Islamic Banking and Finance

:: 14 Works Cited
Length: 1937 words (5.5 double-spaced pages)
Rating: Excellent
Open Document
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Text Preview

More ↓

Continue reading...

Open Document


1.1 Background Study
The Islamic banking and finance sector is a fast growing industry, where it expanding and getting stronger each and every year. According to Tahmoures (2013), there are over 300 Islamic banks and financial organizations successfully running their business from Dubai, Los Angeles, London, Karachi, Jakarta, Cairo, Riyadh and many other cities in the world. The Financial Times estimates the value of the industry in overall are exceeding $1 trillion (Christophe, Rima, Laurent, Financial Times Special Report, 2010). Most of the expansion has been contributed by the issuance of sukuk.

According to Nazri (2012) in his presentation of Islamic Banking Operations and Regulatory Framework Workshop in Sri Lanka, sukuk is defines as certificates that represent the holder’s proportionate ownership in an undivided part of the underlying asset, where the holder assumes all rights and obligations to such assets. Commonly, sukuk is known as ‘Islamic bonds’, but the correct translation of the Arabic word of Sukukis, ‘islamic Investment Certificates’ (Tahmoures, 2013). The term ‘Islamic bond’ is being pointed out as the only difference between sukuk and conventional bond is that the regulation consistent with Islamic principle of financial trading apply to sukuk (Arif and Meysam, 2012).

Conventional bond is a debt obligation issued by corporation or government in order to obtain financial resources (Zhamal, 2010). The issuer is obligated to pay back the bondholder a principal amount plus periodic interest payments or coupons, upon maturity. This conventional bonds are prohibited by Shariah due to the interest bearing loan transaction (Nazri, 2012). Unlike conventional bonds, sukuk are issued accordance to Shariah principle (Fadma and Rachid, 2013).

Despite of the differences between sukuk and conventional bond, Balkish, Azwan and Rabiatul (2012) stated that, both financial instruments have fixed term maturity, bear profit (coupon) and tradable at normal yield price. However, sukuk must be related and attached to specific asset, service, or project for a certain time period.

1.2 Problem Statement
According to Dodik (n.d), there is only 20 total of results from Proquest searching of sukuk. Today, the increasing popularity of Islamic finance and banking product around the world, especially the issuance of sukuk, a great number of research has been attempted to investigate difference, application, and performance as related to sukuk. In the past research made by Fadma and Rachid (2013), they only evaluate the performance of sukuk portfolio in compared to conventional bond portfolio, in the context of Malaysian market. In their study, they are trying to find either the correlation between return of the portfolio of sukuk and bonds exist.

How to Cite this Page

MLA Citation:
"Islamic Banking and Finance." 20 Aug 2017
Title Length Color Rating  
Islamic Banking and Finance Essay - 1.0 INTRODUCTION 1.1 Background Study The Islamic banking and finance sector is a fast growing industry, where it expanding and getting stronger each and every year. According to Tahmoures (2013), there are over 300 Islamic banks and financial organizations successfully running their business from Dubai, Los Angeles, London, Karachi, Jakarta, Cairo, Riyadh and many other cities in the world. The Financial Times estimates the value of the industry in overall are exceeding $1 trillion (Christophe, Rima, Laurent, Financial Times Special Report, 2010)....   [tags: Islamic Banking Essays]
:: 14 Works Cited
1937 words
(5.5 pages)
Strong Essays [preview]
Essay on Islamic Banking: Sharia Compliant Finance - ... Islamic bank cannot spend the acceptable part of their safety liquidity reserve in hard cash with bank. Likewise, the liquid extra also leftover unwanted. The different, the traditional banks of some countries do not bear and suffer from this kind of limits. As such, the output of the Islamic banks is badly and harmfully affected. 4. Lack of liquidity of assets: Another problem caused by the spread of funding formulas based on religion, which is difficult to convert these formulas financing to financial instruments that can be negotiated....   [tags: bad, forbidden, islamic money markets] 2129 words
(6.1 pages)
Research Papers [preview]
Essay about Awarness of Islamic Banking Culture in Pakistan - Published information about principles of Islamic banking and finance and their applications is growing day by day. Pakistan is one of the 57 Islamic countries having a total population of over 170 million where majority of population practice Islam. Steps for Islamization of banking in Pakistan were initialized during 1977-78. Elimination of interest from the operations of specialized financial institutions took place in 1979 and from commercial banks during 1981-85. Commercial banks in Pakistan were cased to accept any interest baring deposits and all deposits were treated on the basis of profit and loss sharing since 1985....   [tags: Finance ]
:: 18 Works Cited
3308 words
(9.5 pages)
Term Papers [preview]
Islamic Finance Industry Essay - ... Yet it does not occur in each cycle, or downturn, that so many factors coexist in one time that shakes the global economic system as much as it happened in the latest crisis starting in 2007-2008. (Renata JankaToth). The financial crisis of 2007-2008 also known as the Global Financial Crisis is considered the worst financial crisis. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world....   [tags: banking, crisis,economy] 933 words
(2.7 pages)
Better Essays [preview]
Essay about Profit Loss Sharing in Islamic Banking - Profit-loss sharing In order to be able to understand the core factors that contribute to the lack of profit-loss sharing in Islamic banking, this mode of financing must first be introduced. The fundamental basis for PLS is based on equity orientation. Such a mode of financing allows all parties involved to share both risks and losses in the ratio of their individual capital input, while the profit is allocated on an agreed ratio. This Islamic mode of banking guarantees the sharing of profits or losses and ensures no accrual of a fixed rate of interest, which promotes the efficiency and stability of the Islamic banking system....   [tags: Finance, Islam]
:: 13 Works Cited
1883 words
(5.4 pages)
Powerful Essays [preview]
Concepts of Islamic Finance Essay - ... The principle in Islamic finance include the prohibition of any predetermined payment over and above the principal amount (riba), prohibition of the transaction involving uncertainty about subject-matter and term of contract (gharar) which is refer to the selling of goods that does not exist or does not owned, prohibition on maisir which is refer to the transaction based on speculating or gambling and prohibition on the investment by dealing with unlawful or haram business such as drugs, alcohol and gambling....   [tags: shariah, interest, banking] 878 words
(2.5 pages)
Strong Essays [preview]
Essay on Islamic Financial System: The Sukuk or Islamic Bond - It is in no doubt that the Islamic finance and banking sectors have grown into a significant market that played a great role and emphasis in the worldwide financial industry. As a matter of fact, the Islamic finance industry presented and showed a stellar development and growth in terms of figures (Hancock, 2013), as Islamic finance is maturing at 10 to 15 percent annually, and there is no indication that such inclination is to decelerate in the future (Afshar, 2013). Furthermore, Islamic banking is known as a key contributor in the Islamic finance total assets in terms of its market share, which is of about 80.3% (, 2013)....   [tags: islamic law, Prophet Muhammad] 1010 words
(2.9 pages)
Strong Essays [preview]
Essay about The History and Development of Islamic Finance - ... Its promote soundness and stability of the Islamic financial industry by issuing global prudential standards and guiding principles. Nowdays, Malaysia try as much as posibble to continue to contribute to the strengthenig and soundness of global Islamic finance. The current issues of Islamic finance Nowsdays, the Islamic fainance system was comprehensive and expended its use because it is cheaper and fair system. However, some of tsystem used in Islamic finance has limition. There are: a) The lack of appetite for risk-sharing Assets In Islam’s economic principle prohibit of interest and pure debt, and sharing of risk....   [tags: economic, interest, investment] 1783 words
(5.1 pages)
Better Essays [preview]
The Evolution of Islamic Finance and Financial Institutions Essay - ... The Dow Jones Islamic Market Index (DJIM), launched in 1999 in Bahrain, was first benchmark to represent Islamic-compliant portfolios and for investors seeking investments in compliance with Muslim Shariah law. The DJIM in essence is a specialized ethical index that screens out prohibited stocks, as defined by Shariah law, and it is monitored by Muslim scholars. Malaysia is recognized as one of the dynamic leaders and practitioners of Islamic finance particularly in the Islamic Banking, Sukuk and Islamic Equities Markets....   [tags: economic positioning] 681 words
(1.9 pages)
Research Papers [preview]
Financial performance of Islamic banking and conventional banking in United Kingdom- A Comparative Study - Chapter 1: Introduction 1.1-Introduction to Chapter: This chapter describes the brief introduction about research title, research aims, research objectives, research hypothesis, research context and research limitation used in this research. 1.2-Research Title: Financial performance of Islamic banking and conventional banking in United Kingdom- A Comparative Study. 1.3-Research Aim: The Aim of this research is to analysed and evaluate the financial performance of European Islamic Investment Bank (UK) with Allied Irish bank (UK) and Northern Bank (UK), In Terms of their Profitability, Liquidity, Risk & solvency & Efficiency Ratios which will give an insight comparison of overall financial per...   [tags: Economics ]
:: 5 Works Cited
1634 words
(4.7 pages)
Powerful Essays [preview]

Besides, they also trying to identify either sukuk portfolios return differ from conventional bond. This research is being made to find out the performance of sukuk in general. However, current study attempt to address the performance of sukuk in more specific area. According to the Economist Intelligence Unit (2012), industrial output increased by 5.8% year on year in October. The performance demonstrated how Malaysia is handling to stabilize the impact coming in from the export sector as result of economic slowdown. Hence, the issuance of sukuk in the industrial product sector is quite promising. In order to measure the performance of the issuance of sukuk, factors related must be identified. One study made by Zhamal (2010) identified type of risk associated with sukuk and conventional bond. However, the study is referring to sukuk capital market in general. Thus, this study is designed to investigate the factors affecting performance of sukuk in Malaysian industrial product sector.

1.3 Research Question
1.3.1 Does sukuk performs well in Malaysian industrial product sector?
1.3.2 Whether inflation gives impact to performance of sukuk in industrial sector?
1.3.3 Whether interest rate gives positive or negative relationship toward sukuk’s performance in industrial sector?
1.3.4 Does gross domestic product influence industrial sector sukuk’s performance?

1.4 Research Objective
1.4.1 To investigate the performance of sukuk in Malaysian industrial product sector
1.4.2 To determine the impact of inflation towards sukuk performance of Malaysian industrial product sector
1.4.3 To investigate the relationship of interest rate with performance of Malaysian industrial product sector’s sukuk
1.4.4 To determine the influence of gross domestic product towards Malaysian industrial product sector

1.5 Limitation of Study
1.5.1 Lack of latest data
This research is solely depending on secondary data to get any information to be completed. To avoid any inaccurate results, latest data is needed. Existing data such as journal, published thesis, and even website were mostly quite out to date
1.5.2 Lack of time
It is quite difficult to manage time between undergo industrial training in the morning and doing research at night due to fatigue problem.
1.5.3 Confidential of information
There are some data that is up to date and desirably required for the purpose of the research. However, most of it are strictly confidential and protected from public. Furthermore, there are no personal or authority details in any case of permission to use the data is needed.

1.6 Significance of Study
1.6.1 To the researcher
This research is hopefully to increase and adding knowledge about the usage and issuance of sukuk in the Malaysia capital market. Besides that, this research will give clear picture on what factors that might influence the performance of the sukuk, especially in industrial product sector.
1.6.2 To the university
This research is going to benefit the university as one of the new resources for references to be used by other researchers in the future, regarding to same topic nature.

1.7 Definition of terms

2.1 Introduction
Sukuk is an Islamic investment certificate and it is issued in accordance with Shariah principle. Fadma and Rachid stated that, Malaysia is being acknowledge as the world most active and liquid capital market of sukuk issuance, due to the regulation imposed by Central Bank of Malaysia (as cited inThomas, 2007). Because of that, several studies has been conducted by researchers in relation to factors affecting performance of sukuk in Malaysia, such as Fadma & Rachid (2013) and Shahida & Saharah (2013). This is due to the factors affecting the performance of sukuk such as GDP, inflation, interest rate, and yield

2.2 Gross Domestic Product (GDP) affecting performance of sukuk
GDP is one of the factor that affecting performance of sukuk. Generally, GDP is used as indicator to evaluate the health of country's economy, by measuring the monetary value of final goods and services. According to Tim (2008), GDP is composed of goods and services produced for sale in the market and also includes some non-market production, such as defense and education services provided by the government. GDP also can be defines as market value of all final goods and services, where the goods can be re-sold and the services are consumed immediately, that are currently produced in the country during a given time period (University of California, n.d).

Roslina and Asyadi (2010) intended to propose suitable sukuk models for agricultural activities in Indonesia. The authors implemented that agriculture sector in Indonesia remains important, although the sector only comprising 14% of GDP in 2007. Roslina and Asyadi (2010) concluded that the growing of economy in agriculture sector will causes many attempt to issue more sukuk, as it is one of the way to reduce poverty and may be used for technological advancement.
Ali and Rihab (2013) conducted their research by testing whether macroeconomic factors influence the construction of certain structure of sukuk. Their research covers most of the main sukuk issuer's countries such as Malaysia, Brunes, Saudi Arabia, and many more, for the period of 2003 until 2012. The conduct their research by using two variables (economic growth and trade openness), and the result shows that economic growth measured by GDP has a positive impact on the growing of the sukuk market.

2.3 Interest rate affecting performance of sukuk in Malaysia
Interest rate is commonly known as extra charged which is expressed as percentage of principal by a lender to a borrower. According to Oxford Dictionaries (2014), interest rate is defined as the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. Richard (n.d) stated that interest rate flew with the flow of general economic activities and change in response to the expectations borrowers and lenders have towards future level of prices.

Zhamal (2010) addressed the issue of similarity of sukuk interest rate to fixed-rate conventional bond's risk. Thus, as the market interest rate increases, sukuk value will drop. Zhamal also argued that sukuk structure cannot use fixed interest rate or market index such as LIBOR, as a return for the initial sukuk investment (as cited in Usmani, 2008). The research comes into suggestion implying that returns of sukuk should base on actual performance of an underlying asset instead of existing market rate.

2.4 Inflation affecting performance of sukuk in Malaysia
Generally, inflation is defined as the movement in the general level of prices. Gail (2003) define s inflation as a sustained or continuous rise in the general price level, or alternatively as a sustained or continuous fall in the value of money.

2.5 Research model


2.6 Hypothesis statement
2.6.1 There is a relationship between gross domestic product, interest rate and inflation towards sukuk performance in Malaysian industrial product sector.

3.1 Introduction
Research methodology is on of the process used by researcher to collect information and data for the purpose of making a wise business decision. Research methodology also means data is collected, analyzed and interpreted (Patron, 2009). This chapter will describe how the data is gathered, before it is being analyze and interpret. Data for this research has been obtained from secondary resources, which are literature studies and articles.

3.2 Research Design
Research design is the process of systematic plan to study a scientific problem. It is one of the way for obtaining information needed to solve the research problem by identifying what data should be gathered, how, from whom, when it should be collected, and how to analyze the data.

3.3 Data Collection Method
Data collection is an important aspect of any type of research study. Data can be collected by many ways, in different setting or sources (Uma Sekaran Fourth Edition). In this research, data is collected by using secondary data from various secondary sources such as Bond Pricing Agency of Malaysia website, Bursa Malaysia, google scholars, online published journal and thesis.

Ali.Said, Rihab Grassa (2013). The Determinant of Sukuk Market Development: Does Macroeconomic Factors Influence The Construction of Certain Structure of Sukuk? Journal of Applied Finance & Banking, vol 3, no 5, 2013, 251-267
Christophe J. Godlewski, Rima Turk-Ariss, Laurent Weill (2011). Do Markets Perceive Sukuk And Conventional Bonds As Different Financing Instruments? Bank of Finland Discussion Papers. No.6. 2011
Dodik Siswantoro (n.d). Review on Sukuk Researches: Where Are We Now? Facualty of Economics University of Indonesia
Economist Intelligence Unit (2012). Malaysia Economy: Industrial Sector Continues To Grow In October. Economist Intelligence Unit Limited.
Fadma EL Mosaid, Rachid Boutti (2013). Sukuk And Bond Performance In Malaysia. International Journal of Economics and Finance. Vol 6. No 2. 2014
Mohamed Ariff, Meysam Safari (2012). Are Sukuk Securities The Same As Conventional Bonds? Afro Eurasian Studies, Vol 1. Issue 1. Spring 2012. 101-125
Mohd Nazri Chik (2012) Sukuk: Shariah Guidelines For Islamic Bonds. Islamic Banking Operations and Regulatory Framework Workshop Sri Lanka.
Roslina.M.S, Mohd.A.R, (2010). Modelling Sukuk Structures In Indonesia: Economic Development And The Risk Management. Universiti Techonology Mara (UiTM) Johor.

S.Shahida, Saharah Sapiyi, (2013). Why Do Firms Issue Sukuk Over Bonds? Malaysia Evidence. Prosiding PERKEM VIII. Jilid , 551-573
Tahmoures A. Afshar (2013). Compare And Contrast Sukuk (Islamic Bonds) With Conventional Bonds, Are They Compatible?. The Journal of Global Business Management Voume 9. No 1. 2013
Thomas, A. A. (2013). Malaysia;s importance to the Sukuk Market: March 2007 report. American Journal of Islamic Finance
Tim Callen (2008). What is Gross Domestic Product? International Monetary Fund's Middle East and Central Asia Department. Retrieved from

Uma Sekaran, Roger Bougie (2010) Research Methods For Business: A Skill Building Approach. 5th Edition
Usmani T., (2008), Sukuk and their contemporary application
University of California-Berkeley (n.d). Economic Output. Retrieved from
Zhamat K Nanaeva (2010) How Risky Sukuk Are: Comparative Analysis Of Risks Associated With Sukuk And Conventional Bonds. The British University in Dubai.

Return to