpret their experiences, how they construct their worldsand what meaning they attribute to their experiences (p. 5).

The choice of qualitative research methodology can be further explained by itsability to generate comprehensive information to determine the perception of thecustomers about the shari’ah compliance of their Islamic banks. Given that, briefanswers to structured questions will not be able to provide the required in-depthinformation to assess the issue at hand adequately (Weischedel et al., 2005).

Sample and data collectionA total of ten interviewees were selected depending on some specific criteria. Thesample is composed of well-educated and articulate individuals, with the ability tounderstand and respond to detailed questions concerning specific issues of Islamicbanks as they are practicing today. Polit et al. (2001) recommend that not more thanten interviewees should be included in the study, to allow an in-depth exploration inphenomenological studies. Furthermore, the sample of ten respondents isconsidered suitable, as it has been used in similar studies (Tijani et al., 2009;Koenigstorfer and Klein, 2010).

To access participants’ experiences, in-depth interviews were conducted,particularly semi-structured interviews, using a tape recorder. These interviews

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were ranging from 10 to 20 minutes. At the beginning of every interview, theinterviewees were given a guarantee of the confidentiality and were also assuredthat their identities will not be revealed in any publication.

The interviewees have been customers of their respective Islamic bank for two to eightyears. The informants were basically eight males and two females who were customers ofIslamic banks for at least two years. Notably, this will allow them to have a betterunderstanding and familiarity with the Islamic banking practice. The interviewees werecarefully selected to represent local Malaysian as well as international customerstemporarily or permanently living in the country.

Data analysisAll the ten interviews were reviewed several times before being transcribed. Subsequently,a phenomenological approach to analyse data was adopted, which involves interpreting andreflecting on the data transcript so as to achieve a holistic understanding of the meaning ofthe participants’ experiences (Alexis and Vydelingum, 2007).

Furthermore, the area of shari’ah compliance and other issues of Islamic bankshave been severely discussed from the experts and professionals’ point of view.Hence, this data analysis approach was chosen to allow the customers to expresstheir opinion based on their own experiences.

ResultsAwareness of the shari’ah compliance criticismsThe criticisms of the shari’ah compliance of the Islamic banks are the main concernsof this study because they lead indirectly to the assessment of the Islamic banks’shari’ah compliance perception of the Islamic banks’ customers. The interviewsprovide evidence that all the interviewees are aware of the current criticisms as tothe shari’ah compliance of Islamic banks. However, the degree of exposure dependson several considerations. In this regards, interviewee G noted:

I am exposed to many of these criticisms based on my field of study.

On the other hand, interviewee D associates his awareness about the currentshari’ah criticisms to the Bai’ Bithaman Ajil (BBA) and hire and purchase agreementor Al Ijarah Thumma Al Bay’, which is similar to the argument of El-Din andAbdullah (2007), Rosly (2010) and Siddiqi (2007):

One of them is that their job is trying to paint the conventional products with Islamicnames, such as Hire Purchase Agreement, BBA, etc. And at times, some of these productsare even worse or more dangerous than those of the conventional banking, because of theirshari’ah aspects. And because when shari’ah is attached to something, you want to fulfilthe rules of shari’ah to the latter. But we discovered that they are doing so in a way thatpays them not in a way that pays the customer.

In the same context of BBA, interviewee A noted that:

I heard a lot of criticisms of Islamic banks in Malaysia. Some people mentioned about thehila of using bay’ dayn. Recently, I heard about BBA, it is said that if we borrow for 20years, after 10 years of the loan payment, in BBA the principle would not be fully paid yet.Only the profit would be covered. But the riba takes a little bit of principle already. And wecannot only criticise, some researches also suggest Musharakah, but in Musharakah alsothe bank does not want to take risk because it is low profit for them, it means that they are

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doing business for the sake of money instead of achieving the maslahah which is givingmore benefit to the society. I can say overall. These are some of the criticisms that I haveheard.

The above statement is in line with the findings by Meera and Dzuljastri (2009). Theauthors found that BBA is even more expensive than the conventional housingloans, while musharkah mutanaqisah was found to be the cheaper mode offinancing. In addition to the BBA issue, interviewee E expressed that:

I heard many criticisms but I did not really emphasise the issues. However, most of themare about bay’ al ‘inah transactions.

Additionally, interviewee H was more concerned about the issue of benchmarking,which supports the argument of Rosly (2010):

Actually, the one that I am really particular about is benchmarking of the profit rate to theinterest rate. Islamic banks do not need to look after the conventional; they have to findanother basis, to move away from the conventional banking practice. I think the mainthing is interest rate, once the interest rate is eliminated, all the other issues will be solved.

Finally, interviewee J mentioned that:

Nowadays, everything comes from the western banks and the shari’ah boards of Islamicbanks just recommend them. For instance, credit card, we do not have to be so much crazywith the western innovation, we have to come out with something from our ownperspective of innovation and not to depend on their own innovation. I think there is lot oflacking; this is why we can see lot of criticisms, lot of awareness that has already beencreated among the practitioners and the clients of Islamic banks. I think this will at leasthelp the Islamic banks to think about it.

Overall, the interviewees showed a good degree of awareness of the currentcriticisms of the shari’ah compliance of the Islamic banks. The interviewees weremainly concerned with the benchmarking of profit rate to interest rate, theover-usage of darurah, the continuous mimicking of conventional banking products,etc. In the next section we will shed light on the perception of the customers on thesecriticisms.

Perception on the criticisms of the Islamic banks’ shari’ah complianceAfter examining the awareness of the interviewees about the criticisms to theshari’ah compliance of the Islamic banks, at this stage we will explore theirperception about majority of these criticisms. Overall, interviewee J agrees with thecriticisms to the shari’ah compliance of Islamic banks, and he expressed that:

These criticisms mainly come from academicians. And they themselves have noticed thatthere is huge difference between the theory and the practice of Islamic banking. I thinkthere is a reasonable ground for all these criticisms.

Interviewee E supports interviewee j’s view and he also looks positively to thesecriticisms. This:

To some extent, I agree with most of these criticisms […] […] These criticisms actuallyshow that the customers are aware and understand the operations of Islamic banks, tosome extent of course. Because otherwise, they would just let the Islamic banks operatejust like they want. So for me it is positive.

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Interviewee A showed a straightforward position by noting that:

If you go to the Islamic banks, you will see the rate already, which contradicts with theshari’ah rules, because the bank cannot state the profit upfront. In this way the choice offinancial instruments will depend on the rates offered, for example choosing mudarabah ifthe rate is higher compared to musharakah and so on. So it should not be like that. Becauseit is not only profit sharing but also loss sharing.

The statement by interviewee A supports the findings of Sairally (2002), Dusuki andAbozaid (2007) and Yusof and Fahmy (2008) claiming that the current practice ofIslamic banking today used many of the interest-like financial instruments.

Furthermore, one of the issues emphasised by the interviewees is the darurahusage as criticised by Dusuki and Abozaid (2007). In this regards, interviewee Jnoted that:

Darurah kind of things can be a good excuse for the Islamic banks while the environmentis not Islamic. If you are living in an Islamic environment, Islamic country where 70 percent of the population are Muslims, then darurah issues should not come to the picture. Itshould be in fact avoided. It is one of the things that we should stop practicing.

Interviewee I has been more specific by clarifying that the banks should distinguishbetween the kinds of darurah the banks are referring to. Because if the banks lookfor the easy way to run the business then there will be no limit for that darurahusage:

Actually, darurah is one of the dimensions of usulul fiqh. But we should also consider whatkind of darurah it is. Is it a real need to Islamic banks or not? In the stage where Islamicbanks are now, Islamic transactions are growing, the Islamic economies are also growing,so there should be some alternatives. But the darurah should not be for long time, it shouldchange after a period of time. So we cannot basically just keep depending on that darurah,we should find an alternative.

In response to the statement of interviewee I, interviewee G provided an example ofinstruments that are still in use though the alternative has already been found:

If it is in the issue of bay’ inah, then we have a better one now […] […] the bankers protecttheir interest, rather than achieving the shari’ah compliance and I think it is not acceptablefor them to do that, because it begins with the intention. The intention of the bank must beto fulfil all the shari’ah requirements and not to get the profit, though the bank anywayshould aim to get profit. But there should be progress towards achieving shari’ah.

The above statement provides evidence of darurah abuse in the current Islamicbanking practice, similar to the argument of Dusuki and Abozaid (2007).

Another issue highlighted by the interviewees is that of benchmarking the profitrate to the interest rate, which has been seen in the literature as against shari’ah(Rosly, 2010). Interviewee C noted that:

Islamic banks do not need to look after the conventional; they have to find another basis,to move away from the conventional banking practice.

However, interviewees H and J disagree with the above statement and consider thatIslamic banks should be using this basis at least for the time being; otherwise theywill lose the market share. Interviewee H’s comment was typical:

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This is a real issue. Because if they do not consider, they will lose the market, so in thisfinancial system, it is difficult to have a different benchmark, because the market is stillone single market. So if you do not consider that one that means you will lose. Either youwill lose the customer or you will lose the market. So for me, yes, they should consider, atleast temporarily.

This contradicts with the argument of Rosly (2010) and Yusof and Fahmy (2008). Theirarguments claim that when the profit rate is benchmarked to conventional interest rate,then the Islamic banks become more or less similar to the conventional banks.

The interviews also revealed the fact that Islamic banks in Malaysia operate in a dualbanking system, i.e. under the conventional regulations and accounting standards, andthis was claimed to be affecting the shari’ah compliance of Islamic banks as highlighted byAbdullah and Dusuki (2004), Rosly (2010) and El-Din and Abdullah (2007). Interviewee Gand half of the interviewees all agree with the above argument and clearly note that:

The fact that Islamic banks operate under the conventional regulations and accountingstandards strongly affects the shari’ah compliance aspect of Islamic banks. In fact, thesubstance is more important than the form of transactions, and in this case, the form andsuperficial look Islamic but the substance is nothing but a conventional banking operation. Inother words, this is a disguised form of conventional banking.

However, another half disagrees that the accounting standards and regulations affectthe shari’ah compliance of the Islamic banks. Interviewee J’s comment was typical:

To me, with my little knowledge, the accounting aspect has no problem with the practice ofIslamic banking. For example if you have debit/credit accounting, it does not mean that thefigures have an Islamicity problem. The problem is what the figure is representing, what theamount you are getting represents, profit or interest, from which project it is coming from, etc.But your mechanics, your tools should not be a problem, so there is nothing wrong with thetechnique or calculation. The problem is where the figure is coming from, is it from a halaltransaction or non halal. For the accounting standards, we can take good lessons from thewestern practice, because this has been in place for more than 400 years, and Islamic bankingis newly born child compared to the conventional.

Overall, majority of the interviewees agree with most of the criticisms of the shari’ahcompliance of Islamic banks. However, the customers perceive that the use ofconventional-like instruments can be solved by first stop abusing the darurah principleand work forward by establishing Islamic regulations and accounting standards, byfurther learning from the existing Western regulations. In the meantime, the customersperceive that the current criticisms will also motivate the Islamic banks to move forwardto the full shari’ah compliance.

Discussions and conclusionsThis study provides insights into the experiences of the Islamic banks’ customers inMalaysia regarding the shari’ah compliance parameter of their respective Islamicbanks. Prior to the discussion about shari’ah compliance of the Islamic banks from thecustomers’ experience, a number of other themes were evoked during the interviewsessions.

The findings revealed that the interviewees have considerable exposure andawareness of the current criticisms of the shari’ah compliance of Islamic banks. In thisregards, most of the interviewees agree and support majority of these criticisms, but

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they are also optimistic about the future. They believe that these criticisms will motivateIslamic banks to work towards the achievement of full shari’ah compliance, byestablishing their own Islamic banking regulations and accounting standards, and alsoby regulating the use of darurah for the current period.

The findings of the current study have significant contributions to the body ofknowledge, practitioners and stakeholders, as well as to the policymakers andregulators. In fact, this is the first study that examines the shari’ah issues of Islamicbanks from customers’ perspectives, which enriches the literature in this area ofresearch. Similarly, the findings provide insights on the customers’ perception on thematter of shari’ah compliance, which will motivate the banks to deploy more efforts tocomply with the shari’ah and, subsequently, with the expectation of the customers. Thisalso means that the policymakers and regulators should implement the necessaryregulations to ensure the compliance of Islamic banks with shari’ah.

In fact, the darurah principle has long been applied in dealing with Islamic financeshari’ah issues. Currently, these issues should be acknowledged by the governmentauthorities and the corresponding regulatory bodies in Islamic finance, and attemptsshould be made to find alternative solutions to these issues. This is particularly relevantin the current era of increasing globalisation, where Islamic banking has to preserve itsunique identity.

Though the findings provide great indication on the customers’ perception aboutshari’ah compliance of Islamic banks, the study has some limitations that should beconsidered for the future studies to be conducted in this area. Firstly, the sample is takenfrom mainly two Islamic banks in Malaysia, and it is also relatively limited, so theresults cannot be generalised to the whole country. Secondly, the study focuses only onone aspect of the Islamic banking principles, hence the future studies are recommendedto cover other aspects of it. The future studies are also recommended to use mixedmethodology with triangulation to validate the results.

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Corresponding authorAbdelghani Echchabi can be contacted at: abdelghani.mo@gmail.com

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