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Measuring Shariah non-compliance risk (SNCR): claw-out effect of al-bai-bithaman ajil in default

Author

Listed:
  • Saiful Azhar Rosly
  • Muhammad Arzim Naim
  • Ahcene Lahsasna

Abstract

Purpose - The purpose of this paper is to examine the meaning, nature and measurement of Shariah non-compliant risk faced by Islamic banks. Design/methodology/approach - Al-bai-bithaman ajil (BBA) contract documentation is analyzed in the light of the legal environment in Malaysia and measurement of Shariah non-compliant risk based on constructed or hypothetical cases. Findings - Shariah non-compliant risk will adversely affect bank’s earnings when BBA contracts are deemed invalid in the court of law, either in a foreclosure or ruling via court declaration. Research limitations/implications - The paper is written based on content analysis, Malaysian legal cases with hypothetical examples for better understanding. Practical implications - Islamic banking should be able to use the findings to estimate potential loss from Shariah non-compliant risk and make the necessary provisions. Originality/value - This paper provides new insights of risks faced by credit-intensive Islamic banks, that when relinquishing critical requirement of Islamic contract such as ownership risk will suffer loss.

Suggested Citation

  • Saiful Azhar Rosly & Muhammad Arzim Naim & Ahcene Lahsasna, 2017. "Measuring Shariah non-compliance risk (SNCR): claw-out effect of al-bai-bithaman ajil in default," Journal of Islamic Accounting and Business Research, Emerald Group Publishing Limited, vol. 8(3), pages 272-283, June.
    • Handle: RePEc:eme:jiabrp:jiabr-02-2016-0018
    DOI: 10.1108/JIABR-02-2016-0018
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    Cited by:

    1. M. Kabir Hassan & Md Nurul Islam Sohel & Tonmoy Choudhury & Mamunur Rashid, 2024. "A systematic literature review of risks in Islamic banking system: research agenda and future research directions," Risk Management, Palgrave Macmillan, vol. 26(1), pages 1-29, February.

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