The Impact of Ownership Risk in True Sale-Based Financing on Profit Charges: A Structural Equation Modelling (SEM) Approach
The fundamental principle of true sale is based on the ownership state of the subject matter of sale where the selling party must own the asset legally and keep full ownership of the goods before making the sale. In the riba-free system, the Islamic bank assumes a role of a trading entity. It undertakes a trading position and exposes itself to business risk as the asset is booked on its balance sheet. It follows that the profit rate it charges the customer will reflect an additional risk-premium to account for the business risk exposure. Due to business risk exposure, this study introduces the financial infrastructural constraints on the use of true sale-based Islamic financing namely 1) economic capital requirement for the on-balance sheet holding of tradable assets and 2) the tax charges by the fiscal authority on the purchase of tradable assets by the bank. Thus, based on this premise, the objective of this study was formulated to empirically investigate the impact of these constructs (cost of fund, overhead, default risk, capital charges, tax burden and profit rate) on profit rate of true sale-based financing. A Survey questionnaire and a semi structured interview were the tools used for data collection. The analysis was done by using Structural Equation Modelling (SEM) technique and the findings revealed that all independent variables except for cost of fund, have positive and significant impacts towards profit rate charged. Given the findings of this study, it is recommended that the true sale-based Islamic financing is to be funded by investment fund rather than deposit fund. Hence, the additional capital and tax charges will be absorbed by the investors. From this study, we hope that future research could be expanded further by investigating cross border Islamic banking practices in terms of the pricing of true sale model and closer comparison can be made between Malaysian Islamic banks and Foreign Islamic banks.
Bank Negara Malaysia, Guideline on Investment Account 2014
Bank Negara Malaysia, Financial Stability Report 2014.
Byrne, B. (2001). Structural equation modeling with AMOS: Basic concepts, applications and programming. Mahway, NJ: Lawrence Erlbaum Associates.
Dahlan, N. H. M. & AlJunid, S. Z. S. A. K. (2011). Shariah and legal issues in house buying in Malaysia: The legality of BBA with special reference to abandoned housing projects. Pertanika Journal of Social Science and Humanities, 19(2), 349-361.
Government of Malaysia, Sale of Goods Act 1957.
Government of Malaysia, Islamic Financial Service Act 2013.
Hair, J. F, Black, W. C., Babin, B. J, Anderson, R. E. & Tatham, R. L. (2006). Multivariate data analysis (6th edition). Upper Saddle River, NJ: Pearson Education.
High Court Malaysia. (2008). Arab Malaysian Finance Berhad v Taman Ihsan Jaya Sdn. Bhd. Malaysian Law Journal, 5(631), 631-660.
Islamic Financial Services Act (IFSA). (2013). Law of Malaysia, Act 759.
Kamali, M. H. (2007). Commodity futures: An Islamic legal analysis. Thunderbird International Business Review, 49(3), 309-339.
Meera, A. K. M. & Abdul Razak, D. (2005). Islamic home financing through musharakah mutanaqisah and al-bai’ bithaman ajil contracts: A comparative analysis. Review of Islamic Economics. Journal of the International Association for Islamic Economics and the Islamic Foundation, 9(2), 5-30.
Mohd Sapian, S., Shafii, Z. & Syed Mohamad, S. F. (2012). Comparative analysis of financial reporting practices in conventional and Islamic banks in Malaysia. The Journal of Muamalat and Islamic Finance Research, 9(1), 61–75.
Rosly, S. A. (2012). A critical analysis of al-bay as the alternative to usury (riba) (Unpublished Manuscript). INCEIF.
Siddiqui, S. H. (2001). Islamic banking: True modes of financing. New Horizon. Retrieved on 3rd March 2013 from http://nzibo.com/IB2/truemodes.pdf.
The Mejelle. (2001). An english translation of majallah el-ahkam-i-adliya and a complete code on Islamic civil law. Kuala Lumpur, Malaysia: The Other Press.
Zainudin, A. (2012). A handbook on SEM (Structural Equation Modeling) (4th ed.). Kota Bharu. Kelantan: Universiti Teknologi Mara.
Copyright (c) 2019 The Journal of Muamalat and Islamic Finance Research
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work.
Copyright of the accepted articles will not remain with author(s). Prior to publication of accepted article, author(s) will be asked to assign copyright to the JMIFR. All published articles in the journal are copyrighted to the JMIFR.