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Selected Research Abstracts in Islamic Financial Criminology Selected Research Abstracts in Islamic Financial Criminology Several Phase One research projects in the niche research area of Islamic Financial Criminology have been successfully completed in 2011 by ARI researchers. One of the most important requirements imposed on ARI HICoE-funded research is the need for researchers to produce at least five spin-offs, one of which is in the form two publications in journals that are indexed by SCOPUS/ISI Thomson/Excellence in Research for Australia (ERA). The other spinoffs could include indexed proceedings, product innovation, research book, book chapters, publication in professional journals and publication in refereed journals. Listed below are abstracts of selected research ARI HICoE’s completed research projects:

FRAUD PREVENTION MECHANISMS OF MALAYSIAN GOVERNMENT-LINKED COMPANIES: AN ASSESSMENT OF EXISTENCE AND EFFECTIVENESS

Normah Omar and Katerina Maria Abu Bakar

AbstractUnderstanding the root causes of fraud and learning about the most effective fraud prevention mechanisms are critical in reducing the incidence of financial fraud. This study solicits the views of fraud investigators on the existence and effectiveness of fraud prevention mechanisms within Government-Linked Companies (GLCs). Specifically, effective fraud prevention mechanisms (FPM) should be undertaken by five critical groups, namely the board of directors, audit committees, external auditors, internal auditors, and anti-fraud specialists. Selected fraud prevention mechanisms include fraud investigators perceived surprise audits, fraud hotline, fraud prevention program and training, anti-fraud policy, fraud vulnerability reviews, operational audits, whistle-blowing policy, internal audit or fraud examination department, and, imposing penalty and disciplinary action as more effective than the others. Overall, this study provides important insights to practitioners and organizations in identifying fraud prevention mechanisms that are most effective.

INSTRUMENTS AND RISKS IN ISLAMIC FINANCIAL INSTITUTIONSRashidah Abdul Rahman, Fauziah Hanim Tafri, Yaseen AIJanadi

AbstractThe nature of specific risks facing Islamic Financial Institutions (IFIs) together with the virtually unlimited number of ways available to them to provide funds through the use of combinations of the permissible Islamic modes of financing, profit and loss sharing (PLS) modes of financing and non-PLS, raises a host of issues among others in risk management. This study presents and explains the different types of risks arising from Musharakah, Mudharabah, Murabahah, Salam, Istisna and Ijarah Islamic products. Further, it highlights how financial institutions that provide such Islamic financial contracts are exposed to several corresponding underlying risks, as well as how these risks are managed.

PROCUREMENT ISSUES IN MALAYSIAWee Shu Hui, Radiah Othman, Rashidah Abdul Rahman, Normah Omar and Nurul Husna Haron

AbstractThis study was undertaken to survey the perception of the two main stakeholders in procurement system; the contractors and the procurement officers on issues such as accountability, transparency, corruption, integrity and cronyism pertaining to the public procurement system in Malaysia. Interviews were conducted over a 9-month period to gauge the perception of the procurement officers and contractors on procurement issues in Malaysia. The interview data were then transcribed and grouped according to six main themes; transparency, procurement policies and procedures and its implementation, personnel involved in the procurement system, estimation/budget/pricing, professionalism and ethics and timeliness. The procurement officers were blamed for malpractice and non-compliance to the policies and procedures of the procurement system. The findings would be of great value to the Government to improve its service delivery by acknowledging the experiences of the contractors in utilizing its procurement system.10

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Selected Research Abstracts in Islamic Financial Criminology Selected Research Abstracts in Islamic Financial Criminology CREATIVE ACCOUNTING:

AUDITORS AND THE DETECTION OF FINANCIAL FRAUDZuraidah Mohd-Sanusi, Yusarina Mat-Isa, Takiah Mohd Iskandar, Lee Teck Heang

AbstractCreative accounting practices may often be tantamount to misleading the users of financial statements, and auditors should always be alert to the possibility that they amount to actual fraud. Creative accounting practices that may indicate the presence of fraud are more worrying than accounting errors. Auditors need to increase their vigilance in conducting audits, especially if the indicators of creativity raise suspicions that the purpose may be to fraudulently manipulate the accounts. Detecting creative accounting practices is not an easy task, but auditors should not pass on their responsibilities to others. This study identify on the areas of possible manipulation of company accounts, measures the creative accounting practices of company using a checklist and analyses two case studies of Malaysia companies that have used creative accounting practices. Understanding the issue of creative accounting helps auditors to ensure a high quality of financial reporting and to maximize returns to stakeholders.

IMPLEMENTATION OF MAQASID SHARI’AH IN ISLAMIC HOUSE FINANCING

Rohana Othman and Rafidah Mohd Azli

AbstractThe Maqasid-oriented approach in Islam demonstrates the Muslims commitment to uphold the authenticity of Islam as a religion and a complete way of life (ad-din). Ignorance on Maqasid Shari’ah in Islamic business transactions, particularly for Islamic house financing led to misinterpretation, disruption, chaos, and trivial conflicts among the contracting parties. This paper discusses the implementation of Bai’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah (MM) Home Financing instruments as practiced in Malaysia using the method of Imam al Shatibi. This paper concluded that a sound understanding of the knowledge, goals, and objectives of the Shari’ah at every level of a contract involving parties to a sale and purchase in Islamic Home Financing would enable improvement in practice through ijtihad (collective decision or general consensus).

CHALLENGES FOR ISLAMIC FINANCIAL INSTITUTIONS (IFIS): TRANSITION FROM CONVENTIONAL TO ISLAMIC AUDITING

Nawal Kasim

AbstractPersistently high expectations from the operations of IFIs appear to create challenges and issues in many aspects including the monitoring function. It has been suggested that there is a need to have regular independent shariah audits in IFIs as people are now experiencing a movement along a continuum from a society that trusts everything and audits nothing to a society that trusts nothing and audits everything. The study surveys different groups of respondents who are involved with shariah compliance/auditing in the IFIs using questionnaires and interviews. It is argued that the basic financial statement auditing model is flawed since it makes auditors financially dependent on companies. The Islamic financial system places high moral values, fairness and ‘Maslahah of the Ummah’ as among its principles. Due to the primary difference in the Islamic socio-economic vision to the Western profit-maximization concept, the auditing function in IFIs is suggested to be evaluated within its own framework and using its own criteria.

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ISLAMIC CORPORATE SOCIAL RESPONSIBILITY, CORPORATE REPUTATION AND PERFORMANCE

Roshayani Arshad, Suaini Othman, Rohana Othman

AbstractThis study examines the effect of Islamic Corporate Social Responsibility disclosure and on corporate reputation as well as performance. These relationships are examined based on content analysis of of annual reports of 17 Islamic banks in Malaysia for 2008, 2009 and 2010. Results of this study provide evidence that CSR activities communicated in corporate annual reports are significantly positively related with corporate reputation as well as firm performance. These results indicate that CSR activities and disclosure from Islamic perspectives are equally important business strategies in creating continuous superior performance for organisations. In addition, it also highlights that organisations need to develop a stakeholder orientation particularly in an environment of increasing pressure from jurisdictions dominated by Islamic stakeholders on organisations engaging in Islamic products to increase their social responsibilities from the Islamic perspectives.

CRIME PREVENTION IN ISLAMIC FINANCIAL INSTITUTIONS: PRACTICES IN BRUNEI DARUSSALAM

Noraini Mohamad, Mohamad Asri Abdullah and Nawal Kassim

AbstractStrategically, Brunei aims to be the global player in Islamic banking activities and this is evidenced through the mergers of their two large Islamic Financial Institutions namely, the Islamic Brunei Bank Berhad (IBB) and Islamic Development Bank Berhad (IDB) to form Bank Islam Brunei Darussalam (BIBD). Though the merger has successfully increased BIBD’s total assets, branches and ATMs, BIBD in particular or the Ministry of Finance in general lacks the Islamic Financial Criminology (IFC) guidelines for Islamic Financial Crime prevention on Islamic products and services offered by IFIs in the State. Conflicts arise when the judgment of Civil Court on matters pertaining to Islamic financial criminology are based on conventional practices. Thus, this paper examines the background of Islamic financial criminology crime prevention in the banking system in Brunei Darussalam and suggests improvement to support the development of an Islamic financial system in the State.

WAQF MANAGEMENT AND ADMINISTRATION IN MALAYSIA: ITS IMPLEMENTATION FROM THE PERSPECTIVE OF ISLAMIC LAW

Mohd Afendi Mat Rani, Asmah Abdul Aziz

AbstractThe management and administration of the waqf property is an important issue to be resolved in Malaysia. This article includes the discussion of the powers of a trustee of an endowment property in Malaysia. A number of legal obstacles and constraints that impeded efforts to develop waqf property in Malaysia are identified. Thus, the implementation of a waqf management must be aligned with the waqf legislation so that there is a continuity of the reward to the waqf donor through good governance and systematic procedures. The trustee who manages the waqf property is responsible to look after, preserve and develop the land that is donated in order to collect income which can be distributed to the recipient. Although the Religious Council is appointed as the sole trustee on the management of waqf in Malaysia, nevertheless, from the practical aspect, these assets are still subjected to various acts made by Parliament.

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Selected Research Abstracts in Islamic Financial Criminology Selected Research Abstracts in Islamic Financial Criminology THE UNDERLYING CONTRACTS OF ISLAMIC BANKING PRODUCTS

AND SOME RELATED ISSUES IN THE CURRENT PRACTICESiti Khadijah Abdul Manan and Norlela Kamaluddin

AbstractEver since the establishment of the first Islamic bank in Malaysia, the progress and development of Islamic banking and finance have been tremendous and commendable. Various Islamic banking products are developed and introduced based on certain Islamic business contracts that comprise cuqud al-ishtirak, cuqud al mucawadat and others. Some products are even developed on hybrid basis while some others are based on controversial or disputable contracts. The tremendous development of the products nevertheless has stirred a string of discussions and arguments as the products are seen as just replication of the conventional products. This paper will therefore attempt to highlight several issues on some of the Islamic banking (IB) products. The underlying contracts and their current applications in Islamic banks are first explained to give preliminary understanding of the issues. It is believed that, by highlighting the issues, some appropriate measures could be explored in future research in order to materialise the true meaning of Islamic banks.

SECURITIES SCREENING FOR SHARI’AH-COMPLIANCE: METHODOLOGICAL AND MEASUREMENT ISSUES

Radiah Othman and Rashid Ameer

AbstractThe purpose of this study is to provide a new framework for screening equity securities in Islamic capital markets. The study reviews the current state of art in the screening methodologies. Through this critical review this study highlights the methodological and measurement problems associated with choice of financial variables. This study further cites examples of shortcomings in the current screening methods and measurements used by some of the leading Islamic index providers and propose a new screening framework based on the Halal and Haram parameters as well as Islamic ideals of social justice and equity. This study seeks to reproach fatalism of current screening methods which aims to align the selection of equity securities for portfolio diversification in Islamic capital market. The study offers a new insightful and radical viewpoint on the development of screening and rating of securities for Islamic capital markets.

TADLIS IN ISLAMIC TRANSACTIONSMohamed Azam Mohamed Adil, Mohd Dani Muhamad, Ezani Yaakub, Amal Hayati Ishak

AbstractThe discussion on tadlis has been quite complicated since Muslim jurists are in dispute over its meaning. Some tend to interchange it with taghrir and ghabn. While others suggest that the doctrine of tadlis and misrepresentation are so closely interrelated. This study suggests that the doctrine of tadlis is so akin to taghrir and ghabn which mean fraud. It also suggests that the effect of fraud in Islamic transactions is that the defrauded party may rescind the contract by exercising the option of fraud (khiyar al-tadlis).

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