Shari'ah Compliance as a Matter for Financial Performance

Shari'ah Compliance as a Matter for Financial Performance

Md. Harun Ur Rashid (International Islamic University, Bangladesh), Md Hafij Ullah (Coventry University, UK) and Faruk Bhuiyan (Macquarie University, Australia)
DOI: 10.4018/978-1-7998-0218-1.ch020


Islamic banks must comply with the Shari'ah rulings fully as it is the foundation of Islamic banks. However, the level of Shari'ah compliance is not the same among the Islamic banks. Similarly, despite performing well, the financial performances of Islamic banks differ from each other. Therefore, the chapter explores the association between financial performance and Shari'ah compliance. The chapter used both the primary and secondary data. The primary data was collected through surveying 300 bank executives from six full-fledged Islamic banks operated in Bangladesh with a structured questionnaire on Shari'ah compliance, whereas information on financial performance were extracted from the annual reports of the sample banks. Descriptive statistics and regression analysis were used to analyze the data and conclude the findings. The findings show that Shari'ah compliance has a positive and significant impact on the financial performance with respect to the total liabilities and total assets.
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This chapter is the response to the call of Ullah and Khanam (2018) for a quantitative analysis exploring the relationship between financial performance and Shari`ah compliance efficiency of the Islamic banks. The study of Ullah and Khanam (2018), based on interviews, proved that Shari’ah compliance is the fundamental instinct for the financial performance of the Islamic banks in Bangladesh where financial performance and Shari’ah compliance of the Islamic banks differ significantly. Among others, Shari’ah compliance is the most important factor for influencing the financial performance of the Islamic banks, and Shari’ah compliance is impacted due to lack of government rules, lack of Shari’ah knowledge of the employees, lack of proper Shari’ah board, and lack of sufficient research and development (Ahmad & Haron, 2002; Archer & Karim, 2002; Metawa & Almossawi, 1998; Naser et al., 1999; Rashid et al., 2009).

The word ‘Shari’ah’ has been derived from the Arabic word ‘Shari’ah meaning ‘divine law,’ ‘Islamic law,’ or the ‘Law of God.' There are four sources of Islamic Shari’ah: (a) interpretations of the Qur’an, that is, the guidance provided by God to humanity through the last messenger Muhammad (May peace be upon him) (b) interpretations of the Hadith, that is, the sayings and lifestyle of the Prophet (May peace be upon him); (c) Ijma, agreement amongst Muslim scholars or jurists or collective reasoning; and (d) Qiyas/Ijtihad, that is, the individual reasoning (Ullah, 2014, p. 184).

Islam is a complete code of life (Al-Qur’an, 5:3) since Allah (Subhanahu wa Taala) and Allah’s messenger Prophet Mohammad (May peace be upon him) gave guidelines regarding every aspect of human life to be dealt with (Ather & Ullah 2009). Therefore, Muslims are required to follow Islamic guidelines while dealing with banking transactions. Shari’ah as the foundation of all types of Islamic banks and Islamic organizations because no bank or organization can be considered as ‘Islamic’ without following the Shari’ah (Ullah, 2014). The verse of the Holy Qur’an “But Allah (Subhanahu wa Taala) as permitted trade and has forbidden interest” (Al-Qur’an, 2:275) is the main principle of accepting Shari’ah laws in the banking business. In addition, Islamic banks are not to involve in Gharar (excessive risky projects), Maisir (projects of which outcome depend on luck or chance), Haram (Islamically prohibited) or harmful products like tobacco, alcohol, short-selling, pornography (Ullah, et al., 2018). This Shari’ah law introduces the Halal ways of doing business which eliminates all kinds of injustice from the financial system ensuring socio-economic development (Imam & Kpodar, 2010; Jalil & Rahman, 2010; Rahman, 2007; Ullah, 2014).

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