The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Shubuhat by Type of Bank: A Study on Islamic Banks in Malaysia
Essa Ries Ahmed a, Md Harashid Haronb, Sofri Yahya c a.b c
Universiti Sains Malaysia, School of Management, 11800, Penang, Malaysia.
Universiti Sains Malaysia, Gragduate School of Business, 11800, Penang, Malaysia.
a
b
* c
[email protected],
[email protected] ,
[email protected],
ABSTRACT Shariah Compliance is the single most important element that distinguishes between conventional and Islamic banks. Islamic banks have to offer products and services, and conduct operations that are halal, and neither haram nor shubuhat (doubtful matters). No study has been ever conducted as regards specifically the latter in the Islamic banks in Malaysia. The objectives of this paper are, therefore, to firstly find out if there are such thing as shubuhat in Islamic banks, and if there are; to secondly determine differences of shubuhat by type of Islamic bank. A total of 21 Islamic banks in Malaysia representing the whole population was selected. Secondary data was used and sourced from the banks’ 2010 annual report. Using descriptive statistics, the existence and the extent of existence of shubuhat in Islamic banks operating in Malaysia was ascertained. It was found that shubuhat did exist in some Islamic banks, and local Islamic banks had slightly higher shubuhat than that of their international counterpart.
Keywords: Shariah Compliance, Shubuhat (Doubtful matters), Halal and Haram * Corresponding author 1
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
1. Introduction Shariah compliant - which is dynamics in nature (Haron, Yahya and Digale, 2013) - is the essence of Islamic banks and Islamic finance. In fact, it is the essence of all matters that require the certification of Islam. All this while, the emphasis on the shariah compliance has been on the matters of halal and haram. The compliance of the shariah is viewed as engaging in halal activities and avoiding from haram activities. However, according to the Hadith of Prophet (PBUH) as in Sahih Al-Bukhari & Muslim: “Truly, what is lawful is evident, and what is unlawful is evident, and in between the two are matters which are doubtful (shubuhat)” (Bukhari, No: 52), (Muslim, No: 1599). This Hadith is one of the major principles of Islam, which is under the provisions of Halal and Haram. In this Hadith, the Prophet Mohammed (PBUH( explains what doubtful things are, and prescribes a legitimate approach in dealing with them. Despite the guidance from the Hadith above, as one of the sources of knowledge in Islam, the literature on shubuhat with regard to shariah compliance is almost non-existent, much less in Islamic banking. As such, this paper can be regarded a humble-and-infinitesimal contribution toward that respect. 2. Islamic banking in Malaysia Analysts and industry observers opine that Malaysia was at the forefront of Islamic finance owing to its conducive regulatory and legal framework coupled with the right Islamic financial infrastructure and human capital development. Most foreign players are upbeat about 2
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Malaysia’s Islamic banking sector, given that Muslims make up over 50% of the population and more than half of the Islamic finance customers are non-Muslims. Realizing the rapid growth and further potential of Islamic finance in Malaysia, and helped by the Malaysian government policy on Islamic finance and banking; foreign banks are aggressively expanding their Islamic banking operations locally. They made the Islamic banking more competitive, even though are not welcomed by the local counterpart. Undeniably, Malaysia is shariah-compliant-friendly country. The history started around fifty years ago with the establishment of Tabung Haji, and intensified with the islamization process some thirty years ago till today. In the later stage was when the first Islamic banks in the country were first established, in 1982. Currently, Malaysia is moving to the next level of shariah-compliant era where government is now seriously putting rules and incentives to encourage companies to be active participants in shariah-compliant fields. Cooperating with some organizations such as Securities Commissions, Bursa Malaysia, Bank Negara Malaysia and some other financial institutions, the Malaysian government has introduced varieties of product choices for Islamic finance. This extended to Islamic financial product traded in capital market which is a market where activities are carried out in ways that do not conflict with the principles of Islam. In Malaysia, this Islamic capital market is monitored by Shariah Advisory Council (hereafter SAC). It established by the Securities Commission in 1996 under section 18 of the Securities Commission Act 1993 (SC, 2007). The SAC was given the mandate to ensure that the running of Islamic Capital Market complies with the principles of Shariah. In line with shariah principles Islamic banks are engaged in product development activities to cater for the needs of a wide range of parties. It is essential for these banks to 3
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
innovate and operate within the ambit of shariah. Hence, the need for supervision is an integral part of any institution that deals by the name of Islamic finance. The safeguard to make Islamic banks perform their dealings according to the shariah comes when there is a legitimate control body in the bank (Lahsana, 2010) and Shariah Supervisory Board (SSB) is formed to shoulder the tasks. The SSB normally consists of fiqh muamalat experts to guide the bank’s operations and transactions in accordance with the rules of Shariah. Malaysia and several other countries have passed laws to govern the formation and functions of Shariah Supervisory Board. Therefore, Shariah Supervisory Board undoubtedly forms the most important and influential entity in any Islamic financial institution (Mass, 2010). However, as alluded earlier, a part of being shariah compliant is avoiding the shubuhat (doubtful matters/deeds). Thus, it is essential that all dealings and activities in the Islamic banks’ business to have to avoid shubuhat. For example, Muslims are required to work in Halal activities because "Shariah is a body of legal principles derived from Quran, the teachings of the prophet Mohammed (pbuh1) and interpretations of those teachings by Islamic jurisprudential scholars" (Masudi, 2005). In general, Shariah seeks to bring benefits to the individual and the community, and its laws are designed to protect these benefits and to facilitate the improvement and perfection of the conditions of human life on earth (Kamali, 2009). Shubuhat are matters that are neither distinguishable as being halal nor haram, thus, not many people recognize them or know their ruling. Scholars, however, can reach a rule regarding such matters by applying a suitable text or qias (analogy) or istishab (accompanying). So if the scholar were to come across such a matter in which it is not immediately obvious whether it is 1
Peace be upon him
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
halal or haram, then he would attempt to classify it as one of the two with the appropriate evidence. If he is able to classify it under halal then it is considered as such. Such matters may not be free of doubt even then and if it is so then it is safer to leave it falling thus under the Prophet’s words, "he who avoids doubtful deeds has achieved purity in his religion and his reputation". As for those matters that a mujtahed is unable to classify, should he rule it to be halal or haram or refrain from ruling (al-twaquf) (Al Nawwawi: Vol. 11∕27, 16∕111). Islam encompasses all aspects of life; Muslims should follow the rules of Islamic law requirements and will also be extended to cover all aspects of life and not be restricted and limited to certain areas, particularly finance and banking. There tarnishes, and things are not issues clearly and in accordance with Islamic Shariah. There are many doubtful and controversial issues, especially in the institutions that are dealing with both systems (traditional and Islamic). This will affect Muslim customers, if the company is committed to comply with the law, even with a minor amount of activities that do not meet the requirements of Shariah (Abdul Rahim, 2008). According to Jamal (2002), it has been mentioned before that Imam al-Bukhari recorded this hadith in the Book al-Buyu' (commercial). When it comes to trade there are a considerable amount of doubtful activities, for example where fraud is done professionally. Therefore one must be careful if the activity is associated with obvious commercial, lawful or not allowed, otherwise, one should avoid it if it is doubtful.
As such, this paper will look into shubuhat in Islamic banks in Malaysia and ascertain it existence, if any, and extent of its existence; and its differences between local and foreign Islamic banks. 5
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
3. Shubuhat (the plural of shubhat) Al Shubha lexically means likeness; that which bears resemblance to two things. Allah (swt2) says in the Quran: “for surely to us the cows are all alike -tshabaha-” (Al-Baqarah: 70), i.e. It has become difficult for us to distinguish between the required cow and the others. “and those who have no knowledge say: Why does not Allah speak to us or a sign come to us? Even thus said those before them, the like of what they say; their hearts are all alike – tshabahat-”. Indeed we have made the communications clear for a people who are sure” (AlBaqarah: 118) i.e. they are alike. “He it is Who has revealed the Book to you; some of its verses are decisive, they are the basis of the Book, and others are allegorical -mutshabihat-; then as for those in whose hearts there is perversity they follow the part of it which is allegorical -tshabaha-, seeking to mislead and seeking to give it (their own) interpretation. But none knows its interpretation except Allah, and those who are firmly rooted in knowledge say: We believe in it, it is all from our Lord; and none do mind except those having understanding” (Al-Imran: 7). Al shubhat in shariah means doubtful deeds or matters. The scholars have disagreed on how to define al shubha according to shariah; some say as ibn Rajab al-Hanbali said "It is the
2
Subhana wa ta’ala
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
doubtful deeds that occurs whenever there existed two different beliefs regarding a matter generated from two different reasons". Al Showkani said in Nayl Al Awtar, "It is that for which there is conflicting evidence”. Some scholars said that is mubah (permissible) and others said it is makrooh (disliked). (Nayl Al Awtar, Al Showkani). Ibn Daqeeq Al Eid said, " doubtful deeds is any matter supported by conflicting evidence from Quran and sunnah, and could carry more than one meaning, and it is devout to avoid" (Al Nawawi, 1997: p 24). Yusuf (1989) said "In the mind of a mujtahed (a scolar qualified to issue rulings) there is a region in between the obvious halal and the obvious haram, either due to conflicting evidence, or due to doubtful in the application of the evidence on a particular matter. It is devout as a Muslim to avoid these doubtful deeds so as not to be dragged into resembling what is known to be haram. Al-Imam al-Suyuti said in his commentary on Sunan Al Nassa'i while narrating this hadith, " The scholars have had a lot to say on the explanation of doubtful deeds, we can explain it in the best way, doubtful deeds is confusion (iltibas) and this term is used to describe something resembles a certain base matter, while at the same time it resembles another matter conflicting with the former, as if it resembles the latter more closely, hence they say ishtabaha i.e. its mixed from two deferent things and become one thing. Obviously, here it is devoutness to avoid this confusion and whoever does that is described as devout and conservative in his religion". Al Suyuti has also explained this matter in detail in his book Al Ashbah wa al nathaer. As for those who said that doubtful deeds are the matters that are considered permissible (mubah), their reasoning is that these matters are neither explicitly halal, nor explicitly haram. Therefore, it is considered as mubah, especially as excesses in these permissible matters could lead to haram, for instance in food, drink and attire, etc. And those who defined it as makrooh 7
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
have taken into consideration that shariah has warned against doubtful deeds, and since there is no clear evidence of the forbidding, thus, it is considered as makrooh, and excesses of this nature certainly lead to haram itself. In this study, shubhat is defined as a mixture of haram activities and halal activities in Islamic banks, the details of which will be explained in the following section, methodology. 4. Methodology In this paper, the existence and extent of existence of shubuhat in Islamic banks was determined using the quantitative approach. The study was conducted on population of the Islamic Banks in Malaysia. The quantitative data were collected from the annual reports of the identified Islamic banks. These Islamic banks were comprised of two different types of banks: local and foreign (Association of Islamic Banks in Malaysia (AIBIM), 2010). Total Islamic Banks were 21 banks, as on March 2010 (see Table 1). Therefore, the entire population was studied without taking smaller samples for the analysis. Table 1: Islamic Banks in Malaysia Type of Banks
Number of Banks
Foreign Islamic Banks
4
Local Islamic Banks
17
Total
21
Source: AIBIM (2010)
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Arguably, there are many places in which shubuhat may occur, but this paper uses one of the main yet unavoidable Islamic banks’ activities - dealing with conventional banks as a proxy to measure shubuhat. Shubuhat, i.e. dealing with conventional banks: Shubuhat is measured using mixture-proportion basis of the amount of deposited money (i.e. revenue ,expenses, assets and liabilities) by the Islamic banks with the conventional banks or vice versa over total funds of the Islamic banks (i.e. its rate to total). Two methods were used, of finance and revenue, for the mixture-proportion measurements in Shubuhat (Shehatah, 2009): i. Method of analyzing the structure of finance in order to determine the proportion of the Haram mixture. This method was based on analyzing the elements of the structure of finance to the elements of self-financing, and elements of finance based on interest, to determine the percentage. The proportion of financing was calculated based on interest to the total financing structure as in equation 1:
Total finance by systemof interest 100% Total funding (self - financing finance based on interest)
(1)
ii. Method of analyzing elements of income and expenses to estimate the ratio of income mixing haram
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
This method was based on the idea of separating income of halal activities (away from the doubtful) from income of forbidden activity. For example: for the earned bank interest, income from securities of the institutions shares dealing with haram operations, interest earnings resulting from debt rescheduling to others, demurrage and the interest of bonds (Shehatah, 2009). On the basis of this method, revenue from haram is divided on the total income and then percentage was calculated from equation 2:
Revenue gained from the frobidden 100% Total Revenues (income halal income haram)
(2)
On the other hand, the average means of shubuhat (finance or revenue) by type of bank is calculated as follows: Average means of shubuhat (finance or revenue) of local Islamic banks, equation 3: Total shubuhat (finance or revenue) of local Islamic banks Number of local Islamic banks (3) Average means of shubuhat (finance or revenue) of foreign Islamic banks, equation 4: Total shubuhat (finance or revenue) of foreign Islamic banks Number of foreign Islamic banks (4) 5. Results 10
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
The descriptive analyses of shubuhat (Finance and Revenue) and their means differences by type of Islamic banks are presented in the succeeding sections. The statistics on shubuhat by individual Islamic banks is tabulated first, followed by means of shubuhat of local and foreign Islamic banks. 5.1 Descriptive Statistics on shubuhat of Finance and Revenue As elucidated earlier, the shubuhat has two types, namely shubuhat of finance and shubuhat of revenue. The cross tabulation analysis was used to analyze the shubuhat in the Islamic banks. Two banks did not have shubuhat based on finance (i.e. 9.5 percent). Table 4: shubuhat of finance Ratio
Frequency
Percent
0.000
2
9.5
0.001 to 0.010
5
23.8
0.011 to 0.030
5
23.8
0.031 to 0.600
9
42.9
Total
21
100.0
On the shubuhat based on revenue, the findings showed that there were 6 Islamic banks that did not fall under this category, a percentage of 28.6 as illustrated in Table 5.
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Table 5: shubuhat of revenue Ratio
Frequency
Percent
0.000
6
28.6
0.001 to 0.010
1
4.8
0.011 to 0.030
6
28.6
0.031 to 0.201
8
38.1
21
100.0
Total
5.2 Means of shubuhat (finance) between local and foreign Islamic banks The results of shubuhat (finance) showed that the local Islamic banks had higher mean (0.09288) of shubuhat as compared to their foreign counterpart (0.01350), see Table 6. Table 6: Means of shubuhat of finance Type
Mean
Number of banks
Std. Deviation
Local
.09288
17
.144597
Foreign
.01350
4
.011358
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The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Total
.07776
21
.133290
5.3 Means of shubuhat (revenue) between local and foreign Islamic banks As the previous results above, local Islamic banks still had higher mean of shubuhat (0.04312) as compared to their foreign counterpart (0.03100) as shown in Table 7. But, the difference was getting smaller, 0.01212 as compared to the difference of shubuhat (finance), 0.07938. Table 7: Means of shubuhat of revenue Type
Mean
Number of banks
Std. Deviation
Local
.04312
17
.057004
Foreign
.03100
4
.030833
Total
.04081
21
.052592
6. Discussion 6.1 The extent of existence of Shubuhat Firstly, as one of the objective of this paper, this study found that shubuhat did exist in the Islamic banks (Tables 4 and 5). Most of the Islamic banks fell on the bands of shubuhat. About 10 percent of the Islamic banks had zero shubuhat of finance, while around 30 percent of the Islamic banks had shubuhat of revenues. 13
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
6.2 Differences in shubuhat by type of bank Secondly, to further understand the shubuhat, differences of shubuhat by type of banks was examined, see Tables 6 and 7. The mean of shubuhat of Islamic banks based on finance was 0.07776, while the mean of shubuhat of Islamic banks based on revenue was 0.04081. On the whole, the average shubuhat of Islamic banks was better of revenue as opposed to of finance. Finally, in an effort to fulfill the second objective of this paper, a closer look at Table 6 and 7 had been done. From both tables, it was found that the means of shubuhat of finance and revenue were higher for local Islamic banks as compared to international Islamic banks, even though the gap was infinitesimal in the case of shubuhat of revenue.
As banks are highly regulated
institutions, the differences are probably due to more commitment from the foreign banks to the rules and regulations of the host country, specifically of shariah to keep away from the unovaidable haram-related activities, leading to lower resultant shubuhat. 6.3 Implication The findings highlight earlier leads to several implications. The discussion on these implications will be divided into two perspectives namely, theoretical and practical. Theoretical perspective First this study added a new discussion on understanding of shariah compliance, i.e. shubuhat in the Islamic banking. This study also identified the relationship between Shubuhat and type of 14
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Islamic banks. Both are novels finding in the shubuhat study. Besides, the importance of avoiding shubuhat has been mentioned repeatedly in the holy Qur’an and Hadith. Practical Perspective Type of banks is proven to be one of the essential control mechanisms for predicting the extent of existence of shubuhat in the Islamic Banks. This also gives valid reason to committee of SAC (Shariah Advisory Council) in Bank Negara for its on-going strategy of having more foreign Islamic banks operating in Malaysia. Implicitly, the mechanism of effecting reduction and subsequently avoidance of shubuhat by local Islamic banks could be learnt through their foreign counterpart. 6.4 Future Research The study is on shubuhat and type of Islamic banks in Malaysia. Having known the relationship of shubuhat with type of Islamic banks, therefore, it is recommended for future study to compare it with Islamic Banks in other countries. Furthermore, there are many other factors that would contribute to differences in shubuhat in Islamic Banks. Therefore, future research may consider these factors. It is recommended for future studies to apply qualitative methods such as case study specifically on each of factors for better understanding of shubuhat in Islamic banks. This study is descriptive in nature, it is suggested that future study would employ inferential statistics, especially as regards shubuhat in Islamic banks in the world. 7. Conclusion 15
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
This study established the existence of shubuhat, and described the extent of existence of shubuhat in Islamic banks in Malaysia; and the extent of existence of shubuhat by type of bank. The study found that only a few Islamic banks are shubuhat-free, and the extent of existence of shubuhat is higher in local Islamic banks. Customers, Islamic banks and the relevant authorities’ bodies can now literally turn to the annual reports to ascertain the existence of shubuhat in particular Islamic banks. The extent of the existence of shubuhat can be further specifically determined by looking at whether the Islamic banks are of local or of foreign origin. References Al-Qur’an, the Noble 1996, Saudi Arabia: Alharamain Islamic Foundation. Abdul Rahim 2008, ISRA Islamic Finance Seminar shariah audit for Islamic Finance services: the needs and challenges, International Shari’ah Research Academy for Islamic Finance (ISRA) Islamic Finance Seminar held in Kuala Lumpur on 11th. November 2008. Association of Islamic Banks in Malaysia (AIBIM), 2010, Main Page, Retrieved March 14th, 2010 from http://www.aibim.com Al-Bukhari, M. I. I. 1997, Sahih al Bukhari, Islamic Book Service: Kaherah. Al-Imam al-Suyuti 1979, Lubab Al naqul fi asbab al nuzul, Darul kutub al ‘elmiyah: Kaherah. Al-Imam al-Suyuti 1979, commentary on Sunan Al Nassa'I with Al Suyuti – Al Hashiah: 7/243, Bait al afkar al dawliyah: Kaherah. Al-Nawawi, Y. 1997, Al-Majmoo Sharh al-Muhadhib, Beirut: Daar al-Fikr. Al-Shawkani, M. 1997, Nayl al-awtar min ahadith sayyid al-akhyar, sharh muntaqa al-akhbar, Dar al-jil: Beirut. Haron, M.H., Yahya, S., and Digale, A. 2013, Shari’ah-Compliant Public Listed Companies in the Kuala Lumpur Stock Exchange (KLSE): Are there Differences across Sub-categories of Company Characteristics?, Emerald Group Publishing Limited, International Journal of Islamic and Middle Eastern Finance and Management (in press). 16
The 9th Asian Academy of Management International Conference, 13-16 October 2011, Penang, Malaysia.
Kamali 2009, Maqasid al Shariah made simple, The International Institute of Islamic Thought IIIT: Herndon. Lahsasna, 2010, Shariah aspects in business and finance, INCEIF: Kuala Lumpur. Mass Riyaz Malik 2010, Shariah Supervisory Board in Islamic Finance, International Center for Education in Islamic Finance(INCEIF): Kuala Lumpur. Masudi 2005, Islamic way of life (English, Trans. Second edition Vol. 1), Himilaya publishers: New Delhi. Muslim, A. 1971, Sahih Muslim, Dar Ihya al-Kutub al- Arabiyya: Kaherah.
Securities Commission (SC) 2007, Act 2007 - Securities Commission Malaysia, available at http://www.sc.com.my/eng/html/resources/guidelines/SC_%28Amendment%29_Act2007 .pdf Shehatah, H. 2009, Islamic Financial Analysis for The financial statements of companies, Alexandria Library: Alexandria. Yusuf, Q. 1989, The lawful and the prohibited in Islam, Al-Faisal Press: Kuwait. Jamal, A. 2002, Commentary on the Forty Hadith of al-Nawawi, Al-Basheer Publications and Translations: Kuwait.
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