Contrastación estadística de la primera Hipótesis Específica

This sub-section attempts to address the second research question, namely, how does the adequacy of legal regulations by the Central Bank of Malaysia in the case of non- Shariah compliant events ensure that the IFIs prevent any rises of anti-money laundering activities. The previous studies concluded that the non-Shariah compliant events may occur due to two categories which are Shariah (Arshad and Wardhany, 2012; Al-Zuhaili, 2006; Chong and Liu, 2009) and non-Shariah reasons as reported in the published annual report (BIMB, 2011; CIMB Islamic Bank, 2011). Therefore, the survey will empirically examine and investigate the area from the perspective of Shariah officers who deal directly with the daily operations of IFIs.

Table 31.0 lists the findings on the existence of non-Shariah compliant events within the IFIs according to the perceptions and observations of Shariah personnel. The findings further explain the frequency of repeated non-Shariah compliant events in the operations of IFIs.

Table 31.0: The existence of non-Shariah compliant events within the IFIs Questionnaires

(Q53-Q64)

Percentage Frequently Occurred

Frequent Never Rare Occasional

Q53. Gharamah

(penalty) paid by customers to the bank due to a delay in prepayment of Islamic financing services rendered/ credit facility.

Answered Question: 31 Skipped: 7 6.45% 9.68% 35.48 % 35.48 % 12.90%

Q54. Return on investment recognised and received from the investment activity in the non-Shariah compliant fund, shares and business. Answered Question: 32 Skipped: 6 9.38% 3.13% 25% 53.13 % 9.38%

Q55. The asset sold to the customer before the Islamic bank takes ownership/ possession of the asset from the seller first in a Tawarruq (Commodity Murabaha) based transaction. Answered Question: 32 Skipped: 6 3.13% 0% 50% 34.38 % 12.50% Q56. Asset Sale Agreement (ASA) and

Asset Purchase Agreement (APA) are

not in a proper sequence in an Inah based transaction. Answered Question: 32 Skipped: 6 12.50% 6.25% 21.88 % 31.25 % 28.13% Q57. System failure to 6.25% 0% 59.38 21.88 12.50%

accommodate Islamic financing that resulted in compounding interest of prepayment amount paid by a customer. Answered Question: 32 Skipped: 6 % % Q58. Selling a commodity to a Third buyer (Broker 2) that has connection with the first seller (Broker 1) in a Commodity Murabahah based transaction. Answered Question: 32 Skipped: 6 3.13% 0% 78.13 % 12.50 % 6.25% Q59. Overcharging customers in an Islamic financing/ credit facility offered by an Islamic bank. Answered Question: 32 Skipped: 6 3.13% 3.13% 53.13 % 31.25 % 9.38% Q60. Advertising false Islamic financing product information in brochures. Answered Question: 32 Skipped: 6 6.25% 6.25% 46.88 % 34.38 % 6.25%

Q61. Capital guaranteed offered by Islamic banks in Modaraba (profit and loss sharing) investments to its customer. Answered Question: 32 Skipped: 6 3.13% 0% 81.25 % 12.50 % 3.13% Q62. Commission received by the Islamic banks from a merchant due to an Islamic credit card facility used by customers on a

prohibited item according to Shariah law.

Answered Question: 32 Skipped: 6 12.50% 3.13% 46.88 % 28.13 % 9.38% Q63. Interest received by an Islamic bank due to money deposited in an interest based/ conventional saving account. Answered Question: 32 Skipped: 6 3.13% 3.13% 37.50 % 40.63 % 15.63% Q64. Regarding the above questions, what is the most non-Shariah compliant event that

Comments:

Three respondents commented that no non-Shariah compliant event occurred within their IFIs.

occurred in your IFI. Answered Question: 27 Skipped: 11

comments on this question.

Twenty-two respondents commented individually as the following;

(1) Those related to non-Shariah Compliant advertisements and promotional materials.

(2) Advertisements and promotional materials containing non-Shariah compliant elements.

(3) ASA APA. But currently being rectified with strict procedures.

(4) As above (referring to the question from No. 53 to No.63.

(5) Events which occurred due to operational lapses. (6) Return on investment recognised and received from investment activities in non-Shariah compliant funds, shares and businesses.

(7) Issue of pre signing or a sequence in a BBA contract.

(8) Interest received by an Islamic bank due to money deposited in an interest based/ conventional saving account.

(9) Failure to ensure execution of aqad.

(10) Improper sequence of signing aqad documents as most of them are arranged/ conducted by solicitors or appointed staff, who work with a sister company (conventional side) as we practice a leverage model, where an Islamic bank leverages on Conventional Bank's resources e.g. staff, system, facilities, etc. Nevertheless, the Bank continuously gives/ conducts training on the awareness of Shariah/Islamic

banking/finance to such parties. (11) Sequence of aqad (contract)

(12) When sometimes it is discovered that the Bank give financing to the customer on non-Shariah activities/items.

(13) PPA and PSA not in sequence.

(14) Bai' Inah transaction was executed not in a correct manner.

(15) As per the above question No.56. (16) Absence of aqad.

(17) Insufficient amount of an underlying asset to facilitate a Tawarruq transaction.

(18) Miscalculation of the modaraba portion

(19) Guaranteed return for wadiah deposit-based products

(20) Interest from money deposited in an escrow account.

(21) Commission received from a credit card merchant.

(22) Terminologies used.

Table 31 The Existence of non-Shariah compliant event within the IFIs

Figure 7.0 illustrates the graph of frequency of non-Shariah compliant events that occurred within the IFIs based on the given scenarios. As can be seen from the graph, the non-conformity that frequently occurs in Islamic banking operations are the scenarios mentioned in Question 56 and 62, where the Asset Sale Agreement (ASA) and Asset Purchase Agreement (APA) are not in a proper sequence in an Inah based transaction and commission received by the Islamic banks from a merchant are due to an Islamic credit card facility used by customers on prohibited items according to

Shariah law. The least non-conformity that ever happened within the IFIs was Capital guaranteed offered by the Islamic banks in a Modaraba (profit and loss sharing) investment to its customer. This was followed by selling a commodity to a Third buyer (Broker 2) that had a connection with the first seller (Broker 1) in a Commodity

Murabahah based transaction.

Figure 5. Frequency of Non-Shariah Compliant Event

Figure 2.3 explains the relationship between the highest occurrence of a non-Shariah compliant event and the experience of Shariah personnel. Most experienced respondents (more than 6 years’ experience) categorised the incident of Asset Sale Agreement (ASA) and Asset Purchase Agreement (APA) are not in a proper sequence

in Inah based transaction as Rare (9 out of 27), followed by Occasional (7 out of 27),

Never (4 out of 27) and Frequently Occurred (3 out of 27). Interestingly, 3 out of 27 experienced respondents skipped this question. Moreover, the most experienced respondents (more than 6 years’ experience) categorised the other incident as Never (11 out of 27), followed by Rare (7 out of 27), Frequently Occurred (3 out of 27) and Occasionally (2 out of 27). Interestingly, 3 out of 27 experienced respondents skipped this question as well.

Table 32.0 Cross-tabulation of group respondents – the highest occurrence of non-Shariah compliant events and experience of Shariah personnel.

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% Q53 Q54 Q55 Q56 Q57 Q58 Q59 Q60 Q61 Q62 Q63

Figure 7.0 - Frequency of Non-Shariah Compliant

Event

Sum of Respondent

Asset Sale Agreement (ASA) and Asset Purchase Agreement (APA) are not in a proper sequence in an Inah based transaction.

Working Experience ? Frequent Frequentl y Occurred

Never Occasional Rare Ski ppe d Grand Total 1 - 5 years 1 1 3 2 1 1 9 6 - 10 years 1 3 4 2 5 3 18 Less than a year 2 2 more than 10 years 5 4 9 Grand Total 2 4 7 9 10 6 38 Sum of Respondents

Commission received by the Islamic banks from a merchant due to an Islamic credit card facility used by a customer on a prohibited item according to Shariah law.

Working Experience? Freque nt Frequen tly Occurred Never Occasi onal

Rare Skipped Grand Total 1 - 5 years 1 4 1 2 1 9 6 - 10 years 2 9 2 2 3 18 Less than a year 2 2 more than 10 years 1 1 2 5 9 Grand Total 1 4 15 3 9 6 38

Table 32 Cross-tabulation of group respondents – the highest occurrence of non- Shariah compliant events and experience of Shariah personnel

Overall these findings indicate the occurrence and existence of non-Shariah compliant events within an Islamic finance framework. A total of 22 out of 27 respondents further established an additional event that occurred in the day-to-day operations of the IFIs. On the other hand, only 3 respondents denied any occurrence of such an event.

4.3 CHAPTER CONCLUSION

In conclusion, the findings from the questionnaire surveys empirically addressed the research questions designed earlier in order to achieve the objectives outlined in Chapter 1 of this thesis.

First and foremost, the findings from the surveys empirically examine the first research question, namely, how does the Shariah Advisory council for IFIs in Malaysia ensure the activities are in compliance with Islamic Finance and how the non- Shariah compliant events should be reported to the authority (Central Bank of Malaysia). Noted from previous studies that the purification method applied is theoretically varied according to the Shariah opinion from different jurisdictions for instance, the non-Shariah compliant event can be divided into four categories (Md Hashim, A. and Habib, F., 2016) or three categories (Shaik Mohammed et al., 2017) or two categories (Ali et al., 2013). The present study examines the basic understanding of Islamic finance by the Shariah officers of IFIs in Malaysia is vital as they play important roles to execute the decisions taken by appointed Shariah Committees within the IFIs. The majority of the respondents agreed that non-Shariah compliant events might occur in the operations of IFIs and that the income generated from the illegitimate transactions were not recognised as income for the IFIs. In addition to that, most respondents agreed that by attending training in Shariah issues related to Islamic banking products, they would have a better understanding and did not agree that Islamic banks mimicked conventional banks products. From the questionnaires itself, the study can conclude that most Shariah personnel were fully equipped with a proper understanding on Islamic banking products whilst they lacked an understanding towards conventional products. Having a knowledge of both to hand

would assist the personnel to compare and identify differences between both products and play an effective role to educate others.

Secondly, the findings from the surveys empirically answered the second research question, namely, how does the adequacy of legal regulations by BNM in the case of non-Shariah compliant events ensure the IFIs prevent any rises of anti-money laundering activities in order to achieve the objective of understanding the legal regulatory framework pertaining to non-Shariah compliant transactions. The respondents also agreed that a severe punishment will be imposed on IFIs and that the Shariah committee plays a major role on discussing the rectification plan for non- Shariah compliant events. However, the findings from the questionnaires found that there were respondents who agreed that some IFIs may not actually disclose the non- Shariah compliant event, despite the fact that it was a requirement provided by the BNM. Recent literature reviews exposed that channelling fund to charity is a common practise in Islamic finance in rectifying many incidents of non-Shariah compliant transactions occurred within the existing Malaysian regulatory framework (Mirza- Begum, 2014; Bahmmam, 2013; BNM, 2011; DAWN, 2008). Having said that, the Shariah governance framework in Malaysia only stated that non-Shariah income must be disposed to charitable cause (BNM, 2011).

As expressed through the questionnaires, the present empirical study finds that some of IFIs do not maintain a list of charitable bodies for the purpose of the disbursement process on non-Shariah compliant income, which raised a significant concern about whether adequate procedures were implemented according to the requirements of the AML Act.

Finally, the findings from the quantitative approach addressed the final research question, namely, how does financial disclosure in an annual report prevent IFIs in financing terrorism activities. The recent literature reviews summarised that the financial disclosure could have an adverse impact on the reputation of IFIs due to its non-conformance towards Islamic principles (Haqqi, 2014). There was a gap in the terminology used by the standard setting body, AAOIFI, that requires a clear written statement that all non-Shariah income “has been cleansed” (AAOIFI, 2008) as compared to the BNM one that only requires the statement “non-Shariah income has been considered for cleansing” (BNM, 2011). This inconsistency could create

confusion among stakeholders. Hence, the present study has empirically established that a total of 70% of the respondents who are the Shariah officers working with the IFIs in Malaysia, agreed that the preferable method in channelling the non-Shariah income was through a charitable body. However, only 14% was given to poor people. Interestingly, a total of 17% of the respondents agreed that IFIs did channel the non- Shariah income to overseas charitable bodies which could expose the IFIs if overseeing terrorist activities. The present study further provides empirical evidence that not all IFIs disclosed the recipients of non-Shariah income by IFIs and its purified amount in Malaysia which has raised a significant concern on the channelling and disbursement process of non-Shariah compliant income among Shariah personnel and whether adequate procedures are implemented in IFIs to safeguard the requirements of the AML Act as Shariah governance is not statutorily mentioned in the laws of Malaysia (Miskam and Nasrul, 2013). The present study also closes the gaps identified in the Chapter 2 of this thesis.

CHAPTER FIVE

CHAPTER 5: SHARIAH AUTHORITY TO DEAL WITH NON-SHARIAH