Qualitative Research in Financial Markets

Shariah issues in Islamic banking: a qualitative survey in Malaysia

Abdelghani Echchabi Hassanuddeen Abd. Aziz

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Abdelghani Echchabi Hassanuddeen Abd. Aziz , (2014)," Shariah issues in Islamic banking: a qualitative
survey in Malaysia", Qualitative Research in Financial Markets, Vol. 6 Iss 2 pp. 198 - 210
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Sulaiman Abdullah Saif Al Nasser, Datin, Joriah Muhammed, (2013),"Introduction to history of Islamic
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Farhana Ismail, M. Shabri Abd. Majid, Rossazana Ab. Rahim, (2013),"Efficiency of Islamic and conventional
banks in Malaysia", Journal of Financial Reporting and Accounting, Vol. 11 Iss 1 pp. 92-107 http://
dx.doi.org/10.1108/JFRA-03-2013-0011
Saiful Azhar Rosly, Mohd Afandi Abu Bakar, (2003),"Performance of Islamic and mainstream
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6,2

Shariah issues in Islamic

banking: a qualitative survey
in Malaysia

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198
Received 24 December 2012
Revised 10 March 2013
18 April 2013
Accepted 24 April 2013

Abdelghani Echchabi
Department of Business Administration,
International Islamic University Malaysia, Kuala Lumpur, Malaysia, and

Hassanuddeen Abd. Aziz

Department of Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
Abstract
Purpose The purpose of this paper is to examine the customers perception regarding the current
shariah issues of Islamic banks in Malaysia. Specifically, the study attempts to examine the awareness
of the current criticisms of the main shariah issues in Islamic finance, and the perception of the selected
customers towards these criticisms.
Design/methodology/approach The study uses a qualitative approach to understand in detail the
customers perception and experiences about shariah compliance of Islamic banks. Semi-structured
interview is used with ten Islamic banks customers in Malaysia. The study also used phenomenological
techniques to analyse the data.
Findings The findings revealed that the interviewees have considerable exposure and awareness of
the current criticisms of the shariah compliance of Islamic banks.
Originality/value This research is the first to study the shariah issues of Islamic banks in Malaysia
from the customers perspective, by using a qualitative research approach. The findings of this study
are of original importance, because they unveil the customers experience in an area that has been
severely looked at from the professional and experts point of view only.
Keywords Malaysia, Islamic banks, shariah
Paper type Research paper

Introduction
Islamic banking has been defined as banking in consonance with the ethos and value system
of Islam and governed, in addition to the conventional good governance and risk management
rules, by the principles laid down by Islamic Shariah (Said et al., 2010, p. 1).
It involves wider ethical and moral issues than simply interest-free transactions, which makes
it more economically efficient than conventional banking and which promotes greater
economic equity and justice (Khan, 2010, p. 1).
Qualitative Research in Financial
Markets
Vol. 6 No. 2, 2014
pp. 198-210
Emerald Group Publishing Limited
1755-4179
DOI 10.1108/QRFM-12-2012-0035

In countries where Islamic banks co-exist together with conventional banks, an

important criterion that differentiates the former from the latter is its compliance with
the Islamic rules or its shariah compliance. In the current practice of Islamic banking,
many issues have been raised regarding the compliance of the existing Islamic banks
with shariah or Islamic law, and this threatens the success of the Islamic banking

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system not only in countries where it simultaneously exists with the conventional
banking system, but also in a full Islamic banking system.
Furthermore, in a dual banking system, the patronisation of a certain bank would
be more challenging, in the sense that Islamic banks are relatively new. Thus, the
services offered by the long existing conventional banks and the magnitude of the
operations would be more elaborate. Thus, it is very crucial to examine the
perception of the Islamic banks customers in Malaysia about the shariah
compliance of their Islamic banks.
Hence, the aim of this research is to study the perception of Islamic banks
customers regarding the compliance of their respective banks to shariah. As part of
the specific objectives, the study attempts also to examine the exposure of the
Islamic banks customers to the current criticisms of the shariah compliance of
Islamic banks, and their perception about these criticisms.
Correspondingly, the current study is an attempt to answer the following two
research questions:
(1) Are the Malaysian Islamic banks customers aware of the current criticisms
to the shariah compliance of Islamic banks?
(2) What are the perceptions of the Islamic banks customers about the
criticisms of shariah compliance of Islamic banks?
Following this introduction is a brief overview on the development of the Islamic
banking industry in Malaysia. Thereafter, a review of the previous studies will be
presented, focusing on the criticisms of the shariah compliance of Islamic banks.
Then the methodology, the findings, the discussions and conclusions will be
presented sequentially.
Brief overview on Islamic banking development in Malaysia
According to Mokhtar et al. (2008), the history of Islamic banking in Malaysia can be
traced back to the establishment of Tabung Haji in 1963. The idea was mooted out
of the necessity to develop a mechanism to encourage the Muslims to save for their
pilgrimage, as the Malaysian Muslims in the past had resorted to various traditional
means of saving and keeping their money for the sacred journey (Laldin, 2008, p. 3).
In this regard, Sufian (2007) argues that the establishment of Islamic banking in
Malaysia was mainly affected by its prior implementation in the Middle East.
Notably, in 1980, the Bumiputera Economic Congress requested the Malaysian
government to allow the establishment of an Islamic bank in the country.
Subsequently, the National Steering Committee was set up in 1981 to study this
proposal in its different aspects. The conclusions of the study suggested that it will
be viable to establish an Islamic bank in Malaysia. In fact, this marked the
establishment of the first Islamic bank in the country, namely, Bank Islam Malaysia
Berhad in 1983.
Laldin (2008) considers that the banks progress was very encouraging, with its
activity rapidly expanding throughout the country. This has prompted the
government to further develop the Islamic banking industry in Malaysia.
As a result of the governments efforts, Malaysia has emerged as the first country
to implement a dual banking system where Islamic banking system operates
side-by-side with the conventional banking system. The Malaysian model has been

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recognised by many Islamic countries as the model of the future, and many countries
have shown interest in adopting the Malaysian system in their respective countries
(Mokhtar et al., 2008).
The Malaysian Islamic banking system is currently made up of 15 banking
institutions comprising nine domestic commercial banks, four foreign commercial
banks and two Islamic banks offering Islamic banking products and services under
the Islamic Banking Scheme. These Islamic banking institutions offer a
comprehensive and broad range of Islamic financial products and services ranging
from savings, current and investment deposit products to finance products such as
property financing, working capital financing, project financing, plant and
machinery financing, etc. (Sufian, 2007).
Literature review
The Islamic aspect of the Islamic banking practice is considered one of the most
important factors differentiating it from its conventional counterpart. Thus, for the
Islamic banks to compete in the current dual markets, it is important for them to
keep aligned with the shariah requirements that represent the very essence of the
religious rules of Islam. In fact, banks looking to move into the Islamic banking
market first need to appoint a shariah board or a shariah counsellor to ensure
conformity and minimise shariah risk (Sungard, 2008).
Generally speaking, shariah compliance means the conformity of the Islamic
banking transactions to the Islamic law or shariah. In elaborating further about
shariah compliance, Dusuki and Abozaid (2007) distinguished between hukm qadai
and hukm diani. The former consists of the compliance with all the shariah
conditions and requirements pertaining to a contract in its form and structure, while
the latter is related to the purpose of the contract which must be in line with the
shariah. It is important to note that the intention as well as the form and structure
of the Islamic products should be in total compliance with shariah, for the Islamic
banks to be qualified as full shariah-compliant.
Shariah compliance of Islamic banks has been severely criticised especially in
the current era, where the industry is in a between the hammer and the anvil
situation, i.e. faced with the innovation obligation to satisfy commercial objectives
that are restricted by the shariah requirements, which makes the Islamic jurists
exposed to the possibility of issuing fatwas that may run in conflict with their
lucrative position (Rosly, 2010). This actually gives a comparative advantage to the
conventional banks that can be more innovative and competitive, as they have no
other restriction except the banking acts.
Ownership is one of the issues that have evoked so many criticisms as to the
shariah compliance of Islamic banks (Sairally, 2002). The rule of ownership here
means that the Islamic banks should hold ownership of the asset, which is
equivalent to taking risk and liability as well, following alkharaj bi daman or
alghurmo bil ghunmi principle in Islam, that is there is no return without risk and
liability. As such, Rosly (2010) argues that the rule of ownership must prevail in all
the sales bearing the contract of Al bay.
However, in practice, Jarrar (2009) discovers that the Islamic banks transfer the
ownership to the customers, so that the latter will bear the risks as well as the
liabilities involved. And this view was further supported by Dusuki and Abozaid

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(2007), who argue that the Islamic banks do not hold any liability. In fact, the banks
transfer all the risks to the customer leaving the bank without any undertaken risk
(Kamali, 2007). This is done through what is commonly called beneficial ownership,
while the customer will have his name on the official documents as legal owner
(El-Din and Abdullah, 2007).
Though the Islamic banks attempted to resolve the ownership issue by resorting
to the beneficial ownership, the latter is still not acceptable from shariah point of
view. This is because it is simply a modified version of the conventional practice
(El-Din and Abdullah, 2007).
In the same context, the Islamic banks practice the sale of assets before acquiring
them (Sairally, 2002; Rosly, 2010), and this is strictly prohibited in Islam, as the
prophet pbuh warned from selling something that one does not own. As such,
Kamali (2007) came to the conclusion that the transfer of assets without transfer of
ownership is not valid, and this view was consolidated by Rosly (2010) concerning
sukuk, whereby he considered it to be non-shariah-compliant if the special purpose
vehicle fails to transfer the asset ownership to the holders or investors.
The criticisms addressed to Islamic banks include also that of penalty payment
(Jarrar, 2009; Rosly, 2010). In practice, Islamic banks usually charge a penalty fee of
1 per cent on the late repayment of the customers. El-Din and Abdullah (2007)
highlight the majority view of the scholars stating that this penalty charge from the
debtor for the late payment is similar to riba prohibited by the holy Quran.
Therefore, the owner cannot charge an additional amount if the hirer delays the
payment. This view was supported by Al-Omar and Iqbal (2000) confirming that
Islamic banks cannot charge anything extra if the buyer defaults or settles his
payment lately, because that would be a serious riba. As such, Usmani (1999) argues
that the penalty stipulated, for instance, in case of financial lease agreement is not
valid in an Islamic lease. On the other hand, Meenai (2001 cited in Sairally, 2002)
argues that in murabahah financing, once the contract is finalised, a fixed liability is
created, implying that the price once agreed upon cannot be increased or decreased
in relation to time. Hence, clients who pay early cannot be rewarded, and those who
default in making payments on time cannot be penalised.
Nevertheless, some of the scholars consider that the penalty payment is
permissible in some instances. For example, Baharum (2004, cited in El-Din and
Abdullah, 2007) argues that when two parties or more enter into a valid contract,
they will be bound by terms and conditions in the contract. As such, breaching any
of these terms will cause the innocent party to suffer a loss, which needs to be
compensated.
Similar to the penalty payment, Dusuki and Abozaid (2007) considered the
custodial fee in the case of rahn or Islamic pawn broking to be equivalent to the
interest rate used in conventional banking. More importantly, Sairally (2002)
highlights the value of time compensation, the use of interest rate to discount future
cash flows as well as the fact to include default risk margin with the mark-up
margin, as against the shariah rules. In this context, Kamali (2007) asserts that
some aspects of Ijarah, for example, are not fully shariah-compliant. This includes
the maintenance and insurance fees that are solely borne by the customers (El-Din
and Abdullah, 2007), hence contradicting with the concept of justice in Islam.

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Moreover, the current debate on the shariah compliance of Islamic banks is

crucial regarding the benchmarking of the Islamic profit rate to the conventional
interest rate (Rosly, 2010). This is quite different from the implementation of
conventional-like instruments, in the sense that some of the instruments are
theoretically and practically compliant with the shariah requirements; however, in
the profit rate determination, the Islamic banks use the conventional interest rate as
a proxy or benchmark. At that level, this is considered as making conventional and
Islamic banking operations similar (Yusof and Fahmy, 2008).
In addition, Islamic banks are perceived to have used various conventional-like
instruments such as term charges in the case of hire purchase agreement. These
instruments are mostly based on market interest rate; making instruments like
Al-Ijarah Thumma al-Bay (AITAB), for instance, look like conventional hire
purchase agreement (El-Din and Abdullah, 2007). This argument is similar to that of
Sairally (2002) concerning liquidated damages as well as the mark-down approach
used by Islamic banks to give rebates to customers. In the same context, Rosly (2010)
considered profit rate swap with upfront profit and profit made by Islamic banks for
late payment as conventional-like instruments.
Islamic banks are equally reproached the large reliance on Bay al inah (Sairally,
2002) and tawarruq, which is a direct instrument of debt creation (Siddiqi, 2007) and
that do not conceptually and practically differ much from the conventional. In
addition, it is an indirect way of obtaining funds without involving in sale
transactions and their implications (Sairally, 2002).
Bay al inah is generally known as sale based on the transaction of Nasiah. The
debtor sells to the creditor some object for cash which is payable immediately; the
debtor immediately buys simultaneously the same object for a greater amount for a
future date. Thus the transaction amounts to a loan. The difference between the two
prices represents the interest. Such contract was evolved in the early period of Islam,
and it exists for the fundamental reason that a loan for interest is forbidden because
it is equivalent to usury. In this contract, there is an economic interest for both the
borrower and the lender, which at the same time circumvents the prohibition of
usury (Rosly, 2010, p. 8). This view is supported by that of Dusuki and Abozaid
(2007) stating that Bay inah-based and riba-based transactions are actually same.
Rosly and Bakar (2003) also described inah as a way of legitimising interest or
interest-like financing.
Another issue related to the shariah compliance of Islamic banks is the
non-existence of a written shariah law (Abdullah and Dusuki, 2004) as well as
accounting standards specific to the Islamic banking industry (Rosly, 2010). As
such, some instruments like Al Ijaraha Thumma Al Bay, Musharakah, Murabahah,
etc. are entertained on the basis of conventional regulations and are recorded and
treated as financing rather than leasing (Abdullah and Dusuki, 2004; Rosly, 2010;
El-Din and Abdullah, 2007). As such, El-Din and Abdullah (2007) argue that the
above matters can only be resolved by having shariah regulations and of course
accounting standards specific to the Islamic banking principles. And as these are
not currently available, then Islamic banks are still not compliant with shariah.
Furthermore, there is an argument that touches the essence of the Islamic
banking practice today. That is the use of money in its current form, i.e. fiat money
or debt money (Siddiqi, 2007; Meera, 2002, Meera and Larbani, 2009). This argument

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states that the use of money in its current form contributes to the unattainableness
of maqasid shariah, which represents the core of shariah itself. The use of the
current fiat money has also created a huge gap between the real market and the
financial market, because of the exponential increase of debt.
Based on the above arguments, a number of researchers have reached a serious
assessment of the Islamic banking practice in terms of shariah compliance. Sairally
(2002) came to the conclusion that Murabahah is a good way of charging interest, by
referring to the artificial transformation of the initial financing transaction. Dusuki
and Abozaid (2007) supported this argument by stressing that the only difference
that exists between the Islamic and conventional banking systems is in the
technicalities and legal forms, while, in essence, the substance is the same. The
authors backed their argument by putting forward the statement of Ahmad
Al-Naggar that Islamic banking operations differ only cosmetically from
conventional banking operations.
From the customers point of view, Abdullah and Dusuki (2004) found that
Islamic banks customers perceive that there is no difference between AITAB and
conventional hire purchase agreement. In the same context, Yusof and Fahmy (2008)
argued that Islamic banks are seen by customers as just a change in names. The
tendency of Islamic banks to be modelled after the conventional banking system
(Dusuki and Abozaid, 2007) is considered to be due to the eagerness of the Islamic
banks to participate and compete in the banking industry (Yusuf and Fahmy, 2008).
Rosly (2010) supports this view and concludes that Islamic banks close the front
door to riba while opening the back door of riba.
Methodology
Approach
In line with the objectives abovementioned, a qualitative research approach was
applied. According to Merriam (2009), qualitative research allows the researcher to
understand how people interpret their experiences, how they construct their worlds
and what meaning they attribute to their experiences (p. 5).
The choice of qualitative research methodology can be further explained by its
ability to generate comprehensive information to determine the perception of the
customers about the shariah compliance of their Islamic banks. Given that, brief
answers to structured questions will not be able to provide the required in-depth
information to assess the issue at hand adequately (Weischedel et al., 2005).
Sample and data collection
A total of ten interviewees were selected depending on some specific criteria. The
sample is composed of well-educated and articulate individuals, with the ability to
understand and respond to detailed questions concerning specific issues of Islamic
banks as they are practicing today. Polit et al. (2001) recommend that not more than
ten interviewees should be included in the study, to allow an in-depth exploration in
phenomenological studies. Furthermore, the sample of ten respondents is
considered suitable, as it has been used in similar studies (Tijani et al., 2009;
Koenigstorfer and Klein, 2010).
To access participants experiences, in-depth interviews were conducted,
particularly semi-structured interviews, using a tape recorder. These interviews

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were ranging from 10 to 20 minutes. At the beginning of every interview, the

interviewees were given a guarantee of the confidentiality and were also assured
that their identities will not be revealed in any publication.
The interviewees have been customers of their respective Islamic bank for two to eight
years. The informants were basically eight males and two females who were customers of
Islamic banks for at least two years. Notably, this will allow them to have a better
understanding and familiarity with the Islamic banking practice. The interviewees were
carefully selected to represent local Malaysian as well as international customers
temporarily or permanently living in the country.
Data analysis
All the ten interviews were reviewed several times before being transcribed. Subsequently,
a phenomenological approach to analyse data was adopted, which involves interpreting and
reflecting on the data transcript so as to achieve a holistic understanding of the meaning of
the participants experiences (Alexis and Vydelingum, 2007).
Furthermore, the area of shariah compliance and other issues of Islamic banks
have been severely discussed from the experts and professionals point of view.
Hence, this data analysis approach was chosen to allow the customers to express
their opinion based on their own experiences.
Results
Awareness of the shariah compliance criticisms
The criticisms of the shariah compliance of the Islamic banks are the main concerns
of this study because they lead indirectly to the assessment of the Islamic banks
shariah compliance perception of the Islamic banks customers. The interviews
provide evidence that all the interviewees are aware of the current criticisms as to
the shariah compliance of Islamic banks. However, the degree of exposure depends
on several considerations. In this regards, interviewee G noted:
I am exposed to many of these criticisms based on my field of study.

On the other hand, interviewee D associates his awareness about the current
shariah criticisms to the Bai Bithaman Ajil (BBA) and hire and purchase agreement
or Al Ijarah Thumma Al Bay, which is similar to the argument of El-Din and
Abdullah (2007), Rosly (2010) and Siddiqi (2007):
One of them is that their job is trying to paint the conventional products with Islamic
names, such as Hire Purchase Agreement, BBA, etc. And at times, some of these products
are even worse or more dangerous than those of the conventional banking, because of their
shariah aspects. And because when shariah is attached to something, you want to fulfil
the rules of shariah to the latter. But we discovered that they are doing so in a way that
pays them not in a way that pays the customer.

In the same context of BBA, interviewee A noted that:

I heard a lot of criticisms of Islamic banks in Malaysia. Some people mentioned about the
hila of using bay dayn. Recently, I heard about BBA, it is said that if we borrow for 20
years, after 10 years of the loan payment, in BBA the principle would not be fully paid yet.
Only the profit would be covered. But the riba takes a little bit of principle already. And we
cannot only criticise, some researches also suggest Musharakah, but in Musharakah also
the bank does not want to take risk because it is low profit for them, it means that they are

doing business for the sake of money instead of achieving the maslahah which is giving
more benefit to the society. I can say overall. These are some of the criticisms that I have
heard.

The above statement is in line with the findings by Meera and Dzuljastri (2009). The
authors found that BBA is even more expensive than the conventional housing
loans, while musharkah mutanaqisah was found to be the cheaper mode of
financing. In addition to the BBA issue, interviewee E expressed that:

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I heard many criticisms but I did not really emphasise the issues. However, most of them
are about bay al inah transactions.

Additionally, interviewee H was more concerned about the issue of benchmarking,

which supports the argument of Rosly (2010):
Actually, the one that I am really particular about is benchmarking of the profit rate to the
interest rate. Islamic banks do not need to look after the conventional; they have to find
another basis, to move away from the conventional banking practice. I think the main
thing is interest rate, once the interest rate is eliminated, all the other issues will be solved.

Finally, interviewee J mentioned that:

Nowadays, everything comes from the western banks and the shariah boards of Islamic
banks just recommend them. For instance, credit card, we do not have to be so much crazy
with the western innovation, we have to come out with something from our own
perspective of innovation and not to depend on their own innovation. I think there is lot of
lacking; this is why we can see lot of criticisms, lot of awareness that has already been
created among the practitioners and the clients of Islamic banks. I think this will at least
help the Islamic banks to think about it.

Overall, the interviewees showed a good degree of awareness of the current

criticisms of the shariah compliance of the Islamic banks. The interviewees were
mainly concerned with the benchmarking of profit rate to interest rate, the
over-usage of darurah, the continuous mimicking of conventional banking products,
etc. In the next section we will shed light on the perception of the customers on these
criticisms.
Perception on the criticisms of the Islamic banks shariah compliance
After examining the awareness of the interviewees about the criticisms to the
shariah compliance of the Islamic banks, at this stage we will explore their
perception about majority of these criticisms. Overall, interviewee J agrees with the
criticisms to the shariah compliance of Islamic banks, and he expressed that:
These criticisms mainly come from academicians. And they themselves have noticed that
there is huge difference between the theory and the practice of Islamic banking. I think
there is a reasonable ground for all these criticisms.

Interviewee E supports interviewee js view and he also looks positively to these

criticisms. This:
To some extent, I agree with most of these criticisms [] [] These criticisms actually
show that the customers are aware and understand the operations of Islamic banks, to
some extent of course. Because otherwise, they would just let the Islamic banks operate
just like they want. So for me it is positive.

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Interviewee A showed a straightforward position by noting that:

If you go to the Islamic banks, you will see the rate already, which contradicts with the
shariah rules, because the bank cannot state the profit upfront. In this way the choice of
financial instruments will depend on the rates offered, for example choosing mudarabah if
the rate is higher compared to musharakah and so on. So it should not be like that. Because
it is not only profit sharing but also loss sharing.

The statement by interviewee A supports the findings of Sairally (2002), Dusuki and
Abozaid (2007) and Yusof and Fahmy (2008) claiming that the current practice of
Islamic banking today used many of the interest-like financial instruments.
Furthermore, one of the issues emphasised by the interviewees is the darurah
usage as criticised by Dusuki and Abozaid (2007). In this regards, interviewee J
noted that:
Darurah kind of things can be a good excuse for the Islamic banks while the environment
is not Islamic. If you are living in an Islamic environment, Islamic country where 70 per
cent of the population are Muslims, then darurah issues should not come to the picture. It
should be in fact avoided. It is one of the things that we should stop practicing.

Interviewee I has been more specific by clarifying that the banks should distinguish
between the kinds of darurah the banks are referring to. Because if the banks look
for the easy way to run the business then there will be no limit for that darurah
usage:
Actually, darurah is one of the dimensions of usulul fiqh. But we should also consider what
kind of darurah it is. Is it a real need to Islamic banks or not? In the stage where Islamic
banks are now, Islamic transactions are growing, the Islamic economies are also growing,
so there should be some alternatives. But the darurah should not be for long time, it should
change after a period of time. So we cannot basically just keep depending on that darurah,
we should find an alternative.

In response to the statement of interviewee I, interviewee G provided an example of

instruments that are still in use though the alternative has already been found:
If it is in the issue of bay inah, then we have a better one now [] [] the bankers protect
their interest, rather than achieving the shariah compliance and I think it is not acceptable
for them to do that, because it begins with the intention. The intention of the bank must be
to fulfil all the shariah requirements and not to get the profit, though the bank anyway
should aim to get profit. But there should be progress towards achieving shariah.

The above statement provides evidence of darurah abuse in the current Islamic
banking practice, similar to the argument of Dusuki and Abozaid (2007).
Another issue highlighted by the interviewees is that of benchmarking the profit
rate to the interest rate, which has been seen in the literature as against shariah
(Rosly, 2010). Interviewee C noted that:
Islamic banks do not need to look after the conventional; they have to find another basis,
to move away from the conventional banking practice.

However, interviewees H and J disagree with the above statement and consider that
Islamic banks should be using this basis at least for the time being; otherwise they
will lose the market share. Interviewee Hs comment was typical:

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This is a real issue. Because if they do not consider, they will lose the market, so in this
financial system, it is difficult to have a different benchmark, because the market is still
one single market. So if you do not consider that one that means you will lose. Either you
will lose the customer or you will lose the market. So for me, yes, they should consider, at
least temporarily.

This contradicts with the argument of Rosly (2010) and Yusof and Fahmy (2008). Their
arguments claim that when the profit rate is benchmarked to conventional interest rate,
then the Islamic banks become more or less similar to the conventional banks.
The interviews also revealed the fact that Islamic banks in Malaysia operate in a dual
banking system, i.e. under the conventional regulations and accounting standards, and
this was claimed to be affecting the shariah compliance of Islamic banks as highlighted by
Abdullah and Dusuki (2004), Rosly (2010) and El-Din and Abdullah (2007). Interviewee G
and half of the interviewees all agree with the above argument and clearly note that:
The fact that Islamic banks operate under the conventional regulations and accounting
standards strongly affects the shariah compliance aspect of Islamic banks. In fact, the
substance is more important than the form of transactions, and in this case, the form and
superficial look Islamic but the substance is nothing but a conventional banking operation. In
other words, this is a disguised form of conventional banking.

However, another half disagrees that the accounting standards and regulations affect
the shariah compliance of the Islamic banks. Interviewee Js comment was typical:
To me, with my little knowledge, the accounting aspect has no problem with the practice of
Islamic banking. For example if you have debit/credit accounting, it does not mean that the
figures have an Islamicity problem. The problem is what the figure is representing, what the
amount you are getting represents, profit or interest, from which project it is coming from, etc.
But your mechanics, your tools should not be a problem, so there is nothing wrong with the
technique or calculation. The problem is where the figure is coming from, is it from a halal
transaction or non halal. For the accounting standards, we can take good lessons from the
western practice, because this has been in place for more than 400 years, and Islamic banking
is newly born child compared to the conventional.

Overall, majority of the interviewees agree with most of the criticisms of the shariah
compliance of Islamic banks. However, the customers perceive that the use of
conventional-like instruments can be solved by first stop abusing the darurah principle
and work forward by establishing Islamic regulations and accounting standards, by
further learning from the existing Western regulations. In the meantime, the customers
perceive that the current criticisms will also motivate the Islamic banks to move forward
to the full shariah compliance.
Discussions and conclusions
This study provides insights into the experiences of the Islamic banks customers in
Malaysia regarding the shariah compliance parameter of their respective Islamic
banks. Prior to the discussion about shariah compliance of the Islamic banks from the
customers experience, a number of other themes were evoked during the interview
sessions.
The findings revealed that the interviewees have considerable exposure and
awareness of the current criticisms of the shariah compliance of Islamic banks. In this
regards, most of the interviewees agree and support majority of these criticisms, but

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they are also optimistic about the future. They believe that these criticisms will motivate
Islamic banks to work towards the achievement of full shariah compliance, by
establishing their own Islamic banking regulations and accounting standards, and also
by regulating the use of darurah for the current period.
The findings of the current study have significant contributions to the body of
knowledge, practitioners and stakeholders, as well as to the policymakers and
regulators. In fact, this is the first study that examines the shariah issues of Islamic
banks from customers perspectives, which enriches the literature in this area of
research. Similarly, the findings provide insights on the customers perception on the
matter of shariah compliance, which will motivate the banks to deploy more efforts to
comply with the shariah and, subsequently, with the expectation of the customers. This
also means that the policymakers and regulators should implement the necessary
regulations to ensure the compliance of Islamic banks with shariah.
In fact, the darurah principle has long been applied in dealing with Islamic finance
shariah issues. Currently, these issues should be acknowledged by the government
authorities and the corresponding regulatory bodies in Islamic finance, and attempts
should be made to find alternative solutions to these issues. This is particularly relevant
in the current era of increasing globalisation, where Islamic banking has to preserve its
unique identity.
Though the findings provide great indication on the customers perception about
shariah compliance of Islamic banks, the study has some limitations that should be
considered for the future studies to be conducted in this area. Firstly, the sample is taken
from mainly two Islamic banks in Malaysia, and it is also relatively limited, so the
results cannot be generalised to the whole country. Secondly, the study focuses only on
one aspect of the Islamic banking principles, hence the future studies are recommended
to cover other aspects of it. The future studies are also recommended to use mixed
methodology with triangulation to validate the results.
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Corresponding author
Abdelghani Echchabi can be contacted at: abdelghani.mo@gmail.com

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