Contributions to Management Science

Nadia Mansour
Lorenzo Mateo Bujosa Vadell Editors

Islamic
Sustainable
Finance, Law
and Innovation
Opportunities and Challenges
Contributions to Management Science
The series Contributions to Management Science contains research publications in
all fields of business and management science. These publications are primarily
monographs and multiple author works containing new research results, and also
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Nadia Mansour • Lorenzo Mateo Bujosa Vadell
Editors

Islamic Sustainable Finance,

Law and Innovation
Opportunities and Challenges
Editors
Nadia Mansour Lorenzo Mateo Bujosa Vadell
Department of Finance Faculty of Law
University of Sousse-Tunisia and University of Salamanca
University of Salamanca-Spain Salamanca, Salamanca, Spain
Monastir, Tunisia

ISSN 1431-1941 ISSN 2197-716X (electronic)

Contributions to Management Science
ISBN 978-3-031-27859-4 ISBN 978-3-031-27860-0 (eBook)
https://doi.org/10.1007/978-3-031-27860-0

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Contents

Analysis of Acceptance’s Level of Takaful Products in Iran . . . . . . . . . . 1

Mitra Ghanbarzadeh, Asma Hamzeh, and Nasrin Hozarmoghadam
Identifying and Ranking Factors Affecting the Demand for
Takaful Insurance in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Asma Hamzeh and Mitra Ghanbarzadeh
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of
Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Dwi Indriastuti Yulianingsih and Olivia Fachrunnisa
The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare in
Productive Zakat Empowerment (Sharia Maqasid Approach) . . . . . . . . 33
Ivan Rahmat Santoso, Syahrir Mallongi, Siradjuddin, and Muhammad
Basir Paly
Economic Empowerment of Islamic Boarding Schools Through
Optimization of Halal Value Chain: A Conceptual Offer . . . . . . . . . . . . 45
Lamya Nurul Fadhilah and Syamsuri
Developing Conceptual Framework for Public–Private Partnership
Projects via Mobilization of Islamic Finance in Indonesia . . . . . . . . . . . . 57
Muhammad Imaduddin and Salina Hj. Kassim
Takaful on COVID-19 Coverage: Case Study of Malaysian’s General
Takaful Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Alya Nabihah Idris and Marhanum Che Mohd Salleh
The Impact of Islamic Branding on Customer Loyalty with Customer
Satisfaction as an Intervening Variable . . . . . . . . . . . . . . . . . . . . . . . . . 95
Abdul Muizz Abdul Wadud and Layaman

v
vi Contents

Role of Islamic Microfinance in Enhancing Financial Inclusion

in Bangladesh: A Systematic Literature Review . . . . . . . . . . . . . . . . . . . 105
Niaz Makhdum Muhammad, Salina Bt. Kassim, Nur Farhah Binti Mahadi,
and Engku Rabiah Adawiah Bt Engku Ali
The Application of Artificial Intelligence in Metaverse: A New
Challenge on Personal Data Protection in the Financial System . . . . . . . 117
Lia Sautunnida, Nor Razinah Mohd. Zain, Izura Masdina Mohamed Zakri,
and Azhari Yahya
The Application of Mobile Banking Services by Malaysian Islamic
Banks: An Evaluation of the Customers’ Main Concerns . . . . . . . . . . . . 127
Siti Ainatul Mardhiah Yusof, Nor Razinah Mohd. Zain,
and Azman Mohd. Noor
Islamic Equity Financing as a Financial Inclusion Enabler: Nigeria
in Spectrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Tesleem Olajuwon Isa Akosile, Nor Razinah Mohd Zain,
Engku Rabiah Adawiah Bt Engku Ali, and Salina Kassim
Financial Inclusion in Somalia Between Reality and Expectations . . . . . 145
Abdirahman Abdillahi Farah and Abdulmajid Obaid Hasan Saleh
Potential of Islamic Microfinance: Issues, Challenges, and Way
Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Nur Harena Redzuan, Salina Kassim, Romzie Rosman,
Mohd Faizuddin Muhammad Zuki, and Siti Saffa Shaharuddin
The Role of Financial Behavior, Financial Stress, and Financial
Well-Being Toward Islamic Financial Literacy . . . . . . . . . . . . . . . . . . . . 167
Aubaidillah Doloh, Nur Harena Redzuan, and Zarinah Mohd Yusoff
An Analysis of the Impact of Islamic Microfinance Among Asnaf . . . . . 177
Nur Harena Redzuan, Salina Kassim, Romzie Rosman,
Mohd Faizuddin Muhammad Zuki, and Siti Saffa Shaharuddin
Rectifying the Downsides Pension Fund with the Critical Analysis
of Triangle Justice Ecosystem: A Comparative Case Study
in Indonesia and Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Fahmi Alamil Huda
The Effect of Financing Distribution on NPF in Islamic Banking:
A Short- and Long-Term ECM Analysis . . . . . . . . . . . . . . . . . . . . . . . . 197
Pungky Lela Saputri, Hanif Ahmadi, and Diah Ayu Kusumawati
The Rahn Practices by the Real Estate Agencies in Afghanistan:
The Sharīʽah and Legal Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Mohammad Tamim Siddiqi and Rusni Hassan
Contents vii

Improving Microtakaful Offering Through Stakeholders’

Collaboration: Critical Analysis Using Systematic Literature Review . . . 219
Kartina Md Ariffin, Salina Kassim, Nur Harena Redzuan,
and Habeebullah Zakariyah
Sukuk’s Role in Financing Infrastructural Development During the
Covid-19 Pandemic in Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Abubakar Abubakar Usman and Auwal Adam Sa’ad
Identifying Factors of Financial Exclusion of Rural Farmers: Case
Study in Ulu Dong, Raub, Pahang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
Siti Saffa’, Aziq Arifin, Abdullah Hafiz, and Nur Harena
Roles of Islamic Financial Literacy on Financial Decision-Making:
Building a Conceptual Framework Based on the Theory of Planned
Behavior and Social Cognitive Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Auni Zulfaka and Salina Kassim
An Evaluation of Cash Waqf Deposit Performance Through Islamic
Banks in Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
Mohammad Kamal Uddin
Takaful Plan for E-Hailing: A Comparison Between the Available
Private Motor Vehicle Takaful Plans in Malaysia . . . . . . . . . . . . . . . . . . 277
Fadhilah Abdullah Asuhaimi, Ahmad Khaliq,
and Fatimah Noor Rashidah Mohd Sofian
The Role of Religiosity and Hardworking on Human Resource
Performance of Baitul Maal wat Tamwil Ummat Sejahtera Abadi . . . . . 287
Annisa, Widodo, and Olivia Fachrunnisa
Improving Business Success Through the Use of Accounting
Information and Business Capital Management . . . . . . . . . . . . . . . . . . . 301
Rita Rosalina and Luluk Muhimatul Ifada
Islamic Communication in Outbound Management Training . . . . . . . . . 317
Devina Aprilia Nur Aini and Olivia Fachrunnisa
Addressing Negative Spillover Effects of Overcrowding in Malaysian
Prisons: Can Islamic Financial Institutions Play a Role? . . . . . . . . . . . . 323
Siti Nursyawani binti Misman, Mohd Ariff bin Mohd Salimin,
Rahimah binti Farjan Ali, Ieman Huda binti Adnan, Salina binti Kassim,
and Syed Marwan Mujahid bin Syed Azman
Evaluation on the Practice of Ijarah for Vehicle Financing and Its
Regulation in Islamic Financial Institutions in Sri Lanka . . . . . . . . . . . . 335
M. H. M. Abdullah and Rusni Hassan
viii Contents

Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs:

How Can Islamic Fintech in Zakat Institutions Play a Role? . . . . . . . . . 345
Farah Farhana Jauhari, Syarah Syahira Mohd Yusoff, and Salina Kassim
Optimizing Digitalpreneurship through Digital Skills and Platform
Strategy on MSMEs in Central Java . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
Diah Ayu Kusumawati and Pungky Lela Saputri
Sharia Investment Decision-Making: Gender Lens Investing, Fear
of Missing out, and Islamic Financial Literation . . . . . . . . . . . . . . . . . . . 367
Puspa Devi Maharani, Lathiefa Rusli, Kurnia Rahman Abadi,
and Siti Syarah Fadhilah
How Do Islamic Banks Report and Distribute Zakat in Malaysia? . . . . . 377
Nurul ‘Iffah M. A. Zaaba and Rusni Hassan
The Role of Libyan Zakat Foundation in the Achievement of Social
and Economic Development (Zliten Zakat Foundation as a Model) . . . . 387
Salem Faraj Gamo, Abdulmajid Obaid Hasan Saleh,
and Deden Misbahudin Muayyad
Islamicity and Reporting Performance on Islamic Banking Financial
Performance in Indonesia Post-COVID-19 (Period: 2019–2021) . . . . . . . 397
Cahaya Fitriana Dewi Amala, Ely Windarti Hastuti,
Muhammad Ridlo Zarkasyi, Kurnia Rahman Abadi, and Yaafiatul Hasanah
The Effect of Institutional Theory Toward Shariah Audit Practice in
Malaysian Takaful Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409
Noor Aimi Mohamad Puad, Nurdianawati Irwani Abdullah,
and Zurina Shafii
Assessment of Financial Performance of RSI Sultan Agung
Semarang Through the Maqashid Sharia Concordance (MSC)
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427
Muhammad Ali Ridho and Luluk Muhimatul Ifada
Impact of Electronic Service Quality on Customer Satisfaction
of Islamic Banks in Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435
Altaf Ahmad, Zishan Naseer, and Habeebullah Zakariyah
Maqashid Sharia Framework: Sharia Financial Inclusion
Through Indonesian Sharia Mobile Bank . . . . . . . . . . . . . . . . . . . . . . . . 445
Andiyani Kurnia
Exploration of Sharia Bank Services in Muhammadiyah’s Higher
Education Students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455
Ummu Salma Al Azizah and Bella Jastacia
Contents ix

Is the Islamic Religiosity Become the Cashless Behavior Among

Muslim Community? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465
Chindy Chintya Cahya and Khoirul Umam
The Presentation and Disclosure of Islamic Banks’ Financial
Statements: A Comparative Analysis of IFRS and AAOIFI Financial
Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473
Pazilaiti Ababaike, Romzie Rosman, and Ashurov Sharofiddin
Indonesia’s South-South Cooperation in Promoting Sharia Economic
Development in Sudan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
Agata Nina Puspita, Ica Cahayani, and Ahmad Mujaddid Fachrurreza
Significance and Potential Role of the Islamic Banking and Finance
Services in Bangsamoro Autonomous Region in Muslim Mindanao . . . . 495
Jawad Z. Salic
ESG Practices and Firm Risk: Evidence from Malaysia . . . . . . . . . . . . . 501
Nik Anis Idayu Nik Abdullah and Razali Haron
The Muhammadiyah Waqf Organization: Prospects and Challenges . . . 511
Junarti, Isnan Hari Mardika, Syed Musa Alhabshi, and Amirsyah
Strategies for Improving Cash Waqf Fundraising Through
Optimization of Cash Waqf Literacy in Indonesia . . . . . . . . . . . . . . . . . 523
Nurul Rahmania and Hartomi Maulana
Measuring the Customer’s Perception of the Use of Financial
Technology in Algerian Islamic Banks . . . . . . . . . . . . . . . . . . . . . . . . . . 533
Taalbi Abdelhak, Ashurov Sharofiddin, and Nur Farhah Binti Mahadi
Current Trends and Sustainable Development of Warehouse
Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
P. Reznik Nadiia, А. Demchenko Tetyana, А. Slatvinskyi Maksym,
V. Kosmidailo Inna, M. Khodakyvskyy Volodymyr, V. Bugaychuk Vita,
and V. Valinkevych Nataliia
Exploring CSFs for Application of Six Sigma Programs:
An Empirical Evidence from Small-Scale Industries (SSIs) . . . . . . . . . . 551
T. K. Murugesan, K. P. Jaheer Mukthar, V. Raju, Nelson Cruz-Castillo,
Rolando Remigio Sáenz Rodríguez, and Lilia Uribe-Pomachagua
Analysis of Acceptance’s Level of Takaful
Products in Iran

Mitra Ghanbarzadeh , Asma Hamzeh , and Nasrin Hozarmoghadam

Abstract Takaful is an Islamic insurance system, and, in practice, it is considered a

method based on the joint guarantee of the members of a group against possible
losses on each of them. Recently, insurance companies in Iran have included takaful
products in their portfolio. Therefore, considering the entry of Iranian insurers into
this field to develop these products in Iran, it is necessary to check the customer’s
acceptance rate of takaful products in Iran. Indeed, with the large number of insurers
in Iran, the awareness of the people about takaful products is still low among them.
The main objective of this chapter is to determine and analyze the main components
of consumers’ acceptance of takaful in Iran. To study the level of awareness or
acceptance of takaful insurance and its main principles, we need to determine the
factors influencing Iranian people to select takaful products over conventional
insurance. Some of the variables considered to have an impact on the acceptance
of takaful products in Iran are demographic variables (such as age, gender, marital
status, religion, income, education, occupation, province, or locality), macroeco-
nomic variables (such as inflation rate and return of other financial markets), price,
services quality, Shariah view, marketing and advertisement variables, and product
characteristics. To investigate the acceptance and awareness of takaful in Iran, the
researchers employed a qualitative research approach, distributed to customers,
because the aim of this chapter is to measure the individual reasons for the commu-
nity in using takaful products. Based on the research’s results, Iranian insurers can
attain a good image to their consumers by producing a proper product that will give a
good experience to them.

M. Ghanbarzadeh (✉) · A. Hamzeh · N. Hozarmoghadam

Insurance Research Center, Tehran, Iran
e-mail: [email protected]; [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 1

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_1
2 M. Ghanbarzadeh et al.

1 Introduction

Takaful is an alternative to the conventional insurance (Muhammad 2018).

According to the Islamic religion of the Iranian people, it is expected that Islamic
finance and especially takaful are considered more, and takaful can operate alongside
conventional insurance in Iran. Based on this, it is necessary to develop and design
suitable models for accepting takaful insurance. It is necessary to pay attention to the
fact that, due to the low penetration rate of this field in the country, the level of
awareness of people about this type of insurance is also low. Many studies have
investigated the acceptance rate of takaful insurance in other countries, which will be
briefly reviewed below.
Coolen-Maturi (2013) evaluates the real demand for takaful products and the
awareness about takaful insurance among Muslims in the United Kingdom. Its
results show that there is a lack of awareness about takaful products among them.
Kehinde and Sharofiddin (2021) analyze the consumers’ acceptance of takaful in
Nigeria and show that Shariah view, locality, consumer acceptance, service quality,
attitude, awareness, subjective norm, and perceived behavior control are the factors
influencing the awareness and acceptance level of takaful in Nigeria. Wan Abdul
Aziz et al. (2011) investigate the government servant’s perception of Islamic motor
insurance in Malaysia based on product knowledge, awareness, advertising, and
benefit of the product. The findings show that customer’s perception levels are very
positive toward this product. Razak et al. (2013) consider the acceptance’s level of
takaful in Malaysia using interviews with four customers and show the most factors
that influence communities in Malaysia to purchase takaful products. Maiyaki and
Ayuba (2015) examine the factors that impacts the consumers’ choice toward takaful
service in Kano Metropolis, Nigeria, based on consumers’ awareness, perception of
takaful services, and the trust and confidence they reposed in takaful operators. They
show that awareness, perception, trust, and confidence are significantly related to the
consumers’ perception. Echchabi et al. (2014) investigate the willingness of the
Tunisian customers to adopt takaful and determine the factors that influence their
decisions. The results indicate that they are willing to adopt Islamic insurance
services.
The topic of providing takaful insurance has been raised in Iran’s insurance
industry for several years, but it has not yet been implemented. This is despite the
fact that takaful insurance has been implemented in other Islamic countries for years.
Therefore, checking the level of awareness and the level of acceptance of customers
can be a good starting point for offering these products in Iran so that the product is
offered according to the awareness and acceptance of customers. In addition, the
desire to buy takaful products (such as car third party, car body, health, life, mobile
and travel) and the importance of various factors are examined.
Based on this, the objective of this chapter is to examine the consumers’ accep-
tance of takaful in Iran. To evaluate the level of awareness or acceptance of takaful
insurance and its main concepts, we need to determine the factors influencing Iranian
people in their choice to choose takaful over conventional insurance. To analyze the
Analysis of Acceptance’s Level of Takaful Products in Iran 3

acceptance and awareness of takaful in Iran, we use a qualitative method and the
questionnaires were distributed to customers.
In order to achieve the aforementioned goals, the chapter is organized as follows.
Section 2 gives the basic concepts of takaful insurance. In Sect. 3, the methodology
of research is presented. Section 4 investigates the analysis of the acceptance rate of
takaful products in Iran. Finally, the conclusion is provided in Sect. 5.

2 Takaful Insurance

The takaful or Islamic insurance industry has features that distinguish this industry
from the common commercial insurance industry. For example, takaful operations
have financial transparency compared to common commercial insurance operations,
and unlike common insurances, takaful beneficiaries also share in the surplus and
investment profits. Therefore, studying takaful patterns and checking the legality of
its activities in order to use takaful patterns to cover companies and individuals as an
alternative to common insurance due to its unique features can lead to the flourishing
of the economy. Common commercial insurance and takaful insurance differ from
each other in terms of the nature of the business, the nature of the contract, sources of
laws and regulations, and being based on the principle of cooperation. For example,
in the nature of business, common insurance is based on the motive of earning profit
and helping the shareholders and owners of these companies to maximize their
returns, but takaful is based on the motive of supporting and providing the social
welfare of the takaful recipient and his family. In the nature of the contract, the
customers of common commercial insurance are the same buyers of insurance
policies who pay insurance premiums to the insurance company to cover the possible
risks of their own family and so on. In fact, it is a sale contract where the insurer
receives money from the insurer against the risk coverage, but takaful is an agree-
ment among all takaful parties to share their risks. Also, common insurance rules and
regulations are the result of business experiences, human thoughts, judicial literature,
the bases, and the culture of that country. The takaful regulations are based on the
Islamic principles of “Qur’an and Sunnah,” opinions and religious fatwas of scholars
and jurisprudential committees in these companies. Legal authorities can take cases
from common insurance companies and adjust and modify them for the takaful
system. Being based on the principle of cooperation is one of the other advantages of
takaful that the members are the insured and the insurer at the same time, that is, they
share in all losses and also participate in risk transfers (Hamid and Rahman 2011;
Suma 2006).
4 M. Ghanbarzadeh et al.

3 Methodology

Considering that takaful insurance in Iran is in the stage of being offered by

insurance companies, it is very important to check the awareness and acceptance
of takaful by customers. In this regard, this chapter examines the awareness and
acceptance of people in Iran using field study and questionnaire tool. In addition, to
get a proper questionnaire, the library and document method is used. Since the
statistical population is large and widely geographically distributed, an online survey
is used with a nonprobability sampling technique.
The research questionnaire consists of five parts. In the first part, questions were
asked about the respondents’ demographic information (such as gender, marital
status, age, education, city of residence, monthly income, and current type of
insurance). In the second part, the level of awareness of the concepts related to
takaful insurance is measured. In the third part, questions regarding the agreement
with the use of Arabic words in takaful insurance are placed to determine whether the
respondents agree with using the words such as riba, gharar, and mudarabah in
takaful insurance or not. In the fourth part, the importance of various factors such as
economic indicators (inflation, returns of other financial markets, income), product
features (takaful insurance price, quality and diversity of takaful insurance services,
compliance with the principles of Islamic jurisprudence and the absence of riba,
gharar, and gambling in insurance takaful, investment of funds from takaful insur-
ance premiums in Islamic-financial markets, distribution of excess capital among
takaful policyholders) and the index related to appropriate marketing and advertising
of the insurance company have been measured so that based on the Likert scale the
respondent can rate the importance of each factor. In the fifth part, the acceptance
rate of takaful insurance has been evaluated based on various questions, which are
part of the questions related to the type of takaful insurance that they tend to buy if
offered in the country. The other part of this section is related to questions about the
respondent’s thoughts on the suitability of the takaful, which shows its
acceptance rate.

4 Acceptance of Takaful Insurance in Iran

In this section, we analyze the results of the questionnaire regarding the awareness
and acceptance of takaful in Iran. The number of respondents to the questionnaire is
148, and their demographic information will be analyzed in the following. Figure 1
provides an overview of the demographic status of the respondents. As can be seen,
51 percent of respondents are male and 51 percent are between 30 and 38 years old.
The survey shows that about 74 percent of the respondents are highly educated with
at least a master’s degree. With regard to monthly income, 76 percent of the
respondents earn more than 70 million IRR. Also, about 58 percent of the
Analysis of Acceptance’s Level of Takaful Products in Iran 5

Gender 4.05% Marital Status

5
0%

29.73%
49.32%
50.68%
66.22%

Male Female Single Married widowed divorced/Separated

Income (Milion Rials) Level of Education

60.00% 60.00%
53.38%
43.24%
40.00%
40.00% 31.08%
22.97%
22.97% 20.00%
20.00%
9.46% 0.68% 2.03%
6.76% 7.43%
0.00%
Diploma Associate Bachelor Master PhD and
0.00% and above
< 30 30-50 50-70 70-90 >90 below

Employement Type
80.00%
58.11%
60.00%

40.00%
20.95%
20.00%
7.43% 4.05% 7.43%
1.35% 0.68%
0.00%

Fig. 1 Demographic information of respondents

respondents are employed in the private sector, whereas 21 percent of the respon-
dents are employed in the public sector.
Next, in order to clearly understand the behavior of customers, they were asked a
question about the type of common insurance covered by commercial insurance, the
results of which are shown in Fig. 2.
6 M. Ghanbarzadeh et al.

Fig. 2 Which insurance the respondents have?

Table 1 Awareness of respondents about takaful concepts

Mean
Concept Yes No Maybe score
Takaful insurance 33.78% 31.08% 35.14% 2.03
Riba (interest) 66.22% 12.84% 20.95% 2.53
Maisir (gambling) 70.95% 10.14% 18.92% 2.61
Gharar (uncertainty) 27.03% 51.35% 21.62% 1.76
Mudharabah contract 54.73% 22.97% 22.30% 2.32
Wakalah contract 68.92% 13.51% 17.57% 2.55
Takaful insurance is free of riba, gharar, and maisir 29.73% 43.24% 27.03% 1.86
According to some Sunni jurists, conventional insurance 41.22% 33.11% 25.68% 2.08
includes riba, gambling, and gharar
Takaful insurance is more compatible with the principles 42.57% 35.14% 22.30% 2.07
of Islamic jurisprudence
Policyholders share in the income from Takaful insur- 52.70% 29.05% 18.24% 2.24
ance operations and investments made according to
Islamic Sharia
Takaful insurance is based on the motive of supporting 49.32% 27.03% 23.65% 2.22
and providing the social welfare of the insured and her
family
Based on the principle of cooperation in Takaful insur- 54.05% 29.95% 25% 2.42
ance, members share in all losses and participate in risk
transfer

As seen from Fig. 2, car third-party insurance (because it is mandatory in Iran)

and health insurance are the most insurance the respondents have at the moment.
Now, we examine the awareness of takaful concepts among people in Iran. This
includes an understanding of the essential elements of takaful insurance, such as
riba, maisir, and gharar. Table 1 shows its results (it should be noted that score 1 is
used for no, 2 is used for maybe, and 3 is used for yes). The results indicate that the
respondents are somewhat familiar with takaful insurance and many respondents are
Analysis of Acceptance’s Level of Takaful Products in Iran 7

Table 2 Desire to buy takaful insurance products

Type of takaful Desire to buy Reluctance to buy Not sure
Car third-party takaful 31.76% 29.05% 39.19%
Car body takaful 30.41% 32.43% 37.16%
Health takaful 35.14% 31.08% 33.78%
Life takaful 32.43% 29.73% 37.84%
Home takaful 29.73% 31.76% 38.51%
Mobile takaful 20.27% 41.89% 37.84%
Travel takaful 16.89% 40.54% 42.57%

Table 3 Respondent’s agreement to the use of Arabic words (such as riba and gharar) in takaful
insurance
Percentage in
Opinion Percentage Reasons each opinion
Yes 4.05% To show takaful insurance as an Islamic product 50%
To show the difference between takaful and conven- 16.67%
tional insurance in Iran
To attract customers who have problems with conven- 16.67%
tional insurance in terms of Islamic principles
Other 16.67%
No 67.57% To avoid misunderstandings about other common 37%
insurances in the country
To attract customers of any religion 35%
Other 28%
No idea 28.38%

aware of the concepts of riba and maisir with means 2.53 and 2.61, respectively.
Also, few respondents are aware about gharar and the freeness of takaful from riba,
gharar, and maisir and other concepts related to takaful insurance.
In the following, the willingness of customers to buy takaful products is exam-
ined. In fact, customers have been asked which takaful product they would like to
buy if takaful insurance products are offered in the country. The maximum value in
each row is bolded. Based on the results of Table 2 and low awareness of takaful
insurance and its concepts, most respondents are not sure whether to buy a car third-
party takaful, car body takaful, life takaful, home takaful, and travel takaful. In fact,
there is little knowledge about takaful products in Iran, and therefore, insurance
companies should use appropriate strategies in order to create culture and increase
the knowledge of customers.
Table 3 shows the respondents’ agreement regarding the use of Arabic words in
takaful insurance. As can be seen, 68% of the respondents do not agree with the use
of Arabic words and only 4% agree with using these words in takaful. About
28 percent did not have an opinion on this matter.
Table 4 examines the importance of various factors such as economic factors
(inflation, returns of other financial markets and income), factors related to takaful
 8

Table 4 Importance of various factors on takaful insurance demand

Very Moderately Slightly Not Std.
Concept important Important important important important Mean deviation
Takaful insurance price 44.60% 27.70% 18.90% 3.40% 5.40% 4.03 1.12
The quality and variety of takaful insurance services 54.70% 21.60% 14.20% 4.10% 5.40% 4.16 1.15
Compliance with the principles of Islamic jurisprudence and not 30.40% 16.90% 29.10% 10.80% 12.80% 3.41 1.36
having riba, gharar, and gambling in takaful insurance
Investing funds from takaful insurance premiums in Islamic 26.40% 20.90% 34.50% 7.40% 10.80% 3.45 1.26
financial markets
Surplus distribution of capital among takaful policyholders 36.50% 29.70% 23.60% 4.10% 6.10% 3.86 1.14
Inflation 34.50% 31.80% 21.60% 3.40% 8.80% 3.80 1.21
Income 38.50% 29.70% 18.20% 5.40% 8.10% 3.85 1.23
Returns of other financial markets 40.50% 27.70% 22.30% 3.40% 6.10% 3.93 1.15
Proper marketing and advertising by the insurance company 37.80% 30.40% 16.90% 6.10% 8.80% 3.82 1.25
M. Ghanbarzadeh et al.
Analysis of Acceptance’s Level of Takaful Products in Iran 9

Table 5 Respondent’s acceptance level

Strongly Strongly Std.
agree Agree Undecided Disagree disagree Mean deviation
I think takaful 14.20% 23.60% 42.60% 10.80% 8.80% 3.24 1.1
insurance is
suitable for
every customer
I think the com- 8.80% 22.30% 33.10% 23.60% 12.20% 2.92 1.14
mon insurance
in the country is
no different
from takaful
insurance
All insurance 20.90% 26.40% 32.40% 10.10% 10.10% 3.38 1.21
companies must
offer takaful
insurance along
with regular
insurance
I welcome the 22.30% 30.40% 31.80% 7.40% 8.10% 3.51 1.16
offer of takaful
insurance in the
country
I think takaful 32.40% 31.80% 27.70% 2.00% 6.10% 3.82 1.1
insurance
should be avail-
able for both
Shia and Sunni
people

product features (price, compliance with the principles of Islamic jurisprudence,

investing funds in Islamic markets and surplus distribution), and factors related to
appropriate marketing and advertising of the insurance company in the sale of
takaful insurances. The results show that the importance of the mentioned factors
is high from the point of view of the respondents. Among the reported factors, the
quality and variety of takaful insurance services have the largest importance, and
“Investing funds from takaful insurance premiums in Islamic financial markets” and
“Compliance with the principles of Islamic jurisprudence and not having riba,
gharar, and gambling in takaful insurance” have the lowest importance.
Table 5 shows the results of the acceptance level of takaful in Iran. The maximum
value in each row is bolded. Based on the responses received from the participants,
about 38% of them are strongly agree or agree with “suitability of takaful insurance
for each customer”; 31% of them are strongly agree or agree to “takaful insurance is
the same as common insurance in the country”; 47% of them are strongly agree or
agree to “offering takaful products by all insurance companies”; 53% of them are
strongly agree or agree to “welcoming the offer of takaful insurance in Iran”; and
64% of them strongly agreed or agreed to “need for takaful insurance for Shia and
Sunnis.”
10 M. Ghanbarzadeh et al.

Table 6 Reliability tests of questionnaire

Cronbach’s Cronbach’s alpha based on standardized No. of
alpha items items
Demand 0.894 0.897 9
factors
Awareness 0.879 0.877 12
Acceptance 0.739 0.738 5

To measure the internal consistency (homogeneous reliability) of the question-

naire, there are various methods, one of the most widely used of which is Cronbach’s
alpha coefficient, which is obtained based on the average covariance (or correlation)
of the questions (items) in a questionnaire (test). Table 6 shows the results of
reliability tests for takaful’s demand factors, awareness, and acceptance part of the
questionnaire. Based on Table 6, Cronbach’s alpha coefficients for the mentioned
categories are all above the 0.7 minimum threshold. This indicates higher internal
consistency that leads to reliable questionnaire.

5 Conclusion

Considering that insurance companies in Iran have recently implemented takaful

insurance products, it is necessary to put appropriate advertisements in order to
increase the knowledge of customers in the field of takaful products. In this regard,
investigating the level of awareness and acceptance of takaful by customers can be a
way forward for insurance companies. Therefore, in this chapter, we analyzed the
awareness and acceptance of customers toward takaful insurance products. To
achieve this goal, it is necessary to calculate the factors influencing the acceptance
of takaful products, as well as the factors that determine the awareness of customers
about these products. Some of the factors considered to have an influence on the
acceptance of takaful products are as follows: demographic variables (such as age,
gender, marital status, religion, income, education, occupation, province, or local-
ity), macroeconomic variables (such as inflation rate and return of other financial
markets), price, services quality, Shariah view, marketing and advertisement vari-
ables, and product characteristics. Based on the findings, the respondents are some-
what familiar with takaful insurance and many respondents are aware of the concepts
of riba and maisir. Also, few respondents are aware about gharar and the freeness of
takaful from riba, gharar, and maisir and other concepts related to takaful insurance.
Also, the most respondents are not sure whether to buy a car third party takaful, car
body takaful, life takaful, home takaful, and travel takaful. In fact, there is little
knowledge about takaful products in Iran, and therefore, insurance companies
should use appropriate strategies in order to create culture and increase the knowl-
edge of customers.
Analysis of Acceptance’s Level of Takaful Products in Iran 11

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Identifying and Ranking Factors Affecting
the Demand for Takaful Insurance in Iran

Asma Hamzeh and Mitra Ghanbarzadeh

Abstract In recent decades, the Islamic financial services industry has grown
significantly. With the increasing development of the Islamic financial system,
takaful products have also experienced extensive growth and changes. In order to
further promote this type of insurance, it is important to identify the key factors on
demand and also evaluate their importance. In Iran’s insurance industry, insurers
have recently entered this field. Therefore, the results of this research can be useful
for policymakers and takaful operators in formulating appropriate strategies to
increase demand for takaful insurance. In this regard, in this research, the general
aspects of takaful insurance are first explained. Then, the indicators affecting
demand were identified using library studies and a review of written documents,
and these indicators were categorized into five economic, social, and demographic
sectors, marketing and sales, as well as product characteristics. Then, using a field
study and distributing a questionnaire among the experts in the research field, the
level of importance of the indicators was analyzed relative to each other and the
indicators were ranked according to their importance.

1 Introduction and Literature Review

Takaful is not newly created. It has been done in different forms for more than 1400
years, starting with the practice of “Aqilah” by the ancient Arabs, where there was a
mutual agreement between tribes that if someone was killed unintentionally by
someone from another tribe, the slayer’s relatives were mutually responsible for
the payment. They take over the ransom for the relatives of the victim. In other
situations and their coverage, this was used later. For example, to cover someone in
the group who had an accident during a voyage in the maritime trade. In takaful

A. Hamzeh (✉) · M. Ghanbarzadeh

Insurance Research Center, Tehran, Iran
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 13

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_2
14 A. Hamzeh and M. Ghanbarzadeh

Table 1 The most important differences between conventional insurance and takaful
Takaful Conventional insurance
Donations are made through participant contri- The policyholder pays the premium to get
butions. Pooled funds can be used to protect coverage and the risk is transferred to the
other participants from risk. insurance company.
It follows government and Sharia laws. It only obeys government laws.
The Takaful operator will only invest in Sharia- Insurance companies can invest in bonds, etc.
compliant items that do not have any gharar
(uncertainty), maisir (gambling and chance),
and riba (interest).
Profits are divided between managers and con- Profits are returned to shareholders.
tributors of a takaful fund.
Source: (Wahab 2021)

insurance, participants agree to insure each other through contributions (as financial
aid) to a pool.
Takaful fund is created by this pool. Depending on the nature of the risk, the type,
and the coverage period, the amount of participation in this fund is done. The takaful
fund is managed by the takaful operator who charges a fixed fee or a percentage of
profits, or both. After deducting the costs and demands of the participants, the cash
profit or discount is divided among the participants. There are differences between
conventional insurance and takaful insurance. One of the differences is that in
conventional insurance the premium is paid to the insurance company, which
bears all the risks, while in takaful, the participants contribute to the takaful fund
to protect each other against risks. Also, any surplus in takaful funds is distributed
among shareholders and contributors based on mudarabah, wakalah, or waqf
models, while in conventional insurance, all profits belong only to the shareholders
of the insurance company. Therefore, conventional insurance is more based on profit
and commercial aspects, while takaful is based on cooperation. Another difference is
that takaful companies adopt Sharia principles in all aspects of their operations
(Maturi 2013). In Table 1, the most important differences between conventional
insurance and takaful can be seen.
General takaful and family takaful are two types of takaful. One of the important
features of general takaful is short-term policy, participants’ contributions to the
public takaful fund, tabarru as the main element, without savings element, and it can
be divided into motorized and non-motorized takaful. One of the important features
of family takaful is typically a long-term policy that compares poorly with conven-
tional life insurance. Participants aim to save for their long-term needs, for example,
children’s education, pension, and compensation for dependents in case of death and
disability, etc. Family takaful includes two funds: savings and investment elements
(Jaffer et al. 2010). Figure 1 shows a report on global takaful in 2018.
Research on takaful and its demand has received attention in recent years.
Nevertheless, it is a relatively new field of research that has high potential, especially
in Iran. Husin and Haron (2020) reviewed the research on the demand for takaful
insurance, and the effective factors identified in this research regarding the demand
Identifying and Ranking Factors Affecting the Demand for Takaful. . . 15

Fig. 1 Report of the takaful Family

industry worldwide, 2018. Takaful
(Source: (Mihardjo et al. 7%
2020)) General
Insurance
33%

General Life
Takaful Insurance
5% 55%

for takaful insurance are economic, education, interest rate, inflation, leverage,
urbanization, sector deposit, and development, expected bankruptcy, Islamic bank-
ing/financial, demographic, company size, managerial ownership, tax consider-
ations, income, population size, religious belief, life expectancy, social structure,
dependency ratio, prior experience, and risk aversion. Riaz et al. (Riaz et al. 2020)
showed that product awareness, reputation, and religious adherence have a positive
relationship with family takaful demand, and marketing has an insignificant rela-
tionship with family takaful demand. Akhter and Khan (2017) revealed that infla-
tion, education, urbanization, and per capita income were factors affecting the
demand for takaful and conventional insurance. They also cited the increase in
people’s awareness of takaful products as a factor for increasing demand. According
to Arfin et al. (Arifin et al. 2013), things such as the reputation of takaful operators,
representative system, types of services and products, advertising, and marketing are
important factors affecting the demand for family takaful. According to Yazid et al.
(Shukri Yazid et al. 2012), factors affecting the demand for family takaful insurance
in Malaysia are age, income, education, inflation, interest rate, savings, unemploy-
ment, pensions, stock, price of insurance, life expectancy, dependency ratio, finan-
cial development, urbanization, number of children and family size, and
employment status. Gate and Worthington (2008) stated that besides religious belief,
factors such as reputation, price, and service quality are also influential in the
demand for takaful.
Therefore, in this chapter, an attempt has been made to identify the factors
affecting the demand for takaful insurance in Iran. It is important to know these
factors because insurers in Iran have recently entered this field. Therefore, the results
of this research can be useful in formulating appropriate strategies in order to
increase the demand for takaful insurance. Also, conducting this research, in addi-
tion to identifying the factors that affect takaful demand, fills the gap in takaful
literature in this field.
16 A. Hamzeh and M. Ghanbarzadeh

2 Materials and Methods

The research method for this chapter is applied research that consists of library
studies and mixed exploratory studies in terms of the research strategy. To provide
an overview of the factors affecting takaful demand, the review of written documents
and the documented experience of countries was considered. Then, using a field
study and distributing a questionnaire among the experts in the research field, the
level of importance of the indicators was analyzed relative to each other and the
indicators were ranked according to their importance. For this purpose, Friedman’s
test and factor analysis were used.

3 Results and Discussion

In this section, the intended indicators for the demand for takaful insurance were
determined by reviewing the literature. Then, a questionnaire was distributed among
insurance industry experts to confirm these indicators and receive suggestions about
new indicators. A 5-point Likert scale was used in the research questionnaire.
Based on the results, the indicators are divided into five categories of economic
(E), social (S), demographic (D), marketing and sales (MS), and features of takaful
insurance products (P). In the economic category, the indicators income (E1), level
of inflation (E2), GDP (E3), interest rate (E4), stock market returns (E5), develop-
ment of Islamic finance/banking sector (E6), savings rate (E7), and the unemploy-
ment rate (E8); in the social category, the indicators dependency ratio (S1),
community welfare index (S2), life expectancy (S3), and social structure (S4); in
the demographics category, the indicators age (D1), marital status (D2), the number
of children (D3), employment status (D4), education (D5), and religion (D6); in the
marketing and selling category, the indicators customer awareness of the product
(MS1), company reputation (MS2), product variety and service quality (MS3),
advertising (MS4), and technical knowledge of the sales network (MS5); and in
the features of takaful insurance product category, the indicators investing funds in
Islamic financial markets (P1), distribution of surplus capital among policyholders
(P2), policyholders being shareholders in takaful fund (P3), no usury, gharar, and
maisir in takaful insurance (P4), compatibility of takaful insurance with both Shia
and Sunni perspectives (P5), there is no conflict between the interests of the insured
and the insurer (P6), being based on the principle of cooperation (P7), and the price
of the insurance policy (P8) were finalized.
Next, we analyze the results of the questionnaire. A total of 34 people responded
to the questionnaire, of which 71% were women and 29% were men; 61.3% had a
doctorate or higher education. The majority of people had a long history of working
in the insurance industry.
Friedman’s nonparametric test was used to compare three or more dependent
groups that are measured at least at the ordinal level. This test can also be used for
Identifying and Ranking Factors Affecting the Demand for Takaful. . . 17

continuous data (interval or relative), but their ranking is also considered when
calculating these data. In fact, this test is used when we want to examine the opinions
of a group in several fields and, based on the opinions of that group, determine the
priority of each item based on a meaningful rating (or meaningful tendencies of
people to each of the variables), and show that when using the Friedman test, all k
variables are randomly assigned to n blocks. After the observations are recorded for
each block-variable combination, the data are displayed in a two-dimensional table,
where each row represents a block and each column represents a variable. Therefore,
the data table contains k columns and n rows, and the data are ranked in each row. In
this way, the Friedman test seeks to analyze the total ranks of the columns (vari-
ables). In the Friedman test, the H0 assumption is based on the sameness of the
average ranks among the variables. Rejecting the null hypothesis means that at least
two variables have a significant difference among the variables. Friedman’s test
statistic is in the following form:

12
M= R2j –3n ðk þ 1Þ
nk ðk þ 1Þ

In the above relationship, k represents the number of variables, n represents the

number of respondents to the questionnaire, and Rj represents the total ranks of the
jth column (variable). The M test statistic is approximately chi-squared with (k-1)
degrees of freedom (Schenkelberg 2020). In this research, we perform the Friedman
test for all five sectors separately with the following assumptions:
H0: The indicators of the desired sector have the same level of importance.
H1: The indicators of the desired sector do not have the same level of importance.
In the analysis of the results of the Friedman test, if the significance level is lower
than the error rate, the existence of a difference between the significance level of at
least one pair of indicators is inferred. Since this test is usually considered at the 5%
error level, the significance level must be less than 0.05 to reach this result. Tables 2,
3, 4, 5, 6, and 7 show the results of Friedman’s test implementation for each group of
indicators.
According to the results for all categories of indicators except for economic
indicators, the level of significance is smaller than the first type error α = 0.05 and
the hypothesis H0 is rejected, that is, at least two of the indicators in all categories of
indicators except for economic indicators do not have the same level of importance.
Confirmatory factor analysis is one of the two main types of factor analysis.
Confirmatory factor analysis (CFA) measures the ability of a predetermined model
to fit the data. In other words, this type of factor analysis examines whether the
factors considered by the researcher really explain the variances of the observed
variables according to the established pattern. In confirmatory factor analysis, the
researcher uses his knowledge in the field of theory, experimental research, or both
and hypothesizes the pattern of relationships between hidden variables and manifest
variables and then tests them using statistical analysis. Therefore, at this stage, we
use confirmatory factor analysis to test the model and relationships between
variables.
18 A. Hamzeh and M. Ghanbarzadeh

Table 2 Descriptive statistics

Indicators N Mean Std. deviation Minimum Maximum
D1 34 3.5294 1.07971 1.00 5.00
D2 34 3.4118 1.01854 1.00 5.00
D3 34 3.4118 1.04787 1.00 5.00
D4 34 3.8824 1.00799 1.00 5.00
D5 34 3.4118 1.07640 1.00 5.00
D6 34 3.5882 1.01854 1.00 5.00
E1 34 3.8529 1.07682 1.00 5.00
E2 34 3.7353 1.02422 2.00 5.00
E3 34 3.5294 1.10742 1.00 5.00
E4 34 3.5294 1.13445 1.00 5.00
E5 34 3.7941 1.06684 1.00 5.00
E6 34 3.9706 0.86988 2.00 5.00
E7 34 3.6471 1.12499 1.00 5.00
E8 34 3.8529 0.98880 1.00 5.00
MS1 34 4.2059 0.84493 2.00 5.00
MS2 34 3.9118 0.79268 2.00 5.00
MS3 34 4.1765 0.93649 2.00 5.00
MS4 34 4.1765 0.83378 2.00 5.00
MS5 34 4.3235 0.72699 3.00 5.00
P1 34 3.9706 0.90404 2.00 5.00
P2 34 4.2941 0.75996 3.00 5.00
P3 34 4.0882 0.86577 2.00 5.00
P4 34 3.7941 1.03805 2.00 5.00
P5 34 3.6765 0.97610 1.00 5.00
P6 34 3.7059 1.00089 2.00 5.00
P7 34 3.7059 1.00089 2.00 5.00
P8 34 4.1176 0.64030 3.00 5.00
S1 34 3.6176 1.04489 1.00 5.00
S2 34 3.9118 1.02596 1.00 5.00
S3 34 3.8235 1.16698 1.00 5.00
S4 34 3.9706 0.90404 2.00 5.00

Table 3 Friedman test results for demographic indicators

Ranks Test statistics
Mean rank N 34
D1 3.46 Chi-square 17.011
D2 3.19 df 5
D3 3.19 Asymp. sig. 0.004
D4 4.29
D5 3.24
D6 3.63
Identifying and Ranking Factors Affecting the Demand for Takaful. . . 19

Table 4 Friedman test results for economic indicators

Ranks Test statistics
Mean rank N 34
E1 4.79 Chi-square 8.702
E2 4.43 df 7
E3 3.97 Asymp. sig. 0.275
E4 4.07
E5 4.63
E6 4.93
E7 4.29
E8 4.88

Table 5 Friedman test results for marketing and sales indicators

Ranks Test statistics
Mean rank N 34
MS1 3.16 Chi-square 15.093
MS2 2.44 df 4
MS3 3.15 Asymp. sig. 0.005
MS4 2.97
MS5 3.28

Table 6 Friedman test results for the features of takaful insurance product indicators
Ranks Test statistics
Mean rank N 34
P1 4.57 Chi-square 28.482
P2 5.59 df 7
P3 5.12 Asymp. sig. 0.000
P4 4.13
P5 3.82
P6 3.94
P7 3.91
P8 4.91

Table 7 Friedman test results for social indicators

Ranks Test statistics
Mean rank N 34
S1 2.10 Chi-square 8.713
S2 2.71 df 3
S3 2.54 Asymp. sig. 0.033
S4 2.65
20 A. Hamzeh and M. Ghanbarzadeh

Fig. 2 The final output of the factor analysis

By using Lisrel software and second-order confirmatory factor analysis, the

compatibility of the desired model for the effect of factors on demand for takaful
insurance in Iran, which was compiled in the questionnaire, is checked with the
relevant data. The strength of the relationship between the factor (hidden variable)
and the observable variable (questionnaire questions) is shown by the factor load.
This value should be between -1 and 1, and values higher than 0.4 or lower than -
0.4 are acceptable. The final output of the factor analysis is shown in Fig. 2. All
variables show a high correlation with their respective constructs. Only the policy
price variable (0.22) has a lower correlation with the features of takaful insurance
products compared to other variables. To compete with conventional insurance, the
price must be attractive and affordable. But takaful’s features and general services
have a greater impact on customer satisfaction. For example, in family takaful
Identifying and Ranking Factors Affecting the Demand for Takaful. . . 21

insurance, people are not attracted by the lower price to increase their purchases but
prefer investing in other assets to family takaful insurance. So, product variety and
service quality have more influence than price.

4 Conclusions

In this research, the factors influencing the demand for takaful insurance and their
level of importance in Iran were identified. Based on the analysis of this research, it
can be concluded that welfare creates a feeling of need for safety and security for
people and their assets, after which insurance or a certain product is in demand.
Increasing education increases the demand for takaful insurance. Because literacy
and education create public awareness of the availability of Islamic financial prod-
ucts through various media, it can lead to greater acceptance of the product.
The change in the social structure such as the change from rural life to urbaniza-
tion, the changes in family structure toward nondependence on children, and the
independence and financial stability of the elderly generation due to the migration of
children to larger cities have a positive effect on the Islamic financial sector.
Developments and strengthening of the financial sector, along with creating
confidence in investors, play an effective role in economic growth. Also, the
financial sectors, after the global financial crisis, focused more on insured invest-
ments in order to minimize possible losses. The development of the financial sector
encourages investors to acquire ownership of financial assets to secure their future
and expand their activities. Therefore, it creates the need to provide these assets
through insurance products, which leads to an increase in their demand.
Another factor influencing the demand for insurance and takaful is the depen-
dency ratio. The definition of this ratio is the average number of young or elderly
family members who depend on primary income support. Supporting family depen-
dents against financial problems is an effective factor in the demand for this product.
Employment status can encourage the purchase of takaful insurance. A better job
situation gives more confidence in the future and financial progress, and a person
acts with more awareness of his and his children’s future, and the need for insurance
becomes more obvious.
Shariah compliments are the main selling point of takaful, which should be
strengthened by takaful operators because, if this issue is not observed, it will lose
its Muslim customers. Islamic marketing strategies that focus on the principles of
justice and the welfare of society should be followed.
Innovative takaful products should be introduced by takaful operators and good
services should be provided in order to have a greater share of the market and
conform to the conventional insurance market. Takaful operators must educate the
general public that their work is in accordance with the principles of Sharia, and in
order to increase the demand for takaful insurance, they must create awareness
among the general public about the work and products of takaful. Reputation also
has a significant impact on takaful demand, which requires managers to fulfill their
22 A. Hamzeh and M. Ghanbarzadeh

promises and provide quality services to win the trust of customers. Takaful oper-
ators should make more efforts in increasing public awareness and knowledge about
takaful products and should create a more efficient distribution channel to reach
potential customers. Policymakers should also focus on protecting the interests of
participants and market certainty through prudential regulation. The regulator’s
support for the Takaful business is essential in estimating the necessary confidence
of customers.

References

Akhter W, Khan SU (2017) Determinants of Takaful and conventional insurance demand: a

regional analysis. Cogent Econ Finance 5
Arifin J, Shukri Yazid A, Sulong Z (2013) A conceptual model of literature review for family
Takaful (Islamic life insurance) demand in Malaysia. Int Bus Res 6(3):210–216
Gait A, Worthington A (2008) An empirical survey of individual consumer, business firm and
financial institution attitudes towards Islamic methods of finance. Int J Soc Econ 35(11):
783–808
Husin MD, Haron R (2020) Takaful demand: a review of selected literature. ISRA Int J Islam
Finance 12(3):443–455. https://doi.org/10.1108/IJIF-03-2019-0046
Jaffer S, Ismail F, Noor J, Unwin L (2010) Takaful (Islamic Insurance): concept, challenges, and
opportunities. Milliman Res Rep
Maturi T (2013) Islamic insurance (takaful): demand and supply in the UK. Int J Islam Middle East
Financ Manag 6(2):87–10
Mihardjo LWW, Jermsittiparsert K, Chankoson T, Iqbal Hussain H (2020) Impact of key HR
practices (human capital, training and rewards) on service recovery performance with mediating
role of employee commitment of the Takaful industry of the Southeast Asian region. Emerald
Group Holdings Ltd., pp 1–21
Riaz S, Saleem Q, Muhammad Ishaq H, Aqdas R (2020) The determinants of family Takaful
demand in Pakistan. Hamdard Islamicus 43(3):572–585
Schenkelberg F (2020) The non-parametric Friedman test, Report in Accendo reliability
Shukri Yazid A, Arifin J, Hussin MR, Norhayate W, Daud W (2012) Determinants of family
Takaful (Islamic life insurance) demand: a conceptual framework for a Malaysian study. Int J
Bus Manag 7(6)
Wahab A (2021) A complete guide: Takaful vs conventional insurance in Malaysia, https://www.
iproperty.com.my/guides/takaful-vs-conventional-insurance-in-malaysia
Nafsul Ihtisab Change Agility:
A Foundation to Spread the Spirit
of Change

Dwi Indriastuti Yulianingsih and Olivia Fachrunnisa

Abstract The concept of change agility has been widely discussed in previous
studies. However, there is still an opportunity to be reexamined since this concept is
still lacking in moral values that should be added from Islamic values. This study
aims to introduce the value of Ammar Ma’ruf, which is driven by the spirit of Nafsul
Ihtisab in employees related to their ability to respond to the changing process,
namely, Nafsul Ihtisab Change Agility. In the current era of disruption and pan-
demic, the world is changing so fast that it takes a spirit of religiosity and the ability
to change in order to survive and be able to keep up with current development.
Nafsul Ihtisab Change Agility is the ability to initiate change from within the
employees themselves and be willing to spread the spirit of change to other
employees by helping each other so that they can change for the better, sincerely,
expecting pleasure of Allah SWT. This new concept is built on the concept of
employee agility, the ability of employees to deal with change and coupled with
the values of religiosity. This concept has dimensions of proactivity, competency,
and moral value (Nafsul Ihtisab). Employees who apply religious values such as
Ammar Ma’ruf with the spirit of Nafsul Ihtisab can be a way to occur the better
change and ensure no employee is left behind in this change because everyone will
help and advise each other just hoping for the pleasure from Allah SWT.

1 Introduction

Undeniably, nothing lasts forever in this world except change itself. Change can be
caused by various things such as technology, environment, government policies, and
pandemics. Changes that occur so quickly make every organization need the ability
to adapt quickly in order to survive. Those who will come be the winner is not the
strongest but the one that can adapt/adjust to the environment. Many organizations

D. I. Yulianingsih (✉) · O. Fachrunnisa

Sultan Agung Islamic University (UNISSULA), Semarang, Indonesia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 23

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_3
24 D. I. Yulianingsih and O. Fachrunnisa

have implemented change, but 70 percent of them have failed to change (Senge et al.
1999). Employees tend to change only when the organization has the same goals as
the employee’s goals such as experience and rewards due to this changes (Davis and
Newstrom 1985), meaning that change is transactional and only worldly oriented.
Nevertheless, human beings must change for the better every day and aim not only
for the purpose of the world but also for the hereafter just hoping for pleasure and
reward from Allah SWT.
There are many change procedures offered by many experts, and most of them
focus on the organization as a whole or how management should work with its
employees to bring about change (Barclay 2009). This means that there are two
perspectives on which to focus on change. First is the focus on how to change the
organization at the organizational level, where attention must be paid to all processes
involved in the organization. Second is to focus on changing the people in the
organization, which is usually more effective due to the fact that an organization is
not an entity in itself, but a collection of people. Most studies have proven that for
change to be effective change efforts must be focused on people because an
organization is a collection of people working toward a common goal.
Organizational change usually means that the efforts of changing come from
above or the leader since it is more likely to occur. Initiative from above is
considered more likely to occur because the leader is at the forefront of change
and allows change to flow down the hierarchy (top-down). Based on the research
conducted by reference (Indriastuti and Fachrunnisa 2021), change-oriented leader-
ship has a positive influence on the readiness to change of the employee. Leadership
is an important factor in an organization because it can influence and direct
employees to achieve organizational goals. This chapter focuses on another option,
namely, focusing on employees as the subject to oversee the actual change. This
chapter is actually not only about change but also about how to empower employees
to make change. Employee involvement in change management and how each
employee can initiate change is something that needs attention for further discussion.

2 Change Agility and Value Orientation

2.1 Change from Within

Change initiatives usually start from the top/leaders and then communicated to the
bottom/employees. A change will occur if all members of the organization or
company are willing to work together on it. Developing a sense of urgency in all
employees is necessary to create change in the company. Stimulation of motivation
from the leader is the first step in developing this sense of urgency (Kotter 1995).
Change Champion, in this case the leader, will work with decision-makers within an
organization regarding any changes that need to be made, after which the decision
will be communicated through the Change Leader and Change Agents below him
hierarchically. This Change Agent will later be tasked with disseminating changes to
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change 25

other employees in their respective divisions/work units. Employees are asked to

follow the new methods propagated by the Change Agent in order for the changes to
be successful.
A successful change needs support from the employees. But actually organiza-
tions can do much more than that. So far, organizations have spent a lot of time and
money investing in change. Whether the change can be successful or not is up to the
employee to make the change or not. Therefore, employees should be the focus of
the organization. As stated in the literature, employees are the most important aspect
of an organization, as well as the most important aspect of any change in the
organization. According to the seven steps of change presented by McKinsey, in
organizational change, the internal aspects of the organization that need to be aligned
if the organization wants to be successful are hard elements and soft elements. The
hard elements consist of strategy, structure, system, and shared values while the soft
elements consist of style, staff, and skills (Waterman et al. 1980). Aside from that,
the organizational structure and system must also focus on its employees as part of
the soft element, and since employees are the first to be affected by the change, they
have to be the first to implement the change. It is important for employees to realize
their own importance and potential in organizational change efforts.
Employees are expected to be able to drive positive change for the organization,
which comes from within themselves. Hence, some questions are there that
employees should ask themselves. The first relates to the initiation of employees
in their contribution to change: Is there anything I can do to make the organization
better? The second question relates to introspection from within employees to take
responsibility for change: What should I do to become a better employee? When
such questions arise from an employee, the initiation of change comes from within
the employee themselves since the focus of change is centered on the employee
instead of only the organization.

2.2 Every Employee Is an Agent of Change

Almost all change models address how to handle employees during the change
process. The organization informs employees how to change or what to do during a
change. However, one thing that the model still lacks in discussing is how to have
employees who are able to initiate change from within themselves. In the Qur’an in
Surah Ar-Rad verse 11, it is said that Allah will not change a person’s fate unless
they change it for themselves. In addition, Professor Jerry Gilley at Colorado State
University (2009) (Gilley et al. 2009) stated, “You can’t empower anyone, they have
to empower themselves.” The next question is in organizational change which aspect
should be changed first, the organization or the people in it? If an organization is a
group of like-minded people and a common goal, then the answer to that question is
the latter. So, it can be concluded that the success of change in an organization is
determined by the ability to change of the people in it. That being the case,
26 D. I. Yulianingsih and O. Fachrunnisa

employees must have the ability to change themselves and be able to initiate change
from themselves because every employee is a change agent for himself.

2.3 Employee Agility in the Organizational Change Process

In this current era of disruption and pandemic, challenges become more complex and
accelerated in the work environment. Organizations must be able to respond to the
major changes that occur if they want to survive. Therefore, the organization is very
dependent on employee’s ability and agility to change. The ability of employees to
adapt is one of the keys to the company’s success so that organizations can be more
responsive and adapt quickly in order to survive and win the competition. The
strategy that is often used by companies is to have employees who are agile. If
every employee has the same understanding of this, then change will not be so scary.
It will only become part of the daily routine. Employees who can adapt quickly to
changes by utilizing a variety of available resources will be readier to face the change
(Indriastuti and Fachrunnisa 2019). Therefore, agility is important and has become a
necessity for organizations to be able to deal with new situations or rapid changes.
Consequently, assessing that agility for organizations is very important, and this
agility will be even more important in the next few years (Petermann and Zacher
2020).

2.4 Employee Agility for Successful Organizational Change

The ability to change agilely in the middle of today’s turbulent era will generate
competitive advantage if the organization succeeds in responding to change in the
right way. The application of a more agile mindset in this organization will play a
major role in the success of change in the company. The companies will increase the
individual readiness to change in advance because it has a significant effect on
employees to support to change (Yulianingsih and Fachrunnisa 2020). Therefore, the
company is expected to drive speed and adaptability by implementing agile strate-
gies in its leaders and employees. In an agile corporate environment, employees
communicate well with each other for the success of the company. For this reason,
companies with an agile culture will not have to worry about and fear failure. In fact,
even if it happens, that failure will be accepted for further improvement as being
agile allows companies to move faster and outperform their competitors (Baran and
Bible 2019; Petermann and Zacher 2022) also suggesting that agility is critical for
organizations to cope with the changes they face.
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change 27

2.5 Helping Each Other Between Employees in Facing

Change

According to (Griffin and Hesketh 2003), employee agility is assessed from a

behavioral perspective and defines agility as observable performance or behavior
in the workplace that consists of three different dimensions, namely, proactivity,
adaptability, and resilience. Proactivity consists of initiating behavior (starting
activities that lead to the solution of a change-related problem) and anticipating
behavior (perceiving and anticipating problems), and describes individual activities
that have a positive impact on the environment. The ability to adapt or adaptability
consists of learning behavior (constantly learning new tasks, skills, and procedures),
interpersonal adaptability (ability to get along and work with individuals from
various professions and backgrounds), professional flexibility (assume and change
different roles when necessary), and describes an individual’s modification of
oneself to be better suited to the environment. Finally, resilience describes an
individual’s ability to deal with a changing environment and function effectively
in stressful situations.
The agility of employees can be assessed through their behavior in increasing the
ability to initiate changes in themselves and also the ability to communicate in
spreading the spirit of change to other employees and to their surroundings. This
is important to ensure no employee is left behind in the changing process. Employees
who have the agility to change tend to communicate with each other better for the
company’s success (Petermann and Zacher 2022). Questions that employees
might ask: Have I made any changes? Have I asked my friends to change? Have I
helped my friends to keep up with the flow of change? These questions should arise
from every employee. Good employees should not only think about themselves, but
they should also think about other people and their surroundings so that the changes
can be endured together without anyone being left behind.

3 Nafsul Ihtisab Change Agility: Dimensions and Indicators

Al-Qur’an and Hadith are the guidelines for the life of Muslims, in which there are
the words of Allah used as human guidance in carrying out their role in this world.
Allah SWT commands humans to help each other in terms of goodness and stay
away from evil (Amar ma’ruf nahi munkar). Allah SWT says in the letter Ali Imron
110, “You are the best people born for humans, enjoining the right and forbidding
the evil, and believing in Allah. If the People of the Book had believed, it would have
been better for them; among them are believers, and most of them are ungodly” [Ali
Imron:110]. Likewise, Allah distinguishes the believers from the hypocrites; with
this, Allah SWT says in Surah At-Taubah 71, “And those who believe, male and
female, some of them (are) helping others. They command (do) what is right, forbid
28 D. I. Yulianingsih and O. Fachrunnisa

what is evil, establish prayer, pay zakat and obey Allah and His Messenger. They
will be given mercy by Allah; Verily, Allah is Mighty and Wise” [At-Taubah: 71].
An employee is also a servant of God in this world who must have the spirit to
help each other and call for goodness, or referred to as Ammar Ma’ruf, who is
overwhelmed by the spirit of Nafsul Ihtisab. Ammar Ma’ruf is a commendable
character that must be possessed by a Muslim to be able to call for goodness/help
in goodness and prevent evil (ungoodness). This praiseworthy character is very
important for employees to have because with Ammar Ma’ruf employees can
influence others to help, advise, and work with each other in terms of changes
toward goodness.
According to Imam Ghozali, Nafsul Ihtisab, it includes finding out the
ungoodness, prohibiting with advice, reprimanding harshly, changing by hand,
threatening and scaring, beating with hands or feet, and taking up arms (Jihadussyufi
and Hasanah 2019), but Imam Al-Ghazali advises only using two stages for Nafsul
Ihtisab, namely, informing and advising. Because if you use violence and coercion, it
will cause slander (disaster) and more negative impacts. So, it can be concluded that
Ammar Ma’ruf with Nafsul Ihtisab based on Imam Ghozali is a process of enjoining
ma’ruf (goodness) and forbidding munkar (ungoodness), a willingness to help
people change toward goodness, willingness to give advice to others who want to
follow changes for the better, and help each other by using good ways and do it
sincerely just to expect pleasure from Allah SWT.
This chapter proposes a new concept, namely, Nafsul Ihtisab Change Agility, in
solving organizational change problems, which consist of the ability to initiate
change from within the employees themselves and want to spread the spirit of
change to other employees by helping each other so that they can change for the
better, with pure sincerity only expecting pleasure from Allah SWT.
Nafsul Ihtisab Change Agility consists of three dimensions; the first dimension
comes from the employee agility dimension, Proactive, which is the ability to be able
to initiate change characterized by the following indicators: having the ability to find
solutions to any problems related to change, being able to relate to other employees,
able to cooperate with other employees, and have high motivation and curiosity. The
second dimension, Competence, is taken from the dimension of the theory of
change, where employees with good competency will be better prepared to face
changes in their organization. The indicators of this dimension are the ability of
employees to develop new knowledge and procedure quickly, the ability to use IT,
the ability to use different tools and resources, the ability to develop continuously,
and the ability to increase skills rapidly. The third dimension is the dimension of
Religiosity, which is taken from Islamic values, namely, Nafsul Ihtisab, the indica-
tors of this dimension are the willingness to help each other, the willingness to advise
each other, and the willingness to invite each other to the goodness of one another
who are based on sincerity and solely expect the pleasure of Allah SWT. Figure 1
shows the integration of the theory of change, employee agility, and Islamic values
(Table 1).
The three dimensions above could be synthesized and conclude that Nafsul
Ihtisab Change Agility is the ability of employees to change agilely based on the
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change 29

Fig. 1 Nafsul Ihtisab change agility elements

Table 1 Dimensions and indicators of Nafsul Ihtisab Change Agility

Dimensions Indicators References
1. Proactive: Finding solution-related change (Sherehiy and Karwowski 2014)
problem
Engagement (Sherehiy and Karwowski 2014)
Self-motivation (Muduli and Pandya 2018; Patil and
Suresh 2019)
Curiosity (Muduli and Pandya 2018; Patil and
Suresh 2019)
Collaboration (Muduli and Pandya 2018; Qin and
Nembhard 2015)
2. Rapid development of new skills and (Breu et al. 2002)
Competence work procedures
Ability to deal with different complex (Breu et al. 2002)
IT (Petermann and Zacher 2022)
Ability to work with different tools and (Sherehiy and Karwowski 2014)
resources (Qin and Nembhard 2015)
Ability to develop continuously
Ability to improve knowledge and skill
3. Nafsul Willingness to help others in goodness QS (At-Taubah: 71), (Jihadussyufi and
Ihtisab Hasanah 2019)
Willingness to advise others in QS (Ali Imron: 110), (Jihadussyufi and
goodness Hasanah 2019)
Willingness to invite others toward QS. (Ali Imron: 110), (Jihadussyufi and
goodness Hasanah 2019)
30 D. I. Yulianingsih and O. Fachrunnisa

desire to help each other in a better direction, solely to expect pleasure and reward
from Allah SWT. Characterized by indicators, they have the ability to increase new
skills and knowledge quickly, able to work using IT and different resources, have
curiosity, able to collaborate with other employees, willing to help other employees,
and willing to provide advice and input in terms of goodness to other employees,
which is based on expecting the blessing of Allah SWT.
The novelty of Nafsul Ihtisab Change Agility will cover the weaknesses of the
theory of change and the concept of agility through its three dimensions, namely,
Proactive, Competence, and Nafsul Ihtisab. People who are proactive will be more
agile in dealing with change, as well as people who have competence will be easier
to keep up with the flow of change, and people who have Nafsul Ihtisab willing to
help, advise, and invite others to change for the better. So, it can be concluded that
employees who have Nafsul Ihtisab Change Agility behavior are those who have the
ability to change agilely and have willingness to help, advise, and invite other
employees to change for the better so that no employee is left behind during this
change process.

4 Future Research

There is still very little research available on organizational change that focuses on
employees who are integrated with Islamic values, while most of the research still
focuses on organizational change. Further research can be carried out using either
quantitative, qualitative, or mixed methods to test this new concept. In addition, this
concept can also be linked to other variables such as employee performance and job
satisfaction.

5 Conclusion

This chapter focuses on an important part that has not been touched by the manage-
ment side, particularly the part that includes changes initiated by individuals in the
organization. Employees must have the ability to change in line with organizational
changes. Employees are the first to be affected by the change process. Therefore, it is
the employees who must change first so that it can be said that employees are the
spearhead of change, everyone is an Agent of Change for themselves and must be
able to spread the spirit of change to other people and their surrounding by helping
each other so that no employee is left behind in the process of this change by
prioritizing Ammar Ma’ruf (Nafsul Ihtisab) that is carried out solely for the pleasure
of Allah SWT.
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change 31

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The Conceptual Framework of Mustahiq
Entrepreneurs’ Welfare in Productive
Zakat Empowerment (Sharia Maqasid
Approach)

Ivan Rahmat Santoso , Syahrir Mallongi, Siradjuddin,

and Muhammad Basir Paly

Abstract The performance of microenterprises is crucial and a big challenge for

mustahiq entrepreneurs. Business continuity is needed because mustahiq entrepre-
neurs make a living through these activities. But in business development, some-
times mustahiq faces obstacles to making it happen. This study aims to identify and
describe the welfare factors of mustahiq. The charting the field method is used to sort
articles by topic, discussion, year, and sources used in this study.
Meanwhile, data were obtained from literature studies from various sources,
including reference journals for 2012–2022. This research produces a conceptual
framework regarding mustahiq welfare factors, including internal and external
aspects of mustahiq, namely, productive zakat, Islamic entrepreneurial motivation,
competence, and the success of sharia maqasid businesses. This study enriches
previous limited studies on the welfare of mustahiq entrepreneurs following maqasid
sharia and contributing to mustahiq entrepreneurs, poverty alleviation, and good
zakat management.

I. R. Santoso (✉)
State University of Gorontalo, Gorontalo, Indonesia
e-mail: [email protected]
S. Mallongi
Universitas Muslim Indonesia, Makassar, Indonesia
Siradjuddin · M. B. Paly
Alauddin State Islamic University, Makassar, Indonesia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 33

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_4
34 I. R. Santoso et al.

1 Introduction

1.1 Background

The role of zakat as an instrument in Islam is aimed at creating welfare for the poor
and economic empowerment under Islamic law. The productive zakat empowerment
program is one of the zakat programs that can sustainably support the poor to
improve the economy. Productive zakat distributed through microenterprise devel-
opment is anticipated to provide long-term socioeconomic effects, especially for
mustahiq (zakat recipients) who run microenterprises for sustainable welfare
improvement (Beik and Arsyianti 2015). On the other hand, the professionalism of
the zakat institution as a channeling agent is very important in realizing the welfare
of mustahiq (Iqbal et al. 2019) as the ultimate goal of the productive zakat program.
It should be directed to welfare per Islamic recommendations, namely, maqasid
sharia (Widiastuti et al. 2021a), where a mustahiq is not only prosperous materially
through business growth but also spiritually, which is marked by an increase in
worship and also a change from mustahiq to muzaki (zakat giver). This is also a form
of accountability to Allah SWT, from zakat institutions to productive zakat recipi-
ents, by providing accountable and transparent services.
However, in the application to realize these goals, mustahiq sometimes encoun-
ters obstacles in their business, which are allegedly caused not only by the assistance
program provided but also by the aspect of the role of mustahiq entrepreneurs, who
are the object of zakat itself. Therefore, a study to identify the welfare factors of
mustahiq entrepreneurs is vital to be explored in depth. In addition, this study also
offers novelty by exploring a more comprehensive review of articles not limited to
recipients of assistance through productive zakat programs to generate new factors
that support the welfare of mustahiq entrepreneurs. This study aims to identify the
welfare factors of mustahiq entrepreneurs in the zakat program. This study is
intended to produce a conceptual framework and model for the welfare of mustahiq
entrepreneurs through the maqasid sharia approach.

2 Literature Review

2.1 Background Theory

2.1.1 Productive Zakat

Productive zakat is fund that is channeled to mustahiq and is not immediately

consumed but instead might be generated and utilized to support their business
(Wardhana et al. 2020). According to Armiadi Musa, productive zakat is zakat that is
given to mustahiq in the form of working capital that is expected to increase income
and meet mustahiq’s daily needs in a sustainable manner (Musa 2020). Yusuf a-Al-
The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare. . . 35

Qardhawi supports that a successful zakat distribution model can overcome the
problems that cause poverty by increasing mustahiq welfare (Qardawi 2000).
Zakat meets the requirements of maqasid sharia in its requirements compared to
other conventional measurements (Kusuma and Ryandono 2016). This index can be
used as a measure of the welfare and welfare of Muslim countries or the population
of Muslim countries. Because zakat intersects with all dimensions of Muslim life, it
can then show the level of prosperity (economic), solidarity (social), and spiritual
(individual), and it can be measured.

2.1.2 Mustahiq Entrepreneur

Mustahiq zakat is an asset that belongs to those who are eligible for zakat, which in
this case refers to QS At-Taubah (Beik and Arsyianti 2016): 60 that are referred to as
eight (eight) asnaf, which includes fakir, poor, amil, muallaf, fi riqab (to free slaves),
gharim (people who owe), fisabilillah (people in the way of Allah), and ibnu sabil
(travelers) (Qardawi 2000). Mustahiq entrepreneurs, who are recipients of produc-
tive zakat assistance, apart from belonging to the group mentioned earlier, also have
special characteristics in the form of physical and mental potential, and ability to
work (Rahman and Ahmad 2011; Saini 2016; Shiyuti and Al-Habshi 2019), as well
as a strong desire to transform in the productive zakat program (Abang Abai et al.
2020; Afif Muhamat et al. 2013). Mustahiq is part of the main elements of imple-
mentation zakat. Both have a very important position considering that if there is one
of the two then zakat cannot be carried out.

3 Methodology

This study uses the method of Charting the Field (Hesford et al. 2006) by sorting
articles by discussion, topic, source, and year. The topics chosen in the article are
devoted to the discussion as well as factors and indicators that support the welfare of
entrepreneurs and, more specifically, to mustahiq recipients of productive zakat,
while the journals that become references are articles published throughout
2012–2022. The selection of articles up to the current year, as well as the welfare
factors of entrepreneurs in general, is to explore findings in the context of developing
a conceptual framework. The research data were gathered from the open-source
Google Scholar reference, although the choice of the papers was founded on three
criteria. The first requirement is that from 2012 to 2022 papers must be indexed in
Google Scholar. The second requirement is that articles must be available online.
The third requirement is that the essay must address the factors or indicators of
mustahiq entrepreneurs’ well-being. To describe the causes and indicators, a qual-
itative descriptive method of data analysis was used for the welfare of mustahiq
entrepreneurs.
36 I. R. Santoso et al.

4 Results and Analysis

4.1 Results

4.1.1 Articles About Welfare Mustahiq

This section will present the outcomes of the literature using pre-established stan-
dards. Charting the Field is used to organize articles that fit the criteria. Articles that
cover mustahiq well-being indicators and contributing variables are included in
Table 1.
Thirteen articles satisfy the requirements for addressing the elements and indica-
tors of the well-being of mustahiq entrepreneurs, as shown in Table 1. The years
2022 (n = 2), 2021 (n = 2), 2019 (n = 3), 2018 (n = 1), 2016 (n = 2), 2015 (n = 2),
2014 (n = 2), and 2013 (n = 2) are the years with the most articles published. As a
result, the majority of articles were published in 2019. Additionally, the 13 papers
that were accessible were split into two categories for analysis, namely, (1) mustahiq
entrepreneur success determinants and (2) mustahiq entrepreneur success indicators.

4.1.2 Mustahiq Entrepreneur Welfare Factors

Four factors—productive zakat programs, motivation, competence, and economic

success—determine the prosperity of mustahiq entrepreneurs, according to a review
of 13 articles that adhere to the preset criteria. These four criteria are detailed in
Table 2.
Based on Table 2, productive zakat program factors are discussed in five articles,
motivational factors in three articles, and competence in three articles. Similarly,
business success factors are also discussed in three articles.

4.2 Analysis

In this section, a detailed explanation of the analysis of each mustahiq welfare factor
will be described through the maqasid sharia approach along with the proposed
conceptual model based on a literature review.

4.2.1 Productive Zakat Program Factors

The literature study identified five papers that address productive zakat programs as a
mustahiq welfare factor, namely, (Beik and Arsyianti 2016; Mawardi et al. 2022;
Nafiah 2015; Sharofiddin et al. 2019; Widiastuti et al. 2021b). According to (Beik
and Arsyianti 2016), utilizing the CIBEST model’s four indicators for measuring
The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare. . . 37

Table 1 List of journals

No. Journal Title Author Index
1 Al-Shajarah: Journal of the The impact of zakat distribu- (Sharofiddin Scopus
International Institute of tion on social welfare: A case et al. 2019)
Islamic Thought and Civiliza- study of Selangor zakat agen-
tion (ISTAC) cies, Malaysia
2 Journal of Islamic Monetary Measuring Zakat Impact on (Beik and Scopus
Economics and Finance Poverty and Welfare Using Arsyianti
(JIMF) Cibest Model 2016)
3 Iqtishadia (Journal of Islamic Zakat for Economic Empow- (Furqani Google
Economics and Business erment (Analyzing the et al. 2018) scholar
Studies) Models, Strategy, and Impli-
cations of Zakat Productive
Program in Baitul Mal Aceh
and Baznas Indonesia)
4 At-Tawassuth: Journal of The Effect of Productive Zakat (Sundari Google
Islamic Economics of Medan City Baznas on Tanjung scholar
Business Growth and Welfare 2019)
of Mustahiq in Medan Timur
District
5 Small Business Economics Surfeiting, the appetite may (Naudé et al. Scopus
sicken: Entrepreneurship and 2014)
happiness
6 El-Qist: Journal of Islamic The Effect of Productive Zakat (Nafiah Google
Economics and Business Utilization on Mustahiq Wel- 2015) scholar
(JIEB) fare in the Revolving Live-
stock Program of Baznas
Gresik Regency
7 Journal of Economics and The Effect of Productive Zakat (Musthofa Google
Entrepreneurship Management and Human 2019) scholar
Resources Competence on
Welfare
8 VISIONER: Journal of The Influence of Competency (Fauzie et al. Google
Regional Government in of Village Facilitators and 2020) scholar
Indonesia Effectiveness of Village Fund
Allocation on Improving
Community Welfare in Hand
Cut and Alue Dama Villages,
Setia District, Southwest Aceh
Regency, Aceh Province
9 Scientific Papers-Series Man- Effect of Entrepreneurial Skills (Ariwodor Google
agement Economic Engineer- Acquisition on the Welfare of and Agwu scholar
ing in Agriculture and Rural Agribusiness Households in 2016)
Development Abia State, Nigeria
10 Journal of Business Research Entrepreneurship and subjec- (Amorós Scopus
tive wellbeing: Does the moti- et al. 2021)
vation to start up a firm matter?
11 Journal of Management Why Entrepreneurs Often (Baron et al. Scopus
Experience Low, Not High, 2013)
Levels of Stress: The Joint
(continued)
38 I. R. Santoso et al.

Table 1 (continued)
No. Journal Title Author Index
Effects of Selection and Psy-
chological Capital
12 Journal of Islamic Accounting Analyzing the impact of pro- (Mawardi Scopus
and Business Research ductive zakat on the welfare of et al. 2022)
zakat recipients
13 Cogent Business and A mediating effect of business (Widiastuti Scopus
Management growth on zakat empowerment et al. 2021b)
program and mustahiq’s
welfare
Source: From various reference sources

Table 2 Identification of Mustahiq’s welfare factors

No. Variable Source
1 Productive zakat (Sharofiddin et al. 2019; Beik and Arsyianti 2016; Nafiah 2015;
program Widiastuti et al. 2021b; Mawardi et al. 2022)
2 Motivation (Naudé et al. 2014; Amorós et al. 2021; Baron et al. 2013)
3 Competence (Musthofa 2019; Fauzie et al. 2020; Ariwodor and Agwu 2016)
4 Business success (Furqani et al. 2018; Widiastuti et al. 2021b; Sundari Tanjung 2019)

absolute poverty, it is demonstrated that productive-based zakat may raise the

mustahiq welfare index using a variety of indices, such as the welfare index, material
poverty index, spiritual poverty index, and role index. Further research (Nafiah
2015) shows that the user has a favorable impact on livestock business aid of fruitful
zakat. On the welfare of the mustahiq, the mustahiq feel a rise in income and greater
satisfaction of needs following involvement in effective zakat empowerment. Based
on the findings, the results of this research show that the productive zakat program
can provide welfare to mustahiq by providing venture capital assistance and entre-
preneurial assistance as the theory of (Musa 2020) and Ali (1988) is related to the
concept of zakat for the welfare of the people.

4.2.2 Islamic Entrepreneurial Motivation

Based on the literature review, three studies discuss motivation as a welfare factor:
(Amorós et al. 2021; Naudé et al. 2014; Rietveld et al. 2015). Motivation in Islamic
economics is driven by the desire to achieve a higher goal, namely, falah, for a good
life (hayah thayyibah) (Chapra 1992). From the perspective of contemporary man-
agement science, the concept of sharia maqasid welfare has very close relevance to
the idea of motivation. When associated with the concept of maqasid ash-shari’ah, it
is clear that in the view of Islam human motivation in carrying out economic
activities is to fulfill their needs in the sense of obtaining the benefit of living in
the world and the hereafter (Riyanto 2010).
The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare. . . 39

4.2.3 Entrepreneurial Competence

Based on the literature review, three articles discussed competence as a mustahiq

welfare factor. Research by Ariwodor and Agwu (2016) shows entrepreneurial
abilities positively and significantly impact the household’s well-being. Significant
influence means that entrepreneurial competence has a good impact on mustahiq,
who have sufficient skills to improve business performance. This study is supported
by research from Musthofa (2019) and Fauzie et al. (2020), which shows a favorable
impact of entrepreneurial competence at the same level of welfare. In Islamic
economics, human resources are better known as human resources (human), the
resources (potentials) possessed by humans to achieve and balance a goal to be
completed in business, both worldly and in the hereafter. Human resources (human)
are based on the instructions of Allah and His Messenger through experience and
study of the Qur’an and Al-Hadith (Parmujianto 2017). Islam is very concerned
about all forms of human activity, including aspects of human resources; by having a
good basis and experience and adhering to religious values, it is hoped that human
resources will be more responsible for the mandate they carry and can become
quality human resources (Ramdani Harahap et al. 2021).

4.2.4 Islamic Business Success

Three studies that are based on a review of the literature address company success as
a supporting factor in achieving mustahiq welfare, namely, (Furqani et al. 2018;
Sundari Tanjung 2019; Widiastuti et al. 2021a). In addition, business success in
Islam has a different dimension. The business is run not only for material profit but
also can increase an entrepreneur at the level of spiritual improvement (Hendra and
Deny 2008). Success is assessed not just by one’s ability to make money but also by
how successfully one accomplishes religious objectives, which might result in
benefits for business owners in the hereafter (Hassan and Hippler 2014). Business
success in maqasid sharia includes financial and nonfinancial factors, the material
quality of life, and spirituality (Bahri and Aslam 2021) cover: (1) Maqasid
al-Syariah directly connected to the rise of microbusiness owners in the form of
the principle of protection of offspring (hifdz al-nasl) and asset protection (hifdz
al-mal); (2) hereditary protection (hifdz al-nasl) in the context of developing
microentrepreneurs to maintain business continuity and sustainability; and (3) prop-
erty protection (hifdz al-mal) to develop microenterprises that require expert man-
agement to grow and generate profits (E S Bahri et al. 2019) so that it can be
concluded that business success in Islam is a success that includes material and
spiritual business improvement that is characterized by business growth and involve-
ment in Islamic social activities.
40 I. R. Santoso et al.

4.2.5 Maqasid Sharia-Based Mustahiq Entrepreneurial Welfare Model

On the basis of the above literature study, a conceptual model of mustahiq entrepre-
neur welfare is designed, made up of both independent and dependent variables. The
independent variables include productive zakat program factors, Islamic entrepre-
neurial motivation, entrepreneurial competence, and Islamic business success. At the
same time, the dependent variable is the welfare of mustahiq maqasid sharia
entrepreneurs. In light of the literature, the above study assesses the welfare of
mustahiq entrepreneurs that is influenced by productive zakat programs, Islamic
entrepreneurial motivation, competence, and Islamic business success; there are four
hypotheses. H1: productive zakat programs have an impact on the well-being of
mustahiq entrepreneurs that is both positive and substantial. H2: Islamic entrepre-
neurial motivation influences the well-being of mustahiq entrepreneurs in a way that
is both positive and significant. H3: competence positively and significantly affects
the well-being of mustahiq company owners. H4: the prosperity of Islamic enter-
prises positively and significantly affects the well-being of mustahiq business
owners. A conceptual framework for the welfare of mustahiq entrepreneurs is
developed based on the aforementioned premise. It comprises four exogenous
factors (productive zakat programs, motivation, competence, and company perfor-
mance) and one endogenous component (wealth of mustahiq entrepreneurs). As a
result, Fig. 1 provides an example of the conceptual model of a successful mustahiq
businessman.

Fig. 1 Conceptual model for maqasid sharia-based mustahiq entrepreneurial welfare

The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare. . . 41

5 Conclusion and Recommendation

The welfare of mustahiq in empowering productive zakat is essential to change

mustahiq who were previously mustahiq into munfiq and, in the end, become
muzaki. In addition, this research has identified articles that discuss the welfare of
mustahiq utilizing the Charting the Field method. The study’s results found four
factors that have the potential for mustahiq welfare: productive zakat programs,
Islamic entrepreneurial motivation, Islamic entrepreneurial competence, and Islamic
business success. In addition, these results have the impact that mustahiq’s welfare is
not only determined by external factors in the form of funding assistance from zakat
institutions but also mustahiq themselves in the form of motivation and competence.
Training/coaching and financial assistance from zakat institutions are intended to
increase the motivation and competence of mustahiq. Still, the encouragement from
these two factors will be maximized if it comes from mustahiq itself to achieve
business success that ultimately sustainably brings mustahiq welfare. Considering
the results of this study, it can be a recommendation for practitioners, in this case,
zakat managers, to further optimize the empowerment of productive zakat through
sufficient business assistance accompanied by entrepreneurial training for business
success and mustahiq welfare. The information can be used by the government to
expand the role of zakat institutions as government instruments in poverty allevia-
tion and empowerment of entrepreneurs, especially mustahiq recipients of assis-
tance. For academics, this work opens up a new area for further exploration. To
examine the suggested conceptual framework, especially the combination of vari-
ables used in the offered model, to obtain a new concept that is more effective in
improving the welfare of mustahiq through productive zakat programs.

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Economic Empowerment of Islamic
Boarding Schools Through Optimization
of Halal Value Chain: A Conceptual Offer

Lamya Nurul Fadhilah and Syamsuri

Abstract According to the Islamic Boarding Schools Database, in 2022, Indonesia

had 31,385 Islamic boarding schools, with a total of 4.29 million students, of which
44.2% have economic potential. Islamic boarding schools encourage students to
have an entrepreneurial mindset to help the nation’s economy grow. Hence, it can be
claimed that they have pioneered the economic development of the people, espe-
cially in Indonesia. Islamic boarding schools economies are developed by various
economic activities, including suppliers, producers, distributors, and customers.
Many Islamic boarding schools manufacture goods like food and sell them to others.
This demonstrates the developed presence of a network or relationship among
Islamic boarding schools has the potential to lead to economic development. But
many other types of barriers hamper its empowerment and economic development,
such as the sub-optimal management of economic management. One of the main
strategies is the implementation of a halal value chain ecosystem in the Islamic
boarding school’s business unit. Therefore, this study aims to conceptualize the
optimization of the halal value chain that can offer solutions to strengthen the
economy of Islamic boarding schools in Indonesia. This study is based on a library
and uses a descriptive methodology to gather data on literacy, which is subsequently
subjected to content analysis or other scientific analysis. The findings of this study
provide an acceptable empowerment model for Islamic boarding schools that is also
in line with the halal value chain cycle, which is anticipated to best support their
economic empowerment.

L. N. Fadhilah (✉) · Syamsuri

Universitas Darussalam Gontor, Ponorogo, Indonesia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 45

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_5
46 L. N. Fadhilah and Syamsuri

1 Introduction

1.1 Background Study

To improve the national economy, we can go through community economic inde-

pendence. The first step is to empower the community’s economy. Efforts to
empower the community can be carried out in three ways, namely, (1) enabling
and creating an atmosphere or climate that allows the potential of the community to
develop; (2) empowering and strengthening the potential or power possessed by the
community; and (3) protecting the community and preventing it from becoming
weak in the empowerment process, in this case preventing competition and exploi-
tation of the strong against the weak (Kartasasmita 1995).
Islamic boarding school is the social forum that plays an essential role in a
community’s economic empowerment. As the oldest Islamic educational institutions
in Indonesia, Islamic boarding school proves the role and existence in the process of
development and the struggle of the nation not only in spiritual education but also
social and economic terms (Ningsih 2017) Even Islamic boarding school became a
suitable place in sharia economic theory for the community in and around it. This is
supported by the strong ties of human resources, including the students, the alums,
guardians of students, and the surrounding community (Syamsuri and Borhan 2016).
The large number of Islamic boarding schools in Indonesia, which reached
31,385, has a total of 4.29 million students (Statistik Data Pondok Pesantren
2020). The opportunities for advancing the national economy are very high, starting
from the availability of jobs for the surrounding community, to the needs of Islamic
boarding schools, which, if managed properly, can make it producer as well as
consumer that can increase the local market demand. It is possible to utilize the
management of economic operations as an indicator of the independence efforts by
looking at things like the development of its business units (Sugiono and Indrarini
2021). Islamic boarding schools have a strategic role in developing the sharia
economy, including increasing their economic independence, which is essential in
creating human resources with character and reliability in the economic field (Radjak
and Hiola 2020).
Islamic boarding schools can achieve financial independence through various
business ventures, including producers, suppliers, and distributors. Many of them act
as producers who distribute their products to others (Dzikrulloh and Koib 2020).
This demonstrates the developed presence of a network or relationship among
Islamic boarding schools that has the potential to lead to economic development.
However, many challenges, including poor economic management, impede Islamic
boarding schools’ economic empowerment and development. Implementing a halal
value chain ecosystem in the Islamic boarding school business unit is one of the
effective strategies. Islamic boarding schools can leverage their economic potential
and human resources’ strength in numbers and community links by creating a halal
value chain. As a result, they can become both a source of demand and production
for various activities with economic value (Sugiono and Indrarini 2021).
Economic Empowerment of Islamic Boarding Schools Through Optimization. . . 47

Fig. 1 Market Value of Halal Foods Worldwide from 2017 to 2023 (in billion USD)

Additionally, because Islamic boarding schools are based on sharia and require that
all of their students live according to its precepts, they have a significant potential to
implement the halal value chain (Hudaefi and Heryani 2019) as halal is a topic that
needs to be taken into consideration, especially by Muslims. The global market for
halal foods provides the graphic statistics in Fig. 1.
Referring to the data above, it can be said that halal products are in great demand
by both Muslim and non-Muslim communities. This is evidenced by data from
Statista 2022, which states that every year the demand for halal products on the
world market, especially food products, always increases significantly. From 2017 to
2023, it is estimated to increase by 1.2 trillion US dollars. Indonesia, a country with a
Muslim majority, has a high opportunity to produce halal products from all aspects
so that it can encourage the occurrence of a halal ecosystem. Islamic boarding
school, as the oldest Islamic educational institutions in Indonesia, should be able
to support the creation of a halal value chain. Since halal principles have been
incorporated into the members’ production, distribution, and consumption activities,
the Islamic boarding school has unknowingly developed a halal ecosystem (Annisa
2019). In addition, by utilizing all of its economic potentials it can empower the
spiritually and economically community. Through halal value chain strategy, Indo-
nesia, with a Muslim majority, has the potential to become the center of Islamic
economic development in the world (Mu’awwanah et al. 2021).
48 L. N. Fadhilah and Syamsuri

1.2 Objective

This study aims to conceptualize the optimization of the halal value chain through
the economic empowerment of Islamic boarding school. Expanding the halal value
chain can help the local economy, particularly in Islamic boarding schools, where it
can help the community’s economy. Furthermore, regarding both geographic poten-
tial and human resources, the appropriate form of empowerment can assist Islamic
boarding school in realizing their potential and contributing to the economy of the
community in and around them.

2 Literature Review
2.1 Background Theory

2.1.1 Economic Empowerment

According to its etymology, empowerment refers to processes, methods, activities,

and empowerment. Terminologically speaking, it refers to the action of people
attempting to direct their individual lives and mold the future according to their
skills and preferences (Adi 2001). Empowerment is a process that can be started and
maintained by people looking for strength or self-determination. It can be seen as a
delegation or giving of authority that results in a hierarchy of strengths and lack of
power (Simon 1993).
Islam sees society as a system in which people depend on and help one another. In
an ideal world, society has a relationship with each individual that benefits both
parties. The disparity in economic income offers an opportunity to promote peace
and friendship among individuals. Islam promotes community empowerment by
upholding three fundamental tenets: equality, ukhuwwah, and ta’awun (Sany 2019).
To attain the three pillars of the Muslim community’s strength—faith, knowledge,
and social dimension—empowerment employs a partial-continuous strategy and a
structural approach (amal) (Susilo 2016). Economic solid infrastructure is vital to
establishing community independence and self-reliance, impacting community eco-
nomic development success. It can also be claimed that the main factor in commu-
nity empowerment is education, both formal and nonformal, as the outcomes of
progress in the field of education will produce a critical and responsive community
(Alam 2008).

2.1.2 Halal Value Chain

From upstream to downstream, the halal value chain is an ecosystem or halal supply
chain business that consists of four industrial sectors: halal travel and tourism, halal
health care and pharmaceuticals, halal food, and halal finance (Tieman et al. 2012).
Economic Empowerment of Islamic Boarding Schools Through Optimization. . . 49

One of the many halal lifestyles practiced by every Muslim is the halal value chain,
which begins by guaranteeing the halalness of all operations, including raw mate-
rials, production processes, packaging, distribution of goods, and retail sales to
finished goods that are ready for consumption (Annisa 2019). Overall, all process
activities in the halal value chain must avoid direct contact with haram, overcome the
risk of contamination, and ensure that halal is consistent with the perceptions of
Muslim consumers. The product can adapt to international settings and is valued by
many nations through the halal label (Talib et al. 2015). Because a product’s quality,
authenticity, safety, and hygiene are all characterized by the halal label, it can also be
considered standardizing a product’s quality (Ambali and Bakar 2013).
The five great programs listed below are the effective tactics for strengthening
Indonesia’s halal value chain: (1) establishing halal hubs in various locations under
the comparative advantages of each region; (2) providing halal standards that are
acceptable everywhere; (3) promoting a halal lifestyle; (4) offering financial incen-
tives to local and international actors who contribute to the growth of the halal value
chain business; and (5) establishing an international halal center to encourage
international cooperation (Muslihati 2020).

2.2 Previous Studies

Islamic boarding school is more valuable than other educational institutions because
it combines teaching materials from the natural and religious sciences with Islamic
values and educational principles, making Islamic boarding schools an alternative
that can wholly produce human resources with good personalities (Syamsuri and
Borhan 2016). In this case, Islamic boarding school has developed its entrepreneur-
ship for economic progress to support the welfare of the entire community and its
surroundings; this is supported by research by Indrawati (2014), Fatmsari (2016),
Alhifni and Ahwarumi (2018), and dan Kurniawan and Lionardo (2020). Adnan
(2018), according to his research, education, the possibility of reducing the Islamic
boarding school’s operational burden, and the demands of da’wah were the driving
forces behind its community empowerment. Additionally, it was discovered that
many employed the idea of economic empowerment based on the community
economic development; the research backs this up through Syafa’at et al. (2020),
Dandy Sobron Muhyiddin et al. (2022), and Ariatin et al. (2022). The economic
empowerment of Islamic boarding school is also carried out through the develop-
ment of Islamic philanthropy, and this is supported by research by Imari and
Syamsuri (2017), Nasrullah et al. (2018), and dan Fatira and Nasution (2019).
The previous studies only focused on research on economic empowerment and its
implementation in Islamic boarding schools, as well as its impact on the surrounding
economy. However, it is rare to find research that has discussed the optimization of
the halal value chain as an effort to empower the pesantren economy. In this study,
the researchers have tried to analyze the concept of the halal value chain that can be
applied to economic empowerment in Islamic boarding schools so that it can
improve previous research.
50 L. N. Fadhilah and Syamsuri

Fig. 2 Conceptual framework. Source: Results of data analysis researchers

2.3 Conceptual Framework

If the Islamic boarding school appropriately carries out the process, defining the idea
of the halal value chain through four processes—input, production, distribution, and
consumption—can assist in strengthening the community’s economic empowerment
in and around it (Fig. 2). This occurs because Islamic boarding schools can benefit
from the economic potential of their community as they implement the halal value
chain both in terms of employment opportunities or commercial partners that can
boost the productivity of the parties involved. Moreover, Indonesia might establish
itself as a hub for sharia economic development if Islamic boarding schools simul-
taneously carried out the economic empowerment of the community in this circle.

3 Methodology
3.1 Data

Data collection techniques through a review of books, literature, notes, and various
reports related to the problem to be solved are presented (Nazir 1988). The content
analysis method, a research instrument that focuses on the media’s actual content
and internal properties, is used in the data analysis methodology. This study is used
to draw reliable conclusions and may be revisited depending on the situation. In this
Economic Empowerment of Islamic Boarding Schools Through Optimization. . . 51

analysis, multiple interpretations are chosen, compared, combined, and arranged to

get the pertinent information that research requires (Fraenkel and Wallen 2007).

3.2 Model Development

The halal value chain model used in this study is Marco Tieman’s adaptation of the
halal cluster model. Tieman (2015) lists four significant halal clusters in his findings,
including (1) halal education and research, (2) halal integrity network, (3) halal
supply chain, and (4) enablers. In this study, the researchers simplified the input,
production, distribution, and consumption activities that made up the halal cluster
and changed the model within the context of the halal value chain. The researcher
hopes to demonstrate through this model the potential for economic empowerment
offered by the idea of the halal value chain, particularly in Islamic boarding schools.

3.3 Method

This type of research is library research or library research. This method is carried
out using literature and documents from previous studies. This research aims to gain
an in-depth and broad understanding of the subject being studied. Library research is
intended to make it easier for researchers to organize printed books in topical or
discipline categories. The ideal result is that the researcher can browse through the
full text of not only short catalog records that represent those texts but the text itself
systematically (Mann 1995).

4 Results and Analysis

4.1 The Economic Potential of Islamic Boarding Schools

and Its Impact

This is because, as opposed to institutions without legitimacy, Islamic boarding

schools are part of social organizations with significant legitimacy based on religious
principles, which positively impacts the community’s economic development
(N.S. 2008). Islamic boarding school has enormous economic potential, which it
should be able to maximize to turn into a chance to empower the local community
and those around it. Every economic activity carried out by its community, such as
cooperatives and Baitul Mal Wa Tamwil (BMT), should ideally respect the princi-
ples of halal and thoyyib in their consumption behavior (Annisa 2019). The graphic
data in Fig. 3 shows the economic potential of Islamic boarding schools.
52 L. N. Fadhilah and Syamsuri

2.000
1.800
1.600
1.400
1.200
1.000
800
600
400
200
0
No Business unit Agribusiness Cooperatives, Plantation Health Center Arts Culture
SMEs & Islamic
Economy

Fig. 3 The amount of economic potential in the Islamic boarding schools, Indonesia

Islamic boarding schools have the potential for economic growth in various
industries, including maritime, agribusiness, vocational, cooperatives, SMEs, animal
husbandry, plantations, technology, health facilities, sports, arts, and culture.
According to the information above, Islamic boarding schools have the most eco-
nomic potential in cooperatives, SMEs, and Islamic economics. The empowerment
activities carried out by Islamic boarding schools also include teaching their students
life skills (Kurniawan and Lionardo 2020). One example is giving students the
responsibility to manage the cooperative that belongs to the Islamic boarding school
organization. This is an approach that Islamic boarding schools contribute to the
empowerment of the community. When producing goods, like clothing, using
Islamic boarding schools’ owned convection system, for example, the entrepreneur-
ship practiced by the Islamic boarding schools also involves the local community.
Giving Islamic boarding schools employment options, helping to lower unemploy-
ment, and boosting the community’s economy benefit the local economy.

4.2 Halal Value Chain Concept in Islamic Boarding School

Community Empowerment

It is necessary to have an empowerment model that can describe and optimize the
potential of Islamic boarding schools through the halal value chain to empower the
community’s economy. Four processes—input, production, distribution, and
consumption—in the execution of the halal value chain are made more accessible
by sharia economic development tools. The first process is input, which refers to
some logistical and supplier-related operations. Plantations, agriculture, and halal
slaughterhouses (RPH) are some examples of businesses operating in this sector.
Many Islamic boarding schools operate enterprises in this sector, particularly in
agriculture. The Al-Ittifaq Islamic Boarding School in Bandung is one such institu-
tion that manufactures agricultural goods and sells them to the general public
(Yulivan 2022).
Economic Empowerment of Islamic Boarding Schools Through Optimization. . . 53

Production is the second process. While it is true that production is a process used
to generate or add value to an item, it can also be defined as the transformation of raw
materials gained from suppliers into an item or product (Kumar and Suresh 2008). In
this case, it is necessary to have halal certification in every product marketed to
maintain quality and as a halal guarantee to consumers. Since most of the Islamic
boarding schools manufacture goods for either personal or public consumption, they
have evolved into producers. Examples of products produced by most Islamic
boarding schools are food products such as mineral water and catering, while the
examples that produce food are Islamic boarding schools Darussalam Gontor
Ponorogo, Sunan Derajat Lamongan, and Darul Hijrah South Kalimantan (Syamsuri
2020).
The third process is distribution, which is the process of getting a thing or service
from the producer to the consumer so that it can be consumed by everyone who
needs it either conventionally or through the online market. To protect halal products
from being contaminated by non-halal products, it is essential to pay attention to the
transit of halal-produced commodities during the distribution process, especially
outside Islamic boarding schools (Ahmad and Shariff 2016).
In addition to being a producer, the Islamic boarding school also functions as a
consumer, due to the restrictiveness of the production supply (Dzikrulloh and Koib
2020). As a result, Islamic Boarding School needs partners who can offer commod-
ities for the student needs in order to meet market demand. By involving local
business owners or suppliers as partners of the Islamic Boarding School, the local
community’s economy will benefit and develop in response to the demand from it
(Fig. 4).
Additionally, Islamic economic development plays a significant role in
supporting its industry. Islamic boarding schools’ economic infrastructure and
utilities, such as waqf instruments, Islamic philanthropy, cooperatives, BMTs, and
SMEs as Islamic boarding school business capital, are included in its development
(Azizah 2016). Good management of sharia financial instruments can facilitate the
running of each process halal value chain in Islamic boarding schools. Islamic
boarding schools should be an excellent opportunity to support the success of the

Input Production Distribution Consumption Halal Value

Chain in Islamic
boarding school
Islamic Finance Development Instrument

Islamic Boarding School Community Economic Empowerment

Fig. 4 The Islamic boarding school economic empowerment model through halal value chain.
Source: Results of data analysis researchers
54 L. N. Fadhilah and Syamsuri

halal value chain in Indonesia as an Islamic educational institution that produces

human resources with Islamic character, given the need for human resources who
understand Islamic law in every process.

5 Conclusion and Recommendation

5.1 Conclusion

This study offers a model of Islamic boarding school economic empowerment

through the halal value chain, which complements previous studies where economic
empowerment through entrepreneurship is based on the economic development of
the people and is in the form of a protective economy. Furthermore, utilizing the
implementation of the halal value chain in Islamic boarding schools gives more
contributions to empowering the communities in them, especially students, as well
as providing them with provisions to take part in the wider community related to the
halal lifestyle, which will encourage the growth of the halal value chain in Indonesia.

5.2 Recommendation

Based on the results of this study, the researcher recommends further research related
to the implementation of the halal value chain in Islamic boarding schools using this
model to obtain research results relevant to the field.

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6349
Developing Conceptual Framework
for Public–Private Partnership Projects via
Mobilization of Islamic Finance
in Indonesia

Muhammad Imaduddin and Salina Hj. Kassim

Abstract Indonesia needs to address the issue of widening infrastructure gaps by

investing IDR 6445 trillion in infrastructure development until 2024. The invest-
ments, however, cannot be funded solely from the government budget as it can only
cover 37 percent of the required amount. The concept of public–private partnership
(PPP) has the potential to fulfill the requirements of the remaining 63 percent of the
funding gap of infrastructure investment in Indonesia. Islamic finance has the
potential to support the PPP projects as the alternative financing source to meet
this objective. Islamic finance focuses on the risk allocation through distribution into
the best possible parties in the transaction that is also in line with the concept of PPP.
Despite the increasing efforts to mobilize Islamic finance for financing PPP projects,
so far there have been no projects funded under Islamic finance instruments in the
existing PPP projects that have reached “Financial Close” with total investment of
US$67.27 billion. This study aims to develop a conceptual framework based on the
cycle of the PPP process using the institutional theory and value chain theory. The
institutional theory is important to regulate the PPP arrangement from being an
innovation to procure infrastructure asset outside the government budget. PPP pro-
jects present a contractual term of long-term concession agreement, and the applied
PPP concept comprises the causal processes from inputs, related activities, outputs,
and outcome as defined under value chain theory. The primary purpose of concep-
tual framework is to explore the status and challenges of Islamic finance mobiliza-
tion in PPP infrastructure projects in Indonesia. The framework also assists the study
in exploring the feedbacks from the relevant stakeholders and formulating way
forward. The study is expected to contribute to proposing the applicable policy
and framework recommendation, strategy, and incentives to mobilize proper Islamic
finance resources for the development of PPP project in Indonesia.

M. Imaduddin (✉) · S. H. Kassim

IIUM Institute of Islamic Banking and Finance, Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 57

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_6
58 M. Imaduddin and S. H. Kassim

1 Introduction

1.1 Background of Study

In order to meet the United Nations Sustainable Development Goal (UN SDGs)
No. 9, namely, to build resilient infrastructure, promote inclusive and sustainable
industrialization, and foster innovation, the world will need to invest around US$90
trillion in sustainable infrastructure assets until 2030 (Bhattacharya et al. 2015). This
requirement translates into an annual investment of US$5–6 trillion or double the
current infrastructure spending (Ahmad and Alawode 2017). To bridge this gap in
infrastructure investment, a concept of public–private partnership (PPP) was intro-
duced to promote private sector participation in developing the required public
infrastructure projects (PPP Reference Guide 2012).
PPP is defined as a long-term contract through concession between a private
sector and a public sector (government entity) for providing a public asset or service,
whereby it is a risk allocation concept based on the dominant use of private sector
resources that are extended beyond construction to operation and management
stages (Uzunkaya 2017). The private sector bears significant risk and management
responsibility, as well as entitles for the remuneration that is linked to performance
under concession agreement (Ahmad and Alawode 2017; Wang et al. 2019).
PPP is often described as a government off-balance sheet concept as the asset is
booked under private sector consortium. PPP is developed through private sector
intervention in capital, expertise, and technology by introducing the proper risk
allocation toward the infrastructure projects (PPP Reference Guide 2012). As a key
feature of PPP, risk allocation emphasizes the transfer of responsibility of risk to the
party that is best able to understand a risk, control the likelihood of the risk
occurring, and/or minimize the impact of the risk vis-à-vis the entitlement of the
incentives (Hovy 2015). Risk allocation is the process of identifying risk and
determining how and to what extent they should be shared and optimal risk alloca-
tion the key driver for value for money in a PPP project (Hovy 2015).
In the context of Indonesia, the country needs to address critical infrastructure
gaps and invest at least US$600 billion between 2014 and 2024 in building and
upgrading infrastructure (Lin 2014). According to the Ministry of National Devel-
opment Planning (2019), to sustain growth in the country, the Government of
Indonesia has invested heavily in infrastructure projects from 2015 to 2019. The
investments, however, cannot be funded solely from the government budget as it is
only able to fulfill 41.3 percent of total infrastructure funding needs based on
estimation of infrastructure funding needs in 2015–2019, which is about IDR 4796
trillion in total. Approximately 36.5 percent of the funding gap is expected to be
fulfilled through cooperation with private using a PPP scheme (Bappenas 2019).
Furthermore, the Government of Indonesia has set an infrastructure target for the
period of 2020–2024 with the proposed infrastructure investment cost of IDR 6445
trillion or equivalent to 6.2 percent of GDP (Bappenas 2020). The capacity of the
government to fund the infrastructure development through government’s own
Developing Conceptual Framework for Public–Private Partnership. . . 59

budget is only IDR 2385 trillion or equivalent to 37 percent of total needs (Bappenas
2020). Therefore, innovations, cooperation, and partnership are strongly needed to
fill the gap of 63 percent of this infrastructure investment requirement.
One of the alternative financing sources for developing PPP infrastructure pro-
jects is Islamic finance (Alexander 2010; Ahmad and Alawode 2017). In this regard,
the development of global Islamic financial service industry has been performing
sound growth. Based on the figures reported for 56 countries, the global Islamic
finance industry grew year-on-year by 11.00 percent to US$2.4 trillion in assets in
2017 or by the compound annual growth rate of 6.00 percent from 2012 (Reuter
2018). The global Islamic finance industry is expected to grow 10 percent over
2021–2022 due to increased Islamic bond issuance and a modest economic recovery
in the main Islamic finance markets. Despite the COVID-19 pandemic, the Islamic
finance industry continued to grow with global Islamic assets expanding by 10.6
percent in 2020 against the growth of 17.3 percent the previous year (S&P Global
2022). It is, arguably, in line with the PPP concept that is based on the development
of new tangible assets and focusing on the risk allocation to distribute to the best
possible parties in the transaction (Hovy 2015; Ashmawi et al. 2018).

1.2 Statement of Problem

The proper infrastructure projects have a significant impact on the economic growth
in the countries (Alfen 2010; Estache and Garsous 2012; Palei 2014; Ismail and
Mahyideen 2015). It enables businesses to generate additional production capacity.
It increases the employment rate due to significant job creation and, at the same time,
also enhances the productivity of workers. The infrastructure sector contributes to
the accession of the poor and undeveloped areas to the core economic activities.
The alternative form to implement an efficient and effective infrastructure project
is by deploying PPP scheme in this intervention (Ernst and Young 2015). PPP is
triggering an unprecedented focus on financial management and the cost efficiency
of government procurement. Moreover, Islamic finance can play a considerable role
as a source of financing for PPP infrastructure projects such as airports, toll roads,
power plants, and hospitals.
Despite the increasing efforts by emerging economies to mobilize Islamic finance
for financing the infrastructure projects, the use of Islamic finance is still limited in
this context including in Indonesia (Ahmad and Alawode 2017; Rarasati et al. 2019).
According to Comcec Report in 2019, Islamic banks in Indonesia invested less than
10.00 percent of their portfolio in the infrastructure sector, that is, 8.40 percent. In
the context of PPP projects in Indonesia, there are 140 projects that have reached
Financial Close with a total investment of US$67.27 billion (PPP Knowledge Lab
2020). Despite the increasing efforts to mobilize Islamic finance for financing PPP
projects, so far there have been no projects funded under Islamic finance instruments
in the existing PPP projects that have reached “Financial Close” with a total
investment of US$67.27 billion. Financial Close is the date of the conditions that
60 M. Imaduddin and S. H. Kassim

Table 1 PPP projects in Indonesia

Indonesia Total PPP projects Total investments
Financial close 140 US$67,274 million
Active projects 123 US$60,363 million
Source: PPP Knowledge Lab (2020)

all relevant covenants to implement the project under financing documents are
fulfilled (Mohamad et al. 2018) (Table 1).
According to previous studies, the main challenges to implement the Islamic
finance in the infrastructure projects are the lack of awareness, limited case study
references, challenge in the documentation process, as well as insufficient capacity
of government officials, investors, and other stakeholders regarding the merits and
viability of Islamic finance to support such projects (Rarasati 2014; Wibowo 2015;
Ahmad and Alawode 2017; Rianto 2017).
The urgency to mobilize Islamic finance to support PPP projects in Indonesia
consists of several considerations. Firstly, Ahmad and Alawode (2017) argued that
applying Islamic finance to PPP infrastructure projects is a natural fit due to its focus
on financing the procurement of the asset through the notion of risk allocation. In
conventional finance, the treatment of risk allocation is measured by interest rate.
Meanwhile, the nature of Islamic finance instrument emphasizes asset procurement
capacity in measuring the risk allocation, which makes them a natural fit for PPP
infrastructure project.
Secondly, the implementation of Islamic finance instruments shall attract the
potential for funding mobilization from Muslim investors from the Middle East
and other Muslim countries for the development of PPP infrastructure projects in
Indonesia (Kasri and Wibowo 2015; Wibowo 2015; Ahmad and Alawode 2017).
Thirdly, the need for private sector involvement in funding the infrastructure
projects is still relevant since all the capital requirements cannot be fully fulfilled by
the government budget. Approximately 36.5 percent of the funding gap is expected
to be fulfilled through cooperation with private using a PPP scheme (Bappenas
2019). Lastly, it is an opportunity to further develop the Islamic finance industry in
Indonesia by allocating the portfolio to support PPP infrastructure projects (Ahmad
and Alawode 2017; Bappenas 2019).
Apart from what has been previously explained, what are the current status, main
issues, and challenges to mobilize Islamic finance to support the development of PPP
projects in Indonesia? What are the determinants of investment consideration for
Islamic banks to finance the PPP projects in Indonesia? What are the strategy and
way forward to mobilize Islamic finance in the PPP projects in Indonesia?
This study aims to explore the issues, challenges, and determinants to mobilize
Islamic finance in supporting the development of PPP projects in the context of
Indonesia. It is expected to contribute to the development of Islamic finance in the
PPP projects in Indonesia from not only academic perspective but also from the
market players’ and regulators’ viewpoint.
Developing Conceptual Framework for Public–Private Partnership. . . 61

1.3 Research Objectives

The objectives of this research shall be defined as follows:

1. To explore the issues and challenges to implement Islamic finance for PPP
projects in Indonesia
2. To identify the determinants of investment considerations for mobilizing Islamic
finance for PPP projects in Indonesia
3. To propose the mechanism and framework for mobilizing Islamic finance for PPP
projects in Indonesia, based on the findings from the first two objectives
4. To assess and identify the possible practical implementation issues and suggest
the way forward in implementing the framework under objectives

2 Literature Review

2.1 The Concept of Public–Private Partnership

Public–private partnership (PPP) is defined as a contract through concession

between a private sector and a public sector (government entity) for providing a
public asset or service, whereby the use of private sector resources is extended
beyond construction to operation and management stages (World Bank 2017;
Yescombe 2011; Uzunkaya 2017). The private sector bears significant risk and
management responsibility, as well as entitles for the remuneration that is linked
to performance under concession agreement (Ahmad and Alawode 2017; Wang
et al. 2019).
The PPP structure in infrastructure project is mainly focused on the long-term
project finance scheme, where the structure is designed based on projected cash flow
rather than the balance sheet of the sponsor or equity holder (Hasnain et al. 2014). It
is a nonrecourse structure by establishing a special purpose vehicle (SPV) to
implement the project (Camacho 2005; Lone and Quadir 2017; Kang et al. 2019).
A framework to develop and implement the PPP contract consists of three main
stages (World Bank 2012). The first stage is structuring and appraising PPP contract.
In this initial stage, a priority public investment project is identified and initially
approved for development as a PPP. Then the government shall prepare the PPP
structure with regard to the key commercial terms, namely, the proposed contract
type, risk allocation, and payment mechanisms. Furthermore, this proposed PPP
structure will be appraised based on economic and technical viabilities. Becker and
Patterson (2005) suggest that there are categories during this stage, that is, (a) the
social outcome objective, (b) the general degree of financial return and financial risk,
(c) the principal nature of managerial involvement of both parties in the partnership,
and (d) the degree of conformance with the balanced model of structuring public–
private partnerships.
62 M. Imaduddin and S. H. Kassim

Government Agency
Offtaker
Direct Agreement

PPP Contract

EPC Contractor Financiers

Project Company
(Special Purpose Vehicle)
O&M Operator Equity Investors

USER

Fig. 1 PPP project structure (World Bank 2017)

The second stage is the design formulation of the PPP contract. In this regard, the
procurement of PPP transaction is being finalized in terms of contract and other
agreements. Sanghi et al. (2007) and Hoppe et al. (2013) suggested that the pro-
curement focuses on developing commercial principles into contractual terms as
well as designing the provisions for contract management and dispute resolution.
The third stage is the implementation of the PPP transaction. In this stage, the
government selects the private entities that will implement the PPP through a
competitive procurement process. The transaction stage is complete when the project
reaches Financial Close or the conditions that all relevant covenants to implement
the project under financing documents are fulfilled (Mohamad et al. 2018). The
government has to manage the PPP contract over its lifetime, including monitoring
and enforcing the PPP contract requirements and managing the relationship between
the public and private partners (Fig. 1).
The critical success factors to implement PPP structure in infrastructure project
are mainly on commitment and responsibility of public and private sectors, strong
and good private consortium, and appropriate risk allocation (Cheung et al. 2012;
Kristiawan and Rohman 2020). The political support and strong private consortium
are also discovered as the critical success factors in the PPP project, whereas the
cause of PPP projects to fail is when the consortium lacks the appropriate knowledge
and skills (Dulaimi et al. 2010).

2.2 The Need for Public–Private Partnership in Indonesia

Indonesia is the 14th largest country in the world comprising a land area of
1,916,862 square kilometers. It is also the seventh largest country in terms of land
and sea area combined (Bappenas 2020). The population of Indonesia is 266.7
million, becoming the fourth most populous country in the world. Islam is the largest
Developing Conceptual Framework for Public–Private Partnership. . . 63

religion in Indonesia, with approximately 231 million people being Muslims (86.7
percent) (Bappenas 2020).
The Government of Indonesia has implemented the commitment to accelerate
private sector participation in infrastructure development and investment. It is
believed that relying solely on the government budget for infrastructure funding
may not achieve the desired results due to the immense infrastructure needs associ-
ated with economic growth. The Government’s National Medium-Term Develop-
ment Plan (RPJMN) 2015–2019 estimated that the total investment needed for
infrastructure development during these years reached IDR 4796.2 trillion (around
US$345.4 billion) and is expected to grow to IDR 5957.7 trillion (US$429 billion)
during 2020–2024 (Asian Development Bank 2020).
Furthermore, the Government of Indonesia has set an infrastructure target for the
period of 2020–2024 with the proposed infrastructure investment cost of IDR 6445
trillion or equivalent to 6.2 percent of GDP (Bappenas 2020). The capacity of the
government to fund the infrastructure development through government’s own
budget is only IDR 2385 trillion or equivalent to 37 percent of total needs (Bappenas
2020). Therefore, innovations, cooperation, and partnership are strongly needed to
fill the gap of 63 percent of this infrastructure investment requirement.
The government expects that around 63 percent of the investment value will be
provided by state-owned enterprises (SOEs) and the private sector. However, private
sector involvement in infrastructure investment from 2015 to 2018 was still lower
than the target, reaching only 21 percent. Given the funding limitations, private
sector participation through a public–private partnership (PPP) scheme will be
pivotal for the provision of infrastructure in Indonesia (Asian Development Bank
2020).
Indonesia currently has several PPP facilitating mechanisms and government
support mechanisms, such as the project development facility (PDF), guarantee
facility, viability gap fund (VGF), availability payment mechanism, and a land
acquisition financing mechanism (Asian Development Bank 2020). In addition,
there are companies that play an active role in facilitating PPPs in the country,
such as a private nonbanking finance corporation, namely, PT Infrastructure Finance
Facility (PT IFF), Indonesia Infrastructure Guarantee Fund (IIGF), a state-owned
enterprise (SOE) under the Ministry of Finance (MOF) that is responsible for
providing government guarantees for infrastructure projects developed under the
PPP scheme, and the PT Sarana Multi Infrastructure (PT SMI), an SOE that provides
long-term financing and advisory services for infrastructure development in Indo-
nesia (Asian Development Bank 2020).
From an institutional perspective, PPPs in Indonesia have been driven by the
Ministry of National Development Planning/National Development Planning
Agency (Bappenas), the PPP Unit under the Ministry of Finance, and the PPP
Joint Office. From 1990 to 2019, 135 PPP projects across various sectors such as
electricity, information and communication technology (ICT), ports, roads, and
water have achieved financial closure through private investments. However, 12 pro-
jects worth a total of US$4.64 billion (approximately Rp64 trillion) were canceled.
64 M. Imaduddin and S. H. Kassim

The total investment made in the 135 PPP projects was approximately US$63.5
billion (approximately Rp881.3 trillion) (Asian Development Bank 2020).
From a sector perspective, energy has the dominant share of PPPs, followed by
the roads and water- and wastewater sectors. Excluding the outlier of railways,
which has had only one project, the sector with the highest average size of projects
reaching financial closure is energy, at US$598 million (approximately IDR 8.3
billion), followed by roads, at US$283 million (approximately IDR 3.9 billion). The
following figure depicts the total investment and the average size of PPP projects in
each sector between 1990 and 2019 (Asian Development Bank 2020).
Out of these 135 PPP projects that achieved financial closure, 19 PPP projects
were procured through direct appointment, and 39 were procured through a com-
petitive bidding process across various infrastructure sectors. The remaining projects
indicated that 77 projects were unsolicited (Asian Development Bank 2020).

2.3 Islamic Finance for Public–Private Partnership

in Indonesia

According to Alexander (2010) and Ahmad and Alawode (2017), one of the
alternative financing sources for developing PPP and infrastructure project is Islamic
finance, whereby its concept emphasizes the underlying tangible assets. It is, argu-
ably, in line with the PPP concept in managing the risk allocation by distributing to
the best possible parties in the transaction (Kociemska 2020).
Ijara and Istisna are the two most common instruments used in the long-term
infrastructure projects as mentioned by Ahmad and Alawode (2017), Manzoor et al.
(2017), Dieng (2019), and Felix and Abubakar (2019). In these instruments, Zawawi
et al. (2014) described that the IFIs bear the construction risks with the SPV. IFIs,
then, transfer this risk to the construction contractor in the other separate contract.
The other approach is to introduce an Islamic tranche and syndicated club deal
facility with the conventional loans, whereby this structure aims to bridge the idea of
all financing requirement cannot be fully facilitated by Islamic finance instruments
(Camacho 2005).
There are increasing efforts by emerging countries to mobilize Islamic finance
and private financing to enhance the quality of infrastructure projects through the
application of the PPP scheme (Ahmad and Alawode 2017). However, there are
several challenges to implement Islamic finance in the PPP and infrastructure pro-
jects. The main challenge is the availability of long-term facility from the Islamic
Financial Institutions (IFIs) to support this initiative (Rarasati et al. 2019).
Rarasati (2014) and Ahmad and Alawode (2017) also suggested that there is a
considerable knowledge gap regarding the understanding of concept and strategy of
Islamic finance to support the infrastructure challenges in developing countries and
to become alternative resource mobilization for infrastructure projects. The percep-
tion and knowledge from relevant stakeholders are key factors to promote more
Developing Conceptual Framework for Public–Private Partnership. . . 65

investors, government entities, and other stakeholders to be more aware of the merits
of Islamic finance in the infrastructure projects.
Moreover, Rarasati et al. (2019) implied that the investors’ behaviors and char-
acteristics as well as the government policies and regulations are also identified as
the key barriers to the implementation of Islamic finance in the infrastructure pro-
jects. The behaviors and characteristics of investors have preferences to invest in
higher return projects, the type of infrastructure assets, favorable tenors, preferred
financial institutions, fixed-return sharia structure, secure project, as well as the
reputation of the parties involved in the project (Rarasati et al. 2019; Imaduddin
and Sharofiddin 2021).
In the context of Indonesia, the country needs to address critical infrastructure
gaps and invest at least US$600 billion between 2014 and 2024 in building and
upgrading infrastructure (Lin 2014). The Government of Indonesia has set an
infrastructure target for the period of 2020–2024 with the proposed infrastructure
investment cost of IDR 6445 trillion or equivalent to 6.2 percent of GDP (Bappenas
2020). The capacity of the government to fund the infrastructure development
through government’s own budget is only IDR 2385 trillion or equivalent to
37 percent of total needs (Bappenas 2020).
The merger of the Islamic finance subsidiaries of state-owned banks in 2021 is
positive for Islamic finance sector in Indonesia (S&P Global 2022). The Indonesian
government has created Bank Syariah Indonesia (BSI) with a vision to be among the
top 10 global Islamic banks. It is also in line with the Government of Indonesia’s
plan to promote Sharia-compliant financing by creating a strong Islamic bank (S&P
Global 2022).
BSI is now the seventh largest bank in the country with assets of IDR 265 trillion
or equivalent to US$15 billion in 2021 (S&P Global 2022). This represents a
domestic market share of about 2.5% (Financial Service Authority 2021). The
bank will benefit from economies of scale and improved ability to raise funds at
competitive rates. It can leverage the wide reach of its three major stakeholder banks
and will be well positioned to grow considering Indonesia’s large Muslim popula-
tion. Associated revenue and cost synergies could lift profitability over the next
3–5 years (S&P Global 2022). With the conversion of two regional banks, namely,
Bank Pembangunan Daerah Riau Kepri and Bank Nagari, to become full-pledge
Islamic banks, the total asset of Islamic banks has reached 7 percent of the market
share of the banking industry in Indonesia. The Financial Service Authority (OJK)
has stated that the total Islamic finance asset in Indonesia as of September 30, 2021,
has increased year-on-year by 17.32 percent to IDR 1901 trillion or equivalent to US
$132.7 billion (S&P Global 2022).
Despite the increasing efforts by emerging economies to mobilize Islamic finance
for financing the infrastructure projects, the use of Islamic finance is still limited in
this context including in Indonesia (Ahmad and Alawode 2017; Rarasati et al. 2019).
According to the Comcec Report in 2019, Islamic banks in Indonesia invested less
than 10.00 percent of their portfolio in the infrastructure sector, that is, 8.40
percent (Comcec 2019). Despite the increasing efforts to mobilize Islamic finance
for financing PPP projects, so far there have been no projects funded under Islamic
66 M. Imaduddin and S. H. Kassim

finance instruments in the existing PPP projects that have reached “Financial Close”
with a total investment of US$67.27 billion (PPP Knowledge Lab 2020). Financial
Close is defined as the date of all conditions for disbursement of financing facility of
PPP project is achieved (World Bank 2017).

3 Relevant Theories for Conceptual Framework

3.1 The Importance and Nature of Framework

As formulated in the problem statement, the use of Islamic finance is still limited in
the PPP infrastructure projects (Ahmad and Alawode 2017). As a consequence,
exploring the implementation of Islamic finance is important to evaluate the benefit,
perception, and performance in developing PPP (public–private partnership) infra-
structure projects. According to Liu et al. (2014) and Uzunkaya (2017), the logical
framework of PPP concept can capture the cycle of the project.
In order to assess the critical issues and challenges of the PPP project, these
literature advised the framework of PPP framework comprises of the input, process
or activities, output, as well as outcome or the goal of the PPP project. In fact,
Uzunkaya (2017) also added the impact aspect after the outcome to capture the long-
term development objective. Liu et al. (2014) suggested that most prior studies
conducted for PPP evaluations only emphasize “time” and “cost” performances
that are basically input and output.
According to Ahmad and Alawode (2017), there are two relevant aspects in
developing PPP projects, namely, preparation of bankable and feasible projects, as
well as the mobilization of additional financing sources to finance PPP projects. In
the second aspect, Islamic finance can play a significant role as an alternative source
of financing to support the implementation of PPP infrastructure projects. It is,
therefore, very critical to mobilize the Islamic finance in PPP infrastructure projects.
Furthermore, developing the conceptual framework is important to achieve the
objectives of this study. It will use the concept developed by Liu et al. (2014) and
Uzunkaya (2017) that will particularly focus on the issues and challenges of PPP
projects vis-à-vis Islamic finance instruments mobilization.

3.2 Institutional Theory: Context of PPP Structures

Institutional theory is based on the concept of organizational value to persuade the

public in terms of legitimacy that deserves support in order to exist (Cappellaro and
Longo 2011; Carvalho et al. 2017; Casady and Peci 2021). Institutional theory
focuses on explaining similarity and common objective within organizational fields,
while neo-institutional theory seeks to explain how change occurs within organiza-
tions and institutions (Biygautane et al. 2019). Institutional PPPs enable the specific
Developing Conceptual Framework for Public–Private Partnership. . . 67

government services to reap great benefits when introduced as a complement to the

traditional public service provisions for a defined set of services and goals
(Cappellaro and Longo 2011).
The importance of institutional theory is in the analysis of institutions and
legitimacy as a way of understanding the innovation process within institutions
understanding them as social groups that share a particular perception and select
agendas, norms, and preferences (Carvalho et al. 2017). A successful implementa-
tion of PPPs relied on issues such as contract and process management, as well as
organizational forms and strategies (Biygautane et al. 2019).
In the context of PPP structures, institutional theory is important to regulate the
PPP arrangement from an innovation to procure infrastructure asset outside the
government’s budget. There have been considerable changes in the public sector
regulatory institutions in terms of responsible parties to steer the regulation itself and
how the regulation is operationalized (Demirag et al. 2009). The changes mainly
emphasize the value chain from inputs and process to performance and results
evaluation, outcomes, transparency, and accountability (Demirag et al. 2009).
Using the example in the United Kingdom, Demirag et al. (2009) argue that private
funding can only be used if it provides value for money (VFM) analysis for
off-balance infrastructure asset investment.
According to Cappelaro and Longo (2011), there are four pillars of institutional
PPP, namely, (1) a strategic market orientation to a specialized service area with
sufficient potential demand, (2) the allocation of public capital assets and the
consistent financial involvement of the private partner, (3) the adoption of private
administrative procedures in a regulated setting while guaranteeing the respect of
public administration principles, and (4) clear regulation of the workforce to align
the contracts with the organizational culture.
In relation to the Islamic finance, institutional theory is the most influential in
progressing Shariah governance as it contributes toward the organizational image,
helps to achieve religious legitimacy, and inspires a more robust regulatory envi-
ronment (Karbhari et al. 2020).
Implementing a PPP project successfully requires commitment and a range of
skills and expertise from the relevant institutions (World Bank 2017). Government
agencies and individuals responsible for implementing projects need a sound under-
standing of the needs of the particular sector, skill in economic and financial
appraisal of projects and PPPs, expertise in structuring privately financed infrastruc-
ture project contracts, expertise in procurement and contract management, and
experience in dealing with the private sector (World Bank 2017).
The main challenge in designing the institutional arrangements for PPPs is to
ensure that all resources and expertise are available to implement PPP projects
successfully. Responsibility for implementing a PPP project typically falls to the
ministry, department, or agency responsible for ensuring the relevant asset or service
is provided (World Bank 2017; Asian Development Bank 2020). However, partic-
ularly at the early stages of a PPP program, such entities usually have the full range
of skills and experienced required. Thus, other government entity such as PPP unit is
also involved in the process. Both in developed and developing countries, a strong
68 M. Imaduddin and S. H. Kassim

PPP central unit has been shown to be critical to a successful program (World Bank
2017).

3.2.1 Value Chain Theory: Relevance with PPP Cycle

Value chain is defined as the full range of activities that are required to bring a
product or a service from conception through the different phases of production
involving a combination of physical transformation and the input of various pro-
ducer services, delivery to final consumers (Faße et al. 2009). The value chain
mainly focuses on the market collaborating strategy, which emphasized the linkages
between the whole cycle of process from production, operation, and marketing
activities of the products and services in an effective and efficient manner (Kumar
and Rajeev 2016).
PPP projects present a contractual term of long-term concession agreement
(World Bank 2017). In a PPP intervention, the applied model comprises the causal
processes from inputs, related activities, outputs, and outcome in the whole process
(Uzunkaya 2017). The whole-life approach maximizes the efficiency of service
delivery. It is an end-to-end process to have an incentive to integrate service delivery
costs considerations at the core of the rationale for using PPPs for the delivery of
public services (World Bank 2017).
In order to assess the issues and challenges of the PPP project, the framework of
the PPP scheme in terms of exploring issues and challenges should go beyond the
input and output and includes process or activities as well as outcome or the goal of
the project (Uzunkaya 2017). The outcome aspect relates to capture the long-term
development objective of the PPP project. Liu et al. (2014) suggested that most prior
studies conducted for PPP evaluations only emphasize time and cost performances,
which are basically input and output.
Uzunkaya (2017) also emphasizes that the framework includes inputs, activities,
outputs, outcomes, and impacts as the hierarchical steps to combine the development
of the ultimate results of a PPP project. The theory of project finance and the theory
of public investments in relation to PPPs help define each of these steps and causal
connections among them. It is fundamental to depart from the social issue to be
addressed with the partnership within the configuration of the impact of value chain,
the framework of the partnership, and the key roles taken on by partnerships. This
leads to the overall mission of the partnership between public sector and private
sector, which has to be identified and measured (Uzunkaya 2017).

4 Developing Conceptual Framework

The primary purpose of conceptual framework is to explore the issues and chal-
lenges of Islamic finance mobilization in PPP infrastructure projects in the context of
Indonesia. Liu et al. (2014) mentioned that the framework focuses on the process of
Developing Conceptual Framework for Public–Private Partnership. . . 69

Table 2 PPP value chain variables

Value
chain Variables References
Input Project physical Liu et al. (2014), Ahmad and Alawode (2017), and
characteristics Uzunkaya (2017)
Value for money (VfM) World Bank (2012), Liu et al. (2014), Uzunkaya
(2017), and World Bank (2017)
Legal and concession World Bank (2012), Ahmad and Alawode (2017),
agreements and World Bank (2017)
Risk management Kok (2014), World Bank (2017) and Xing and
Guan (2017)
Resource mobilization Ahmad and Alawode (2017)
Procurement World Bank (2017), Asian Development Bank
(2018)
Shariah compliance Jalil (2006), Ayub (2007), Ahmad and Alawode
(2017) Rashid et al. (2018)
Process/ Resource utilization Minnie (2011), Yescombe (2011), Liu et al. (2014),
activities Uzunkaya (2017)
Contract management World Bank (2017), Adiyanti and Fathurrahman
(2021)
Project construction and World Bank (2017), Asian Development Bank
implementation (2020)
Health, safety, and environ- Hardcastle and Boothroyd (2003), Snodgrass
ment (HSE) (2013), World Bank (2017)
Output Time, cost, and quality Liu et al. (2014), Uzunkaya (2017), and Ahmad and
Alawode (2017)
Learning and growth Samii et al. (2002), Mohamad et al. (2018)
indicators
Operation and maintenance World Bank (2017), Soltani and Firouzi (2020)
Revenue driver Mu et al. (2011), World Bank (2017)
Stakeholder satisfaction Yuan et al. (2012), Wojewnik-Filipkowska and
Węgrzyn (2019)
Environment and social World Bank (2017), Asian Development Bank
governance (2020)
Outcome Project outcome (economic Aundhe and Narasimhan (2016), Kwofie et al.
and social outcome) (2016), and Uzunkaya (2017)
Maslahah aspect Jalil (2006), Kasri and Wibowo (2015), Ahmad and
Alawode (2017), Ayub (2019)
Source: Author’s own

quantifying the efficiency and effectiveness of action, and it is the prerequisite for
performance improvement in the implementation of the PPP project. The framework
also assists the study in exploring the feedbacks from the relevant stakeholders in
terms of perception and experience in this regard (Table 2).
According to Liu et al. (2014) and Uzunkaya (2017), the conceptual framework
of the PPP project model shall cover the whole cycle of PPP projects in order to
70 M. Imaduddin and S. H. Kassim

critically explore and identify the issues and challenges to implement Islamic finance
instruments. In line with the theory of value chain, the PPP cycle consists of four
value chain pillars, namely, input, process or activities, output, and outcome.

4.1 Input

Input is the process of the initiation stage for the development of PPP projects. The
public sector or the government assesses certain infrastructure sector where new
investment and improvements are required. A framework plan is prepared to focus
on the affordability of the project, the value for money from the option available, the
required project output, and the risks associated to the project and its mitigation plan.
The other consideration is what projects will attract the private sectors involvement
to participate in the project. According to World Bank (2012), Liu et al. (2014),
Koschatzky (2017), Uzunkaya (2017), Ahmad and Alawode (2017), and Mohamad
et al. (2018), the variables selected for the input consist of project physical charac-
teristics, value for money (VfM), legal and concession agreements, risk manage-
ment, resource mobilization, and procurement.

4.2 Project Physical Characteristics

Project physical characteristics entail the type of infrastructure assets as an underly-

ing PPP project. The characteristic is mainly divided into two main assets, namely,
hard infrastructure and social infrastructure (Ahmad and Alawode 2017). Hard
infrastructure is physical assets and supporting information technologies that pro-
vide basic services that are essential to economic activity and life quality such as
water desalination, toll road, airport, seaport, power plant and utilities, and Internet
and communication services. Social infrastructure is the type of asset that is essential
to the economy and human beings such as health, education, and financial assets.

4.3 Value for Money (VfM)

According to World Bank (2012), value for money means achieving the optimal
combination of benefits and costs in delivering services that is needed by the
government. PPP projects require evaluation of whether a PPP asset is likely to
offer better value for the public or the government if compared to the traditional
public procurement. Value for money analysis is used to assess specific PPP project
from both qualitative and quantitative aspects.
In particular, whether the proposal can be absorbed by the private sector investors
and the project can bring the economic value to the government. World Bank (2017)
Developing Conceptual Framework for Public–Private Partnership. . . 71

has provided general guidelines on the value for money for PPP projects. One of the
most common reasons for governments to turn to PPPs is the perception that PPPs
create fiscal space in enabling enhanced implementation of infrastructure projects
with upfront capital expenditure from the government often substituted by the
recurrent cost of meeting availability payments during the life of PPP projects.
Value for money is a key component of best value, and it has been viewed as the
principal benchmark of the strategic objective of PPPs. Some values of PPPs in
infrastructure development may not be entirely reflected by cost, but by other issues
such as project completion time and quality. The evaluation associated with VfM in
a PPP project is a complicated process, and the uses of absolute time and cost
measures do not reflect the complexity of PPP delivery (Liu et al. 2014).

4.4 Legal and Concession Agreements

The underlying transaction of a PPP project is the concession agreement between the
government entities or public agencies and private sector investors (World Bank
2012; Ahmad and Alawode 2017). The agreements are derived from the relevant
regulatory framework in the country. The draft of the agreements shall cover the
relevant mitigation of all project risks such as technical and engineering, economic,
social, and environmental aspects (World Bank 2017). The concession is the under-
lying contract for service payment and revenue generator for the private sector
investors. It also covers the dispute resolution from force majeure, default, liquidated
damages, choice of law, and litigation measures. The applicability of key agreements
of concession, offtake, and all types of PPP contracts is given (World Bank 2017).

4.5 Risk Management

PPP projects involve numerous risks associated with their implementation (Xing and
Guan 2017). Risk management is a matter of how to allocate the risks to the best
possible parties in the PPP projects. Risk management implementation aims to
reduce investment losses, take more important decisions, and gain mutual benefit
between the public and private parties (World Bank 2017). In the initiation stage of
the PPP project, the parties mutually agree to identify several key risks in the
transaction and decide on how to allocate them in the concession agreements. The
risks shall cover construction risk, completion and interface risk, operating risk,
social and environmental risks, and political and force majeure risk. The concept of
risk-sharing mechanism is also in line with the Islamic finance nature.
72 M. Imaduddin and S. H. Kassim

4.6 Resource Mobilization

Resource mobilization aspect is a critical part of the development of PPP projects.

Proper PPP implementation requires technical and financial resources mobilization
(Ahmad and Alawode 2017). Technical resource is provided by the involvement of
private sector from technology, expertise, and experience in managing the project.
Whilst financial resources are mainly equity investors and financial institutions to
provide long-term financial requirement to support the project. Islamic finance can
play a significant role as the provider of financial resources in developing PPP
projects.

4.7 Procurement

The PPP process consents government to originate the long-term commitment to the
development of new infrastructure assets for possibly within 20–30 years. In order to
provide the appointment of selected private sector to conduct the implementation of
PPP project, procurement process is required. Procurement aims to develop bidding
selection process to get the competitive private sector in developing PPP projects.
World Bank (2012) and Asian Development Bank (2018) have provided PPP
Procurement Guideline for the selected competitive bidding process cycle, namely,
bid evaluation process, contents of a bid package, contents of a PPP contract,
contract negotiations, as well as contract implementation and management.

4.8 Shariah Compliance

According to Jalil (2006), Ayub (2007), Ahmad and Alawode (2017), and Rashid
et al. (2018), Shariah compliance is the key element for developing the Islamic
finance in supporting the projects. It is to be in line with the principle of Muamalah
under Islamic jurisprudence. The main principle is the prohibition of riba (interest),
gharar (uncertainty), maishir (speculation/gambling), and other noncompliance
aspects in the transaction.

4.9 Process/Activities

The second pillar is process or activities. This stage relates to the implementation of
the PPP projects. It is often started by the achievement of Financial Close as the
milestone where all conditions related to the precedent of all financial requirements
have been fulfilled. The selected variables for this pillar consist of resource
Developing Conceptual Framework for Public–Private Partnership. . . 73

utilization, contract management, project construction and implementation, as well

as Health, Safety, and Environment (HSE).

4.10 Resource Utilization

Resource utilization relates to the utilization of qualified human resources, devel-

oped institutions, financial resources, technology and technical measures, and effi-
ciently functioning processes (Uzunkaya 2017). In a typical PPP structure,
government and private sector investor have dissimilar stages of expertise, knowl-
edge, and incentives in different project stages (Yescombe 2011). Private sector
focuses more on the financial return of a project; meanwhile, the government side
mainly emphasizes the economic benefits to the society (Minnie 2011). Resource
utilization generally emphasizes the performance measurement and effort to utilize
the available resources and capacity in conducting the PPP project (Liu et al. 2014).

4.11 Contract Management

PPP contract management is the process that enables all parties in the transaction to
meet their respective tasks and obligations in delivering objectives required under
the PPP contract (World Bank 2017; Adiyanti and Fathurrahman 2021). Once the
PPP contract has been finalized and the transaction has been effective, each respec-
tive party must conduct their specific role. Effective contract management requires
mutual cooperation between the government and private sector investor throughout
the project concession term. The other consideration is the PPP contract management
is to have proactive approach in implementing the project to mitigate future needs,
anticipated risks, and overcome with acceptable solution in unforeseen challenges
and situations. PPP contract management aims to accomplish continuous enhance-
ment in performance over the life of the PPP contract (World Bank 2017). Under the
typical PPP project, the supporting contracts also play an important role in the
implementation of the projects such as Engineering, Procurement, and Construction
(EPC) agreement, Operation and Maintenance (O&M) Agreement, and fuel supply
or spare part inventories agreement (World Bank 2017).

4.12 Project Construction and Implementation

This is the critical part of the construction and implementation of the project. Under
this development stage, the infrastructure asset in the PPP project is being
constructed. The government has selected the private sector to implement the project
under certain scenarios (World Bank 2017):
74 M. Imaduddin and S. H. Kassim

Design Build Finance Operate (DBFO). The responsibility of the private sector is
to design, build, finance, and operate the infrastructure asset under the PPP conces-
sion (World Bank 2017).
Build Operate Transfer (BOT). Under this regime, the private sector will con-
struct, implement, and operate the contract under predetermined period of time and
the asset will be transferred to the government after a certain period. The private
sector will implement the planning and design as per the PPP concession agreement
(Adiyanti and Fathurrahman 2021).
Build Own Operate (BOO). The government awards the right to design, finance,
build, and operate the PPP project to the private sector with the full ownership. The
private sector does not require to transfer the asset after the end period of the PPP
concession agreement (World Bank 2017).
Build Own Operate Transfer (BOOT). Private sector will design, build, own, and
operate the project under a certain period of time. After the end of concession
agreement, the asset will be transferred back to the government. The transferring
to the government is based on the pre-agreed price or at a market price to be agreed
upon at a later stage (World Bank 2017).
Build Own Lease Transfer (BOLT). The government awards the concession
agreement to finance and build a project to the private sector, which is leased back
to the government after the completion of the construction at agreed terms and
conditions. The asset is operated by the government, and the asset is transferred
back to the government at the end of the concession period (World Bank 2017).
Rehabilitate Operate Transfer (ROT). In this scenario, the asset already exists and
the private sector is responsible for conducting rehabilitation of specific infrastruc-
ture asset to meet the new technology and upgrade the interface system. The private
sector is also responsible to operate the asset and then to transfer back to the
government after the concession period ends (World Bank 2017).

4.13 Health, Safety, and Environment (HSE)

The Health, Safety, and Environment (HSE) aspect is a critical part of the PPP
implementation (Snodgrass 2013). Health and safety are related to the project and
surrounding community mainly focusing on the physical and nonphysical hazards of
the project, life and safety project infrastructure, general facility design, transporta-
tion, emergency preparedness and response, disease prevention, and monitoring
(Hardcastle and Boothroyd 2003).
The environment aspect focuses on the air emissions, energy conservation,
wastewater and ambient water quality, hazardous material management, waste
management, and contaminated environment. Certain financial institutions, such as
Islamic Development Bank and International Finance Corporation (IFC), have HSE
policy to be implemented by the private sector in implementing the PPP project
(Snodgrass 2013). It is also frequently monitored and part of the terms and condi-
tions under the financing agreements.
Developing Conceptual Framework for Public–Private Partnership. . . 75

4.14 Output

The construction completion of infrastructure asset built under the PPP project is the
main output. In some terminology, it is often defined as the Commercial Operation
Date (COD) or the first day of operation and the project starts to generate revenue
under the PPP Concession Agreement.

4.15 Time, Cost, and Quality

The performance measurement of the PPP project is often described under three
specific categories, namely, time, cost, and quality (Liu et al. 2014). Under the
normal circumstances, the time reflects the overall construction period needed to
complete the asset (Uzunkaya 2017). Cost is related to the overall budget to
complete the asset. Quality is the measurement against specific technical and
financial requirements stipulated under the terms and conditions of PPP concession
agreement (Liu et al. 2014). The three aspects are relevant to the output of the
completed PPP project.

4.16 Learning and Growth Indicators

Learning and growth emphasizes the assessment and evaluation of the underlying
construction performance, operational and financing experience. Lessons learnt from
the implementation of the project will provide a strategy to overcome the issues and
challenges in the future (Samii et al. 2002; Mohamad et al. 2018).

4.17 Operation and Maintenance

Operation and Maintenance (O&M) is the activities to undertake the commercial

operation and scheduled maintenance program of the PPP projects (Soltani and
Firouzi 2020). In a typical PPP project, the Project Company appoints the dedicated
operator to undertake this obligation. It is also recognized and absorbed by the
government through certain dedicated agreements. The scope of the tasks covers the
level of dedicated O&M services, performance standard to be achieved, incentive
mechanism, limits on liabilities, and scope of the authority’s obligations and relevant
permits (World Bank 2017).
76 M. Imaduddin and S. H. Kassim

4.18 Revenue Driver

Revenue driver is related to the service payment or availability payment relates to the
PPP project. Availability payment is defined as the investment return for private
sector in providing their services and is reimbursed through a predetermined
performance-based payment plan (Mu et al. 2011; World Bank 2017).

4.19 Stakeholder Satisfaction

Stakeholder satisfaction is a means of evaluating the PPP project performance and

implementation in areas such as change management, program management, and
project management. A response and experience metric-based stakeholders’ satis-
faction with a program, project, or initiative is given (Yuan et al. 2012). Stakeholder
satisfaction is driven by the necessity of a new approach to stakeholder analysis in
the PPP projects highlighting the need to understand and engage PPP stakeholders
and their influences on the project success and sustainable development (Wojewnik-
Filipkowska and Węgrzyn 2019).

4.20 Environmental, Social, and Governance (ESG)

Environmental, social, and governance (ESG) criteria are very important to measure
the output of the PPP project (World Bank 2017). Environmental criteria consider
how a project performs and how to mitigate the negative impact on the nature and
surrounding environment. Social criteria examine how it manages relationships with
employees, suppliers, customers, and the communities where the project operates.
Governance deals with the leadership, reporting, compliance with law, audit, internal
controls, and shareholder rights (World Bank 2017). In the context of PPP, ESG
criteria are implemented toward the financing agreement and project covenants as
the output of the project (Asian Development Bank 2020).

4.21 Project Outcome and Maslahah Aspect

Project outcome is the results that occur from creating the product or service
(Aundhe and Narasimhan 2016). Expected outcome is the changes in policies,
people, and communities that the PPP project aims to achieve with the output
(Kwofie et al. 2016). Project outcome focuses more on the broad mission. Project
outputs and deliverables are the infrastructure assets created as a result of the PPP
scheme plan (Uzunkaya 2017). Project outcomes are more challenging to measure as
Developing Conceptual Framework for Public–Private Partnership. . . 77

Theory of Value Chain

PPP Project Life Cycle

Process /
Input Output Outcome
Activities

Project Physical
Characteristics
Time, Cost, and
Value for Money Quality
Resource
(VfM)
Utilization
Learning and
Project Outcome
Legal and Growth Indicators
Contract (Economic and
Islamic Concession
Management Social Outcome)
Finance Agreements Stakeholder
satisfaction
Mobilization Project Maslahah
Risk
Construction and Aspect
Management Operation and
Implementation
Maintenance
Resource
Health, Safety,
Mobilization Revenue Driver
and Environment
(HSE)
Procurement Environment and
Social Governance
Sharia
Compliance

Institutional Theory

Fig. 2 Conceptual framework. (Source: author’s own)

it involves bigger picture ideas. If properly managed, PPPs offer potential benefits
and promising outcomes over conventional procurement methods, realizing the
benefits require complex multidisciplinary procedures and satisfaction of a variety
of stakeholders with diverse incentives and objectives (Uzunkaya 2017).
According to Jalil (2006), the concept of maslahah and Shariah objectives
establishes a more detailed order of priorities among competing projects, rationalizes
choices under the light of the Shariah, and ensures the coherence of the selected
project with the Islamic system. The public and private institutions could establish
ranking of priorities for the potential competing projects based on the maslahah and
Shariah objectives analysis of the projects to determine the best solution for
resources allocation in an Islamic framework (Jalil 2006). The study will focus on
economic, social outcomes, and maslahah aspect (Fig. 2).

5 Conclusion

This study aims to develop a conceptual framework based on the cycle of the PPP
process using the institutional theory and value chain theory. The institutional theory
is important to regulate the PPP arrangement from being an innovation to procure
infrastructure asset outside the government budget. PPP projects present a
78 M. Imaduddin and S. H. Kassim

contractual term of long-term concession agreement, and the applied PPP concept
comprises the causal processes from inputs, related activities, outputs, and outcome
as defined under value chain theory. The primary purpose of conceptual framework
is to explore the status and challenges of Islamic finance mobilization in PPP
infrastructure projects in Indonesia. The framework also assists the study in explor-
ing the feedbacks from the relevant stakeholders and formulating way forward. The
study is expected to contribute to proposing the applicable policy and framework
recommendation, strategy, and incentives to mobilize proper Islamic finance
resources for the development of PPP projects in Indonesia.

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Takaful on COVID-19 Coverage: Case
Study of Malaysian’s General Takaful
Operators

Alya Nabihah Idris and Marhanum Che Mohd Salleh

Abstract COVID-19 has been declared a pandemic by the World Health Organi-
zation since the year 2020 and has become a global issue in the health and economic
sectors. The pandemic has affected millions of people worldwide by reducing health
rates and financial well-being. This has also led to mental health problems. This
research aims to observe and compare the COVID-19 coverages offered by general
takaful operators in Malaysia. This research adopts a qualitative approach where
secondary data is collected through the websites and documentation of the sample of
three general takaful operators. Later, a comparative analysis is conducted to com-
pare the COVID-19 coverage offered by the operators. The analysis found that
various coverages of COVID-19 have been offered by general takaful operators.
The general takaful operator that has offered more initiatives to help COVID-19
victims was Etiqa General Takaful Berhad in TripCare 360 Takaful (six coverages),
followed by Zurich General Takaful Malaysia Berhad in Z-CoVac Protect Takaful
(two coverages). The coverage varied from medical expenses to COVID-19 post-
vaccination inconvenience or death. The findings from this research reveal that each
operator has put effort into giving the best COVID-19 coverage for their customers.
This research is significant to the academic literature as well as industry players in
their effort to provide the best coverage against the pandemic through product
innovation in order to fulfill society’s needs and remain reliable in the industry.

1 Introduction

The COVID-19 pandemic has had many impacts that affected both health and
economic activities around the world. The epidemic originated in Wuhan City,
China, has conquered the world since December 2019 (Elengoe 2020) and has
become a heavy crisis with various levels of strength in a short period of time

A. N. Idris (✉) · M. C. M. Salleh

Department of Finance, Kuliyyah of Economics & Management Sciences, International Islamic
University Malaysia, Kuala Lumpur, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 83

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_7
84 A. N. Idris and M. C. M. Salleh

(Meyer et al. 2020). By March 12, 2020, the World Health Organization (WHO)
stated that COVID-19 had become a pandemic with millions of deaths and infections
around the world (Code Blue 2020). The rapid spread of the virus led the govern-
ment to initiate lockdown to reduce the infection among people. This initiative has
created a bigger problem, which is the economy. The pandemic that started from a
health emergency has turned into a global financial crisis (Mahadi and Ismail 2021).
COVID-19 also has an impact on psychosocial by creating mass chaos, financial
damage, and economic strain (Khairi et al. 2020). Various sectors have been closed
temporarily or permanently. It resulted in unemployment and temporary leave
among workers. Stavrunova and Yerokhin (2008) stated that unexpected job loss
is a significant life event that affects personal wealth and generates financial hard-
ship. Other than that, the health rate is also decreasing, and the death amount from
COVID-19 keeps increasing every day. The impact on the economy and health has
affected people’s financial well-being. Many people have been admitted to the
hospital and have been burdened by the hospital fee due to loss of income since
they are unable to work because of COVID-19. People with low income struggle to
survive in the pandemic and have also been obliged to pay bills. Moreover, disrup-
tion in financial well-being can lead to mental health problems.
In order to reduce the burden of people’s financial strain and health costs, the
takaful industry in Malaysia steps up to offer protection and coverage due to
COVID-19 to help people and ease their financial well-being. As takaful is one of
the mechanisms to mitigate hardship and poverty (Patel 2004; Fisher 2000), they
should ensure policyholders’ lives and assets against any unforeseen misfortune,
disaster, or catastrophe (Mahadi and Ismail 2021). All takaful operators in Malaysia
responded to the call by offering various benefits and products of coverage against
COVID-19. However, the operators have limited capacity to offer benefits for
COVID-19 victims as it will involve high costs due to increased COVID-19 cases
at that time. Thus, this research explores and compares general takaful products
offered to cater to COVID-19 cases in the Malaysian takaful industry.

2 Literature Review
2.1 Takaful Coverage for COVID-19 in Malaysia

Malaysia is not exceptional to receive negative impact from COVID-19. Despite the
coronavirus epidemic giving Malaysia both public health disaster and a financial
disaster, takaful operators are committed to ensuring that all aspects of takaful
protection for policy/certificate holders are unaffected by COVID-19 in Malaysia
and that all essential services to policy/certificate holders are available during this
time (Eldaia et al. 2021). According to Persatuan Insurans Am Malaysia (PIAM)
(2021), pandemic-related risks are often not covered by any insurance or takaful
plans anywhere in the world. The omission is due to the difficulty of pricing
coverage for a once-in-a-lifetime event like a pandemic, which has an incalculable
Takaful on COVID-19 Coverage: Case Study of Malaysian’s General. . . 85

impact and cost. Because COVID-19 is a pandemic, it is not covered by medical or

health insurance or takaful benefits. However, Eldaia et al. (2021) mention that to
keep the economy stable and keep people safe, takaful companies in Malaysia take
practical steps to fight against the odds. Since early 2020, the insurance and takaful
industries have taken dedicated steps to aid policy/certificate holders who have been
financially and physically impacted by the epidemic (The Sundaily 2021).
One of the takaful actions is an input of RM8 million from the COVID-19 Test
Fund (CTF), which is guaranteed by insurance and takaful, to support the MOH
efforts to conduct additional coronavirus testing for Malaysians (Eldaia et al. 2021).
PIAM (2021) reported that RM8 million CTF was established on March 20, 2020, to
allow policyholders and certificate holders to be tested for COVID-19. Life Insur-
ance Association of Malaysia (LIAM), Malaysian Takaful Association (MTA), and
Persatuan Insurans Am Malaysia (PIAM) announced that a reimbursement up to a
maximum of RM300 for COVID-19 testing (one reimbursement per individual)
could be applied by medical insurance policyholders and takaful certificate holders
to increase the number of tests that can be supported by the CTF. In the next year
after the fund release, LIAM, MTA, and PIAM (2021) announced that following the
increase in daily COVID-19 instances and to urge more Malaysians to take the tests,
the industry pledged another RM2 million on May 11, 2021, to bring the total to
RM10 million. It has been reported that over 65,000 policy/certificate holders have
benefited from the CTF.
Next, in response to the country’s pressing needs in the early stages of the
pandemic in 2020, the majority of life insurers and takaful operators have provided
supplemental benefits such as daily hospital income to policy/certificate holders
(PIAM 2021). In early February 2020, takaful operators in Malaysia provide cash
relief for the certificate holders upon COVID-19 diagnosis, the coverage for hospi-
talization due to COVID-19, and also death benefit due to the virus (MTA 2020).
The Sundaily (2021) disclosed that in the year 2021 individual life insurers and
family takaful operators had extended cash relief efforts for customers diagnosed
with COVID-19, including a cash allowance for hospitalization (RM150-RM250 per
day for up to 30 days of hospitalization) and a special lump-sum death benefit
(ranging from RM5000 to 20,000) upon the insured or covered person’s death.
Besides, life insurers and family takaful operators have pledged additional funds to
assist policyholders in the form of medical assistance for COVID-19 treatment in
government or private hospitals, as well as serious vaccine side effects under the
National Immunisation Programme or PICK, from April this year to December 2021
(Life Insurance Association Malaysia (LIAM), Malaysian Takaful Association
(MTA), and Persatuan Insurans Am Malaysia (PIAM) 2021). PIAM (2021)
acknowledged that individual insurance companies and takaful operators have also
launched numerous programs to assist policy/certificate holders. However,
policyholders and certificate holders affected by COVID-19 are recommended to
check with their respective life insurance companies/takaful operators for more
information as the flexibility granted varies from business to company (LIAM 2020).
The Sundaily (2020) reported that according to BNM life insurers and family
takaful operators would allow COVID-19-affected policyholders and takaful
86 A. N. Idris and M. C. M. Salleh

participants to defer regular premium or contribution payments due under life

insurance policies and family takaful certificates for 3 months without affecting
policy coverage. This privilege started on April 1, 2020, until December 31, 2021.
Life insurers and family takaful operators can give this flexibility through a no-lapse
guarantee, an extension of the grace period, or any other method that keeps the
policy/certificate intact during the deferral time (LIAM 2020). This relief measure
announced by LIAM and MTA also included the additional assistance of which the
policyholder and takaful participant affected by COVID-19 can renew an expired
policy or certificate. Another benefit is the afflicted policyholders, and takaful
participants are allowed to continue to meet their premium or contribution payments
with their policies or certificates maintained. This benefit could include revisions to
the sum assured or covered, premium or contribution structure adjustments, and
conversion to a paid-up policy. Other than that, fees and charges for the policy or
certificate modifications will be waived. This additional relief assistance also
allowed any penalties or repercussions for late premium or contribution payments
to be waived, especially if policyholders or takaful participants affected by COVID-
19 cannot access electronic payment channels during the MCO (LIAM 2020). As of
May 17, over 1.2 million life insurance policyholders and half a million family
takaful certificate holders have benefited from the deferment of premium/contribu-
tion payment initiative with premium/contribution value amounting to over RM2.6
billion for life insurance and RM0.8 million for family takaful that has been deferred
respectively (The Sundaily 2021).

3 Methodology

The qualitative research made the explanation and exploration available within the
context of takaful coverage for COVID-19 among general takaful operators in
Malaysia to give values and understandings to the topic studied. Case study research
is conducted by collecting secondary data among general takaful operators in
Malaysia to observe the takaful coverage for COVID-19. This study relies on
secondary data that the researcher collects from all product-related information
disclosed by the general takaful operators at their website. In detail, this study
utilizes product disclosure sheets and advertisements published on the website of
the respective operators as the main reference for document analysis. This research
chose the case study method because the source of this research derives from
observations and documents to investigate the takaful coverage for COVID-19
offered by general takaful operators in Malaysia.
As part of a qualitative study, nonprobability sampling is used in this research.
Nonprobability sampling is a sampling technique that uses nonrandom methods to
extract samples (Showkat and Parveen 2017). This sampling method is suitable for
research on case study as it tends to focus on small samples and is intended to
investigate a real-life occurrence rather than make statistical assumptions about the
general population (Yin 2003). The sample for this study is selected from the
Takaful on COVID-19 Coverage: Case Study of Malaysian’s General. . . 87

population of general takaful operators in Malaysia. There are four general takaful
operators in Malaysia. For this research, a sample of the top three general takaful
operators was chosen based on their gross premium/contribution received over the
year 2019. The sample was collected from The Malaysian Insurance Directory 38th
Issue 2020/2021. Gross premium/contribution is chosen as the component to select
the sample of takaful operators for, according to Saad (2012), the management of
expenses and commission is utilized as input elements in the effectiveness measure
of financial performance between Islamic and conventional insurance, while pre-
mium and net investment income are used as output factors. Three general takaful
operators with the highest gross premium/contribution for the year 2019 are Etiqa
General Takaful Berhad (RM 1,513,789,000), Syarikat Takaful Malaysia Am
Berhad (RM 723,511,000), and Zurich General Takaful Malaysia Berhad
(RM 621,362,000).
This study analyzes data using document analysis and comparative analysis
techniques. Document analysis is a method for systematically studying and evalu-
ating documents, whether they are printed or electronic (computer-based and
Internet-based) in nature (Bowen 2009). Meanwhile, a comparative study is a
method for analyzing phenomena and comparing them to uncover points of distinc-
tion and resemblance (MokhtarianPour 2016). The data of takaful products collected
from general takaful operator websites were listed and analyzed through documen-
tation analysis according to plan type for each operator. After that, the data of the top
three general takaful was put into a comparison table based on products, benefits
offered, amount of contribution, and fees charged or contracted used in the product.
These aspects were analyzed among the three selected takaful operators to give the
comprehensive and systematic results of takaful coverage of COVID-19 in
Malaysia.

4 Findings and Discussion

Based on the documentation analysis, the coverage for COVID-19 that was offered
by three general takaful operators is shown in Table 1. The three general takaful
operators are Etiqa General Takaful Berhad, Syarikat Takaful Malaysia Am Berhad,
and Zurich General Takaful Malaysia Berhad. The analysis of general takaful
operators is focused on the product that offers coverage for COVID-19 by the

Table 1 COVID-19 coverage by general takaful operator

No. Takaful operators COVID-19 coverage
1 Etiqa General Takaful Berhad TripCare 360 Takaful
2 Syarikat Takaful Malaysia Am Berhad Takaful mcClick MozzCare
3 Zurich General Takaful Malaysia Berhad Z-CoVac Protect Takaful
Source: Author’s findings
88 A. N. Idris and M. C. M. Salleh

benefits offered, amount of contribution, fees charged, and contract used in the
product.

4.1 Case Study 1: Etiqa General Takaful Berhad

4.1.1 TripCare 360 Takaful

TripCare 360 Takaful product protects the covered person against specified events
that may occur while domestic or foreign travel, whether for business or pleasure. It
covers things like accidental death or permanent disability, medical expenses
resulting from an accident or illness, different travel problems, baggage and/or
personal effects losses or damages, personal liability, and emergency services.
While this product initially did not cover medical expenses related to communicable
diseases that require quarantine by law, Etiqa offered a special waiver for the
medical exclusion to give medical coverage against COVID-19. However, after
the travel restriction, the coverage for COVID-19 has fallen back under the
exclusion.
The benefits vary depending on the type of occurrence and the amount of plan
coverage chosen. There are seven benefits covered by Etiqa in this product: the death
or permanent disability, medical expenses, travel inconvenience, losses or damages
to baggage, personal effects, personal money and/or travel documents, personal
liability, emergency services, and an optional benefit for adventurous activities. As
Etiqa offered a special waiver in this product, the coverage for COVID-19 was
included under medical expenses (Section B) as shown in Table 2, which is Medical
Expenses Benefit. The special waiver of medical coverage offered by Etiqa enables
the certificate holders to claim this benefit for medical treatment due to COVID-19
during the course of their travel, which is originally under the exclusion. For
Section B, Etiqa shall pay the essential incurred expenses in B1 to B6 within the
period of takaful that gives rise to the claim resulting from the death of the person
covered, bodily injury, or illness during their trip up to the limit of the benefit amount
as provided in the schedule of benefits. These medical expense benefits are only
applicable to accidental causes when traveling within the United States. However,
the medical cover for illness is only relevant to the International trip plan as the
domestic trip plan only covers medical expenses due to accident only. This means
COVID-19 medical cover is available for the international trip plan only.
The certificate holder must pay the overall contribution is determined by the
number of covered persons, their present age, the level of coverage, the area covered,
and the length of the trip. The number of covered persons and their present age is
divided into individual adult (18–70 years old), individual senior citizen
(18–70 years old), individual and spouse adult, and family. For a family, the
contribution payment is on adults and children who are unmarried and/or unem-
ployed. They must be at least 45 days of age and not more than 18 years of age. If
studying full time in a recognized tertiary institution, they must be not more than
Takaful on COVID-19 Coverage: Case Study of Malaysian’s General. . . 89

Table 2 Schedule of benefits in TripCare 360 takaful

Benefit amount (RM) per person by level of
cover
Summary of benefits (per any one accident/ International
incident, per trip) Domestic Silver Gold Platinum
The maximum aggregate limit of liability is RM5,000,000 per one accident/incident. If the
aggregate amount of all the benefits payable under this contract exceeds this limit, the benefit
payable to each covered person shall be proportionately reduced such that the total of all benefits
paid does not exceed this limit
Section B—medical expenses, in excess of Due to Due to accident or illness
RM100 accident
only
B1. Medical-related expenses (up to) 50,000 100,000 300,000 500,000
B2. Follow-up treatment expenses (up to) 5000 5000 10,000 30,000
B3. Alternative treatment expenses (up to) Not covered Not Not 1000
covered covered
B4. Compassionate care (up to) Not covered 5000 5000 5000
B5. Child care/guard and return of child(ren) Not covered 5000 5000 5000
(up to)
B6. Daily hospital income/hospital confinement 150 per day 150 per 250 per 350 per
allowance (maximum of 20 days) day day day

23 years of age on the effective date of takaful. The level coverage consists of
domestic trip plan and an international trip plan (silver, gold, and platinum). The
length of the trip depends on the number of days, which is divided into a certain
number of days, additional week, annual, or by adventurous activities. The coverage
for this product is available on a trip-by-trip basis or on an annual basis. The
coverage is for a year on an annual basis, and the certificate can be renewed annually.

4.2 Case Study 2: Syarikat Takaful Malaysia Am Berhad

4.2.1 Takaful myClick MozzCare

Takaful myClick MozzCare is a plan coverage for dengue fever or Zika virus. If the
certificate holder is diagnosed with dengue fever or the Zika virus during the
coverage period, a lump-sum payment will be paid to him/her. As this plan works
with Zika virus coverage, it is also applicable to COVID-19 coverage. However, this
plan has already closed its offers and is not available at the moment. Under this
product, the certificate holder can choose three plans covered in the benefit for Zika
and dengue. The duration of this coverage for the three plans is for 1 year, which
means the certificate holder needs to renew the cover annually. The plans available
for this product are depicted in Table 3.
The contribution that the certificate holder needs to pay for this product varies on
the plan chosen by them. It is RM40.00 for Bronze Plan, RM55.00 for Silver Plan,
90 A. N. Idris and M. C. M. Salleh

Table 3 Benefits of Takaful Sum covered

myClick MozzCare
Benefits Bronze plan Silver plan Gold plan
Dengue RM 2000 RM 3000 RM 4000
Zika RM 2000 RM 3000 RM 4000

Table 4 Benefits of Z-CoVac Protect Takaful

Basic cover Upgraded cover
Benefit Benefit description (RM) (RM)
A Accidental death and permanent disablement 2000 10,000
B COVID-19 post-vaccination death 2000 10,000
C COVID-19 post-vaccination inconvenience 500 2000
benefit

and RM70.00 for Gold Plan. The contribution needs to be paid annually by the
certificate holder. On the other hand, two types of fees charged for this product are
the wakalah fee/administration fee and stamp duty. The administration fee or
wakalah fee includes marketing and administration expenses where the certificate
holder needs to pay 60% of contribution for the fee charged. When the contribution
is paid, the charge will be deducted in advance. Another fee incurred is stamp duty,
in which the certificate holder needs to pay RM10.00 for the individual certificate.
Tabarru’, wakalah, and qard are the three Shari’ah concepts applicable in this
contract.

4.3 Case Study 3: Zurich General Takaful Malaysia Berhad

4.3.1 Z-CoVac Protect Takaful

Z-CoVac Protect Takaful provides compensation in the event of disability or death

caused exclusively and directly by an unexpected, unforeseeable, and fortuitous
incident. COVID-19 post-vaccination advantages are also covered by this product.
This product is available for Zurich employees, intermediaries, strategic partners,
and policyholder/certificate holders from selected Zurich products. The selected
products are Personal Sentinel Version 3 Takaful and Personal Sentinel Version
3 Plus Takaful. Personal Sentinel Version 3 Takaful is a yearly renewable product
that pays out in the case of bodily damages, disablement, or death caused purely and
directly by an unforeseen and fortuitous incident. Meanwhile, Personal Sentinel
version 3 Plus Takaful is a yearly renewable personal accident takaful that pays out
in the case of bodily harm, disability, or death caused purely and directly by an
unforeseeable incident. Z-CoVac Protect Takaful provided three types of benefits
under this product: A, B, and C. Table 4 shows the benefit description, and the
number of basic and upgraded cover plans for each benefit.
Takaful on COVID-19 Coverage: Case Study of Malaysian’s General. . . 91

The difference between the basic coverage plan and upgrade cover plan is in the
duration of coverage, which is 30 days initiated on the vaccination date of COVID-
19-approved vaccine for basic cover and 60 days for upgrade cover. The coverage
for benefit A is valid for any events related to accidental death and permanent
disablement. On the other hand, benefit B coverage comes into action if the event
related to COVID-19 Post Vaccination Death happens to the person covered under
either of two conditions. First, after receiving the dose(s) of the COVID-19-
approved vaccine, the person covered is diagnosed with an adverse event following
immunization within the period of coverage and dies as a result of the adverse event
following immunization within 12 consecutive months. Second, either he or she is
diagnosed with COVID-19 during the period of coverage after receiving the dose
(s) of COVID-19-approved vaccine and dies as a result of COVID-19 within
12 months. This benefit is only applicable to one of the terms listed in benefit B,
not both. Meanwhile, benefit C or COVID-19 Post Vaccination Inconvenience
Benefit is a benefit for the drawback resulting from post-vaccination during the
period of coverage.

5 Conclusion and Recommendations

The documentation analysis indicates that for general takaful business most of the
operators have offered coverages for COVID-19 attached to a specific product. The
operator that provided the highest number of coverage is Etiqa General Takaful
Berhad in TripCare 360 Takaful (six coverages on medical expenses for travelers),
followed by Zurich General Takaful Malaysia Berhad in Z-CoVac Protect Takaful
(two post-vaccination coverage), then Syarikat Takaful Malaysia Am Berhad in
Takaful myClick MozzCare (one coverage upon COVID-19 diagnosed). The anal-
ysis of COVID-19 products offered by general takaful operators was done based on
their benefits offered, amount of contribution, fees charged, and contract used in the
product. For example, one of the medical benefits offered by Etiqa is medical-related
expenses. The benefit is applicable for an international trip plan, and the amount can
be claimed in a range of between RM100,000 and RM500,000 depending on the
plan type. On the other hand, Zurich offered coverage on inconvenience or death due
to COVID-19 vaccination with the claim amount between RM500 and RM2,000,
while STMAB offered the coverage between RM2,000 and RM4,000 upon COVID-
19 diagnosis. The contribution for TripCare 360 Takaful is in the range between
RM20 and RM2,000 depending on the number of days’ trip, individual, and plan.
The contribution for Z-CoVac Protect Takaful coverage is in the range between
RM0 to RM18.00 depending on the plan, while it is between RM40 and RM70 for
the contribution amount in Takaful myClick MozzCare. The fees included in these
products are all the same, which are wakalah fees, stamp duty, and service tax (only
for TripCare 360 Takaful and Z-CoVac Protect Takaful).
In addition, the comparatives analysis has found that the coverages for COVID-
19 offered by general takaful operators were compared based on their Shari’ah
92 A. N. Idris and M. C. M. Salleh

concepts, benefits offered, contribution amount, and fees charged. Wakalah and
tabarru’ are the Shari’ah concepts applied by Etiqa, STMAB, and Zurich in their
products. Other Shari’ah concepts on qard are both applied by STMAB and Zurich,
while hibah and ju’alah only applied by Zurich in their products. The benefits offered
were different from each of the products depending on their purpose. Etiqa offered a
special waiver on medical coverage due to COVID-19 for customers who purchase
their travel product (TripCare 360 Takaful), STMAB offered the benefit of lump-
sum payment upon COVID-19 diagnosed (Takaful myClick MozzCare), and Zurich
offered the benefit on hospitalization and death caused by the side effects of COVID-
19 vaccine (Z-CoVac Protect Takaful). The contribution payment is also different
between the products. The contribution payment from Etiqa product is based on the
number of individuals, days of the trip, type of plans, and trip area. Meanwhile, the
contribution payment from STMAB and Zurich was based on the type of plans or
covers taken by the certificate holders. STMAB applied annual contributions from
three plans while Zurich applied contributions per coverage day, between 30 days
and 60 days of coverage. The fees charged from TripCare 360 Takaful, Takaful
myClick MozzCare, and Z-CoVac Protect Takaful are all the same wakalah fee but
different charges between each other, which range between 45% and 60% of the
contribution.
As this research was conducted during the COVID-19 pandemic, the implemen-
tation of various MCOs limited the research options on methodology. This research
was conducted online, which depends solely on the takaful operator’s website to
collect data on takaful products. Furthermore, the data of takaful products on
COVID-19 that is not available on the website because the period offers end need
to be collected by emailing the takaful operators. During the MCO, many takaful
operators’ staff were working from home and sometimes late in replying to the
email. The availability of their customer service became limited and time-consuming
as well. From the limitations discussed, a few future studies are suggested to fill in
the gap on this topic. A study on customer satisfaction with the COVID-19 product,
awareness of COVID-19 coverage, and a study on the financial performance of
takaful operators during COVID-19 are some recommendations to expand this topic
area. In the future, where the COVID-19 infection reduction and movement restric-
tion are completely abolished, other methodology for qualitative study such as
interviews can be conducted to add more future studies on this topic. Some sugges-
tions on the study, such as customer satisfaction with COVID-19 product and
awareness of COVID-19 coverage, are among the study that suits the methodology.

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The Impact of Islamic Branding
on Customer Loyalty with Customer
Satisfaction as an Intervening Variable

Abdul Muizz Abdul Wadud and Layaman

Abstract The purpose of an Indonesian Islamic bank is to provide the community

with financial services based on sharia law. Currently, the Bank Sharia Indone-
sia (BSI) is the largest Islamic bank in Indonesia. The BSI branch office closest to the
city center is BSI Cirebon. The existence of BSI is expected to be able to provide
satisfactory service to its customers. BSI is the result of a merger of three state-
owned Islamic banks, namely, BSM, BNIS, and BRIS. Customers perceived various
changes following the merger; thus, this study was driven by the level of loyalty of
customers who had transferred their accounts to BSI. This research was conducted to
examine whether Islamic branding and customer satisfaction had an effect on
customer loyalty at BSI Cirebon. This study used quantitative methods with a
sample size of 100 respondents. Sampling used the solving technique with purposive
sampling method. The data analysis techniques used in this study include the
research instrument test, classical assumption test, hypothesis testing, path analysis,
and the coefficient of determination test. According to the partial t-test calculation,
Islamic branding has a positive and substantial effect on consumer loyalty. Customer
satisfaction is positively influenced by Islamic branding. Customer satisfaction has a
big and beneficial impact on customer loyalty. Islamic branding has a positive and
considerable impact on customer loyalty, which is mediated through BSI Cirebon
customers’ satisfaction. Based on the calculation of the f-test (simultaneously)
customer satisfaction and Islamic branding on customer loyalty has an f-count
greater than f-table (21,820 > 3.94) and a significance value of 0.000 < 0.05. This
means that Islamic branding and customer satisfaction variables affect customer
loyalty together.

A. M. A. Wadud (✉)
International Islamic University of Malaysia, Kuala Lumpur, Malaysia
Layaman
Institute of IAIN Syekh Nurjati Indonesia, Cirebon, Indonesia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 95

N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_8
96 A. M. A. Wadud and Layaman

1 Introduction

1.1 Background

Since the early 1990s, when Bank Muamalat Indonesia was established, Islamic
banks have developed in Indonesia. Gradually, Islamic banks have been able to
address the requirements of those who seek banking services in accordance with the
principles of Islamic law to which they adhere, particularly those pertaining to the
prohibition of usury and nonproductive speculative activities such as gambling and
ambiguity that violate the principles of fairness in transactions, as well as the
commitment to direct financing and investment in commercial activities that are
moral and permissible.
Bank Syariah Indonesia emerged in serving the local community, one of which is
the city of Cirebon. Cirebon City is included in the city that has a majority Muslim
community. Hence, Islamic financial services are needed in the midst of the people
of the Cirebon City. The data for the people of Cirebon City based on their religion
are provided in Table 1.
According to Table 1, the majority of Cirebon population are Muslims, implying
a need for sharia-compliant financial services. BSI is one of the most interesting
banks among the general public. The Top Brand Awards data for 2018–2019 show
public interest in Indonesian Islamic banks as shown in Table 2.
According to Table 2, BSI customers who were previously customers of BSM,
BNIS, and BRIS have a higher percentage than their competitors, BCA Syariah and

Table 1 Cirebon city popu- Religion Unit Men Women

lation based on religion
Islam People 161,302 158,931
Catholic Christian People 3085 3489
Protestant Christian People 6842 7521
Budha People 1045 1117
Hindu People 47 56
Kong Hu Cu People 30 26
Other People 5 1

Table 2 Cirebon city population based on religion

2018 2019 2020 2021
Brand TBI Brand TBI Brand TBI Brand TBI
BSM 27.6% BRI-S 29.1% BRI-S 29.5% BRI-S 29.2%
BRI-S 27.5% BSM 21.2% BSM 20.3% BNI-S 22.6%
BNI-S 27.0% BNI-S 15.4% BNI-S 19.6% BSM 19.9%
BCA-S 6.5% BCA-S 15.4% BCA-S 11.2% BCA-S 12.6%
Bank 4.2% Bank 4.7% Bank 3.3% Bank 4.2%
Muamalat Muamalat Muamalat Muamalat
The Impact of Islamic Branding on Customer Loyalty with. . . 97

Bank Muamalat. As a result, this demonstrates the public’s strong interest to save
at BSI.
Azizah (2012) stated that banks recognize the importance of the customer aspect
in this era of globalization. As a result, businesses must establish, maintain, and
enhance stronger relationships with their customers by providing high-quality ser-
vices. Customer satisfaction is defined generally as a person’s experience of joy or
disappointment as a result of a comparison between his opinion and expectations of
bank products.
Consumer satisfaction and Islamic branding are two factors that impact customer
loyalty. Customer satisfaction should be emphasized so that Islamic banking can
maintain its existence and thrive in a highly competitive banking sector. Hence,
customers who are fully satisfied will be intensely loyal (Ardiyanto 2013).
According to various statements above, the author would like to expand the study
with a more in-depth analysis of the impact of Islamic branding on customer loyalty
with customer satisfaction as intervening variable.

2 Literature Review

2.1 The Concept of Islamic Branding

According to Islamic business ethics, the six basic elements of Islamic ethical
standards related to business activities are truth, trust, honesty, sincerity, knowledge,
and justice. The author shows various publications related to the topic or issue being
studied in this literature review, notably Islamic branding, customer happiness, and
customer loyalty. This literature review was carried out to determine the conceptual
framework of the subject being studied.
Alserhan (2010) stated that Islamic branding is a concept with several definitions;
it may be both a differentiator and a policymaker at the same time. Islamic branding
is a sharia identity that demonstrates the halal component of a product or service. As
regards financial institutions, consider Islamic commercial banks, sharia coopera-
tives, and sharia pawnshops.
As Wilson and Liu (2011) argued, the idea of Islamic branding is quite recent.
Islamic branding is a marketing strategy that embodies a number of Islamic ideals,
including respect for responsibility and a fundamental knowledge of sharia law.
Muslim clients are addressed through Islamic branding that complies with sharia
standards in both conduct and the execution of marketing messages.

2.2 The Concept of Customer Satisfaction

According to Bitner et al. (1997), satisfaction is defined as the consumer’s response

to the evolution of disinformation (disinformation) or consumer responses regarding
98 A. M. A. Wadud and Layaman

the fulfillment of needs and actual product loyalty, which is felt that in this increas-
ingly fierce competition, more producers are involved in fulfilling the needs of
consumers’ desires. As a result, every business entity must prioritize customer
satisfaction as its primary goal. Satisfaction is an evaluation of a product’s or
service’s characteristics or features, or the product itself, that provides a level of
consumer pleasure related to meeting consumer consumption needs.
Delivering high-quality service was the only method to satisfy customers since
the client determines how satisfied they are with the services they get. Customer
satisfaction measured how well the customer’s expectations were met by the per-
ceived performance of the product. The client would be happy and pleased if the
given goods exceeded their expectations.
Islamic bank had grown rapidly in Indonesia in recent years; therefore, Islamic
banks were expected to be in a higher level of competition not only competing with
conventional banks but also competing with fellow Islamic banks in increasing
customer quality and service. Therefore, Islamic banks must have the advantage of
being chosen as a financial intermediary institution so that Islamic banks could fulfill
customer satisfaction as well as their pleasure.
The Concept of Customer Loyalty Loyalty can be defined as a loyalty of Islamic
bank customers. Loyalty is classified into two types: active loyalty and passive
loyalty. Active loyalty occurs when the customer is satisfied with the service
received, it will indirectly promote and invite people around him to use the products
and services of the same Islamic bank as himself. While passive loyalty occurs when
a customer decided to stay on the side of a sharia bank even though it could be when
the customer is not satisfied (Manik 2018). The concept of loyalty has four mutually
sequential stages: (1) cognitive loyalty is the stage in which a brand is trusted and
favored over other brands. (2) Affective loyalty is the customer selection attitude
toward a brand that comes as a result of satisfaction. (3) Connective loyalty is
defined as a strong repurchase intention and substantial involvement in purchasing
as a motivating factor. (4) Activity loyalty is described as the capacity to connect an
increase in interest and desire with a readiness to overcome potential obstacles.

3 Methodology

3.1 Data

The data used in this study consist of primary data and secondary data. Primary data
were obtained from distributed questionnaires, as well as direct observations on the
research object. Secondary data were obtained from the literature study by looking
for theories related to research variables.
The Impact of Islamic Branding on Customer Loyalty with. . . 99

3.2 Method

This study used quantitative method, whereas the population of customers of BSI
Cirebon who have migrated accounts is about 2.443 customers.
Purposive sampling was used in this study, and the Slovin formula was used to
calculate the number of sample members from the sampling technique used in the
study. The sample calculation result on a population of 2.443 BSI customers is
96.07, but the sample size in this study was set at 96 respondents to avoid sample
error. Hence, the author will examine 100 customers of BSI Cirebon.
In this study, the Likert scale was employed to examine attitudes, views, and
perceptions of social issues. The validity of the data must be tested before being
analyzed to determine the truthfulness of the respondents in answering questions
about whether Islamic branding and customer satisfaction affect loyalty among BSI
Cirebon customers.
The reliability test of this study was calculated using SPSS 26 for Windows, with
as many instrument samples as the specified number of respondents. The alpha
Cronbach technique was used to assess the reliability of this study.
The assumptions in the regression analysis were tested before data analysis and
hypothesis testing were carried out. The regression assumptions that will be tested
based on the data in this study are normality, autocorrelation, heteroscedasticity,
multicollinearity, and linearity.
The approach of path analysis is being used to determine the influence of
intervening factors. Path analysis is the use of regression analysis to estimate causal
relationships between variables that have previously been determined based on
theory.

4 Results and Analysis

4.1 Results

According to Table 3 below, the R2 value in the Model Summary table is 0.170,
which indicates that the Islamic Branding Promotion variable (X1) accounts for 17%
of the variance. Other factors account for the remaining 83%, which were not
included in this research.
The author then calculated the Islamic branding t test (X1) on customer loyalty
(Y), which has a t-value of 4.481 and a significant value of 0.000. Based on the
calculation results, it is known that at a significant level of 10% the t-value is greater

Table 3 Model summary 1

Model R R2 Adjusted R2 Std. error of the estimate
1 .412a 0.170 0.162 0.14451
a
Predictors: (constant), Islamic branding
100 A. M. A. Wadud and Layaman

than t-table (4.481 > 1.660), and the significance value is 0.000 < 0.05. Hence, H1
is accepted, which means that Islamic branding (X1) partially has a positive and
significant influence on customer loyalty (Y).
Meanwhile, the value of R2 was 0.623; this indicated that the Islamic branding
promotion variable (X1) contributes 62.3% of the total. The remaining 37.7% might
well be attributed to a variety of additional factors that were not taken into account in
this study.
The author then calculated the Islamic branding t test (X1) on customer satisfac-
tion (Y), which has a t-value of 12.735 and a significant value of 0.000. Based on the
calculation results, it is known that at a significant level of 10% the t-value is greater
than t-table (12.735 > 1.660), and the significance value is 0.000 < 0.05. Hence, H2
is accepted, which means that Islamic branding (X1) partially has a positive and
significant influence on customer satisfaction (Y).
On the other hand, according to the value of R2 it was 0.268. This number means
that the customer satisfaction promotion variable (X2) contributed 62.3% of the
total. The remaining 73.2% is attributable to other factors that were not taken into
consideration in this research.
The author then calculated the customer satisfaction t-test (X2) on customer
loyalty (Y), which has a t-value of 5.985 and a significant value of 0.000. Based
on the calculation results, it is known that at a significant level of 10% the t-value is
greater than t-table (5.985 > 1.660), and the significance value is 0.000 < 0.05.
Hence, H3 is accepted, which means that customer satisfaction (X2) partially has a
positive and significant influence on customer loyalty (Y).
The value of R2 was 0.023, which indicated that the customer satisfaction
promotion (X2) and Islamic branding factors (X1) both contribute 2.3%. The
remaining 97.7% may be attributed to a variety of additional factors that were not
taken into account in this study.
As a result, the direct impact of Islamic branding on customer loyalty is greater
than the direct impact of customer loyalty with customer satisfaction as an interven-
ing variable. This is represented by the value of the direct effect, which is greater
than the value of the indirect effect, 0.412 > 0.408. These findings consider that
Islamic branding (X1) has a significant and positive impact on customer loyalty via
customer satisfaction (X2) (Y).

4.2 Analysis

According to the previously analyzed data, all statements in the independent vari-
ables, Islamic branding, customer satisfaction, and the dependent variable (customer
loyalty) are valid and reliable.
The Impact of Islamic Branding on Customer Loyalty The results of this study
stated that the Islamic branding variable has a direct and significant effect on
customer loyalty. It is represented by the results of the partial test (T-test), which
The Impact of Islamic Branding on Customer Loyalty with. . . 101

showed that the t-value is greater than t-table (4.481 > 1.660) with a significance
value of 0.000 > 0.05.
Customers will be more interested in using bank products and services accord-
ingly with the strength and effectiveness of Islamic branding. Islamic branding,
which is in accordance with the situation and conditions, will be able to create a
positive view for the bank, resulting in a positive impact on the level of customer
satisfaction and even future loyalty among customers. Many customers will be
interested in bank products or services when Islamic branding is presented with
the right quality and at the right time.
This finding is consistent with Magdalena’s previous research (2018). Customers
who already have faith in a commercial institution are more inclined to have faith in
other companies and organizations. Frequent recurring purchases and a great aware-
ness of what and where consumers want to buy are two traits that define client
loyalty. The results of the study and analysis allow us to conclude that Islamic
branding has a favorable and substantial influence on consumer loyalty (Magdalena
2018).
The Impact of Islamic Branding on Customer Satisfaction According to the
second hypothesis, the reflection of the partial test (T-test) results demonstrated that
the value of t-value is greater than t-table (12,375 > 1.660) with a significance value
of 0.000 > 0.05. As a result, the H2 hypothesis—that the Islamic branding variable
has an impact on the customer satisfaction variable for BSI customers—is accepted.
Islamic branding is created with the intention of satisfying consumer needs so that
they can feel satisfied and at peace knowing that what they are consuming complies
with Shari’a. Customers who adhere to Islamic law understand that Islamic branding
is essential for maintaining the moral as well as spiritual necessities. Consuming
goods and services was performed with the aim of being moral and spiritually
delighted. This statement supports the study conducted by Khairunnisa and Zahara
(2021), the impact of Islamic branding on consumer satisfaction, which demon-
strated that customer satisfaction will increase accordingly with the improvement in
Islamic branding.
The Impact of Customer Satisfaction on Loyalty The third hypothesis was
validated by the partial test (T-test) findings, which showed that the t-value was
higher than the t-table (5985 > 1660) with a significance value of 0.001 > 0.05. The
H3 hypothesis, which states that the customer satisfaction variable affects the
customer loyalty variable, is thus accepted.
Customers would typically stay loyal for longer and make more purchases
whenever a company releases new products or upgrades existing ones, receives
suggestions from customers for new products or services, talks favorably about the
company and its products, pays little attention to rival brands, and introduces new
products and services. It is also easier to keep current customers than to attract
new ones.
According to a study conducted by Magdalena (2018), maintaining a customer’s
performance implies improving financial performance and ensuring the firm’s sur-
vival, which is the primary motivation for a company to attract and keep them. The
102 A. M. A. Wadud and Layaman

process of getting loyal customers should be broken up into many steps, starting with
finding potential customers and ending with bringing back previous partners.
The Impact of Islamic Branding on Customer Loyalty Through Customer
Satisfaction as an Intervening Variable Based on the fourth hypothesis, Islamic
branding and customer satisfaction have a direct and important impact on customer
loyalty, and the simultaneous test (F-test) and coefficient of determination (R2)
results demonstrated that Islamic branding and customer satisfaction together affect
customer loyalty.
Through a significance level of 0.000 (Sig. 0.05), the results of the simultaneous
test (F-test) reveal that Islamic branding and customer satisfaction have an impact on
BSI customer loyalty. F-value is greater than F-table, that is, 21.280 > 3.94. Hence,
it is possible to draw the conclusion that Islamic branding and customer satisfaction
affect BSI customers’ loyalty simultaneously.
Meanwhile, the coefficient of determination test results revealed an R2 value of
0.310. In other words, all Islamic branding factors (X1) and customer satisfaction
variables (X2) may explain 31% of the customer loyalty variable (Y), while the
remaining 69% can be explained by variables not explored in this research. Further-
more, the path analysis findings show that the direct impact is higher than the indirect
effect, that is, 0.412 > 0.408.
These results indicate that Islamic branding (X1) through customer satisfaction
(X2) has a good and substantial impact on loyalty among customers (Y). Based on
the t-test, the t-value was 3.461 > 1.660 with a significance level of 0.05. As a result,
H4 is acknowledged, indicating that customer satisfaction may operate as a mediator
between Islamic branding and customer loyalty.

5 Conclusion and Recommendation

5.1 Conclusion

The author drew the following conclusions based on the study conducted above:
1. According to the result of this study, Islamic branding (X1) partially had a
positive and significant impact on customer loyalty (Y). Customers will be
more interested in using bank products and services accordingly with the strength
and effectiveness of Islamic branding. Many customers will be interested in bank
products or services when Islamic branding is presented with the right quality and
at the right time.
2. Islamic branding (X1) partially had a positive and significant impact on customer
satisfaction (X2). Islamic branding is created with the intention of satisfying
consumer needs so that they can feel satisfied and at peace knowing that what
they are consuming complies with Shari’a. Customers who adhere to Islamic law
understand that Islamic branding is essential for maintaining the moral as well as
spiritual necessities.
The Impact of Islamic Branding on Customer Loyalty with. . . 103

3. Customer satisfaction (X2) partially had a positive and significant impact on

customer loyalty (Y). Customers would typically stay loyal for longer and make
more purchases whenever a company releases new products or upgrades existing
ones, receives suggestions from customers for new products or services, talks
favorably about the company and its products, pays little attention to rival brands,
and introduces new products and services.
4. Islamic branding had a positive and significant impact on customer loyalty that
was mediated by BSI customer satisfaction. Based on the calculation of the f-test
(simultaneously), customer satisfaction and Islamic branding on customer loyalty
has an f-value greater than f-table and a significance value of 0.000 < 0.05. This
means that Islamic branding and customer satisfaction variables impacted cus-
tomer loyalty together.

5.2 Recommendation

Based on the results of the conducted study, the following recommendations are
given:
1. BSI Cirebon should offer details on the locations of BSI ATMs distributed
throughout the city of Cirebon because many users complain about how chal-
lenging it is to discover and access ATMs. A possible effort is to increase the
number of ATMs in Cirebon.
2. For further research, it is expected that researchers could well look at additional
variables affecting customer loyalty.
3. The author examined the intervening variable using path analysis in SPSS.
Accordingly, it is expected that the next author would use additional program
analysis, such as structural equation modeling (SEM).

Acknowledgments This study would not have been feasible without the tremendous help of my
supervisor and the parties involved in this study, such as all of the employees of Bank Sharia
Indonesia, Cirebon City, Indonesia. From my initial interaction with them, their expertise and
demanding attention to detail have been an inspiration and have kept my work on track.

References

Alserhan BA (2010) On Islamic branding: brands as good deeds. J Islam Market

Ardiyanto RB (2013) Pengaruh Kepuasan Nasabah terhadap Loyalitas Nasabah yang Dimediasi
oleh Kepercayaan Nasabah pada Bank BRI Syariah Surakarta. Jurnal Naskah Publikasi:1–17
Azizah H (2012) Pengaruh Kualitas Layanan, Citra dan Kepuasan Terhadap Loyalitas Nasabah.
Manag Anal J 1(2)
Bitner MJ, Faranda WT, Hubbert AR, Zeithaml VA (1997) Customer contributions and roles in
service delivery. Int J Serv Ind Manag
104 A. M. A. Wadud and Layaman

Khairunnisa G, Zahara Z (2021) Pengaruh Islamic Branding Dan Perilaku Religius Terhadap
Kepuasan Nasabah Pada Bsm Palu. Jurnal Ilmu Manajemen Universitas Tadulako (JIMUT)
7(3):225–236. https://doi.org/10.22487/jimut.v7i3.240
Magdalena M (2018) Pengaruh kepuasan nasabah terhadap loyalitas nasabah KPR BTN pada PT.
Bank Tabungan Negara Tbk. cabang Padang
Manik AFI (2018) Pengaruh Kepuasan Nasabah, Loyalitas, Terhadap Kinerja Keuangan Bank
Syariah di Indonesia. Prosiding Ind Res Workshop Natl Sem 9:602–607
Wilson JAJ, Liu J (2011) The challenges of Islamic branding: navigating emotions and halal. J
Islam Market
Role of Islamic Microfinance in Enhancing
Financial Inclusion in Bangladesh:
A Systematic Literature Review

Niaz Makhdum Muhammad, Salina Bt. Kassim, Nur Farhah Binti Mahadi,
and Engku Rabiah Adawiah Bt Engku Ali

Abstract Islamic microfinance (IsMF) is an interest-free, often noncollateral

financing arrangement for providing small loans to the poor and underprivileged.
Through IsMF, the poor are able to access financial resources and it becomes
possible for them to improve their economic and social well-being. While there
can be various models of IsMF, in essence, the process involves offering financial
and technical assistance to the poor and nurturing empathy and philanthropy by
following the principles of Islamic Shariah. However, it has been found that the
implementation of IsMF programs in Bangladesh is still at a nascent stage, though it
is a Muslim-majority country with approximately 90% Muslims. Generally, finan-
cial inclusion is a major issue in Bangladesh as more than 45% of adults in the
country are out of formal financial services. Furthermore, the financial inclusion rate
for women is only 26%. As a consequence, the poor are suffering from hardcore
poverty and are unable to meet basic financial needs. This study aims to identify the
reasons for the low financial inclusion rate in Bangladesh. It will also highlight the
effective ways to enhance financial inclusion through IsMF in Bangladesh. A
systematic literature review approach has been adopted in this study, and for this
purpose, 22 peer-reviewed articles published in the last 5 years have been collected
and analyzed to acquire the necessary information. It is expected that the findings of
this study will be useful for the financial institutions, civil society organizations, and
the government of Bangladesh to take effective measures to adopt IsMF programs
for improving the financial inclusion rate and ensuring the welfare of the marginal-
ized people in this country.

N. M. Muhammad (✉) · S. B. Kassim · N. F. B. Mahadi · E. R. A. B. E. Ali

IIUM Institute of Islamic Banking and Finance (IIiBF), IIUM, Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 105
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_9
106 N. M. Muhammad et al.

1 Introduction

Microfinance is a powerful instrument for eradicating poverty and can have a

significant impact on national development. Offering financial services to the under-
privileged and destitute people of a nation who are unable or unwilling to use
mainstream banking institutions is known as microfinance. In the long run, it can
assist the poor in raising their financial and social status, lowering their vulnerability,
and turning them into productive citizens who can aid in the overall growth of the
nation.
Small loans are typically granted on a short-term basis in traditional microfinance
programs. These programs also feature prompt repeat loan distribution after prior
loans are promptly repaid, convenient service delivery and location, and streamlined
assessment of investments and borrowers. Most of the time, microfinance companies
make an effort to make sure that the loan funds are reaching the people who are
experiencing extreme poverty and hardship. Islam, however, opposes the fixed cost
of capital, sometimes known as interest or Riba, which is closely related to tradi-
tional microfinance. Many pious Muslims want to steer clear of interest-based
microfinance because of their beliefs and social restrictions (Islam et al. 2020).
About 20% of the poorest people in some countries with a majority of Muslims
choose not to engage in traditional microfinance programs, according to the
researchers in (Cameron et al. 2021).
Again, having a bank account or using digital financial services is often known as
financial inclusion. It can help people transcend poverty by enabling investments in
their businesses, health, and education. The provision of financial services can also
help those in need build up their savings, which can be used to deal with financial
emergencies like crop failure or job loss that could push families in danger. How-
ever, relying solely on cash might be difficult to manage (Demirguc-Kunt et al.
2018). Hence, IsMF initiatives can be useful in raising the level of financial inclusion
in underdeveloped nations, like Bangladesh.
As mentioned in (Umar et al. 2022), IsMF, during the COVID-19 pandemic, can
positively and significantly enhance the socioeconomic circumstances of struggling
people from various parts of the world. Determining how Islamic microfinance
might improve the financial inclusion of those in need is therefore crucial, especially
for a developing nation like Bangladesh. IsMF can undoubtedly play a significant
role in helping Bangladesh’s unfortunate citizens and bringing back their smiles in
the end because this nation has also been severely affected by the pandemic’s
aftereffects. The goal of this study is to identify the reasons for the low financial
inclusion rate in Bangladesh. It will also highlight the effective ways to enhance
financial inclusion through IsMF in Bangladesh.
Role of Islamic Microfinance in Enhancing Financial Inclusion. . . 107

2 Literature Review

Previous literature works have highlighted that millions of Bangladeshis living in

extreme poverty are unable to take part in development projects because they lack
access to official financial institutions. As a result, they are unable to accumulate
wealth, take advantage of various economic opportunities, or pay for their children’s
education (Muhammad 2022a). Furthermore, when they are forced to deal with
financial shocks, they become extremely vulnerable. Although Bangladesh is a
leader in the world when it comes to the implementation of microfinance projects,
the traditional microfinance system here is unable to meet the needs of the poor and
also fails to improve their general socioeconomic conditions. The contribution of
conventional microfinance programs to eradicating poverty is not large, in part
because of high interest rates and other unreported costs associated with credit
disbursement (Uddin and Benabderrahmane 2019). By using a sample of 400 Islamic
and conventional microfinance clients through a simple random sampling technique,
researchers in (Uddin and Benabderrahmane 2019) discovered that Bangladeshi
microfinance firms frequently charge interest rates of around 31%, which is signif-
icantly higher than the interest rates of traditional banks, which are between 10% and
15% (Uddin and Benabderrahmane 2019).
Additionally, greater operational expenses, religious people’s lack of interest, and
a lack of customized goods are impeding Bangladesh’s efforts to spread the use of
the traditional microfinance system (Nabi et al. 2017). In these circumstances, IsMF
schemes can be used by people as a successful remedy for this issue. However, just
5% of Bangladesh’s microfinance market is accounted for by the IsMF sector, and
more than 37 million of the nation’s poorest citizens already benefit from various
conventional microfinance programs (Nabi et al. 2017). Given that over 90% of the
population of this country is Muslim, this is a serious problem.
Again, using semi-structured interviews involving 40 borrowers of Grameen
Bank, it was found in (Kassim and Rahman 2018) that the microfinance sector
continues to face a variety of problems and obstacles while having promising futures
and positive progress. These difficulties include microfinance institutions’ (MFIs)
failure to manage finances and risks, the lack of consumer trust, their incapacity to
deal with the diverse and special features of their clients, their lack of knowledge of
fintech, and their vast geographic and regional gaps. The desired growth of the MFIs
in many nations throughout the world is also being hampered by incompetent
workers, a lack of money, failed marketing initiatives, internal competition, and a
lack of coordination among the MFIs, as well as inadequate supervision by the
relevant government (Kassim and Rahman 2018). In this situation, in order to ensure
the emancipation of people from the curse of poverty, Islamic microfinance can play
a crucial role.
Moreover, the International Monetary Fund (IMF) reports that more than 45% of
people in Bangladesh do not have access to formal banking services (Uddin et al.
2018). For marginal farmers, women, and other socially disadvantaged populations
in this country, access to basic banking services remains a serious challenge.
108 N. M. Muhammad et al.

Particularly, just 26% of women are represented in this (Uddin et al. 2018). The
nation’s financial inclusion issue could be improved by using Islamic microfinance
programs (Nabi et al. 2017). The difficulties in properly implementing the Islamic
microfinance system in Bangladesh must therefore be identified. Assessing the most
efficient ways to employ Islamic microfinance to raise the rate of financial inclusion
in this nation is also essential.

3 Methodology

The systematic review approach has been adopted in this study to achieve the
research objectives. Hence, the necessary data and information were gathered from
secondary sources. The secondary source on Islamic microfinance included different
books and reports from research organizations, regulatory authorities, donor orga-
nizations, and government agencies. In this chapter, a descriptive-analytical
approach was also adopted to analyze and compare the source articles.
In addition, research databases like Scopus, Mendeley, and Google Scholar were
used for finding the relevant articles. Different keywords, like “Islamic
microfinance,” “Islamic microfinance in Bangladesh,” “financial inclusion,” “finan-
cial inclusion in Bangladesh,” “challenges in financial inclusion,” “Islamic
microfinance and financial inclusion,” etc., were used for gathering the necessary
information. Through extensive research, 145 related articles were collected, and out
of these, 22 peer-reviewed papers published in different indexed journals and
conference proceedings were chosen for this study. Only the papers with full text
available, written in English, and published between 2017 and 2022 were included in
this study.

4 Findings and Discussion

4.1 What Is Islamic Microfinance?

Islamic microfinance (IsMF) is an interest-free, no-collateral financing arrangement

that offers small loans to the underprivileged (Islam et al. 2020). The following
Quranic verses support the concept of Islamic microfinance (Sura Hashr 59:7):
Wealth must not circulate only among the rich ones among you.

Allah SWT also reveals in the Quran (Sura Nisa, 4:29):

O you who have believed, do not consume one another’s wealth unjustly but only [in lawful]
business by mutual consent.

As mentioned in (Islam et al. 2020), Islamic microfinance programs have two

goals. First, by helping the underprivileged financially and technologically and
Role of Islamic Microfinance in Enhancing Financial Inclusion. . . 109

encouraging generosity and empathy by abiding by Shariah principles, Islamic

microfinance aims to advance social well-being. The second objective is achieving
institutional sustainability and financial gain through the provision of personal loans
to economically marginalized business owners. According to (Ahmad et al. 2020),
Islamic microfinance is based on four major principles:
1. Interest is absolutely prohibited.
2. Although the most popular Islamic microfinance programs do not adhere to
conventional profit-and-loss sharing notions, lenders are reimbursed through
profit sharing.
3. Islamically banned activities, such as maysir (gambling), drinking, and borrowing
and lending to conventional MFIs that charge interest, are not permitted to be
funded by IMFIs.
4. Contractual provisions must be entirely clear and free of all ambiguity due to the
prohibition of Gharar or uncertainty.
As noted in (Muhammad 2022b), Islamic microfinance differs from its traditional
equivalent in a few key ways. Islamic beliefs, for instance, are at the foundation of
Islamic microfinance, which provides a superior means of eradicating poverty by
advancing social justice and developing human potential. Islamic microfinance
institutions (IsMFIs) attempt to conduct business in various nations by applying
Islamic teachings, such as monotheism, the prohibition of usury, the adoption of
Maqasid-al-Shariah, defending justice, and removing all elements of gambling from
all financial transactions (Rohman et al. 2021). Currently, the IsMFIs use the
following contracts: Qard-al-Hasan, Ijarah, Mudarabah and Musharakah, and
Murabaha (purchasing and selling-based contracts) (Rohman et al. 2021).

4.2 Islamic Microfinance in Bangladesh

The microfinance initiatives of Grameen Bank are well known throughout the world.
For its extraordinary contribution to reducing poverty through traditional microcredit
programs, this organization was awarded the Nobel Peace Prize in 2006. Numerous
MFIs are currently in operation in this nation and are providing millions of the
nation’s poor with credit without the need for collateral. However, due to the fact that
the top microfinance companies have not yet begun implementing Islamic Shariah,
the sector of Islamic microfinance is still relatively young in Bangladesh (Nabi et al.
2017). Additionally, the bulk of the IsMFIs operating today in Bangladesh continue
to use Grameen Bank’s group lending model (Uddin and Mohiuddin 2020).
The expansion of Islamic microfinance in this country has lagged behind expec-
tations due to a number of issues, including a lack of sufficient resources, a lack of
regulatory support, and the high cost of transactions (Hossain and Abdullah 2019).
Major obstacles to the growth of Islamic microfinance in Bangladesh include the
predominance of conventional NGOs/MFIs and the absence of Islamic financing. As
a result, just 5% of Bangladesh’s microfinance market is accounted for by the Islamic
110 N. M. Muhammad et al.

microfinance sector despite the fact that more than 37 million poor individuals in this
nation already benefit from various microfinance programs (Nabi et al. 2017).
Financial institutions such as Islami Bank Bangladesh Limited (IBBL) introduced
Islamic microfinance initiatives including the Rural Development Scheme (RDS) in
1995 (Ashraf 2018; Muhammad 2022c). The RDS program offers investment
finance for a variety of industries, including agro-machinery, agricultural cultivation,
poultry, cattle, nurseries, rural housing, fisheries, rural transportation, and off-farm
enterprises. As found in (Abdullahi et al. 2021), the impact of the money invested by
RDS had greatly boosted household income, expenditure, employment, and agricul-
tural and livestock productivity.
Another prominent actor in the field of Islamic microfinance is Muslim Aid
Bangladesh, a renowned worldwide organization that has been active in this nation
since 2004. This IMFI employs public donations, subsidized funding from multilat-
eral organizations like the Islamic Development Bank (IsDB), as well as local
commercial banks to provide microcredit facilities to its customers (Uddin and
Mohiuddin 2020). Muslim Aid charges roughly a 12% service fee (munafa’ah) for
Qard (personal and microbusiness cash lending), and around a 13% profit rate for its
SME financing product called “bai-muajjal” (Uddin and Mohiuddin 2020). For
RDS, however, this rate is 10% (Uddin and Mohiuddin 2020). Researchers in
(Uddin and Mohiuddin 2020) also discovered that RDS and Muslim Aid both
have loan recovery rates of over 98 percent. However, other Islamic Banks and the
Islamic divisions of conventional banks have not been effective in aggressively
promoting Islamic microfinance products or developing programs with the same
level of success as RDS of IBBL. Islamic microfinance is still in its early stages in
Bangladesh due to all of these factors (Abdullahi et al. 2021).

4.3 Concepts, Determinants, and Impacts of Financial

Inclusion

Financial inclusion, according to the World Bank, refers to having access to and
using formal financial services (Demirguc-Kunt et al. 2018). It is also described as a
procedure for guaranteeing that financial services are accessible to everyone in
society and that they may use them with ease (Nabi et al. 2017). In order to address
the demands of all customers while avoiding involuntary financial exclusion,
researchers in (Abdullahi et al. 2021) defined financial inclusion as the arrangement
of the provision of a wide range of financial services at a reasonable cost. However,
when a person has little access to official financial services, they are deemed to be
financially excluded (Shinkafi et al. 2019).
The World Bank’s Global Findex database is the world’s most complete collec-
tion of data on financial inclusion (Demirguc-Kunt et al. 2018). It offers details on
how to pay bills, manage risks, and save or borrow money. The third version of the
database, which includes statistics on the financial inclusion of more than
Role of Islamic Microfinance in Enhancing Financial Inclusion. . . 111

140 high-income and developing nations, was created in 2017. The database con-
tains updated metrics on the use of official and informal financial services as well as
access to them (Demirguc-Kunt et al. 2018). In addition, the World Bank report
makes recommendations for improving unbanked individuals’ access to financial
services and motivating them to use digital financial services (Demirguc-Kunt et al.
2018).
One of the most significant factors affecting financial inclusion is account own-
ership. The 2017 Global Findex database defines this account ownership as having
an individual or joint account at a financial institution, like a bank, or through a
mobile money provider (Demirguc-Kunt et al. 2018). Furthermore, 1.7 billion adults
worldwide still do not have bank accounts (Chen and Yuan 2021). These 1.7 billion
unbanked individuals reside in various poor nations, whereas account ownership is
almost universal in high-income nations. A quarter of unbanked people reside in the
poorest 20% of households in their economy, which is almost twice as many as those
who do so in the richest 20% (Demirguc-Kunt et al. 2018).
Financial inclusion boosts the economy, expands funding options for effective
resource allocation and intermediary services, lowers income inequality, and pro-
motes the development of new firms (Banna et al. 2022). Financial inclusion can also
be a useful strategy for accomplishing sustainable development goals, which can
raise the standard of life for the world’s poor and also contribute to the decrease in
poverty on a global scale. It can also assist the underprivileged to engage in
productive activities, make long-term decisions regarding consumption and invest-
ment, and deal with unforeseen circumstances (Nabi et al. 2017).
Moreover, persons who do not use official financial services frequently end up in
poverty and contribute to inequality (Nabi et al. 2017). Besides, they could experi-
ence irregular or recurring shocks if they have to rely on their own resources to cover
unforeseen expenses (Nabi et al. 2017). These powerless individuals frequently
make poor decisions when the necessity to invest in profitable ventures arises
(Nabi et al. 2017).

4.4 Reasons for the Low Financial Inclusion Rate in

Bangladesh

Financial inclusion is currently seen as one of the primary facilitators for boosting
wealth and reducing poverty. However, the World Bank database indicates that 50%
of people in Bangladesh lack any form of account (Demirguc-Kunt et al. 2018).
Access to basic financial services continues to be a major problem in this country,
particularly for marginal farmers, women, and other socially excluded groups. In
particular, just 26% of women are included in this (Uddin et al. 2018). Again, the
percentage of adults having mobile money accounts increased from 3% in 2014 to
only 21% in 2017 (Demirguc-Kunt et al. 2018). According to the GSM Association
112 N. M. Muhammad et al.

of Bangladesh, in 2021, 20% of women and 41% of adult males have mobile money
accounts (Abdullahi et al. 2021).
People in Bangladesh are unable to become bankable due to poor literacy rates, a
sizable rural population, and the high interest rates of the traditional banking system
(Uddin et al. 2018). The number of nonbankable people in Bangladesh is alarmingly
high despite voluntary exclusion, inadequate financial institution infrastructure, and
significant political upheaval (Uddin et al. 2018). In Bangladesh, traditional financial
institutions such as banks and investment firms are unable to grant loans to slum
dwellers due to a lack of collateral (Hossain and Abdullah 2019). Millions of people
in this nation are financially excluded as a result.
Cost, distance, trust, documentation, and religious views are listed by (Nabi et al.
2017) as significant barriers to financial inclusion. Moreover, lack of trust, religious
convictions, high costs, challenges associated with opening accounts, and distance
from banks and other financial institutions are among the other significant barriers to
financial inclusion in Bangladesh (Abdullahi et al. 2021). The risks associated with
information asymmetries and high transaction costs related to the processing and
monitoring of microcredits also act as a major barrier to enhancing financial inclu-
sion in Bangladesh. In this dire situation, Islamic microfinance system can be an
effective solution to improve the financial inclusion scenario of this country (Nabi
et al. 2017).

4.5 Effective Ways to Enhance Financial Inclusion Through

Islamic Microfinance in Bangladesh

According to (Kassim and Rahman 2018), microfinance has proven to be a success-

ful means of boosting financial inclusion by enhancing credit access for particular
demographic groups who are usually excluded from mainstream finance, such as
women microentrepreneurs and the poor. Besides, there is a long-standing connec-
tion between microfinance and financial inclusion. According to the study,
microfinance has a good but insignificant effect on financial inclusion in the short
term, but a good and statistically significant effect on the level of financial inclusion
in the long run. Currently, because traditional financial institutions are reluctant to
lend to persons with low incomes or without collateral, the impoverished frequently
have to turn to microfinance banks. Thus, it is shown in (Kassim and Rahman 2018)
how important microfinance can be in promoting financial inclusion in Bangladesh.
The ultimate goal of microfinance programs, as opined in (Milana and Ashta
2020), is to pull the needy and impoverished out of poverty through financial and
social inclusion. These underprivileged individuals, microbusiness owners, or small
firms rely on relationship-based banking and group-based models, which are the key
components of microfinance program, because they lack access to formal banking
services. However, MFIs’ high interest rates frequently discourage the poor from
obtaining loans from them. In the end, this has an effect on a nation’s rate of financial
Role of Islamic Microfinance in Enhancing Financial Inclusion. . . 113

Table 1 A structured approach to enhancing financial inclusion

Level of income Re-distributive pillar Risk-sharing pillar
Low income Hybrid solutions (applications Micro-small-medium enterprises
with market-based solutions) (MSME)
Poverty (above pov- Qard al Hasan, Zakah, and Waqf Micro-finance (Murabaha,
erty line) Musharikah), micro-takaful
Extreme poverty Zakah, Sadaqah, and Waqf Collective risk sharing through
(below poverty line) collective support during crisis

inclusion (Bharti and Malik 2022). Islamic microfinance programs can effectively
address this issue by raising the rate of financial inclusion in Bangladesh. As
mentioned in (Abdullahi et al. 2021), Islamic microfinance offers an inclusive
financial system that can reduce extreme poverty and increase shared wealth. It
also encourages efficient resource allocation, improves productivity, and advances
people’s well-being by encouraging saving habits and preventing the expansion of
exploitative informal loan sources. IsMF system can also be effective in providing
access to a number of financial services—microinsurance or Takaful, microsavings,
microcredit, and money transfers. Through all these, financial inclusion can be
enhanced in the end.
As argued in (Nabi et al. 2017), the social safety nets created by conventional
microfinance system and other methods of reducing poverty, as well as the trickle-
down effects of GDP growth, have not been sufficient to free all those living in
poverty from its cycle. Given this, special Islamic microfinance (IsMF) models—
with distributive and risk-sharing elements not present in conventional microfinance
models—can promote financial inclusion among the poor, which can also result in
lowering poverty and inequality in Bangladesh. Redistribution tools, like sadaqah,
zakat, waqf, and other charity-based microfinance models, as well as risk-sharing
tools like profit-based microfinance models (Musharakah and Mudaraba) with
micro-takaful can all become effective tools for financial inclusion in this country.
Table 1 highlights a structured approach to enhancing financial inclusion in
Bangladesh (Ali et al. 2020).
As suggested in (Shinkafi et al. 2019), with some creative financial inclusion
strategies, there are some opportunities for improving the socioeconomic standing of
underprivileged Muslim communities. Using the Islamic solidarity principle, it can
be possible to build and supply Islamic microfinance products that are acceptable for
the underprivileged. They further contended that this service would benefit the poor
by enabling them to grow their savings into amounts sufficient to meet a variety of
needs, including those of small enterprises, customers, and the community at large.
Furthermore, according to (Shinkafi et al. 2019), IsMFIs can easily attract the
unbanked population by designing digital Islamic financial products, like new and
effective mobile phone applications. Utilizing cutting-edge resources, professionals,
and the Islamic microfinance industry’s vibrant, competitive environment will
undoubtedly help in enhancing financial inclusion in a country like Bangladesh.
IsMFIs can also contribute to enhancing the financial literacy of marginalized people
114 N. M. Muhammad et al.

so that they become encouraged to join different IsMF programs and make better
choices regarding the IsMF products suitable for them. In the end, this will result in
enhancing the rate of financial inclusion in Bangladesh.
In order to achieve financial inclusion, IsMFIs can provide immediate attention to
skill development and boost the workforce level. What sets Islamic microfinance
apart from its conventional counterpart are the Islamic social tools, such as Zakat,
Waqaf, and Sadaqah, which openly help the poor to satisfy their basic requirements
before granting them microcredit. IsMF offers a chance to help Muslim communities
who are struggling with extreme poverty and is beneficial for low-income house-
holds to participate in financial activities (Shinkafi et al. 2019). From the discussion
above, it can be inferred that Islamic microfinance has a greater possibility of
achieving financial inclusion because of the use of interest-free loans and efficient
financial services and products.

5 Conclusion and Recommendations

Financial inclusion can assist people in escaping poverty by encouraging invest-

ments in their enterprises, health, and education. The availability of financial ser-
vices can also assist those in need to accumulate savings, which can then be utilized
to deal with unforeseen financial calamities like crop failure or job loss that could
drive families into squalor. As this study has demonstrated, Islamic microfinance
programs can help in increasing the degree of financial inclusion in developing
countries like Bangladesh.
IsMF, during the COVID-19 pandemic, can positively and significantly enhance
the socioeconomic circumstances of struggling people in Bangladesh by involving
them in mainstream financial activities. Thus, it can undoubtedly play a significant
role in helping Bangladesh’s unfortunate citizens and bringing back their smiles in
the end because this nation has also been severely affected by the pandemic’s
aftereffects.
Consequently, this study suggests that all the stakeholders of the financial system
in Bangladesh should come forward and start launching educational initiatives to
change the perception of people regarding the role that Islamic microfinance insti-
tutions can play in promoting financial inclusion in this country. As is common
practice in countries where Islamic finance is institutionalized, Islamic microfinance
institutions in Bangladesh should complement their commercial products and ser-
vices with Islamic social finance products like Zakat, Sadaqat, and benevolent loans.
The central government, as well as the local governments of this country, should
also come forward and encourage the formation of IsMFIs so that these institutions
can play a more effective role in assisting the marginalized people of this country.
The government should also guarantee the provision of basic infrastructures like
road networks, reliable and sustainable power supplies, and other facilities so that the
IsMFIs can easily reach prospective consumers. Through only the concerted efforts
of the government, civil society organizations, policymakers, practitioners, and the
Role of Islamic Microfinance in Enhancing Financial Inclusion. . . 115

people, IsMFIs can play the desired role of enhancing the financial inclusion rate in
Bangladesh and thus improving the socioeconomic condition of the destitute people
in this country. This will eventually help in building a sustainable and caring society
based on justice and equity.

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The Application of Artificial Intelligence
in Metaverse: A New Challenge on Personal
Data Protection in the Financial System

Lia Sautunnida , Nor Razinah Mohd. Zain ,

Izura Masdina Mohamed Zakri , and Azhari Yahya

Abstract This chapter aims to examine and evaluate new challenges of personal
data protection in the financial system as a result of the application of artificial
intelligence in metaverse. This evaluation is critical since this advanced technology
is yet to be regulated by the relevant financial authorities. Nowadays, there are
already a number of issues relating to personal data protection in the financial system
that needed comprehensive resolutions. In this research, qualitative and normative
legal research methods are referred to and used. Additionally, content analysis from
literature review and descriptive analysis are utilized in the course of finding relevant
data. From this research, it is discovered that there is the possibility that the
application of metaverse and artificial intelligence may decrease the level of privacy
and protection of personal data of users. At the same time, they can cause substantial
impact and influence for a long-term economic sustainability, especially within the
financial system. Furthermore, there are no available laws and policy that are in place
to regulate matters of privacy and personal data protection when it comes to the
application of artificial intelligence as well as in the metaverse. This research also
highlights the legal approaches that are taken by the European Union Commission
(EU) in dealing with the application of artificial intelligence.

L. Sautunnida (✉) · I. M. M. Zakri

Faculty of Law, Universiti Malaya (UM), Kuala Lumpur, Malaysia
e-mail: [email protected]; [email protected]
N. R. M. Zain
IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia
(UIAM), Kuala Lumpur, Malaysia
e-mail: [email protected]
A. Yahya
Faculty of Law, Universitas Syiah Kuala (USK), Darussalam, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 117
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_10
118 L. Sautunnida et al.

1 Introduction

Innovations in computer science have significant impacts on daily life through

improving and transforming social interactions, communication, and human engage-
ment. Three significant technical innovation waves have been identified from the
viewpoint of end consumers; where each is based on the emergence of personal
computers, the Internet, and mobile devices. Virtual reality (VR) and augmented
reality (AR) are two examples of spatial, immersive technologies driving the fourth
wave of computing innovation at the moment. The next paradigm in ubiquitous
computing is anticipated to emerge as a result of this wave, and it has the power to
revolutionize (online) business, education, distant work, and entertainment. In this
research, legal normative and qualitative research approaches are used and referred
to. In collecting relevant information for literature review, the descriptive analysis
and content analysis are also employed.
Currently, the most apparent results from the latest innovative technical wave are
the emergence of Metaverse and the usage of artificial intelligence (AI). Due to the
technological and philosophical complexity of the Metaverse and AI, defining them
could be difficult. The Metaverse is a continuous and enduring multiuser environ-
ment that fuses physical reality and digital virtuality. It is essentially a post-reality
universe. It is built on the convergence of technologies like augmented reality
(AR) and virtual reality (VR), which allow for multimodal interactions with people,
digital items, and virtual settings. Thus, the Metaverse is considered as a web of
persistent, multiuser, and socially networked immersive experiences. It allows for
real-time, embodied user communication and dynamic interactions with digital
artifacts. Its first iteration was a web of virtual worlds that avatars could teleport
between. The modern Metaverse includes social, immersive VR platforms that are
compatible with massive multiplayer online video games, open game worlds, and
AR collaborative spaces (Mystakidis 2022). Although there is no consensus on what
AI is, AI has been described in terms of specific approaches to human intelligence or
intelligence in general. Many definitions make it as a reference to computers that
behave like people or are capable of carrying out intelligent tasks (Samoili et al.
2020).
The connection between the Metaverse and AI is that the Metaverse, a term
derived from the words meta and universe, has been introduced as a shared virtual
world powered by a variety of emerging technologies, including fifth-generation
networks and beyond, virtual reality, and artificial intelligence (AI). Among such
technologies, AI has demonstrated the critical importance of processing big data to
improve immersive experiences and enable virtual agents to have humanlike intel-
ligence. There is a worthwhile effort underway to investigate the role of AI in the
creation and growth of the metaverse (Huynh-The et al. 2022). There are some
discussions on AI related to financial systems. The study on the connection between
economic growth and technological advancement was done by Schumpeter as early
as 1912. According to the World Bank and the International Monetary Fund, in order
to accomplish all 17 Sustainable Development Goals (SDGs), more development
The Application of Artificial Intelligence in Metaverse: A New. . . 119

fundings are necessary. No poverty (SDG No. 1), decent work and economic growth
(SDG No. 8), responsible consumption and production (SDG No. 12), and climate
action (SDG No. 13) are the major objectives in the area of financial management.
These sustainable development goals enable the use of digital technologies in
financial management to achieve digital finance and sustainable finance. Industry
4.0 digital technologies are currently gaining traction in achieving digitalization and
sustainability in a variety of fields. Examples of critical areas where Industry 4.0
digital technologies intervention is highly required for financial management include
risk assessment, fraud detection, wealth management, online transactions, custom-
ized bond scheme, customer retention, and virtual assistant. IoT, cloud computing,
robotic process automation (RPA), AI, and blockchain are examples of other areas
involving Industry 4.0 digital technologies where they should be considered in the
financial management.
Artificial intelligence (AI) is viewed as a key technology in the context of the
Industry 4.0 paradigm for achieving advanced self-capabilities such as self-
optimization, self-awareness, and self-monitoring, as well as disrupting the structure
of manufacturing processes and business models. Banks and financial institutions
must reposition themselves as service organizations that prioritize investing in
digital transformation over traditional services in order to maintain stability in the
face of intense competition and, as a result, shifting market conditions. According to
previous research, there are few studies that have addressed the significance and
application of AI and Metaverse in integrating Industry 4.0 digital technologies in
financial management (Bisht et al. 2022). Artificial intelligence has the potential to
make the financial system to be smarter and more autonomous. Nevertheless, there
are concerns about personal data privacy and security. Until these concerns are
addressed, it remains to be seen whether artificial intelligence can be developed in
the European Union Commission in accordance with the General Data Protection
Regulation (Humerick 2017). Despite their many potential benefits, the Metaverse
and AI pose significant privacy and security risks due to the technologies’ massive
amounts of data spread across cyberspace.

2 Literature Review

AI and the metaverse have been discussed by certain academics. The phrase
“Metaverse” was first used, according to Mystakidis (2022), in Neal Stevenson’s
1992 science fiction book titled Snow Crash. It is described in this book that through
the use of headphones and goggles, individuals from all around the world can
connect to and access this parallel virtual reality cosmos made from computer
visuals. The Street is a protocol that connects multiple virtual communities and
locales in a manner akin to the information superhighway and serves as the founda-
tion of the Metaverse. In the Metaverse, users are represented by avatars that are
programmable digital bodies. Despite being digital and artificial, Stevenson’s
Metaverse experiences can have a genuine effect on the physical self. Among the
120 L. Sautunnida et al.

literature where Metaverse was depicted can be found in William Gibson’s VR

cyberspace, Matrix, and in the science fiction book titled Neuromancer from 1984
(Mystakidis 2022).
According to Kye et al. (2021), there are four different types of Metaverses that
stand out with their own potentials and restrictions in their educational applications:
(1) augmented reality, (2) lifelogging, (3) mirror worlds, and (4) virtual reality. An
augmented reality T-shirt that enables students to examine the inside of the human
body as parts of an anatomy lab is one example of how augmented reality can be
used in medical education (Kye et al. 2021). In addition, a research team at a hospital
in Seoul created an augmented reality spinal surgery platform. The metaverse has the
following potential as a new educational environment: a space for new social
communication; increased freedom to create and share; and the provision of new
experiences and high immersion through virtualization. As identified by Kye et al.
(2021), Metaverse has its own apparent weaknesses. It may lead to weaker social
relationships and open up privacy invasion. As well as the commission of numerous
crimes due to the virtual nature and anonymity of the metaverse and poor real-world
adaption for pupils whose identities have not yet been established. The metaverse is
anticipated to alter not just gaming and entertainment but also the way of life and
economics. The Metaverse also has tremendous potential as a brand-new platform
for social interaction (Kye et al. 2021).
Metaverse is fast growing, as shown by the 200 million Geppetto subscribers and
the virtual election campaign in Animal Crossing (Park and Kim 2022). It is also
found that two-thirds of American children aged 9–12 use Roblox, which has
150 million monthly active users (MAU), with one-third of them being under the
age of 16. The primary subject of early Metaverse study in 2006 was Second Life.
Online egos are identical to offline ones where the contemporary Metaverse is built
on Generation Z social interaction. As a result, it differs from the preceding
Metaverse as the share of social activities and contents increases, demanding a
new definition for the present.
There are three ways that the new Metaverse is different from the old one. First,
the quick advancement of deep learning greatly increases the precision of language
and visual recognition, and the advancement of generative models enables more
natural movement and an immersive environment. Processing time and complexity
were lowered when using multimodal models as E2E (end-to-end) solutions with a
multimodal pre-trained model. Second, the Metaverse was previously only accessi-
ble through PC and had poor consistency owing to time and location restrictions, but
thanks to mobile devices that can always be connected to the Internet, it is now
simple to access the Metaverse whenever and wherever the user chooses. It is found
that Roblox offers 50 million games and 3 billion hours of usage every month. By
having so, more time is spent on people than on social networking platforms (e.g.,
TikTok and YouTube). It features a virtuous cycle environment where producer
income and inflow rise as consumers and usage time rise while delivering different
contents, leading to a growth in sales of digital advertisements. Finally, the present
Metaverse is different from the previous one in that program coding is possible to be
The Application of Artificial Intelligence in Metaverse: A New. . . 121

done inside the Metaverse and that virtual currency is used to make the Metaverse
world more connected to the actual world (Park and Kim 2022).
Onik et al. (2019) said that the most common source of data breaches when it
comes to artificial intelligence (AI) is data leaks from the usage of artificial intelli-
gence. Numerous experts believe that AI compromises privacy. Real-time picture
processing exposes millions of personal data while revealing human identity. The
main problem with AI and robotics in terms of data privacy, according to Onik
et al.’s (2019) analysis, presently, is that there is no privacy standardized for
AI-based solutions. It is ineffective to ask the user for permission. Monitoring of
artificial intelligence decision-making (profiling) is necessary in order to avoid data
leaks in the AI application.

3 AI in Metaverse: A Consideration on Financial System

The development of digitalization has an impact on the growth of the banking world
today, as evidenced by the use of ATM machines to eliminate the need for carrying
cash and facilitate interbank transfers without having to meet with a banker and
shorten the time. Another example is the introduction of the Mobile Banking feature,
which allows users to complete a variety of tasks while sitting at home, including
transfers, payments, and online shopping, all through a single application. This
feature is thought to be much more convenient than ATMs, but it has the drawback
of not allowing users to withdraw cash in its actual form. The metaverse in banking
is typically linked to the virtual administration of financial transactions. Making it
simpler for customers to transact with any bank, wherever in the world, is advanta-
geous. It also helps business development become more cutting-edge and global.
Companies will endeavor to invest in and embrace metaverse-related technologies
for the development of digitalization and high acceptance of non-face-to-face envi-
ronments as the metaverse world becomes more and more popular in the financial
services sector (Emergen Research 2022). It implies that the financial sector will
increasingly use virtual reality to alter how clients do financial transactions. The
threat of cybercrime, including data leaking, which is becoming more and more
common if the AI system is not supported by strong security measures and frequent
upgrades, increases with the sophistication of the technology utilized. The develop-
ment of the virtual gaming industry is one of the elements affecting the expansion of
the metaverse in the finance industry. The creation, trading, and storage of financial
assets, as well as cross-border payments and foreign currency, have all increased as a
result of this trend (Morgan 2022). Banks are prompted to look for new technologies
by this kind of activity in order to update their infrastructure and compete on the
decentralized web.
Banking has evolved its traditional operational system from traditional bank to
digital banking, according to the evolution of banking. The presence of digital
banking creates opportunities for decentralized finance, as evidenced by the presence
of blockchain and cryptocurrencies (Barriga et al. 2021). The “Metaverse and
122 L. Sautunnida et al.

Money” research from Citibank claims that metaverse technology is having an

impact on the growing income of the worldwide economy, notably in the global
financial sector. Given that the use of digital technology is expected to generate 7.5
trillion euros in worldwide income in 2021, it is anticipated that the use of metaverse
technology would generate between 8 and 13 trillion USD in global income by 2030
(Barriga et al. 2021). It implies that the country’s economy will greatly benefit from
the spread of the metaverse both now and in the future. The simplicity and comfort of
transactions in today’s environment are significantly influenced by banks and other
financial organizations. Currently, the management of financial aspects by banks is
intricately related to the world economy. In order to ease international transactions,
banks must act swiftly once the general public becomes aware of the cryptocurrency
currencies that can only be traded in the digital realm. This is where the metaverse
function comes into play. Additionally, banks and fintech companies need analytics
tools to comprehend and track how clients utilize virtual reality financial services
when they introduce mobile banking. The business must offer consumers outstand-
ing service in order to guarantee that they can utilize virtual reality services effi-
ciently and that all of their transaction demands are satisfied. Many banks currently
run their financial service companies digitally and without borders, thus their clients
are scattered across the nation even though the bank does not have a branch office
there. The bank’s presence aims to facilitate commercial prospects and enlighten the
public about the financial services it offers, as well as to increase revenues. Addi-
tionally, businesses connect a number of other businesses that trade online, allowing
for the ownership of a portion of the transaction’s proceeds by additional businesses.
These days, there are many advantages to integrating the metaverse into financial
operational systems, such as the fact that all transaction activities are conducted
virtually, customers are dispersed across multiple countries, and the currencies used
can include both fiat money and cryptocurrencies, making the transaction process
more practical and adaptable. One of them is CBM Bank in the United States
(Barriga et al. 2021), which is creating an immersive virtual world and offering a
variety of services to its clients. In addition, one of the metaverse businesses that
employs AI technology is PT. Bank Seabank Indonesia (Seabank), a virtual banking
firm from the SEA Group that offers digital banking transaction services in Indonesia
and Singapore. Both the Indonesian Financial Services Authority and the govern-
ment of Singapore have granted business licenses to the Seabank. A recent study
found that due to the convenience and usefulness of the services employed, 43% of
consumers felt more comfortable utilizing virtual reality for banking rather than
having to leave their homes and conduct transactions at the bank directly with little
time and flexibility (Barriga et al. 2021). As more banks use VR technology, this
number is anticipated to increase. Customers using this metaverse have several
alternatives for completing transactions; they can go to the closest banking branch
office, monitor it through the official banking application, or just handle it directly
through the virtual bank.
The Application of Artificial Intelligence in Metaverse: A New. . . 123

4 Findings and Discussion

In the metaverse, a manufactured world, people can “live” by the rules of the creator.
In order to interact socially, individuals can debate a subject, work on a project, play
games, think about their experiences, and come up with solutions. A metaverse is a
virtual and augmented reality (AR/VR) world that is “shared,” “permanent,” and
“de-centralized.” The metaverse may contain both AR/VR and other essential
components, or it may only contain an AR/VR system that can show virtual content.
A key component of technology that makes it possible for the world to operate in line
with the laws of its creator is artificial intelligence (AI). A network of virtual worlds
in three dimensions (3D) called a “metaverse” is intended to promote social inter-
action. This conversation examines the metaverse’s future through the perspective of
AI (AI). This transformation of digital cyberspace includes hardware support, audio
processing, link development, and security protection. A promising method for
effectively and economically capturing scenes is computational imaging. Large-
scale diffractive technology used in virtual and augmented reality headsets is
being developed faster thanks to AI (Cheng et al. 2022). In summary, the metaverse
is a meta reality where people can interact with one another, communicate, work,
play, and do business just like they would in the actual world. In some works of
fiction, the term “Metaverse” refers to a digital technology that can combine virtual
reality (VR) and augmented reality (AR) to create a 3D virtual world in which users
can appear to interact in real life.
Artificial intelligence is crucial to the functioning of virtual reality in the appli-
cation of metaverse technologies. AI helps to make sure that VR can interact with
users and fulfill their needs. In the metaverse, AI essentially merges into a single
entity with the goals of realizing observation, computation, reconstruction, cooper-
ation, and interaction. Simply said, AI’s goal is to create a realistic metaverse. To
that end, it is used to collect any data and features that customers require in real life
and turn them into the virtual world. AI created an imagination that could be
recorded in a virtual system. AI is utilized to operate and manage human–computer
interaction (HCI) systems in the metaverse. To support the real metaverse in HCI,
three requirements must be met: perception, presentation, and understanding. The
role of AI is required to build a metaverse environment that appears real-time,
organic, and immersive, and the most crucial factor is that the entire system can be
comprehended and used by customers. AI makes HCI more accessible to users so
that the system in use may engage in two-way communication with users. AI in the
metaverse encompasses both a comprehension of some aspects of user psychology
and aids in the process of mutual interaction between computers and people. In order
to make users feel comfortable and practical when using the virtual service system,
the company must be able to ensure that the virtual reality system it creates knows
the will and subsequent needs of the users. As a result, during system operation, the
system must master and be able to understand the user’s intention.
The security of consumer personal data who utilize financial services must be
observed in order to gain public trust. The sophistication of storing users’ personal
124 L. Sautunnida et al.

data should rise along with the use of more advanced technology. However, more
and more forms of cybercrime are emerging as global Internet access becomes more
practical and convenient. The need for a strong data security system arises from the
fact that as more people become accustomed to the metaverse, especially in the
financial industry, which is a sensitive object that has a right to be protected by all
customer transaction information. The existence of the metaverse has an impact on
the information that is spread; the system used is human computerization, which can
read and track a user’s physical movements, including their face, eyes, posture, and
other physical characteristics, in order to more precisely and precisely ascertain the
authenticity of service users. Financial institutions that administer pension funds
regularly use biometric data to better distinguish retired clients.
The existence of such a system will undoubtedly lead to an increase in the amount
of personal data that is shared and accessed, changing what was previously only
general personal data in the form of names, ID numbers, addresses, parents’ names,
family cards, telephone numbers, and so forth into data and information about
physical users to help identify those who use financial services. This will pose a
challenge to the security of personal data in the future. Because not only the user’s
written identity but also their original appearance and photo will be known, endan-
gering their right to privacy if they are viewed without authorization. As a result,
increased personal data security measures must be used to balance the sophistication
of the technology being used. The business must create internal data privacy rules to
manage the significant risks of a data breach in order to stop this. One thing to keep
in mind is that a lot of personal information will be gathered in the metaverse. As a
result, after the customer enters his complete data, a system that can immediately
protect and encrypt data is needed. Nevertheless, the corporation (either banks or
fintech companies) is required by law to control how it must use and update its data
processing system to protect the personal data of its customers. There is a chance that
the employment of artificial intelligence and the metaverse will result in a reduction
in user privacy protection. They can also have a significant impact on and influence
long-term economic sustainability, particularly in the financial sector. Furthermore,
when it comes to the application of artificial intelligence as well as in the metaverse,
there are no existing rules and policies that are in place to control matters of privacy
and personal data protection.
Considering the importance of privacy and personal data protection, the European
Union (EU) Commission has long supported and promoted AI collaboration within
the EU in order to improve the EU’s competitiveness and guarantee confidence
based on EU standards. Following the publication of the European AI Strategy in
2018 and extensive stakeholder consultation, the High-Level Expert Group on
Artificial Intelligence (HLEG) produced Guidelines for Trustworthy AI in 2019
and an Assessment List for Trustworthy AI in 2020. In parallel, the first Coordinated
Plan on AI was unveiled in December 2018 in collaboration with Member States.
The EU Commission’s White Paper on AI, which was published in 2020, set a clear
vision for AI in Europe—an ecosystem of quality and trust. The current idea was
built on top of this notion. The public consultation on the White Paper on AI had
active participation from participants from all over the world. There are some gaps in
The Application of Artificial Intelligence in Metaverse: A New. . . 125

the current product safety legislation that need to be filled, particularly in the
Machinery Directive, according to the “Report on the Safety and Liability Implica-
tions of Artificial Intelligence, the Internet of Things, and Robotics” that was
published alongside the White Paper.
The updated Coordinated Plan will utilize funding from the Digital Europe and
Horizon Europe programs, as well as the Recovery and Resilience Facility, which
has a 20% target for digital spending, and Cohesion Policy programs. It will also
include “(i) create enabling conditions for AI’s development and uptake through the
exchange of policy insights, data sharing and investment in critical computing
capacities; (ii) foster AI excellence ‘from the lab to the market’ by setting up a
public-private partnership, building and mobilising research, development and inno-
vation capacities, and making testing and experimentation facilities as well as digital
innovation hubs available to SMEs and public administrations; (iii) ensure that AI
works for people and is a force for good in society by being at the forefront of the
development and deployment of trustworthy AI, nurturing talents and skills by
supporting traineeships, doctoral networks and postdoctoral fellowships in digital
areas, integrating Trust into AI policies and promoting the European vision of
sustainable and trustworthy AI globally; and (iv) build strategic leadership in high-
impact sectors and technologies including environment by focusing on AI’s contri-
bution to sustainable production, health by expanding the cross-border exchange of
information, as well as the public sector, mobility, home affairs and agriculture, and
Robotics” (EU Commission 2021).

5 Conclusion

As a way of achieving digitalization and sustainability across a variety of industries,

Industries 4.0 digital technologies are rising in popularity. Banks and other financial
institutions must reimagine themselves as service companies that prioritize invest-
ments in digital transformation over traditional services. Artificial intelligence has
the potential to create a more intelligent and autonomous environment (AI). The
banking industry will increasingly embrace virtual reality to change how consumers
transact with money. By 2030, the utilization of metaverse technology will bring in
somewhere between 8 and 13 trillion USD worldwide. Major corporations (either
banks or fintech companies) are utilizing the metaverse to increase the sophistication
and utility of their offerings.

Acknowledgments This chapter is part of a thesis titled “Indonesia’s Regulatory Framework

Towards a Comprehensive Legal Settlement Mechanism on the Leakage of Personal Data in the
Financial Sector,” which was written and completed by Lia Sautunnida, who was sponsored by
Pemerintah Aceh in collaboration with the PhD UM-USK Split Site Program. The researcher
expresses her highest gratitude to Allah Subhanahu Wata’ala for blessing, love, opportunity, health,
and mercy to complete this chapter. The researcher was able to participate in the tenth ASEAN
International Conference on Islamic Finance 2022 (AICIF) due to the support and invitation of her
dearest friend Asst. Prof. Dr. Razinah Mohd. Zain. She is extremely grateful for her guidance,
126 L. Sautunnida et al.

sincere and valuable assistance, and encouragement. She is also grateful to her supervisor, also her
co-author, Dr. Izura Masdina Mohd. Zakri, and her co-author, Dr. Azhari Yahya, whose support and
cooperation contributed to the success of this chapter. This chapter is far from perfect, but it is
expected that it will be useful not only for the researchers, but also for the readers. For this reason,
constructive thoughtful suggestion and criticism are welcomed.

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The Application of Mobile Banking Services
by Malaysian Islamic Banks: An Evaluation
of the Customers’ Main Concerns

Siti Ainatul Mardhiah Yusof, Nor Razinah Mohd. Zain ,

and Azman Mohd. Noor

Abstract The continuous advancement of financial technologies in the realm of

Islamic banking and finance is influenced by the spread of banking digitalization.
The digitalization of banking is undeniably related to the expansion and dependency
on the use of the Internet among the customers. Instead of depending on physical
location, Islamic banks nowadays have ample chances to engage and communicate
with their customers through this current online banking platforms. In order to
ensure their consistent follow-up with the latest digital transformation, Islamic
banks must be ready to adopt the new technology, ready to shift their costs of
services to the online applications, and reconsider their corporate structures. Focus-
ing on the application of mobile banking as a prominent part of banking digitaliza-
tion among Malaysian Islamic banks, it is important to consider their customers’
concerns relating to its usages. Thus, this research focuses (1) on explaining the
understanding of what is considered as a mobile banking and its usages among
Malaysian Islamic banks and (2) evaluating the concerns among Islamic banks’
customers relating to the use of mobile banking in their daily activities. In doing this
research, the researchers apply the qualitative research approaches and content
analysis of obtained data from library-based research. As part of the findings, it is
identified that the customers’ concerns are related to their awareness, knowledge of
using the mobile banking, trust toward the safety of their personal information or
transactions, and the security of the mobile banking system.

S. A. M. Yusof (*) · N. R. M. Zain · A. M. Noor

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia
(UIAM), Kuala Lumpur, Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 127
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_11
128 S. A. M. Yusof et al.

1 Introduction

The continuous development of the banking industry in Malaysia is influenced by

the rapid growth of information technology. The expansion of banking digitalization
has an impact on the continuous advancement of financial technologies in the
Islamic banking and finance context. Mobile banking is one of them. Mobile
banking is a branch of financial technologies continuously evolving and is
influenced by the spread of banking digitalization. Closely connected with banking
digitalization, Islamic banking is currently embracing mobile banking to support and
modernize its banking systems and other services. Islamic banking is also not
exceptional in implementing and providing mobile banking applications to their
customers.
Mobile banking is now considered essential for customers who partake in Internet
banking. Malaysian customers have been exposed to mobile banking applications,
with the majority of them applying and using technology-based services in their
daily life. With the existence of mobile banking services, they can conduct any
financial transaction or refer to any financial services in their daily life by utilizing
technology (specifically, the Internet) as a medium or platform for such transactions
or services. Apart from traditional banking, mobile banking offers customers several
benefits such as time efficiency, flexibility, and easy accessibility to financial
services without time and place limitations. It is appropriate to provide such benefits
for customers and enable them to accomplish their transactions more quickly
compared to traditional branch services. The usage of mobile banking services
may also assist in increasing financial inclusion among Malaysians.
Mobile banking provides effortless, timeliness, and flexibility that provide users
to conduct banking transactions through mobile devices only. According to Mohd
Thas Thaker et al. (2018), compared to manual interaction, mobile banking provides
a platform for customers to interact with their financial service providers even faster.
In other words, the digital world has effectively reshaped the whole operational
activities of the banking system. Mobile banking has recently replaced online
banking for customers to securely perform online transactions such as account
balance inquiries, funds transfers, bill payments, and other features.
This study provides two major contributions in considering customers’ concerns
about the usage of mobile banking applications: firstly, it explains the understanding
of what is considered as mobile banking and its usage among Malaysian Islamic
banks. The second contribution is evaluating the concerns among Islamic banks’
customers relating to the use of mobile banking in their daily activities. In doing this
research, qualitative research approaches are used and applied. In addition to
collecting relevant information for the literature review, content analysis of obtained
data from library-based research is also deployed.
The Application of Mobile Banking Services by Malaysian Islamic Banks:. . . 129

2 Literature Review

Islamic banking systems are defined as banks that allow their customers to conduct
business in accordance with Islamic law. Shariah requires all transactions to be in
legal form, and transactions involving interest are prohibited (Maali et al. 2006).
Islamic banking is a banking system that has been developed in accordance with
Shariah principles and Quran laws that prohibit the acceptance of Riba (usury) and
Gharar (risk or speculation) in the study by Dixon (1992). In other words, it refers to
a system of banking or financial activity that adheres to Islamic law. The fundamen-
tal of Shariah sources consists of the Quran and the Sunnah, which are the primary
sources of Shariah, whereas Ijma’ (consensus) and Qiyas (analogy) are the second-
ary sources of Shariah.
Moreover, mobile banking, also known as m-banking, is the act of conducting
online financial transactions using mobile telecommunication devices such as
mobile phones or tablets. Mobile banking allows users to access financial and
nonfinancial services such as account management, balance inquiry, transference,
bill payment, PIN change, and checkbook requests (Shaikh and Karjaluoto 2015).
Similarly, mobile banking is an interaction between customers who are directly
connected to a bank using a mobile device such as a mobile phone, smartphone,
and tablet. Mobile banking provides advantages such as freedom from time con-
straints, flexibility in location, and efficiency for any banking transaction purpose
compared to traditional branch banking or computer-based Internet banking
(Laukkanen 2017).
The development of digital banking platforms (mobile banking) has also had an
impact on Malaysia in reshaping the banking industry landscape, particularly in
Islamic banking. According to Bank Negara Malaysia, mobile banking subscribers
for both conventional and Islamic banks have increased since mobile banking was
introduced in Malaysia in 2006 until 2022, with 26.8 million registered subscribers
in September 2022 (Payment System of Bank Negara Malaysia 2022a). Currently,
there are 18 banks (both conventional and Islamic banks) in Malaysia that provide
mobile banking services to their customers, which are Al Rajhi Banking & Invest-
ment Corporation (Malaysia) Berhad, AmBank (M) Berhad, Alliance Bank Malay-
sia Berhad, Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, Bank of
China (M) Berhad, Bank Simpanan Nasional, CIMB Bank Berhad, Citibank Berhad,
Hong Leong Bank Berhad, HSBC Bank Malaysia Berhad, Industrial and Commer-
cial Bank of Cina (M) Berhad, Malayan Banking Berhad, OCBC Bank (Malaysia)
Berhad, Public Bank Berhad, RHB Bank Berhad, Standard Chartered Bank Malay-
sia Berhad, and United Overseas Bank (Malaysia) Berhad regardless of conventional
banks and Islamic banks (Bank Negara Malaysia 2022b).
Furthermore, Bank Islam Malaysia Berhad is one of the Malaysian Islamic banks
that introduced TAP (Transact-at-Palm), a mobile banking service, to their cus-
tomers in 2010. TAP is a mobile banking or mobile banking-i that allows users to
conduct mobile banking-i service anytime and anywhere without the need for
Internet access (Bank Islam Malaysia Berhad 2022). Following the trend, in 2017,
130 S. A. M. Yusof et al.

Bank Muamalat Malaysia Berhad (BMMB) introduced their mobile banking appli-
cation known as i-Muamalat mobile application, which is equipped with a high-
security system that meets the security standard required by the Malaysian banking
industry. The i-Muamalat mobile application enables and allows their users to check
their account balance, transfer funds, make bill payments, and do top-up services for
the users’ mobile data credit (Bank Muamalat Malaysia Berhad 2022).
Recognizing the tremendous potential of mobile banking in the banking industry,
several studies were conducted using both qualitative and quantitative methods to
analyze and examine mobile banking adoption among Malaysian consumers by
using both qualitative and quantitative methods (Thaker et al. 2019). Thaker et al.
(2019) examined the factors that influence the adoption of Islamic mobile banking
services among Malaysian consumers using extended Technology Acceptance
Model (TAM). Based on the responses from 250 banking customers, the study
revealed that perceived usefulness and perceived risk have a significant influence
on customers’ adoption toward Islamic banking services in Malaysia.
Bakar et al. (2017) have conducted research on the perceived ease of use,
security, and privacy of mobile banking in Malaysia and discovered that security
and privacy have a significant impact on mobile banking adoption through analysis
of 150 samples of users’ CIMB Bank Berhad in Kuala Terengganu, Malaysia. Bakar
et al. (2017) indicated that CIMB Bank Berhad employs advanced technologies to
ensure that customers’ personal information and details are kept private and confi-
dential. On the contrary, Bakar et al. (2017) found that the perceived ease of use does
not significantly differ with mobile banking adoption through analysis of 150 sam-
ples of users’ CIMB Bank Berhad in Kuala Terengganu, Malaysia. Bakar et al.
(2017) stated that it is because the CIMB’s customers have a perception that mobile
banking service is not easy to perform and still have insufficient and lack of
knowledge on mobile banking services since mobile banking remains relatively
new in Malaysia.
Besides, Masrek et al. (2012) conducted research on trust in mobile banking
adoption in Malaysia. Masrek et al. (2012) want to develop a conceptual framework
for consumer trust in mobile banking adoption and revealed that mobile banking
providers, mobile telecommunication providers, and mobile technology are impor-
tant and crucial in establishing consumer trust to adopt mobile banking services.
Abdinoor and Mbamba (2017) revealed that individual awareness gives a significant
impact on consumers’ adoption of mobile banking services in Tanzania. It means
that the increase in individual awareness levels will increase mobile banking services
adoption. Abdinoor and Mbamba (2017) also exposed the importance of individual
awareness to explain that mobile banking and service providers must ensure that
consumers are aware of the benefits, with enough information, and their service is
compatible with their needs that will lead to positive consumers’ perception of
services offered once mobile banking is accepted by the users.
The Application of Mobile Banking Services by Malaysian Islamic Banks:. . . 131

3 Mobile Banking Services Application: Customers’ Main

Concerns

The growth of mobile banking applications not only depends on the advancement of
technology but also on customers’ awareness, knowledge, trust toward the safety of
their personal information, and security in mobile banking systems. Customer trust is
taken into consideration in conducting any financial transaction through mobile
banking applications. It involves matters pertaining to data security and consumer
protection. Security aspects and consumer trust are strongly connected with
conducting mobile banking applications. Data security and customer protection
play important roles as well as the need to improve customers’ trust in conducting
mobile banking applications. Usually, customers do not want to confront the risk
when using mobile banking applications. Customers must consider risks such as
security, data input and output, privacy, connection, and the fear of losing informa-
tion before using mobile banking applications.
Customers’ awareness and knowledge are also important when using mobile
banking services. Some customers are unaware and unwilling to use mobile banking
services in their daily lives. This is related to consumers’ awareness of the mobile
banking services of Islamic banks. As a result, they prefer to conduct any transaction
through traditional banking at a branch compared to using mobile banking services.
Furthermore, they believe that mobile banking services will make their transaction
more complicated than traditional branch banking. Thus, they are more willing to
make any transaction at the Islamic bank branch.
Therefore, customers’ awareness and trust are important in conducting mobile
banking services when their personal information is highly secured and protected by
Islamic banks. The enhanced security features and protection of mobile banking
applications give customer trust in using mobile banking applications as provided by
Islamic banks.

4 Findings and Discussion

This research focuses (1) on explaining the understanding of what is considered as a

mobile banking and its usage among Malaysian Islamic banks and (2) evaluating the
concerns among Islamic banks’ customers relating to the use of mobile banking in
their daily activities. First, this study defines mobile banking, which allows cus-
tomers of financial institutions to conduct transactions and other banking activities
(account balances, transaction history inquiries, fund transfers, and bill payments)
using a mobile application on a smartphone or tablet. The banking industry provides
a variety of channels to its customers, including traditional branch service, self-
service devices such as automated teller machines (ATM), telephone banking,
Internet banking, and mobile banking. Mobile banking allows customers to conduct
financial transactions by using a mobile device (mobile phone, smartphone, or tablet)
132 S. A. M. Yusof et al.

(Shaikh and Karjaluoto 2015). The usage of mobile banking among customers
indicates a positive trend and steady increase since mobile banking was introduced
in 2006 until 2022 (Payment System of Bank Negara Malaysia 2022a). Recognizing
the significance of evolved mobile banking, Islamic banks made an effort to intro-
duce mobile banking and slowly shifted away from traditional banks.
Second, this study discovered that customers’ concerns are related to their
awareness, knowledge of using the mobile banking, trust toward the safety of their
personal information or transactions, and the security of the mobile banking system.
A study by Abdinoor and Mbamba (2017) revealed the importance of individual
awareness to explain that mobile banking and service providers must ensure that
consumers are aware of the benefits, have enough information, and that their service
is compatible with their needs. The increase in individual awareness levels will
increase mobile banking services usage. Similarly, customers’ concerns are also
related to trust toward the safety of their personal information in conducting mobile
banking services as also found by Masrek et al. (2012), who want to develop a
conceptual framework for consumer trust in mobile banking adoption in Malaysia.
This study revealed that mobile banking providers, mobile telecommunication pro-
viders, and mobile technology are important and crucial in establishing consumer
trust to adopt mobile banking services. Moreover, the security of the mobile banking
system is an important part to consider when using mobile banking services. It was
proved by Bakar et al. (2017) that security and privacy have a significant impact on
mobile banking adoption through analysis of 150 samples of users’ CIMB Bank
Berhad in Kuala Terengganu. This study indicated that CIMB Bank Berhad employs
advanced technologies to ensure that customers’ personal information and details are
kept private and confidential. As a result, their customers have confidence in using
their mobile banking applications safely and securely.

5 Conclusion

As a way of reaching banking digitalization among Malaysian Islamic banks,

customers’ concerns need to be considered in using mobile banking services without
time and place limitations. Mobile banking is a part of banking digitalization that
facilitates financial transactions on mobile devices by using mobile banking appli-
cations. Mobile banking provides efficiency, easiness, effortlessness, and freedom
from time constraints and flexibility anywhere. Consistently with the efforts in
making Malaysia continuously grow with the digital transformation, it is essential
for Islamic banks to provide secured features of mobile banking services for
increasing the customers’ trust in using mobile banking over traditional banks. By
considering this, it is important for Islamic banks to design a better strategy to
improve the customers’ concerns about mobile banking services in Malaysia.

Acknowledgments This study is treated as a part of the outcomes from a thesis titled “An
exploratory study on mobile banking and their services in Malaysian Islamic banks: customers’
The Application of Mobile Banking Services by Malaysian Islamic Banks:. . . 133

awareness and their protections,” which was written and completed by Siti Ainatul Mardhiah binti
Yusof, who received sponsorship from Jabatan Perkhidmatan Awam (JPA). All glory is due to
Allah, the Almighty, whose Grace and Mercies have been with us to complete our writing despite
the difficulties. Although it has been difficult, His Mercies and Blessings on us have made the task
of completing this chapter easier. I would like to express my heartfelt gratitude to my main
supervisor who is my outstanding co-author, Asst. Prof. Dr. Nor Razinah binti Mohd. Zain invited
me to the tenth ASEAN International Conference on Islamic Finance 2022. With her advice and
encouragement, I have the opportunity to be a part of this publication. I am extremely grateful and
indebted to her for her expert, sincere, promptitude, and valuable guidance and encouragement
extended to me. I am also grateful to my co-supervisor, also my co-author, Prof. Dr. Azman bin
Mohd. Noor, whose support and cooperation contributed to the success of this chapter. Once again,
we glorify Allah for His endless mercy on us, One of which is allowing us to successfully finish this
chapter. Alhamdulillah.

References

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Islamic Equity Financing as a Financial
Inclusion Enabler: Nigeria in Spectrum

Tesleem Olajuwon Isa Akosile , Nor Razinah Mohd Zain ,

Engku Rabiah Adawiah Bt Engku Ali , and Salina Kassim

Abstract Inclusivity in access to finance is a global concern and a key enabler of the
prime Sustainable Development Goals (SDGs). This study focuses on appraising
Islamic equity financing as an essential vehicle for a deepened and effective financial
inclusion in Nigeria. The study relies on primary and secondary data sourced from
surveys, interviews, official publications, working papers, articles, e-books,
websites, and online resources in furtherance of its objectives. Through the adoption
of qualitative analysis, content analysis is used to define the status of financial
inclusion in Nigeria. This study finds that the value proposition of Islamic equity
financing aligns with the objectives of the Nigerian authorities to engender financial
inclusion and that the challenges debarring the adoption of Islamic equity financing
as a financial inclusion enabler were already being mitigated. Consequently, the
study recommends that Islamic Banks in Nigeria increase their product class allo-
cations for Islamic equity financing contracts in their financial asset creation. Fur-
ther, the Central Bank of Nigeria (CBN), being the key regulator of Nigeria’s
financial industry, is enjoined to evolve strategies that will see to the expansion of
the country’s financial inclusion drive through Islamic equity financing and
contracts.

1 Introduction

Concerned about the challenges around the world, the United Nations (UN) General
Assembly in December of 1983 mandated the World Commission on Environment
and Development headed by Mrs. Gro Harlem Brundtland to evolve “a global
agenda for change.” On March 20, 1987, the Commission submitted its 247-page
report entitled “Our common future” that came to be known as the “Brundtland

T. O. I. Akosile (✉) · N. R. M. Zain · E. R. A. B. E. Ali · S. Kassim

IIUM Institute of Islamic Banking & Finance, International Islamic University Malaysia, Kuala
Lumpur, Malaysia
e-mail: [email protected]; [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 135
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_12
136 T. O. I. Akosile et al.

Report of 1987” (United Nations 1987). The Brundtland Report harped on the
sustainable development of the globe and set the tone for the Millennium Develop-
ment Goals (MDG) and subsequently the Sustainable Development Goals (SDG)
through which the UN intends to address myriad global crises that include socio-
economic crisis. The SDGs, among others, strive to reduce socioeconomic inequal-
ities and promote inclusive and sustainable economic growth for all (Mondini 2019).
Like many other sovereigns around the globe, the Federal Government of Nigeria
(FGN) keyed into the MDGs in a bid to, among others, mitigate the socioeconomic
imbalance and noninclusive economic growth within its territory. To achieve this,
social development institutions were created, such as the National Poverty Eradica-
tion Programme (NAPEP) and Small and Medium Enterprises Development Agency
of Nigeria (SMEDAN) in the years 2001 and 2003, respectively. After the winding
down of the MDGs in 2015, the Office of the Senior Special Assistant to the
(Nigerian) President (OSSAP) on MDGs undertook a critical assessment of how
the country fared in its MDG journey and subsequently issued a report. The said
report noted that reduction in economic inequities and poverty was yet to be
effectively achieved and identified the path toward a more inclusive economic
growth to essentially be through effective financial inclusion (OSSAP MDG
2020). Sequel to the introduction of the SDGs, the Nigerian authorities initiated
programs to step up financial inclusion in the country, which culminated in the
introduction of the National Social Investment Programme (NSIP) in 2016. Under
the NSIP, the subprograms that were introduced included the Government Enterprise
and Empowerment Programme (GEEP), Conditional Cash Transfer (CCT) program,
N-power program, and the Home Grown School Feeding (HGSF) program, among
others (The State House 2020).
The Central Bank of Nigeria (CBN), in furthering the FGN’s financial inclusion
drive, had in the year 2010 estimated to reduce financial exclusion rate of Nigeria’s
adult population to 20% by the year 2020 (CBN 2012). The CBN subsequently
launched the National Financial Inclusion Strategy (NFIS) policy document first in
2012. In the policy document, the CBN posited that “financial inclusion is achieved
when adult Nigerians have easy access to a broad range of formal financial services
that meet their needs at affordable costs.” Pursuant to this, efforts were made, and
programs and projects initiated and implemented. It is worth noting the active
participation of the CBN at the meeting of Central Bank Governors of the
Developing-Eight Organization for Economic Cooperation (D-8) held in Islamabad
in 2012. The follow-up meeting was held in Abuja, Nigeria, in July 2010 (D-8 2010).
The highlight of the meeting was a resolution that the Central Banks would, among
others, “promote Innovative Financial Inclusion Policies, explore opportunities in
Islamic Finance and establish information exchange and promote peer learning
amongst D-8 central banks” (Alliance for Financial Inclusion (AFI) 2010). Bien-
nial surveys were conducted since 2012 (See Table 1 and Fig. 1 below) to gauge the
financial inclusion strategy of the CBN. The surveys revealed that while in 2012
about 60.3% adult Nigerians were financially incldued, by 2020 the number had only
increased to 64.1%. By implication, 41.6% were still excluded as at 2016; thus, there
was more work to be done to hit the 80% inclusion target by the year 2020, hence,
the CBN revised its NFIS policy document (CBN 2018).
Islamic Equity Financing as a Financial Inclusion Enabler: Nigeria in Spectrum 137

Table 1 Authors’ own illustration of Nigeria adult population financial exclusion rate from EFInA
access to financial services in Nigeria 2012/2014/2016/2018 and 2020 surveys
2012 2014 2016 2018 2020
Financial exclusion 39.70% 39.50% 41.60% 36.80% 35.90%

Financial Exclusion
43.00%
41.60%
42.00%
41.00%
39.70% 39.50%
40.00%
39.00%
38.00%
36.80%
37.00% 35.90%
36.00%
35.00%
34.00%
33.00%
2012 2014 2016 2018 2020

Fig. 1 Authors’ own illustration of Nigeria adult financial exclusion rate from EFInA access to
financial services in Nigeria 2012/2014/2016/2018 and 2020 surveys

Biennial surveys in Nigeria by the Enhancing Financial Innovation and Access

(EFInA) in between 2012 and 2020 reveal a fluctuating progress (EFInA 2019,
2021).
Islamic equity financing is believed to perhaps be one of the innovative
approaches to effective financial inclusion (Mohieldin et al. 2012; Sadiq et al.
2020). This study thus seeks to examine the likely role that Islamic equity financing
could play in helping Nigeria bring the remaining 16.8% of its adult population into
the financial inclusion bracket, albeit 2 years after the 2020 target.
This study is divided into four sections. The first segment provides a background
on Nigeria’s financial inclusion journey since the Brundtland Report. The second
segment examines relevant literature pieces on financial inclusion through Islamic
equity financing. The third segment will concisely address the methodology adopted
by the study. The potential of Islamic equity financing as a financial enabler for
Nigeria is the focus of the fourth segment, while the last segment rounds up the study
and proffer recommendations for policymakers and the research gaps to be further
explored.
138 T. O. I. Akosile et al.

2 Literature Review

The earliest works in modern times on Islamic economic system, a subset of which is
Islamic banking and financial systems, had advocated partnership (Islamic equity
financing) as the Islamic alternative to the interest-laden system (Siddiqi 1983,
1985). This became the popular Islamic banking model through several works of
Dr. Muhammad Nejatullah Siddiqi, who drew inspiration from the works of
Maulana Abul Ala Maududi (1947), among other venerable scholars of the era
(Abdullah 2022). The Islamic equity financing was seen as one of the ways through
which Islam’s objective of equitable resource distribution, inclusion, and social
justice could be achieved. It was also seen as a potent tool for effective financial
inclusion of the start-ups and owners of microbusinesses who do not have what it
takes to access financing for their businesses from commercial banks. Muslim
majority nations were thus urged to take advantage of the embedded solution in
Islamic equity financing to solve the twin challenges of poverty and financial
exclusion (Mohieldin et al. 2012). Kayed (2012) aligned with the position of
Mohieldin et al. (2012) and observed that the reality of most Islamic financial
institution’s activities seems to be at variance with what was thought to be the
core of Islamic finance. He noted that most of them behaved like conventional
banks by adopting their financing relationship products that are debt-based instead
of equity financing. Shaikh (2017) proceeded to surmise that high agency cost could
be a key reason why most Islamic financing institutions avoid the extensive usage of
Islamic equity financing in their asset creation. He thus suggested that enterprise-
level finance and distinct entry criterion should be used by Islamic financial institu-
tions to reach the right targets. That through this approach the challenges of adverse
selection and high monitoring costs could be resolved by the Islamic financial
institutions. Naceur et al. (2015) saw a nexus between investment financing through
Islamic equity financing and the propensity for improved accessing of credits. They
urged authorities and regulators of financial services industry to explore our Islamic
equity financing that can enable and improve access to finance and thus engender a
more effective financial inclusion. Their stand was supported by Azmat and Ghaffar
(2021), who were of the view that regulators could regulate the credit market in such
a way that encourages the use of more of Islamic equity financing as against debt-
based financing to achieve a reduction in inequity and societal risk, while achieving a
more inclusive financial system.

3 Merits of Islamic Equity Financing for Nigeria

A synthesis of the various scholarly exposition on Islamic equity financing (Ayayi

2012; Khan 2015; Mohd Ariffin et al. 2015; Onagun 2017; Shaikh 2017; Maikabara
2019; Sadiq et al. 2020; Yustiardhi et al. 2020; Akosile and Zain 2023) reveals that
the merits of Islamic equity financing include the following:
Islamic Equity Financing as a Financial Inclusion Enabler: Nigeria in Spectrum 139

(a) Promotes wealth and job creation: The entrepreneurs, small businesses, and
start-up businesses that would have been otherwise discouraged from furthering
their business ideas due to challenges around access to funds to do so would find
solace in partnering with a fund provider. This also reduces unemployment and
attendant youth restiveness and other social malaise that characterize underde-
veloped or developing societies.
(b) Growth-oriented: From the demand side, it encourages owners of small busi-
nesses to continue to improve their skills and talent to attract more investors or
capital providers for a joint venture, thereby engendering innovation, and crea-
tivity. From the supply or capital provider side, there would be more concern
about survival of business ventures, thus bringing about concern for capacity
development of the entrepreneur or start-up business that culminates into
increased efficiency and income opportunities for the venture.
(c) Interaction of finance with real economic activities: An equity-based-driven
economy entails greater economic activities as it involves direct participation
of the owner of capital in the production process. Economic agents are
concerned about the results of the business venture as the shared risk means
that investors would have to bear the risk of business failure. Consequently, the
system inculcates good values in business management practices to ensure the
success of business ventures.
(d) Promotes positive social mobility: Through Islamic equity financing, finance is
not only made available to those who have the requisite skills to create wealth, it
also promotes positive movement of individuals and families to affluence. The
upward movement of a disadvantaged and at times financially excluded strata of
a society creates a healthy economy. Such units of the society are not bugged
down with shackles that are at times created through debt-based financing. This
is because nonperformance of an Islamic equity financing only results in loss of
effort and unemployment with zero debts rather than indebtedness. Indebted-
ness, on the other hand, may lead to social immobility or worsen social status of
individuals and household.
(e) Cheap access to finance: Islamic equity financing ordinarily does not require the
counterparty to provide collateral requirements to access finance. However, the
same could be required to cover cases of misconduct and breach of contractual
terms and negligence on the part of the active partner or joint venture manager.
These merits of Islamic equity financing serve as objective of the federal gov-
ernment of Nigeria in securing the common economic well-being of its citizens as
articulated in Section 16 (2) of the Constitution of the Federal Republic of Nigeria
1999 (as amended). It equally satisfies the Central Bank of Nigeria’s cravings for
engendering the financial inclusion of adult Nigerians through “access to a broad
range of formal financial services that meet their needs at affordable costs” (CBN
2018).
140 T. O. I. Akosile et al.

4 Challenges Militating Against Islamic Equity Financing

in Nigeria

The challenges identified as constituting a clog in the wheel of the free and extensive
adoption of Islamic equity financing by Islamic financial institutions include
(a) Adverse selection: Adverse selection is where upon entering into a transaction
there is no symmetry in the available information to the parties, that is, a party is
more informed than the counterparty as it relates to the subject matter of the
underlying contract. Thus, the disadvantaged party make decisions that may turn
out to be detrimental to him, while the more informed party benefits from the
transaction at the expense of the disadvantaged counterparty (Maikabara 2019).
(b) Moral hazard: This entails the possibility of the counterparty, usually the
financed party acting in bad faith or conducting the jointly financed business
in such a reckless way that might lead to losses, because the resultant economic
losses would be shouldered by the nonactive partner in the endeavor.
(c) Supervision: The implication of a Musharakah contract implies that the financial
institution should be actively involved in the underlying business of the
Musharakah relationship, thus, exposed to business and credit risk simulta-
neously. Alternatively, the financial institutions are expected to closely supervise
the business (Mohd Ariffin et al. 2015). It has been argued that Islamic financial
institutions are usually unable to or inclined toward active and direct participa-
tion in the various types of small businesses because of the attendant cost and the
fact that it is at times impracticable (Shaikh 2017). Reasons for the impractica-
bility include the competence of the financial institution’s personnel in the area
of business of the partner.
(d) Legal regime: For example in jurisdictions like Malaysia, the National Land
Code precludes financial institutions from direct relationship with property
developers (Mohd Ariffin et al. 2015). This will negatively impact the smooth
prosecution of Islamic equity financing, particularly where the Islamic financial
institutions should, in furtherance of the equity contract, have a direct relation-
ship with a property developer. Tax laws in jurisdictions could also pose a
challenge, especially in determining deductibles like stamp duties and capital
gain tax, among others.
(e) Regulatory constraints: This includes regulatory requirement that financial
institutions provide lending against collaterals, assign risk weightage to their
financing activities, and set aside adequate loss provisioning. An example in this
regard is the prescription by the Islamic Financial Services Board (IFSB) on risk
weightage for Musharakah-related transactions, which is construed to be a
limiting factor for Musharakah transaction for Islamic financial institutions.
Although the IFSB standard further provides that regulators provide guidance
for financial institutions wishing to explore the regulatory slotting criteria
approach (Onagun 2017).
Islamic Equity Financing as a Financial Inclusion Enabler: Nigeria in Spectrum 141

While the highlighted challenges militating the extensive adoption of Islamic

equity financing in Nigeria hold true, there appears to be remedies or mitigants to
most of them.
In the aspect of adverse selection and supervision, most financial institutions
determine their credit policies and operational focus. An example of this is providing
priority financing for sectors like agribusiness, renewable energy, education, etc.
Further to that, specialized desks are established to extensively access related
requests from such sectors of the economy. Personnel of such desks are equally
provided capacity development and enhancement from time to time.
The moral hazard issues have been mitigated by the CBN requirement that credit
checks be done on individuals and entities prior to providing financing. The CBN
had licensed credit bureau firms that aggregate credit history from financial institu-
tions on a monthly basis. Such updated database of credit history could be a good
tool to aid credit analysts of financial institutions to properly profile their
counterparties.
In relation to legal and regulatory regimes, Nigeria has consistently achieved
good mileage in laws and regulations that support ease of doing business, such as the
passing into law of Banks and Other Financial Institutions Act, 2020, among others.
The latest in this trend being the issuance of Non-interest Finance (Taxation)
Regulation 2022. By this gazette regulation, the Federal Inland Revenue Service
(FIRS), Nigeria’s tax authorities, sought to regulate the taxation of Islamic financing
activities, including Islamic equity financing, in line with the principles of Islamic
commercial jurisprudence.

5 Conclusion and Recommendation

The embedded value proposition of Islamic equity financing finds accords with the
objectives of financial inclusion drive of the Nigerian authorities. This includes, but
is not limited to, wealth creation and growth orientation that directly connect
financing with real economic activities in a cheap way that enhances positive social
mobility. Although Islamic equity financing in Nigeria, like other climes, is not
immune from challenges. These challenges appear to have been mitigated by
mechanisms and steps taken by the Nigerian stakeholders, albeit inexhaustive.
It is in view of the above that this study recommends that Islamic financial
institutions in Nigeria increase their sectoral allocations for Islamic equity financing
contracts in their financial asset creation. Also, the CBN, being the key regulator of
Nigeria’s financial industry, is enjoined to evolve strategies that will see the Islamic
equity financing play a more enabling role in the country’s financial inclusion drive,
which is about 16% behind the year 2020 target.

Acknowledgments First, I acknowledge Allah’s unceasing blessings and bounties over the ages.
My sincere gratitude to Asst. Prof. Dr. Nor Razinah binti Mohd. Zain, who consistently encouraged
my participation at the tenth AICIF 2022, the same way I remain indebted to Prof. Dr. Engku
142 T. O. I. Akosile et al.

Rabiah Adawiah Bt Engku Ali and Prof. Dr. Salina Kassim for their motherly guidance. And to the
entire IIiBF wonderful and hardworking academic and nonacademic team for all learning, trainings,
and knowledge-sharing moments.
Wal Alhamdulillah Rabil Alameen.

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Financial Inclusion in Somalia Between
Reality and Expectations

Abdirahman Abdillahi Farah and Abdulmajid Obaid Hasan Saleh

Abstract Somalia has experienced some stability and peace following a civil war
that lasted for 20 years, but the economic situation is still difficult, and the nation is
still susceptible to environmental, political, and economic shocks. Since GDP per
capita is equivalent to $435, Somalia remains below the $1750 rate in sub-Saharan
Africa. 37% of the population live in poverty, where 80% live in rural areas and 43%
live on only one dollar a day. Somalis are renowned to be very entrepreneurial
people despite the fact that less than 5% of the need for micro- and microenterprise
finance is currently being met in Somalia, according to market research. There are
over 2 million possible projects and hundreds of millions of dollars in funding
needed to meet the magnitude of unmet demand. The research aims to reveal the
realities of financial inclusion in the Republic of Somalia and monitor the most
significant transformations after political stability. The research adopts the analytical
descriptive approach to the study of literature and the quantitative approach to the
analysis of secondary data relevant to the size of the use of financing tools and bank
cards.

1 Introduction

Financial inclusion is the cornerstone of achieving a set of United Nations develop-

ment goals to achieve a better and more sustainable future for all. Accordingly, the
World Bank considers financial inclusion to be one of the main pillars for reducing
extreme poverty and increasing prosperity and well-being in society. In addition,
increasing financial inclusion encourages the poorer segments of society to save
money and increases the availability of economic resources.
The lack of basic financial services prevents the poor from carrying out many
everyday tasks that may greatly enhance their quality of life. They can start

A. A. Farah (✉) · A. O. H. Saleh

IIUM, Institute of Islamic Banking and Finance, Kuala Lumpur, Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 145
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_13
146 A. A. Farah and A. O. H. Saleh

accumulating assets and taking other actions to raise their standard of living once
they are integrated into the financial system. They can accomplish a lot of things,
such as save money, be approved for financing to grow their small business or build
homes, have a safe way to pay their bills to hospitals or schools, and much more.
According to earlier research, it is challenging to imagine sustained financial
stability and economic growth while a large portion of the population and SMEs are
financially excluded from the formal financial system. This is because financial
inclusion and economic growth are closely related. For this reason, governments
and supervisory and executive authorities are actively seeking to enhance financial
inclusion, and the Group of Twenty (G20) committed to this and even developed an
action plan to track progress in achieving this goal (Arnold and Gammage 2019).
Despite all these efforts, global financial inclusion data for 2021 indicate that
nearly a quarter of the global adult population is excluded from access to basic
financial services (Demirgüç-Kunt et al. 2021).

1.1 Research Problem

The concept of financial inclusion requires the ability to access a wide range of basic
financial and banking services, including owning bank and savings accounts, pay-
ment systems, and money transfer services, in addition to the existence of legislation
to protect consumers financially.
According to the Global Financial Inclusion Report 2021 published by the World
Bank, 1.9 billion adults worldwide lack access to the formal financial system
(Demirgüç-Kunt et al. 2021).
According to the World Bank, statistics show that about two-thirds of the adult
population in Somalia do not have accounts in formal financial institutions, and that
the percentage of those who own credit cards does not exceed 1%. Many adults in
Somalia use informal methods of saving and borrowing (such as savings in savings
clubs, borrowing from family and friends, and other informal methods) (World Bank
2014).
The provision of various financial services through mobile phone, or “Mobile
Money,” has advanced at an increasingly rapid rate over the past 30 years. For
example, transferring money via mobile phone by creating new delivery channels
that are “mobile branches.” In Somalia, these mobile banking services are essential
for increasing financial access. According to World Bank data, mobile money has
achieved success in Somalia, where data indicate that 37% of adults use these mobile
financial services (World Bank 2014).
Financial Inclusion in Somalia Between Reality and Expectations 147

1.2 Research Objective and Research Questions

Through the analysis of secondary data on financial inclusion in the Republic of

Somalia, the study aims to investigate the reality of financial inclusion in the country
and the contribution of mobile money to financial inclusion promotion, and the role
of mobile money and their uses in promoting financial inclusion opportunities.
What is the reality of financial inclusion in the Republic of Somalia? What is the
role of mobile money in promoting financial inclusion in Somalia?

1.3 Research Method

A combination of quantitative and qualitative approaches was used in the data

analysis. A qualitative approach will be adopted in this chapter. There is a need to
review the relevant literature, which includes data collection from various studies
conducted on financial inclusion, in general, or in Somalia, in particular, and to
understand it more. Accordingly, the analytical approach will be conducted to collect
and study secondary data and reports issued by the World Bank on financial
inclusion and mobile financial services, as well as United Nations reports, data of
the Central Bank of Somalia, and other studies in this framework.

2 Literature Review

A good summary of the classification of financial inclusion in Africa has been

provided in the work of Triki and Faye (2013). The main goal of this study was to
advance the conversation about financial inclusion in Africa, document the reality of
financial inclusion there, and inform decision-makers and financial sector stake-
holders about the opportunities and challenges that currently exist and require more
attention and action. The specific objective of this study was to discuss the concept
of financial inclusion and the efforts made to measure it, in addition to an overview
of the state of financial inclusion in Africa. The study also intends to analyze certain
strategic concerns and choices connected to the planning and implementation of the
financial inclusion agenda in Africa, as well as to investigate transformative ways
created to serve the unbanked. This study demonstrated that many people and
businesses are still shut out of official financial services in Africa despite the
continent’s recent expansion of the financial industry. The biggest hurdles and
obstacles are rising costs, distance, and lack of confidence. According to this report,
certain demographic groups—such as those who live in rural regions, the poor,
women, and those with lower levels of education—are further locked out of the
financial system. The study also demonstrated that removing structural obstacles,
such as low income levels and governance issues, is difficult because it also
148 A. A. Farah and A. O. H. Saleh

necessitates addressing their fundamental causes. The first step in the solution phase
involves innovations that, by lowering prices, increasing access, and lowering entry
barriers, can radically alter how individuals engage in financial transactions. It is
beyond the scope of this study to examine the financial inclusion in Somalia.
In another study by Ahmad et al. (2020), with an emphasis on sub-Saharan
Africa, the purpose of this study was to conduct a detailed analysis of the data
currently available about mobile money and its contribution to financial inclusion
and development. In order to examine the relationship between financial inclusion
and economic development in both theory and practice, the study uses a descriptive
and analytical approach. This study clearly showed how mobile money has a
positive economic impact, especially in terms of its contribution to financial
inclusion.
In a study that aimed to evaluate how mobile money impacted financial inclusion.
Gas (2017) discovered that mobile money is practical and useful for addressing
financial exclusion in various countries. A survey was used to perform the study, and
1942 people from Kenya and Somalia provided the data. It was analyzed using
several variables, but the focus of the study was on the impact of owning an account
in mobile money platforms on financial inclusion in these two countries.
In summary, it has been shown from this review that most of these studies have
failed to provide information on financial inclusion in Somalia and the contribution
of mobile money in financial inclusion also; it has been shown that the contribution
of mobile money can make to promoting financial inclusion is no longer just a
theoretical opinion, but there are findings on the ground revealed by research that
supports this view. In the last part of this research, we will discuss (digitally) how
mobile money has contributed to enhancing financial inclusion in Somalia.
According to a World Bank report, financial inclusion is the availability to both
individuals and businesses of practical and affordable financial services and prod-
ucts, such as transactions, savings, loans, and insurance, that are offered in a
sustainable and moral way (Demirgüç-Kunt et al. 2021).
According to a number of studies, financial inclusion is an economic situation
where people and businesses are not refused access to basic financial services
because they do not fulfill efficiency standards. The process of ensuring that
low-income people have affordable access to suitable and timely financial services
and credit when they need it is known as financial inclusion (Chithra et al. 2013).
There are only a few studies that concur on the three primary aspects of financial
inclusion: access, utilization, and quality. Triki and Faye (2013) point out that
adopting a more comprehensive and multifaceted definition of financial inclusion
is essential in that it aids in overcoming the frequently false belief that inclusion
would invariably be attained by merely providing more access points. Instead, a
more comprehensive view of financial inclusion should address the frequency with
which customers utilize goods, whether those products satisfactorily meet their
needs, as well as whether they benefit as a result. Many countries are currently
gathering data in a certain order, evaluating access first, usage second, and quality
third, even though initiatives to promote financial inclusion should aim to enhance
all three dimensions simultaneously. This frequently occurs because data on the
Financial Inclusion in Somalia Between Reality and Expectations 149

degree of service provision are more readily available than usage and quality data in
many countries.
It is nearly universally understood that financial inclusion is crucial for alleviating
poverty and supporting inclusive economic growth. Financial inclusion is a means,
not an end in itself. There is mounting evidence that it offers people significant
advantages. According to a few studies, persons who are involved in the financial
system are more likely to be able to launch and grow enterprises, invest in education,
manage risks, and weather financial shocks (Khandare 2019).
Chithra et al. (2013) According to research on financial inclusion, those who have
access to the financial system are better able to start and expand enterprises, invest in
education, manage risks, and survive financial shocks. Increasing savings,
empowering women, and the promotion of investment and consumption are all
results of access to the official financial system and means of payment and savings.
Additionally, the advantages of financial inclusion extend beyond people. Increasing
financial service accessibility for both people and enterprises may contribute to the
reduction in income inequality and the acceleration of economic growth.
Financial exclusion is used in a variety of contexts; it is most frequently used to
refer to a broad notion that describes a lack of access to and utilization of a variety of
financial services. Statistics typically distinguish between the “underbanked” (those
who use no financial services at all) and “unbanked” (those who have limited access
to financial services). Financial exclusion, the antithesis of financial inclusion, is a
situation in which people lack access to the financial services and products they
require.
The Global Financial Inclusion Report identifies a set of forms of financial
exclusion, which can be categorized into two main categories: (1) voluntary exclu-
sion: it refers to a segment of the population or businesses that have chosen not to
engage in the formal financial system and not use the financial products and services
offered. This is either for religious or cultural reasons or a lack of trust in financial
institutions. Several studies have argued that voluntary exclusion is not a result of the
failure of financial institutions’ performance, and therefore nothing can be done to
address it. However, financial literacy and the design of financial products and
services that meet religious and cultural requirements may be a solution for this
segment of society. (2) Forced exclusion: it refers to a segment of the population or
commercial establishments that have been excluded either because of the high cost
of financial services, the customers have to travel to meet financial service providers,
the lack of identification papers, or the lack of sufficient income. This forced
exclusion is inevitably the result of government failures and financial market flaws
(Ozili 2021).
150 A. A. Farah and A. O. H. Saleh

3 Result and Discussion

3.1 Overview of Financial Inclusion in Somalia

Bank Accounts
According to the World Bank (2014) report, in Somalia, the percentage of adults
owning bank accounts reached 39%, made up of 44% men and 34% women. In
contrast, 69% of adults in Somalia who own bank accounts are more educated (with
a high school diploma or higher), whereas 61% of the country’s population does not
own a bank account. This is clearly indicated in Fig. 1 (Fig. 1 from Global Findex
database 2014: measuring financial inclusion around the world. By The World
Bank, 2014).
Savings
People save money for future expenses such as saving for big purchases, educational
expenses, business, old age, or potential emergencies. As shown in Fig. 2, The
World Bank (2014) report indicates that the rate of savers in Somalia is 37% of the
total adult population. This represents 42% of males compared to 32% of females.
The percentage of educated people—who hold high school diplomas or higher—
reached 56% of the total savers. Only 3% of all savers, according to the study, keep
their money in commercial banks. While 15% of all savers belong to savings clubs,
which are the most popular alternative to official financial institutions. The study
also shows that 15% of savers do so to pay for their children’s education (Fig. 2 from
Global Findex database 2014: measuring financial inclusion around the world. By
The World Bank, 2014).

Fig. 1 Adults who own Bank Accounts

bank
accounts vs. nonowners of
bank accounts adults who
39% own bank
accounts
61% non-owners
of bank
accounts

Fig. 2 Savers vs. Savings

non-savers

37 Savers

63 non savers
Financial Inclusion in Somalia Between Reality and Expectations 151

Fig. 3 Borrowers vs. Loans

nonborrowers

Borrowers
44
56 non
Borrowers

Fig. 4 The rate of financial 71 80

literacy among adults in
Somalia, Malaysia, and 60
Norway 36
40
15
20
0
Norway Malaysia Somalia

Loans
Most people occasionally borrow money either for the aim of starting a business,
paying reimbursable debts like student loans, buying a home, buying a property, or
paying for unanticipated emergencies. As shown in Fig. 3, the percentage of over
56% of Somali adults are borrowers, making up Somalia. And only 2% of the loans
came from formal financial institutions, while 18% of the loans came from local
shops where the borrowers used the “buying on credit” (debt). In contrast, the study
indicated that the number of borrowers from friends or family is more than ten times
more than the number of borrowers from licensed financial institutions, and this
group accounts for more than 40% of all borrowers. According to the data, 29% of
all loans were made for health-related or medical expenses, and 11% were made for
tuition or educational expenses. Additionally, based on the data, no more than 1% of
Somalia’s adult population owns credit cards (Fig. 3 from Global Findex database
2014: measuring financial inclusion around the world. By The World Bank, 2014).
Financial Literacy
The World Bank questionnaire adopted a global benchmark in the issue of financial
literacy, which is an individual’s understanding of risk diversification, inflation,
numeracy, and interest compounding, four fundamental financial concepts. Com-
pared to other nations, as shown in Fig. 4, Somalia’s adult financial literacy rate is
estimated to be 15%, while Malaysia’s adult financial literacy rate is 36% and
Norway’s adult financial literacy rate is 71% according to Klapper and van
Oudheusden (n.d.) report (Fig. 4 from Global Findex database 2014: measuring
financial inclusion around the world. By The World Bank, 2014).
152 A. A. Farah and A. O. H. Saleh

3.2 The Financial Sector in Somalia

The Somali financial sector gradually began to move out of the informal pattern to a
more regulatory and institutional pattern in 2009 when the Central Bank of Somalia
was established. After the outbreak of the civil war in 1991, there was no central
monetary authority for more than 20 years. The current financial system consists of
the central bank, commercial banks, microfinance institutions (MFIs), money trans-
fer companies (MTBs), and mobile money operators (MMOs) that provide mobile
financial services.
Official data according to the Q4 2021 report issued by the Central Bank of
Somalia indicate that there are 13 licensed commercial banks, 10 licensed money
transfer companies (MTBs), and 2 licensed mobile money operators (MMOs) in the
country.
The country’s commercial banks have seen a significant increase in their assets
since 2015, and they are still on the rise today. At the end of 2021, according to a
report by the Central Bank of Somalia, as shown in Fig. 5, the total assets of
commercial banks amounted to about 17% of GDP, while the volume of loans
granted to the private sector amounted to 3% of GDP.
Digitally, as shown in Fig. 5, the total assets of commercial banks—at the end of
2021—amounted to about 1222 million US dollars compared to the same period in
2020, when the total assets were estimated at 845.7 million US dollars. This
indicates an increase of approximately 44%.
In terms of loans granted to the private sector, it amounted to about 222.7 million
US dollars at the end of 2021, while the volume of loans granted to the private sector
in 2020 was about 145.7 million US dollars, an increase of more than 53%.
On the other hand, liabilities of commercial banks in Somalia amounted to about
1025.1 million US dollars at the end of 2021, while these commitments were
estimated at 712.3 million dollars at the end of 2020. That is an increase of about
44%. While the deposits of customers from individuals and commercial institutions
amounted to 948.1 million dollars by the end of 2021, that is, 42% increase over the
volume of customer deposits for the year 2020 (Fig. 5 from Quarterly economic
review. By Central Bank of Somalia, 2021, www.centralbank.gov.so).

Commercial Banks
Dec-21 Dec-20
1,222 1,500
Million US Dollars

948.1 1,025.10
845.7
667.2 712.3 1,000
145.8 222.7 500
0
Loans granted to Deposits Liabilies Assets
the private sector

Fig. 5 Change in the value of assets, liabilities, deposits, and loans granted to the private sector,
between December 2020 and December 2021
Financial Inclusion in Somalia Between Reality and Expectations 153

3.3 Mobile Money Services

It is defined as “a network architecture for storing and moving money that makes it
easier for different players to exchange cash and digital value. Offering mobile
money is a tactical innovation and revolution that can speed up processes, cut
costs, and increase access to financial services for customers” (Iazzolino 2015).
Mobile money is more common in places where official financial institutions are
underdeveloped and out of reach for large populations either because the services
offered by these official financial institutions are expensive or because they do not
satisfy local needs (Shrier et al. 2016).
As it gets adopted throughout commerce, healthcare, agriculture, and other
sectors, mobile money has the potential to become a widely used platform that is
changing whole economies. Currently, there are at least 110 mobile financial
services platforms. The M-PESA platform is the most famous worldwide. It started
in Kenya and now operates in six countries, has 51 million users, and the value of
financial transactions conducted exceeds 314 billion US dollars annually (vodafone
2020).
Mobile money is not limited to providing services to individuals but also to
providing services to small and medium enterprises (SMEs), where mobile financial
services have made it possible for SMEs to carry out financial transactions quickly,
wherever they are, and without the requirement for a formal bank account.
At the level of SMEs, the problem is that commercial banks do not adequately
meet the needs and requirements of SMEs in terms of financial liquidity and banking
services for several reasons, including the lack of guarantees, and insufficient
documents that prove credit capacity. Besides, bank accounts in commercial banks
for SMEs are not cost-effective due to the high bank fees and transportation costs
incurred by the owners of these SMEs to travel to banks for financial transactions
(Higgins et al. 2012).
It can be argued that the use of mobile money is a technique to help SMEs to
streamline their operations because they make up the majority of businesses in the
country and given the catastrophic consequences of onerous banking procedures on
their performance. Because the platform will just improve the way in which pay-
ments are made and debts are collected, which will exacerbate the challenges SMEs
have with working capital management and liquidity. Although mobile money may
not completely solve all of the financial issues that SMEs encounter, the advantages
of using the system exceed the drawbacks by a wide margin. Regardless of whether
the system is used alone or in conjunction with a bank account, it boosts SMEs’ sales
and lowers operational expenses, both of which have a favorable impact on how well
they perform financially (Talom and Tengeh 2020).
It must be emphasized that in dozens of developing countries mobile money has
greatly increased account ownership. It should be noted that Somalia is no exception
to other East African countries in that mobile money is the most popular tool for
financial transactions within the country. To explain this, The World Bank (2017)
data report indicates that the percentage of adults in Somalia who have accounts in
154 A. A. Farah and A. O. H. Saleh

Mobile Money users in Somalia

82.7 78.2 75.4 100
64.3 70.4

%
50

0
secondary primary Age +25 and women Men
educaon or educaon or less older
more

Fig. 6 Mobile money users in Somalia

Product Mix by Volume Product Mix by Value

4.4%
6.3%
0.8%
11.5%

14.0%
P2P transfers
Disbursements
22.5% 15.0% Bill Payments
49.9% 30.4% Merchant Payment
Airtime top-up
International remittance
30.0%
10.3%
5.1%
Worth
155 m $ 2.7 B
Million Transaction Monthly Us Billion per Month

Fig. 7 Usage of mobile money and volumes of mobile money

mobile money platforms exceeded 73%. The data also show that the gender gap is
almost nonexistent as it is only 5%. It is reported that the percentage of males who
own accounts in mobile money platforms in Somalia reached 75%, while the
percentage of females reached 70%. This is clearly indicated in Fig. 6 (Fig. 6
From Mobile money in Somalia household survey and market analysis. By The
World Bank, 2017).
In sum, the majority of people and companies in Somalia currently primarily use
mobile money for transactions. In Somalia, as shown in Fig. 7, mobile money
transactions are estimated to be worth $2.7 billion from 155 million transactions
per month. This represents about 36% of GDP. It is necessary to point out here that
there are also so-called hawala, which are money transfer agencies, and they are an
effective basis in the financial system in Somalia and depend on the local population
in Somalia to receive or send money throughout the world. Data indicate that 76% of
adults in Somalia use these agencies for international transfers compared to only
3.5% of the population using commercial banks for international transfers (Fig. 7
from Mobile money in Somalia household survey and market analysis. By The
World Bank, 2017).
Financial Inclusion in Somalia Between Reality and Expectations 155

4 Conclusion and Recommendations

This study looked at the reality of financial inclusion in the Republic of Somalia as
well as the biggest developments after political stability and mobile money’s role in
promoting financial inclusion in Somalia. The use of the official financial system to
manage financial risks, expand investment options, and conduct many of daily
financial activities more securely and effectively is made possible by financial
inclusion, according to the research. The findings also show that the rapid uptake
of mobile money for social and commercial purposes unavoidably contributes
significantly to financial inclusion, financial empowerment, and the overall welfare
of people and SMEs.
The observations presented above led to the following recommendations
being made:
• The number of studies examining the effects of financial inclusion has increased
significantly during the past 2 years. However, research on how various aspects of
financial inclusion affect economic development is still very young. There are
currently few studies on the subject, and more research is required, particularly
when it comes to payments, savings, and insurance.
• Financial products must be primarily adapted to people’s requirements in order to
be relevant and make a difference in their financial life if we are to fully enjoy the
benefits of financial inclusion. To increase and ensure confidence in the legal
financial system, this also entails protecting and educating consumers.
• The delivery of financial services has changed and will continue to change as a
result of technological advancements. Financial services’ potential contribution
to economic growth may fluctuate as they evolve.

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Potential of Islamic Microfinance: Issues,
Challenges, and Way Forward

Nur Harena Redzuan, Salina Kassim, Romzie Rosman,

Mohd Faizuddin Muhammad Zuki, and Siti Saffa Shaharuddin

Abstract Microfinance is an important tool in promoting financial inclusion, which

has attracted global attention. More countries are offering microfinance with the
support of the government, specialized organizations, and financial institutions.
Microfinance is regarded as a means to promote inclusive growth. Therefore, this
study analyzes the issues, challenges, and way forward of Islamic microfinance. The
study employs a qualitative research method by reviewing the selected literature
using content analysis. Islamic microfinance has proved to be more effective in
reducing poverty and improving socioeconomic conditions. Although it takes a
considerable number of resources and funds and many years to convert and adapt
conventional microfinance to Islamic microfinance, it has a significant role to play in
a Muslim-majority country to promote growth and prosperity among the poor. The
study may significantly contribute toward the sustainable and socially impactful
growth of the Islamic microfinance, especially in achieving the maqasid Shariah and
Sustainable Development Goals (SDGs). The originality of this study may contrib-
ute to the formation of a new body of knowledge and enrich the literature sources in
the field of Islamic microfinance that will benefit both academicians and
practitioners.

1 Introduction

Microfinance is now widely recognized as a significant tool for poverty reduction

and women’s empowerment and as a prospective financing method for banks,
financial institutions, and nongovernmental organizations (NGOs). Countries with

N. H. Redzuan (*) · S. Kassim · R. Rosman · S. S. Shaharuddin

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
e-mail: [email protected]
M. F. Muhammad Zuki
Kolej University Islam Perlis, Perlis, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 157
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_14
158 N. H. Redzuan et al.

a robust microfinance system have significantly reduced poverty and improved

women’s socioeconomic conditions. According to Islam, although the terms
microfinance and microcredit are frequently used interchangeably, there is a distinc-
tion to be made. Microfinance is the provision of a wide variety of financial services
provided to low-income individuals who do not have access to them. Savings, loans,
insurance, leasing, money transfers, and other services are among those offered. It is
a well-known reality that microfinance is the most effective strategy to empower the
underprivileged and boost their income-generating capability. On the other hand,
microcredit is a small amount of loan provided to the poor to help them improve their
quality of life. This small amount of loan can help people get out of the poverty cycle
by creating income.
This research analyzes the issues, challenges, and way forward of Islamic
microfinance. Islamic microfinance has proved to be more effective in reducing
poverty and improving socioeconomic conditions. Although it takes a considerable
number of resources and funds and many years to convert and adapt conventional
microfinance to Islamic microfinance, it has a significant role to play in a Muslim-
majority country to promote growth and prosperity among the poor. The study may
significantly contribute toward the sustainable and socially impactful growth of
Islamic microfinance, especially in achieving the maqasid Shariah and Sustainable
Development Goals (SDGs).

2 Microfinance and the Poverty Alleviation

Poverty alleviation is one of the main agendas in achieving sustainability. According

to the United Nations (UN), “Poverty is not just the lack of access to economic or
material resources, but also a violation of human dignity.” The World Bank also
additionally gives a statistical definition of poverty. They classified people with a
daily income of less than US$1.9 categorized as poor and in 2008 World Bank
widened the scope of its connotation of poverty. They expand that the lack of
infrastructure, inadequate access to education, and healthcare issues are now
included in the concept of poverty. This highlights and illustrates how multifaceted,
complex, and unpredictable the phenomenon of poverty is and how it involves
social, economic, and political realities, especially concerning a lack of resources
(Gupta and Sharma 2021). As a result, they believe in their research that having a
steady income is crucial and may be one of the mechanisms for advancing socio-
economically and breaking the cycle of poverty.
Among the most popular methods for reducing and combating poverty and
boosting economic growth, particularly in developing nations, is microfinance
(Chu and Luke 2018; De Haas 2021). Microfinance was founded on the idea that
granting poor or vulnerable people access to small loans and they may start a small
business that may help them break the cycle of poverty. Kasu (2018) stated that
microfinance helps to improve vulnerable people’s quality of life over the long term
by providing “collateral-free” lending, which frees them from paying the exorbitant
Potential of Islamic Microfinance: Issues, Challenges, and Way Forward 159

interest rates of traditional moneylenders. This may give them the motivation to
improve their lifestyle by having a small business to generate income. Millennium
Development Goals’ 2020 Vision acknowledges the importance and the starting of
microfinance institutions (MFIs), and Mohammad Yunus and the Grameen Bank,
the recipients of the 2006 Nobel Peace Prize, have highlighted the success of these
microfinance institutions in Bangladesh (Bayulgen 2008). Since this moment,
microfinance had shown a significant impact on this vulnerable group in order to
reduce poverty. Hence, other countries have copied this model and concept and used
it as inspiration to grow and develop a targeted group, that is, the poor and vulnerable
people to have their own income.

3 Microfinance: Issues and Challenges

Generally, the word microfinance is a combination of two words: micro and finance.
According to Basu et al. (2020), microfinance is “the provision of financial services
to low-income poor and the core poor self-employed community.” Microfinance also
is considered to be a powerful tool to fight poverty by providing basic financial
services, such as credit, savings, insurance, and the ability to transfer funds (Uddin
and Hossain 2020). These financial products and services are delivered by various
types of microfinance institutions, which differ from each other in their legal
structure, objectives, and methodology. This statement illustrated that microfinance
as a service for poor and low-income clients is viable. This is due to microfinance
being a movement aimed at providing permanent access to a suitable variety of high-
quality financial services to very poor, poor, and low-income households (Hermes
et al. 2011). That means the aim of the establishment of microfinance is basically
toward the customer that is excluded from the mainstream financial institutions.
Unfortunately, despite the positive outcome of microfinance institutions that will
improve and escape the poor people in the poverty trap, worldwide microfinance
institutions’ performance does not meet expectations. This is due to the fact that
there are a lot of challenges and issues regarding the implementation, practices, and
others in the microfinance industry.
First and foremost, the issues and challenges of microfinance in Pakistan. It is
worth noting that Pakistan has made significant strides in implementing the
microfinance industry with commercial and state programs aimed at facilitating
convenient access to credit for the underprivileged and decreasing the percentage
of poverty and vulnerability (Iqbal et al. 2019; Khan et al. 2021). One of the best
practices of microfinance institutions in Pakistan is “akhuwat” foundation.
According to Khan et al. (2018) and Shaheen et al. (2018), akhuwat foundation
was initiated by the idea of a group of philanthropists founded Akhuwat in 2001 in
the Lahore Gymkhana with the intention of eradicating and reducing the prevalence
of poverty. It is worth noting that akhuwat is the most successful Islamic
microfinance institution based on its significant repayment achievement (Rafay
et al. 2020).
160 N. H. Redzuan et al.

Nevertheless, Akhuwat and other microfinance organizations in Pakistan had

hampered issues and challenges with sustainability and market outreach that may
be related to a lack of knowledge, a lack of financial literacy, and religious convic-
tions in implementing microfinance (Azmi and Thaker 2020). Moreover, the severity
of the issue has also increased as a result of both natural and unpredictable disasters.
The most notable of these is the nation’s security condition, which has negatively
impacted the economy as a whole. The country’s institutional tensions, political
volatility in recent years, and historical flatness are all contributing to these issues.
Additionally, although microfinance has a long history in Pakistan and has been able
to expand at a rate of 40–50% yearly, the 2008 financial crisis and rising prices had a
negative impact on the situation. In particular, with regard, rising food prices have
significantly reduced the purchasing power of the general public. Additionally, it
appears that the lack of education, lack of communication between the microfinance
organization and the poor transportation systems, as well as the continual rise in
population and property values, are stumbling blocks to microfinance (Khan et al.
2018).
Secondly, the issues and challenges of microfinance in Yemen. The problems in
regulating and supervising microfinance in Yemen, in particular, have been found as
there is distinct law in their Islamic microfinance institutions that helps legalize
microfinance activities in the market. Moreover, according to Alshebami and
Khandare (2014), Yemen also facing challenges because the concept of
microfinance is relatively new. Therefore, they are hampered by the misconception
of lending for the poor that typically belongs to low-income individuals who are
unable to pay back the loan. Additionally, acquiring skilled and trained people,
particularly in rural areas, is a challenge for the microfinance business in Yemen,
which results in managerial shortcomings (Alshebami and Khandare 2014).
The poor promotion of Islamic microfinance services also does not benefit the
people in increasing awareness about the advantages of Islamic microfinance. Such
is the problem that also happens in the MENA region, exclusive of Sudan, Syria, and
Yemen. As they are registered as NGOs there, they have been restricted in extending
loan providing other than just a deposit. This does not sustain them as something as
vital as savings are limited and this puts a risk to the safety of the poor and their poor
cash flow management. It makes them unattractive to commercial banks and inves-
tors, making them rely on only donors and government loans that may cripple their
operations in the long term.
Azmi and Thaker (2020) have also included that there is a lack of appropriate
infrastructure making the legal and regulatory framework more underdeveloped and
not fully applied. As mentioned in Alshebami and Khandare (2015), the infrastruc-
ture such as basic utilities, security, transportation, and foreign currency stability is a
concern in microfinance for the empowerment of poor women in Yemen. This
contributes to the poor performance of Islamic microfinance institutions in Yemen.
To add to the list, institutions are made to face high operational costs, which leads to
the poor relying on increasingly burdening loans. In adverse, some have even opted
to cancel their contracts with these institutions and rely solely upon relatives. This
does not help the poor climb out of their living standards. Small capacities in finance
Potential of Islamic Microfinance: Issues, Challenges, and Way Forward 161

and operations have also lessened the market outreach in MENA regions. Having a
small capacity has indeed impeded the growth of microentrepreneurs as more than
4 million potential microentrepreneurs in the region including in the rural areas have
been unable to receive microfinance services. The people depend on credit alone for
their enterprise, and the lack of commitment by the policymakers has denied the
country more professionals or trained consultants in the field. This makes for slow
growth in this market as it shows a lack of innovation and creativity in providing the
services the people deserve.
Azmi and Thaker (2020) and Satar and Kassim (2020) have also noted that the
concerns in governance and management have been a massive part in the poor
performance of Islamic finance in Indonesia and the lack of experts in the field of
Islamic banking. Overly complex models and Islamic banking practices, insufficient
internal control, and external auditors, and unreliable reporting have not aided the
cause in the country mentioned. The researchers have also penned that donations and
sponsors that were channeled into the Islamic microfinance institutions in the
country have not been properly and effectively regulated nor supervised, which
can be a source of concern for the sustainability of the institutions in the coming
years. The need to make organizational changes may also become a problem for
these institutions in Indonesia (Azmi and Thaker 2020). The need for Islamic
microfinance institutions in the country falls short as there is no organization or
monitoring bodies that supervise these institutions. To illustrate, Baitul Maal wa
Tamwil (BMT) is a fast-growing microfinance provider in Indonesia. This immense
growth in numbers is attributed to the lack of legal ruling that protects and provides a
guarantee over the customers’ funds. This is especially a concern as the branches
provide a limited reach to the people, particularly the people living in the rural areas
of the city.
Wediawati (2018) has mentioned that the issue of IMFI’s unsustainability may
come from the different approaches and beliefs between the welfarist and the
intuitionists. Welfarists focus on alleviating poverty by prioritizing depth rather
than breadth in outreach. They also measure success in social metrics as one can
take from the example of a group named AIM who has abused funds for political
reasons. This being unattractive to the public eye, the top management is all replaced
with new figures. Uncertainty in donors and the high transaction costs have also
limited the economy from scaling bigger; this was an issue when it came to
commercialization and the cost that comes with it (Kassim et al. 2019).
Kassim et al. (2019) also mentioned that Malaysian microfinance institutions
have been limited to only a small number of services as a result of the Malaysia
Banking and Financial Act 1989 and it being considered NGOs. This is a different
situation in Bangladesh with the Grameen Bank and in Indonesia with the Bank
Perkreditan Rakyat (BPR). It means that only microcredit loans are the only service
that Malaysian MFIs get to offer much to contrary to the country’s counterparts.
They were allowed to offer even microinsurance, microsavings, and pension funds.
This also stems from savings as part of the emphasis. For example, in Indonesia, the
Bank Nagari-BPRs in West Sumatra obligates its clients to put some savings even as
low as 1000 Rp (less than USD 1) in the BPR before they are allowed loans.
162 N. H. Redzuan et al.

Additionally, borrowers are only eligible to apply for financing that does not exceed
their total savings in the bank. In Malaysia, however, MFIs are tied to the law and do
not have the ability to generate more independent income.
Siwar and Talib (2001) mentioned that the Malaysian government considers
subsidized microcredit programs in Malaysia a part of an important social cost that
the government needs to bear. This became a political tool, especially for those that
are desperate for financial assistance. This system has caused a relatively higher level
of nonperforming loans in TEKUN and YUM compared to AIM because of the
continuous financial support they receive from the government. This is also a
challenge for Malaysian MFIs as other countries have systems that would tailor
more to potential growth as they have the model of loan repayment modes, duration,
amount, grace periods, and interest rates charged accordingly to borrowers. In the
practice of the Grameen Bank, different loan contracts are imposed on different
groups of borrowers in consideration of the nature of the borrowers’ businesses and
their affordability (Mokhtar et al. 2012). For example, borrowers in the dairy
farming industry may repay their loans according to their milking cycle, hence
allowing a more flexible repayment system.
It is also found in Islamic studies that loan repayments are made from the cash
flow cycle of the businesses of the borrowers. The flexibility in the system had
inherently made it easier for borrowers to bear, and it is really something Malaysia
should take lessons from. To make use of and maximize the MFI’s full potential,
Malaysia needs to integrate it into the country’s mainstream banking and financial
system. This will then help to spark greater awareness of products, stimulate
creativity in product innovation to avoid stagnancy in the industry, and increase
public access to microfinance via stronger distribution channels, standardized regu-
lation, and improved transparency. An establishment of an association to manage
Islamic MFIs is needed to ensure that it continues to self-sustain, minimizing its
dependency on donor funding and government grants.
Table 1 provides the selected literature review on issues and challenges to
implementing Islamic microfinance based on the specific country analysis.

4 Way Forward for Islamic Microfinance

Much research shows that Islamic microfinance helps in the development of rural
areas and eradicating poverty in the poor. In every aspect of the challenges, there are
some opportunities and improvements for Islamic microfinance. Here are the sug-
gestions for the way forward for Islamic microfinance:
• Governance issue: It is stated in The Malaysia Banking and Financial Act 1989
that “No person shall carry on banking services, including receiving deposits on
the current account, deposit account, savings account or no other similar account,
without a license as a bank or financial institutions.” This Act has weakened the
range of financial services offered by Malaysian microfinance institutions
Potential of Islamic Microfinance: Issues, Challenges, and Way Forward 163

Table 1 Country analysis of the implementation of Islamic microfinance

Country Authors (year) Issues and challenges
Indonesia Azmi, N. N. I. N. M., & Thaker, 1. Governance and management
M. A. B. M. T. (2020). Literature survey issues where lack of Islamic banking
on Islamic microfinance. Global Review expertise in managing Islamic
of Islamic Economics and Business, 8(1), microfinance
023-033. 2. Difficulty in fully understanding
the excessively complex models and
Islamic banking procedures
3. Due to the absentee commis-
sioners’ lack of internal control and the
limited size of the company below the
level allowed by the auditing (insuffi-
cient external auditing)
4. Source of funding issue—money
channeled into Islamic microfinance
institutions by donors and government
agencies is not done by proper effective
regulation and supervision
5. Inadequacy of monitoring, regu-
lation, and trustworthy reporting
6. No specific entity or agency that
is monitoring and supervising the
microfinance institutions
Indonesia Wediawati, Besse. (2018). Sustainability 1. The issue of sustainability of the
of Islamic Microfinance in Indonesia: A Islamic microfinance institutions—the
Holistic Approach. Academy of Strategic disagreements between the stakeholders’
Management Journal. 17. 32–45. points of view is inextricably linked to
the problem of IMFI sustainability
Indonesia Satar, N., & Kassim, S. (2020). Issues 1. Insufficient human resources with
and Challenges in Financing the Poor: good managerial skills to manage the
Lessons Learned from Islamic performance of the institutions
Microfinance Institutions. European 2. Many officers and employees of
Journal of Islamic Finance, (Khan et al. Islamic financial institutions have low
2018). financial literacy and no background in
finance and economic
Malaysia Kassim, S., Kassim, S. N., & Othman, 1. Ethical concerns: commercializa-
N. (2019). Islamic Microfinance in tion and mission drift
Malaysia: Issues and Challenges. In 2. Governance challenges: The
Proceedings of the Second International restriction on deposit-taking activities
Conference on the Future of ASEAN and loan program inflexibility
(ICoFA) 2017-Volume 1 (pp. 367–377). 3. Regulatory concerns:
Springer, Singapore. microfinance institutions as subsidized
institutions
4. Governance issues: The need for
centralized supervision and the separa-
tion of Islamic MFIs from mainstream
banking
(continued)
164 N. H. Redzuan et al.

Table 1 (continued)
Country Authors (year) Issues and challenges
Pakistan Azmi, N. N. I. N. M., & Thaker, 1. The issues related to sustainabil-
M. A. B. M. T. (2020). Literature survey ity and market outreach
on Islamic microfinance. Global Review 2. Lack of awareness of Islamic
of Islamic Economics and Business, 8(1), microfinance
023–033. 3. Low financial literacy
4. Constraint on religious beliefs
Yemen 1. Issues related to regulation and
supervision in Yemen
2. No separate law for the Islamic
microfinance institutions that can legal-
ize the activities in the market

compared to the Grameen Bank in Bangladesh and Bank Perkreditan Rakyat in

Indonesia. The other country’s banks have more independence in creating and
offering diversified financial instruments to the public. The microfinance institu-
tions in Malaysia are only allowed to offer microcredit services. However, there is
a range of services to provide such as micro-takaful, microsaving, and pension
funds. But such products are impossible because it is stated in the law that it is
legally not allowed for other financial institutions other than banks to take
deposits from clients. Therefore, microfinance institutions can only offer credit
facilities. Microfinance institutions would be able to develop more if the law is
amended, allowing the institution to offer their services (Kassim et al. 2019).
• Ethical issues: The conflict that arises due to the priorities leads to drift from the
mission of the microfinance institutions. There are different ways of giving to the
poor as set by the Islam religion, which are zakat, alms, and infaq. Therefore,
many institutions are now prioritizing distributing funds through those ways,
which minimize the contribution given to microfinance. For example, Amanah
Ikhtiar Malaysia (AIM) went through a downfall and mission breakdown during
the period of 1992–1999 when it was found out that there was a misuse and abuse
of funds to attract supporters by some politicians. Reports state that the leakage of
funds was made during the introduction of two new loan schemes, namely, “Skim
Pinjaman Nelayan” (SPIN) and “Skim Khas Ibu Tunggal” (SKIT). Statistics
showed that any of the participants were not able to repay the loans. Due to this
incident, the institution faced the highest nonloan repayment in the establish-
ment’s history. As a rectification, the existing members of the top management
were removed, and then new members were hired as replacements. It took many
years and hard work to improve from the downfall and gain back the trust of the
public (Kassim et al. 2019).
• Development in Islamic microfinance institutions: Some of the microfinance
institutions in Malaysia are funded by the government. Therefore, the funding
is limited and there are other restrictions as well that leads to slow development in
the sector compared to other countries. Thus, microfinance institutions are bound
by the law and unable to generate income of their own. They are not allowed to
Potential of Islamic Microfinance: Issues, Challenges, and Way Forward 165

get funding from any other sources. On the other hand, the microfinance institu-
tions in Indonesia get the funding by themselves and are able to diversify their
products as well (Kassim et al. 2019).
Several studies have proven that Islamic microfinance can help reduce poverty.
For instance, the research by Saad proved that the economic performance of AIM
participants is significantly determined by the amount of money borrowed from
AIM. Other factors found to influence the respondents’ economic performance are
education level and age, gender, assets owned before joining AIM, and area of
residence. In Bangladesh, the study by Elwardi (2015) proved that Islamic
microfinance had a positive impact on poverty reduction as shown by empirical
studies, especially in rural areas. The study concluded that the various loan programs
have a significant role in alleviating poverty unless they were in an environment with
material and social capital sufficient to achieve the goals of said programs. Islamic
microfinance has won recognition as an important strategy against poverty; it is an
institution that is ready and prepared to serve a larger population of the target poor
individuals.
To conclude, Islamic microfinance would be a strategy to implement to help in
eradicating poverty. It is important to revise the laws and regulations by the countries
to give more independence to the microfinance institutions to operate their institu-
tions effectively. Moreover, it is through the help of the government and large
corporations that the microfinance sector would be improved. In addition, with
advancement of technology the Islamic microfinance could be used as a
web-based platform to reach more clients and more investors.

Acknowledgments The authors wish to express their gratitude to the sponsor of this research
project, the Jamalullail Research Grant Scheme (JRGS 21-010-0010). Special appreciation to the
anonymous referees for their valuable comments and suggestions on the earlier version of the paper.

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Wediawati B (2018) Sustainability of Islamic microfinance in Indonesia: a holistic approach. Acad
Strateg Manag J 17:32–45
The Role of Financial Behavior, Financial
Stress, and Financial Well-Being Toward
Islamic Financial Literacy

Aubaidillah Doloh, Nur Harena Redzuan, and Zarinah Mohd Yusoff

Abstract Financial literacy is an important national issue and has become the main
focus in many countries. Various reports have confirmed that a huge number of the
world’s population is lacking knowledge of finance. The increasing number of
people with a low level of financial literacy reflects the effectiveness of their
educational institution and impacts the well-being of the national economy in the
country. Thus, this study explores the role of financial behavior, financial stress, and
financial well-being in Islamic financial literacy. The study employs a qualitative
research method by reviewing the selected literature using content analysis. Finan-
cial behavior, financial stress, and financial well-being are good predictors to
determine the level of Islamic financial literacy. The study suggests that the regulator
and education institutions should provide more relevant projects and programs to
improve the knowledge and understanding of Islamic financial literacy, especially
among youth, to reflect on good financial behavior and financial well-being
according to Islamic principles.

1 Introduction

Money is one of the most essential needs that no one could avoid, especially in this
modern day. This money should be managed carefully by its users to prevent
insolvency and bankruptcy. So, people need to have basic knowledge of money
management and usage to be smart money spenders. Knowledge of finance has a
high impact on one’s behavior toward money. Thus, financial literacy is not only
necessary for financial students or teachers, but anyone who uses money.
Financial literacy has been defined with several definitions by different groups
and individuals. Mason and Wilson (2000) have defined financial literacy as a

A. Doloh · N. H. Redzuan (*) · Z. Mohd Yusoff

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 167
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_15
168 A. Doloh et al.

making process in which individuals use a set of skills and technologies, resources,
as well as contextual knowledge to arrive at information to make decisions with
consideration of the financial consequences. Garman and Gappinger (2008) also
defined financial literacy as “one’s knowledge of facts, concepts, principles, and
technological tools that are fundamental to being smart about money” (p. 83).
Furthermore, financial literacy is also defined as “the ability to make informed
judgments and to make effective decisions regarding the use and management of
money” (Noctor et al. 1992, p. 4). While Schagen and Lines (1996) proposed a
definition of financial literacy saying that a financially literate one can enjoy abilities
comprising of understanding of money management, knowledge of financial insti-
tutions, services, and systems, analytical and synthetic skills, and attitudes that lead
to responsible and effective management of financial matters.
However, some financial analysts emphasized that there is low personal financial
literacy around the globe. This financial literacy is of growing importance as the
financial markets and financial institutions compete massively with one another.
Moreover, the development of financial products is rapidly growing with the gov-
ernment pushing people to be more responsible for their retirement planning. In
addition, university students can prevent engaging in unprofitable investments by
increasing their level of financial literacy. Therefore, financial knowledge is very
significant for anyone to live a comfortable life at the time and in the future.
Financial literacy has been studied not only by financial researchers but regula-
tory authorities, nationally and internationally. This is to determine the level of
financial literacy among the citizens and the population and create financial pro-
grams to increase their level of financial literacy. This will influence positively their
financial behaviors and attitudes to financial products and services. Therefore, this
study explores the role of financial behavior, financial stress, and financial well-
being in Islamic financial literacy.

2 Islamic Financial Literacy

2.1 Literacy and Financial Literacy

Based on the title of the study, the operational definition of this chapter consists of
three definitions to provide a clearer meaning of the research.

2.1.1 Literacy

Traditionally, the term literacy is understood as the ability to write and read. This
term is thought to have emerged together with the emergence of numeracy and
computational devices around 800 BC. Gradually, the term has been expanded to
cover the ability to use language, images, numbers, and other symbol systems of a
culture or a community.
The Role of Financial Behavior, Financial Stress, and Financial Well-Being. . . 169

The Oxford English Dictionary has defined the term literacy as “the quality or
state of being literate; knowledge of letters; condition in respect to education
especially the ability to read and write.” While the American Heritage Dictionary
of English language, fifth edition, defined literacy as “the condition of quality,
especially the ability to read and write.” Both definitions basically define the quality
and the ability to read and write. The United Nations Educational, Science and
Cultural Organization (UNESCO) has also defined the word literacy as the “ability
to identify, understand, interpret, create, communicate and compute using printed
and written materials associated with varying contexts” (United Nations Literacy
Decade 2003–2012).

2.1.2 Financial Literacy

The term literacy itself means the ability to read, write, and do simple arithmetic.
This is not sufficient to define financial literacy due to today’s highly complex social,
economic, and political system. Undoubtedly, literacy is the first stage of empow-
erment. Financial literacy is the next stage and more complex step toward empow-
erment. It enables us to effectively save, use, secure, and grow our fruits from the
monthly earned income. In brief, having proficiency in dealing with our financial
affairs will allow us to make our money function as hard as ourselves (Bhatt 2017).
Sujaini (2022) stated that financial literacy refers to “the ability to understand and
apply different financial skills effectively, including personal financial management,
budgeting, and saving. Financial literacy makes individuals self-sufficient so that
financial stability can be accomplished.” It is the ability to know how money
functions in the world, how one earns or makes a profit from it, how he manages
it, invests it, and donates it to help people. Financial literacy refers to a set of
knowledge and skills that lets a person make effective decisions on his financial
resources.

2.2 Islamic Perspective on Financial Literacy

There are plenty of studies and research on financial literacy. However, the studies
on financial literacy based on the Islamic perspective are still limited. A few studies
are focusing on Islamic financial literacy by past researchers. Yet, the definition of
Islamic financial literacy has not been commonly accepted. Nevertheless, few
studies have defined it. Rahim et al. (2016) defined it as “the ability of a person to
use financial knowledge, skill, and attitude in managing financial resources
according to the Islamic teachings.” While Antara et al. (2016) defined Islamic
financial literacy as “the degree to which individuals have a set of knowledge,
awareness, and skill to understand the fundamental of Islamic financial information
and services that affect its attitude to make appropriate Islamic financing decisions”
(p. 199). They stated that Islamic financial literacy is very significant as it can
170 A. Doloh et al.

influence a Muslim’s attitude toward financial behaviors such as differentiating

between Islamic financing from conventional financing.
In 2017, Zaman et al. (2017) conducted a study on the role of Islamic financial
literacy in the adoption of Islamic banking services in Lahore, Pakistan, and found
that the majority of the respondents have awareness of the legitimacy of Islamic
banking services, quality of services and products, the customer quality, and legit-
imacy of the Islamic banking system. Moreover, they also found that educational
attainment level among the masses, services quality, customer services, and legiti-
macy of Islamic banking influence the adoption rate of Islamic banking services.
Rahman et al. (2018a, b) studied the significant role of Islamic financial literacy
among college students in Malaysia. They mentioned that the most important
difference between conventional and Islamic finance is the prohibition of
non-Halal elements such as riba (interest), gharar (uncertainty), and maysir
(gambling).

2.3 Global Perspective on Financial Literacy

In 2003, the Organization for Economic Co-operation and Development (OECD)

established a project aiming to provide a way to improve financial literacy and
standards via the development of common principles of financial literacy. In March
2008, the OECD launched the International Gateway for Financial Education with
the purpose to serve as a clearing house for financial education projects, information,
and studies.
Moreover, the National Financial Educators Council (NFEC) defines financial
literacy as “possessing the skills and knowledge on financial matters to confidently
take effective action that best fulfills an individual s personal, family, and global
community goals”. Despite many definitions of financial literacy, its components are
mostly similar. Precisely, financial literacy refers to the significance of having skills
and knowledge to make effective decisions on financial resources. However, S&P
Global FinLit Survey was conducted in 2014 on the basic literacy questions of the
four fundamental concepts for financial decision-making, namely, basic numeracy,
inflation, interest compounding, and risk diversification.
An individual can gain financial knowledge from his or her parents, friends,
educational institution, and media. Chen and Volpe (2002) stated that a person who
learned business or economics courses is likely to be a financially knowledgeable
person. This is supported by Falahati and Paim, who stated that a student who joins a
finance education activity is knowledgeable to manage his or her fund. Despite many
studies supporting this statement, Wagland and Taylor (2009) mentioned that it is
not necessary for business students to score higher than nonbusiness students. They
stated that some students from science courses perform better than both business
students and students who learn compound interest knowledge.
The Role of Financial Behavior, Financial Stress, and Financial Well-Being. . . 171

2.4 Financial Literacy Among Youth

The research was conducted by Chen and Volpe on personal financial literacy in
1998 in the United States from 14 college campuses in 6 different states. The survey
was undertaken by studying 924 university students from small 2-year colleges to
large 4-year colleges both public and private institutions. The survey consisted of
36 questions that analyzed college students’ financial literacy concerning these
subjects: borrowing, saving, investments, insurance, and general financial knowl-
edge. They analyzed the responses based on this percentage score: 80% and above
was described as a high level of financial literacy, 60–79% was considered medium
level, and below 60% was included as a low level of financial literacy. The survey
found that the students were inadequate in their knowledge of personal finance with
a mean score of only 52.87%. The authors stated that this was due to the lack of a
sound education on personal finance in the university curriculum. Moreover, the
study found that study majors did contribute to the level of financial literacy as it
stated that business students performed greater and scored a higher level of personal
financial literacy compared to nonbusiness students. Generally, the result indicated
that the students scored at a low level of financial literacy. In addition, the
researchers concluded that juniors and undergraduate students performed weaker
than graduate students. Similarly, university freshmen performed weaker than
seniors and male students performed better than female students.
The study was done by McKenzie in 2009 on the financial literacy of university
students. Similar to Chen and Volpe, this study was carried out in the United States
in the southeastern part studying seniors at public, state, and large universities who
completed at least 105 course credit hours and also applied for graduation in
2007–2008. All 186 graduating students were used in the research. A total of
102 female students (54.84%) and 84 male students (45.16%) participated in the
research.
The rating scale used in the study was developed by Mandell (2004) to examine
the level of financial literacy of the students. The survey found that the mean score
was 72.5% and the median score was 75.5%, which means a high level of students’
financial literacy. For knowledge of money management, 97 students (52.15%)
showed that they would take chance to study a personal financial course if they had.

2.5 Malaysian National Strategy for Financial Literacy

The 2018 survey conducted by the Financial Education Network (FEN) found that
Malaysian people have low confidence pertaining to their own financial knowledge.
One in three of them rate themselves to be of low knowledge of finance. Moreover,
1 in 5 Malaysian working adults (MWA) did not manage to save in the past 6 months.
Also, 52% of Malaysians face difficulty to raise even RM1000 for emergency funds.
While 68% of active EPF participants do not reach the Basic Savings recommended
172 A. Doloh et al.

based on the age band. Besides, RinggitPlus also conducted a survey on Malaysian
Financial Literacy 2021 and found that approximately half of Malaysians save less
than RM500 each month. About 51% of Malaysians can survive less than 3 months
if their jobs are gone, but 28% can survive for 6 months. Furthermore, around 44%
of consumers have started retirement planning.
To address the mentioned situations, several initiatives were attempted:
1. Ministry of Education Malaysia: The elements of financial education were inte-
grated into the curriculum for primary as well as secondary school students
directly and indirectly. For example, moral education, economics, accounting
principles, business, and others.
2. Bank Negara Malaysia: Karnival Kewangan as a one-stop edutainment center to
enhance Malaysians’ financial literacy and serve the needs of financial con-
sumers. Moreover, BNM carries a program named Train-the-Trainer (TTT) to
train and enhance the ability of counselors in government agencies to provide
them with a guide on how to conduct educational programs.
3. Employees Provident Fund: Belanjawanku is an expenditure guide that provides
an estimate of minimum monthly expenses on different kinds of goods and
services for Malaysian households. It helps them to plan for their individual as
well as family budgeting to achieve a good living standard.
4. Agensi Kauseling dan Pengurusan Kredit (AKPK): Financial education public
programs are taken by AKPK throughout the year targeting many segments such
as women, youth, entrepreneurs, and other related parties. The programs are held
to enhance their knowledge and skills that allow them to make effective and
correct decisions on their financial resources.
There are a few studies on financial literacy among university students in
Malaysia. However, the main studies done are by Yew et al. in 2017 and Kamel
and Sahid in 2021. Yew et al. (2017) focused on the title of education literacy among
undergraduates in Malaysia while Kamel and Sahid (2021) emphasized the topic of
financial literacy and the financial behavior of university students in Malaysia. Each
study is elaborated on and studied.
Yew et al. (2017) studied financial education literacy among undergraduates and
distributed a survey to a total of 605 students from 4 institutions of higher learning
located in Klang Valley, Malaysia. Four institutions were selected for the study,
namely, University Tunku Abdul Rahman (UTAR), the University of Malaya (UM),
Raffles International College of Higher Education, and Help University. The study
applied convenience sampling to collect data on financial literacy, behavior, attitude,
and financial socialization factors. They found that college and university students
overall have a low level of financial literacy. Life experience and parental guidance
were considered important predictors of students’ financial knowledge while the
year of study was not a significant predictor. The study also suggested promoting
experiential learning about the knowledge of financial matters, and this will contrib-
ute to a positive attitude and better practices on it.
The Role of Financial Behavior, Financial Stress, and Financial Well-Being. . . 173

3 Conceptual Framework of the Study

Figure 1 illustrates the conceptual framework of the study. The variables of the study
are adopted from a study made by Rahman, Isa, Masud, and Sarker in 2021 when
they conducted a study on the role of financial behavior, financial literacy, and
financial stress in explaining the financial well-being of the B40 group in Malaysia.
Their study examined four variables with the level of financial literacy: financial
behavior, financial literacy, financial stress, and financial well-being.
Since this study has quite a similar tendency, this research applies the same
variables in the chapter to assess the level of Islamic financial literacy. Thus, the
independent variables of this study are financial behavior, financial stress, and
financial well-being while the dependent variable is the level of Islamic financial
literacy. The study will examine whether these independent variables have influ-
ences on the level of Islamic financial literacy (the dependent variable).

3.1 Hypotheses of the Study

3.1.1 Financial Behavior

Financial behavior has a very significant relationship with financial literacy. The
financial behavior of a person can indicate the level of his financial literacy. Susanti
(2013) stated that financial literacy has a positive influence on a person’s financial
behavior. As supported by Zulaihati et al. (2020), financial literacy has also a
positive impact on the behavior of expenditure, saving, and short-term as well as
long-term planning. However, financial behavior involves how a person handles,
manages, and uses available financial resources. According to Yew et al. (2017),
financial behavior is to be assessed through people’s efforts in budgeting, price
comparisons, savings, purchasing, and investment. The final link in the chain that

Fig. 1 Conceptual framework of the study

174 A. Doloh et al.

links knowledge with practice is financial behavior (Yew et al. 2017). As such, the
hypothesis of this study is:
H1: Financial behavior has a positive relationship with Islamic financial literacy.

3.1.2 Financial Stress

Financial stress occurs when a person is unable to meet his financial responsibilities
(Kim et al. 2006). Rahman et al. (2021) stated that financial stress can be defined as
“complexity engagement, general financial responsibilities due to lack of money.” In
other words, financial stress happens when one is not capable of fulfilling financial
needs, managing living expenses, and having adequate finances to make ends meet.
It may involve the impression of fright, scare, and distress, but may also involve
anger and dissatisfaction (Davis and Mantler 2004). Moreover, financial stress can
raise endanger hopelessness and negatively affect one’s health and psychological
well-being (Steen and MacKenzie 2013). According to Heckman et al. (2014), the
negative outcomes of financial stress are depression, anxiety, poor academic perfor-
mance, poor health, and difficulty persisting toward degree completion. Thus, the
study hypothesis is:
H2: Financial stress has a negative relationship with the level of Islamic financial
literacy.

3.1.3 Financial Well-Being

Plenty of surveys have suggested that a lot of Malaysians are not able to make
responsible financial decisions for their financial well-being (Hayei and Khalid
2019). Financial well-being is considered an essential concern for individuals,
communities, as well as nations. Well-being includes a wide aspect of overall living
quality that involves income level, job safety, housing facilities, healthcare access,
education facilities, and others. Thus, financial well-being is one of the crucial
aspects of the overall well-being of individuals. Financial well-being implies the
financial circumstance as well as adequate money to address an individual’s needs
with security and freedom of choice (Rahman et al. 2021). However, financial
scholars generally defined financial well-being as one’s attitude toward financial
status based on objective indicators and subjective perceptions. The objective
indicator includes the size of income, savings, debt, and financial aspects, while
subjective perception includes satisfaction with the financial situation currently and
future finance (Cox et al. 2009). Many researchers found that financial literacy is
highly linked to financial well-being. Better financial well-being and lesser financial
anxiety are considered the outcome of financial literacy. In other words, financial
well-being is the outcome of financial literacy. Due to that, the hypothesis of the
study is:
The Role of Financial Behavior, Financial Stress, and Financial Well-Being. . . 175

H3: Financial well-being has a positive relationship with the level of Islamic
financial literacy.
To conclude, many past studies confirmed that there is a significant relationship
between these variables (financial behavior, financial stress, and financial well-
being) and the level of financial literacy. Thus, the study is to explore the level of
Islamic financial literacy through these three variables and examine whether there is
a relationship between the variables. The result is believed to provide some sort of
data that is useful for the regulator and education institutions to realize and take the
necessary actions accordingly.

Acknowledgment The authors wish to express their gratitude to the sponsor of this research
project, the Jamalullail Research Grant Scheme (JRGS 21-010-0010). Special appreciation to the
anonymous referees for their valuable comments and suggestions on the earlier version of the paper.

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An Analysis of the Impact of Islamic
Microfinance Among Asnaf

Nur Harena Redzuan, Salina Kassim, Romzie Rosman,

Mohd Faizuddin Muhammad Zuki, and Siti Saffa Shaharuddin

Abstract Microfinance has proven that it is an effective tool for poverty reduction
and socioeconomic development. Yet, the impact of microfinance on the recipients is
still questioned and varies from one institution to others. This research analyzes the
impact of Islamic microfinance on asnaf. The study employs a qualitative research
method by using primary data collection. The input for the study is obtained from the
semi-structured interview with the representatives of State Islamic Religious Coun-
cils (SIRCs) and Islamic financial institutions. The originality of this study may
contribute to the formation of a new body of knowledge and enrich the literature
sources in the field of Islamic microfinance that will benefit both academicians and
practitioners. This impact study on performance and measurement may significantly
contribute toward the sustainable and socially impactful growth of the Islamic
finance industry, especially in achieving the maqasid Shariah and value-based
intermediation (VBI) goals.

1 Introduction

Malaysia has nearly eliminated poverty, with a vastly low poverty rate of 8.4% as of
2019. The Economy Management and Prospects Report in 2019 published by the
Ministry of Finance Malaysia stated that it estimated that 43.1% of Malaysian
households were fairly poor, in other words, are earning less than 60% of the average
income. The income gap between the upper 20% of households and the rest 80% in
Malaysia had doubled from 1995 to 2018. The monthly minimum salary was
increased to RM1, equivalent to USD 265 from the previous range of RM900 entire

N. H. Redzuan (*) · S. Kassim · R. Rosman · S. S. Shaharuddin

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
e-mail: [email protected]
M. F. Muhammad Zuki
Kolej University Islam, Perlis, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 177
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_16
178 N. H. Redzuan et al.

Malaysia across every state. To reduce and assist with the cost of living for the B40/
low-income group, structured policies of monthly aid of RM500–RM1000 (USD
120–USD 240) for households with a monthly income average of RM4000 (USD
960) and below were established in 2019.
A positive economic cycle established will ensure that the people may benefit
from the wealth of the state and country directly. So here comes the main focus of
this research, which is about microfinance that will be able to play a major role in
improving the lives of the low-income group in Malaysia. Thus, practicable income
is needed to promote microfinance facilities so that the funding can be used in
starting their own involvement in small trading by using this said facility and thus
improve the financial condition, especially for low-income households.
There is nothing new in microfinance and its relation to small business traders in
Malaysia. There are many interests and attempts by the people in hope of becoming a
microtrader in order to enhance their incomes in several sectors and industries such
as trading, etc. In venturing into those kinds of business activities, many of them
have problems with capital to support their ongoing businesses or to be used as a
start-up cost of operation for their business whereby relying on banks or other
financial institutions to support their action by giving credits is difficult. The role
of Islamic financial institutions as financial entities to improve the economy in a
particular segment and the living standards of the people in general stems from a
point where it provides platforms for deposits, financing, and other financial
activities.
Microfinance is now widely recognized as a significant tool for poverty reduction
and women’s empowerment and as a prospective financing method for banks,
financial institutions, and nongovernmental organizations (NGOs). Countries with
a robust microfinance system have significantly reduced poverty and improved
women’s socioeconomic conditions. According to Islam et al., although the terms
microfinance and microcredit are frequently used interchangeably, there is a distinc-
tion to be made. Microfinance is the provision of a wide variety of financial services
provided to low-income individuals who do not have access to them. Savings, loans,
insurance, leasing, money transfers, and other services are among those offered. It is
a well-known reality that microfinance is the most effective strategy to empower the
underprivileged and boost their income-generating capability. On the other hand,
according to Shukran and Rahman, microcredit is a small amount of loan provided to
the poor to help them improve their quality of life. This small amount of loan can
help people get out of the poverty cycle by creating income.
This research analyzes the impact of microfinance on the recipients among asnaf.
With the realization that each financial institution may have different models of
operations, target markets, and strategies, thus the findings can serve as a guideline
to come up with a specific impact measurement model that is unique to an institution.
The outcome of the research can potentially be used to measure the impact of
existing microfinance products and provide a guideline to review the future direc-
tions for microfinance. This impact study on microfinance may significantly con-
tribute toward the sustainable and socially impactful growth of the Islamic finance
An Analysis of the Impact of Islamic Microfinance Among Asnaf 179

industry, especially in achieving the maqasid Shariah and value-based intermedia-

tion (VBI) goals.

2 Review of Literature on Microfinance

Among the most popular methods for reducing and combating poverty and boosting
economic growth, particularly in developing nations, is microfinance (Chu and Luke
2018; De Haas 2021). Microfinance was founded on the idea that granting poor or
vulnerable people access to small loans and they may start a small business that may
help them break the cycle of poverty. Kasu (2018) stated that microfinance helps to
improve vulnerable people’s quality of life over the long term by providing “collat-
eral- free” lending, which frees them from paying the exorbitant interest rates of
traditional moneylenders. This may give them motivation to improve their lifestyle
by having a small business to generate as income. Millennium Development Goals’
2020 Vision acknowledges the importance and the starting of microfinance institu-
tions (MFIs), and Mohammad Yunus and the Grameen Bank, the recipients of the
2006 Nobel Peace Prize, have highlighted the success of these microfinance institu-
tions in Bangladesh (Bayulgen 2008). Since this moment, microfinance had shown
such a significant impact on this vulnerable group in order to reduce poverty. Hence,
other countries have copied this model and concept and used it as inspiration to grow
and develop a targeted group, which is the poor and vulnerable people to have their
own income.
Table 1 provides the selected literature review on the selected literature review on
impact study of microfinance.
Several issues can be identified from the existing studies as well as the current
practices of microfinance that need further research and deliberations. Some of these
issues will be taken up by the proposed research that also provides the motivation to
undertake this research. Based on the previous research conducted by
the researchers, the research gap is identified as the need to conduct a study on the
impact of microfinance on recipients. The output of the impact study will help the
Islamic financial institutions to authenticate and measure their social contribution to
the community from the microfinance product.

3 Research Method

This study employs a primary data source in order to achieve the research objective.
Also, library research is the additional method to support the data collected. Primary
data is an original source for research in the form of raw data, which is needed to be
collected, processed, and analyzed. The primary data is obtained through the semi-
structured interview with the representatives of State Islamic Religious Councils
(SIRCs) and Islamic financial institutions. The study also refers to several reports on
180 N. H. Redzuan et al.

Table 1 Selected literature on impact study of microfinance

No. Reference Impact of microfinance
1. Wibowo, K. A. (2014). Providing financial • Significant number of microenterprises
services to people who do not qualify bank- and contribute to the employment rate in
ing in Indonesia. FINANCIAL INCLU- Indonesia
SIVENESS OF THE POOR: ‘BEYOND • Does not impact the financial crisis and
MICROFINANCE’ vital role in labor absorption
• There are capital needs of
microenterprises; therefore, microfinance
can play an important role to support the
microenterprises
• Significant number of microenterprises
• Huge potential in the market and have
the potential to increase economic growth
• To change the mentality from only
being a receiver to being a giver.
2. Abdullah, R. (2014). Islamic Microfinance • Microfinance as a mechanism to allevi-
Institution in Brunei Darussalam. FINAN- ate poverty
CIAL INCLUSIVENESS OF THE POOR: • Empowering economic development
‘BEYOND MICROFINANCE’ • As a starting capital to reach the
unbankable people
• Microfinance plays a vital role in order
to assist a huge amount of small business
• For economic diversification and to
overcome the rate of unemployment
3. Rahman, R.A. & Siwar, C., (2018). • Analyze the socioeconomic profile of
Chapter 5: Impact of Microfinance on borrowers, learn history, size, and enter-
Income Improvement and Poverty Reduc- prises, impacts on employment, income,
tion: Malaysian experience. Book: Financial expenditure, savings, assets, and percep-
Inclusiveness of the Poor Beyond tions on livelihood and satisfaction on the
Microfinance. IIUM PRESS operation of AIM
4. Cokrohadisumarto, W.M. (2018). Chapter 2: • Reducing poverty
Enhancing the role of Islamic Microfinance • Improving the household income
Institutions in Alleviating Poverty. Book:
Financial Inclusiveness of the Poor Beyond
Microfinance. IIUM PRESS
5. Diniyya, A. A. (2019). Development of waqf • Able to contribute to the GDP
based microfinance and its impact in allevi- • Play an important role in the socioeco-
ating the poverty. Ihtifaz: Journal of Islamic nomic development
Economics, Finance, and Banking, 2(2),
107–124.

the impact measurement of Islamic microfinance published by Islamic financial

institutions.
An Analysis of the Impact of Islamic Microfinance Among Asnaf 181

4 Findings and Discussion

There are some potential benefits of Islamic microfinance to the recipients. The
impact of microfinance on the microentrepreneurs based on the data collected from
this study is as follows:
1. The microentrepreneurs received additional working capital from the
microfinance, hence are able to generate more productivity of the business.
Therefore, the business is able to increase in business income and revenue.
2. Most of the microentrepreneurs are being excluded from the formal financial
service due to the constraint of lack of documentation on their microbusinesses.
With the training attended by the microbusiness owners that is part of the program
of microfinance, now the majority of the microentrepreneurs are able to open a
savings account for their business.
3. With the funding received from microfinance, the microentrepreneurs are able to
expand the business with asset acquisition such as purchasing machinery for
business expansion.
4. The businesses are opening more job opportunities to the family members and the
neighborhood community.
5. The adaptation and usage of technology and digitalization, for example, the
microbusinesses are using the QR code to facilitate transactions by the customers.
6. The most impact on the microentrepreneurs is the change of status from zakat
recipients to zakat payers.
There are some selected case studies reported on the impact of microfinance on
the recipients in Malaysia:
182 N. H. Redzuan et al.

Here are the impacts of microfinance on the individual data extracted from the
Sustainability Report 2021 by Sadaqa House.
An Analysis of the Impact of Islamic Microfinance Among Asnaf 183

I used to have a hard time interacting with other people. My sentence is long. But when I
entered the course class from BangKIT (microfinance program), it opened my eyes and mind
to how to communicate and deal with people from the distribution channels. So now,
Alhamdulillah, my distribution channels have increased from twelve, now there are
50 channels.
Puan Siti Fadzilah Ismail—SR Orange Enterprise BangKIT Microfinance entrepreneur

I was an employed staff with a salary earner, so I really had no experience at all in terms of
business. But when I joined BangKIT (microfinance program), I was taught how we have
strategies to find the target customers, how we want to know our own customers, and how to
expand the business I just saw a person’s way of thinking as a business owner. Not just buy
and sell and make a profit. Other than that, I like BangKIT because in this program he
teaches me not only to focus on myself but in this program, there is an emphasis on charity.
How can I improve my knowledge so that I can help other people? And there is a program to
improve on our spiritual side, the guidance given in the program is very comprehensive.
Miss Zetty Yelia Yusman Yeoh—Nasi Kenyang Enterprise
BangKIT Microfinance entrepreneur

5 Conclusion

In conclusion, much research shows that Islamic microfinance helps in the develop-
ment of rural areas and eradicating poverty in the poor. The recommendations are
made for the way forward of Islamic microfinance:
1. To analyze specific and relevant impact indicators of microfinance.
2. To ensure the suitability of monitoring and mentoring programs for the recipients
for the sustainability of microfinance.
3. To establish a proper database for microfinance recipients for depth analysis.
4. To establish customer profiling as the mechanism for data recording and tracking.
5. To establish outreach and promotion of microfinance.
6. To improve on entrepreneurs’ self-improvement and motivation, to provide
training on entrepreneurship and how to market products to distributors.

Acknowledgment The authors wish to express their gratitude to the sponsor of this research
project, the Jamalullail Research Grant Scheme (JRGS 21-010-0010). Special appreciation to the
anonymous referees for their valuable comments and suggestions on the earlier version of the paper.

References

Bayulgen O (2008) Muhammad Yunus, Grameen Bank and the Nobel peace prize: what political
science can contribute to and learn from the study of microcredit. Int Stud Rev 10(3):525–547
Chu V, Luke B (2018) NGO accountability to beneficiaries: examining participation in microen-
terprise development programs. Third Sect Rev 24(2):77–104
De Haas H (2021) A theory of migration: the aspirations-capabilities framework. Comp Migr Stud
9(1):1–35
Kasu B (2018) How does microfinance affect out–migration. Sociol Int J 2(6):452–454
Rectifying the Downsides Pension Fund
with the Critical Analysis of Triangle Justice
Ecosystem: A Comparative Case Study
in Indonesia and Malaysia

Fahmi Alamil Huda

Abstract The objective of this chapter is to redesign the Indonesian pension fund’s
business model, management system, and new strategies to balance adequate profits,
affordability, and sustainable programs. Consider the Malaysian pension system and
adapt the INTERDAP application used by PT. Angkasa Pura II. Through this
qualitative case study, we applied the foundations of the Triangle Sharia Justice
Ecosystem (TSJE); Sharia, digitized the system, and supported green investment in
the long run. By modeling the business strategy, facilitating the business model and
supplier relationship management, and creating mutually beneficial management
among stakeholders, the study found that Malaysia’s pension system has an invest-
ment purpose. Indonesia, on the other hand, provides pension loans only based on
previously agreed cumulative contributions. Malaysia encourages people across the
country to save on severance funds. The pension system is still managed conven-
tionally. Malaysia requires a pension contribution of 23% of the employee’s base
salary, while Indonesia requires only 3%. This will affect the contribution of pension
funds to the GDP. Malaysia’s pension fund accounts for 60% of GDP. Besides,
Indonesia is at only 6.03%. Another view is, to become a developed country,
pension funds need to reach 60% of GDP by 2045 because 42% of the total supply
of funds in the infrastructure sector comes from pension funds. The practical
implications of this study are access to information, security, and transparency in
the management of pension funds through a digital system supervised by the Sharia
Regulator (BPS) and the Indonesian government’s efforts to realize that supports the
green economy. This study integrates the foundations of the TSJE about pension
funds management. The limitation of the research study is that more detailed studies
and methods are needed to analyze this study. It is expected that this TSJE system
will be applied further.

F. A. Huda (✉)
Indonesian International Islamic University (UIII), Depok, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 185
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_17
186 F. A. Huda

1 Introduction

The retirement agenda is always set based on an agreement between the employer
and the employee. Contracts usually take the form of ordinances, commonly referred
to as pension fund regulations, that apply to both employees and employers. Pension
regulations are part of a collective bargaining agreement (Ahmed 2020).
Pension payments not only provide income security but also motivate employees
to improve their performance. Employees can rest assured by offering a post-
retirement service program. This is especially for those who think that retirement
will reduce their productivity. On the other hand, for some who are still productive, it
is also motivated that their performance is still being evaluated by the company.
Recent developments in pension services have led several institutions to set up
pension funds. The management of this pension fund is very beneficial from a
business point of view. We can imagine the profits from interest-free contributions,
which are then invested in various investment areas. In Indonesia’s pension fund
regulation, the existence of a pension program funding system can form the accu-
mulation of funds needed to maintain the income continuity of old-age program
participants (Meilani 2015).
The basic problem with Indonesian pension funds is that (1) not all participants
understand that their pension fund is invested and that the return on investment
achieves a certain rate of return, and (2) the Sharia Pension Fund is not included in
the Pension Fund Act, and (3) investment portfolio restrictions, at the beginning
become a sign of caution in pension fund management, but investment options are
limited (Kasri et al. 2020).
Pension funds play a very important role in nation-building. On the other hand,
Indonesia’s pension savings contribute very little to GDP, reaching only 6.03%
compared to Malaysia. Malaysia is still very late as it reaches 60% of GDP based on
pension savings (Purnamasari and Rani 2019). In general, the Malaysian pension
system is an arrangement that contributes to a fund designed to provide pensions to
employers and employees, usually employees who have retired. Malaysia’s retire-
ment income strategy aims to reduce poverty in the elderly by ensuring financial
well-being in old age. Otherwise, there is a risk that pension support will not be
sufficient to provide these groups with sufficient income for old age (Ali et al. 2020).
One path can be followed by pursuing financial inclusion under Shariah to
promote transparency in the management of pension funds. Unfortunately,
Indonesia’s Islamic financial literacy and penetration index is still less than 9%
(Bank Syariah Indonesia 2022). The level of Islamic financial inclusion is still low at
only 9.1%. It is well below the traditional financial inclusion of 76.72% (OJK 2022).
Malaysia’s Islamic financial market share has reached 30%. Therefore, media efforts
that are easily accessible and accessible to the community are needed, especially for
workers who are about to retire. Digital media is a solution to financial inclusion
Rectifying the Downsides Pension Fund with the Critical Analysis. . . 187

under the Shariah Act and is believed to promote the creation of transparency in
information related to managed pension funds.

2 Literature Review

Some examples of pension fund business models that have been implemented in
Indonesia are PT. Taspen with the segmentation of Civil Servants/PNS and BPJS
(Social Security Administering Body) Employment with the segmentation of private
employees who implement a contribution scheme with a certain percentage rate
deducted from monthly income (basic salary + family allowance). PT TASPEN
(Persero) or Civil Service Savings and Insurance Fund is an Indonesian State-Owned
Enterprise that is engaged in old-age savings insurance and pension funds for ASN
and State Officials. TASPEN was appointed as the provider of pension payments
based on the Decree of the Minister of Finance Number: 79/KMK.03/1990 dated
January 22, 1990, and the letter of the Minister of Home Affairs Number: 842.1-099
dated February 12, 1990. Contributions that must be paid by participants are
4.75% × monthly income (basic salary + family allowance).
BPJS (Social Security Administering Body) Employment contributions are
deducted every month from employees. The deductions for each employee are
different, depending on the amount of salary earned. The bigger the employee’s
salary, the bigger the BPJS deduction every month. The purpose of BPJS Employ-
ment is to provide old-age insurance for wage recipients and nonwage recipients.
Contributions paid every month can later be disbursed on the condition that they are
not working or unemployed. Many people when not working take care of BPJS to
disburse funds. However, some are left alone for savings in old age. To enjoy these
facilities, employees must first become BPJS Employment participants, which are
usually taken care of by the company where they work. The BPJS Employment
contributions are not all borne by the workers. Some are deducted from employee
salaries and partly from the company (Yandani 2016).
According to Purba (2022), the Pension Guarantee (JP) facility is only intended
for wage earners by paying monthly contributions of 1% of workers and 2% of
companies. As quoted from the BPJS Employment website, pension insurance is one
of the social security services that aims to ensure that BPJS participants who have
entered retirement age or have permanent disabilities get a decent life. There are
several benefits offered through this program, namely (1) participants who have paid
a minimum contribution of 15 years or 180 months will receive monthly cash when
entering retirement age until they die, and (2) registered heirs will also receive
monthly cash. Until he dies or remarries, (3) participants who experience a disability
due to work accidents will receive monthly cash assistance with a density rate (the
level of compliance with contribution payments by participants) of at least 80%, and
(4) children who become the participant’s heirs will also receive monthly cash until
the age of 23 years (Huda and Kurnia 2022).
188 F. A. Huda

3 Methodology

3.1 Triangle Sharia Justice Ecosystem (TSJE)

The qualitative case study and observational research method was applied in this
study. We observe Sharia management and pensions that have not been well
marketed. Think about pension fund management in Malaysia, which is said to be
better than in Indonesia. We took the initiative to establish a digital pension fund
management policy based on Sharia principles, as well as to apply the relevant
pension fund management pattern in Malaysia.
We adapted the INTERDAP application applied to PT Angkasa Pura II to
guarantee the pension funds of its employees. The application of the INTERDAP
System (Integrated Information System for Pension Funds) aims to find out the
benefits and information of a data and information processing system in a Pension
Fund. The system application design using SQL Server and Microsoft Visual Basic
6.0 applications becomes the system method used to be integrated (accounting,
investment, finance, human & general resources, and participation and administra-
tion) and supports the principles of good Pension Fund Governance in PT Angkasa
Pura II (Persero). This can be a problem solver in the delivery of information on
pension benefits to employees to find out the process of paying the pension. The
general mapping of the Triangle Sharia Justice Ecosystem (TSJE) in this research is
given in Fig. 1.

Sharia Supervisory Board (DPS) X IFIs

Mitigation: Prudent Risk Management Guidelines

↑ ↓

Fig. 1 Improvement of regulation and supervision of effective articulation pension funds

Rectifying the Downsides Pension Fund with the Critical Analysis. . . 189

3.2 Implementation Procedure

The application of INTERDAP in management and pensions is modified in this

study. To encourage transparency and clarity in the distribution of pension money,
this application will incorporate Sharia-compliant features. The Financial Services
Authority (OJK), in coordination with the Indonesian Ulema Council, has produced
regulations that serve as the foundation for the application of Sharia law.
Mudharabah, Wakalah, and Hibah are the contracting frameworks that are used in
the operation of this pension fund. Contracts called mudharabah are utilized between
pension funds and investors as well as pension funds and investees. The Employer
and the Pension Fund are bound by a Wakalah contract. Both the Employer and the
Participant use the Hibah in the meanwhile.
By implementing a Sharia fund management pattern, the digital system can make
it easier for users who allocate their pension funds to be invested in Green Invest-
ment whose instruments can be openly explained in the submitted application
(Table 1).

4 Results and Discussion

4.1 Return and Risk Perspective in Green Investment

Numerous varieties of investment are wished for inexperienced initiatives at various

tiers of improvement, especially the ones involving smooth technologies and sus-
tainable electricity assets (from new technologies to already extensively deployed
technology). It has been incorporated. Such projects are available to institutional
buyers through equity (consisting of indexes and mutual price range), fixed earnings
(especially inexperienced bonds), and alternative investments (together with per-
sonal equity and direct investment via green infrastructure finances). Green bonds
are an appealing asset elegance, particularly for institutional buyers interested in
socially responsible investments, as maximum pension budgets are searching out
low-risk investments that provide a steady move of income adjusted for inflation
(SRI) gathering as traders. Notwithstanding interest in those goods, the pension price
range continues to allocate most effectively a small component of their belongings
(much less than 1%) to such inexperienced property. There are several reasons for
this (Della Croce et al. 2011).
From the INTERDAP system that was built based on the conventional system, we
strive to integrate the system based on Sharia. This idea emerged based on the
implementation of the pension system implemented in Malaysia, known as the
Employee Provide Fund (EPF), as one of the countries with the best pension fund
management in Southeast Asia.
Based on the return and risk perspective in Fig. 2, green investment can be made
in the SRI (Sustainable and Responsible Investment) stock index at the Indonesian
190 F. A. Huda

Table 1 Differences in the scheme of the pension fund system in Malaysia and Indonesia
Malaysia (employee provident fund (EPF)) Indonesia (BPJS Ketenagakerjaan)
• National mandatory savings—private sector There are no nationally binding rules
• Contribute longer
• More careful de-accumulation of assets
Retirement age: 60 years (Hussein 2019) Retirement age: 56 years
Employee Provident Fund Act 1991
23% of employee salary 3% of employee salary
• 11% employees • 1% employees
• 12% ≤ company • 2% company
Formula: Formula:
Dues percentage × work period × months × last Dues percentage × work period × months × last
salary salary
Assumption: Assumption:
Total funds in retirement account Total pension fund contribution
23 % × 28 × 12 × 10.000.000 = 772.800.000 3 % × 28 × 12 × 10.000.000 = 100.800.000
Account I Formula:
70 % × 772.800.000 = 540.960.000 Maximum withdrawl × last salary
Account II Maximum benefit earned per month
30 % × 772.800.000 = 231.840.000 40 % × 10.000.000 = 4.000.000
“Beyond savings” initiative February
1, 2008 → changes
(" member financial security)
Life expectancy ", family ties # and medical
expenses "
1. Employee Contribution rate reduced
age by 50%
55–75 years • 5.5% ≤ employees
old • 6% ≤ company
2. Employee Basic savings MYR The total savings of employees during the
age 55 years 120,000 (EUR retirement deduction is unknown at the end
24,600) = Rp.
403,719,708.19
3. Withdrawal Before: Maximum withdrawal of 40% of accumulated
options • Monthly payments/ pension contributions
(November withdrawals from savings
1, 2007) After:
• Flexibility <
• Withdraw part of the
savings at any time
– Prevent members
from withdrawing money at
once
– Not practical in long-
term financial security
– (Research) with-
drawal at once spent within
10 years; life expectancy 75
– Accumulated savings
are spent too quickly and
prematurely
(continued)
Rectifying the Downsides Pension Fund with the Critical Analysis. . . 191

Table 1 (continued)
Malaysia (employee provident fund (EPF)) Indonesia (BPJS Ketenagakerjaan)
– EPF balance that is
not withdrawn at the age of
80 is transferred to the
unclaimed money keeper
– Multipurpose savings
fund (withdrawal → hous-
ing, education, medical
expenses)
Note: " increasing, # decreasing

Fig. 2 Comparison of performance stock index of SRI-KEHATI, IDX 30, and LQ45 in 2009–2021

Biodiversity Foundation (KEHATI) for grants on investment returns in the forestry,

agriculture, and marine sectors. History SRI-KEHATI is a US grant to Indonesia in
the form of an Endowment Fund that continues to be managed and its profits are
made in the capital market (stocks and bonds). The SRI-KEHATI stock index is the
only reference for investment principles that focuses on Environmental, Social, and
Good Governance (ESG) or ESG in Indonesia. Four types of portfolios can be used
by investors in investing their pension funds, namely: (1) KEHATI Lestari Mutual
Fund (RDKL) managed by PT. Bahana TCW Investment Management. Until 2022,
12 companies have joined. Furthermore, there are 3 stock index products based on
ESG, namely: (2) the SRI-KEHATI stock index with the 25 best publicly listed
companies; (3) ESG Quality 45 IDX (Indonesia Stock Exchange/BEI) Kehati
(ESGQ 45) with 45 selected companies; (4) ESG Sector Leaders IDX Kehati
(ESG SL IDX KEHATI) with 48 selected companies representing their fields.
192 F. A. Huda

Table 2 The New Business Model Canvas (BMC) of pension fund

Business Model Canvas (BMC) of TSJE pension fund
9
Key partners 6Key 1
Value 5
Customer relationships 2
Customer
activities proposition segments
*MUI (Indo- *Website *Syariah base *MPC (membership, *Employee of
nesian Ulema development *Discoverability points, coupon) the private sec-
Council) and mainte- *Easy access *Promo tor and govern-
*OJK (Finan- nance *Community *Customer support: FAQ ment sector
cial Services *Plate form development and service contact us via
Authority) developer *Transparency website, phone, WA, and
*Website *Pension *Accountability email
developers management *Trust *Social media, blogs,
*Apps devel- newsletter
oper *Involvement through
*Stakeholders open-source projects
*Sharia Bank *Loyalty bonus
*DPPK 7
Key 3
Channels
*DPLK resources
*Customer *Appstore
trust *Google Play
*Human *Mobile (smartphones
resources and tablets)
*Capital *Website
structure
*The experts
*Investor
*Office
activity
8 4
Cost structure Revenue streams
*Platform cost *Pension fund
– Risk management fee *Investment instrument
– System development/maintenance *Transactional cost
– Screening fee *Fees for additional services
– Investment instrument *Platform fees and subscription
*Company cost
– Operational cost
– Officers
– RnD
– Salary
– Pension roadmap
– Marketing
Note:
Value proposition = 1
Value turnover = 2, 3, 4, 5
Value generation = 6, 7, 8, 9
Rectifying the Downsides Pension Fund with the Critical Analysis. . . 193

4.2 Business Model Canvas (BMC)

A strategic management tool, known as the “Business Model Canvas” (BMC), is

used to swiftly and clearly describe and express business ideas or concepts. The
Pension Fund Application’s business model canvas is shown in Table 2.
The most effective way to interact with consumers and potential customers is
through customer relationships. The ways to hook users above that have been
described can be considered as an effort to interact effectively with users or potential
users. All activities related to business productivity and also related to a product, as
well as generating a value proposition, are also called key activities. In this stage, the
company must explain how to create a business value proposition by carrying out
activities so that a product can be better known to the wider community. On the other
hand, the revenue stream is income that has been deducted from the costs incurred.
This is a very crucial element of the Business Model Canvas (BMC), so it must be
managed as much as possible to increase business revenue. Starting from raw
materials, and products, to performance, must be used properly (Huda 2022).

4.3 New Business Model and Strategy of the Triangle Sharia

Justice Ecosystem (TSJE) Pension Fund

From the discussion above, what is needed is a strategy to build a system and build
infrastructure for business ideas. The discussion in this chapter refers to the Sharia
system so that pensioners receive pension benefits that are managed and applied in a
digital system within the Sharia corridor supervised by the relevant agency for active
participants and transferred to become retirees. Panelists try to map out the business
model flow in this pension fund application in Fig. 3. It is hoped that the system,
work procedures, and everything related to the system are well organized and
integrated using Sharia-based digital software and that the collected pension funds
can be allocated to support the green investment movement in the future.

5 Conclusion and Recommendation

5.1 Conclusion

From the discussion above, what is needed is a strategy to build a system and build
infrastructure for business ideas. The discussion in this chapter refers to the Sharia
system so that pensioners receive pension benefits that are managed and applied in a
digital system within the Sharia corridor supervised by the relevant agency for active
participants.
194 F. A. Huda

Green Economy

Fig. 3 New business model and strategy of the Triangle Sharia Justice Ecosystem (TSJE)
pension fund

There are several differences in the management and pension schemes for private
employees between Malaysia and Indonesia based on those managed by the gov-
ernment, namely, the Employee Provident Fund (EPF) not only functions as a
pension fund but is also a multipurpose savings fund that allows withdrawals to be
made to finance housing, education, and cost of treatment. Meanwhile, when
compared to the management of pension funds at BPJS Employment, there are no
binding rules. In addition, there are also differences in pension age determination,
and total withdrawal of funds to investment instruments presented in the pension
fund management system in Malaysia.
TSJE is a general idea that combines three corners, namely, Sharia, Digital, and
Green Investment. Digital media is a solution to financial inclusion under the Shariah
Act and is believed to promote the creation of transparency in information related to
managed pension funds. Following the example of a Malaysian country that has
turned its pension fund into a form of investment, this study attempts to present a
means of investment in a built digital system: green investments.

5.2 Recommendation

From the discussion above, what is needed is a strategy to build a system and build
infrastructure for business ideas. The discussion in this chapter refers to the Sharia
system so that pensioners receive pension benefits that are managed and applied in a
digital system within the Sharia corridor supervised by the relevant agency for active
participants.
Rectifying the Downsides Pension Fund with the Critical Analysis. . . 195

The limitation of this research is that it is still in the form of a new business model
concept and strategy from the Pension Fund financial industry in Indonesia, both in
the form of Business Model Canvas (BMC) and Supplier Relationship Management
(SRM) by taking a case study on the INTERDAP system application (Integrated
Information on Pension Funds). However, conventionally based applications recog-
nized that there are still many problems. The pension fund system in Indonesia is
also the lowest, far below Malaysia. Therefore, digital, green investment, and Sharia-
based integration strategies are needed as a solution. Research that can be done in the
future is how to make this application real and used by the wider community through
collaboration with a reliable IT team. The system provides convenience and speed in
the data processing. With the ease of data processing using the system, it must also
be accompanied by an increase in the ability of users who use the system. Therefore,
it takes a study of the introduction of the system, so that in operating the system the
user does not feel confused that he can understand the commands in the system.

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The Effect of Financing Distribution on NPF
in Islamic Banking:
A Short- and Long-Term ECM Analysis

Pungky Lela Saputri , Hanif Ahmadi , and Diah Ayu Kusumawati

Abstract This research aims to analyze the effect of murabahah, mudharabah, and
musyarakah financing on nonperforming financing (NPF). It examined the effect of
financing distribution on NPF based on the quarterly data from BSI from 2015 to
2022 and used the error correction model (ECM) analysis. The results showed that in
the long term, the distribution of murabahah, mudharabah, and musyarakah financ-
ing did not affect NPF. Meanwhile, in the short term, only murabahah and
musyarakah financing affected NPF with a significance level of 0.05 and 0.03,
respectively. The results can be a significant indicator of adequate steps for BSI in
taking a financing distribution policy to prevent financing risk. This research only
focuses on murabahah, mudharabah, and musyarakah financing which are widely
used by society as affecting factors on NPF.

1 Introduction

1.1 Background

Islamic banking replaces interest-based intermediation with profit and loss sharing
(PLS) and is an interest-free intermediary institution (Mansoor Khan and Ishaq
Bhatti 2008); (Hassan and Aliyu 2018). Islamic banks are financial institutions
that function as collectors of funds from surplus communities and distribute them
to deficit communities (Saputri et al. 2020). Therefore, financing is the main activity
for Islamic banks. Instead of interest-based loans, Islamic banks offer financing
products, not only profit sharing (PLS), but also nonprofit and loss sharing
(non-PLS) (Azmat et al. 2015). The profit-sharing system (PLS) in Islamic banks
must be a fundamental characteristic that distinguishes Islamic banks from conven-
tional banks (Hamza and Saadaoui 2013).

P. L. Saputri (✉) · H. Ahmadi · D. A. Kusumawati

Faculty of Economics, Universitas Islam Sultan Agung, Semarang, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 197
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_18
198 P. L. Saputri et al.

Because PLS contracts result in moral hazard, asymmetric information, and

adverse selection, Islamic banks that offer PLS contracts, such as murabahah,
mudharabah, and musyarakah, face high-risk financing. PLS contracts, on the
other hand, increase the likelihood of experiencing a drop in financing quality.
The amount of nonperforming financing (NPF), which is converted into the ratio
of nonperforming financing for an Islamic bank, is one of the hazards in Islamic
banking. The risk of decreased profitability will rise as nonperforming debt
levels rise.
This study is grounded in the nonperforming financing (NPF) theory. The
financing distribution made available by banks to creditors will not always proceed
as anticipated by the contract. Banks’ profitability is impacted when portions of the
financing distribution they give are not repaid. This is known as nonperforming
financing. The smooth operation of the debtor’s responsibilities to the bank may be
impacted by external (macro) and internal (micro) environmental factors on both the
customer or debtor side and the bank side. As a result, there is a chance that the
debtor will not succeed with the money provided. Clients are unable to fulfill their
obligations to the bank due to internal client factors, internal bank factors, and bank
and customer external factors.
Therefore, this research attempts to fill the gap by offering a new concept related
to the effect of murabahah, mudharabah, and musyarakah financing on the NPF of
Islamic banks. This article presents the novelty depicted in the regression analysis
using the error correction model (ECM). Thus, the effect of murabahah,
mudharabah, and musyarakah financing on the NPF of Islamic banks can be seen
in the long and short term.

1.2 Objective

This study aims to analyze the impact of the distribution of murabahah,

mudharabah, and musyarakah financing on the NPF of Islamic banks in both the
long and short term.

2 Literature Review

2.1 Background Theory

2.1.1 Nonperforming Financing (NPF) in Islamic Bank

Financial institutions understand that in order to remain competitive, they must focus
on risk mitigation strategies. Every financial institution is required to recognize and
manage the risks associated with managing deposits and a portfolio of earning assets.
The Effect of Financing Distribution on NPF in Islamic Banking: A Short-. . . 199

The risk itself may take the shape of output uncertainty in a corporation (Ahmad
2018). Allah made this truth known in Surah al-Hashr verse 18:

‫ﺲ ﻣﺎ ﻗﺪﻣ ْﺖ ﻟِﻐﺪ ﻭﺍﺗ ُﻘﻮﺍ ﺍﻟﻠﻪ ۗﺍِﻥ ﺍﻟﻠﻪ ﺧ ِﺒ ْﻴ ٌﺮ ِۢﺑﻤﺎ ﺗ ْﻌﻤﻠُ ْﻮﻥ‬
ٌ ‫ﻳﺎﻳﻬﺎ ﺍﻟ ِﺬ ْﻳﻦ ﺍﻣ ُﻨﻮﺍ ﺍﺗ ُﻘﻮﺍ ﺍﻟﻠﻪ ﻭ ْﻟﺘ ْﻨ ُﻈ ْﺮ ﻧ ْﻔ‬

In this verse, Allah SWT orders people to establish plans based on circumstances
and conditions, assess their behavior, and foresee the future in order to reduce
potential losses. People must first consider what will occur by keeping an eye on
or making plans for the future. It is obvious that according to the Islamic perspective,
risk in business cannot be completely removed, but it is encouraged to be managed to
reduce its impact. The risk is sunnatullah in a business and that only Allah’s
judgment would determine the outcome.

2.1.2 Murabahah and NPF

There are many vulnerabilities that murabahah financing exposes Islamic banks to:
First, if the buyer cancels the transaction, Islamic banks are not guaranteed; second,
Islamic banks will incur losses if the value of the goods drops as a result of flaws or
damage while being stored (Antonio 2001); third, changes in comparable prices
happen when an item’s market price increases following an Islamic bank purchase
on behalf of a customer; and fourth, a client’s rejection. Murabahah financing is a
sale and purchase with debt. The asset is the customers to do with as they please,
including reselling. If so, Islamic banks will be exposed to a sizable default risk
(Wijaya and Moro 2022).

2.1.3 Mudharabah and NPF

Mudharabah entails several significant risks, particularly when applying for finance.
The mudharib therefore has access to information that Islamic banks do not. We refer
to this risk as information asymmetry. The customer, who is acting as the fund
manager in this instance, is not required to assume the risk of incurred losses. Losses
that are the result of negligence or fraud are assessed to the mudharib.

2.1.4 Musyarakah and NPF

Musyarakah is a partnership between the customer and the bank. If the business
turnover increases, the profit sharing to Islamic bank also increases, and vice versa; it
is even possible that what has been distributed is not the result but the loss. However,
in practice, Islamic bank is not responsible for the loss. Islamic bank only loses the
opportunity to get business results and delays in payment of the debtor’s
principal debt.
200 P. L. Saputri et al.

2.2 Literature Studies

Mutamimah and Saputri (2022) study findings demonstrated that murabahah financ-
ing significantly reduces financing risk.
Warninda et al. (2019) conducted research on 63 Islamic banks in the Middle
East, South Asia, and Southeast Asia to determine how mudharabah and
musyarakah affected risk in Islamic banking. According to the findings, musyarakah
was at a higher risk than mudharabah.
Misman (2012) and Abusharbeh (2014) performed analysis on how profit and
loss sharing affects financing risk. It is claimed that the profit-sharing system will
raise funding risk.
Ahmed (2010); Chong and Liu (2009); Zeineb and Mensi (2014) stated that the
revenue-sharing model will make monitoring and enforcing restrictions much more
stringent.
An additional study was done on Malaysian Islamic banking. The usage of the
PLS style of funding may be the cause of the risk issue in the Malaysian Islamic
banking system (Lassoued 2018).
According to research conducted by Abedifar et al. (2013), due to asymmetric
information, adverse selection, moral hazard, and expensive strict supervision,
financing with a profit and loss sharing system will raise the risk of Islamic banking.

2.3 Conceptual Framework

Based on the literature review and the results of previous studies that have been
carried out to determine the factors that influence the NPF, the variables of
murabahah financing, mudharabah financing, and musyarakah financing were
determined to be factors that affect the NPF in this research. These three variables
were used as variables that build the research model framework and as a research
problem-solving framework which can be seen in Fig. 1.

Murabahah (MR)

Mudharabah (MD) NPF

Musyarakah (MS)

Fig. 1 Conceptual framework

The Effect of Financing Distribution on NPF in Islamic Banking: A Short-. . . 201

3 Methodology

3.1 Data

This research uses quantitative secondary data. The data is periodic data (time series)
of the NPF ratio and the distribution of Islamic bank financing, namely, murabahah
financing, mudharabah financing, and musyarakah financing. The data was obtained
from financial reports published by Bank Syariah Indonesia (BSI) on its official
website (https://www.bankbsi.co.id/).

3.2 Model Development

Based on the research background and literature review, the proposed hypotheses are
as follows:
H 1: Murabahah financing has a positive and significant effect on NPF in the
long term.
H 2: Murabahah financing has a positive and significant effect on NPF in the short
term
H 3: Mudharabah financing has a positive and significant effect on NPF in the
long term.
H 4: Mudharabah financing has a positive and significant effect on NPF in the
short term.
H 5: Musyarakah financing has a positive and significant effect on NPF in the
long term.
H 6: Musyarakah financing has a positive and significant effect on NPF in the
short term.

3.3 Method

The method used in this research was descriptive and quantitative analysis. Descrip-
tive analysis is used for obtaining clarity regarding the characteristics and descrip-
tions of the NPF, murabahah, mudharabah, and musyarakah variables based on data
from the quarterly financial statements of the Indonesian Sharia Bank (BSI). The
researchers used quarterly financial statements due to the accuracy of results. The
shorter the financial statements’ publication range, the more accurate the research
results, considering this research used time series data in a short- and long-term ECM
analysis.
The estimation model used in this study was regression analysis with a dynamic
model, namely, the error correction model (ECM).
202 P. L. Saputri et al.

The test process used the stationarity test with augmented Dickey–Fuller. In
addition, the test also used the integration test with the regression model equation
as follows:

NPF = α0 þ α1 MRt þ α2 MDt þ α3 MSt þ εt

Information → NPF, nonPerforming financing; MR, murabaha financing;

MD, mudharabah financing; MS, musyarakah financingα0 α1 α2 α3 :

long‐term regression coefficient

The error correction model is a test method that can be used to find a balance
model in the short term. The Resid coefficient (-1) (RES) must be significant to state
whether or not the ECM used is valid. If this coefficient is insignificant, then the
model is not suitable, and it is necessary to make further changes to the model
specifications. The ECT imbalance correction coefficient, in this case, RES (-1) in
the form of absolute values, describes how fast it takes to get the equilibrium value.
The following is the equation of the ECM model used in this study:

DðNPFÞ = β0 þ β1 DðMRÞ þ β2 DðMDÞ þ β3 DðMSÞ þ Β4 RES ð - 1Þ

Information → DðNPFÞ : NPFt –NPFt - 1 ; DðMRÞ : MRt –MRt - 1 ;
DðMDÞ : MDt –MDt - 1 ; DðMSÞ : MSt –MSt - 1 ; RESð - 1Þ : Residð - 1Þ

4 Result and Analysis

4.1 Result

The results of this research have been previously tested with the classical
assumption test.
Based on Table 1, normality test result is Prob. 0.866720 > 0.05,
heteroscedasticity test result is Prob. 0.0728 > 0.05, autocorrelation test result is
DW 0.695 < 2, and the multicollinearity test result shows the centered VIF of
independent variables are <10. It can be concluded that the data of this research
passed the heteroscedasticity, multicollinearity, and autocorrelation tests, and the
data were normally distributed. Therefore, this research can be continued for the
analysis test stage.
The Effect of Financing Distribution on NPF in Islamic Banking: A Short-. . . 203

Table 1 Classical assumption test

Type of test Results
Normality test Jarque–Bera prob. 0.866720
Heteroscedasticity test Prob. F(3.26): 0.0728
Autocorrelation test Durbin–Watson: 0.695
Multicollinearity test Centered VIF
MR, 1.559886; MD, 2.281786; MS, 2.937363
Source: Processed in 2022

Table 2 Stationarity test Stationary at first difference

results NPF, MR, MD, MS Variables (Prob.)
NPF 0.0000
MR 0.0002
MD 0.0001
MS 0.0001
Source: Processed in 2022

Table 3 Cointegration test results

Trace 0.05
Hypothesized no. of CE(s) Eigenvalue Statistics critical value Prob.**
None * 0.649620 54.93191 47.85613 0.0094
Source: Processed in 2022

4.1.1 Stationarities Test NPF, MR, MD, MS

Based on Table 2, the data for the variables NPF, MR, MD, and MS are
nonstationary at level I(0), as can be shown. This study contains nonstationary
variable data at level I(0). In order to determine how steady the data will be, a
degree of integration test is required. According to Table 1, all data variables are
stationary at the first difference or I(1).

4.1.2 Cointegration Test

Based on Table 3, the outcome of the Engle–Granger test, which was employed to
ascertain the cointegration relationship, can be seen. According to the test findings,
the probability value of 0.0094 is less than 0.05, and the trace statistics value of
54.93191 is higher than the Eigenvalue (0.649620) and critical value (47.85613).
This could mean that the variables have a long-term association or a cointegration
relationship.
204 P. L. Saputri et al.

Table 4 Regression OLS test results

Dependent variable: NPF
Variable Coefficient Std. error t-Statistics Prob.
C 4.119648 0.260616 15.80735 0.0000
MR 4.15E-08 4.47E-08 0.928406 0.3617
MD 3.88E-08 3.51E-07 0.110681 0.9127
MS -1.34E-07 7.37E-08 -1.817712 0.0807
Adjusted R-squared
0.753126
Source: Processed in 2022

Table 5 Error correction term (ECT) results

Dependent variable: D(NPF)
Variable Coefficient Std. error t-Statistics Prob.
RESID01(-1) -0.262230 0.150047 -1.747652 0.0433
Source: Processed 2022

4.1.3 Regression Analysis

Regression analysis was performed using the OLS method to determine the effect of
murabahah financing, mudharabah financing, and musyarakah financing variables
on NPF in the long term.
Based on Table 4, according to the OLS method’s results for regression, the
F-probability statistics value is 0.000000. It implies that, when combined, financing
through murabahah, mudharabah, and musyarakah has a considerable long-term
impact on NPF. The results of OLS regression testing indicate that the adjusted
R-squared value, which represents the determination coefficient, is 0.753126. This
indicates that over the long term, the variations in NPF of 75.31% can be explained
by financing methods such as murabahah financing, mudharabah financing, and
musyarakah financing. The model does not account for the remaining 24.69% of the
data, which is explained by additional factors. Based on Table 3, the following
formula can be used to represent the OLS regression equation:

NPF = α0 þ 4:15MRt þ 3:88MDt–1:34MSt þ εt

The probability of RES(-1) or error correction term (ECT) is 0.0433 with a

coefficient value of -0.262230. The ECT coefficient value is negative and the
absolute is less than 1 (Table 5). It can be interpreted that the ECM model specifi-
cation is valid to use.
Based on Table 6, the results of the regression using the ECM approach indicate
that the F-statistics has a probability of 0.05. This suggests that, when combined,
financing through murabahah, mudharabah, and musyarakah has a considerable
impact on NPF in the short term. Regression testing using the ECM yielded an
adjusted R-squared value of 0.127363, according to the results. This suggests that in
The Effect of Financing Distribution on NPF in Islamic Banking: A Short-. . . 205

Table 6 Regression test with ECM method results

Dependent variable: D(NPF)
Variable Coefficient Std. error t-Statistics Prob.
C -0.116028 0.111154 -1.043851 0.3065
D(MR) 7.38E-08 3.60E-08 2.050993 0.0509
D(md) -2.80E-07 6.40E-07 -0.437678 0.6654
D(MS) -1.34E-07 5.99E-08 -2.227182 0.0352
R-squared
0.220860
Adjusted R-squared
0.127363
Source: Processed in 2022

the near run, financing options such as murabahah, mudharabah, and musyarakah
can account for 12.73% of the variation in NPF, with the remaining 87.27% being
explained by factors outside the model. The ECM regression equation can be put
into the following formula based on Table 6.

DðNPFÞ = β0 þ 7:38DðMRÞ–2:80DðMDÞ–1:34DðMSÞ þ Β4 RESð- 1Þ

4.1.4 Analysis

The significance level of murabahah financing affecting NPF in the long term is
0.3617. It is greater than the alpha value (0.05); thus, hypothesis 1 is rejected.
Murabaha financing is the most common type of financing. Murabahah applications
have set payments that start at the beginning and end. The number of installments
that clients pay does not change if inflation rises over the long term. From the start of
the contract, customers can plan the cash flow arrangements required to repay
murabahah financing. As a result, the effect of financing risk is still manageable
(Retnowati and Jayanto 2020).
The significance level of murabahah financing affecting NPF in the short term is
0.05; thus, hypothesis 2 is accepted. It is related to the financing model with the
Murabaha scheme. The decision about the margin financed by Islamic banks has a
significant impact on the contract in this financing. Customers may probably run into
issues with floating rate changes in short-term murabahah financing. Islamic banks
typically consider the BI rate factor for determining the margin when using a floating
rate system. However, if the contrary occurs, customers who have accepted financ-
ing cannot change margins; as a result, the ability to pay in the short term is quite
likely to weaken. When it rises, the stipulated margin will also be large. The results
of this research align with (Mutamimah and Saputri 2022) which stated that
murabahah financing has a significant effect on financing risk.
206 P. L. Saputri et al.

The significance level of mudharabah financing in influencing NPF in the long

term is 0.9127, which is greater than the alpha value (0.05); thus, hypothesis 3 is
rejected. It is heavily influenced by inflation factors and the inflation factor is used as
a reference by sharia since it is based on a financing plan utilizing a mudharabah
contract where the payment of obligations is significantly dependent on the cus-
tomer’s income over the long term. Inflation will, therefore, indirectly harm cus-
tomers’ capacity to fulfill their obligations to Islamic banks. This differs from
(Lassoued 2018) which states that mudharabah financing can increase NPF.
The significance level of mudharabah financing in affecting NPF in the short
term is 0.6654, which is greater than the alpha value (0.05); thus, hypothesis 4 is
rejected. Mudharabah financing has no effect on NPF. This is because the customers
who will do the financing contract are selected customers who have good charac-
teristics, are financially capable, and do not have a history of bad lending and
borrowing transactions. Islamic banks perform a 6C analysis. Therefore, in the
short term, NPF is not affected by mudharabah financing (Prasetyandari et al. 2021).
The significance level of musyarakah financing in affecting NPF in the long term
is 0.0807, which is greater than the alpha value (0.05); thus, hypothesis 5 is rejected.
Musyarakah contracts are not widely developed by Islamic banks in reality, because
they are believed to have a greater risk. Islamic bank management tends to avoid
profit-sharing contracts with musyarakah schemes because they are exposed to profit
sharing and have to share risks or losses (Danupranata and Riduwan 2020).
The significance level of musyarakah financing in affecting NPF in the short term
is 0.0352, which is smaller than the alpha value (0.05); thus, hypothesis 6 is
accepted. This shows that the higher the financing with the musyarakah contract,
the lower the NPF. Musyarakah financing, which is not the main product of Islamic
banks, will certainly not have too much short-term financing risk as other financing
products. This finding is different from research conducted by (Warninda et al. 2019)
which states that musyarakah has a higher risk than mudharabah.

5 Conclusion and Recommendation

5.1 Conclusion

Islamic banks always analyze the ability of customers before distributing financing.
Moreover, Islamic banks are also always careful in choosing financing contracts.
Financing contracts that carry various risks will be minimized to be offered by
Islamic banks. This makes the financing distributed by the majority having no effect
on the NPF of Islamic banks in both the long and short term.
The Effect of Financing Distribution on NPF in Islamic Banking: A Short-. . . 207

5.2 Recommendation

It is possible to do more study to find additional internal and external variables that
affect nonperforming funding. Further study on economic growth actors who might
act as advocates for handling nonperforming financing is required. More research
can be done on strategies or methods for handling nonperforming loans as Islamic
banking continues to expand. Conducting research on financing arrangements for the
commercial company sector (murabahah, istisna, and ijarah) or other profit-sharing
financing agreements that have an impact on the NPF is also an option.

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15640/jeds.v2n3a13
The Rahn Practices by the Real Estate
Agencies in Afghanistan: The Sharīʽah
and Legal Analysis

Mohammad Tamim Siddiqi and Rusni Hassan

Abstract The purpose of this paper is to assess the current practices of al-Rahn
(mortgage) by real estate agencies (REAs) in Afghanistan. The local Islamic
scholars’ and Muftis’ perspectives are not clear about the current practice of
al-Rahn. Some of them justified the current practice based on the concept of Bai
al-Wafā, while the others are of the view that the present practice is an interest-based
contract. Afghanistan is an Islamic country located in the heart of south-central Asia
and has more than 39 million people, 99% of which are Muslims. Al-Rahn still
continues in its traditional and classic form in Afghanistan where there are some
Sharīʿah and legal issues remain in its current application. Hence, this study will
investigate the Sharīʿah and legal issues existing in the current structure of al-Rahn in
the country. The study will pursue a qualitative library-based approach to explore the
current practices of al-Rahn by REAs. The secondary data from a variety of sources,
including the Afghan Civil Code and other related laws, case studies, theses, related
articles, and current literature, will be chosen for this purpose. For data interpreta-
tion, the narrative analysis method will be used. The findings of this research will
help the REAs and contracting parties to understand the legal and Sharīʿah issues
related to the al-Rahn contract. It will also help the related regulatory authority to
take action to ensure that the practices of al-Rahn comply with Sharīʿah principles,
not only to meet up the expectation of the public but also as legally required by the
legislation of the country.

M. T. Siddiqi (✉) · R. Hassan

Institute of Islamic Banking and Finance, International Islamic University Malaysia, Selangor,
Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 209
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_19
210 M. T. Siddiqi and R. Hassan

1 Introduction

1.1 Background

Al-Rahn is an Arabic noun that is derived from Rahana (‫ )ﺭﻩﻥ‬and literally, it has
several meanings; however, the most related meanings are stability and durability
(Ibn Fares 1979). It also means pledged, custody, safekeeping, security, guarantee,
and imprisonment [Al-Baqarah: 283], [Al-Muddathir: 38] and [Al-Tur: 21]. Tech-
nically, al-Rahn refers to mortgage, pledging, collateral, charge, and lien (Shater
et al. 2017). In Islamic Fiqh al-Rahn is defined as keeping a property as a security
against a loan, so that the pledged item can be used to return the loan in case of
default (Dasūqi 2012). According to Al-Zuhaylī (1989), indeed, al-Rahn is one of
the contracts of voluntary charitable contract (tabarru’) and is a permissible contract
according to Qur’an, Sunnah, and Ejma’.
Qur’an: In the Holy Quran Almighty Allah says:
) ‫ﻰ ﺳﻔ ٍﺮ ﻭ ﻟﻢ ﺗﺠﺪﻭﺍ ﻛﺎﺗﺒﴼ ﻓﺮﻫﺎ ٌﻥ ﻣﻘﺒﻮﺿ ٌﺔ‬
‌ ‫( ﻭ ﺇﻥ ﻛﻨﺘﻢ ﻋﻠ‬
“if you are on a journey and you do not find a scribe, then let there be a pledge taken
(from the debtor) (this is sufficient).” Al-Baqarah: 283

Al-Dimashqī (1999) argued that from the above verse the legality of al-Rahn is
proven, and from the (‫ )ﻓﺮﻫﺎ ٌﻥ ٰﻣﻘﺒﻮﺿ ٌﺔ‬we can infer that the pledged property should be
kept with the creditor until his debt is returned to him (Al-Saadi 1999).
Sunnah: As per the below narration of Ayesha (RDA), the Prophet (SAW)
himself entered into this contract:
“‫ ﺍﺷﺘﺮﻯ ﺭﺳﻮﻝ ﺍﻟ ٰﻠﻪ ﺻ ٰﻠﻰ ﺍﻟ ٰﻠﻪ ﻋﻠﻴﻪ ﻭﺳ ٰﻠﻢ ﻣﻦ ﻳﻬﻮﺩﻱ ﻃﻌﺎ ًﻣﺎ ﺑﻨﺴﯿﺌ ٍﺔ ﻭﺭﻫﻨﻪ ﺩﺭﻋﻪ‬:‫“ﻋﻦ ﻋﺎﺋﺸﺔ ﺭﺿﻲ ﺍﻟ ٰﻠﻪ ﻋﻨﻬﺎ ﻗﺎﻟﺖ‬
“The Holy Prophet of Allah (SAW) purchased some food from a Jew on credit and
pledged his iron shield to him.” Al-Bukhari (2002)

Ejma’: According to AAOIFI standard 39, al-Rahn contract permissibility is proven

by Ijma’ and even a single scholar could not be found to deny this contract.
According to Ibn Qudāmah (1985) and Ibn Rūshd, the jurists of Mazahib
al-Arba’a (Mālikīa, Hanafīa, Shāfiʽīa, and Hanbalīa) agreed that the al-Rahn contract
is permitted in both traveling and non-travel.
Currently, al-Rahn is practiced as a micro-credit product of Islamic financial
institutions in Islamic and non-Islamic countries such as Malaysia, Indonesia,
Nigeria, and India (Amuda and Deraman (2015); Khan and Nisar (2004); Shater
et al. (2017); Ahmad et al. (2019); Safi et al. (2020)). However, in Afghanistan
al-Rahn is still practiced in its classical form (Rahimi 2015). According to Rahimi, in
Afghanistan, when the owner of land needs cash, he/she refers to the real estate
agencies (REAs) and registers his/her house under the title of al-Rahn. The customer
(pledgee) goes to the REA and takes the house or apartment for a certain amount of
money that he/she lends to the owner. As long as the owner of the house does not
return the mentioned person’s money, he/she will use the house without paying any
rent. In this way, the owner of the house raises his/her financial problem and the
lender uses the mortgaged house without rent in return for the money he/she lent.
The Rahn Practices by the Real Estate Agencies in Afghanistan:. . . 211

The application has many Sharīʿah and legal issues, where the using of the house
without paying Ujra or rent is obviously a form of usury, which is totally prohibited
in Islam. Moreover, according to the Afghan Civil Code (ACC) Art. 1785, the
pledgee cannot profit from the house without any cost, if he obtains benefit from
the pledged house, he must deliver it to the owner of the house or it must be deducted
from the debt, while in the current practices in Afghanistan, the pledgee benefits
from the house without paying the rent to the owner, or reducing the rent amount
from the loan, which is against the ACC.

2 Literature Review

2.1 The Concept of Al-Rahn

Basically, al-Rahn is one of the collateral and security contracts, which is an asset or
property used to secure a debt. For example, a loan is typically assured by pledging a
property that should have a Shariah-compliant financial value. According to Adam
(2020), al-Rahn facilitates transactions and reduces credit risk. As stated by Hisham
et al. (2013), according to the majority of Islamic schools’ jurists, Al-Rahn has five
pillars which include Rāhin (pledgor), Murtahin (pledgee), Marhūn bih (debt),
Marhūna (the asset), and Sīghah (agreement). However, as argued by Al- Kāsānī
(1982) according to al-Hanafīa, only Sīghah is the pillar of the contract and other
elements are the conditions of the contract.

2.1.1 Al-Rahn Practices as a Contemporary Microfinancing Tool

According to Abdul-Razak (2011), almost 70% of the clients agreed that the al-Rahn
product played a special role in enhancing the financial situation of its customers.
For example, in Malaysia, the mentioned product is called al-Rahnu and up to early
2020 the structure mentioned by Faakihin and Hassan (2018) was combined from
various Islamic contracts, namely:
1. Qard al-Hasanah (benevolent loan)
2. Al-Rahn (pledge)
3. Wadi’ah yad damanah (savings with a protection guarantee)
4. Ujrah (fee)
However, according to BNM (2019), the Sharīʿah Advisory Council of Bank
Negara Malaysia 198th and 199th Meeting, the abovementioned structure was not
fully Sharīʿah-complaint. Hence, from the first of February 2020 onward, the struc-
ture of al-Rahnu changed from Qard (loan) to Tawarruq (SAC 198th and 199th
Meeting 2019).
212 M. T. Siddiqi and R. Hassan

2.1.2 The Concept and Current Practices of Al-Rahn in Afghanistan

In the Afghan Civil Code (ACC) article 1770, Al-Rahn is defined as “possessory
mortgage which is a contract on the basis of which mortgager undertakes to give his
property to possession of mortgagee or another trustee person in exchange for a
financial right whose full or partial payment shall have priority over rights of the first
degree creditors and creditors of lower degrees.”
As stated by Siddiqi (2017), the current structure of al-Rahn in Afghanistan is as
follows:
1. Rāhin (pledgor) needs cash and, in order to receive a loan, registers his property
(house/apartment) in a real estate agency for pledging.
2. Murtahin (pledgee) has some cash and does not want to live in a rental house/
apartment and wants to save the rent cost, goes to the real estate agency, and asks
for a mortgaged house.
3. The real estate agent prepares the contract for both contracting parties.
4. Rāhin received a certain amount of money (usually equal to 50% of the price of
the house) and gives the keys of the house to the Murtahin.
5. The Murtahin lives in the house and pays no rent, so he is saving the rent amount
against the loan he paid to the Rāhin.
6. The real estate agency receives 1% service charge of the whole amount of the
transaction; 0.5% will be paid by Rāhin and 0.5% by Murtahin (REA Law Art:
7 and 18).

2.2 Previous Studies

As al-Rahn is not a new contract, it was in practice since the inception of the Islam
religion, and Muslims were practicing it, even the holy Prophet (PBUH) entered into
this transaction himself (Noraini 2013). The contract of mortgage as a new Islamic
banking product was started in most Islamic countries many years ago, for example,
in 1992, Sharīʽah-compliant mortgage was introduced by MGIT in Malaysia. Since
then, scholars intended to fully Islamize this product; they published papers on
different aspects of this product.
Since Afghanistan is a war-torn country, unfortunately, there is not much litera-
ture related to mortgage issues in Afghanistan, and very few scientific articles have
been published, such as the concept of al-Rahn in al-Hanafīa Mazhab and in ACC
(2008) by Basirat. However, what he mentioned in his book was the theoretical
concept, not the current practices of al-Rahn in Afghan society. The current practices
of al-Rahn in Afghanistan from the Sharīʿah perspective is almost a controversial
issue, the views of scholars and local Mufties are not very clear. Firstly, according to
Dr. Zarifi (2018), the current practice of al-Rahn in Afghanistan is indeed Bay’
al-Wafā (a sale with the right of redemption). He adds that although it is called
al-Rahn, in reality, it is Bai al-Wafā, and in such contract, the customer is permitted
The Rahn Practices by the Real Estate Agencies in Afghanistan:. . . 213

to use all the benefits of the pledged item (Mabī’iah) without its first owner’s
permission. Secondly, another famous mufti and PhD, Dr. Mumtaz (2016) believes
that the current practice could be Islamized by adding two conditions:
(a) The benefits of Murtahin should be with the permission of Rāhin.
(b) The benefits should not be against the loan or deferment payment; it could be
from other credit transactions such as the sale contract.
Thirdly, a number of local Mufties and scholars agreed that the current practice is
not Sharīʿah-compliant and has Riba issues (Haqshaar 2016; IslamPP (2009a) and
(2009b)). According to Rahimi (2015), the current structure of al-Rahn not only has
Sharīʿah issues, but also does not rely on ACC; it is a type of customary practice
which has legal and Sharīʿah objections.

3 Methodology

In this research, a qualitative research method is used with data collected from
secondary sources. This paper is based on literature and academic texts such as
Arabic dictionaries, jurisprudence books, theses, research papers, and reading mate-
rials related to the concept of al-Rahn. This study relies on documentation analysis to
assess Sharīʽah issues related to al-Rahn such as benefiting from the loan and
consistency of uncertainty in the contract of al-Rahn. For the purpose of finding
legality issues, the Afghan Civil Code and other related legislation such as the
property dealers’ code analyzed to find out legal issues in the current structure of
al-Rahn practices in Afghanistan.

3.1 Result and Analysis

Based on the in-depth narrative analysis of different sources such as related journals
and classic jurisprudence books of four famous Islamic schools, in comparison to
those sources and references, the current structure of al-Rahn in Afghanistan has
Sharīʿah and legal issues, the description of which is as follows:

3.1.1 Sharīʿah Issues

All Islamic jurists are of the opinion that benefits and losses of the pledged property
are related to the Rāhin (pledgor), because he is the original owner of the pledged
property, although it is currently in the custody of the mortgagee, as indicated in a
Hadith:
(‫)ﻻ ﻳﻐﻠﻖ ﺍﻟ ٰﺮﻫﻦ ﻣﻦ ﺻﺎﺣﺒﻪ ﺍ ٰﻟﺬﻱ ﺭﻫﻨﻪ ﻟﻪ ﻏﻨﻤﻪ ﻭﻋﻠﻴﻪ ﻏﺮﻣﻪ‬
214 M. T. Siddiqi and R. Hassan

“A pledge does not become the property of mortgagee; it remains the property of its
owner who mortgaged it; he is entitled to its benefits and liable to its expenses.” Al-Zarqani
(2003) No: 4/27

In addition to the above hadith, all jurists agree that the benefits and losses of the
mortgaged property belong to its owner (Al-Zuhaylī (6/133) 1989; Al-Dasūqi
(3/246), ND; Al-Sāwī (3/205) 1995).
According to Ibn Nujaym (1997), the use of the pledged property by the mort-
gagee (Murtahin) is Makroh al-Tahrimi (prohibited) in Islam, even if the pledgor
permits him. As in the current mortgage contract in Afghanistan, the mortgagor has
pledged the house against a loan; according to all jurists, when the al-Rahn contract
is against a loan, it is Riba and prohibited for Murtahin to benefit from the pledged
property, although in some cases according to some jurists if the pledged item is for
the guarantee of a sale contract in some conditional conditions, it is permitted for
Murtahin to benefit from the pledged property (Al-Zuhaylī (6/133) 1989; Al-Dasūqi
(3/246), ND; Al-Sāwī (3/205) 1995).
Some Hanafi jurists are of the opinion that if at the beginning of the contract the
pledgee does not stipulate the use of the mortgaged property and later the pledgor
allows him to use it, it is permissible, but if at the beginning of the contract he
stipulates the use of the mortgaged property, it is usury and prohibited (al-Hamowee
(3/244) (1405 AH)), and Riba (interest) is forbidden in Islam, as Almighty Allah
mentions in the Holy Qur’an:
(‫)ﻭﺃﺣ ٰﻞ ﺍﻟ ٰﻠﻪ ﺍﻟﺒﻴﻊ ﻭﺣ ٰﺮﻡ ﺍﻟﺮﺑﺎ‬
“But Allah has permitted trade and has forbidden interest.” (Al-Baqarah:275)

Imam Tahāwī says, “all the Islamic scholars agreed that every loan which gives
benefit (to the creditor) is considered Ribā and the Murtahin (mortgagee) cannot use
the pledged item” (Tahāwī 1994). Furthermore, al-Zuhaylī (1989) and Al-Sāwī
(1995) argued that benefitting from the pledged item for mortgagee is Riba
(usury). In the current practices as it was mentioned before, the pledgee lives in
pledged apartment and pays no rent, so without any doubt it is Riba. According to
the argument of Zarifi (2018), the current practice is Bay’ al-Wafā. However, in the
contract of al-Rahn which is published by the Ministry of Justice and all the REAs
that only use that format, the contract type is clearly mentioned (Gerawi), which is
the Persian meaning of al-Rahn. Moreover, the International Fiqh Academy (Majmʽa
al-fiqh al-Islami), in the seventh session, announced this contract (Bay’ al-Wafā)
forbidden from the Sharīʽah perspective (Resolution No. 68/4/7 1992).

3.1.2 Legal Issues

Article no. 3 of the Afghanistan Constitution mentioned, “No law shall contravene
the tenets and provisions of the holy religion of Islam in Afghanistan.” According to
Art. 1785 of the ACC, “Mortgagee may not take advantage of the mortgaged
property, movable or immovable, without permission of mortgager.” “He may
lease the mortgaged property, with the permission of mortgager, and pay its rent to
The Rahn Practices by the Real Estate Agencies in Afghanistan:. . . 215

mortgager or he may, upon the permission of mortgager, deduct the rent from the
original debt, even if the mortgage contract has been annulled.” As stated in all the
above articles, the pledgee cannot use or benefit from the pledged property, if he
lives in the pledged house or apartment, he should pay rent to the pledgor according
to the market price, and if he does not pay, the amount should be deducted from the
debt. A similar rule is mentioned in the AAOIFI (2015), Sharīʽah Standard 39, Sec-
tion 3/2/18 as well, “the mortgagee has no right at all to enjoy free of charge benefit
from the mortgaged asset with or without the permission of the mortgagor.” “How-
ever, on permission of the mortgagor the mortgagee can utilize the mortgaged asset
against the normal pay for similar assets. the mortgagee is not allowed to benefit
from the pledged asset free of charges, if he (the mortgagee) is using the pledged
item without paying the rent, it will be committed Riba (usury).” Keeping all the
references in view, in the current practices of al-Rahn in all the scenarios mentioned
in the literature, the pledgee (who only has the right of keeping the pledged property)
is enjoying the pledged property free of charge which is totally against the current
legislations and AAOIFI standards.

3.1.3 Al-Rahn Cases in Afghan Courts

As a result of the existing Sharīʽah and legal issues in al-Rahn practices, Afghan
judges cannot have a clear and specific decision or verdict for the disputes that arise
between the contract parties of al-Rahn.
As stated by Rahimi (2015), some judges are of the opinion that the current
practice of al-Rahn has Riba (usury) issues, which are against article 3 of the Afghan
constitution. In case of conflict between the mentioned article and the current
practices, the judges may compel the pledgor to return the debt based on the concept
of justice. Some others may recognize the current practice as Bai al-Wafā contract,
and when the contract period ends, the creditor needs his money, and if the debtor
does not have cash, it is a hard decision for judges to take. Because if the judges want
to say the property and pay the debt for its price, it is against the principles of Bai
al-Wafā, because in Bai al-Wafā, according to the previous promise, the house
should be sold back to the debtor, not to the third party. These contradictory Sharīʿah
decisions caused legal issues to exist in the current practices of al-Rahn.

4 Conclusion and Recommendation

This study notes that in Afghanistan, al-Rahn is practiced in its customary and
classical form. The services of al-Rahn are provided by real estate agencies, which
are mostly small offices like local shops with a minimum number of two or three
staff. Most of the customers are small- and medium-income-level people, who want
to save their rent expenses by pledging their house or apartment. Although Afghan-
istan is an Islamic country and almost 99% of the population is Muslim, still, the
216 M. T. Siddiqi and R. Hassan

practice of al-Rahn has Sharīʿah and legal issues. The most common Sharīʽah issue is
Riba, and its cause is that the Murtahin gets advantages and benefits from the
al-Marhūna (pledged property) free of cost. He lives in the pledged house and
pays no rent. Afghan Mufties views are not very clear about the nature of the
contract, which causes conflicts of Fatwas. Some of them believe that the current
practice is a conventional al-Rahn contract, while others believe that it is Bai
al-Wafā. Moreover, some legal issues also exist in the current practices of al-Rahn
in Afghanistan such as the following: Using the pledged item and benefiting from it
without paying Ujra (rent) for Murtahin is against article 1785 of ACC. The nature of
the contract is not very clear that it is al-Rahn or Bai al-Wafā and this uncertainty
leads to confusion and inconsistency in the court rulings over al-Rahn issues but also
puts the judge in ambiguity to make a clear decision.
Since the people of Afghanistan are Muslims and Halal and Haram issues are
important to them, those who interact with this contract should leave it immediately.
Since al-Rahn is originally a Sharīʿah-compliant contract, all of its principles and
conditions are stated in the Sharia, and if people want to pledge real estate or goods
against their debts, they should not use the benefits of the mortgaged property, but let
the right of benefits to its owner as prescribed by Sharīʿah.
One of the options that can replace the current mortgage is the contract of Bai
al-Wafa (sale of loyalty). Despite the differences of opinion among the scholars on
this contract, due to the following reasons, this contract is preferred for Afghanistan:
1. Bai al-Wafa is one of the contracts that is discussed in detail in Mujalla Al-Ahkam
al-Adliyyah from articles 396 to 403, and it is one of the permissible contracts that
was accepted during the Ottoman Caliphate.
2. The contract of Bai al-Wafa is one of the permissible contracts in the civil law
of Republic of Afghanistan (1977) and it is explained in detail from articles 1136
to 1151.
3. The contract of Bai al-Wafa is at least out of the degree of Riba, entering into Bai
al-Wafa will at least save the people from absolute prohibition (Haram
al-Mutlaq), and the contract parties will move from Haram to Shobha (doubt to
be prohibited). According to Qaeda al-fiqhiyya (Jurisprudence rule), A ´khaf
al-Dararain (‫)ﺍﺧﻒ ﺍﻟﻀﺮﺭﯾﻦ‬, it is better to select the Shobha if the contract parties
have to choose between Haram and Shobha.
4. As mentioned in this paper before, the current practice of al-Rahn has legal issues
as well. However, if Bai al-Wafa is replaced with the current practice, legal issues
will be solved, because Bai al-Wafa is a permissible contract in the Afghan
Civil Code.
It is recommended that the authorities form a commission of experts who have
expertise in the fields of Sharīʿah and law to examine this matter, come out with a
definitive ruling on its practice, and introduce a specific framework for the current
practices. These would solve the issue of different practices on these highly
demanded and popular products and, on the other hand, save the people from
committing Riba. It is recommended to those who work in the academic and research
sector to do more research in relation to solving the aforementioned problems, find
The Rahn Practices by the Real Estate Agencies in Afghanistan:. . . 217

better solutions, and come out with a Sharīʿah and legal base structure for the current
practices of al-Rahn. Another recommendation is on the need for the contemporary
al-Rahn product in Afghanistan to be offered (IFIs) so that it can be properly
regulated and supervised by the relevant authorities such as the Central Bank of
Afghanistan.

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Improving Microtakaful Offering Through
Stakeholders’ Collaboration: Critical
Analysis Using Systematic Literature
Review

Kartina Md Ariffin, Salina Kassim, Nur Harena Redzuan,

and Habeebullah Zakariyah

Abstract Since Bank Negara Malaysia (BNM) issued its Discussion Paper on
Microinsurance and Microtakaful in 2016, the takaful industry saw the production
of various microtakaful products by the industry. Collaborations with the govern-
ment agencies were also established signifying the industry’s intention to include the
B40 community into the financial system through subsidized microtakaful partici-
pation. These initiatives, however, have not been able to tap the targeted segment
given the low penetration rate among the B40. This study uncovered several
challenges arising from the lack of harmonization and proper coordination among
the takaful operators and the government agencies. Lack of data management of the
B40 and improper product distribution have also made it difficult for the targeted
segment to participate in these products. The findings also revealed the various
challenges faced by the microtakaful initiatives when political instability causes
frequent change in public policies, specifically on the benefits allocated for the B40.
This paper opens up opportunities for further research to be conducted on how a
microtakaful model may collate the various initiatives of the takaful operators and
government agencies under one roof. It also triggers the need to further exemplify
how Islamic social finance instruments may assist in providing microtakaful cover-
age to the B40.

1 Introduction

Bank Negara Malaysia’s (BNM) first Discussion Paper on Microinsurance and

Microtakaful was issued in 2016. This was subsequent to the issuance of Islamic
Financial Services Board (IFSB) and International Association of Insurance

K. Md Ariffin (✉) · S. Kassim · N. H. Redzuan · H. Zakariyah

IIUM Institute of Islamic Banking and Finance, International Islamic University, Kuala
Lumpur, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 219
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_20
220 K. Md Ariffin et al.

Supervisors’ (IAIS)s joint paper on Issues in Regulation and Supervision of

Microtakaful (Islamic Microinsurance) in 2015 which defines microtakaful as
follows:

“Microtakaful is the Islamic counterpart of microinsurance, and exists in both

Family and General forms. It is joint-guarantee initiative, whereby a group of
participants agree among themselves to support one another jointly for the
losses arising from specified risks, under the core principles of Tabarru’
(donation), Taāwun (mutua assistance) and Prohibition of Ribā (usury).
Microtakāful is generally offered to [the] low-income and underprivileged
segment of the population (which is usually excluded from the general Takāful
terms and conditions) by various entities which are regulated and supervised
by regulatory and supervisory authorities of Takāful/insuranc or any other
competent regulatory and supervisory authority under the national laws of
any jurisdiction.”

The lessons exemplified from worldwide experiences have spurred BNM to

loosen its regulatory framework to provide takaful protection to the underserved.
Perlindungan Tenang was first issued in 2017 under the guideline “Introduction of
Insurance and Takaful Products Targeted at Underserved Segments.” In 2021,
refinement was made in the official Perlindungan Tenang guideline (BNM 2021).
The guideline emphasized the need for microtakaful products to be simple in
features, pricing and process. Despite the enabling framework of BNM and the
efforts of the takaful operators, the penetration rate of the B40 remains low. Out of
the 7.28 million B40 in Malaysia (DOSM 2019), only 293,946 individuals have
participated in this programme (MTA 2021), despite being given RM75 worth of
Perlindungan Tenang vouchers by the government to each individual. This raise
concerns as to whether certain factors have not been appropriately addressed by the
industry to increase the penetration rate.

2 Towards Financial Inclusivity

Since Malaysia established its first takaful operator in 1984, the nation now has a
total of 15 takaful operators offering family and general takaful products. Based on
the Islamic Financial Services Industry Stability Report 2021, Malaysian takaful
contribution stands at USD2.103 billion, with family takaful leading the sector at
18.6% of the total insurance and takaful contribution (IFSB 2021). Over the years,
various initiatives have been undertaken by the takaful operators to uphold Maqasid
Shariah through its existence. Innovative products were created to serve not only the
segment which can afford takaful protection, but also the poor and the underserved.
In its more refined, enabling and fit-for-purpose regulatory framework Perlindungan
Improving Microtakaful Offering Through Stakeholders’ Collaboration:. . . 221

BNM Microtakaful Framework

TAKAFUL OPERATOR INDUSTRY CONSUMER PROTECTION

Offer more innovative, Promote wider take-up of Strengthen consumer
diverse and meaningful microtakaful products by protection requirements to
microtakaful products in a broadening the distribution safeguard consumer
sustainable mannerthrough channels to address challenges interests.
clearer expectationson associated with high
product development distribution costs, as well as
enabling product combination

Source: (BNM, 2021)

Fig. 1 The BNM microtakaful framework for Perlindungan Tenang. (Source: BNM 2021)

Penetration rates of 20-59 year olds,

88% national and by selected states, 2016
NON-B40
68%
56%
49% 46%
36% 36% 30%
B40* 30%
23% 26%
19%

r r L h
pu ho NA an
u rlis ba
m Jo O g Pe Sa
Lu TI ng
ala NA re
Ku Te

Source: (Chiew, 2018)

Fig. 2 B40 and non-B40 penetration rates for insurance and takaful. (Source: Chiew 2018)

Tenang (BNM 2021), BNM illustrates the three (3) main areas covered by the
microtakaful framework (Fig. 1).
Apart from Perlindungan Tenang, the takaful operators also have independent
collaboration with other government agencies to provide coverage for the under-
served segment (YaPEIM 2006). These collective initiatives, however, showed
minimal penetration rate among the B40 population (Chiew 2018), as shown in
Fig. 2.

3 Methodology

A systematic literature review (SLR) approach is adopted by screening research

papers, news excerpts, industry reports, academic journals and annual reports of
government agencies to understand the features of microtakaful products and the
types of collaboration between takaful operators and government agencies in
222 K. Md Ariffin et al.

offering microtakaful products to the B40. Key terminologies used to search include
“microtakaful”, “Islamic microinsurance”, “B40” and “underserved”. Thematic
analysis is conducted to identify the similarities, patterns and cross-references
between these documents to obtain information that will help achieve the objective
of this study.

4 Literature Review

This section elaborates the various microtakaful initiatives undertaken by the takaful
industry and the government agencies. It also illustrates the regulatory changes made
by BNM to the regulatory framework to expand the product offerings to the B40.

4.1 Malaysia Microtakaful Products

Prior to 2016, many affordable products have been offered to the underserved.
Among the first was the coverage provided by Takaful Ikhlas in 2007 to 100,000
farmers from Farmers Welfare Federation of Malaysia. At a rate of RM1.80 per
annum, the farmers were given funeral expense worth RM500 upon their death
(Brugnoni 2013). The products tabulated in Table 1 targeted specific clientele. Mohd
Rom et al. (2012) uncovered in their study that the B40 was willing to pay a
maximum of RM35 for a microtakaful protection. Hence, the tabulated products
fell outside of the B40 affordability range.

Table 1 Microtakaful products offered by the takaful industry

Year & Name of Takaful Operator Collaboration with Benefits

Product
Jan 2009 Syarikat Takaful Corporate Social Financial assistance for orphans, single mothers
Takaful myJalinan Kasih Malaysia Responsibility (CSR) and disabled individuals
Jan 2009 Syarikat Takaful Corporate Social Complement the initiatives of teachers by assisting
Takaful myJalinan Ilmu Malaysia Responsibility (CSR) excellent students in English proficiency
Angkatan Koperasi For Cooperative Members only
Mar 2009 Kebangsaan Contribution: RM 5 – RM25 per annum
Skim Tabarru’ Koperasi Etiqa Takaful Malaysia Death/TPD Benefits: as high as RM 19,000
(ANGKASA) Covers up until age 80
For Indonesian maids (to be paid by employers)
Jun 2011 Etiqa Takaful / Takaful
Domestic Helpers - Contribution: RM 70 per annum
Affairs Programme Ikhlas Death/TPD/Hospitalisation/Medical Cost up to
RM40,000 due to accident
Contribution: as low as RM 50 per month for 24-
Jan 2011 Etiqa Takaful Bank Rakyat hour coverage
Takaful Murni Financial Benefits for participant and family
members
Contribution: as low as RM 50 per month for 24-
Jan 2011 Etiqa Takaful Bank Rakyat hour coverage
Takaful Didik Education Plan
Contribution: as low as RM 50 per month for 24-
Jan 2011 Etiqa Takaful Bank Rakyat hour coverage
Takaful Amanah Comprehensive Protection for families

Source: (Mokhtar et al. 2012; Abdul Wahid and Nordin 2014)

Improving Microtakaful Offering Through Stakeholders’ Collaboration:. . . 223

YaPEIM (Malaysia Islamic Economic Development Foundation) offers Skim

Khairat Nasional in 2006 to protect the members’ family against the loss of the head
of family. In addition, under its well-known Ar Rahnu-Based Micro Credit
programme, the B40 is able to pawn his valuables in order to obtain a loan of up
to 65% of the item’s value (YaPEIM 2006). In managing the risk for this
microfinancing facility, YaPEIM collaborates with Etiqa through iProtect (YaPEIM
2021) where coverage is provided to the pawnee against death or total permanent
disablement. This plan rids the beneficiaries the obligation to pay back outstanding
loans from ArRahnu credit facility.
The Fishermen takaful scheme was introduced in 2012 for fishermen registered
under the Fisheries Development Authority of Malaysia (LKIM). From the annual
allowance of RM3,600 that they received from the government, RM100 were
channelled to Etiqa Family Takaful for coverage on accidents, disablement and
death (LKIM 2020). This collaboration with Etiqa was terminated in 2020 and the
total contribution is now channelled to Pertubuhan Keselamatan Sosial (PERKESO).
1Malaysia Micro Protection Plan (1MMPP) was an initiative of the insurers
and takaful operators in 2011 (Abdullah 2021). With RM20 per month, coverage
was given for death, accidents, illnesses, fire and loss of properties. The plan did not
sustain due to the restrictions imposed by regulation which was then not forthcoming
for microtakaful nor microinsurance products. The insurers and takaful operators
also faced operational challenges due to the lack of microinsurance/microtakaful
partners (Insurance Research Centre 2011).
i-BR1M is an initiative of the government of Malaysia where collaboration was
made with ten (10) takaful operators to provide group coverage to BR1M1 recipients
in year 2014. This microtakaful product provided coverage worth RM1,000 for
natural death and RM30,000 for accidental death or total and permanent disable-
ment. With each BR1M recipients’ contribution being RM50.00 per individual, the
government allocated RM4.6billion for this microtakaful plan (Abdullah 2021).
MySalam is an initiative of Pakatan Harapan. It was introduced in year 2019,
subsequent to the discontinuation of i-BR1M in year 2018. MySalam is also funded
by the government and targeted at the B40 segment. Coverage under mySalam
includes RM8,000 for critical illness and daily hospital allowance worth RM50 at
government hospitals (MOF n.d.). Unlike i-BR1M, mySalam is currently managed
solely by Great Eastern Takaful Berhad from 2019 to 2024.
Perlindungan Tenang is the recent initiative of the government of Malaysia.
This initiative saw the collaboration between BNM and industry associations to
provide coverage to about eight (8) million working adults and 700,000 micro-
enterprises (Povera 2017). With participation of 19 insurers and takaful operators,
the industry saw the opening up of the financial system to the B40 community

1
BR1M (Bantuan Rakyat 1 Malaysia) was first introduced in 2012, under the recommendation of
BNM. The initiative targeted mainly the low-income segment to assist them with the daily
livelihood. This was introduced during the reign of the sixth Prime Minister Dato’ Sri Mohd
Najib bin Tun Abdul Razak. Under this initiative, eligible individuals received a one-off payment
of RM500.
224 K. Md Ariffin et al.

Table 2 Perlindungan Tenang takaful operators

# Takaful Operator Name of Product Product Benefits

1 AIA Public Takaful AIA - i Starter Plan Death
2 Eqa Family Takaful Berhad POS Tenang Death
Accidental Medical Reimbursement
3 FWD Takaful Berhad FWD Kasih Death & Total Permanent Disability
Badal Haji / Charity
Funeral Expenses
4 Great Eastern Takaful Berhad MikroSayang (1) Accidental Death, Daily Hospital Allowance
(2) Accidental Death, Crical Illness
(3) Accidental Death, Daily Hospital Allowance, Crical Allowance
5 Hong Leong MSIG Takaful Berhad HLM Takaful Tenang Death
Total Permanent Disability
6 HLM Takaful Tenang 50 Death
Total Permanent Disability
7 Prudenal BSN Takaful Berhad BSN Takaful Sakinah Death
Funeral Expense
8 Lindungi Death
Total Permanent Disability
9 Syarikat Takaful Malaysia Berhad Takaful myTenang Care Death
Total Permanent Disability
10 Takaful Ikhlas Malaysia Berhad Agro Mabrur - I Not available
Ikhlas Perlindungan Tenang Death & Total Permanent Disability
Badal Haji
Funeral Expenses

Source: https://www.mycoverage.my/

(Chiew 2018). Under Perlindungan Tenang (2021), BNM outlined key criteria to be
observed in creating microtakaful products. These products need to have “good
value, accessible, easy to understand and easy to buy and claim” features (BNM
2021). This initiative was first introduced in 2017 and refined in 2021, where the
government provided the Perlindungan Tenang Voucher (PTV) to each of the B40 to
obtain free coverage (Perlindungan Tenang 2021). Eight (8) of the nineteen (19) pro-
viders are takaful operators, shown in Table 2. It should be mentioned that these
takaful operators have also created their own microtakaful products, apart from
Perlindungan Tenang.
Microtakaful Jariyah was introduced in 2018 by Prudential BSN Takaful
Berhad (PruBSN) to individuals who were registered in the national poverty data-
base, e-Kasih. Through collaboration with the Prime Minister’s Office (PMO)—
Implementation Coordination Unit (ICU), PruBSN provides free coverage to the
head of family of this community based on the names obtained from the PMO
(PruBSN 2018). The free coverage is provided through utilization of PruBSN’s
Prihatin Zakat Fund, voluntary participation in Ihsan rider by existing participants
and donation from PruBSN employees and agents. Microtakaful Jariyah provides a
one-year coverage to eligible individuals upon which renewal is subject to the
availability of the fund.
Improving Microtakaful Offering Through Stakeholders’ Collaboration:. . . 225

4.2 Malaysia Microtakaful Regulatory Infrastructure

BNM in its Financial Sector Blueprint (FSB) 2011–2020 signified the importance of
making financial services more accessible to the poor. Subsequent to the FSB
2011–2020 issuance, the discussion paper on microinsurance and microtakaful
was issued (BNM 2016). Among the highlights of the discussion paper include the
following:
(a) Establishes a shared understanding on the overarching vision for
microinsurance/microtakaful development in Malaysia.
(b) Describes the bank’s expectations on the characteristics of microinsurance/
microtakaful products.
(c) Clarifies the areas of proportionate regulatory treatment that the bank will
consider for microinsurance/microtakaful products.
Chiew’s (2018) article on BNM’s enabling framework illustrated the first guide-
line on Perlindungan Tenang in 2017. When it was first introduced in 2017 (Povera
2017), only ten (10) plans were offered by six (6) providers. In 2021, an enhanced
guideline saw the participation of 19 companies with eight being takaful operators
offering 11 microtakaful products. The government of Malaysia provides subsidies
for these products by launching the Perlindungan Tenang Voucher (PTV)
programme on 30 September 2021 (Perlindungan Tenang 2021).
In parallel movement, nationwide, the Financial Capability and Inclusion
Demand Side (FCI) Survey conducted by BNM in 2015 unveiled the ill-prepared
condition of Malaysians in handling major shock (BNM 2016). Ninety-four percent
indicated a low level of confidence in facing financial loss. Two assumptions may be
drawn from this: (a) Based on the 2015 total population of 30.27 million, about
400,000 individuals do not have access to financial services, and (b) these individ-
uals may also be the ones who are not served by the insurance/takaful industry.
The MTA took up the call for change of financial infrastructure through the
issuance of Value-Based Intermediation for Takaful (VBIT)2 in 2021. The document
specified the following guiding principles to steer the industry:
(a) Articulates the TO’s institutional intent or commitment.
(b) Integrates the key underpinning thrusts of VBIT.
(c) Basis for formulation of business strategies.
(d) Reflected in the organization’s culture.

2
The Value-Based Intermediation for Takaful Operators (VBIT) framework “aims to encourage
industry players towards achieving growth that is sustainable and meaningful for all stakeholders. In
the effort to create a positive socio-economic impact, Takaful Operators (TOs) aspire to become a
major influence on the realisation of prosperity and Maqasid Shariah. The framework operates as a
guideline for Takaful Operators in their implementation of Value-based Intermediation for Takaful
(VBIT) by outlining the best conduct and practices in the industry. The framework is comprehen-
sive and relevant to Family Takaful, General Takaful and Retakaful Operators” (Malaysian Takaful
Association, 2021).
226 K. Md Ariffin et al.

(e) Align with Maqasid Shariah and ESGs.

(f) Acts as a voice for the aspirations of the TO’s leadership.
Early in Jan 2022, BNM issued the Financial Sector Blueprint (FSB) 2022–2026
which unveiled further growth:
1. 96% of customers have active deposit accounts compared to 87% in year 2011.
2. 95% of sub-districts have access to financial services, compared to 46% in 2011.
3. 45% of business financing is made to small-medium enterprises (SMEs) com-
pared to 39% in 2011 (75% of these were microenterprises).
4. 41% share of total financing are from Islamic banks (24% in 2011).
5. 42% of adults own at least one life insurance policy or takaful certificate,
compared to 33% in 2014.
In this latest FSB, renewed commitment was given by BNM to increase acces-
sibility of Perlindungan Tenang by the B40 through three new strategies:
(i) promotion of greater innovation through flexibilities of the Perlindungan Tenang
framework, (ii) provision of greater access to demand-side information and (iii)
advancement of financial literacy initiatives through the Financial Education Net-
work (FEN)3 (BNM 2022). This observation denotes the earnestness of BNM to
ensure the objectives of financial inclusion are met.

5 Analysis

An analysis in this section apprehends the matching of the microtakaful initiatives of

the takaful operators and the regulatory framework that has been put in place
by BNM.

5.1 Malaysia Redundancy of Microtakaful Products

and Initiatives

i-BR1M initially provided accidental death and total permanent disablement benefits
worth RM30,000. In 2018, coverage was reduced to RM1,000 on funeral expense

3
Financial education network (FEN) was established in 2016, under the collaboration of BNM,
government and various stakeholders of financial education to coordinate and drive Malaysia’s
financial education strategy. Its aim is to improve the nation’s financial literary through a two-tiered
governance framework, i.e. (i) a high-level interagency steering committee (HSLC) to provide
strategic direction and oversee the formulation and implementation of the national strategy and (ii) a
working-level group, a subcommittee to ensure the execution of action plans for each of the
strategic priorities and report the progress and outcome to the HLSC (source: https://www.
fenetwork.my/)
Improving Microtakaful Offering Through Stakeholders’ Collaboration:. . . 227

benefit. When Malaysia’s government changed in the 14th General Election,

i-BR1M was terminated (Mohamad 2016).
MySalam was introduced by Pakatan Harapan for the B40 in 2019 (MOF n.d.).
This microtakaful protection is fully covered by Great Eastern Takaful Berhad from
2019 to 2024 under an arrangement with the new government. GE Holdings Limited
transferred RM2billion to the government for not having to divest 30% of its
shareholdings to Malaysian investors (Sy-Lyn 2019). In return, this RM2billion is
channelled to GE Takaful to provide free protection to the B40.
Perlindungan Tenang Voucher (PTV) is funded by the government of Malay-
sia. When the voucher was first introduced in 2021, each of the B40 individuals was
given vouchers worth RM50 per person. On January 2022, the voucher value
increased to RM75 per person. Effective July 2022, the eligible B40 individuals
are required to pay RM5 prior to being given the RM75 per person (myCoverage n.
d.).
A gap has inadvertently been created by the concurrent offerings of PTV and
mySalam. Through mySalam, critical illness benefits worth RM8,000 in addition to
daily hospital allowance of RM50, are provided to the recipient. A scrutiny on
Perlindungan Tenang benefits saw GE Takaful (MikroSayang) covering accidental
death RM5,000, critical illness RM5,000 and daily hospital allowance RM50.00
(myCoverage n.d.). This sparks a conflict where a B40 individual may unknowingly
receive two products from the government of Malaysia. In the event of critical
illness, this individual will receive RM8,000 from mySalam and RM5,000 from
Perlindungan Tenang. This could be avoided if proper coordination is put in place to
ensure all B40 individuals receive free coverage given that only 300,000 from the
7.28 million B40 individuals have participated in Perlindungan Tenang (MTA
2021).
YaPEIM’s Skim Khairat Nasional is funded by the government. Its iProtect,
however, is a collaboration with Etiqa Takaful which provides coverage for the
pawned items at a rate of RM1.25 per RM1,000 (YaPEIM 2006). In year 2012,
YaPEIM Smart Ventures Sdn Bhd’s CEO indicated the intention to create its own
takaful company, given the increasing contribution charged by Etiqa (Mokhtar et al.
2012). However, the intention was dismissed due to lack of expertise in managing
takaful operation.
Microtakaful Jariyah’s free coverage for the B40 is funded via its PruBSN’s
Prihatin Zakat Fund and donations from the existing participants, staff and agents.
This has enabled it to reach more than 20,000 B40 participants (PruBSN 2018).
PruBSN is also an operator under the Perlindungan Tenang, offering BSN Takaful
Sakinah and Lindungi. This triggers similar redundancy possibility when a qualified
recipient of mySalam also receives free microtakaful coverage from PruBSN
Microtakaful Jariyah, when in actual fact he has already participated in Takaful
Ikhlas’ Perlindungan Tenang plan. The illustration of the product redundancy
section leads to the detection of the next issue arising from the sustainability of
microtakaful initiatives.
228 K. Md Ariffin et al.

Table 3 Government-subsidized microtakaful initiatives

Microtakaful Initiatives Source of Funding Start Date End Date Contribution

Fishermen Takaful Scheme Government of Malaysia 2012 2020 RM5.24 million

i-BR1M (version 1) Government of Malaysia 2014 2018 RM 4.6 billion

Perlindungan Tenang (RM50 voucher) Government of Malaysia 2017 2021 RM 180 million

mySalam Government of Malaysia 2019 2024 RM 2 billion

Perlindungan Tenang (RM75 voucher) Government of Malaysia 2021 current RM 270 million

Source: (LKIM 2020; Abdul Wahid and Nordin 2014; Perlindungan Tenang 2021; MOF n.d.)

5.2 Funding Uncertainties for Microtakaful Initiatives

The mentioned microtakaful initiatives are funded by the government of Malaysia.

The commendable initiatives have seen the outflow of national budgets to provide
microtakaful products that may be redundant to a certain segment of the B40
population and scarce to another section of the B40 population. Table 3 is a summary
of what had been spent on some of these government-subsidized initiatives:
Several critical questions arose from these:
1. The 15th General Election took place on 19 November 2022; Malaysia had its
tenth Prime Minister (The Star 2022). Will the contribution for mySalam and
Perlindungan Tenang be channelled to a different initiative?
2. Will a newly subsidized microtakaful product be offered to the B40?
Prior to the 14th General Election, Dato’ Sri Mohd Najib bin Tun Haji Abdul
Razak was the sixth Prime Minister of Malaysia, after succeeding from Tun Abdul-
lah bin Haji Ahmad Badawi in 2009. In consequence of the loss of the majority in
2018’s 14th General Election, Tun Dr. Mahathir Mohamad became the seventh
Prime Minister for only 22 months. Further turmoil within the political party led to
the creation of Perikatan Nasional on March 2020. Tan Sri Dato’ Haji Mahiaddin bin
Haji Md Yasin was appointed to be Malaysia’s eighth Prime Minister for 6 months
before Dato’ Sri Ismail Sabri bin Yaakob took over as the ninth Prime Minister. The
15th General Election in Nov 2022 again saw a change in the Prime Minister with
the appointment of Dato’ Seri Anwar Ibrahim. Table 4 shows the list of Malaysia’s
Prime Ministers since 2009.
Improving Microtakaful Offering Through Stakeholders’ Collaboration:. . . 229

Table 4 Malaysia’s Prime Ministers since 2003

Years Governing Coalion Prime Minister

31 Oct 2003 - 3 Apr 2009 Barisan Nasional 5th: Tun Abdullah bin Haji Ahmad Badawi
3 Apr 2009 - 9 Mei 2018 Barisan Nasional 6th: Dato' Sri Mohd Najib bin Tun Haji Abdul Razak
10 Mei 2018 - 24 Feb 2020 Pakatan Harapan 7th : Tun Dr. Mahathir Mohamad
1 Mac 2020 - 21 Aug 2021 Perikatan Nasional 8th: Tan Sri Dato' Haji Mahiaddin bin Haji Md Yasin
21 Aug 2021 - 24 Nov 2022 Perikatan / Barisan Nasional 9th: Dato' Sri Ismail Sabri bin Yaakob
24 Nov 2022 - now Prime Minister's Party 10th: Dato' Seri Anwar Ibrahim

Source: (PMO n.d.)

6 Conclusion

The current enabling framework provided by BNM as well as the cooperative

reactions from the takaful operators have stirred positive movement towards greater
financial inclusion for the B40. However, if political instability continuously dis-
rupts public policies and causes frequent changes on the ways subsidies will be given
to the B40, the efforts by the BNM and the takaful operators will definitely hinder the
materialization of the FSB 2022–2026 objectives.
Recommendations for Further Research The following recommendations for
research are envisioned to be conducted in the future to address the gaps that have
been identified in the analysis of this study:
(a) To explore the utilization of Islamic social finance instruments such as sadaqah,
zakat and waqf to fund microtakaful initiatives.
(b) To identify a microtakaful model that is able to collate all products under one
roof. This is to eliminate redundancy of microtakaful coverage for the B40.
(c) To create a database containing comprehensive details of the B40 population to
enable ease of reaching out initiatives by the microtakaful operator.
(d) To provide takaful literacy and awareness programme to the B40 in order to
create awareness among them on the importance of financial protection
instruments.

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TAKAFUL-FAQ.pdf. Accessed March 3, 2022
Sukuk’s Role in Financing Infrastructural
Development During the Covid-19
Pandemic in Nigeria

Abubakar Abubakar Usman and Auwal Adam Sa’ad

Abstract The Covid-19 pandemic has affected the financing infrastructural devel-
opment particularly in the Global South (GS). Amid the pandemic, Nigeria has
found sukuk financing as an alternative source for financing some of its infrastruc-
tural development. This article aims at investigating why sukuk offers a significant
alternative source of financing infrastructural development in Nigeria. The article
argues that the lack of availability of conventional sources of financing development,
economic downturn caused by Covid-19, the potential investment return, the sukuk
structure, and sukuk successes in other economies all contribute to the sukuk
thriving as an important alternative source of financing infrastructural development
in Nigeria.

1 Introduction

The Covid-19 pandemic outbreak has been yet the biggest global-level catastrophe
of the twenty-first century. Virtually all aspects of social life have been disrupted by
the Covid-19 pandemic (Garrow and Lurkin 2021; Kells 2020; Szeles and Saman
2020). With businesses and economic activities temporarily closed during the height
of the pandemic, countries (particularly of the GS) find it hard to finance their
infrastructure which is essential for their economic growth and development
(Goodell 2020; Owusu-Manu et al. 2019). Nigeria, like other economies, has been
impacted by Covid-19. Its dilapidated infrastructures have been in need of massive
investments (Onolememen 2020) but made worse by the outbreak of Covid-19. One
of the solutions Nigeria looked to for financing its infrastructure has been sukuk. It
has issued sukuk worth over a billion USD (2019–2021); the latter was reportedly
oversubscribed by 346% (Nwachukwu 2021).

A. A. Usman (*) · A. A. Sa’ad

Institute of Islamic Banking and Finance (IIiBF), International Islamic University, Kuala
Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 231
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_21
232 A. A. Usman and A. A. Sa’ad

The literature on Islamic finance (IF) broadly and sukuk specifically within the
context of global political economy has been gaining momentum lately (Hanieh
2020). A few studies have examined IF in relation to sustainable development goals
(Diallo and Gundogdu 2021; Khan 2019). However, very few studies investigated
the role of Islamic financial instruments for financing development (Chu and
Muneeza 2019; Mustafa et al. 2018). Few other studies also investigated the use
of sukuk to finance infrastructure development (AbdulKareem et al. 2021;
AbdulKareem and Bin Mahmud 2019). What appears missing from the literature
is the emergence of sukuk as an alternative source of financing infrastructure in
Nigeria during Covid-19.
This article explores sukuk’s role in financing infrastructure in Nigeria during
Covid-19. This is done in a number of sections. Section “Introuction” reviews
current literature on financing development under the climate of Covid-19 pandemic.
Section “Financing Development” focuses on sukuk as an alternative source of
financing infrastructure development in Nigeria during the pandemic. The section
also examined conventional sources of financing development in the Covid-19
period, the economic downturn caused by the Covid-19 outbreak, investment return
of sukuk, and the structure of sukuk as factors that led to the emergence of sukuk as
an alternative source of financing infrastructure in Nigeria.

2 Financing Development

The dominant development models of the 1940s and 1950s equated development
with economic growth. The conclusion of World War II marked a transformative
period in global geopolitics, leading to the automatic emergence of two camps of
nations based on their level of development: the former colonial powers, which were
more advanced, and the newly independent nations (Horton 2019; Watts and Scales
2020). The dominant prescription about development, at some point, focused on
savings and how countries with less development have people who are too poor to
invest or they simply spend like the people in the developed parts of the world.
Many of the newly independent nations had to look abroad to finance their
development with most of the funds coming in the form of aids and loans from the
developed world, the Global North (Watts and Scales 2020). Some tried to explain
development in terms of international exploitation particularly when explaining the
poor development in the developing parts of the world (de Carvalho 2009). The
so-called Bretton Woods Institutions were at the heart of the foreign aids and loans
that the GS has been so much reliant on for financing its development (Mphande
2020).
In recent years, China and Japan have emerged as a major source of financing
infrastructure development in the developing world (Alhassanz 2019; Jiang 2019).
Both countries have funded transport infrastructures in numerous emerging econo-
mies. However, financing infrastructure development in Africa, according to
Bongwa and van Dijk (2021), faces numerous challenges and requires various
Sukuk’s Role in Financing Infrastructural Development During the Covid-19. . . 233

innovative financial mechanisms. Unfortunately, Africa’s existing legal, institu-

tional, and governance constrain attracts sources of development financing particu-
larly the private capital. The domestic sources of financing development were mostly
inadequate (Griffin 1965).
Many economies in the GS employ a combination of sources to finance their
infrastructure. Some countries used inequality and inflation policies as a form of
substitute for taxation and resource mobilization (Griffin 1970), but majority con-
tinued to rely on foreign aids and external debts which bring about many challenges
mainly due to the fragility of international trade monetary systems (Loxley 2019).
Despite the challenges, however, these sources have remained the conventional
sources of financing development (Dash 2018). Moreover, there has been expansion
of the scope for greater participation of private investors with innovative instruments
such as bonds, equity, and other forms of capital market instruments (including IF)
that include both debt and equity features. Public-private partnerships (PPP) have
also been explored in terms of financing development in the GS (Sergi et al. 2019).
Furthermore, effective use of public expenditure, nurturing human capital,
maintaining transparency and accountability, upgrading technology, and enhancing
value-added initiatives are all considered as innovative methods of financing devel-
opment (Barua 2020; Lau 2022). Also, regionalism is another strategy and oppor-
tunity through which the developing world can speed up the development of their
domestic institutions and be able to generate faster and steadier growth as well as
develop their ability to deal with the challenges and risks involved in the deeper
integration into the global economy (Birdsall and Rojas-Suarez 2004).

2.1 Financing Infrastructure Development During Covid-19

Pandemic

Following the Covid-19 outbreak, questions on national development suddenly

came to the fore because of the looming financial crisis that the pandemic caused
(Oldekop et al. 2020). The current global economy and finance has been massively
affected by the Covid-19 pandemic (Goodell 2020). It slows down the financial
market and new financial regulations have also been profoundly affected by the
pandemic (Wójcik and Ioannou 2020).
The pandemic has further raised questions with regard to the sustainability of the
established financial instruments for financing infrastructure before the outbreak.
The vulnerability of the GS that have been lagging behind in terms of infrastructure
development has been further exposed by the pandemic hampering their progress in
12 of the 17 sustainable development goals (SDGs) (Ahmed et al. 2020; Barbier and
Burgess 2020). The preoccupation with the pandemic caused the likes of education,
infrastructure development, and employment to be neglected by Nigerian govern-
ment (Fagbemi 2021). Alternatively, the government incurred long-term debt to
234 A. A. Usman and A. A. Sa’ad

finance development which hampered sustainability (Shava and Vyas-Doorgapersad

2022).
Nigeria substantially relies on generated revenues from the oil sector. Unfortu-
nately, the oil and gas sector has taken a massive hit due to the pandemic. Norouzi
(2021) revealed that the pandemic caused a 25% decrease in petroleum consumption
at some point causing a 30–40% decrease in CAPEX and R & D investments with
regard to the oil and gas market. These have had massive negative impacts on
Nigerian state’s ability to finance its infrastructure development across the country.
The pandemic caused economic downturn that Nigerian government tried to counter
with cash incentives for businesses in order to arrest the situation (Ozili 2020). The
economic downturn coupled with the poor state of infrastructure was exposed during
the height of the pandemic as the country struggled to combat the pandemic due to
bad roads and poor healthcare facilities, power generation and supply, educational
facilities, and so on (Awofeso and Irabor 2020; Fagbemi 2021; Uyanah et al. 2021).
Unfortunately, other sources of financing development such as PPP were massively
affected by the pandemic with the movement of finance slowing down and the
developing states’ poor revenue generation (Ito 2022).

3 Sukuk as an Alternative Source of Financing

Infrastructure

Sukuk has emerged as an alternative source of financing infrastructure in Nigeria

particularly after the Covid-19 pandemic outbreak. The federal and some state
governments have recently employed sukuk in financing the development of some
infrastructure. A number of researchers have studied sukuk becoming Nigeria’s
recent source of financing infrastructure. Majority of these studies tend to focus on
the potentiality of sukuk in financing one type of infrastructure or another. These
studies are reviewed below for two main reasons. First is to support the proposition
of this article that sukuk is emerging as an alternative financing source for infra-
structural development in Nigeria. Second is to highlight the fact that majority of
these studies focus on sukuk’s prospect rather than explaining the factors contribut-
ing to this new trend.
Sukuk has been studied by researchers as an alternative source of financing
national development, petroleum infrastructure, mining infrastructure, transporta-
tion, power and electricity, agriculture and farming, and so on. For example, sukuk
financing was argued to have a significant role to play in nation building (Abubakar
and Baba 2020; Bakar and Baba 2020). It has immense potential for economic
development, financial inclusion, economic diversification, liquidity control, and
infrastructure financing such as reconstruction and rehabilitation of roads (Abubakar
and Lawa 2020).
A study was conducted by Lawal and Bukar (2020) on the use of sukuk for the
development of petroleum infrastructure in Nigeria. The study concluded that sukuk
Sukuk’s Role in Financing Infrastructural Development During the Covid-19. . . 235

would significantly contribute to the expansion as well as the establishment of new

refineries which would help in bridging the gap between demand and supply that
currently embedded the petroleum market in Nigeria. Similarly, Arabi (2019) looked
into the mining sector and how sukuk can provide a significant source of the
infrastructural development in the sector. The study offered an appraisal of the
legal and policy framework for sukuk investment using a three-pronged approach
of analysis that combines legal, spatial, and economic dimensions. Likewise, others
(AbdulKareem et al. 2021; Adeagbo 2021) found that sukuk has the potential of
becoming an alternative source for rapid economic growth because of its functional
role in attracting both government and private investors.
Sukuk’s potential as an alternative source of funding the #14.2 billion naira
(approximately $ 31,839,694 million) of Kano state power generation project was
explored by Lawal and SaniYahuza (2022). Sukuk can be employed in funding the
development of electricity infrastructure in other parts of the country particularly the
rural areas as well as urban regeneration (Muhammad et al. 2022). Such prospects of
sukuk are likely among the reasons for sukuk emergence during the Covid-19
pandemic as a significant source of financing Nigeria’s infrastructure.

4 Increasing Sukuk Role in Financing Infrastructural

Development in Nigeria During Covid-19

This section identifies factors influencing the emergence of sukuk as an alternative

financing source in Nigeria. Four factors are identified including economic down-
turn, sukuk’s investment return, sukuk structure, and sukuk successes in other
economies.

4.1 Economic Downturn During the Covid-19 Pandemic

Economic downturn caused by Covid-19 has been documented by a few researchers

(Adams-Prassl et al. 2020; Borio 2020). A prediction of a looming financial crisis
caused by the incessant lockdown of most parts of the world was predicted right
from the start of the pandemic (Adams-Prassl et al. 2020). The economic crisis
caused by the pandemic was described as unique for being truly global and caused
largely by noneconomic factors (Borio 2020). The economic uncertainties caused by
the pandemic were also identified by Balli et al. (2020) among the factors explaining
sukuk spread in GCC countries, Malaysia, Indonesia, Turkey, and Singapore.
With falling oil prices and the falling demand for oil products caused by Covid-
19, Nigeria has also suffered economic crisis (Ozili 2020). The pandemic also
caused recession, loss of jobs and incomes, and the deterioration of both financial
and corporate sectors of the country (Kanu 2020). The effects were also evident in
236 A. A. Usman and A. A. Sa’ad

the Nigerian stock exchange sector (Adenomon et al. 2022). Furthermore, both
small- and large-scale businesses were also heavily affected by the pandemic
(Okenna 2020).
To address these negative challenges, Nigerian government began to look at a
number of prospective solutions that include the introduction of palliative measures
that had little positive impact (Awofeso and Irabor 2020), some form of budgetary
responses that include increased borrowing and leveraging on its access to its Islamic
financial sources of credit (e.g., issuing sukuk bonds, etc.) (Ejiogu et al. 2020).
Perhaps the reason for leveraging on Islamic financial instruments such as sukuk is
due to Islamic financial instruments being associated with economic stability
(AbdulKareem et al. 2021) and being less affected during financial crisis (Bakar
and Baba 2020).
The intention to use sukuk as a form of Islamic financial bond for financing
infrastructure development was made known by Nigerian Minister of Finance,
Zainab Ahmed, when she revealed during a Senate hearing that: “we intend to
borrow both locally and internationally, improve on our local borrowing, introduce
an infrastructure bond, and to identify new and enhance existing revenue streams”
(Salaudeen 2021, p. 105). Likewise, in a speech made before the Parliament’s
Committee on Works around 2019, Nigeria’s Minister of Power, Works, and
Housing also proposed to the government to float a N10tm ($27.8bn at the exchange
rate of the time) bond to be used in constructing and rehabilitating roads, rail,
aviation, and maritime development.

4.2 Investment Return of Sukuk

Expected returns of sukuk investment are also a likely factor that helps in making
sukuk an attractive alternative of financing infrastructure in Nigeria during
Covid-19. Expected sukuk returns were found by Duqi and Al-Tamimi (2019) to
be among the influencing factors along sukuk features and religious factor in the
willingness of UAE investors to invest in Islamic sukuk. Risk of return was also
among various challenges of sukuk investment in Malaysia as found by Rahman
et al. (2020).
Additionally, tax incentives are among the motivation of sukuk Prihatin invest-
ment from retail investors in Malaysia which also, like Nigeria, experienced over-
subscription and upsizing during Covid-19 (Bin-Nashwan and Muneeza 2021). In
the neighboring Indonesia, likewise, investment decisions were found to be strongly
influenced by macroeconomic and policy variables (such as inflation, exchange
rates, and interest rates) and financial markets (e.g., financing interest rates, deposit
rates, volumes, and coupon rates) (Suharti 2021).
Looking at the studies above on the factors influencing investors’ investment in
sukuk during Covid-19, it can be deduced that logically, Nigerian sukuk’ investors
would think about the potential return of their investments when deciding to do
so. Oyetunde et al. confirmed this in a report on sukuk in Nigeria. Furthermore, the
Sukuk’s Role in Financing Infrastructural Development During the Covid-19. . . 237

fact that all the three sukuks issued by Nigeria’s Federal Government have been
oversubscribed suggests that investors were positive about their investment returns
as investors are likely to think about maximizing their benefits. This, however,
requires further empirical studies to ascertain the influence of sukuk investment
returns in motivating investors in the context of Nigeria.

4.3 Sukuk Structure

Nigeria used few sukuk structures to design and issue its sovereign sukuk throughout
the nine-year duration since the sukuk market was first explored. The first govern-
ment entity to start the sukuk market in Nigeria was Osun State, in September 2013.
Osun State Government issued 60 billion naira (approx. $ 134,533,920 million)
sukuk (10 billion naira in different tranches) to raise funds to construct schools
throughout the state. Here is the sukuk structure as follows (Fig. 1):
Steps Involved in Sukuk Al-Ijarah Structure

Sukuk Holders

1. Osun Sukuk Company Issues

Sukuk Al Ijarah Issued to Finance
Declaration of Trust

project
2. Issuer SPV declares a trust over
the Sukuk Assets and appoints
Sterling Asset Management &
Started Asset Trustees & Skye Trustees Limited
3. Sukuk Proceeds are transferred to Management & Trustees to act as its delegate trustees on
Issuer SPV behalf of the Sukuk Holders (in line
Ltd. And Skye Trustees with Section 245 of ISA of 2007
Title to Asset Limited
vests in SPV as
reps. of the Sukuk
Sukuk Holders
SPV (Majority owned by State
Assets Government)
5. Issuer SPV enters into Agency
Agreement with Originator for 10. Remittance of Periodic rental and principal is
Construction and Maintenance monitored by the Trustee Delegate

7. Payment for Construction with 9. Payment of Periodic rental and principal amount
Sukuk Proceeds
Agency Lessee (State
Contractor 6. Grand the right to use land via
certificate of occupancy Agreement Government of Osun)

8. SPV forward leases Sukuk assets to State Government

4. Grand the right to use land via
certificate of occupancy
Land Owner
(State Government of
Osun)

Fig. 1 Osun Sukuk Company

238 A. A. Usman and A. A. Sa’ad

1. Osun Sukuk Company Plc (issuer SPV) issues sukuk, which represents an
undivided ownership interest in the sukuk assets and a right against the issuer
SPV to the payment of rental amount and redemption amount.
2. The issuer SPV declares a trust over the sukuk assets (the school buildings to be
constructed and the proceeds of the sukuk for the benefits of sukuk holders and
appoints Sterling Asset Management and Trustees Limited and Skype Trustees
Limited (trustee delegates) to act as its delegate trustee on behalf of the sukuk
holders (in line with section 345 of ISA of 2007).
3. The investors subscribe for sukuk and pay the proceeds to the issuer SPV.
4. The government of the State of Osun (originator) transfers title to the land
required for construction of the sukuk assets to the issuer SPV and issues
Certificates of Occupancy in the name of the issuer SPV.
5. The issuer SPV enters into an agency agreement with the originator for the
construction, maintenance, and management of the sukuk assets.
6. The issuer SPV, the originator, and a construction company enter into a con-
struction contract (“Istisna contract”) for the construction of the agreed number
of elementary, middle, and high schools at a specified date.
7. The issuer SPV transfers the agreed cost of construction of the sukuk assets, as
may be necessary, to the originator acting as the agent.
8. The issuer SPV leases the sukuk assets to the originator under a forward Ijarah
agreement against periodic rental payments (lease rental) and periodic piecemeal
purchase price payment (periodic redemption amount)—ijarah muntahia
bittamleek, i.e., gradual purchase and transfer of legal or beneficial title of the
sukuk assets from the issuer SPV to the government of the State of Osun.
9. The originator (in its capacity as the lessee) starts paying the lease rental
immediately and will commence payment of the periodic redemption amount
at a deferred date based on the forward Ijarah agreement.
10. The trustee delegate oversees the remittance of the lease rental and the periodic
redemption amount to the issuer SPV and ensures the same is distributed among
the sukuk holders as rental payments and purchase price payment at the relevant
dates until full redemption.
11. The issuer SPV and the originator execute a sale and purchase agreement for the
sale of the relevant portion of the sukuk assets covered by the periodic redemp-
tion amount. The piecemeal purchase would continue until full redemption.
The N10 billion (approx. $ 22,422,320 million) Ijarah sukuk was an investment
vehicle to fund the construction of 24 Millennium Model Schools across various
local government areas in the state. The schools comprised of elementary, middle,
and high schools in fulfillment of the state’s drive to improve the literacy rate.
Furthermore, the schools will possess state-of-the-art infrastructural facilities includ-
ing spacious classrooms, well-equipped science and computer laboratories,
resourceful libraries, accessible roads, and electricity among others. Funds received
from the sukuk holders would be used to construct the schools; thus, ownership of
the schools lies with the sukuk holders. The state government of Osun will make
rental payments based on a forward lease (forward Ijarah) agreement. The issuer
Sukuk’s Role in Financing Infrastructural Development During the Covid-19. . . 239

12. Rent &

SUKUK Purchase CBN &
HOLDERS Payment TRUSTEES

5. Investors subscribe 11. Rent &

to the offer and issuer Purchase
4. SPV declares a trust issues certificates Payment
1. FGN Transfers rights over the roads to be
to land for construction constructed
of roads to an SPV 10. Lease of
FGN ROADS SUKUK Roads FGN
2&3 FGN executes forward
lease agreement with the COMPANY 1 PLC (AS LESSEE)
SPV and signs undertakings 13. Sale &
Purchase of roads
at maturity

6&7 SPV enters construction

and Service Agency 8. Project 9. Project
Agreements with the FGN Payment Delivery

FGN (MINISTER OF POWER,

WORKS & HOUSING)

Fig. 2 Federal government 100 billion (approx. $ 224,223,200 m) sukuk prospectus

SPV will commence periodic rental payment to the sukuk holders 90 days after the
date of allotment.

4.3.1 Federal Government Ijarah Sukuk Structure

The federal government of Nigeria raised a seven-year 100 billion Naira Sukuk
Ijarah for road construction and rehabilitation due 2024, using the following struc-
ture (Fig. 2):
The federal government of Nigeria has incorporated the FGN Roads Sukuk
Company 1 PLC (“issuer/trustee”) to issue the sukuk on its behalf.
1. The FGN issues a letter of allocation of specific sections of land to the issuer/
trustee for construction and rehabilitation of identified federal highways.
2. The FGN through the Federal Ministry of Power, Works, and Housing
(“FMPWH”) executes a forward Ijarah agreement with the issuer/trustee to
lease constructed roads.
3. A unilateral purchase undertaking is executed by the FGN to purchase
constructed roads from the issuer/trustee at maturity.
4. The issuer/trustee declares a trust over the roads to be constructed in favor of the
sukuk holders under a Declaration of Trust Deed and appoints FBN trustees and
STL trustees (the “delegate trustees”) to carry out its functions as trustee under
the trust.
5. Investors subscribe to the offer and the issuer/trustee issues electronic invest-
ment certificates through the CBN as registrar.
240 A. A. Usman and A. A. Sa’ad

6. The issuer/trustee enters into a construction agency agreement with FMPWH to

appoint contractors to construct/supervise the road construction.
7. The issuer/trustee also enters into a service agency agreement with the FMPWH
to undertake major repairs on the road after construction.
8. The issuer/trustee pays the contractors through the FMPWH for construction/
rehabilitation of roads from the sukuk proceeds after the work done by the
contractors is certified by the FMPWH and the delegate trustees.
9. The contractors deliver the completed roads to the issuer/trustee, through the
FMPWH.
10. The issuer/trustee (as lessor) leases the roads to FGN (as lessee) in line with the
Forward Ijarah Agreement.
11. The FGN pays periodic rentals for the use of the roads and purchase amounts at
maturity to the FGN Sukuk Repayment Account with the CBN.
12. The CBN, as paying agent, transfers the periodic distribution amounts to sukuk
holders per the scheduled dates.
13. At maturity of the sukuk, the roads are repurchased by the FGN.

4.4 Sukuk Successes in Other Economies

Sukuk gained momentum and broad attention following the 2008 financial crisis.
After the 2008 global financial crisis, IF broadly and sukuk in particular began to
grow by 15% annually (Hasan et al. 2019). Prior to the 2008 financial crisis,
according to Abdel-Khaleq and Richardson (2006), the characteristics of sukuk
had already began attracting sources of capital from issuers outside of the Muslim
world who sought to tap into the liquidity that Islamic investors offered particularly
within the Gulf region.
The Islamic Development Bank (IDB) is considered a pioneer in terms of the
development of the market globally. The sukuk issued by IDB has always been
oversubscribed. In fact, the IDB sukuk has been the most highly rated bond with
AAA ratings (Abdullahi 2013). Such high-level success of sukuk would not go
unnoticed in the international financial markets once IDB moved from being an
issuer of sukuk itself to becoming an incubator that produced most of the researches
and ideas critical for the rise of Islamic capital market (Abdullahi 2013).
Sukuk expansion into the United States capital market in the early 2000s (Abdel-
Khaleq and Richardson 2006) and the successes it later registered following the 2008
financial crisis were essential for other economies approving of sukuk (Richins
2008). Among those places where sukuk registered success was Hong Kong
(Wong and Bhatti 2019). The success of the Hong Kong, Malaysia, and Indonesia
sukuks which involved issuers with high credit quality served as a good reference for
other economies to follow in developing their Islamic capital markets and to
integrate the markets into the global capital market (Laila et al. 2021; Muharam
et al. 2019).
Sukuk’s Role in Financing Infrastructural Development During the Covid-19. . . 241

Among the champions of IF and sukuk financing are the Gulf Cooperation
Council (GCC) countries. The development and success of sukuk in these econo-
mies have been well documented (Al-raeai et al. 2018; A. Aman et al. 2021; A. U.
Aman et al. 2019; Guermazi 2020; Yıldırım et al. 2020). Sukuk success in different
economies serves as a motivating factor for other economies to employ sukuk.

5 Conclusion

The role of sukuk in financing infrastructure in Nigeria is a very important issue for
the Nigerian economy. Despite the Covid-19 economic distress, Nigeria has indeed
found sukuk financing as an alternative source for financing some of its vital
infrastructure including schools and roads. This, however, has become an
eye-opener that gives the country a possible financing capability without resorting
to international organizations for the development of such infrastructures. Given the
size of Nigeria’s economy, IF and sukuk will be immense if utilized fully.

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Identifying Factors of Financial Exclusion
of Rural Farmers: Case Study in Ulu Dong,
Raub, Pahang

Siti Saffa’, Aziq Arifin, Abdullah Hafiz, and Nur Harena

Abstract Islamic microfinance services and products are not new topics that help in
financial inclusion. Low-income groups benefit the most from the services and
products to maintain their activities or business to generate an income. The business
can be in various forms such as sales, food, and beverages or the agricultural and
fisheries sector. However, even with the services and products of Islamic
microfinance, it is found that there is an exclusion for the rural areas in the financial
system. Therefore, this study narrows down its research to a subdistrict of Raub
named Ulu Dong in Pahang to identify the factors of exclusion of the rural farmers in
the areas. With qualitative methodology through library research and interview, this
research concludes their findings at the end. The result of this study shows that there
are several issues and challenges that hampered rural farmers in Ulu Dong, Raub,
Pahang, to take into serious consideration.

1 Introduction

1.1 Background

According to the United States Department of Agriculture (USDA), agriculture is the

primary source of income in developing countries such as Malaysia, Indonesia, and
other 150 countries. Agriculture is one of Malaysia’s most important economic
sectors, employing more than 1.6 million people (Dardak 2015). It is worth to note
that this industry is expected to be worth $59.4 billion in 2021, with $36.1 billion
in exports and $23.3 billion in imports (International Trade Administration
U.S. Department of Commerce 2022). Agriculture also is one of the most significant
components of the National Key Economic Areas (NKEA) because it has the

S. Saffa’ (✉) · A. Arifin · A. Hafiz · N. Harena

Institute of Islamic Banking and Finance (IIiBF), International Islamic University Malaysia,
Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 245
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_22
246 S. Saffa’ et al.

potential to drive economic growth by producing more jobs and improving farmer
income (Lazim et al. 2020). Bujang and Bakar (2019) believe that agriculture plays
an essential role in Malaysia, particularly in terms of the population’s food supply.
There are a number of things that need to happen in order to make that a reality,
including raising crop yields and farm profitability, fortifying the agro-food supply
chain, and enhancing related support and delivery services. This shows that there is
an emphasis on the modernization and transformation of the much important agri-
cultural sector (Bujang and Bakar 2019).

1.2 Problem Statement

Unfortunately, the agriculture sector’s present performance does not fulfil expecta-
tions. According to the World Bank report Agricultural Transformation and Inclu-
sive Growth (2019), the agricultural productivity of Malaysia is less than half of
high-income countries. This issue may be due to the fact that agricultural projects in
Malaysia are frequently smallholdings owned by rural families and households
(Hakimi and Ajeerah 2013). Kata and Walenia (Kata and Walenia 2015) also stated
that rural places appear to have a higher rate of financial exclusion than cities, for
example, limited access because of geographical, economic, and social factors, as
well as behavioral and information conditioning. It was revealed that over 60% of
farmers do not use bank credit, while 64% do not use credit to finance current and
developmental activities on their farms (Kata and Walenia 2015). This situation
emerges as a consequence of rural farmers’ self-exclusion from the loan market, as
well as internal and institutional credit constraints. This exemplifies the inequitable
loop that must be changed in order to assist the rural farmer economy. All these
issues emphasize the critical need for reforms and increasing contributions to the
agriculture sector to the country’s economic trajectory, which is to assist Malaysia’s
transition to a high-income country.

1.3 Research Significance

Hence, research in identifying factors of financial exclusion of rural farmers may

assist the growth of the agriculture sector. The identification of rural farmers’
obstacles may provide relevant parties with the information they require to restart
or reboot the agriculture economy. This case study focuses on farming in Ulu Dong,
Raub, Pahang. We chose Ulu Dong, Raub, as our case study area since Raub is
known for its legendary durian production and Ulu Dong is dominated by Malay
rural farmers (Amekawa et al. 2017).
Identifying Factors of Financial Exclusion of Rural Farmers: Case Study. . . 247

1.4 Research Objectives

The objectives of this research are as follows: (1) to investigate the current issues
involving rural farmers, (2) to highlight the Islamic microfinance financial service
available to assist the rural farmers, (3) to identify the factors of rural farmers’
exclusion from the financial services, and (4) to explore the opportunity that may
enhance and accelerate financial inclusion among rural farmers.

2 Literature Review
2.1 Agriculture in Malaysia

In the first quarter of 2022, the Malaysian agriculture sector amounted to 22604.00
MYR million, contributing to the country’s expanding GDP at 5.0% compared to the
previous quarter at 3.6% (Trading Economics). This sector increased by 0.2% in the
third quarter, compared to 2.8% the previous quarter. The oil palm, fishing, and
livestock subsectors expanded 3.9% (Q4 2021: 4.8%), 3.5% (Q4 2021: -0.5%), and
1.5% (Q4 2021: 0.2%), respectively, influencing the result. Rubber, on the other
hand, fell 18.6% in the first quarter of 2022 (Q4 2021: -18.8%). In seasonally
adjusted terms, this industry fell by 3.2% (Q4 2021: 1.7%) (DOSM).
Furthermore, palm oil is the dominant export as Malaysia also supplies about
24% of the global demand for vegetable oil. The only non-perennial crop grown in
significant quantity is paddy rice with 700,000 hectares (11% of the total area)
(US International Trade Administration Homepage 2022). Under the Ministry of
Agriculture and Food Industry (MAFI), several authorities are identified to assist and
help the agriculture sector in the country (MAFI n.d.). The Malaysian Agricultural
Research and Development Institute plays three significant roles to conduct scien-
tific, technical, and economic research and the provision of various forms of training
and providing extension services to the agriculture sector.
Second, the Federal Agricultural Marketing Agency (FAMA) developed a mar-
keting infrastructure and a supply chain system that is efficient and effective. It also
develops the marketing and increases the demand for food and agricultural produc-
tion domestically and internationally while leading human resources based on the
latest technology. The third authority is the Farmers Organization Authority which
helps in improving the economic and social status, increasing knowledge and skills,
increasing yields and incomes, and improving the way of life of members of the
farming society.
Fourth, the Department of Agriculture (DOA) implements the enforcement of the
Pesticide Act 1974, the Custom Order (Export Restriction) 1988, CITES regulation
(International Trade Convention for Endangered Animal Species and Wild Plants),
and Plant Quarantine Act 1976 to ensure the safety of plants in various aspects. This
includes safety from threats of extinction and protection of the local rights to breed of
plants.
248 S. Saffa’ et al.

The fifth is the Muda Agricultural Development Authority which is responsible

for transforming the paddy industry into a more competitive economy. Lastly, the
National Farmers Organization (NAFAS) would supply input, farm needs, and daily
necessities and provide farm mechanization services, credit and storage facilities for
the farmers as well as platforms for various services. In a nutshell, these six
authorities and organizations play their roles side by side with MAFI for the
betterment of agricultural sectors.

2.2 Background Performance of Rural Farmers in Ulu Dong,

Raub, Pahang

Ulu Dong is a small district in Raub, ND, and most of its citizens are farmers that are
involved in the growth of durians, Kantan, and bananas. The town is coined as the
“Durian Capital of Malaysia” attracting visitors, especially international tourist. In
fact, it is common in Malaysia to acknowledge that the most mentioned durians are
from Raub. According to the Malaysian Soil Taxonomy, Second Approximation
(Paramananthan 1998), the soils are very fine, kaolinitic, isohyperthermic red family
of Tipik Lutualemkuts, making Raub one of the best planting grounds in Malaysia
(Applied Agricultural Resources Homepage n.d.). Therefore, this study chose Ulu
Dong, Raub, Pahang, as the sample for conducting the research.

2.3 Islamic Microfinance to Assist Rural Farmers

in Malaysia

Microfinance has been a crucial part of economic development of every country.

Microfinance is utilized as a tool to alleviate poverty and enhance financial inclusion
among the poor. The idea of microfinancing has made poverty alleviation doable
because as the name implies, microfinancing schemes are usually a small amount of
financing without the need of collateral. This arrangement is a game changer and
very accessible to the poor people as opposed to the bank loan where the borrower
must pledge an asset against the loan (Morduch 2009). Agrobank, Amanah Ikhtiar,
and TEKUN are one of the many examples of Islamic financial microfinance
institutions that assist local communities.

2.4 Challenges and Issues that Hampered Rural Farmers

in Malaysia

In Malaysia the nature of the issues is quite different as compared to the South Asian
region. Most of the agricultural projects are often in the form of smallholdings and
Identifying Factors of Financial Exclusion of Rural Farmers: Case Study. . . 249

are owned or rented from landlords by small families and households predominantly
in the rural areas (Shafiai & Moi, 2015). Woodhill et al. (Woodhill et al. 2020) also
found that most of these small-scale farmers have limited capacity to generate
revenue as compared to large companies. According to Abid, majority of them use
the outputs of their crops for consumption use rather than selling them in the market
as they have no other source of income to feed the family.
According to Samsi (Samsi et al. 2013), the biggest challenge faced by small-
holding farmers in Malaysia is financial constraints. The high price of fertilizers and
organic pesticides make the cost unbearable for them. Farmers have to pay for all
production inputs such as seed, fertilizer, land preparation, and machinery at the
beginning of the farming season, but they are only able to produce the output at the
end of the season. Hence, they will have to take a financing to solve their liquidity
problem between the start and the end period of a farming season. A study by
Woodhill et al. (Woodhill et al. 2020) found that there is a lack of support from
financial institutions towards farmers in developing their agricultural land. There are
several factors that hinder the farmers from getting involved with financial institu-
tions, such as the following:
I. Negative perception towards Islamic financial institutions due to inadequate
financial literacy.
II. Banks are reluctant to grant a finance to small-scale farmers.
III. A lot of bureaucracy in the financial institutions hinders them from getting
involved.
As a result, farmers prefer informal financing, such as borrowing money from
family and friends, because it is more convenient for them. They also prefer to
borrow from relatives because the repayment terms are more flexible than those
offered by established financial institutions. Although there are numerous
microfinances provided to assist the farmers, most of these contracts are only
applicable for short term-term financing. Due to the nature of their activity, the
harvesting can only be done seasonally. For example, in TEKUN financing, they are
required to make repayment on a weekly basis. This arrangement can be challenging
for farmers whose crop is harvested seasonally, like durian.
Sustainability is arguably one of the most important factors in any business,
regardless of the field. The findings of Shafiai and Moi (2015) study showed that the
Department of Agriculture only aids in the first cycle of the agricultural project, i.e.,
cultivation, but for the second cycle, i.e., harvesting, the DOA only monitors the
activity, making it difficult for farmers to sustain their business afterwards.

3 Methodology
3.1 Location of Study and Participants

Three Ulu Dong participants were interviewed for this study. All of them are farmers
who also involved themselves in agriculture activities. This study employed a
250 S. Saffa’ et al.

purposive sampling technique where participants were selected from Ulu Dong,
Raub. The reason for these participant criteria is that they are directly involved in
agriculture activities.

3.2 Design

As this research attempts to investigate the current issues involving rural farmers,
this research adopted a semistructured interview which facilitates a flexible conver-
sation between the researchers and participants, leading to open-ended answers and
giving a deeper analysis on factors of financial exclusion of rural farmers. The
researchers were able to collect verbal information and nonverbal elements of
face-to-face communication from the participants during this interview (Saunders
et al. 2012). The researchers have developed and used the following interview
protocol in the semistructured interview.

3.3 Interview Protocol

Based on Pokidko and Oparaocha (2013), the researchers have structured their
interview as follows (Table 1):

3.4 Data Analysis

Both sets of data will be examined using thematic analysis (TA), which is able to
analyze qualitative data and help the process of intervention development (Braun &
Clarke, 2014). This also allows the researcher to analyze large data via themes in a

Table 1 Interview protocol

Phase Purpose
First phase of the Warming up the participants before starting the interview session, e.g.,
interview “can you tell us a bit about yourself?”
Gathering information on the current issues involving rural farmers
Asking encouraging questions to the participants, such as “why and
how,” to encourage deeper thought
Second phase of the Gathering information, the factors of rural farmers’ exclusion from the
interview financial services
Asking encouraging questions to the participants, such as “why and
how,” to encourage deeper thought
Wrap-up Obtaining more feedback from the audience. Allowing each person to
expand on whatever information they already gave
Identifying Factors of Financial Exclusion of Rural Farmers: Case Study. . . 251

six-step model. According to Howitt and Cramer (2010), data analysis will start from
data familiarization by repetitive reading, chunking into smaller data, coding of the
key parts to enable summarization, refining the data, data labelling into themes, and
finally, the data scrutinization process. Then the finalized themes will be reported in
the findings section.

4 Findings

4.1 Issues of Rural Farmers in Ulu Dong, Raub, Pahang

Three main issues can be observed that are faced by the farmers in Ulu Dong. The
first is the increase in the price of fertilizers. Farmers put fertilizers as the main
components to the sustainability of their crops and plantation as it plays an important
role in the betterment of the sector by ensuring their crops get enough nutrients,
shortening the time period to be harvested, boosting the growth, and helping from
any disease. However, the current price of fertilizers spiked at an abnormal rate
according to them. It is believed that is an aftereffect of the inflation. According to
Bloomberg, Malaysia is targeting the rise of inflation in 2022 (Trading Economics
n.d.) As the inflation rate impacts and affects the country, rural farmers bear the
added weight of their crops at a highest cost than before.
The second issue lingering around them is the requirement of a license in owning a
gun. The respondents agreed that the need for guns is crucial for the safety of their
businesses and themselves. Guns are necessary for the farmers to scare away wild
animal such as tigers from entering their area. Pigs and monkeys disrupt the ecosystem
while snakes could harm the owner. However, owning a gun is bound by laws and
most farmers do not have a license for it. One of the difficulties is that they need to
have proof of income through three months of bank statements; however, it is known
that they do not have any fixed income. The farmers are stuck in a dilemma; owning a
gun without a license would lead to a fine or imprisonment but not having a gun would
jeopardize the safety of their business and themselves.
Third, some farmers view agriculture as their daily work instead of a milestone to
change and shift their life. This includes the waste of budget from the authorities to
support their business through financial assistance. Thus, this study finds that the issue
is on the entrepreneurship mindset and skills of some farmers. In conclusion, this
research finds that cost factors, safety hazards, and mindset skills are the answers to the
problems and challenges that are faced by the rural farmers in Ulu Dong, Raub, Pahang.

4.2 The Knowledge of the Existing of Islamic Microfinance

Financial Services to Assist the Rural Farmers

As Islamic microfinance products have been detailed in the literature review, it has
come to the surprise of the study that the respondents of the interview are fully aware
252 S. Saffa’ et al.

of the availability of Islamic microfinance services and products to assist them on

their businesses. The most mentioned services and products by the respondents are
from TEKUN and Amanah Ikhtiar Malaysia (AIM). The respondents know how the
financing would help and how the system works. However, majority of the respon-
dents view the services and products as a burden to them. For instance, in the case of
weekly payment, one of the mitigation risks from AIM, the farmers are struggling.
As they agreed, weekly payments depend on their profit of the week through
harvested crops, but for the seasonal plantation, they have nowhere to find enough
money not to be defaulted. One of the respondents also claimed that, in some cases,
the monthly payment would humiliate them as their name is being called out in the
meeting and sarcastically being asked the reason for their inability to pay.
It is obvious during the interview that the study finds that there is a negative
perception of the Islamic microfinance products and services. The farmers felt that
the system is not being sensitive to their current financial situation and that the
agriculture sector is not easy as the system thought. The farmers deal with a lot of
issues as explained in the previous section. Those issues directly affect their business
and lead them to financial problems. Financial problems cause the farmers to default
unintentionally. In contrast, one of the respondents views microfinances as a good
move for him. In fact, he is one of the pioneers in the area for entering a contract with
AIM and still stick to AIM for his future businesses. The respondents believe that the
youngsters should grab any chances and opportunities provided by the authorities
which seem easier to be found nowadays compared to the past. Therefore, this study
believed that the farmers of the rural area of Ulu Dong, Raub, Pahang, are equipped
and acknowledge of any microfinance assistance for the agricultural sector. Percep-
tions and experiences of the farmers determined their involvement in any Islamic
microfinance products and services.

4.3 Factors of Low Involvement of Farmers in the Financial

System

4.3.1 Lack of Documentation

According to the participants, the major factor that excluded the farmers from getting
access to financing is lack of proper documentation. Every financial institution
requires them to provide some sort of certificate of ownership of the land as a
collateral to the financing. However, as a first and second generation of farmers in
Ulu Dong, some of them are yet to be granted the land grant although they were
promised the land grant by the government. Some of the farmers inherited a piece of
agricultural land from their ancestor. The most common issue for the later generation
of farmers is the difficulties in changing the name of the registered proprietor in the
title. For instance, if a landowner dies, his/her descendent will have to be assembled
before a judge can distribute the land to the right owner. According to them, this is
almost certainly an impossible task due to financial and time constraints.
Identifying Factors of Financial Exclusion of Rural Farmers: Case Study. . . 253

4.3.2 Lack of Financial and Business Management Skills

One of the most important characteristics of a successful entrepreneur is having an

adequate financial literacy and business skills. Moreover, adequate business docu-
ments such as receipt, long-term business plan, cost, and financial report are required
by institutions such as FAMA in order to be granted a financial assistance. However,
rural farmers in general still lack appropriate business management skills. Hence, a
lot of applicants got rejected.

4.3.3 Moral Hazard

It is undeniable that moral hazard is one of the biggest factors of the low involvement
of farmers with financial institutions. According to the participants, some farmers
lack motivations and incentive to upgrade their financial well-being as well as their
business. The farmers feel like they are working instead of running an agricultural
business; hence, they feel the income is enough as long as they can provide food on
the table. This can be attributed to the lack of entrepreneurial education and business
skills. Another factor that constitutes moral hazard is the fear of rejection. Rural
farmers in Ulu Dong feel like sometimes it is not worth the time and money to go
back and forth from the financial institutions. The story of their friends and fellow
farmers being rejected from getting the financing decreases their motivation and
hope. Hence, according to the respondents, many farmers do not even try to send an
application.

5 Conclusion

The situation of rural development is complicated. It involves permanently

transforming the lifestyles of people living in rural areas by increasing their eco-
nomic abilities and earning potential. It was discovered that farmers face several
main issues, necessitating the adoption of additional measures by government
agencies.

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Roles of Islamic Financial Literacy
on Financial Decision-Making: Building
a Conceptual Framework Based
on the Theory of Planned Behavior
and Social Cognitive Theory

Auni Zulfaka and Salina Kassim

Abstract With the recent surge in interest in Islamic banking and finance, the
subject of Islamic financial literacy has taken on new significance. With the growth
and development of Islamic financial products, it is possible to choose the right ones
and make the right decisions about Islamic financial products by acquiring Islamic
financial literacy. The objective of this study is to propose a conceptual framework
for the roles of Islamic financial literacy in financial decision-making among work-
ing adults in Malaysia. This study will employ the theory of planned behavior, social
cognitive theory, and Islamic financial literacy to test their influence as independent
variables on financial decision-making in choosing Islamic financial products.
Nonetheless, there is a lack of literature available to show the connection between
the theory of planned behavior, social cognitive theory, and the roles of Islamic
financial literacy in financial decision-making. This study’s originality may contrib-
ute to the construction of a new body of knowledge and expand the literature sources
on the subject of a conceptual framework, which will be beneficial to academics and
practitioners alike.

1 Introduction

1.1 Background

Islamic financial literacy has recently become a hot topic and spotlight of researchers
and policymakers as it becomes necessary knowledge in managing financial deci-
sions. The importance of Islamic financial literacy influences financial behavior and
supports people’s financial decision-making, especially among the Muslim commu-
nity. Lack of financial literacy can affect one’s life especially when it comes to the

A. Zulfaka (✉) · S. Kassim

IIUM Institute of Islamic Banking and Finance, International Islamic University, Kuala
Lumpur, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 255
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_23
256 A. Zulfaka and S. Kassim

issue related to high household debts, increasing numbers of bankruptcy among the
youths, inadequate savings for retirement, and mounting values of frozen estates
among Muslims.
Furthermore, with the increasing range of Islamic financial products in the current
markets, Islamic financial literacy is needed to support and discover a solution for the
well-being of society, thus sustaining the economy for the future. Another significant
part of financial literacy is financial decision-making, which needs the application of
financial knowledge in the form of financial behavior and actual financial decision-
making. When selecting a financial product, one can make a solid financial judgment
based on financial knowledge, reasoning, or experience. Besides that, financial
literacy assists individuals in processing financial information and making financial
decisions. People who are literate will comprehend the risk and return connected
with the financial product and will be able to make efficient use of a financial product
by selecting the Shariah-compliant product that best meets their needs.
Current Islamic financial products employ various names for their products,
which has resulted in significant challenges and misconceptions among consumers.
Some even claimed that it is a religious product intended just for Muslims, while
others simply find the names too difficult to memorize and hence choose ordinary
items over Islamic products. Acknowledging the massive knowledge gap that exists,
this chapter aims to propose a comprehensive model to improve the understanding of
Islamic financial literacy on financial decision-making using the theory of planned
behavior and social cognitive theory, with the assistance of the essential literature on
Islamic financial literacy. Several articles have been reviewed related to the use of
both theories toward financial behavior and decision-making.

2 Literature Review

2.1 Islamic Financial Literacy

The notion of Islamic financial literacy generally combines conventional financial

literacy with Shariah and wealth management components. Until recently, no defi-
nition of Islamic financial literacy can be utilized as a workable definition. There
have been several researches on Islamic financial literacy, but none of them fully
define it. Some relate to a system-specific definition of conventional financial
literacy and the Islamic finance obligations that must be met.
Islamic financial literacy is defined as a person’s ability to manage finances using
Islamic financial principles based on knowledge, attitudes, and behavior. As stated
earlier, the root term of Islamic financial literacy can be traced to the concept of
Islamic financial planning. It is also can be defined as a set of knowledge, abilities,
attitudes, and skills of a person in financial activities that include analyzing, man-
aging, and communicating based on Islamic law, which is the implementation of the
content of the Al-Quran to achieve what happened in the world and the hereafter
(Wibowo et al. 2019).
Roles of Islamic Financial Literacy on Financial Decision-Making:. . . 257

The definition of Islamic financial literacy covers broader aspects of finance that
includes essential money management or financial planning such as savings for the
future, takaful, Shariah-compliant investments, charity donation, waqf and sadaqah,
Zakat, the law of inheritance ( faraid), and wasiyah (Abdullah and Razak 2015).
This includes charity (alms) to understand Islamic financial literacy (Aisyah and
Saepuloh 2019).
Meanwhile, (Antara et al. 2016) define Islamic financial literacy as “individuals’
knowledge, awareness, and competence to interpret Islamic financial information
and services that impact their attitude toward acceptable financial decisions.” Islamic
financial literacy also is a religious requirement for all Muslims (Rahim et al. 2016).
It has ramifications for achieving Al-Falah (true success) in this world and the
hereafter. Some might argue that Islamic financial literacy is merely a Shariah-
compliant extension of traditional financial literacy. Moreover, when it comes to
Islamic financial literacy based on an internal factor, (Setiawati et al. 2018) noted
that Islamic financial literacy is a person’s ability to manage finances using Islamic
financial principles based on their knowledge, attitudes, and behavior. This also fits
with Hidajat and Hamdani’s (2015) definition of Islamic financial literacy, which
described it as knowledge based on the Islamic financial system applied to financial
decisions.
Accordingly, this study defines Islamic financial literacy as a person’s ability to
manage their finances wisely by Shariah principles, including their understanding of
the fundamentals of Islamic finance, Islamic financial products, and services.

2.2 Islamic Financial Decision-Making

Making wise financial decisions is an important skill that may affect the lives of
every consumer of financial products. Consumers of financial products must deal
with complex financial products, a diverse range of products, and a plethora of
financial services, providers, and products, all of which make it more difficult to
make sound financial decisions and choose the best option for the individual
consumer (Chmelková, B., 2017).
A recent study shows that there are connections between Islamic financial literacy
and financial decision-making (Antara et al. 2016). Other than that, a person with
elevated views of financial literacy is more likely to skip mortgage payments, receive
collection calls, employ informal loans, and engage in negative banking behavior
(Balasubramnian and Sargent 2020), whereas those without blind spots make better
financial decisions. In another study by (Fong et al. 2021), older families with greater
levels of financial knowledge are more likely to pay off credit card debt promptly,
keep stock, and follow an age-appropriate investment glide path. Meanwhile, in
Indonesia, millennials as the largest population group in the country also revealed
that those with better financial literacy led better financial decision-making
(Widyastuti et al. 2020). In this regard, (Li et al. 2020) discovered that both
258 A. Zulfaka and S. Kassim

subjective and objective financial literacy had a beneficial influence on financial

market involvement.

2.3 Background Theory

This section contains theories that help to support the study. The current study has
developed a conceptual model that encompasses major determinants of individuals’
Islamic financial literacy using significant theories such as the theory of planned
behavior and social cognitive theory in the context of social learning, which is self-
efficacy. These ideas were widely discussed in industries such as financial literacy,
financial decision-making, and financial well-being (Widyastuti et al. 2020;
Abdullah et al. 2018; Balushi et al. 2018; Heikal and Falahuddin 2014; Yusfiarto
et al. 2020). As a result, they can be regarded as highly important predictors of
working individuals’ Islamic financial literacy. Understanding ideas and their struc-
tures may thus play an important role in promoting Islamic financial literacy and
financial decision-making.
As a result, the purpose of this research is to provide a theoretical paper that
explains the function of Islamic financial literacy toward financial decision-making
by applying the theory of planned behavior and social cognitive theory (financial
self-efficacy).

2.4 Theory of Planned Behavior (TPB)

The financial decision-making process has several components. According to tradi-

tional financial theory, behavior emerged as an alternative to studying investor
behavior because it investigates the impact of psychology and other social factors
in consumer decision-making.
The theory of planned behavior (TPB) is one of the theories that may be used to
anticipate and explain the elements that influence behavior (Ajzen 1991). The
benefits of using TPB include deciding one’s viewpoint in interpreting financial
conduct and assessing the preconditions (opportunity, resources, and abilities)
necessary to exhibit given behavior (Ozmete and Hira 2011). TPB also offers a
solid theoretical model for predicting behavioral intentions while making financial
decisions. Attitude, subjective norm, and perceived behavioral control are the three
most significant parts of TPB in explaining important behavior, according to many
studies included in the prior analysis (Sommer 2011).
The theory of planned behavior, which is an extension of the theory of reasoned
action (TRA), provides a theoretical framework for studying the constructs of the
relationship between the three independent factors that shape an individual’s inten-
tion: attitude, subjective norm, and perceived behavioral control. According to
(Bosnjak et al. 2020), the more positive the attitude and subjective norm about the
Roles of Islamic Financial Literacy on Financial Decision-Making:. . . 259

action, the higher the perceived behavioral control, and the stronger an individual’s
intention to do the underconsidered activity.
Many research has been undertaken in order to apply the notion of planned
behavior to financial decision-making. TPB has been widely used in previous
research to determine the intention of using Islamic financial services (Sardiana
2021), to invest in a mutual fund product (Hapsari 2021), to save (Widjaja et al.
2020), and to make Islamic financial decisions among SMEs (Balushi et al. 2018).

2.4.1 Attitude

The degree to which a person has a good or unfavorable opinion of completing a

given activity is described as attitude. The assessment consists of considering two
components: the significance or value of the activity and the pleasure derived from
the action. In general, the stronger the intention to undertake an action, the more
favorable the attitude toward the behavior (Armitage and Conner 2001). This is
reinforced by (Hapsari 2021), who identifies attitude as an important component in
investing intention. Individuals’ financial attitudes might be manifested as a result of
their literacy and understanding. Previous research has shown that one’s financial
attitude is strongly related to the financial literacy of working women in Delhi, India
(Rai et al. 2019). Financial attitude has also been demonstrated to impact financial
management behavior (Herdjiono and Damanik 2016). Another study conducted
among working people in Indonesia by (Setiawati et al. 2018; Baptista 2021)
discovered an effect between financial attitudes and financial literacy on partial
financial behavior management based on hypothesis testing.
Similarly, some studies revealed that attitudes have a significant and positive
influence on the adoption of Islamic financial products and services (Mohamed
Sareye Farah et al. 2017). This is also in line with the findings by (Othman et al.
2017) where the results of the study indicate that attitude influences compliance
behavior when it comes to fulfilling the financial obligations of Zakat.
As a result, further research and debate are required to produce empirical proof of
the relationship between attitude and financial decision-making as recommended by
(Ajzen and Driver 1992) in order for the evidence and findings to be conclusive at
this time.

2.4.2 Subjective Norm

Subjective norm, according to (Ajzen and Driver 1992), refers to the perceived
impact that these important individuals have on a person’s intentions and actions.
Subjective norms emerge as a result of beliefs about the expectations of key referents
and personal drive to conform to these. It also becomes a measure of the social
impacts on a person’s conduct or activities of social peers such as family and friends.
A recent study (Raut et al. 2018) discovered that subjective norms had a positive
link with investment intention. Social circles such as family and friends may have an
260 A. Zulfaka and S. Kassim

impact on someone’s attitude and vice versa. This is demonstrated in a study by

(Koropp et al. 2014), who discovered that family norms influence behavioral
intention to utilize the relevant financial options, which in turn influences financing
behavior. Peers and key referents are also vital in financial decision-making. The
more popular a financial product is in a peer group, the more likely a person is to buy
or invest in financial items. According to (Rahadjeng and Fiandari 2020), stock
purchases might be impacted by subjective standards. It is possible to conclude that
social influence influences the intention to make a financial decision.
However, (Kam et al. 2021) discovered that the subjective norms component had
no impact on residential property purchase decisions. According to the findings of
(Pascual-Ezama et al. 2014), the subjective norm is not positively connected with
investor investment in the Spanish Stock Exchange. Things are possible because
many individuals like it to remain private, especially when it comes to money
transactions, and they are becoming less affected by standards. Other data show
that subjective standards do not have a direct impact on saving behavior (Widjaja
et al. 2020).

2.4.3 Perceived Behavioral Control

Perceived behavioral control relates to the perceived ease or difficulty of carrying out
an activity, and it is considered to reflect the previous experience and predict
obstructions and hurdles (Ajzen 1991).
According to a recent study (Nasir et al. 2020), financial literacy influences
perceived behavioral control, which in turn influences the purchase intention of
unsought items. Perceived behavioral control was also discovered to be a mediator of
financial incentives to save in a voluntary retirement fund (Sabri et al. 2019).
Meanwhile, (Raut et al. 2018) discovered that perceived behavioral control was
positively related to investment intention. This is reinforced by (Salisa 2021) results,
which show that perceived behavioral control has a beneficial influence on invest-
ment intention in the Indonesian capital market. However, this is countered by the
findings of (Sardiana 2021), who discovered that perceived behavioral control had
no effect on investment decisions.

2.5 Social Cognitive Theory

The health sciences are the source of SCT. It proposes a “human agency paradigm”
in which individuals “self-reflect, self-regulate, and self-organize” (Bandura 1989).
According to this theory, ethical and other psychosocial variables such as work
conditions, weather, and so on demonstrate how ethical action is governed by ethical
analysis (Bandura and Wood 1989). As a result, SCT takes an interactionist
approach to moral phenomena and proposes a system in which “personal factors,
such as moral thought and affective self-reactions, moral conduct, and
Roles of Islamic Financial Literacy on Financial Decision-Making:. . . 261

environmental factors all operate as interacting determinants that influence each

other in determining outcomes” (Bandura 1989). According to the SCT, however,
in a social learning environment, self-efficacy connects people, their surroundings,
and their communication (Bandura 1982). It describes a person’s capacity to com-
plete a task successfully and predicts future outcomes. According to (Bandura 1982),
self-efficacy is a notion that represents the emotion of efficiently dealing with a
problem. When people have a high degree of self-efficacy, it provides benefits for
their pleasure, especially physiological and psychological well-being, influencing
people’s attitude changes (Bandura 1982).
In household finance, self-efficacy is linked to positive financial habits and out-
comes (Asebedo and Seay 2018). Previous study also indicates a positive relation-
ship between financial competence and financial well-being (Shim et al. 2009). A
previous study by (Lim et al. 2014) demonstrated the importance of financial self-
efficacy as a crucial monetary wellness strategy on campus. As a result, increasing
monetary “self-efficacy” effectively improves students’ monetary status because it
implies accepting financial assistance. Meanwhile, in financial decision-making,
self-efficacy demonstrates a person’s confidence in carrying out the steps required
to achieve their financial goals (Lopez and Snyder 2012). In this sense, financial
goals may include retiring or paying expenses in the following month (Lown 2011).
According to a recent study (Djou and Lukiastuti 2021), self-efficacy has a beneficial
impact on the intensity of loan decision-making among SMEs. According to
(Husnain et al. 2019), financial self-efficacy has a mediating influence on long-
term investing decisions. Thus, financial self-efficacy is a motivation to make
financial decisions that will lead to long-term financial well-being.

3 Methodology

This study plans to employ a quantitative method by using a set of questionnaires as

the instruments to answer the research objective to provide empirical evidence.
Based on the idea of planned behavior and social cognitive theory, the conceptual
model proposed in this study is a literature review-based research to clarify the
impact of Islamic financial literacy on financial decision-making. Based on the
evaluation of the literature, this study suggests the conceptual framework depicted
in Fig. 1.
The dependent variable in this study is the financial decision-making construct.
Meanwhile, the independent variables are Islamic financial literacy; the theory of
planned behavior such as attitude, subjective norms, and perceived behavioral
control; and financial self-efficacy under the social cognitive theory.
262 A. Zulfaka and S. Kassim

IsIamic Financial Literacy

H1
Theory of Planned Behavior

Attitude H2

Subjective Norms H3 Financial Decision

H4 Making
Perceived Behavioral Control
H5

Social Cognitive Theory

Financial Self-Efficacy

Fig. 1 Proposed conceptual framework

3.1 Hypotheses Formulated

Below are the hypotheses formulated based on the literature reviews:

Hypothesis 1: There is a significant relationship between Islamic financial literacy
and financial decision-making.
Hypothesis 2: There is a significant relationship between attitude and financial
decision-making.
Hypothesis 3: There is a significant relationship between subjective norms and
financial decision-making.
Hypothesis 4: There is a significant relationship between perceived behavioral
control and financial decision-making.
Hypothesis 5: There is a significant relationship between financial self-efficacy and
financial decision-making.

3.2 Data Collection Method

As mentioned earlier, this chapter intends to use the survey method to collect the
data. The advantage of using this survey questionnaire method is that the informa-
tion can be obtained effectively, concisely, and faster according to (Zhang et al.
2017). The survey will be conducted online and face-to-face after the sampling
process.
Roles of Islamic Financial Literacy on Financial Decision-Making:. . . 263

3.3 Population and Sampling

The population is defined as a complete group of entities that share common

characteristics. The population of this study consists of working adults living in
the Klang Valley area. This study uses probability sampling to select the respon-
dents, which is also known as random sampling, and will be based on systematic
sampling. In the event of a bigger population, the method’s execution is highly
simple, low cost, and comfortable to utilize (Etikan 2017). The sample size for this
study is 384, which is based on Krejci and Morgan’s 1970 table.

4 Data Analysis

PLS-SEM will be used to analyze data in this investigation. One of the reasons for
utilizing the PLS-SEM is when the structural model is complicated (Hair et al. 2019).
Because the structural model is complicated and contains several components, this
PLS-SEM was chosen as the data analysis approach. Furthermore, the use of
PLS-SEM is more suited when seeking to extend an existing theory, which is
what this study is attempting to achieve (Hair et al. 2019). It can also estimate
both the measurement model and the structural model at the same time.
The PLS-algorithm approach is used to validate the measurement scale of a
construct in the measurement model (Hair et al. 2019). The structural model analysis
uses the factors that pass this analysis test to look into the relationship between
endogenous and exogenous variables.

5 Conclusion

Islamic financial literacy has been discussed everywhere as it is considered one of

the significant factors for the financial decision-making and financial well-being of
an individual. Islamic financial literacy is regarded as vital since it may influence a
person’s behavior when making decisions, particularly when embracing Islamic
financial products. However, there is still a lack of Islamic financial awareness
among Muslims, particularly in Malaysia. As a result, the current study is critical
in examining the major aspects that can assist to increase Malaysian society’s degree
of Islamic financial literacy.
The purpose of this study is to develop a conceptual framework for investigating
the functions of Islamic financial literacy in financial decision-making. It employs
the theory of planned behavior and social cognitive theory and proposes the inte-
gration of attitude, subjective norms, perceived behavioral control, self-efficacy, and
Islamic financial literacy in financial decision-making to encourage working adults
in Malaysia to adopt Islamic financial products and services. It is envisaged that once
264 A. Zulfaka and S. Kassim

the framework is established, a usable output of significant importance to practi-

tioners and other relevant stakeholders will emerge.

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An Evaluation of Cash Waqf Deposit
Performance Through Islamic Banks in
Bangladesh

Mohammad Kamal Uddin

Abstract Cash waqf, derived from Waqf, an old and traditional way of charity or
philanthropic works promulgated by Islamic law and the Islamic way of life, has
attracted Islamic financial institutions, especially Islamic banks, to increase their
deposits as well as to do philanthropy through banking systems. Bangladesh’s
Islamic banks have maintained mudaraba cash waqf deposit accounts since 1997.
There has yet to be found a study about the performance of Islamic banks in
mobilizing cash waqf deposits. This chapter aims to look at the cash waqf deposit
account maintenance in Islamic banks in Bangladesh and evaluate their performance
in maintaining such cash waqf deposit accounts. Depositors and top executives from
six major Islamic banks will be interviewed for the study. This study will also
examine annual reports of the related Islamic banks and other waqf fund
management-related reports. Besides, textual information will be collected and
analyzed from secondary sources like earlier literature, laws, and principles. The
study’s findings will show whether there is any gap in the performance of those
banks in mobilizing cash waqf deposits and further popularizing cash waqf in the
banking system to help contribute much more to the socioeconomic development of
COVID-19-affected segments of Bangladesh.

1 Introduction

Like many Muslim countries such as Kuwait, Oman, UAE, Saudi Arabia, and
Malaysia (Mohsin 2013), Bangladesh takes the opportunity to popularize the cash
waqf system through the Islamic financial system of the country. Many pious well-
to-do people accumulated their funds to jointly create cash waqf to set up several
private universities in Bangladesh utilizing the enactment of the Private University
Act, 1992, in Bangladesh (Hassan et al. 2019). Another organization, Social Science

M. K. Uddin (✉)
Islami Bank Bangladesh Limited, Dhaka, Bangladesh
IIUM Institute of Islamic Banking & Finance, IIUM, Selangor, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 267
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_24
268 M. K. Uddin

Institute in Bangladesh, is partially established with cash waqf funds. In this way,
cash waqf has gained momentum in Bangladesh. Bangladesh is one of the most
densely populated countries in the world. Unfortunately, like many Muslim coun-
tries among the developing countries that have problems like poverty, lack of
employment, unmet basic healthcare services and accommodation, etc. (Mustafa
and Ogunbado 2015), Bangladeshi people do not have adequate land and tangible
assets for fulfilling their basic needs of housing. Bangladesh has an area of 147.57
thousand square meters for its total population of 165.16 million with a density of
1119 people per square kilometer (Preliminary Report on Population and Housing
Census 2022: Bangla Version). Land and similar tangible properties/assets are too
little in Bangladesh to fulfill the demands of the agriculture and housing sector of the
country. That is why, for traditional waqf, land and other tangible assets are not
donated as waqf as in earlier times. Besides, unlike the conventional tangible asset-
based waqf, philanthropists prefer cash waqf due to its flexibility (Ahmad 2015).
Therefore, cash waqf has been a futuristic alternative for those who want to continue
endless activities of benevolence and charities within the framework of Islam
(Hassan et al. 2019).

2 Objectives of the Study

The study’s objective is to explore the cash waqf deposit account maintenance in
Islamic banks in Bangladesh and evaluate their performance in maintaining those
accounts. By doing this, the study will also find the knowledge gap and the finance/
endowment gap, if any, in maintaining such accounts in Islamic banks in
Bangladesh. The findings will help boost cash waqf deposits in those banks once
the gaps are mitigated.

3 Methodology

The study mainly depends on original texts from the Quran and the Hadiths,
secondary data from Islamic books, annual reports/financial reports of the six Islamic
banks of Bangladesh, publications, websites of those banks, and Bangladesh Bank,
the Central Bank of Bangladesh, and other sources. Information was also collected
from face-to-face discussions and telephonic interviews with a good number of
depositors and some top-level executives of those Islamic banks in Bangladesh.
An Evaluation of Cash Waqf Deposit Performance Through Islamic Banks. . . 269

4 Literature Review

Waqf is an Arabic word that means an endowment or gift in the name of Allah for a
specific purpose. Dr. Samir Alamad, an experienced individual with extensive
knowledge in the field of Shariah law and Islamic commercial law and their
application to Islamic banking and finance, defines waqf as a type of
noncommutative contract in which a donation or gift is made by one party to the
other party with no consideration or cost. The donor transfers ownership of the
subject matter to the recipient free of any obligation or commitment (Alamad 2019).
In Shariah, waqf means any property that is dedicated to Allah and it is transferred
from the dedicator (waqif) to the ownership of Allah. However, the usufruct or
benefit is dedicated to the poor, sick, travelers, or any other noble cause recognized
by Islam.
No direct injunction is found in the Quran about Waqf. However, some hadiths
indicate waqf. A hadith reported by Ibn Umar, whereby Umer ibn al Khitab acquired
a piece of land in Khyber, went to Prophet Muhammad (PBUH) and sought advice
regarding the land. The Prophet (PBUH) advised him that the land should be made
inalienable and the profit given to charity. Therefore, waqf is considered a permanent
donation by a Muslim of any property for a noble purpose that is recognized as pious
or charitable (Islam 2014). Cash waqf being derived from the very idea of waqf, is,
today, recognized as one of the most effective mechanisms in the revival of waqf
institutions in many Muslim countries. The concept of cash waqf was first given in
the eighth century by Imam Zufar, who formulated the concept of cash waqf based
on two fundamental principles: (a) mudaraba should be the investment vehicle for
pooled cash endowment, and (b) investment returns should be spent for social
welfare and charity (Cizakca 2009). In his book, A history of philanthropic founda-
tions: The Islamic world from the seventh century to the present, Cizakca writes that
the Ottoman courts approved cash endowments at the beginning of the fifteenth
century, and these types of endowments had become extremely popular all over
Anatolia and the European provinces of the empire by the end of the sixteenth
century (Çizakça 2000).
In Bangladesh, Social Islami Bank Limited (SIBL), which was established in
1995, first introduced the cash waqf certificate in 1997, a new product for the first
time in the banking history of Bangladesh (Mizanur and Nurul 2019). Then,
incorporated in 1983, Islami Bank Bangladesh Limited (IBBL), the first Islamic
Shariah-based bank in South Asia, introduced a cash waqf deposit product in 2004
and opened its first cash waqf account in 2005. Subsequently, Shahjalal Islami Bank
Limited (Shajalal) in 2006, Al-Arafah Islami Bank Limited (AIBL) in 2008 with
their staff cash waqf, Export Import Bank of Bangladesh Ltd. (Exim) in 2011, and
First Security Islami Bank Limited (FSIBL) in 2017 introduced cash waqf deposit
accounts in Bangladesh (data collected and apprehended from the annual reports of
those banks).
Analyzing the account opening form of those Islamic banks, it is observed that
there are many similarities in maintaining cash waqf deposit accounts among the
270 M. K. Uddin

Islamic banks in Bangladesh. Other than SIBL, which has four types of products for
cash waqf deposits, the other Islamic Banks only maintain mudaraba cash waqf
savings deposit accounts. The modus operandi of those accounts in those banks is
pretty similar:
Cash waqf deposits are accepted as an endowment in conformity with the
Shariah. Banks manage the waqf on behalf of the waqif. Waqf deposit accounts
are perpetual, and the accounts are opened in the title given by the waqif. The
purposes of cash waqf programs in Islamic banks are almost similar. There are four
significant fields where they donate or distribute the profit earned from the mudaraba
cash waqf deposit accounts. The fields are (1) family rehabilitation, (2) education
and culture, (3) health and sanitation, (4) social utility, and others. Each bank offers
the highest weightage or profit to their mudaraba cash waqf deposit accounts. The
waqf amount remains intact, and only the profit amount is spent for the purpose
(s) specified by the waqif. The unspent profit amount is automatically added to the
waqf amount and earns profit over the period. With a minimum deposit of Taka 1000
(one thousand or equivalent foreign currency), a waqif can open a mudaraba cash
waqf deposit account.

5 Findings of the Study

According to Bangladesh Bank, the Central Bank of Bangladesh, there are currently
ten full-fledged Islamic banks operating in Bangladesh, with a total of 1569 branches
(Development of Islamic Banks in Bangladesh, Islamic Banking Wing, Research
Department Bangladesh Bank, Jan–March 2022). For this study, the annual reports
for the last five years, starting from 2017 to 2021, of six major Islamic banks in
Bangladesh are referred to. It is noted that the COVID-19 outbreak started in
Bangladesh in March 2022, and still, it has impacts on the economy and banking
sector of Bangladesh. A table is furnished below showing the cash waqf deposit
performance of the six major Islamic banks in Bangladesh for the last five years
(Table 1):
The performance table shows that each bank has a growing trend for cash waqf
deposits over the years (Table 1). However, the amounts could be more considerable
than the total mudaraba deposits. The highest waqf deposit mobilized by IBBL is
only 19.6 million USD in 2021, which is only 0.13% of the total deposits of that
period. Other than IBBL, the performance of other banks is quite negligible.
However, during the high COVID-19 period (the year 2020–2021), except for
Shahjalal Islamic Bank, the waqf deposit remarkably increased for five other Islamic
banks. The sparklines chart analysis (Table 2) shows the growing trend of waqf
deposits in the Islamic banks in Bangladesh.
The study also investigates why the performance of cash waqf deposit accounts is
unsatisfactory. For this, face-to-face contact and group interviews with many depos-
itors and some high-level executives of those Banks were done. It is found that there
is mainly one gap, i.e., knowledge gap regarding cash waqf, which eventually
creates the financial/endowment gap in managing cash waqf deposit in those banks.
Table 1 Cash waqf deposit mobilization by six Islamic banks in Bangladesh in the last 5 years (2017–2021)
Bank’s Figure in million USD (1 USD = 85
name Year Figure in million Tk (local currency) Taka)
Total Total
mudaraba Cash waqf Total mudaraba Cash waqf % of waqf deposit to % of waqf deposit to
Total deposit deposit deposit deposit deposit deposit total deposit mudaraba deposit
IBBL 2021 1,380,849.22 1,246,809.89 1674.70 16,245.28 14,668.35 19.70 0.1213 0.1343
2020 1,178,871.66 1,069,745.95 1436.99 13,869.08 12,585.25 16.91 0.1219 0.1343
2019 945,908.08 855,396.29 1331.23 11,128.33 10,063.49 15.66 0.1407 0.1556
2018 822,200.72 738,924.71 1131.33 9672.95 8693.23 13.31 0.1376 0.1531
2017 753,913.99 670,697.18 904.21 8869.58 7890.56 10.64 0.1199 0.1348
SIBL 2021 340,398.81 294,345.84 382.36 4004.69 3462.89 4.50 0.1123 0.1299
2020 321,882.45 282,153.14 377.06 3786.85 3319.45 4.44 0.1171 0.1336
2019 287,472.89 255,881.72 342.71 3382.03 3010.37 4.03 0.1192 0.1339
2018 247,950.78 219,603.40 317.05 2917.07 2583.57 3.73 0.1279 0.1444
2017 228,407.73 197,544.53 277.93 2687.15 2324.05 3.27 0.1217 0.1407
Exim 2021 420,673.77 376,054.75 70.52 4949.10 4424.17 0.83 0.0168 0.0188
2020 394,462.90 355,537.65 52.12 4640.74 4182.80 0.61 0.0132 0.0147
2019 355,816.52 324,767.53 41.14 4186.08 3820.79 0.48 0.0116 0.0127
2018 300,786.62 270,936.07 39.74 3538.67 3187.48 0.47 0.0132 0.0147
2017 284,024.11 242,731.66 37.31 3341.46 2855.67 0.44 0.0131 0.0154
AlArafa 2021 353,287.97 305,589.30 72.97 4156.33 3595.17 0.86 0.0207 0.0239
An Evaluation of Cash Waqf Deposit Performance Through Islamic Banks. . .

2020 326,023.41 285,632.60 70.86 3835.57 3360.38 0.83 0.0217 0.0248

2019 297,241.81 262,955.41 33.27 3496.96 3093.59 0.39 0.0112 0.0127
2018 266,205.50 239,328.43 28.29 3131.83 2815.63 0.33 0.0106 0.0118
2017 244,806.26 215,891.45 25.58 2880.07 2539.90 0.30 0.0104 0.0118
ShaJalal 2021 216,810.94 173,614.32 9.16 2550.72 2042.52 0.11 0.0042 0.0053
2020 218,054.81 179,732.29 10.63 2565.35 2114.50 0.13 0.0049 0.0059
271

(continued)
Table 1 (continued)
272

Bank’s Figure in million USD (1 USD = 85

name Year Figure in million Tk (local currency) Taka)
Total Total
mudaraba Cash waqf Total mudaraba Cash waqf % of waqf deposit to % of waqf deposit to
Total deposit deposit deposit deposit deposit deposit total deposit mudaraba deposit
2019 203,237.73 170,131.38 5.13 2391.03 2001.55 0.06 0.0025 0.0030
2018 176,552.00 151,325.53 4.49 2077.08 1780.30 0.05 0.0025 0.0030
2017 145,954.82 124,213.64 4.10 1717.12 1461.34 0.05 0.0028 0.0033
FSIBL 2021 468,835.68 435,025.08 1.51 5515.71 5117.94 0.02 0.0003 0.0003
2020 419,757.85 403,949.41 1.10 4938.33 4752.35 0.01 0.0003 0.0003
2019 376,621.66 347,609.57 1.06 4430.84 4089.52 0.01 0.0003 0.0003
2018 320,021.80 295,468.58 0.98 3764.96 3476.10 0.01 0.0003 0.0003
2017 299,106.10 276,662.12 0.90 3518.90 3254.85 0.01 0.0003 0.0003
Source: Annual reports/financial reports of the bank from 2017 to 2021
M. K. Uddin
An Evaluation of Cash Waqf Deposit Performance Through Islamic Banks. . . 273

Table 2 Cash waqf deposit mobilization through six Islamic banks in Bangladesh for the last
5 years (2017–2021)

Cash Waqf Deposit in Million USD in the year

Bank 2017 2018 2019 2020 2021 Analysis by Sparklines

IBBL 10.64 13.31 15.66 16.91 19.7

SIBL 3.27 3.73 4.03 4.44 4.5

Exim 0.44 0.47 0.48 0.61 0.83

AlArafah 0.3 0.33 0.39 0.83 0.86

Shajalal 0.05 0.05 0.06 0.13 0.11

FSIBL 0.01 0.01 0.01 0.01 0.02

Source: The bank’s annual reports/financial reports from 2017 to 2021. Figures are converted into
USD considering that 1 USD is equivalent to 85 Taka (local currency)

There are still knowledge and financing gaps meaning endowment gaps in mobi-
lizing waqf deposits through Islamic banks in Bangladesh. Being a noncommercial
product, the waqf product has yet to attract much among depositors. In Islam, charity
can be described as fard or obligatory and mustahabb or voluntary. Zakat is an
obligatory charity in Islam, whereas sadaqah, waqf, etc. are mustahabb or voluntary
charities. That is why most of the Muslim depositors perform their philanthropic and
charitable activities through zakat, sadaqah, etc. Many depositors are not inclined to
open cash waqf accounts as the position of waqf in Islamic Shariah is not fard or
compulsory like zakat. Endowing waqf is a mustahab activity. Besides, most of the
depositors who were interviewed are still ignorant about the unanimous verdict for
cash waqf being permissible as practiced in Islamic banks worldwide.

6 Recommendations and Conclusion

As banks serve a significant portion of the people of a country, they can be ideal
institutions for popularizing cash waqf. Banks, mainly Islamic banks, need to come
forward with a better plan and effective programs for increasing the popularity and
274 M. K. Uddin

acceptability of cash waqf deposits in the banking system. Annual reports of the
banks in Bangladesh are found to publish very little information about cash waqf
deposits. Annual reports may declare the profit amount earned from cash waqf
deposit accounts and their use for specific purposes elaborately. Posters and festoons
of the benevolent and philanthropic works done by the profit of cash waqf deposit
may be hung inside every branch of the banks where clients gather regularly to get
banking services. To mitigate the knowledge gap, special knowledge-sharing pro-
grams with clients may be arranged, especially during Ramadan (the month of
Muslim fasting), when Muslim people usually donate substantially.
Cash waqf deposit products are unique ways for people who do not have much
property or immovable assets for their perpetual benevolent and charitable works.
The Islamic banks in Bangladesh allow the opening of a cash waqf deposit account
at only Taka 1000 (equivalent to around USD 10). Suppose the depositors and
employees of the Islamic banks in Bangladesh know the scopes of cash waqf. In that
case, there is an excellent opportunity to capitalize on the unique products in
upgrading the social and financial condition of the poor, distressed people, and
institutions, significantly the COVID-19-affected segments of the country.

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Takaful Plan for E-Hailing: A Comparison
Between the Available Private Motor
Vehicle Takaful Plans in Malaysia

Fadhilah Abdullah Asuhaimi, Ahmad Khaliq,

and Fatimah Noor Rashidah Mohd Sofian

Abstract The era of digitalization and technology brings tremendous changes in

most industries including e-hailing services. E-Hailing services receive a lot of
attention as it helps people to commute from one place to another comfortably,
with more flexibility, convenience, less cost and quicker compared to traditional
public transport. E-Hailing offers public transportation services through an elec-
tronic application. This medium allows e-hailing drivers to meet passengers and
provide transportation services and also spend more time on the road. Eventually,
e-hailing drives expose themselves to higher motor-related risks such as road
accidents, attacks by robberies, threats or even hijacking. Hence, each e-hailing
driver is urged to have an adequate takaful plan to be protected from any unfortunate
events. Looking at the need to have a takaful plan for e-hailing service, this chapter
aims to compare functional private motor vehicle takaful plans offered by existing
takaful operators and suggests improvements on it. Comparative analysis was made
to see any similarities and differences between the available private motor takaful in
the market. The researcher believes this study enables e-hailing drivers to have wider
options and sufficient coverage offered by takaful operators while driving and the
results of the present research add value to the existing knowledge base.

1 Introduction

Living in an urban place, the crowdedness and densest living spaces created stress on
the current population regarding the quality of life. An increased number of people
must share shrinking spatial space which also causes traffic congestion (Li et al.
2017). Looking at the current problem, e-hailing comes as a saviour. E-Hailing
applies the concept of shared mobility where people with extra resources, unused

F. A. Asuhaimi (✉) · A. Khaliq · F. N. R. M. Sofian

Department of Finance, Kuliyyah of Economics and Management Sciences, International
Islamic University Malaysia, Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 277
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_25
278 F. A. Asuhaimi et al.

property, time and skills can share with other people across online platforms
(Wosskow 2014). This online platform reduces physical interaction (Todd et al.
2018). E-Hailing is where a private vehicle is used to transport paying passengers.
People comfortably choose to use e-hailing services as it is a more flexible, conve-
nient and faster option compared to other public transport. E-Hailing offers
on-demand services at an affordable price in comparison with other modes of
transportation, such as taxis, which are sometimes below the market rates.
In Malaysia, e-hailing services existed due to the inefficiency in the traditional
transportation systems. The co-founder of Grab, Anthony Tan, has explained that
Grab was introduced between 2012 and 2013 because of the complicated system of
taxi services (Freischlad 2015). As of June 2013, the service had an average of one
booking every eight seconds, or almost 10,000 bookings per day (Cosseboom 2015).
There are a few reasons why people choose to use e-hailing services, such as poor
public transport infrastructure, better vehicles at lower fares compared to local taxis
and public transport systems and inaccessibility to parking spaces (Frost and Sulli-
van 2016). These reasons are further highlighted through the increase in the fre-
quency of the e-hailing service being used during weekdays. Looking at the demand,
e-hailing drivers would spend more time on the road compared to other people. This
situation would increase the chances of involvement in an accident. Whether it is a
minor or major accident, it still would incur costs and the costs can be compensated
by any insurance or takaful operators. However, not many takaful operators can
provide suitable compensation to e-hailing drivers. This situation triggers this study
to analyse the available private motor vehicle takaful plan that can compensate
e-hailing drivers and users.

2 Motor Vehicle Takaful

General takaful in Malaysia can be mainly divided into two main products: motor
and non-motor-related. Four main takaful operators having licenses to operate
general takaful business in Malaysia include Takaful Malaysia, Etiqa Takaful,
Takaful Ikhlas and Zurich-Malaysia Takaful. The motor takaful business showed
an increase registration of RM 2.54 billion in the year 2021 against RM 2.29 billion
in the year 2020, an increase of 11.2%. The motor takaful business remains at the top
position in terms of portfolio mix at 66.3% from the previous year 2020 with only
66.0%. Figure 1 below illustrates the portfolio mix for the year 2021. The latest data
for the year 2021 records 66.3% of motor takaful compared to fire takaful and other
classes.
In terms of overall distribution channels, both Agency and Banca were the main
contributors with 60.6% and 14.2%, respectively (Malaysian Takaful Association
2021). Figure 2 below illustrates the double-digit growth for Motor Takaful’s gross
contribution for the year 2021.
Takaful Plan for E-Hailing: A Comparison Between the Available. . . 279

Fig. 1 General takaful portfolio mix for 2021

Fig. 2 Motor takaful gross contribution 2021

Under the Road Transport Act 1987 (RTA), section 90 (1) mentioned that it is
compulsory to take motor takaful/insurance for those owning vehicles in Malaysia
(Laws of Malaysia 1987).
The classification of motor vehicles can generally be classified into three main
categories including private cars, motorcycles and commercial vehicles. The private
car and motorcycles are usually vehicles used solely for domestic and pleasure
purposes and the insured’s own business only. It excludes use for hire and reward,
racing, reliability trials, speed testing, tuition, carriage of goods other than samples,
etc. On the other hand, a commercial vehicle is mainly for goods-carrying vehicles,
either a private goods carrier (C permit) or public goods carrier (A permit). This
includes public hire taxis as well as private hires, either self-drive or chauffeur-
driven, private and public buses and coaches, special types such as ambulances, fire
brigades, mobile cranes, food trucks, etc., or even a motor trade.
While in the operation of the e-hailing services in Malaysia, the Public Service
Commission of Malaysia made it mandatory for all e-hailing drives to be insured by
any insurance or takaful operator covering driver, passengers, property and third
parties since the year 2018 (Public Service Commission of Malaysia 2018). This
implies that any public service vehicle (PSV) is required to subscribe to an e-hailing
add-on on top of their usual motor vehicle insurance or takaful coverage since
12 July 2019. This exercise has been deemed practical to ensure that any victims
of road accidents are adequately compensated when accidents occur especially when
it involves the public. Usual types of coverage include act cover, third-party cover,
comprehensive and third-party fire and theft coverage.
280 F. A. Asuhaimi et al.

3 Methodology

This study uses secondary data where library research was done in gathering the
information. After the data were collected, a comparative analysis was done to
critically evaluate the findings. There are two steps involved in finding the data for
this research study. First, we have analysed every takaful operator that has provided
private motor takaful for e-hailing drivers. The keyword searchers are “private motor
takaful” and “e-hailing drivers takaful”. The search engine went directly to the
RinggitPlus website, which has been updated in 2022. Among the 11 takaful
operators, there are only 4 takaful operators that provide private motor takaful as
listed in Table 1.
The researchers found that there are limited findings on the products offered for
e-hailing drivers. Therefore, second, we used the keywords “e-hailing takaful” and
“e-hailing driver protection” to further add extensive research in the search engine.
The researchers found that Grab companies have been collaborating with takaful
operators and insurance. The researchers decided to include both the findings of the
products offered by the takaful operators and insurance companies to be compared in
terms of the daily rate and coverage details. The data have been critically reviewed.

4 Findings and Discussions

Using comparative analysis, the data collected will be critically evaluated in this
section. There are two parts: first is a comparison of the available motor vehicle
private car takaful plans in the market. The coverage offered by each of the takaful
operators will be critically evaluated. The second is a comparison between motor
vehicle private car takaful plans and motor vehicle private car insurance plans that
collaborated with Grab company.

Table 1 Takaful operators and private motor takaful plans offered

Takaful operators Takaful operators and plans offered
Etiqa Etiqa comprehensive private car takaful
Zurich Zurich comprehensive motor takaful
Takaful Malaysia Takaful myMotor
Etiqa/Maybank Maybank comprehensive motor takaful
Etiqa/Maybank Maybank third party eMotor takaful
Zurich Zurich third party fire and theft takaful
Zurich Zurich Z-rider
Takaful IKHLAS Takaful IKHLAS comprehensive motorcycle
Takaful IKHLAS Takaful IKHLAS comprehensive commercial vehicle insurance
Takaful IKHLAS Takaful IKHLAS comprehensive private car
Takaful Plan for E-Hailing: A Comparison Between the Available. . . 281

4.1 Motor Vehicle Private Car Takaful Plans

There are ten motor vehicles and private car takaful plans that are available in the
market. Of these ten plans, only one plan has coverage for e-hailing which is Etiqa
Comprehensive Private Car Takaful. Another nine plans could not cover e-hailing
and focus on the motor vehicle for personal use only as shown in Table 2 below. This
situation gives the e-hailing drivers a limited option since only one plan is offered for
e-hailing service and triggers the drivers to look for other options from other
insurance companies.
The analysis found that out of ten private motor vehicle takaful plans in the
market, eight plans offer comprehensive takaful coverage, while another two plans
cover the third party, which are Etiqa and Zurich, as shown in Table 2. The
comprehensive takaful coverage consists of a person covering loss or damage to
the insured vehicle and the third-party liability arising from the use of the vehicle.
Meanwhile, third-party coverage covers liability for property damage in addition to
liability for death or bodily injury to any third party arising from the use of a motor
vehicle on a road. Both of the covers imply that there is no coverage for death or
bodily injury to any of the insured persons. Since e-hailing drivers spend more time
on the road compared to other people, there will be a high likelihood that they could
be involved in an accident. On 28 December 2019, it was reported by Strong (2019)

Table 2 E-Hailing coverage offered by takaful operators

Legal Legal
Motor vehicle private car Takaful E-Hailing liability to liability of
takaful plans operators coverage Coverage type passenger passenger
Etiqa comprehensive pri- Etiqa Available Comprehensive / x
vate car takaful
Zurich comprehensive Zurich Not Comprehensive / /
motor takaful available
Takaful myMotor Takaful Not Comprehensive x /
Malaysia available
Maybank comprehensive Etiqa/ Not Comprehensive x x
motor takaful Maybank available
Maybank third party Etiqa/ Not Third party x x
eMotor takaful Maybank available
Zurich third party fire and Zurich Not Third party x x
theft takaful available
Zurich Z-rider Zurich Not Comprehensive x x
available
Takaful IKHLAS com- Takaful Not Comprehensive x x
prehensive motorcycle IKHLAS available
Takaful IKHLAS com- Takaful Not Comprehensive x x
prehensive commercial IKHLAS available
vehicle insurance
Takaful IKHLAS com- Takaful Not Comprehensive / /
prehensive private car IKHLAS available
282 F. A. Asuhaimi et al.

in Taiwan News that there was an accident involving two Taiwanese women who
rode a hailed car in Malaysia. One of the Taiwanese women died immediately, while
other Taiwanese women and a 22-year-old e-hailing driver were injured.
Interestingly, takaful operators have provided add-on coverage for “legal liability
to passengers” and “legal liability of passengers”. The difference between the two
add-on coverage is that “legal liability to passengers” offers protection against legal
action brought against you by your passengers, and “legal liability of passengers”
covers drivers for bodily injury caused by your passengers. Zurich Comprehensive
Motor Takaful and Takaful Ikhlas Comprehensive Private Car cover both add-on
coverage. Meanwhile, Etiqa Comprehensive Private Car Takaful only covers legal
liability to passengers. Takaful myMotor (Takaful Malaysia) covers “legal liabilities
of passengers” only. The rest of the motor takaful vehicles do not offer both
coverages. The details can be shown in Table 2 above. This coverage is deemed
important especially for the “legal liability of passenger” to protect the e-hailing
drivers against any injuries caused by the passenger. Recently in April 2022, there
was a case where an e-hailing driver was slashed at his throat by a teenage passenger
after she did not want to pay for the fare (The Star 2022). In May 2019, an e-hailing
driver was attacked by passengers with a hammer and air gun causing a head injury
(Bernama 2019).

4.2 Collaboration Between Grab and Takaful Operator

and Insurance Company

The initiative by the Grab company with the Takaful operator and insurance
company started in 2019. The analysis found that the e-hailing driver needs to pay
daily for their protection. This is very effective as not all e-hailing drivers provide
full-time services. The daily rate ranges from RM 1.33 to RM 5, with the lowest
being from MPI Generali, Zurich and Zurich Takaful. The highest price comes from
Etiqa and Etiqa Takaful. The insurance and takaful are valid only for 24 h.
The coverage for the e-hailing drivers consists of the following: (1) loss or
damage to your own vehicle, (2) liability to third parties, (3) personal accidents
cover for authorized e-hailing driver up to RM10,000, (4) unlimited legal liability to
fare paying passengers and (5) legal liability of fare paying passengers for negligent
acts—unlimited. All of the coverage is the same for all the takaful operators and
insurance companies, except for personal accident coverage.
The protection has covered personal accidents which is more extensive compared
to the normal motor vehicle plan. Zurich and Zurich Takaful can cover personal
accidents for authorized e-hailing drivers up to RM 50,000. This is interesting as the
daily rate is cheaper which is RM1.33 compared to the other protection companies.
The second highest coverage of personal accidents is offered by AmAssurance and
Kurnia Insurance, which is RM 25,000. However, their daily rate is RM 3.00,
Takaful Plan for E-Hailing: A Comparison Between the Available. . . 283

Table 3 Coverage offered by insurance and takaful in collaboration with Grab company
Insurance operators Loss or damage to Personal accidents cover for
and takaful operators Daily rate your own Vehicle authorized e-hailing driver
Allianz RM 3.00 / Up to RM 10,000
AXA RM 3.20 / Up to RM 10,000
Berjaya Sompo RM 3.00 / Up to RM1 0,000
insurance
CHUBB RM 3.00 / Up to RM 20,000
ETIQA & ETIQA RM 4.00 / Up to RM 15,000
takaful (10 May to
9 Nov)
RM 5.00
(10 Nov
onwards)
AmAssurance and RM 3.00 / Up to RM 25,000
Kurnia Insurance
Liberty Insurance RM 3.30 / Up to RM 10,000
MPI Generali RM 1.33 / Up to RM 10,000
MSIG RM 3.90 / Up to RM 10,000
Tokio Marine Insur- RM 1.70 / Up to RM 10,000
ance Group
Zurich and Zurich RM 1.33 / Up to RM 50,000
Takaful

whereas for Etiqa and Etiqa Takaful, the personal accident only covers RM 15,000
even though the daily rate is higher. The details can be seen in Table 3

4.3 Could Takaful Operators Provide Extensive Coverage

for E-Hailers?

The pricing and coverage should be relevant to the current economy and events
occurring. This is the reason why the need for takaful is, in the first place, to help the
subscribers’ needs. Takaful operators should not charge a double higher price as
compared to the insurance company. According to Shariah principles, the takaful
operator should be reminded of the principle of justice and wealth distribution
principle. A just price is a price that does not lead to exploitation or oppression
(injustice), inflicting harm to one party and benefits the other (Kusuma 2019).
Second, we also found that the collaboration of the protection between
takaful operators with the other party is effective as it can reduce the cost of that
takaful operator as well as the participants (e-hailing drivers). This is because takaful
operators should also monitor their risk management, whereby they do not provide
excessive highest coverage but with a lower contribution. However, a lower contri-
bution is needed by the e-hailer driver; a study by Salman Salim et al. (2020)
discovered that the lowest income per day of the respondent was RM 50, that is,
284 F. A. Asuhaimi et al.

RM 1900 per month if they do it on a daily basis. Most of the drivers are doing
e-hailing as part-time jobs to gain additional income (Al-Shakhrit et al. 2021). This
finding implies that most of the e-hailing drivers could not afford to pay an extra
contribution for e-hailing protection if the price is higher.
Third, the takaful operator should continuously provide coverage for the personal
accidents of the e-hailer. This is due to the fact that data shows 347 accidents
involving e-hailing drivers from January 2020 to 2021. Besides, the normal motor
vehicle plan did not provide any personal accident coverage to the insurers. A
personal accident takaful plan will help the subscriber as financial security for family
and dependents should accidental death occur. It also eases the financial burden with
medical expense reimbursement and cash allowances and lastly compassionate cash
on death and relief assistance for covered infectious diseases.
Fourth, the findings show that there is no medical coverage for e-hailing drivers.
Understandably, this is the motor vehicle plan, but takaful operators should include a
medical plan for the e-hailing drivers. This is because not all e-hailing drivers have
medical coverage. Consequently, the Self-Employment Social Security Scheme
under the Social Security Organisation (SOCSO) provides medical benefits for
e-hailing drivers. This scheme is compulsory for the self-employed person in the
passenger transportation sector such as taxi, e-hailing and bus drivers under the
provisions of the Self-Employment Social Security Act 2017, which took effect on
1 June 2017. Self-employed insured persons suffering from self-employment injury
or occupational diseases may receive free medical treatment at SOCSO’s panel
clinics or government hospitals. Not only that, self-employed insured persons can
also claim reimbursement for expenses incurred in getting medical treatment at
SOCSO’s non-panel clinics. Nevertheless, the selected insured monthly earnings
range from RM 1050 to RM 3950.
According to the Annual Report Department of Statistics Malaysia (2020), B40 is
with an average income of RM 4602. Considering our cost of living is high, the
medical benefit coverage for the insured person that earned from RM 1050 to RM
3950 is not enough. The medical coverage should be for the person that is part-time
and the average income is RM 4602. In addition, the Self-Employment Social
Security Scheme provided by the PERKESO still requires the e-hailing drivers to
provide contribution payment per month from RM 13.10 to RM 49.40. Moreover,
the e-hailing drivers can also pay contribution payments per year from RM 157.20 to
RM 592.80. Hence, the contribution payment is still a burden to them. Therefore,
with continuous collaboration, the government and takaful operators should do
something to provide suitable medical takaful plans for the e-hailing drivers, without
burdening them with high contribution payments. It is vital for the government and
takaful operators to assist the e-hailing drivers as e-hailing industries are in demand
and have the potential to boost the Malaysian economy (Al-Shakhrit et al. 2021).
Takaful Plan for E-Hailing: A Comparison Between the Available. . . 285

5 Conclusion

E-hailing services become one of the important transportation services in Malaysia

now. High demand is received every day from passengers to commute from one
place to another. After the COVID-19 pandemic, a lot of people have lost their job
and made e-hailing services their new way of getting income. Since then, there have
been a lot of e-hailing drivers on the road, exposing them to a lot of risks such as
attacks with robberies, threats, hijacking and also accidents. These risks need to be
compensated to ensure that e-hailing drivers’ rights and needs are protected.
Looking at the current takaful plan, there is only one plan provided under motor
vehicle for e-hailing. However, for insurance companies, there are 12 insurance
companies that can provide motor vehicle coverage for e-hailing services. It can be
seen that insurance companies give more options to e-hailing drivers, making them
prone to subscribe to insurance rather than takaful. Looking at the coverage,
insurance does not cover a range of other unfortunate events that may occur while
serving passengers. For example, a driver facing an accident that causes damage to
the car will not be able to claim the personal accident insurance provided by the
e-hailing companies. In addition, most private car insurance does not cover accidents
that occur during commercial activities. This means that if the e-hailing drivers make
a living by using their own cars, such as serving passengers, they cannot claim
compensation should an accident occur during the trip. There a huge gap on the risks
faced by e-hailing drivers and the protection plans provided by insurance and takaful
operators.

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The Role of Religiosity and Hardworking
on Human Resource Performance of Baitul
Maal wat Tamwil Ummat Sejahtera Abadi

Annisa, Widodo, and Olivia Fachrunnisa

Abstract The purpose of this study is to determine the effect of the Religiosity,
Hardworking on performance of Islamic microfinance or Baitul Maal wat Tamwil
(BMT), Indonesia. BMT is a microfinance institution that operates based on sharia
principles and is a legal entity. We distributed questionnaires to 52 employee
respondents at BMT Ummat Sejahtera Abadi. The sampling technique used in this
study is saturated sampling techniques and the test using path analysis. The results of
this study indicate that religiosity and hard work will improve the performance of
BMT human resources. Religiosity is the level of faith, understanding, and obedi-
ence in religion, understanding in a person in living or practicing the teachings of the
religion he believes in, while hard work is interpreted as an effort to move and get
maximum results at work. These two things are indicated to improve the perfor-
mance of BMT human resources.

1 Introduction

The success of a company certainly cannot be separated from the performance of

human resources because it has a very important role and it is an asset for the
company as the executor and driving force of all its existing activities in the
company which aims to make the company still survive in achieving its goals.
What is meant by performance is a successful role achievement that is obtained by
an individual or group of people from what is done. This means that the higher the
quality and quantity of an employee’s work, the higher his performance will be, so
that performance is a quality and quantity of work that can be completed by
employees (Yusuf n.d.).

Annisa (✉) · Widodo · O. Fachrunnisa

Department of Management, Faculty of Economics, Universitas Islam, Sultan Agung
(UNISSULA), Semarang, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 287
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_26
288 Annisa et al.

There are several important things that need to be considered by companies in

managing human resources in order to improve the efficiency and effectiveness of
employees’ work. The success of a company can be seen through the performance of
employees. Companies must be able to control employees in order to be able to get
optimal performance results because good or bad performance achieved by an
employee will affect the success of a company as a whole.
According to Samsari (2004) in Baihaqi (2015), religiosity is the level of faith that
exists in a person in living or practicing the teachings of the religion he believes
in. The religiosity that exists in a person can affect his performance in a company.
With the existence of religion, employees are always close to the creator and instill
the value of goodness, which means that it will make a person’s limit in facing the
competition that exists in the world of work. The religiosity of a person encourages
him to always be wise in facing challenges in doing work. With the religious attitude
of each employee, it will lead to a spiritual intelligence which encourages a person to
be happy in carrying out a job; with this feeling of happiness it will make employees
feel comfortable so that it can improve the quality and productivity of employees.
And besides that, of course, people who have a religious spirit do work not only to
get fortune and profit but also to get rewards as provisions and happiness in the
hereafter in QS: Ash-Syura verse 20. Therefore, employees who have high religios-
ity are employees who have a good performance compared to those who do not have
religiosity (Karina Dewi and Anwar 2018).
In order to obtain the happiness of the world and the hereafter in a balanced way,
Islam teaches its people to work hard, the hard work is in the form of worship and
pious deeds, where worship is an obligation that must be carried out where it is
directly related to Allah SWT, while righteous deeds are good deeds where the act is
done. Can influence or have a positive impact, with this Islam requires a change in
people’s lives. Therefore, the changes made must be carried out as optimally as
possible in order to get the maximum, that’s how Islam recommends hard work in
order to get changes and improvements in the lives of its people.
Hard work will lead to good results; every company definitely needs employees
who are not only smart but also capable and diligent in their work. With employee
awareness in doing and completing the work that is their responsibility, in other
words, employees work without an order and this brings positive things. Employees
like this have high initiative and usually also have high productivity, employee
performance at work is largely determined and influenced by the work ethic of the
individual, hard work in an organization should be owned by every employee
because in the organization a work ethic and commitment are needed. High levels
of employees, if there is no it then the organization is difficult to develop and win the
competition in seizing the existing market share (Tampubolon 2014).
Therefore, each individual or group must have a high level of hard work attitude
in doing work; with this, employees will work as optimally as possible in order to get
quality results, so that from this, employee can achieve achievements, and the results
of these work achievements can certainly be seen in terms of productivity and the
results of the employee’s hard work. With this, the hard work of employees has a
very important role because it can improve individual skills and knowledge. Work
The Role of Religiosity and Hardworking on Human Resource Performance. . . 289

ethic is a totality of individual personality in believing, expressing, and encouraging

oneself to act and achieve optimal charity (Febrianti and Wati 2020).
It is known that there are phenomena in the performance of human resources at
BMT, namely in religiosity there are still some small problems found in the
performance of human resources, namely there are still employees who are late in
coming to studies or religious events held by Baitul Maal wat Tamwil.
Another phenomenon found in this study is that there are still employees who
exceed the limit of collecting the work they are responsible for so that it makes
superiors always give direction to their employees from this it shows that hard work
is still low in the performance of human resources contained in BMT Ummah
Eternal Prosperity of Japan.
In addition to the phenomena that exist in BMT, there is also a phenomenon of
different research results (research gap). Research conducted by (Yusuf n.d.) states
that there is a significant and positive influence on employee religiosity and perfor-
mance. Meanwhile, it is known that there are differences in research, (Kurniawan
2017) which states that religiosity is positively correlated but not significant to
employee performance. Haris and A’rasy’s which states that religiosity does not
have a significant effect on employee performance.
With the existing phenomenon and research gap, it is necessary to develop human
resources in order to improve the performance of BMT human resources for eternal
prosperity through the concepts of religiosity and hard working.

2 Literature Review
2.1 Human Resource Performance

Performance is a real behavior is shown by each individual as a form of achievement

obtained by employees in accordance with their position in a company (Veithzal
2004). Meanwhile, according to Wibowo (2011), performance has a very broad
meaning, not only stating the results of the work but also how it takes place. In the
work process, performance is the result of work that has a strong relationship with
consumers and contributes to the economy. Masram and Mu’ah stated that perfor-
mance is the result of a process of quantity and quality produced or services
performed by someone who does a job. Performance is the comparison of work
results with predetermined standards.
Employee performance is the productivity produced by a person as a contribution
to the organization which can be measured in qualitative and quantitative terms.
According to (Nugroho and Paradifa 2020). From this understanding of perfor-
mance, it can be seen that employee performance is a comparison of the work
achieved by employees with predetermined standards and performance also means
the results achieved by employees, both quantity and quality, in an organization in
accordance with the responsibilities given to the employee.
290 Annisa et al.

2.2 Religiosity

Religiosity is the level of faith in a person in living or practicing the teachings of the
religion he believes in. In general, can be associated with religion, so that the notion
of religiosity can be called the meaning of religion. People who are very religious
tend to internalize their religious teachings in their daily lives. They believe that
religion can guide a person to achieve life goals and determine life goals, thereby
influencing personal and social life. There is a relationship between a person’s level
of religiosity with performance. The higher the level of one’s religiosity, the better
the performance (Sudarti and Zulfa 2020).
Therefore, someone who has high religiosity will tend to have high employee
performance because if employees have a religious spirit, the possibility of fraud,
indiscipline, and other negative things that can harm the company is very small for
this to happen because it is a prohibition in religion, and every religion must teach its
people to always do good things where the work is carried out by employees
professionally. Therefore, employees who have high religiosity should have good
performance compared to those who do not have religiosity (Karina Dewi and
Anwar 2018).

2.3 Hard Working

Work ethic is a totality of personality within each individual in appreciating,

believing, and interpreting something that encourages action in achieving optimal
charity. Employees who have a good work ethic always show a character, attitude,
and belief in doing work and acting and working optimally (Maharani and Efendi
2017). According to Asifudin, the human work ethic is related to individual dimen-
sions if the background is personal where work is a way to realize it. If the value of
social work that motivates work activities such as appreciation from the community,
therefore the work ethic has a strong influence and is inseparable from the social
dimension. Natural environmental factors play a role if climate, natural conditions,
and so on affect the work attitude of the person. Meanwhile, the transcendental
dimension is a dimension that goes beyond the limits of material values that underlie
the work ethic so that in this dimension work is seen as worship. Elçi et al. (2011)
hard work is the key to happiness and financial success and hard work can also be
seen as a moral virtue.

2.4 Religiosity and HR Performance

Religiosity refers to a person’s attitude to life based on the religious values he

adheres to, emphasizing the substance of religious noble values and turning away
from religious formalism (Ghozali 2002). Someone who has high religiosity will
The Role of Religiosity and Hardworking on Human Resource Performance. . . 291

have self-control as a reference in acting desuia in the religious rules he adheres

to. Therefore, employees who have high religiosity should have good performance
compared to those who do not have religiosity (Karina Dewi and Anwar 2018). The
indicators of religiosity (Yusuf n.d.) are: Religious Practice (the ritualistic dimen-
sion), Religious Knowledge (the intellectual dimension), Religious Belief (the
ideological dimension), Religious Feeling (the experiential dimension), and Reli-
gious Effect (the consequential dimension). This is supported by research by
Alfisyah and Anwar (2018) stating that there is a significant and positive influence
on the religiosity and performance of employees.
Hypothesis 1
Religiosity is positively related to human resource performance

2.5 Religiosity and Hardworking

The religiosity of a person encourages him to always be wise in facing challenges in

doing work. With the attitude of religiosity that each employee has, it will lead to a
spiritual intelligence which encourages a person to be happy in carrying out a job;
with this feeling of happiness, it will make employees feel comfortable so that it can
improve the quality and productivity of employees. And with this, it will foster the
spirit of hardworking. The human work ethic is related to individual dimensions if
the background is personal where work is a way of realizing it. If the value of social
work that motivates work activities such as appreciation from the community,
therefore the work ethic has a strong influence and is inseparable from the social
dimension. Natural environmental factors play a role if climate, natural conditions,
and so on affect the work attitude of the person. Meanwhile, the transcendental
dimension is a dimension that goes beyond the limits of material values that underlie
the work ethic so that in this dimension work is seen as worship.
This is supported by research conducted by Elçi et al. (2011) with the results
showing that employee morality and religiosity have a positive effect on hardwork-
ing behavior (Usoh et al. 2020). The results of the study state that the role of work
ethic is very important in improving employee performance, with a good work ethic
in the workplace, performance can increase and thus can make the job well done.
Hypothesis 2
Religiosity is positively related to Hardworking

2.6 Hardworking and HR Performance

Hard work is the key to happiness and financial success and hard work can also be
seen as a moral virtue (Elçi et al. 2011). Employees who have a good work ethic
always show a character, attitude, and belief in doing work and acting and working
292 Annisa et al.

optimally. (Maharani and Efendi 2017). Darjat (2015) in Yanto et al. (2020) namely
hard work, smart work, and sincere work.
Ambarita et al. (2020) stated in their research that there was a significant influence
between work ethic and employee performance. In this study, it shows that a work
ethic that is managed consistently and well will have an impact on the level of
individual performance in doing their work. Employees who have a high work ethic
are reflected in their behavior such as working hard, not wasting time doing work,
and being religious.
Based on the existing literature, it shows that human resource performance will
increase if hardworking is applied in order to encourage individuals to work even
harder and the low hardworking in performance will lead to low individual activities.
Therefore, a balance between hardworking and religiosity is needed for employees.
Hypothesis 3
Hardworking is positively related to human resource performance (Fig. 1)

3 Research Methods

This research was conducted in one of the Islamic microfinance institutions. The
so-called Baitul Maal wat Tamwil/BMT for the Eternal Prosperous Community with
an office in Jepara, Indonesia. In collecting data, we used questionnaires and
interviews. The participants are all employees. With the number of 52 people with
the percentage of men 52% and women 48%. And use Statistical Program for Social
Science (SPSS) to test the hypothesized model, The Statistical Program for Social
Science (SPSS) is a package of computer application programs for analyzing
statistical data.

3.1 Variable Measurement

In this study, measurements using a Likert scale of 1–5 from strongly disagree to
strongly agree were measured using all employee answers. According to Sugiyono
(2012) the Likert scale is used to measure attitudes, opinions, and perceptions of a

Fig. 1 Empirical model

Religosity
H1

Human Resources
H2 Performance

hardworking
H3
The Role of Religiosity and Hardworking on Human Resource Performance. . . 293

person or group of people about social phenomena. With a Likert scale, the variables
to be measured are translated into variable indicators. Then the indicator is used as a
starting point for compiling instrument items which can be in the form of statements
or questions. The answer to each instrument item using a Likert scale has a gradation
from very positive to very negative.
In HR performance we used indicators (Febrianti and Wati 2020) with 6 parts
consisting of quality, quantity, effectiveness, punctuality, independence, and pres-
ence, and to measure religiosity we used the following indicators (Yusuf n.d.):
1. Religious Practice, 2. Religious Knowledge, 3. Religious Belief, 4. Religious
Feeling, and 5. Religious Effect. To measure Hardworking on this variable, we used
the indicators contained in the work ethic according to Darjat (2015), namely: Hard
work, smart work, and sincere work.

3.2 Analysis Techniques

This empirical research uses descriptive analysis and then the validity test is carried
out on each question item using the product moment correlation between each score
on each question item with the number of each score and then continued with
reliability testing using the Cronbach’s negligent method, as well as the coefficient
of determination test and followed by the path analysis test.
Table 1 presents the descriptive statistics. Descriptive statistics are statistics used
to analyze data by describing the data that has been collected as it is without
intending to make conclusions that apply to the public or generalizations. Included
in descriptive statistics are data presentation through tables, pie charts, graphs, and
calculation of the mean, median, mode, standard deviation, and percentage calcula-
tion (Sugiyono 2012: 147).
The validity test of hard working, religiosity, and human resource performance
explains that all the indicators that have been tested can be said to be valid because
the data states that the result of r count is greater than r table. This test serves to
measure the validity of an indicator that represents the existing variables. In this
study, it can represent variables so as to produce the value of r count > r table
(Table 2).
Table 3 presents the reliability test statistics and based on the results of the
reliability test, it is known that the test results that have been carried out by
Cronbach’s alpha show results of more than 0.6 or > 0.6, therefore it can be
concluded that these variables can be said to be reliable or consistent in measuring.

Table 1 Summary of No Variable Mean

descriptive statistics
1 HR performance 4.29
2 Religiosity 4.63
3 Hardworking 4.51
294 Annisa et al.

Table 2 Validity test

Variable Indicators r count r table Sign Notes
Hard working (Y1) Y1 0.839 0.273 0.000 Valid
Y2 0.853 0.000 Valid
Y3 0.676 0.000 Valid
HR performance (Y2) Y1 0.554 0.273 0.000 Valid
Y2 0.700 0.000 Valid
Y3 0.557 0.000 Valid
Y4 0.778 0.000 Valid
Y5 0.768 0.000 Valid
Y6 0.661 0.000 Valid
Religiosity (X1) X.1 0.661 0.273 0.000 Valid
X.2 0.719 0.000 Valid
X.3 0.441 0.000 Valid
X.4 0.687 0.000 Valid
X.5 0. 620 0.000 Valid
X.6 0.848 0.000 Valid
X.7 0.758 0.000 Valid

Table 3 Reliability test No Variable Cronbach’s alpha Tension

1 HR performance 0.752 Reliable
2 Religiosity 0.795 Reliable
3 Hardworking 0.693 Reliable

Table 4 Coefficient of Coefficient of determination test results

determination
Equation model Adjusted R square
1 0.264
2 0.448

In the coefficient of determination test, it is known that the coefficient of

determination in the first equation test shows 0.264. This means that the model
used which consists of the independent variable, namely religiosity, explains the
variation in hard working, which is 0.264 or 26.4% while the rest which is not
explained in this study is 73.6%. In the second equation test, it is known that the
independent variables are religiosity and hardworking and explain the variation of
the dependent variable on the human resource performance variable, which is known
to be 0.448 or 44.8%, while the content that is not explained in this study or other
variables not examined in this study is known to be 55.2% (Table 4).
The path analysis test in Table 5 shows that the regression calculations that have
been carried out in Table 3 can be concluded that there are two (2) regression
equation models, namely as follows:
Table 5 Path analysis summary
Dependent variable Independent variable R square R coef E Path T Sign Effect Effect Effect
Direct Indirect Combined
Hard working Religiosity 0.528 0.279 1.207 0.528 2.663 0.000 0.528
HR performance Religiosity 0.685 0.470 2.265 0.517 4.222 0.000 0.517 0.13 0.650
Hard working 0.253 2.063 0.044 0.253
The Role of Religiosity and Hardworking on Human Resource Performance. . .
295
296 Annisa et al.

Y1 = 0:528 X1Y2 = 0:517 X1 þ 0:253 Y1,

In this it can be seen that the regression coefficient of religiosity has a positive
sign which means that the better the religiosity, the better the hardworking of the
employee and at Y1 also shows a positive sign which indicates the better the
hardworking of the employee, the better the employee’s performance will be.
Based on the direct, indirect, and total effects, they are detailed as follows: human
resource performance is influenced by religiosity through hard working, which is
0.517 + (0.528 × 0.253) = 0.650 or 65%, human resource performance is influenced
by religiosity or 51.7%, resource performance. Humans are affected by hard working
by or 25.3%.

4 Results and Discussion

This study aims to determine the relationship between religiosity and hardworking
and HR performance. The sample is 52 employees of Baitul Maal wat Tamwil or
BMT Ummat prosperous external, and the results in this study prove the role of
religiosity and hardworking in improving HR performance. As well as in this study
complementing previous studies on religiosity and hardworking, the results of this
research also provide a reference on improving HR performance through religiosity
and hardworking. The main objective of this study is to determine and analyze
the effect of religiosity on human resource performance and secondly, to find out the
effect of religiosity on human resource performance through hardworking, and the
third one wants to know the effect of hard working on human resource performance.

4.1 Hypothesis 1 Test Result

The results of research that has been carried out from testing shows that the value of
the Religiosity coefficient is t count 4.222 > t table 2.008 and a significant value of
religiosity shows 0.00. Thus, it states that the probability is <0.05 so that the
religiosity variable on resource performance has a positive and significant effect.
From the results of the questionnaire, it is explained that if the religiosity side of the
employee is high, it does not make the employee despair in doing the job so that the
employee has high morale and hard work, which with this can trigger employees to
work optimally so that it is certainly will impact HR performance. This shows that
the higher the employee’s religiosity, the higher the performance of human
resources. Employees who have the nature, help each other in work QS
Al-Maidah: 2, always carry out Allah’s commands and spread goodness, have
good worship, and good religious knowledge. With these characteristics, the
employee has high religiosity which can have an impact on employee performance.
This will have an impact on the company’s performance will increase.
The Role of Religiosity and Hardworking on Human Resource Performance. . . 297

4.2 Hypothesis 2 Test Result

Based on the results of existing research, it shows that the value of the Religiosity
coefficient is t count t count 2663 > t table 2.008 and the significant value of
Religiosity itself shows 0.00. Thus, it states that the probability is <0.05, so there
is a positive and significant influence on the performance of human resources. From
the results of the questionnaire, it is explained that employees apply religious
teachings at work, perform worship, participate in studies to increase insight and
knowledge, as well as establish good working relationships and good cooperation in
carrying out their work, which with good communication, it can be make work more
effective and efficient; with this, of course, can improve the performance of human
resources.

4.3 Hypothesis Test Result

The results of the research that have been carried out from the test show that the hard
working coefficient value is t count 2.063 > t table 2.008 and a significant value of
0.044, thus it states that the probability is <0.05, the hard working variable has a
positive and significant effect on the performance of human resources. From the
results of the questionnaire, it is explained that in achieving a work target, it takes
hard work of employees in doing work in order to spur employees to improve their
performance to get maximum results. This is of course with hard work can improve
their performance.

5 Conclusion

Religiosity and hardworking are very important aspects, but the issue of improving
the performance of human resources is still widely discussed. Therefore, efforts to
improve the effectiveness of human resource performance still need to be carried out.
Related to this, as for things that can improve the performance of human resources,
one of which is through religiosity and hardworking, the results of this study show
that in optimizing the performance of human resources through the role of religiosity
and hardworking that is done well, it will have the potential to improve the
performance of human resources.
This study succeeded in obtaining empirical evidence that the variables of
religiosity and hardworking had a positive and significant effect on the performance
of human resources. The implication of this research is that it is hoped that manage-
ment can emphasize religiosity at BMT Ummat Sejahtera Abadi in terms of
employee worship, employee knowledge of religion, employee behavior, employee
faith level, by increasing it all management can bring in experts in religion which
298 Annisa et al.

makes employees motivated, and awakened to working optimally with this can make
employee religiosity strong so it is not easy to despair, with this of course it will have
an impact on improving the performance of human resources and it is hoped that
management can emphasize hard working at BMT Ummat Sejahtera Abadi in terms
of enthusiasm at work, responsibility in work, and sincerity in working without
making it a burden, by increasing that all management can provide employee
training, supporting facilities, with that employees can be enthusiastic to work,
with high hard working it will have an impact on improving the performance of
human resources.
From the results of this study, it can be seen that theoretically, this research as a
whole supports several theories that have been presented at the beginning of the
study. The results of the analysis of this study succeeded in proving the hypotheses
that had been proposed previously. This research can be said to be a development of
research from previous researchers. As in the research conducted by Elçi et al.
(2009) with research results showing that employee morality and religiosity have a
positive effect on hardworking behavior. There is a significant and positive influence
on employee religiosity and performance.
In this study it has aspects of limitations, therefore other variables are needed that
are not examined in this study and it is hoped that in future studies to add other
variables that have not been studied and which of course are in accordance with field
conditions.

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Improving Business Success Through
the Use of Accounting Information
and Business Capital Management

Rita Rosalina and Luluk Muhimatul Ifada

Abstract The micro-, small, and medium enterprise (MSME) sector is the largest
economic support sector in Indonesia, but along with the development of the times,
there are still many problems that occur and have not been resolved, one of which is
the low business success of MSMEs. This study aims to offer a conceptual frame-
work for the effect of using accounting information and business capital manage-
ment on business success. This study uses a quantitative approach with research data
in the form of primary data through a questionnaire. The population in this study is
owners or managers of micro-, small, and medium enterprises (MSMEs) in Central
Java. The sampling technique used is nonrandom sampling with the purposive
sampling method. The data analysis technique in this study used multiple linear
regression analysis. Several factors that influence business success proposed in this
conceptual article are the use of accounting information and business capital
management.

1 Introduction

1.1 Background

Indonesia is a country whose economy is based on a populist economy marked by

the presence of micro-, small, and medium enterprises (MSMEs). Hasibuan (2020)
stated that the management of MSMEs, which is easy and does not require a lot of
money, makes the role of MSMEs quite large, both at the regional and national

R. Rosalina (✉)
Master of Accounting Student, Faculty of Economics, Universitas Islam Sultan Agung,
Semarang, Indonesia
L. M. Ifada
Departement of Accounting, Faculty of Economics, Universitas Islam Sultan Agung, Semarang,
Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 301
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_27
302 R. Rosalina and L. M. Ifada

levels. In the national economy, MSMEs have proven their role, especially in the
aspect of the income distribution, increasing job opportunities, increasing non-oil
and gas exports, and economic development in rural areas. Based on data from the
Ministry of Cooperatives and Small and Medium Enterprises (Ministry of Cooper-
ative SMEs), the number of MSMEs in Indonesia until 2020 reached 65.4 million
MSME units, which are divided into microenterprises (UMi) of 64.6 million, small
businesses (UK) of 700 thousand, and medium enterprises (UM) of 65 thousand.
Business success is managed success in realizing goals that are very important in
business survival. Business success is marked by an increase in the amount of
production, an increase in profits or profits, an increase in the number of sales, and
stable business growth (Arlianto 2014). The success of the business cannot be
separated from the role of the owner in running his business. The key to business
success is making accurate managerial decisions and policies (Merdekawati and
Rosyanti 2020).
Business success is influenced by several factors, one of which is the use of
accounting information as an important factor in influencing business success.
According to Mastura et al. (2019), business success is influenced by the role of
management in utilizing accounting information. Every business activity requires
accounting records so that all transactions that have occurred can be known with
certainty and clarity.
Accounting information is defined as accounting financial records that can be
used by business owners in knowing the amount of operating income received, the
number of operating costs incurred, and the amount of loss or profit earned.
Decision-making and policies on business management such as market develop-
ment, policy determination prices, and so on are based on accounting information in
the form of financial statements (Hasibuan 2020). The success of an MSME is
determined by making the right decisions, so accounting information has an impor-
tant role because it is used in decision-making considerations (Wibowo and
Kurniawati 2016).
According to Nurwani and Safitri (2019), the majority of micro-, small, and
medium enterprises in Indonesia have not used and utilized accounting information
in managing their business, due to the many problems that arise, namely, the
application of financial accounting in MSMEs in Indonesia is still weak and low
due to low education, low understanding of financial accounting standards (SAK),
and legal regulations that do not yet exist regarding the obligations of MSMEs to
prepare financial reports. Many MSME actors cannot continue their business
because of the many problems they face (Diansari and Rahmantio 2020).
MSME actors still ignore the importance of using accounting information such as
bookkeeping in business activities that are just developing, so this becomes an
obstacle for MSMEs in financial planning, knowing financial conditions, and bor-
rowing money which will slow down business success (Merdekawati and Rosyanti
2020). MSME activities which are still considered traditional have many weak-
nesses, namely, they still carry out traditional accounting techniques that cannot
distinguish between controlling family (personal) finances and finances from busi-
ness activities, so many MSME actors still combine personal finance with business
finance.
Improving Business Success Through the Use of Accounting Information. . . 303

Another weakness is that the prospect of business progress which is increasingly

complex over time is still ignored by MSME actors (Lazuardi and Salam 2016).
According to Wibowo and Kurniawati (2016), some factors hinder the success of
MSMEs in Indonesia, namely, (1) the lack of business capital issued, (2) the lack of
knowledge about the market owned by MSME actors, (3) the low technology used in
business activities, and (4) bargaining power is still weak.
According to Candra et al. (2020), in addition, there are several external chal-
lenges faced by MSMEs, namely, (1) market competition is increasing in line with
the presence of globalization, (2) regulation and law enforcement are still weak,
(3) the level of trust in product quality is still low by consumers in the country, and
(4) development assistance has not been spread evenly to MSME production centers.
Therefore to be able to develop MSMEs to support the Indonesian economy to
increase the use of accounting information for MSMEs. In solving these problems, it
is necessary to use accounting information in the process of determining the right
policies for MSME owners to increase business success.
In addition to the use of accounting information, business success is influenced by
other factors, namely, business capital management. When building and running a
business, business capital becomes a very important part because it is used to support
operational activities and ensure business turnover (Diansari and Rahmantio 2020).
The important role of business capital management causes business operational
activities to be carried out properly, to seize investment opportunities to increase
the profitability of MSMEs.
In connection with the realization of business success, it will result in increased
effectiveness of business capital management; therefore, MSMEs will update the
way of taking the total adequacy of the availability of business capital used in
achieving the level of business success. Business capital in an MSME requires
good management so when MSMEs have good business capital management, it
can make it easier for MSMEs to achieve business success. However, if MSMEs
have low business capital management, it will slow down business success (Firdarini
and Prasetyo 2020).
The problems that exist in MSMEs in Indonesia can be seen from various aspects.
First, in terms of the use of accounting information, where MSME actors are still
very low in the use of accounting information, they still ignore the importance of the
role of accounting information in business, and MSME actors use traditional record-
ing systems in business activities by combining business finance with personal
finance. This causes MSME actors to find it difficult to find out the advantages
and disadvantages they will get to run their business in the future so that the use of
accounting information that is still low will slow down business success for MSMEs.
Furthermore, from another perspective, it is seen from business capital manage-
ment. Many MSMEs are still not good at managing their business capital, and
MSME actors are still having difficulties in managing business capital. This is
because MSMEs still have a low understanding of the importance of business capital
management in increasing business success, whereas the role of business capital is
very important, where business capital can be used as a reference to get investment
opportunities and get money loans from outside parties.
304 R. Rosalina and L. M. Ifada

Research on the use of accounting information on business success has been

carried out by many previous researchers, namely, Firdarini and Prasetyo (2020);
Mastura et al. (2019); Nurwani and Safitri (2019); Yulianthi and Susyarini (2017),
which states that there is a positive influence between the use of accounting
information and business success, as well as research by Fauzi and Wirausaha
(2020), which states that the use of accounting information does not affect business
success.
Furthermore, previous research on business capital management affects business
success, namely, Firdarini and Prasetyo (2020) conclude that there is a positive
influence between business capital management and business success. And research
by Fauzi and Wirausaha (2020) stated that business capital has a negative influence
on business success, and also research by Netty and Yustien (2019) states that there
is no influence between business capital and business success.
This research refers to research by Diansari and Rahmantio (2020) which states
that the use of accounting information and business capital has a significant influence
on business success. This shows that if MSMEs use accounting information and
good business capital management in managing their business, they can achieve and
increase business success so that MSMEs in lending business capital will not
experience difficulties (Diansari and Rahmantio 2020).
This study combines research models that have been carried out by previous
researchers such as Diansari and Rahmantio (2020)); Hasibuan (2020)); Firdarini
and Prasetyo (2020)); Fauzi and Wirausaha (2020)); Netty and Yustien (2019));
Nurwani and Safitri (2019)); Apriliani and Widiyanto. (2018)); and Yulianthi and
Susyarini (2017)). The combined model is synthesized to produce a new model that
is different from the previous research model.
Based on the phenomena and research gap above, this research is interesting to do
to examine the effect of the independent variable, namely, the use of accounting
information and business capital management, on the dependent variable, namely,
business success in micro-, small, and medium enterprises in Central Java. This
research is also very important for the level of business success so it is hoped that
MSMEs can bounce back and the economy in Indonesia will also recover. So, the
formulation of the problem in this study is as follows:
1. How to increase business success through the use of accounting information?
2. How does business capital management affect business success?

2 Literature Review

2.1 Stakeholder Theory

In 1984, R. Edward Freeman first proposed stakeholder theory; he defined and

described it as a “separation thesis” in the workplace in business discussions. This
theory was then popularized by Clarkson in 1994 who saw that stakeholders have an
Improving Business Success Through the Use of Accounting Information. . . 305

interest in an organization based on moral or legal reasons. An organization has an

obligation if there is a party that has legal rights to the organization. This can result in
good implementation for an organization in maintaining good relations with stake-
holders. An organization should be responsive to stakeholders.
The stakeholder theory defines a company not only to carry out operational
activities for itself but also to be useful for shareholders. In research conducted by
Azmi and Gray, Kouhy, and Adams, it is stated that the survival of a company is
influenced by support from shareholders or other parties. A result of activities or
actions decided by the organization legally or morally, personally or collectively, is a
right and interest of the organization. Stakeholders include shareholders, suppliers,
creditors, employees, consumers, communities, and others.
Stakeholders provide an important role in MSMEs. This relates to the source of
wealth provided by stakeholders for the company’s operational activities such as
donations to the company, loans, and government regulations. So the company
should improve its performance to gain the trust of shareholders that the company
can develop. To achieve this is to use accounting information, and good business
capital management can be used by management as material for business planning
and control in making decisions that are useful for achieving success for the sake of
business continuity.

2.2 Motivation Theory

The word “movere” is a Latin word for motivation which means force, encourage-
ment, or driving, which causes action. The word “movere” is defined as motivation
in English which has the meaning of generating motives, giving motives, and
conditions that cause encouragement. Motivation is explained as an impulse that
invites people to act and behave by motivational techniques based on the cause and
effect of an action, namely, aspects that make a person able to do or not do
something.
In 1993, Bedard and Chi put forward a theory of motivation which was strength-
ened by Spilker in 1995. They stated that to increase the understanding of owners or
managers in using accounting information in business, it is necessary to have
motivation for owners or managers to understand accounting knowledge.
Business success in a company is not only for profit but motivation in developing
a business must also be improved. Business actors, especially MSMEs, must have
high motivation in each of them to continue to improve performance in the current
business competition. Therefore, it can be concluded that the theory of motivation is
the ability of the owner or manager to be able to motivate employees to have high
knowledge of accounting information in its application and to manage business
capital well, in its business activities, to achieve business success.
306 R. Rosalina and L. M. Ifada

2.3 Business Success

Business success is a condition that exceeds other parallel conditions. Business

success is also defined as the achievement of goals and objectives by the company,
which is not interpreted directly (Radzi et al. 2017). Some of the factors supporting
business success in micro-, small, and medium enterprises are a description of work
motivation, business abilities which are illustrated through attitudes, knowledge, and
skills, education levels, and relevant experience. The success of a business is
described through profits or additional wealth obtained in business operations.
Business success is not only felt physically but business success can be accepted
by management in the form of inner satisfaction and individual calling.

2.4 The Use of Accounting Information

Use means a process or method of using something. According to I Cenik and Endro
in Nurwani and Safitri (2019), information is defined as the output of data manage-
ment that is useful for information users. Isaac and Arief in Nurwani and Safitri
(2019) define accounting as a service activity that is useful in making quantitative
information and data, especially in the financial department of a company so that it is
useful in making policies and decisions to determine the choice that is considered the
most appropriate compared to other options.
Furthermore, accounting information is defined as information that is needed in
regulating the company to avoid having problems related to the company’s activities
(Yousef 2013). According to Nwaigburu and Mark (2014), accounting information
is a contribution that has a significant nature to activities that are useful in making
decisions in a company. From the definition above, it can be concluded that the use
of accounting information is defined as a process of applying accounting information
that can generate benefits in the form of quantitative and qualitative data needed by a
company in an accurate decision-making process.
Priliandani et al. (2020) mention that in carrying out its functions, management
requires information, such as quantitative information or qualitative information.
Quantitative information that is widely used is in the form of accounting informa-
tion. Financial statements must be prepared properly to be useful for internal parties
or external parties of the company. Qualitative information is in the form of
information about company policies such as in strategic preparation. The process
of management supervision, operational supervision, and strategic planning, using
financial accounting information (Candra et al. 2020).
Improving Business Success Through the Use of Accounting Information. . . 307

2.5 Business Capital Management

Business capital is one of the factors that must exist before carrying out production
activities. According to Prawirosoentono in Apriliani and Widiyanto. (2018), busi-
ness capital is defined as an asset that must be owned by a company to earn future
profits and is usually expressed in units of value. Apriliani and Widiyanto. (2018)
revealed that the development and achievement of income of a business are
influenced by the size of its business capital.
According to Rumerung (2018), the presence of business capital is very important
in building and running a business. However, the events that often become a problem
are how to manage business capital appropriately and optimally so that the business
that is run will generate profits and can achieve its goals. For MSMEs, large and
small business capital will be a problem in itself, because if the amount of business
capital is too much compared to the business needs, it will result in a lot of loading
costs, but on the contrary, if the amount of business capital owned is too small, the
business run will feel difficult. The business capital used in running a business must
be under business needs.

3 Hypothesis Development
3.1 The Effect of Using Accounting Information on Business
Success

Accounting information is a very important factor in an organization or business. An

organization uses accounting information for the planning, management, or evalu-
ation of an organization. The use of accounting information in the form of notes to
record transactions related to business receipts and expenses. All business activities
can run well due to the available accounting information that can influence achieving
business success.
An MSME in achieving business success cannot be separated from the influence
of the use of accounting information which is used as a basis for decision-making in
running a business, such as being used for market development, pricing, and so
on. So MSMEs need the use of good accounting information for the success of their
business. Business success for MSMEs will be the key to the success and survival of
MSMEs in the future.
Christian and Rita (2016) revealed that accounting information has a very
important influence on achieving business success so that it can be used as a basis
for making decisions. A lack of knowledge of accounting information can cause
financial bookkeeping activities to be hampered. Accounting information is used by
owners or managers such as financial records to find out operational costs that must
be incurred, find out how much income is earned, and find out the amount of profit/
loss earned (Mastura et al. 2019). According to Suryana in Nurwani and Safitri
308 R. Rosalina and L. M. Ifada

(2019), business success is marked by increasing capital, increasing income, increas-

ing sales volume, increasing production output, and increasing the number of
workers.
A study by Diansari and Rahmantio (2020), Nurwani and Safitri (2019),
Hasibuan (2020), and Yulianthi and Susyarini (2017)) mentions that the use of
accounting information has a significant effect on business success. This shows
that when business actors, especially MSMEs, use accounting information well in
making decisions, achieving business success will be easier to achieve and increase,
compared to MSMEs that do not use accounting information in their decision-
making process.
Based on this explanation, the following hypothesis can be formulated:
H1 = The use of accounting information has a positive effect on business
success

3.2 The Effect of Business Capital Management on Business

Success

One of the important factors in running a business is business capital because a

business cannot operate if there is no business capital. The success of a business is
influenced by the size of the amount of business capital which is sufficient to
increase the smoothness and facilitate the development process of a business
(Feriansyah and Manullang 2015). Business capital is defined as the amount of
money used to operate a business so that it can grow and run.
Capital in business can be viewed from several sides, such as capital to set up a
business, capital for business development, and capital to operate daily business
activities (Diansari and Rahmantio 2020). An organization in determining the
business capital needed by an organization needs to be determined precisely because
it will be used to ensure the smooth running of business activities.
Previous research by Apriliani and Widiyanto (2018), Diansari and Rahmantio
(2020), and Firdarini and Prasetyo (2020) reveals the influence between business
capital management and business success. This means that if there is an increase in
business capital, it must be balanced with an increase in business success. It can be
concluded that if the amount of business capital owned is insufficient, it will cause
problems in the production process, and vice versa, if the business capital owned is
excessive, it will cause investment opportunities to be hampered, because the
business capital used is only for operational activities. Therefore, managers must
decide how much business capital is appropriate so that the company’s operational
activities can run smoothly and can capture investment opportunities to increase the
level of profitability so that business success can be achieved.
A business, especially MSME, really needs a management role, especially in
terms of business capital. Business capital is the driving wheel of MSME activities
so good management is needed. The goal is that having good business capital
Improving Business Success Through the Use of Accounting Information. . . 309

management in an MSME will make it easier to achieve business success. On the

other hand, if an MSME has poor business capital management, then MSMEs will
find it difficult to achieve business success.
Based on this explanation, the following hypothesis can be formulated:
H2 = Business capital management has a positive effect on business success

3.3 Research Framework (Fig. 1)

4 Research Methodology

4.1 Types of Research

The type of research used is explanatory research. Explanatory research is a study

that describes the relationship between variable X and variable Y. The research
method used is a quantitative method using a questionnaire. According to Sugiyono
in Blue and Regards, the quantitative research method is defined as a method based
on the philosophy of positivism which is used to examine the population and sample.
Later quantitative methods are used to test a variable by using statistical tools in the
form of numbers or scores which are generally obtained using data collection tools
with answers in the form of questions that are given a range of scores or weights so
that they will generate hypotheses and can explain the relationship between the
independent variable and the dependent variable. It has the ability to develop an
understanding of various things.

The Use of Accounting H1(+)

Information (X1)

Business Success (Y)

Business Capital Management
(X2)
H2(+)

Fig. 1 Research Framework

310 R. Rosalina and L. M. Ifada

4.2 Population and Research Sample

4.2.1 Population

This study uses a population of SMEs in Central Java. Data from the Office of
Cooperatives and Micro, Small, and Medium Enterprises (Diskop UKM) states that
the total number of MSMEs in Central Java in 2020 is 4,174,210 MSMEs
(jatengprov.go.id 2020). The author took the population of Central Java for the
results of the study to be more accurate by using a larger population and wider range.
If you only use the population in one or two districts or cities, the population in the
district that has the criteria according to the provisions that have been made by the
author is not sufficient, so the results of the study will be less accurate because it only
uses a population with a small scope, but by using a population of MSMEs in Central
Java, the author can take samples of MSMEs in various districts or cities in
Central Java.
The consideration of selecting the MSME population in Central Java is because
Central Java province as a province with the third largest population, reaching
34.71 million people, has a total of 4,174,210 MSMEs. Based on this number,
MSMEs are divided into four, namely, 3358 large business units, 39,125 medium
business units, 354,884 small business units, and 3,776,843 micro business units.

4.2.2 Sample

The sample is part of the total population that has certain terms and conditions
(Sugiyono 2019). Determination of the sample size is based on the population used
by the author, namely, MSMEs located in districts or cities of Central Java. There-
fore, this study uses a sample of MSME actors from Semarang City, Semarang
Regency, Demak Regency, and Kendal Regency. The basis for consideration is that
the area has many MSMEs so it can represent the province of Central Java.
The following is a calculation of the overall sample used in this study according
to the 1960 Slovin formula:

N
n=
1 þ N ð eÞ 2
4:174:210
n=
1 þ 4:174:210 ð0:05Þ2
n = 399,96
n = 400 orang

So, the minimum number of samples used is 400 respondents.

Improving Business Success Through the Use of Accounting Information. . . 311

4.3 Sampling Technique

This study used a nonrandom sampling technique using the purposive sampling
method. A nonrandom sampling technique is a sampling technique for each member
of the population who is not given the same opportunity to be used as a research
sample. The purposive sampling method belongs to the category of nonrandom
sampling technique. The purposive sampling method is a technique considering
certain characteristics that will be used in determining the research sample
(Sugiyono 2019). In the purposive sampling method, the author can choose research
subjects and research locations with the aim of studying or understanding the main
problems. The characteristics of the samples used are as follows:
1. MSMEs are located in Central Java, especially Semarang City, Semarang
Regency, Demak Regency, and Kendal Regency.
2. Have a minimum of three employees.
3. The business has been running for at least 2 years.
4. Minimum monthly income of IDR 2,000,000.

4.4 Data Sources and Types

This study uses primary data types. Primary data is a source of data obtained by the
author directly (Sugiyono 2019). Primary data were obtained directly from respon-
dents through questionnaires using all original data collection methods. The primary
data used in this study were obtained through questionnaires distributed directly
(offline) or online using Google Forms. The respondents in question are owners or
managers of MSMEs in Central Java, especially Semarang City, Semarang Regency,
Demak Regency, and Kendal Regency, both those who have not or have been
registered with the Office of Cooperatives and Small and Medium Enterprises of
the Central Java Province.

4.5 Method of Collecting Data

The data collection method in this study used a questionnaire. The questionnaire or
questionnaire method is a data collection technique carried out by the author by
distributing written statements and questions directly or indirectly to be answered by
respondents (Sugiyono 2019). If the number of respondents is very large and widely
distributed, then the questionnaire is suitable to be applied. In the questionnaire,
some questions or statements are open or closed.
From the questionnaire or questionnaire method, the authors prepared two
methods of distribution, namely, online using Google Forms or offline which were
312 R. Rosalina and L. M. Ifada

given directly using paper to several potential respondents, that is, owners or
managers of SMEs in Central Java with as many as 400 respondents.

4.6 Research Period

This research will be carried out from December 2022 to May 2023 by going
through the research stages. It includes observation, submitting research proposals,
making and testing research instruments, data documentation, and research data
analysis.

4.7 Operational Definitions and Variable Indicators

4.7.1 Business Success

This study uses the dependent variable, namely, business success. Business success
is defined as the perception of the owner or founder of the business about the
performance of the owner business compared to the goals to be achieved. The
increasing number of sales, increased production, ever-increasing profits, and busi-
nesses that are always developing are signs of business success (Arlianto 2014;
Merdekawati and Rosyanti 2020). According to Firdarini and Prasetyo (2020), a sign
of business success is the addition of the number of employees and an ever-
increasing sales turnover.

4.7.2 Use of Accounting Information

The first independent variable used in this study is the use of accounting information.
Usage in the Big Indonesian Dictionary is a method and a process of using some-
thing (Priliandani et al. 2020). The definition of accounting information is informa-
tion that has a quantitative nature related to the company as a basis for making
decisions to choose the right alternative (Firdarini and Prasetyo 2020). It can be
concluded that the use of accounting information is the process, methods, and
actions of using accounting information for economic decision-making in determin-
ing many choices among alternative actions so that the decisions taken will be more
appropriate (Hasibuan 2020). According to Belkaoui in Firdarini and Prasetyo
journal (2020), there are three classes of accounting information, namely, financial
information, management information, and operating information.
Improving Business Success Through the Use of Accounting Information. . . 313

4.7.3 Business Capital Management

The second independent variable used is business capital management. Management

is defined as a systematic process within a company for the control and supervision
process in achieving business goals. Furthermore, the understanding of business
capital is the amount of money used in operating a business so that it continues to run
and develop. The amount of business capital owned by a business must be following
the required needs because less business capital will cause difficulties in running a
business, while excessive business capital will make it difficult for businesses to find
investment opportunities from outside parties. So business capital in running a
business must be appropriate and requires good business capital management
(Table 1).

Table 1 Indicator variables

No. Variable Indicator Source
1. Business success 1. Number of employees has increased Nurwani and Safitri
2. Increased consumer orders (2019)
3. Increased turnover or income
4. Product promotion has increased
5. The selling price of the product has
increased
6. Business capital has increased
7. Higher level of sales
8. Production continues to increase
9. Production equipment upgrade
2. The use of accounting 1. Use of accounting information for (Diansari and
information projecting future funding needs Rahmantio 2020)
2. Controlled expenses
3. Well-measured business productivity
4. Using operation information
5. Using management accounting informa-
tion
6. Using financial accounting information
7. Using statutory accounting information
8. Using budgetary information
9. Using additional accounting information
10. There is an increase in business pro-
ductivity
11. The production process is always
supported
3. Business capital 1. Initial capital invested Diansari and
management 2. Business working capital Rahmantio (2020)
3. Business operating capital
4. Challenges in obtaining capital
314 R. Rosalina and L. M. Ifada

4.8 Analysis Techniques

The analysis technique is a data processing technique using the computer program
Statistical Product and Service Solutions (SPSS) version 25.0 which can process
statistical data accurately and quickly. The analysis technique in this study is used to
examine the effect of using accounting information and business capital manage-
ment on business success. Data analysis is made to make decisions from the
processed data. This research, descriptive statistical analysis, data quality test (valid-
ity test and reliability test), classical assumption test (data normality test,
multicollinearity test, and heteroscedasticity test), multiple linear regression analy-
sis, and hypothesis testing (F statistics test, statistical test t, and the coefficient of
determination test [R2]) were carried out.

5 Conclusion

Based on the conceptual explanation of the research above, the use of accounting
information and business capital management affects business success. Accounting
information is useful in making the right decisions for business actors in achieving
business success. Business capital owned by MSMEs has a very important role in a
business because business capital is the driving wheel of MSME operational activ-
ities so good management is needed to achieve business success.

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Islamic Communication in Outbound
Management Training

Devina Aprilia Nur Aini and Olivia Fachrunnisa

Abstract This article explains the concept of good communication in carrying out
OTM (outbound management training) activities. This activity is carried out not only
by individuals but also by one team. In a team, each individual must work together
with other individuals. Cooperation between individuals and other individuals in a
team requires communication. Communication that is suitable for building interac-
tion between people is Islamic. Islamic communication is excellent if used in this
activity because in it, there is communication with good and polite words for anyone
who is communicated with. Each individual must be able to communicate well. This
good communication can be done by applying Islamic communication in it. The
teaching of communication in Islam already existed in the time of the Messenger of
Allah. This teaching is also suitable for everyone, especially the students, to learn it.
Good communication will have a good impact as well. The impact of communicat-
ing with Islam is very diverse in its forms, ranging from the many good words that
appear when talking to others to words spoken that contain excellent rewards. Many
things are still significant in carrying out outbound management training activities,
starting from working on all tasks in training and development in this activity, both
individuals and teams. The results that can be taken if we use good communication
in OTM are very beneficial for companies and other parties, especially in daily life in
the world of work.

1 Training and Development

Training is the process of imparting knowledge, skills, and abilities to employees.

Training is considered a program for improving the technical skills of employees.
Training is defined as a planned learning experience designed to bring about a
permanent change in an individual’s knowledge, attitudes, or skills. As research

D. A. N. Aini (✉) · O. Fachrunnisa

Universitas Islam Sultan Agung (UNISSULA), Semarang, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 317
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_28
318 D. A. N. Aini and O. Fachrunnisa

conveys the development of behavior improvement and performance improvement

and more attendance-oriented training, the focus is on the current work of individ-
uals, improving specific skills and abilities to immediately do their job. Employee
development, on the other hand, generally focuses on future work within the
organization (V and Shaik 2012). Training and development refer to an organized
process initiated by (or under the leadership of) an organization that leads to a long-
term change in the knowledge, abilities, or attitudes of the members of the organi-
zation. In general, training refers to activities aimed at acquiring knowledge, skills,
and attitudes that have direct or short-term applications (such as upcoming pro-
motions), while development refers to activities aimed at acquiring attributes or
competencies that may not have an immediate effect in the application (Borman et al.
2003).
Training and development are needed in an agency. In an agency, there must be
workers who work for the continuity of the agency. If the agency wants to grow and
develop, then its employees must also be able to grow and develop. One way of
growth and skill development of employees is through training and development
activities. With the skills of employees who have grown and developed with this
training and development, it can have a very good impact on the progress of the
agency. Therefore, it is recommended for every agency, especially in the business
world, to be able to process the skills of its employees properly, and one way is to use
training activities and this development.

2 Management Outbound Training

Training and development activities can be carried out inside and outside the agency.
In this training and development activity, the agency will adjust the training and
development activities according to what is needed by the agency. But many of the
various agencies use training and development activities carried out outside the
agency. Training and development activities outside the agency use the outside
environment to be able to train and develop the skills possessed by their employees.
Training and development activities carried out outside the agency are also referred
to as outbound management training.
Outbound management training is a teaching method to improve organizational
performance through learning and experience. Regular broadcast programs discuss
training through adventure and outdoor management (outside the classroom) that
can also be used for psychiatric therapy. In practice, this program is usually carried
out to improve organizational performance within a particular company through
outdoor activities, adventurous nuances, and instructions to raise standards for each
team of workers (Surbakti 2013).
The main objective of the outbound training program is to help participants better
prepare to face any changes that may arise by developing their professional skills.
These skills should focus on improving the integrity, honesty, and reliability of
participants as well as their commitment and confidence in the future success of their
Islamic Communication in Outbound Management Training 319

work (Buchori et al. 2016). Outbound training for the workforce focuses on pro-
cesses and work results based on teamwork between organizational units. Media
outside activities or also known as outbound training is a safe choice to achieve goals
and utilize the training method in question (Kusuma 2018).

3 Communication

Communication is one of the most important things in life, especially in business

life. In carrying out business activities, it must be good for someone to be able to use
good communication for the smooth running of their business. Therefore, commu-
nication is one of the important things for everyone, especially in the business sector,
to use good communication to carry out their business activities.
Business communication is any communication used in creating partnerships, as
well as intellectual resources, to promote an idea, product, service, or organization,
to create value for the business in which it operates (Abdullah 2010). Communica-
tion science generally addresses human interaction, where every individual human
being cannot live his life without communicating. Islamic communication science,
as well as general communication science, is about humans. In the Islamic view,
communication is not only to realize the relationship with Allah SWT but also to
establish communication with humans (Nazarullah 2018).
There are also various types of communication, and one type is verbal commu-
nication. Verbal communication is communication that uses words and writing as a
medium of communication. Verbal communication is often used in various activi-
ties. In carrying out training and development activities, communication is needed.
Communication that is often used in the implementation of this activity is the use of
verbal communication.
The use of the right communication can have an impact on the target as well.
Communication that is often used by an agency is verbal communication. Verbal
communication is also used in various activities both inside and outside agency
activities. But with communication, one can also use profanity when speaking.
Therefore, it is very necessary to have a regulation of pronunciation with profanity.
This control can be overcome by using Islamic communication. Islamic commu-
nication, like the general public, focuses on humanity. According to the Islamic
view, communication serves both the purpose of advancing the vertical relationship
between Allah Almighty and His prophet in the morning and the purpose of
suppressing horizontal communication with humans (Nazarullah 2018).
In this Islamic communication, a person is required to be able to understand and
pronounce only good words. Six words are categorized as Islamic communication
principles or ethics:
320 D. A. N. Aini and O. Fachrunnisa

(a) ‫ﻗﻮﻝ ﺳﺪﺩ ﺍ‬

Qaul sadidan is a strong statement, affirmation, or affirmation, both of
substance and editorial (grammatical) origin. From the point of view of sub-
stance, Islamic communication must convey factual information and everything
clearly and unambiguous, not lie, and also refrain from manipulating
(Nazarullah 2018).
(b) ‫ﻗﻮﻝ ﺑﻞ ﻍ‬
Qaul baligha means neatness, sturdiness, and clarity of meaning. These words
use effective, straightforward, communicative, easy-to-learn, the core of the
problem, and unbelieving speech in the form of speech and messages expressed
according to their standards for intellectual communication, using the language
they have learned (Nazarullah 2018).
(c) ‫ﻗﻮﻝ ﻣﻌﺮ ﻑ‬
Istilah “qaul ma’ruf” refers to good judgments, such as pockets of expression,
and the use of innuendo that is not rude and not offensive (Nazarullah 2018).
(d) ‫ﻗﻮﻝ ﻛﺮﻳﻢ‬
Qaul karima is a repetitive phrase delivered in a hormetic and agitated tone, as
well as pleasant to hear, meek, and infatuated (Nazarullah 2018).
(e) ‫ﻗﻮﻝ ﻝ ﻳﻦ‬
Qaul layyina is a long read, leaning on a sound that is pleasing to the ear and
free from recognition so that it can touch the heart. Islam emphasizes the need to
use clear, concise, and nonoffensive language when communicating (Nazarullah
2018).
(f) ‫ﻗﻮﻝ ﻣﺸﺮ‬.
Qaul masyura is an easy-to-understand concept, a concept that is simple to
understand and easy to understand when communicating, in the sense that it contains
funny or fun words. Communication is carried out between the communicator (the
party who provides the information) and the recipient (the party who receives the
information) (Nazarullah 2018).
The above are six words according to Islamic communication. The above words
have a good meaning of words, and if the tutor of the word is implemented in
everyday life, then it will also have a good impact on whoever implements it. This is
also very good for an agency that implements good speech in every activity in
business.
Agencies can train their employees with good speech training and development
activities. In the implementation and development carried out by agencies, they must
require the use of Islamic communication in these activities. Through the obligation
of Islamic communication in this training and development activity, it is hoped that
every employee can practice using good words which can be implemented and
institutionalized in daily life.
The development that is often carried out by an agency is OMT. OMT is
outbound management training where training and development activities are car-
ried out outside the environment, but these activities are carried out in an environ-
ment outside the agency. OMT has an important role in an agency because this is
Islamic Communication in Outbound Management Training 321

where agencies can train and develop the skills of their employees so that even
agencies will also have a good impact on the body, because of the resources that are
also growing and developing. In addition, OMT must also be used by agencies to be
able to train and develop good communication between employees in the agency.
The training can be carried out by requiring each employee to be able to speak a
good word in OMT and development activities. For example, in a family rafting
game, the team must be able to work well together to be able to win the game. Good
and polite communication can be used to be able to build cooperation between
individuals in the team. Before carrying out the game, it would be nice to say a
prayer first. When in the implementation of the arum rapids when shocked or
something immediately, you can say good pronunciations such as the pronunciation
of “astaghfirullah,” “Allah Akbar,” “Subhanallah,” and many more. In addition to
the words in this Islamic communication being kind and also polite, each of the
words also contains its meaning and reward.
In carrying out this activity, it should be from the game organizer or from the
HRD who made the game by providing a tool that will detect the words spoken by
the game participants, where this tool will work by hearing the words used by
participants in communicating with others. This tool will be used by each team
leader. If any team member uses unkind or dirty words, then this tool will give a
signal. The first signal is a warning signal, the second signal is a signal that gives a
light punishment, and the next signal gives the most difficult punishment signal. The
tool is deprogrammed by the company, and if anyone commits a violation, it will
continue to be recorded in the program at the company.

References

Abdullah MR (2010) Business communications. Business Communications II(1):53–64. http://

repository.lppm.unila.ac.id/2300/
Borman CW, Ilgen RD, Klimoski JR (2003) Handbook from psychology volume 12 industry and
organizations psychology. United States, Canada
Buchori S, Ibrahim M, Saman A (2016) The influence of character education training through
outbound training to improve honesty and integrity. Journal of Educational Psychology &
Counseling 2(1):12–19
Kusuma YA (2018) Outbound training educates methods of strengthening human resources.
Outbound Training As One Of The Educational Methods For Strengthening Human Resources
4(1):148
Nazarullah (2018) Mass communication theory in an Islamic perspective. Peurawi Journal 1(1):
1–16. https://www.jurnal.arraniry.ac.id/index.php/peurawi/article/download/2764/2026
Surbakti S (2013) Sports recreational outbound training, management sports training. Journal of
Sports Science 12(2):32–45
V RD, Shaik N (2012) Evaluate the effectiveness of training & development – Measurement models
2(1):722–735
Addressing Negative Spillover Effects
of Overcrowding in Malaysian Prisons: Can
Islamic Financial Institutions Play a Role?

Siti Nursyawani binti Misman, Mohd Ariff bin Mohd Salimin,

Rahimah binti Farjan Ali, Ieman Huda binti Adnan, Salina binti Kassim,
and Syed Marwan Mujahid bin Syed Azman

Abstract Over the years, the number of Malaysian prisoners continues to rise,
resulting in overcrowding at prisons and further exposing the prisoners to various
health and mental issues. Currently, it is the sole responsibility of the government to
absorb the costs of maintaining the prisons, including maintenance and operating
costs related to prisoners, currently estimated at around RM511 million. However,
from the economic perspective, prison comprises abundant human capital resources,
operating in restricted environments with high-level security measures. These
resources have remained idle and are not being fully utilized for the generation of
economic activities. Harnessing the full potential of the labor resources available in
prisons will bring significant impact on the country’s economy in terms of cost
reduction and increment in goods and service production. In this regard, the Islamic
financial institutions (IFIs) have a potential role to play in addressing these issues,
with the possibility that the IFIs provide financial resources and strengthen engage-
ment with the prison department through innovative financing models towards the
financial sustainability of the prisons. This study intends to conceptualize the role of
IFIs in contributing towards developing the potentiality of prisoners as a productive
economic resource and preparing them with financial independence upon their
release from prison.

1 Introduction

The Malaysian Prison Department is placed under the purview of the Malaysian
Minister of Home Affairs with responsibility of managing and controlling the
accused persons who are being sentenced by the courts of law. These prisons
serve not only as detention but also as rehabilitation of the prisoners. The Malaysian

S. N. b. Misman (✉) · M. A. b. M. Salimin · R. b. F. Ali · I. H. b. Adnan · S. b. Kassim ·

S. M. M. b. S. Azman
IIUM Institute of Islamic Banking and Finance, Selangor, KL, Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 323
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_29
324 S. N. b. Misman et al.

Prison Department is headquartered in the Malaysia Prison Complex in Kajang,

Selangor, in the Klang Valley. Prisons are not like other institutions or organizations
in contemporary society. It is a facility where trained personnel manage and care for
a group of people referred to as “prisoners.” This group is not invited; rather they are
coerced into these places and barred from leaving by guards, walls, and gates. In
other words, the prison department has no authority to choose its clients or to release
them. These inmates must follow a set of rules, and their movements are strictly
monitored.
Prisons are facilities where prisoners are detained, guarded, and involved in
various rehabilitation activities until they are released. Malaysia’s prison department
is the final institution for implementing the criminal justice system after undergoing
the court process and judgement. The department serves the community by detaining
those sentenced by the courts. The department’s responsibilities include protecting
the prisoners with dignity and assisting them in leading productive and law-abiding
lives while in prison and after their release.
There are various issues and challenges pertaining to the overcrowding in Malay-
sian prisons. First, the high cost of operations for the government—it is studied by
Yaacob et al. (2013) that the daily expenses of maintaining a prisoner is around
RM35 to RM41. Considering the current state of the country’s economy post Covid-
19, the cost is expected to increase significantly. With the total number of 66,000
prisoners in 2019 throughout Malaysian prisons, the government needs to incur a
total cost of at least RM 2.6 billion. It resulted in the huge divergence of Malaysia’s
national economy.
Second, in terms of cost efficiency, it is more expensive to operate a prison with
idle prisoners as compared to productive prisoners. Investments in prisons can
reduce daily expenditures of prison operations. Inmates are able to create valuable
items for the government through prison industrial programs, such as furniture,
electronics, foods, and clothes. The sale of these products will further generate
revenue that can be used to offset expenses that would otherwise require the use of
appropriated funds.
Third, in terms of rampant health issues, overcrowding issues in prisons cause the
spread of infectious disease such as tuberculosis to be enlarged among prison
communities that eventually affects the productivity level of prisoners while work-
ing inside the prisons. It will definitely increase the government cost on health
funding.
Fourth, regarding inmates’ exposure to financial literacy, inmates, just like freed
persons, hold financial responsibility not only for their future self upon release but
also to his/her family members. For inmates to have a better life, the prison
department must provide meaningful employment and develop sound educational
and vocational training programs.
Addressing Negative Spillover Effects of Overcrowding in. . . 325

2 Research Methodology

The research used in this study is based on a critical review of relevant literature
related to prisoners. The approaches used in this study focus on the social and legal
aspects on matters related to the prisoners’ development. The research specifications
used in this article are descriptive analytical research specifications. The developed
cost analysis and proposed Islamic finance products are based on the results of a
literature review, a review of relevant previous research results, an empirical study of
the actual needs and conditions of prisoner development, and current and past
practices adopted in addressing issues in prisons. The product specifications
suggested originated from the existing model from previous research and textbooks.
To make it simpler and fit to address the current issues and challenges faced in
Malaysian prisons, the researchers decided to modify it accordingly.

3 Points of Discussion

3.1 Prison Maintenance and Management Cost in Malaysia

Allocation of appropriate budget to maintain the basic need and hygiene of the
prisons falls upon the government. These basic necessities include food, hygiene
tools, clothes, rehabilitation programs, wages for the officials in charge in the
prisons, and infrastructure costs. With an alarming increase in the rate of prison
populations, the cost of maintaining incarcerated people (prisoners) has become a
burden to the national economy, while the economic cost is apparent, lest not the
social cost that each prisoner had caused to their families, children, and society at
large.
Issues related to high-cost maintenance for prisoners are not new in Malaysia.
One study conducted by Yaacob (2012) provided a much-detailed cost incurred in
maintaining a prisoner where it provides the estimated cost expenses for RM35 per
prisoner in the year 2011. Incorporating the estimation with current available data, it
is estimated that almost over RM2.6 billion is spent by the government in the year
2019 for the cost of maintenance and management of the prison alone. It is a huge
cost for the Malaysian economy.

3.2 Current Measures to Utilize Human Resources

in Malaysian Prisons

My Prison Department (MyPride) The Malaysian Prison Department plays a

significant role to ensure the productivity of Malaysian prisoners as well as their
adequacy of vocational and industrial training. As a response, prisoners in Malaysia
326 S. N. b. Misman et al.

are being trained with related industry skills including frozen foods, dipping sauce,
kuih raya, handicrafts, handwoven textile (songket), BBQ sets made from wood,
carved woodworks, clothes, and furniture. These products are then marketed under
the brand name of MyPride. These items are sold not only inside the prisons but also
marketed outside through MyDin hypermarket and Klang Valley hypermarket. An
online site was also established in order to widen the market efficiency of the
products (MOHA, 2022). Interestingly, the profit generated from the revenue is
not only benefited by the government in managing prisons’ facilities but also the
prisoners. Half of the revenue is given to the prisoners for their savings for future
consumption upon release.
BeliGas BeliGas is a registered social enterprise that works with Kajang Prison to
provide cheaper price liquefied petroleum gas (LPG) and provides employment for
B40 and other marginalized communities including ex-convicts. Even though the
employment is given upon the release of prisoners from the prisons, it is a good step
in social integration between ex-prisoners and society. However, a stringent process
is required by BeliGas in selecting prisoners to work under them due to heavy work
of lifting LPG gas. As of 2021, BeliGas has nearly 80 staff with majority of the B40
community and more than 20 employees being ex-convicts (WikiImpact, 2021).
Prisoners to set off Foreign Worker Shortage The Federation of Malaysian
Manufacturers (FMM) states that Malaysia requires more than 600,000 foreign
workers by the year 2022 to assist the industrial sector, particularly the agricultural
sector, due to severe manpower shortage (FMM, December 4, 2021). Hence, instead
of bringing in foreign workers to address the manpower shortage, the government is
now looking at using prisoners to fill in the gap in certain industries. Eligible
prisoners will include prisoners under the parole system program, license release
of prisoners program, and resident reintegration program. The program is expected
to save the government’s cost on incarceration of up to RM182 million per year
(Muzamir, 2022, March 22). This is one of the good beginning steps taken by the
Malaysian government in ensuring productivity of Malaysia’s prisoners to further
contribute to the country’s economic sectors.

3.3 Comparison on Prison Maintenance Costs in Selected

Countries Outside Malaysia

Prison Cost in California The United Nations Office on Drug and Crime
(UNODC) reveals that the cost of incarceration of an inmate as of 2010 amounted
to $48,000 which is more than four times the tuition cost of the University of
California, Los Angeles (UCLA), for a California resident (Atabay, 2013). Surpris-
ingly, after 12 years, the amount spent to incarcerate one inmate increased to
$106,000 per year. An increase by 117% or about $ 58,000 has taken place over a
decade just to maintain the cost of prisoners inside the jails. It was found that both
Addressing Negative Spillover Effects of Overcrowding in. . . 327

security and inmate healthcare constitute the largest portion for the
incarceration cost.
Prison Cost in the United States According to the Bureau of Justice Statistics, the
direct cost of corrections and the criminal justice system of the US government was
$295.6 billion in 2016 with more than 2.2 million people incarcerated. It means that
the government needs to bear the cost of incarcerating an inmate yearly at
$132,400 million per person. From $295.6 billion spent, half of the funds are used
for police protection at $142.5 billion and $88.5 billion for the cost of operating the
prisons, rehabilitation program, and parole systems – the cost of incarceration for the
purpose of corrections and the rest of the expenses goes to judicial and legal systems
(Hayes, 2020).

4 Role of Islamic Financial Institutions through Islamic

Social Finance and Other Instruments

Islamic financial institutions (IFIs) have a much bigger role than to be the financial
intermediaries. Carrying the name of Islamic financial institutions, the level of
expectations is way beyond what the normal financial institutions serve. Upholding
the spirit of Islam, IFIs can do much more with the readily able resources to serve the
public community, including to utilize such framework to cater to the unutilization
of human resources among prisoners in prisons. Various instruments in Islamic
banking and finance can actually be suggested to solve these problems, as per the
main priority of the establishment of Islamic banking and finance itself is to
contribute towards economic development and prosperity within the principles of
Islamic justice.
Corporate Social Responsibilities (CSRs) CSR is a business model in which
companies make a coordinated effort to operate in ways that benefit both society
and the environment rather than cause harm to them (Dusuki, 2008). Faliza (2019)
states that CSR has emerged as the most important component of banking programs
in addressing social issues and community welfare.
The implementation of CSR of Islamic banking on the issues faced by Malaysia
prison can be suggested accordingly to address the particular issue. To put into
practice, Islamic banks and financial institutions can spur their shareholders’ and
stakeholders’ investments and contribute financial resources into the prisons depart-
ment. This will benefit both parties, whereas the financial provider can acquire profit
from the investment, and the prison department benefits from the capital provided,
hence enabling them to do economic activities. With the availability of the human
capital in the prison department, which in this case is the inmates, many economic
generating activities can be done because the inmates act as the labor force, which is
also considered as the economic agent.
328 S. N. b. Misman et al.

In addition, by employing the inmates, this also can help the inmates to save
money for future use, because as we knew it may be hard for them to find a job after
their release due to negative public perception. To implement this idea, firstly, the
prison department can give the particular business skill to the inmates, such as
automotive repairing, baking, culinary, industrial skills, agriculture, and many
more. Then, the prison department can set up a dedicated shop lot within the jail
premises to operate the particular businesses. In addition, they can also set up an
agricultural lot for farming, which is subject to strict supervision by the prison
authorities and prison department. The capital provided could also be used to buy
raw materials and machinery facilities for particular business models. In conclusion,
with proper management and marketing strategies, the business operated by the
prison department and the inmates can generate enough profits to benefit both the
investors and the prison department, which would indirectly prosper the nation’s
economy due to the positive economic output generated.
Islamic Equity Financing: Musharakah and Mudarabah Musharakah financing
is a business partnership in which two or more entrepreneurs work together as
partners and the profits and losses will be split according to the amount of equity
invested.
Islamic banks can act as the capital provider (Rab al-Mal), and the prison
department can act as manager and labor provider (Mudharib). Accordingly,
the bank, which is the capital provider, benefits from the expertise and skills of the
manager (prison department) and the human capital (inmates), and likewise, the
manager (prison department) gets benefits from capital which invests in profitable
ways. By using contracts like Musharakah and Mudarabah, Islamic financial insti-
tutions can finance the operations of this sector and then share the profits generated.
The implementation of Musharakah and Mudarabah financing is parallel to the
concept of Islamic bank as a social institution that carries out its economic activities
not merely for profit, but there is a sense of mutual assistance to realize benefit (Jais
et al. 2020). Profit sharing is one of the basic principles of Islamic economics in the
face of uncertainty, and it is thought to support aspects of justice, and justice is a
fundamental aspect in the Islamic economy.
Social Impact Bond Social impact bond (SIB) is a contract that leverages private
financing for social services while encouraging result accomplishment by making
repayment conditioned on success. The accomplishment of the targeted social goals
is a requirement for repayment and return on investment (ROI). Moreover, a bond-
issuing organization raises funds from foundations, charities, and investors in the
private sector. Hence, to compensate for the service provider with their operational
expenses, these funds are paid out.
Payment from the government or the commissioner to the investors or the bond
issuers only takes place if the measurable outcomes agreed upfront are realized.
Furthermore, in recent years, social impact bond investment has gained appeal as a
way for both individuals and corporations to give back to society while also
increasing their social obligations.
Addressing Negative Spillover Effects of Overcrowding in. . . 329

Fig. 1 The structure of social impact bond (SIB). Source: Adopted from Burand (2013)

Based on the diagram of the SIB mechanism (Fig. 1), an investor finances an
intervention, which is then utilized as working capital by the service provider, in
charge of providing social services, achieving desired outcomes, and conceivably
providing data related to those achievements. This process includes a crucial stage
called outcome measurement, whereby the money will be subsequently released to
the investor, together with the agreed-upon interest, by the government or the
commissioner.
As a result, the government or commissioner is the ultimate payer of outcomes, as
well as the outcome measurements and payment terms. Some SIBs use dual-purpose
intermediaries. For starters, it can operate as a convener, bringing together all
stakeholders involved in the mechanism to achieve an agreement on the transaction
process. Second, it could be in charge of raising capital and transaction structure. In
addition to the targeted population and beneficiaries of the intervention, the benefi-
ciaries of a SIB’s intervention must be specified.
In order to better comprehend how the social impact bond is being used to address
the prison issues in Malaysia, it is necessary to examine the very first social impact
bond ever put into practice. The world’s first social impact bond (SIB) Payment by
Results (PbR) pilot (small-scale preliminary study) was established in 2010 at Her
Majesty’s Prison (HMP) of Peterborough (Disley et al. 2011). This fund is used to
pay for interventions for inmates serving short sentences (less than a year) at that
prison. Prisoners could receive SIB funding for up to 12 months after their release,
and participation was entirely voluntary. All in all, about five million pounds in
private investments has been raised for this SIB.
Investment funding is gathered from private and nongovernment investors in this
SIB to offer upfront funding for the deployment of actions to improve social
330 S. N. b. Misman et al.

outcomes. If this program is successful, the government may be able to save money
by refusing to pay for services that would otherwise be utilized by those who have
low social outcomes, and additional social benefits will be realized. As part of the
SIB, the government consents to provide investors a portion of the savings. Under
the SIB, investors receive payments based on how efficiently the program lowers the
number of rearrests for cohorts (subjected) of inmates released from Peterborough
jail (Anders and Dorsett 2017), in particular, if there is a 7.5% decrease in
reoffending across the entire pilot (small-scale preliminary study) compared to a
national comparison group.
The concept of social impact bonds is parallel to the concept of socially respon-
sible investment (SRI) Sukuk practiced by the Islamic financial institutions. Theo-
retically, the usage of Sukuk aims to attract more funds from the private sector to
bridge the funding gap for infrastructure investments and reduce the debt burden of
the public sector (Abdessamad and Lahsen 2017). Thus, the SIB model implemented
by the government of the United Kingdom could also be implemented in Malaysia to
address the same issue in the scope of SRI Sukuk.
To put into practice, private investors in Malaysia could put their investment into
this Sukuk that will be used to fund offender behavior programs and interventions
seeking to change the thinking, attitudes, and behavior that may lead to reoffending.
In addition to the programs, the support provided with the funds to the offenders
throughout the post-release within a certain period may also lead to the decrease in
the number of reconviction. This will also benefit the investors, as they also get the
returns on the savings of the Sukuk, given by the government in case of reduced
reconvictions.
Zakat Institution for Health Funding of Prisoners One of the major ongoing
issues in Malaysian prisons is rampant health issues. This issue will affect the
productivity of prisoners as economic agents from inside Malaysian prisons resulting
in less products and services offered in the economy. Inadequate access to a full
medical treatment in prisons is one of the major concerns that lead to unattended
health issues affecting prisoners physically and mentally. As highlighted by RMK
12 under the heading of issues and challenges during the period of RMK 11, one of
the contributing factors that lead to inadequacy of delivery healthcare services
throughout the country is unsustainable healthcare financing, apart from inadequate
facilities and mismatch of medical resources (Twelfth Malaysian Plan 2021). Even-
tually, it affects the delivery of healthcare services inside the prisons as well.
Medical funding is pivotal to ensure sustainable healthcare services. In order to
address the ongoing health issues in Malaysian prisons, this study would like to
suggest involvement of Zakat institutions with the Malaysian Prison Department and
Ministry of Health by providing funds in the form of medical assistance, facilities,
and treatment for eligible Muslim prisoners. Muslim prisoners who are being
imprisoned can be classified as poor and needy because they are unable to earn
sufficient income to support their ownselves as well as their dependents who live
outside the prisons. In fact, most prisoners lived with financial difficulty prior to their
conviction that commonly initiates them to commit crimes.
Addressing Negative Spillover Effects of Overcrowding in. . . 331

There are less attempts conducted in channeling Zakat funds to resolve issues and
offer assistance to the prisoners. Nevertheless, few efforts in terms of research papers
and NGO efforts have been traced in using Zakat funds for the prisoners’ well-being.
The discussion is as follows:
Zakat used to fund vocational training inside prisons and provide start-up
business capital upon inmates’ release from prisons. Ishak et al. (2016) suggested
that Zakat funds be channeled to prisoners through vocational training in prisons, as
well as to ex-convicts who wish to become entrepreneurs upon their release, under
the provision of asnaf riqab. In this study, the writer suggested for Lembaga Zakat
Selangor to provide Zakat capital to both groups, with continuous guidance and
monitoring on the funds, in order to harness the full potential of prisoners in Kajang
Women’s Prison and further educate themselves to be more useful, responsible,
trustworthy and be able to survive in the free society.
The result of the study shows that there were positive changes in the attitude of
the respondents (prisoners) after attending vocational training, and they became
more confident to start their own business with start-up capital assistance from
relevant regulatory authorities. Unfortunately, there were no reported sources on
the LZS initiatives with regards to Zakat capital being channeled to any prisons’
vocational training as well as collaboration between LZS and the prison department
for start-up business capital for ex-convicts up to the time when this paper is written.
Zakat funds used for Islamic studies and life skills programs inside prisons and
reentry programs. Another significant effort on the use of Zakat funds for Muslim
prisoners is through the involvement of Islamic NGO by the name of Tayba
Foundation based in the United States. The foundation has given benefits to more
than 9000 incarcerated Muslims across the United States (Tayba Foundation, 2023).
Its educational program is centered on character reformation through spiritual and
behavioral modification. Interestingly, the Zakat funds are also being used to buy
books, provide mental health services, and overcome addiction to the Muslim
prisoners. The Zakat fund is also used for reentry support where it will be given
directly to the released prisoners who are in need upon their release from prisons.
The use of Zakat funds for the prisoners’ well-being as discussed above can be
taken as an example in setting up medical Zakat projects. If Zakat can be used to
fund vocational training as well as educational and life skills programs inside
prisons, provide start-up business capital, and fund for reentry programs upon their
release, then priority could also be given on the funding of prisoners’ healthcare.
Providing and ensuring good healthcare fulfill one of the Daruriyat in Maqasid
Shariah on the protection of life. Thus, the role of Zakat institutions in this regard
is very significant.
332 S. N. b. Misman et al.

5 Conclusion

In conclusion, prisoners should not be left idle in prison as they are also considered
as an economic agent. The Malaysian Prison Department needs to collaborate more
with Islamic financial institutions to further enhance the use of prisoners as one of the
economic resources which is as human capital. In addition to emphasizing the
importance of combining labor resources and financial resources, the Islamic finan-
cial institution needs to develop more products that are aligned with these issues,
which can indirectly solve some of the socioeconomic problems within the society
and nations. For example, the Islamic equity financing through the Musharakah and
Mudarabah models could be further developed by Islamic financial institutions and
Shariah scholars to be purposely implemented in this particular situation that benefits
both capital providers and the prison department.
As for corporate social responsibilities, more Islamic financial institutions should
consider investing in this particular sector as part of their CSR activities which could
greatly help to resolve this issue as well as improve their public images. Further-
more, the Malaysian government and Islamic financial institutions could adopt the
concept of the social impact bond to be implemented in the green Sukuk in Malaysia.
This implementation will not only attract more socially responsible investors and
stakeholders, but it will also assist in addressing this issue. Lastly, there is a need for
the involvement of Zakat institutions in providing Zakat to fund healthcare services
inside the prisons. Cooperation between regulatory authorities and IFIs, combined
with bold investment products, will not only benefit the prisoners, but will also
strengthen the nation’s GDP and economy, as well as improve society’s negative
attitude towards ex-convicts who should have a better future after their release from
prison.

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Evaluation on the Practice of Ijarah
for Vehicle Financing and Its Regulation
in Islamic Financial Institutions in Sri
Lanka

M. H. M. Abdullah and Rusni Hassan

Abstract The growth of the Islamic banking system has been enhanced by the
introduction of Islamic financial innovations. Ijārah ending with ownership is one of
the innovative products used by Islamic financial institutions to finance a variety of
assets, including consumer products, commercial property, and vehicles. In Sri
Lanka, it is predominantly used for vehicle financing, with 80% of the ijārah
facilities granted for vehicle financing. Of 29 Islamic financial institutions, 13 insti-
tutions offer ijārah facilities for vehicle financing. Since the demand for ijārah is high
among individual and corporate customers, it has grown in popularity in the Islamic
financial industry. Notwithstanding its long presence and popularity, it remains
undeveloped and has not reached its full potential. In addition to that, the current
practices of ijārah for vehicle financing in Sri Lanka have been the subject of an
intense debate on whether the operation of ijārah fully complies with Sharī ah
requirements. Therefore, this study aims to examine the current practices of ijārah
for vehicle financing and its regulation from a practitioner’s perspective and identify
the gap between theory and practices. Three leading institutions have been selected
as a case study among three types of financial institutions, namely, Amana bank as
an Islamic bank, Annoor as an Islamic window, and Al-Falah as a leasing company.
The qualitative method is used for this study. The primary and secondary data were
collected through interviews, annual reports, and magazines, as well as from recent
publications. The study reveals the application of ijārah for vehicle financing
remains relatively undeveloped, and efforts should be strengthened to provide a
better and more legitimately structured application of ijārah for vehicle financing in
Islamic financial institutions in Sri Lanka.

M. H. M. Abdullah (✉) · R. Hassan

Institute of Islamic Banking and Finance, International Islamic University Malaysia, Selangor,
Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 335
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_30
336 M. H. M. Abdullah and R. Hassan

1 Introduction

Over the last five decades, Islamic banking and finance have witnessed tremendous
growth with widespread acceptance. The crux of Islamic banking and finance is that
all transactions must comply with Sharī ah. Sharī ah prohibits all transactions in
which some or all of the components are present, such as interest, uncertainty,
gambling, and the trade of prohibited commodities like alcohol.
Ijārah ending with ownership (al-ijārah al-muntahiyah bil-tamlīk) is one of the
forms of an ijārah contract used by Islamic financial institutions to rent out an asset to
a customer for an agreed rental payment over a period of time, and at the end of the
rental period, the legal title of the leased asset is transferred to the customer through a
sale or gift contract.
In Sri Lanka, the most popular mode of effecting Islamic vehicle financing is
through ijārah and it is also the second most dominant product as a mode of financing
after Mudharabah, which has about a 20% share. It has achieved significant growth
during the past decade, despite the challenges it faced due to the Easter Sunday
attacks in 2019 and the COVID-19 pandemic. Vehicle financing is also offered
through diminishing Musharakah. The modus operandi of vehicle financing
processing at Islamic windows and leasing companies is almost similar to that
found at Islamic bank.
The Islamic banking and finance industry in Sri Lanka has been in existence for
over 20 years and is growing tremendously, attracting both Muslim and non-Muslim
customers. The amendment to Banking Act No. 30 of 1988 in 2005 facilitated the
operation of Islamic banks in the country.
There are a number of Islamic financial service providers in the form of invest-
ment and leasing companies and subsidiaries of financial institutions in Sri Lanka.
Currently, out of 33 banks, there is one full-fledged Islamic commercial bank and six
Islamic banking windows. With regard to leasing companies, there are seven
windows of financial institutions. In the case of takaful operators, there is one full-
fledged takaful company and two window operators.
The market value of the Islamic banking sector in Sri Lanka was estimated at
LKR100 billion in 2018. Amāna Bank is the only one full-fledged Islamic bank and
the leading provider of Islamic financial products and services in Sri Lanka to date.
Even though ijārah facility was accepted as a Sharī ah-compliant product, there is
still a question of whether the operation of ijārah fully complies with Sharī ah
principle.
Therefore, the objective of this research is to examine the practice of ijārah for
vehicle financing from the practitioners’ perspective and identify the difference
between the theory of ijārah facility based on Sharī ah principle and the real
operation practiced by the Islamic financial institutions in Sri Lanka. The research
also seeks to know how ijārah is legally operated in Sri Lanka.
Evaluation on the Practice of Ijarah for Vehicle Financing and. . . 337

2 A Review of the Literature

The word al-ijārah or simply ijārah is derived from the root word ajr which means
reward or wages for work done or services rendered. It means in fiqh a contract for
the hire of persons or services, or “usufruct” of a property. From the Islamic banking
point of view, al-ijārah usually refers to an Islamic leasing contract of an asset that is
leased to a customer for a period of time for rental payments.
The practical steps of financing leases in IFIs are as follows:
1. Initial agreement based on unilateral promise or bilateral promise where it
consists of the details of the processes right from purchase of an asset by the
bank, up to the purchase by the client, together with all of the requirements.
2. Islamic banks purchase the described good.
3. The bank then leases the good to the customer based on the agreed rental.
4. Takaful of the goods.
5. Separate promise where the lessee undertakes to purchase the leased good.
After the fulfilling all the conditions of the contract by the lessee, the transfer of
ownership to the lessee will take place with a new contract, either under sale or gift
contract.

3 Background and Development of Ijārah for Vehicle

Financing in Sri Lanka

The amendments of 2005 to the Banking Act No. 30 of 1988 and the competitive
environment within the conventional and Islamic banking systems of Sri Lanka
boosted a special advantage for the marketing of innovative products like ijārah
ending with ownership. Consequently, an ijārah facility has been introduced and
accepted as a mode of financing with more potential as compared to conventional
leasing. Ijārah has been used to finance many activities, including trade, commerce,
agriculture, and vehicles. However, it is predominantly used for vehicle financing.
Ijārah is the second most dominant product as a mode of financing in Sri Lanka,
which has about 20% share after Mudharabah (Fig. 1).
Amāna Bank was the first finance company that initiated an ijārah facility in 1997
in Sri Lanka. Its operation was then extended to other banks and finance companies.
At present, there are more than 29 financial institutions offering Islamic banking
and financial services in Sri Lanka. These are Islamic banks, Islamic windows, and
leasing companies. Of these institutions, about 13 offer ijārah facilities for vehicle
financing for individual and corporate customers. From these institutions, three
leading institutions have been selected as case studies, namely, Amana bank as an
Islamic bank, Annoor as an Islamic window, and Al-Falah as a leasing company.
They are as follows:
338 M. H. M. Abdullah and R. Hassan

Murabaha Wakala Qard

6% 1% Mudharabah
7% 21% Mudharabah
D Musharakah
13% Ijarah

Takaful

Musharakah
Ijarah
Musharakah 20% D Musharakah
14%
Murabaha

Wakala
Takaful
18% Source: RIU

Fig. 1 Products offered by Islamic financial institutions in Sri Lanka. Source: Islamic Finance -
Resaerch Intelligence Unit country update 2018: Sri Lanka

3.1 Islamic Bank

Amāna Bank is the only full-fledged Islamic bank in Sri Lanka to date. It emerged as
Amāna Investment Limited in 1997. The Central Bank of Sri Lanka granted a full
commercial license to set up Amāna Bank in October 2011, to be the first Islamic
bank in Sri Lanka. After the license, it took off successfully with 300,000 customers
and 32 branches nationwide.
The mechanism of ijārah for vehicle financing as provided by Amāna Bank is that
the bank purchases the vehicle at the request of the customer. The bank then rents it
to the customer for a specified period of time. The customer pays the rental, and at
the end of the rental period, the bank will gift it to the customer.

3.2 Islamic Windows of Conventional Banks

Annoor is an Islamic unit of the Bank of Ceylon, one of the wholly owned entities of
the government of Sri Lanka. It was established in 2009. BOC An-Noor is the brand
house for all Islamic banking products and services, including An-Noor Ijīrah
financing for vehicles and machinery.

3.3 Islamic Windows of Finance Companies

Al-Falah LOLC Finance (LOLC) launched its Islamic unit in 2007. Al-Falah offers
various types of products including Musāwamah and Mudārabah for a firm that
specializes in ijārah. It operates 147 branches island-wide.
Evaluation on the Practice of Ijarah for Vehicle Financing and. . . 339

4 Discussion and Analysis

The main objective of this study is to examine the practice of ijārah for vehicle
financing in Sri Lanka from legal and Sharī ah perspectives. In pursuit of this
objective, semi-structured interviews were conducted. Having examined the inter-
view transcript, the following issues are discussed:
– Practice of ijārah for vehicle financing
– Governing law for ijārah and Finance Leasing Act No. 56 of 2000
– Issues of implementing ijārah
– Ijārah industry in Sri Lanka: the challenges and opportunities
(a) Practice of Ijarah
The operation of ijārah is examined from the practitioner’s point of view. The
practitioners are bank officers, Sharī ah advisors and legal expert, and
non-practitioners like Sharī ah experts. Their opinions on the practice of ijārah for
vehicle financing are outlined as follows:
The first step of ijārah practice starts with approaching the customer at one of the
IFIs with the request to own a vehicle, and the customer enters into a promise to
purchase a vehicle. The IFIs then purchase the described vehicle and receive the title
of ownership from the vendor. Subsequently, the IFIs lease the vehicle to the
customer at a rate agreed upon for a period of time. At the end of the agreed period,
the IFIs transfer ownership of the leased vehicle to the customer by gift. This is the
general process undertaken for vehicle financing by the IFIs in Sri Lanka.
(b) Governing Law for Ijarah
The law that governs leasing transactions in Sri Lanka is the Finance Leasing Act
2000 (FLA). The FLA came into operation on August 1, 2001, to regulate and
monitor finance leasing businesses. It consists of 45 sections and is divided into four
parts of which the first part consists of registration of finance leasing businesses. The
second part specifies the duties of the lessor, lessee, and supplier. The third part
presents the powers of the director and officers. Lastly, the fourth part provides
miscellaneous. Conventional leasing is regulated under the Finance Leasing Act
2000 (FLA) which also governs ijārah transactions. It is observed that the FLA has
provisions to regulate basic procedures for effecting the ijārah transaction and most
provisions are not much of an obstacle to implementing ijārah contracts.
(c) Issues in Implementing Ijarah for Vehicle Financing
Having examined the practice of ijārah for vehicle financing, a number of issues
were identified. They are deposit payment, ownership, penalty in case of default, and
early settlement.
– Deposit Payment
A deposit payment is a sum of money held in trust when a vehicle is leased to
protect the vehicle owner against default by the customer and for the cost of repair in
relation to any damage. In Sri Lanka, the deposit on the vehicle is made based on the
340 M. H. M. Abdullah and R. Hassan

type of vehicle. If the vehicle is brand new, the IFIs purchase it directly from the
supplier. In this case, the customer should pay 50% of the total cost of the vehicle
under the quid line of the Central Bank of Sri Lanka. If the vehicle belongs to a third
party, the IFIs contribute 70% of the total cost of the vehicle. The customer sells his
own asset to IFIs on spot cash basis. In the case of ijārah lease back, then customer
enters into an ijārah contract for the same asset. All IFIs follow the same process
except Amana Bank where the vehicle is not given to the customer immediately, but
it is assigned to the customer after 12 months from signing the contract. This
procedure is not followed by Al-Falah leasing company.
– Ownership
Ownership is vital as it determines the rights and liabilities of the parties involved
in ijārah agreement. In ijārah facility, the ownership of the vehicle remains with IFIs.
As an owner, the IFIs will be responsible for maintaining the vehicle and bear all
costs associated therewith, unless the IFIs and customer themselves agree otherwise.
According to some interviewed Shariah scholars, any leasing contract that includes
such agreement and exempts the IFIs from all these obligations violates the Shariah
principle. It is noticed that in the current ijārah practice, almost all liabilities are
assumed by the customer. However, the IFIs, on the other hand, may delegate to the
customer the responsibility of bearing the cost associated with maintenance and
takaful protection cost, which will be deducted when the contract expires.
– Penalty in Case of Default
In the case of late payment, it is noticed that there are two different types of
practices from the institutions in Sri Lanka. Amana bank which is the only full-
fledged Islamic bank in Sri Lanka does not impose penalty for late payment, while
other institutions like Islamic windows and leasing companies impose the late
penalty charges. With regard to the repossession, when the customer fails to comply
with ijārah agreement, the bank is entitled to recover possession of the vehicle
thorough the court, and upon repossession of the vehicle, the bank sells it thorough
a public auction. If proceeds from the sale of the vehicle are insufficient to pay the
outstanding amount due, the bank will recover the shortfall from the customer. In
addition to that, the customer will be responsible for paying the auction expenses.
– Early Settlement
In the case of early settlement, the ijārah contract ends, and the sale contract is
executed to sell the vehicle. A rebate is given for early settlement. This is the
common practice in IFIs, as noticed by the researcher. However, a slight difference
is viewed as Al-Falah imposes a 10% penalty charge in the event the customer
breaches the contract. This amount is added to their profit.
(d) Ijārah Industry in Sri Lanka: Challenges and Opportunities
The Islamic financial institutions in Sri Lanka face remarkable common chal-
lenges while offering ijārah for vehicle financing.
Evaluation on the Practice of Ijarah for Vehicle Financing and. . . 341

4.1 Lack of Awareness on Ijārah Product

Lack of awareness and understanding of the ijārah product is a major challenge for
IFIs in Sri Lanka. The majority of customers do not really differentiate between
ijārah and a conventional lease due to their close similarity in operation, such as
documentation and legal action. As a result, conventional lease is preferred due to
the long presence, less complication, more convenience, and high-quality services
offered in the leasing industry.

4.2 Inexperienced Bank Officers and a Lack of Sharī ah

experts

Lack of experience among bank officers is another serious challenge in the operation
of an ijārah facility. The majority of bank officers are unaware of the ijārah facility,
in terms of how it works and how it differs from a conventional lease. This situation
leads the customers to prefer conventional lease.

4.3 Stiff Competition in the Market

The conventional leasing industry has a well-established reputation in the market.

The customers are already familiar with conventional lease with more confidence.
The challenge is further exacerbated, especially when many customers continue to
perceive ijārah and conventional lease are almost the same products except in their
use of Arabic name to disguise the current practice.

4.4 Threat from an Extremist Buddhist Group

Sri Lanka has witnessed ethnoreligious tensions since the civil war’s termination.
Buddhist monks have been heavily involved in spreading hate propaganda against
Muslims, targeting Islamic law and its related activities. The Bodu Bala Sena (BBS)
is a Sinhalese nationalist and extremist organization that has consistently opposed
and demanded the government authorities to ban the Islamic financial system in Sri
Lanka, claiming that Islamic finance is a mechanism for funding terror, extremism,
and fundamentalism.
342 M. H. M. Abdullah and R. Hassan

4.5 Opportunities of Ijarah for Vehicle Financing

Ijārah has a very bright future in Sri Lanka due to various aspects, such as religious
inclination. Religiosity has an influence on customers. In addition to that, Muslims in
Sri Lanka are well known as a mercantile and entrepreneurial community. Even
though they are the third-largest ethnic community, they play a prominent role in the
country’s economy. It is claimed that the wealth of Muslims surpasses their propor-
tion of the population as they control approximately 30% of businesses in the
country while accounting for only 9.3% of the national population.

5 Conclusion and Recommendation

The research has presented an in-depth study on ijārah for vehicle financing in the
light of Sri Lankan experience. It is considered an initial attempt at gaining a
comprehensive understanding of ijārah facilities as practiced in Islamic financial
institutions in Sri Lanka, from a practical point of view. Three leading institutions
have been selected as a case study among three types of financial institutions,
namely, Amana bank as an Islamic bank, Annoor as an Islamic window, and
Al-Falah as a leasing company.
The findings of this study indicate that most of the practices are in line with Sharī
ah-requirements. However, there are some differences between the three selected
institutions, such as penalty charges in the event of a default, deposit payment, and
maintenance responsibility.
Additionally, Islamic financial institutions in Sri Lanka face remarkable common
challenges while offering ijārah for vehicle financing, such as lack of awareness of
the product, inexperienced bank officers, stiff competition in the market, and the
threat of extremist Buddhist groups.
Based on the discussion above, this research proposes some recommendations
that can be of significant use to Islamic financial institutions operating in Sri Lanka if
applied in the proper manner.
1. The Sharī ah framework for ijārah can be based upon the Finance Leasing Act
2000 since it has been in line with Sharī ah requirements.
2. Islamic financial institutions offering ijārah are highly recommended to standard-
ize the procedure. The research observes that each institution has a specific Sharī
ah framework. Therefore, clear and standard guidelines must be designed to
describe how ijārah is practiced in the light of a legal and Sharī ah framework.
3. Islamic financial institutions must raise the level of their customer service. In
order to penetrate the conventional leasing industry, there is a need to provide
sufficient training and adequate knowledge about the ijārah product to the parties
who are directly involved in it.
Evaluation on the Practice of Ijarah for Vehicle Financing and. . . 343

4. Marketing ijārah facility through rigorous publicity is another important aspect.

In order to enhance the product, awareness programs should be conducted for the
public to alleviate their confusion and skepticism about the authenticity of ijārah.
Enhancing Access to Finance Amongst
Asnaf Micro Entrepreneurs: How Can
Islamic Fintech in Zakat Institutions Play
a Role?

Farah Farhana Jauhari , Syarah Syahira Mohd Yusoff ,

and Salina Kassim

Abstract While the ideal case is that micro entrepreneurs should gain easy access to
finance as they require more financial supports, traditional financial institutions often
reject their financing applications due to the high risk associated with this segment.
Thus, an alternative channel to enable micro entrepreneurs to gain access to financ-
ing is urgently needed. This study aims to explore the potential application of Islamic
FinTech to expand financing outreach in zakat institutions. In achieving its objec-
tives, this study examines the current state of microfinancing which includes the
market size and players, existing financing schemes available, current issues and
challenges facing microfinancing providers and potential FinTech applications that
can be adopted by the microfinancing industry, particularly the zakat institutions. A
critical analysis of the market is important as a starting point in comprehending
Asnaf micro entrepreneurs who are facing this financial difficulty. It is believed that
zakat institutions can play an effective role in enhancing access to finance for the
underserved. This study is only limited to the Malaysian context but can be further
extended in more comprehensive empirical research. The findings will assist zakat
institutions in formulating their FinTech financing strategy and provide an alterna-
tive approach to improve micro entrepreneurs’ access to finance as well as their
repayment capability.

1 Introduction

The largest group of micro, small and medium enterprise (MSME) establishments is
the micro enterprises, with more than 950,000 ventures as of 2021 (Department of
Statistics Malaysia 2022). Asnaf micro entrepreneurs, on the other hand, refers to
Asnaf who are involved in owning a micro business, full time, whether registered or

F. F. Jauhari (✉) · S. S. M. Yusoff · S. Kassim

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Selangor, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 345
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_31
346 F. F. Jauhari et al.

unregistered and dependent on the business for the source of income. Often left out
from traditional financing, lack of access to finance becomes a hurdle for them to
grow in the market. Because of this, efforts have been made to allocate zakat in the
form of capital assistance for these Asnaf micro entrepreneurs. Microfinance refers
to the activity or business that provides financial services, such as small loans, to
poor people or new businesses that cannot use traditional banking services, usually
in developing countries.
FinTech, on the other hand, has become a game changer to facilitate and reshape
the microfinance industry to be more pragmatic and more accessible for the under-
served. According to Mufti Faraz Adam, Islamic Fintech is the use of financial
technologies in delivering products and services that are Shari’ah-compliant through
digital platforms with innovative use experiences and user interfaces (Adam 2021).
Deployment of FinTech in Islamic financial services brings about huge opportunities
for disintermediation of services that promotes transparency and introduces new
cutting-edge financial service business models to promote financial inclusion and
inculcate innovation (Securities Commission and The World Bank Group 2020).
Malaysia provides a good ecosystem for Islamic FinTech to flourish based on the full
support by the government, proactiveness of regulators and supporting agencies,
emergence of home-grown or regional FinTech players and technology developers
and tech savviness of consumers.
Consequently, this study aims to identify and explore the application of Islamic
FinTech and psychometric-based approaches to enhance access to finance amongst
Asnaf micro entrepreneurs. Specifically, the objectives of this study are to assess the
current state of microfinancing and to explore potential Islamic FinTech credit
applications that can be adopted for Asnaf entrepreneurs via microfinancing in
zakat institutions. The study is divided into four sections, namely, a brief introduc-
tion of the topic, a literature review, research methodology and research findings.
The literature review discussed previous studies conducted on access to finance for
Asnaf micro entrepreneurs, Islamic FinTech and its applications in the
microfinancing industry, followed by methodology adopted for this research and
findings that can be further broken down into four parts: the estimated size of Asnaf
micro entrepreneurs, available microfinancing providers, current weaknesses of each
provider and potential Islamic FinTech solution for zakat institutions.

2 Literature Review

2.1 Access to Finance for Asnaf Micro Entrepreneurs from

Zakat Institutions

Zakat organisations have applied various methods and approaches in channelling the
donation to rightful beneficiaries known as the ‘Asnaf’ which includes productive
capital assistance that allows the lawful beneficiary to become self-sufficient from
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How. . . 347

zakat support by engaging in commercial activity. The goal of productive aid is to

raise Asnaf’s income beyond the poverty line by providing early business capital in
the form of cash or equipment (Abdul Halim et al. 2012). In addition, the long-term
purpose of this programme is to generate and grow competitive Muslim entrepre-
neurs whereby zakat capital help would be utilised to establish or sustain a business
by Asnaf who match specific criteria (Ramli et al. 2011). Therefore, Asnaf entre-
preneurs can generally be understood as a group of Asnaf that matched preset
conditions, especially in the poor and needy group, who wants to transform them-
selves from being non-productive Asnaf into productive Asnaf through entrepre-
neurship (Abang Abai 2020). Eventually, these Asnaf will not only break the vicious
cycle of poverty but become zakat contributors themselves.
The question arises as to whether these productive capital assistance or
microfinancing would be in the form of Qard Hasan that requires repayment
although similar facilities which are unconditional to the Asnaf have been
established for so long. The institution of zakat is prepared to carry out Qard-
based microfinancing, according to a semi-structured interview with five
microfinance officers and five zakat officials from zakat institutions in order to
prevent riba and financial failure resulting from lack of accountability in utilising
the ‘free’ financing efficiently. However, most zakat institutions in Malaysia are
silent on the fatwa and provide unconditional capital to the Asnaf (Adnan 2015) due
to the issue of Tamlik, immediate fulfilment, not in practice during prophet PBUH
and companions’ time and consideration of sadd al-dzara’i (blocking the means).
Thus, this study will consider the current practice of microfinancing with no
settlement required.
It seems that the issue of financial or business failure is quite peculiar amongst
microfinancing recipients compared to entrepreneurs from other financial institu-
tions, Amanah Ikhtiar Malaysia (AIM), and can be mitigated if the selection process
of entrepreneurs is based on certain conditions and criteria to become eligible for the
assistance (Adnan et al. 2021). Lack of motivation is an essential factor in deter-
mining whether an entrepreneur will be successful or not. Some academicians have
questioned whether motivation serves as the primary factor explaining entrepreneur-
ial activity (Boldureanu et al. 2020; Hashim et al. 2020; Sahedan et al. 2019). Sadly,
the Asnaf’s motivation is low since they are inherently pessimists and have been
taught that business capital aid is a chance to avoid poverty in a short-term period
rather than a more sustainable source of income (Rahman et al. 2018).
According to research, successful entrepreneurs are inclined towards entrepre-
neurship to some extent, are prepared to take calculated risks to grow their busi-
nesses and have original marketing strategies. Additionally, they exhibit a certain
amount of innovation in the business world, continually envision the future of their
company and take ownership of it. Moreover, the findings indicate that successful
Asnaf exhibits above-average levels of product innovation. It is safe to say that
internal factors or attitudes are the most significant influence of a successful
entrepreneurs.
Other external factors may include the number of trainings acquired (Adnan et al.
2021; Afif Muhamat et al. 2013; Mohd Ali et al. 2015). According to research done
348 F. F. Jauhari et al.

on a sample from Lembaga Zakat Selangor (LZS), factors including knowledge,

capital and training may typically have an impact on how successful the Asnaf
business programme is.

2.2 Islamic FinTech for Asnaf Micro Entrepreneurs

The Malaysian FinTech industry keeps flourishing thanks to favourable legislative

conditions, rising entrepreneurial community and a fast-expanding digital populace.
There is room for more and more FinTech start-ups to proliferate due to the rising
need for better and more inclusive financial services.
According to the Malaysia FinTech Report 2022, Malaysia is preparing to take
the top spot in Islamic Fintech globally. Malaysia, which ranks first in terms of
market maturity and is amongst the top five Islamic FinTech markets based on
transaction volume, is at the centre of this tremendous expansion. Recognising the
potential of the Islamic FinTech market, the Malaysian government and authorities
have been taking steps to promote the development of this sector.
Aside from the two digital banks and a buy now pay later (BNPL) platform, there
are currently 16 fully Islamic FinTech players, which is an additional of five players
in 2021. Comprising of 5% of the total FinTech players locally, there is a lot to keep
up with its conventional peers. Championing digital financial inclusion, the industry
is proud as almost half of the Islamic FinTech players are offering microfinance and
small and medium enterprise (SME) financing as well as adopting Islamic social
finance instruments in contrast to conventional counterparts.
Digital transformation (DX) is rapidly shifting the financial industry starting with
360-degree changes in traditional incumbents. Zakat as catalyst to social and finan-
cial inclusion are also on the race in adjusting towards the current FinTech era. This
is evident from both ASEAN countries, Malaysia and Indonesia, which are quite
advanced in advocating DX as compared to the other Muslim nations. The technol-
ogy system has been adopted by majority of zakat institutions in Malaysia, espe-
cially with regards to zakat payment. Online payment, mobile applications, online
dashboard, artificial intelligence and even aggregator are some of the FinTech
innovations adopted by these institutions. However, there are still certain gaps in
the use of technology for zakat distributions, public reporting of zakat funds and
awareness via online information (Mohd Salleh and Chowdhury 2020).
On the other note, academic research on some rule-based or machine learning
alternative-based scoring to assist zakat institutions in deciding the genuine appli-
cation for microfinance has not been conducted. Perhaps this is due to the newness of
this FinTech applications and commercial microfinancing players have already
started to implement it. To date, there are no scientific literatures that discuss
about psychometric credit scoring in detail except for empirical studies to test the
effectiveness of the model in accurately predicting customer repayment capability.
Industry pioneer like EFL garnered interest from academia and policymakers with
regards to its effectiveness in predicting repayment capability in Peru (Arráiz et al.
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How. . . 349

2017; Sifrain 2020). The psychometric test has reduced the risk of the loan portfolio
of current banked entrepreneurs with credit history and offer financing to those
applications who were rejected based on the traditional rule book (Arráiz et al.
2017). Machine learning-based analysis complementing the analytical workflow of
psychological experiments can maximise precision and minimise repeatability issues
(Orrù et al. 2020). Less privacy concern is one of the advantages of psychometric
assessment compared to other types of alternative credit scoring which require third-
party data sources (Saul fine, n.d.).

3 Methodology

Exploratory research, the spirit of excellent research, is an endeavour to uncover

something new and intriguing through working through a research topic. Explor-
atory studies, a sort of exploratory research, are divided into two types: those that
conduct a preliminary initial examination of a new issue and those that suggest new
ideas or develop new hypotheses on an existing topic (Swedberg 2020). This study is
exploratory in nature to explore new Islamic FinTech application to enhance access
to finance amongst Asnaf micro enterprises. Employing qualitative research, specif-
ically document analysis, is a systematic procedure for reviewing or evaluating
documents, both printed and electronic (computer-based and Internet-transmitted)
material (Corbin and Strauss 2012; Rapley 2007). Journal articles; book chapters;
conference proceedings; reports published by governmental agencies, private insti-
tutions, or professional bodies; information from websites; and newspaper articles
are amongst sources utilised. It is essential for an academician to keep up with
industry trend particularly on the emergence of new unconventional microfinance
players to ensure a holistic ecosystem was covered in the research. Thematic coding
is then produced by capturing or recognising portions of text that are related by a
common topic or concept, to categorise the content and thereby develop a ‘frame-
work of thematic ideas about it’ (Gibbs 2008).

4 Findings

4.1 Microfinancing Industry: Profiling of Asnaf Micro

Entrepreneurs and Existing Islamic Microfinancing
Products in Malaysia

The term ‘B40’ or Bottom 40 refers to low-income households, which are mainly the
Bumiputera community amounting to 2.91 million people in Malaysia and contrib-
ute to only 16% of the total household income (Department of Statistics Malaysia
2020). At present, there are no exact figures on how many B40 entrepreneurs are
350 F. F. Jauhari et al.

Fig. 1 Estimated market

size for B40 entrepreneurs.
Source: Author’s own

there in the country. However, they can be part of the micro enterprises in the formal
sector or own account workers in the informal sector. More than 950,000 active
micro enterprises are out there which includes those who are only registered with the
local councils and associations and the remaining 900,000 in the informal sector.
The market size can be estimated in Fig. 1. The purple region represents the
estimated market size for B40 entrepreneurs that comprises those registered in
formal plus those in the informal sectors (Table 1).

4.2 Islamic Microfinancing Providers’ Weaknesses and Gaps

Ethical and commercialisation issues, sustainability of funding sources and the

concern on irresponsible group members to default payment are some of the most
relevant and pertinent issues to AIM as the number one microfinancing institution in
the country (Kassim and Hassan 2018). Back in 2021, there are news sources
claiming that AIM is in the midst of privatisation that will cause a mission drift
due to accrued debt to the government, but it was highly denied by the management.
Instead, AIM has been in talks with several companies to establish a digital bank but
did not materialise. In terms of accumulated debt, AIM has only managed to settle
out 25% of its loan to the government since 1996 (Bernama 2021). In addition,
thanks to the peer pressure mechanism that contributed to the low non-performing
loan (NPL) rate, the dissatisfaction amongst members of the group financing is a
consideration when a study proved that this is the main issue faced by existing AIM
borrowers. They have to dig their own money to pay for others’ missed repayment
and promote unfair treatment (Kassim and Hassan 2018). On the other hand, Tekun
experienced a quite high non-performing financing (NPF) rate amounting to 38% in
financial year 2017 (Azhar 2017). Surprisingly, no latest information was provided
on the latest NPF incurred by Tekun since then. Earlier, there were also some
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How. . . 351

Table 1 Comparison of existing Islamic microfinancing products in Malaysia

Estimated no. of
beneficiaries since
Products Institutions Summary launched
Debt market Traditional microfinance AIM and Tekun have AIM – 300,000.
institutions: Amanah been championing TEKUN – 420,925.
Ikhtiar Malaysia, Tekun microfinancing in the BSN – 88,000 (2021).
and Yayasan Usaha past three decades, while MEF – 52,000 consist
Maju BSN has been founded of SMEs and micro
Traditional financial in 1974. The higher end enterprises (2021).
institutions (FIs)/devel- of micro enterprises CGC BizMikro-i –
opment finance institu- which is registered with 304 (2021).
tions (DFIs): SSM is with BSN.
BNM micro enterprise BNM’s MEF includes
fund (MEF) (11 partici- self-employed individ-
pating FIs/DFIs), Bank uals, gig workers on
Simpanan Nasional digital platforms and
(BSN) and credit guar- participants of the
antee corporation (CGC) iTEKAD programme
which will be disbursed
by participating
FIs/DFIs. CGC provides
for the bulk of BSN’s
microfinancing funds
and MEF funds.
CGC’s biz-Mikro-i was
launched in 2020 using
the psychometric credit
scoring approach.
Capital market Peer to peer financing Approved by SC to be 197 fully funded notes
platform (P2P): one of the P2P platforms (all schemes – Shariah +
MicroLEAP in 2019, microLEAP is conventional).
the first shariah-
compliant and conven-
tional P2P platform that
focuses on the registered
micro enterprises. It also
offers a group financing
scheme modelled from
the Grameen group
model.
Social finance Zakat institutions Capital assistance to More than 1000 –
Asnaf for businesses has 484 (2021) Kelantan
been established since and 400 (2019) wilayah
1973 but started to be Persekutuan. Overall
prioritised in 1986 via financing ranges from
skim Bantuan Jaya Diri RM1,000 to RM10,000
by Lembaga zakat negeri for all 13 zakat
Kedah. All zakat institu- institutions.
tions in Malaysia pro-
vided this type of
assistance with majority
of them not requiring
repayment.
(continued)
352 F. F. Jauhari et al.

Table 1 (continued)
Estimated no. of
beneficiaries since
Products Institutions Summary launched
Crowdfunding Donation crowdfunding: MicroBangkit-i is part of MicroBangkit-i –
Sadaqa house by Bank donation crowdfunding 292 (as of April 2022).
Islam initiatives by Bank Islam PitchIN – 43 fully
Reward crowdfunding: to finance for registered funded projects.
PitchIN micro enterprises. Bor-
rowers are required to
undertake ‘Ikrar
Peminjam program
Pembiayaan Mikro” to
embrace Islamic values
such as Sadaqah and to
perform dhuha prayers
and surah Waqiah
recital.
As for PitchIN, ideas and
projects are pitched to
the public for funds in
reward crowdfunding. In
exchange, those who
support the idea (via
pledges) will get rewards
from project owners. It
has started since 2012.
Ar-Rahnu FIs/MFIs: RHB, CIMB, Terengganu was the first Bank Rakyat – 240,000
Bank Rakyat, Bank state to introduce this customers (including
Islam, Agrobank, Bank scheme through the individuals).
Muamalat and Tekun Muassasah Gadaian
Non-FIs: Pos Malaysia Islam (MGIT) on
and YBU-YaPEIM 23 January 1992,
Public gold, Ar-Rahnu followed by Kelantan
X’change through the Permodalan
Kelantan Berhad (PKB),
while Yayasan
Pembangunan Ekonomi
Islam Malaysia
(Yapeim) started to offer
the scheme at the end of
1992 and collaborated
with Bank Rakyat,
BIMB and AgroBank.
Effective tools for
women entrepreneurs.
Others Islamic personal financ- A personal financing is a Malaysian banking sys-
ing by FIs/DFIs line of credit provided by tem’s personal use
Licensed moneylenders banks and lending com- financing/loan segment
panies in Malaysia to as of end march (which
help a borrower ease into includes data from
investments, consolidate DFIs) stood at
(continued)
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How. . . 353

Table 1 (continued)
Estimated no. of
beneficiaries since
Products Institutions Summary launched
debt, pay for car repairs RM103.55 billion.
and home renovation Bank Rakyat’s market
and for business pur- share is 57.1%. Eight
pose. As one of the fast new online money-
loans that banks and lenders with 4 of them
other financial institu- owned by public-listed
tions offer, personal companies including
loans give borrowers a Axiata Digital’s
quick way to get cash. Aspirasi or rebranded as
Licensed by Ministry of boost credit, on top of
Urban Wellbeing, hous- the 4572 traditional
ing and local govern- licensed players. Boost
ment (KPKT), registered credit served more than
moneylenders disburse 6200 SMEs in Malaysia
fast loans, require less and Indonesia in 2021.
stringent credit evalua-
tion than the FIs and
offer flexible financing
terms.

loopholes in the administration as reported by the Auditor General in 2017. There-

fore, the risk of corporate governance issue is still there.
Although BNM MEF, personal financing and money lender come with faster
disbursement, high financing rate is associated with them. This might be burden-
some to micro enterprises because BNM MEF might charge as high as 30% per
annum except for a 4% fixed rate charged by Bank Islam through iTEKAD (BNM
2020). Still, majority of Asnaf micro entrepreneurs might not be eligible because it
requires SSM-registered micro enterprises. Money lenders, on the other hand, have
evolved with the rapid FinTech applications in the financial industry. The emergence
of big players, particularly those owned by public-listed companies, has become a
game changer in the microfinancing industry. Aspirasi was founded in 2019, and the
company offers end-to-end digital and AI-driven microfinancing and micro-
insurance solutions. Even though money lenders also charge quite a high rate, it
only can charge up to 18% as per guidelines by the Ministry of Housing and Local
Government of Malaysia (KPKT). The arising issue is that it is not heavily regulated
as FIs and DFIs and KPKT might have no extensive supervision and monitoring
experience as BNM to handle a large number of transactions.
CGC’s BizMikro-i has progressed to be extremely relevant during this challeng-
ing period as CGC to assist MSMEs to navigate through the COVID-19 pandemic,
enabling them to bounce back stronger. Launched in 2020, the BizMikro-i scheme is
a term financing option for working capital that is based on the commodity
Murabahah Shariah principle. It makes it possible to integrate the underserved and
unserved MSMEs into the established financial ecosystem. In order to evaluate the
354 F. F. Jauhari et al.

applicant’s risk profile when processing an MSME financing application, this

scheme uses a special credit risk assessment instrument. In the form of questions,
this evaluation tool gathers psychographic information as predictions. The data is
subsequently subjected to the application of several scientific fields and FinTech
element, including behavioural science, psychometrics, artificial intelligence and
machine learning (Bernama 2021).
Bank Simpanan Nasional, MicroLEAP and MikroBangkit cater to higher-end
micro enterprises who are registered with SSM. Both MicroLEAP and
MikroBangkit utilised crowdfunding platform to source for funding with the former
as a P2P operator and the latter that uses donation crowdfunding platform. However,
considering the social financing rather than commercial component in
MikroBangkit, it should be channelled to lower-end micro, particularly the
unregistered Asnaf micro entrepreneurs, to achieve its societal purpose.
PitchIN is well known for its equity crowdfunding space rather than the reward
crowdfunding platform. There are quite active issuers but there might be a low
success rate either due to low awareness or targeted rewards which might not be
intriguing enough to the public.
Ar-Rahnu is also a very good alternative to microfinancing needs especially with
low storage cost and high margin of financing offered. A survey discovered that cost
(lowest service fees) is one of the main reasons microbusiness owners deal with
Ar-Rahnu (Hadiyan et al. 2020). Despite this, quite large amount of gold collateral is
essential to obtain at least RM5,000 and not all can afford to own such jewellery.
Furthermore, Ar-Rahnu mainly targets woman entrepreneurs only.

4.2.1 Zakat Institutions

From the available literatures compiled including websites and reports for four zakat
institutions, it can be deduced that too little amount has been spent for microfinance
out of the total zakat distribution which is equivalent to only less than 2%. It is
unclear as to why there is less focus on microfinance when there is a financing gap
particularly for the unregistered Asnaf micro entrepreneurs.
Second, there is a high failure rate amongst 687 Asnaf who received capital
assistance as only 7% manage to surpass the kifayah limit based on capital classi-
fication from the RM1,000 to more than RM20,000 bracket (Ramli et al. 2011). The
most prominent reason is their success depends heavily on attitudes and ambitions
shown to become a thriving entrepreneur (Ahmad Yusri Yaacob et al. 2015; Hadi
and Borhan 2013; Ramli et al. 2011; Yahaya 2019). Ramli et al. (2011) also
suggested that before providing capital, it is important to understand recipients’
attitudes and that the type and amount of aid should be appropriate for each recipient.
Some people are born with entrepreneurial capabilities while some needs to be
nurtured. Innovative and risk takers are amongst the qualities of a good entrepreneur
and significantly affect business success.
Third is the lack of commitment from Asnaf for the free money obtained and
whether the fund is solely utilised for business or immediate living purpose. This is
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How. . . 355

due to the absence of repayment element resulting in irresponsible money taking.

Based on the resolution of the Round Table Discussion of Zakat Funds Application
in Takaful Micro and Micro-Credit 2018, zakat can be developed as a source for
micro-credit to compensate for the government’s lack of injection for additional
resources with repayment term (Adnan et al. 2021), but majority of zakat institutions
do not have fatwa issued pertaining this matter.
As for external factors involving zakat institutions itself, three main reasons
include lack of manpower, shortage of expertise and absence of monitoring (Rahman
et al. 2018).

4.3 Role of Islamic Fintech Credit in Zakat Institutions

as Alternative Microfinancing Provider

From the gaps identified in the current microfinance industry, zakat can play a very
significant role in boosting the lives of Asnaf micro entrepreneurs but via FinTech-
enabled microfinancing. It is witnessed from existing practice of some
microfinancing players that FinTech can bring the industry into greater heights by
expanding outreach, promoting efficiency and transparency.
The psychometric-based approach in determining Asnaf’s entrepreneurial capa-
bility may reduce the business failure rate through its first filtering process as it
mainly concerns the attitudes and cognitive aspects of the applicants with the aid of
the machine learning model upon its algorithm. Quite a number of studies has
established a significant relationship between a person’s personality and entrepre-
neurial qualities towards the success rate of a business. Personality is very important;
even the globally recognised group financing model becomes problematic when
there is an irresponsible person in that group. Zakat institutions might have a similar
aptitude test as a must to be taken for potential applicants (Shiyuti and Al-Habshi
2018), but it is not as comprehensive and systematic enough or customised for Asnaf
market. There should be validation on whether the questionnaires are sufficient in
assisting funders to make informed decision. The aid of machine learning and
artificial intelligence will provide accuracy and excellent results, reducing redun-
dancy and wastage of resources. Besides, zakat institutions would extend outreach
by possibly reaching to more non-SSM-registered entrepreneurs.
Having a donation crowdfunding like what LZNK does is also very feasible.
Asnaf Care is a crowdfunding platform to provide financial aids in the form of zakat
to those directly affected by the COVID-19 pandemic. Donation can be in the form
of food items or cash (purchase of vouchers).
Majlis Agama Islam Kelantan (MAIK) is also ahead of other zakat institutions as
they embark on straight-through processing (STP), which substitutes manual pro-
cesses and tasks for automated ones. STP ensures that a business process or service
may be fully automated from start to finish, such as the application, servicing and
arrangement of a commercial financing. Enablers of these initiatives would be
356 F. F. Jauhari et al.

resources needed, be it capital, expertise and software. MAIK is able to make a leap
with the commitment to allocate the position of a chief information officer (CIO) and
chief digital officer (CDO) at the top of the institution. If that comes with the expense
of high cost and pose as a constrain, smart collaboration is a better move.

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Optimizing Digitalpreneurship through
Digital Skills and Platform Strategy
on MSMEs in Central Java

Diah Ayu Kusumawati and Pungky Lela Saputri

Abstract The new normal era brings a positive effect on the business world,
especially MSMEs that are taking advantage of digital information technology
development. An appropriate application of digital information technology can be
used as a supporting factor for business sustainability. Digitalpreneurship is an
entrepreneurship transformation that can take advantage of digitalization, including
the use and development of information technology. Many factors can support
optimizing the application of digitalpreneurship, namely, digital skills and platform
selection strategies. MSMEs’ readiness to become digital entrepreneurs starts from
readiness in digital skills and platform selection strategies. Adequate digital skills
and accuracy in platform selection strategy support the success of MSMEs in
digitalpreneurship. This research developed conceptual definitions and indicators
of digital skill and platform strategy variables that affect the optimization of
digitalpreneurship. The future research agenda will explain and aim at how to
prove the validity of a research proposal.

1 Introduction
1.1 Background

The recent new normal era has brought many changes in moving the wheels of the
economy back, which had been obstructed by the COVID-19 outbreak. MSME
actors also feel this impact. The sluggish economy at that time was also felt by
MSME actors when regulations and prohibitions were enacted during the pandemic.
MSME actors are not only silent to face these conditions but are starting to look for
strategies including using digital technology to develop their businesses. Since then,

D. A. Kusumawati (✉) · P. L. Saputri

Faculty of economics, Universitas Islam Sultan Agung (UNISSULA), Kota Semarang, Jawa
Tengah, Indonesia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 359
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_32
360 D. A. Kusumawati and P. L. Saputri

the digital business trend has started to develop in MSMEs and has become one of
the business opportunities that must be utilized as best as possible. Digital-based
entrepreneurship has had a tremendous impact on today’s business development.
Digital-based entrepreneurship or commonly called digitalpreneurship is built
through the Internet network with the support of platforms as service providers.
Digitalpreneurship is the sale of products and services through electronic networks
(Guthrie 2014). The development of this digital-based economy opens up vast
opportunities for entrepreneurs to create different business areas through electronic
commerce models (Turban et al. 2008).
The rapid development of digital entrepreneurship requires business actors to be
able to operate digital technology-based tools and systems. Therefore, digital skills
are needed to optimize these businesses. Digital skills are abilities and skills that are
carried out to take advantage of opportunities from information and communication
technology (ICT) to improve performance more effectively and efficiently (Leahy
and Wilson 2014; Hargittai and Shafer 2006). Moreover, choosing the right platform
is also important in the success of digitalpreneurship. The platform is one of the
scopes of digitalpreneurship. Digital platforms can be interpreted as a digital scope
that provides business opportunities and has good relationships between business
people and their customers (Hsieh and Wu 2018). Therefore, both will strengthen the
process of digitalpreneurship.

1.2 Objective

The rapid growth of digital-based MSMEs in Indonesia is one of the important forces
for economic growth in the current new normal era. This is the basis for this research
and the occurrence of the gap phenomenon, especially in Central Java SMEs. Most
MSMEs in Central Java have implemented digitalization in their businesses, but
MSME actors still lack digital skills and platform selection strategies in developing
their businesses. In addition, Kraus et al. (Kraus et al. 2019) stated that research on
digital entrepreneurship is still very limited, where the business focuses more on the
technology’s basic characteristics.
Therefore, based on the discussion on optimizing digitalpreneurship which is
affected by digital skills and platform strategy, as a first step, this research analyzes
the optimization of the application of digitalpreneurship through digital skills and
platform strategy. In addition, this research also analyzes and measures the dimen-
sions that exist in preparing future research to prove the validity of the indicator.
Optimizing Digitalpreneurship through Digital Skills and Platform. . . 361

2 Literature Review

2.1 Background Theory

Digital Skill

The transition period from a pandemic to a new normal requires business actors to be
able to adapt to the use of information and communication technology (ICT) to
support their business. MSME actors must be able to implement appropriate
technology-based strategies. The application of this technology-based strategy
must also be balanced with the readiness of MSME actors in their digital capabilities.
Digital ability or digital skill is an ability that is carried out to make the best use of the
opportunities provided by information and communication technology (ICT). Dig-
ital skills are also defined as skills in the use of computers and digital fields such as
the Internet, information, and communication technology by taking control to
operate and utilize them effectively and efficiently (Leahy and Wilson 2014);
(Hargittai and Shafer 2006). Therefore, it can be concluded that digital skills are
abilities and skills in understanding the digital scope and using a computer as a
controller for operational activities to be more effective and efficient. Digital skills
become a new way and strategy that needs to be prepared to explore, run, and build a
digital-based business. In measuring the level of digital skills, this conceptual
research uses four dimensions developed by (Van Deursen et al. 2016) which
include (1) digital engineering skills, (2) digital communication, (3) digital analysis,
and (4) thinking digital.

Platform Strategy

The emergence of digital technology has made the process and results of entrepre-
neurship unlimited. The unlimited process is related to the spatial and temporal
boundaries of entrepreneurial activity, such as “when and where the activity will be
carried out?,” while the unlimited results are related to the structural limits of
products and services (Nambisan 2017). Digital technology-based entrepreneurship
is formed from three basic elements including digital artifacts, digital platforms, and
digital infrastructure. Therefore, the right strategy is needed, especially in choosing a
digital platform as a supporter of digital technology-based entrepreneurship. Digital
technology-based entrepreneurship is from three basic elements including digital
artifacts, digital platforms, and digital infrastructure. Therefore, the right strategy is
needed, especially in choosing a digital platform as a supporter of digital technology-
based entrepreneurship. A digital platform is defined as a set of services and
architecture to accommodate complementary offerings including digital artifacts
(Parker et al. 2016; Tiwana et al. 2010). In Indonesia, several digital platforms
provide features for ordering food online, including Gojek, Grab, and Shopee
food. The three digital platforms have their respective advantages and disadvantages.
362 D. A. Kusumawati and P. L. Saputri

Zahra and Nambisan (Zahra and Nambisan 2011) stated that digital platforms
provide many opportunities for entrepreneurs, including complete product and
service involvement. The determination of a platform selection strategy that supports
digitalpreneurship must take into account the credibility of the website or platform.
According to (Fogg et al. 2002), the credibility of the website or platform is
important because, with this credibility, it will expect visitors to take several actions
starting from viewing promotions and filling out surveys to buying transactions.
There are ten dimensions that can measure the credibility of a website or platform,
such as accuracy of the information, real-world feel, expertise, trustworthiness,
contact information, design appearance, usability, timeliness, promotional materials,
and errors (Clewley et al. 2009). This conceptual research measures the implemen-
tation of the strategy platform applied by MSME actors, using dimensions such as
(1) accuracy of the information, (2) contact information, (3) display design, and
(4) promotional materials.

Digitalpreneurship

Rapid development is very clearly seen in today’s digital-based companies. The

rapid development of these digital-based companies is a driving force of demand and
competitive strength that comes from their customer’s wishes. Therefore, we need
the right business strategy to meet customer desires. One way is to apply
digitalpreneurship to an ongoing business or a new business that will be starting.
Digital entrepreneurship or digitalpreneurship is the process of creating a busi-
ness based on digital value through various digital techniques to support effective
business operations (Sahut et al. 2019). Another definition of digitalpreneurship,
according to Ulhøi (Ulhøi 2021), is a process of the use of digital technology
individually or in groups that are used to regulate the entrepreneurial process,
which includes the introduction of opportunities, exploration of seizures, and
exploitation. Therefore, it can be concluded that digitalpreneurship is a business
creation process using digital technology to manage business processes more effec-
tively and efficiently. Digitalpreneurship uses an offline-to-online (O2O) strategy
which is the basis for managing its business. O2O strategy is defined as using
strategies in online promotion and marketing and encouraging buyers and offline
consumption. According to Xing and Zhu (Xing and Zhu 2014), the dimensions
used to measure the O2O strategy include (1) building a network platform (building
a network on an open business platform to share information), (2) providing per-
sonalized experiences (providing personal information to attract consumers),
(3) strengthening personnel training (strengthening and sharpening the ability to
master digital media), and (4) safeguard transaction security (maintaining the secu-
rity factor and convenience of transactions). Therefore, in measuring the ability of
MSMEs to become businesses that have successfully applied digitalization
(digitalpreneurship), this conceptual research used the following dimensions:
Optimizing Digitalpreneurship through Digital Skills and Platform. . . 363

(1) build a network platform, (2) provide personalized experiences, (3) strengthen
personnel training, and (4) safeguard transaction security.

2.2 Previous Studies

Previous studies can strengthen the hypotheses of this conceptual research, including
Berman (Berman 2012). Based on his research, a business must focus on customer
value, use digital technology, and collaborate to achieve success in digital transfor-
mation. The research from Nambisan (Nambisan 2017) stated that the success of
digital entrepreneurship comes from the platform’s possible interactions. In addition,
it is supported by research from Oumlil and Juiz (Oumlil and Juiz 2018) that the ease
of using digital platforms can optimize digital businesses. Research conducted by
Dutot and Van Horne (Dutot and Van Horne 2015) shows that businesses
implementing digital entrepreneurial processes can form networks and increase
innovation. The similar results from Spiegel et al. (Spiegel et al. 2016) showed
that building a digital entrepreneurship process can make success in the business.

2.3 Conceptual Framework

Based on the study of the digital skills theory, platform strategy, and
digitalpreneurship and supported by previous studies, the following conceptual
model can be described (Fig. 1):

Digital Skill
(X1) H1

Digitalpreneurship
(Y2)
H3

H2
Platform Strategy
(Y1)

Fig. 1 Conceptual framework. H1: Digital skills have a positive effect on Digitalpreneurship. H2:
Platform strategy has a positive effect on Digitalpreneurship. H3: Digital skills has a positive effect
on Digitalpreneurship through Platform strategy
364 D. A. Kusumawati and P. L. Saputri

3 Conclusion and Recommendation

3.1 Conclusion

This conceptual research has discussed theoretical studies as research data that was
supported by previous studies. It can be concluded that the optimization of
digitalpreneurship in MSMEs can be affected by the digital skills possessed by
employees and the platform strategy applied by the business. If an employee at an
MSME has good digital skills and the MSME implements the right platform
strategy, then the MSME is more capable and ready to become a digitalization-
based MSME (digitalpreneurship).

3.2 Recommendation

In this conceptual research, the authors want to identify how far the implications of
digital skills and platform strategy are in optimizing digitalpreneurship. Digital skills
and platform strategy are skills that must be possessed by an MSME when they want
to transform their business into digitalpreneurship. Therefore, they can maintain
business continuity in the current digital era. This is the basic concept of this future
research. Furthermore, this article aims to test the conceptual model empirically with
a sample that will be carried out on micro, small, and medium enterprises (MSMEs)
in Central Java, Indonesia.

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Sharia Investment Decision-Making:
Gender Lens Investing, Fear of Missing out,
and Islamic Financial Literation

Puspa Devi Maharani, Lathiefa Rusli, Kurnia Rahman Abadi,

and Siti Syarah Fadhilah

Abstract Gender lens investing (GLI) has garnered increasing global attention in
recent years. Gender lens investing falls under the gender equality targets contained
in Sustainable Development Goals (SDGs) by 2030. Gender fens investing is an
investment strategy that integrates gender analysis into investment analysis of sharia
investment decision-making (SIDM) and behavior. Fear of missing out (FOMO) is
an investment strategy that integrates analysis of investor behavior in decision-
making and investment behavior based on trends and joining friends. Meanwhile,
Islamic financial literacy (IFL) is an individual’s understanding of fund manage-
ment, contracts in Islamic finance, and investment. This study aims to determine and
measure the effect of GLI, FOMO, and ILF on SIDM. The research data is primary
data (questionnaire) with a total sample of 128 respondents who are Islamic capital
market investors. The method used is a quantitative method, with the help of the
SPSS application in processing data. The results show that there is an influence
between FOMO and IFL on sharia SIDM. Meanwhile, GLI has no effect on
sharia SIDM.

1 Introduction

The era of the industrial revolution 4.0 is a revolution in automation and collabora-
tion of cyber technology that can facilitate one’s activities quickly. The perceived
impact is that it makes it easier for new investors to invest online. One way to
improve one’s welfare can be achieved by investing. A person carries out investment
activities with the aim of a better life in the future (Przybylski et al. 2013; Setyowati
et al. 2018). Meanwhile, the sharia financial sector, which is based on profit sharing,
is more resistant to crises and has managed to get through the crisis well. The rapid
development of Islamic investment in financial markets in Indonesia and globally

P. D. Maharani (✉) · L. Rusli · K. R. Abadi · S. S. Fadhilah

University of Darussalam Gontor, Jawa Timur, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 367
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_33
368 P. D. Maharani et al.

Fig. 1 Development of
Sharia Stocks. Source: OJK
Sharia Stock Statistics 2022

has an impact on reducing the role of conventional finance. According to data

released by the Financial Services Authority/Otoritas Jasa Keuangan (OJK) as of
July 1, 2022, it shows an increase every year from 2017 to 2022. In 2017, period
1 showed 351, 2018 showed 381, 2019 showed 408, and 2020 showed 457. In 2022,
the first quarter recorded the List of Sharia Securities/Daftar Efek Syariah (DES) of
524, which is higher than the previous year which was only 484 (Statistik Saham
Syariah - Juni 2022 (ojk.go.id)) (Fig. 1).
Sharia stock investment decision-making is based on Islamic financial literacy
(IFL), fear of missing out (FOMO), and gender lens investing (GLI). Islamic
financial literacy is an individual’s understanding of fund management and contracts
in Islamic finance and investment (Abidin et al. 2018). Islamic financial literacy is
knowledge about Islamic finance used in financial decision-making (Hidajat and
Hamdani 2016). Based on the OJK’s National Financial Literacy Survey/Survei
Nasional Literasi Keuangan (SNLK) in 2019, the financial literacy rate is 38.03%
in millennials who do not have good enough financial literacy. According to OECD
(Organization for Economic Co-operation and Development) data, every month
around 51.1% of income is for monthly needs, 10.7% is saved, and 35.1% is spent
on houses (Masyrafina 2020). Islamic financial literacy affects financial behavior
and investment choices, according to research done on FEM students at IPB
University. Investment choices are directly impacted by financial behavior, which
can also mitigate the impact of Islamic financial literacy on such choices. In addition,
the level of Islamic financial literacy also has a direct influence on increasing the use
of (Rahman and Arsyianti 2021) Sharia financial technology.
Investment decisions made by investors, in addition to being influenced by
financial literacy, are also influenced by the FOMO. The phenomenon of FOMO
can be intended with an action that is desired to meet psychological needs
(Przybylski et al. 2013). FOMO is illustrated by one’s desire to keep abreast of
Sharia Investment Decision-Making: Gender Lens Investing, Fear of. . . 369

existing trends to stay connected with what others are doing. A large number of
people making investments is an increased trend that has contributed to the rise in
investors. Investment decision-making is influenced by the solicitation or influence
of others. According to Dianka (2022), in general, millennial and millennial gener-
ation investors are still just participating or involved in the FOMO in making
investment decisions. The prospect of the theory explains that individuals do not
always perform actions that fit the criteria of financial theory in risk and certainty, but
individuals also involve psychological factors as well as uncertain attitudes to
rational choices (Kahneman and Tversky 1979).
Gender affects sharia investment decision-making. Due to the hierarchical nature
of gender, it exacerbates existing social and economic inequities (who.int). In
investment decision-making, men and women show different results in investment
decision-making. While males invested in hazardous assets if they were risk takers,
divorced, older, and college-educated, women were more likely to keep risky assets
if they were expecting an inheritance, worked, and had higher net worth (Embrey
and Fox 1998). According to research by Chavali and Mohanraj (2016), sex out-
comes are demographic factors that affect investing patterns. The results show that
there is a gender gap whenever a woman has to take the risk of investing in existing
and new financial products. The study’s findings indicate that male investors make
overconfident selections that are positively and significantly significant. However,
the overconfident and dispositional effects were not significant when making invest-
ment decisions (Adil et al. 2022). In women making investment decisions, psycho-
logical factors play a major role focused in behavioral finance, so their investment
decisions tend to choose low-risk investment paths.

2 Literature Review

2.1 Background Theory

2.1.1 Behavioral Finance Theory

Behavioral finance can be interpreted as the application of psychological science in

the discipline of finance (Pompian 2006). Before making investment decisions, the
investor should consider the potential risks. Return and risk are inextricably linked,
which is why high risk equals high return. In actuality, all investors seek high returns
at low risk. Investment decisions are influenced by aspects of investors’ attitudes that
are rational and irrational, which are part of the behavioral finance theory. Financial
behavior is a reflection of the activities carried out by individuals that show positive
results as well as negative behaviors. Financial behavior that shows positive results
includes managing finances well, being able to set aside savings or funds for
emergencies, and planning long-term goals. Meanwhile, financial behavior with
negative results, including waste, only relies on pension funds and avoids discus-
sions about financial understanding. Behavioral finance theory is a theory that is a
370 P. D. Maharani et al.

reflection of the activities carried out by individuals to determine positive and

negative things (Prosad et al. 2015). Previous research shows that investors make
investment decisions based on their abilities and preferences to be able to control
uncertain events in the future, as well as overestimate their skills and abilities. This
bias makes investors uncontrolled to make actual investment decisions nor can they
influence those outcomes (Borges and Janissek-Muniz 2018).

2.1.2 Prospect Theory

This idea clarifies how a person makes decisions in the face of uncertainty. The
prospect theory was developed by two psychologists, Kahneman and Tversky
(1979), which basically covers two disciplines, namely, psychologists and econom-
ics. This idea explains how a person chooses choices when faced with uncertainty.
The prospect theory explains that individuals do not always perform actions that fit
the criteria of financial theory in risk and certainty, but individuals also involve
psychological factors and uncertain attitudes for rational choices. The prospect
theory describes the bias that influences IDM, namely, FOMO. In making decisions
investors do not always play a rational role and have investment knowledge, but
there are psychological aspects that make irrational decisions.

2.2 Previous Studies

Some of the previous studies that can be used as a reference in the study are
presented as follows:
1. Shiva et al. (2020) Variables: Investment Decisions, No Mobile Phobia
(NOMOPHOBIA), FOMO. Method: PLS-SEM in SmartPLS version 3.3.2. The
results show that retail investors are afraid of the absence of investment informa-
tion and are less comfortable with news on smartphones.
2. Dewi, Febrian, Effendi, and Anwar (2020) Variables: Financial Literacy, Knowl-
edge, Skills, Attitude and behavior”. Methods: Quartile Method, Analysis chi
squared. The findings indicated that there was a strong correlation between
financial management activity and financial attitudes as well. However, there
was little correlation between behavioral finance and financial expertise.
3. Pradikasari and Isbanah (2018). Variables: Financial Literacy, Illusion of Con-
trol, Overconfidence, Risk Tolerance and Risk Perception, and Investment Deci-
sions. Method: Multiple Linear Regression Analysis Technique. The findings
demonstrate how risk tolerance and changeable overconfidence impact invest-
ment decisions. Financial literacy, the sense of control, and risk perception,
however, have no bearing on investing choices.
Sharia Investment Decision-Making: Gender Lens Investing, Fear of. . . 371

2.3 Conceptual Framework

The following is an illustration that shows the relationship between independent

variables, namely, IFL, FOMO, and GLI with dependent variables, namely, SIDM,
in the 4.0 era in millennial and zillenial sharia investors in Indonesia (Image 1).
1. The Effect of IFL on SIDM
High financial literacy will lead to positive things that have an impact on the life of
the individual. And vice versa, investors who do not have financial knowledge will
make bad investment decisions. This is in accordance with the theory of behavioral
finance, a theory that is a reflection of the activities carried out by individuals to
determine positive and negative things. Previous research that has been carried out
states that individuals with a good level of financial literacy can analyze risks that will
occur in the future where these risks can have a detrimental impact, and good
financial literacy will have a good effect in making decisions and can plan finances
appropriately (Pradikasari and Isbanah 2018; Setyowati et al. 2018).
H1: IFL has an impact on SIDM.

2. The Effect of FOMO on SIDM

FOMO is a phenomenon where a person is afraid of missing an event or trend that
is happening, in order to meet his psychological needs. FOMO has an impact such as
fear, anxiety, and even worry about missing out on events that occur. This phenom-
enon is supported by the prospect theory, which considers that human behavior is
considered strange and contradictory in making decisions and not always the
decisions taken are rational (Kahneman and Tversky 1979). Psychological factors
are very influential for a person especially in terms of decision-making. Previous
research has said that many investors neglect the time they have just to get infor-
mation and just want to follow trends on that information; this shows that FOMO
affects investors’ emotional and psychological decisions in making investment
decisions (Shiva et al. 2020; (Przybylski et al. 2013).
H2: FOMO has an impact on SIDM.

3. The Effect of GLI on SIDM

Gender has an influence but is not significant to the intention of transacting
stocks. Meanwhile, financial knowledge has been proven to affect gender relations

Image 1 Conceptual
framework IFL

FOMO SIDM

GLI
372 P. D. Maharani et al.

with the intention to transact shares, both selling and buying, namely, strengthening
the positive influence of gender on transaction intentions. The better the understand-
ing of financial knowledge, both male and female investors will cause transaction
intentions, thereby reducing the number of investors (Hidayah 2018). Another
viewpoint, however, contends that financial decisions are always made in the context
of the situation and do not differ based on gender. In addition, based on the results of
an evaluation from the German Institute of Economic Research, a total of 8000 men
and women stated that as much as 38% invested in risky investment products and
45% for men, although men still dominate, according to this study, the number of
women who choose low-level investments is not due to psychogenic factors (emo-
tional sensitivity) but because they generally have half the income of men. The
National Center for Financial Education revealed that the influence of women’s less
varied tastes in determining investment risk is more influenced by lack of financial
literacy than emotional factors, whereas in the survey women showed low levels of
financial literacy compared to men (Ujang 2022).
H3: GLI has an impact on SIDM.

3 Methodology

We use quantitative methods with a probability sampling approach that uses the
simple random sampling technique. Primary data were used in the study, including
128 respondents who were East Javan sharia investors from the millennial and
zillenial generations. Data gathering methods included questionnaires. Question-
naire was distributed via Google Form. Meanwhile, the sample of the study was
128 investors. The genders representing this study were women (N 76 = 59.4%) and
men (N 52 = 40.6%). To answer the hypothesis, data analysis techniques use
statistics with the help of the IBM SPSS V26 program.

4 Results and Analysis

4.1 Results

Table 1 above demonstrates that the coefficient, or R, has a value of 0.608. As for the
R square of 0.370, that is the square result of the correlation coefficient

Table 1 Model summary

Model R R square Adjusted R square Std. error of the estimate
1 0.608a 0.370 0.355 4.945
a
Predictors: (constant), SFL, FOMO, GLI
Sharia Investment Decision-Making: Gender Lens Investing, Fear of. . . 373

Table 2 ANOVAb
Model Sum of squares df Mean square F Sig.
1 Regression 1779.762 3 593.254 24.261 0.000a
Residual 3032.230 124 24.453
Total 4811.992 127
a
Predictors: (constant), SFL, FOMO, and GLI
b
Dependent variable: IDM

Table 3 T-test results

Model B Std. error Beta t Sig.
IFL ! SIDM 0.497 0.085 0.425 5.871 0.000***
FOMO ! SIDM 0.258 0.049 0.384 5.318 0.000***
GLI ! SIDM -0.715 0.898 -0.057 -0.796 0.427
* 10% level, ** 5% level, *** 1% level

(0.608 × 0.608 = 0.370). IFL, FOMO, and GLI variables have an influence at 0.370
or 37.0% (r2 × 100%), while other variables have an influence at 63.0% (100% -
37.0%).
It is exhibited in Table 2 that the F calculation is 24.261, and for the significance
figure, it is 0.000 < 0.05. Thereover, Ho was rejected and H1 was accepted. This
indicates that the variables of IFL, FOMO, and GLI have a linear relationship to the
variables of SIDM.
The significance value of the link between each free variable and the bound
variable is shown in Table 3 above, and it can be observed that if the significance
value calculated is 0.05, the free variable significantly affects the bound variable. In
other words, the significance value calculated = 0.000 < 0.05 indicates that the
variable IFL significantly influences SIDM. The SIDM variable is significantly
impacted by the FOMO variable (sig. Calculate = 0.000 < 0.05). Significance
value calculated = 0.427 > 0.05, indicating that there is no significant relationship
between the GLI variable and SIDM.

4.2 Analysis

In this study, we focus on the variables of IFL, FOMO, and GLI. The findings
support hypothesis 1, which states that Islamic financial literacy has a significant
impact on SIDM (see Table 4). The SIDM variable benefits from the influence of the
IFL variable. H1 is therefore accepted in this investigation. SIDM will be influenced
by investors’ IFL levels. SIDM will get better the more IFL there is. According to
prior study, people with a high degree of financial literacy are better able to assess
future risks, which will have a positive impact on their ability to make wise decisions
and organize their finances (Pradikasari and Isbanah 2018; Setyowati et al. 2018).
Vice versa, the lower the IFL of investors, the lower the SIDM. According to
374 P. D. Maharani et al.

Table 4 List of additional hypotheses involved in this study

Sig. value
Hypothesis ( p) Result
H1 Islamic financial literacy has an impact on sharia investment p < 0.01 Accept
decision-making H1
H2 Fear of missing out has an impact on sharia investment decision- p < 0.01 Accept
making H2
H3 Gender lens investing has an impact on sharia investment deci- p > 0.1 Reject
sion-making H3

(Nuradibah et al. 2018; Rooij et al. 2011), individuals engaging in activities are
influenced by their level of literacy, and stress brought on by bad money manage-
ment is more prevalent when a person has low literacy levels.
The result shown in the H3 hypothesis is that there is a significant influence on the
FOMO on SIDM (see Table 4). The SIDM is positively impacted by the FOMO
variable. Then H3 in this study is accepted. It shows that the trend of jumping on the
bandwagon in investing in millennials affects investment decisions. FOMO is a
phenomenon where a person is afraid that he will miss an event or trend that is
happening, in order to meet his psychological needs. The prospect theory, which
holds that not all judgments are rational and that human behavior in choosing them is
unusual and paradoxical, is the theory that correlates to the FOMO variable. The
findings of this study are consistent with earlier studies, namely, (Przybylski et al.
2013; Shiva et al. 2020) which states that investors cannot be separated from
smartphones to get information with the aim of not missing out on information
and existing trends; it can be seen that emotional and psychological factors affect
investors especially in choosing investment decisions.
The results shown in hypothesis H3 are that GLI has no significant effect on IDM
(see Table 3). So H3 in this study is rejected. The GLI of investors does not affect
one’s IDM and therefore has no impact on IDM. The investment decision-making of
millennial and zillenial investors is not influenced by gender, both male and female.
Gender is not a reason for investment decision-making. This is consistent with
earlier research by Putri and Hamidi (2019), which found that gender has no impact
on SIDM. Research conducted by Tanusdjaja (2018) shows that the gender factor
does not significantly affect investment decisions.

5 Conclusion and Recommendation

5.1 Conclusion

In accordance with the analysis and discussion of hypothesis testing, several con-
clusions can be submitted which are the answers to the problems posed in this study,
namely:
Sharia Investment Decision-Making: Gender Lens Investing, Fear of. . . 375

1. IFL has a positive and significant effect on SIDM. This indicates that the ability to
manage money and make investment decisions will improve with more financial
literacy.
2. FOMO has a positive and significant effect on SIDM. This indicates that invest-
ment decisions are impacted by the trend of investing in millennials.
3. GLI has no significant effect on SIDM. This means that a person’s gender is not a
benchmark for making an investment decision.

5.2 Recommendation

People need to realize the importance of financial literacy in fund management

because this is the main factor in making an investment. Investors must increase
their knowledge on financial literacy and actively observe market situations and
conditions and the risks involved in investing. When investors have a high knowl-
edge of financial literacy, the level of fear for making investment decisions will
below.

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How Do Islamic Banks Report
and Distribute Zakat in Malaysia?

Nurul ‘Iffah M. A. Zaaba and Rusni Hassan

Abstract Malaysian Islamic banks have been paying, reporting, and distributing
their business zakat, albeit not all banks are doing so. This information can be found
in their financial statements. This study intends to cover both reporting and distrib-
uting practices of those banks. Focusing on all 16 Islamic banks in Malaysia, this
study was conducted using content analysis and semi-structured interviews. With the
help of financial statements and annual reports, content analysis was employed.
Then, officers dealing with the zakat fund were interviewed to gather their insights
on how banks report and distribute the zakat. This study anticipates information that
are not published in the financial statements and annual reports of the banks
particularly on zakat distribution practices.

1 Introduction

Malaysia has taken several initiatives in the development of zakat calculation,

reporting, and distribution guidelines (Abojeib et al. 2019; Tajuddin and Bahari
2019). For a start, the Department of Islamic Development Malaysia (JAKIM)
published a book entitled “Panduan Zakat di Malaysia” with details on zakat
calculation methods (Jabatan Kemajuan Islam Malaysia [JAKIM] 2001), which
later became a reference to the forthcoming guidelines. Then in 2006, the Malaysian
Accounting Standards Board (MASB) has released a technical release on accounting
for zakat on business (MASB 2006). Then, the Department of Waqf, Zakat and Hajj
(JAWHAR) published three manuals: two manuals prepared for the calculation and

N. ‘. M. A. Zaaba (✉)
Faculty of Business and Management, UCSI University, Kuala Lumpur, Malaysia
e-mail: nurul'[email protected]
R. Hassan
Institute of Islamic Banking and Finance, International Islamic University Malaysia, Selangor,
Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 377
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_34
378 N. ‘. M. A. Zaaba and R. Hassan

Table 1 Zakat calculation, reporting, and distribution guidelines

Issuing body Year of issuance Calculation Reporting/disclosure Distribution
AAOIFI 1998 ✓ ✓
JAKIM 2001 ✓
MASB 2006 ✓ ✓
JAWHAR 2008 ✓
2010 ✓
2021 ✓
BNM 2022 ✓

the distribution of zakat respectively and another, specific for the use of banking
industry to guide them in managing the zakat fund (JAWHAR 2008, 2010, 2021).
BNM published a policy document this year for the Islamic banking institutions
on the reporting of information disclosure. Among the requirements is that Islamic
banks need to disclose whether they pay zakat or not. And if they do, other
information such as its responsibility towards zakat payment, the method used in
determining the zakat base together with the beneficiaries of the zakat fund, must be
disclosed as well (BNM 2022). Outside of Malaysia, the Accounting and Auditing of
Islamic Financial Institutions (AAOIFI) prepared Financial Accounting Standard
(FAS) no. 9 specifically for the calculation and reporting of zakat on business
(AAOIFI 1998).
As shown in Table 1 below, there is no single guideline that covers all three
aspects of zakat. Despite the applauding efforts in developing these manuals, the
practices of Islamic banks in their zakat reporting and distribution are still not
standardized and in the infant stage due to minimal zakat disclosure requirements
(Tajuddin and Bahari 2019).

2 Literature Review

Research pertaining to the calculation, reporting, and distribution are blooming but
still limited to the use of content analysis of Islamic banks as shown in Table 2.
Other studies such as Pauzi et al. (2014) as well as Ismail et al. (2016) focused on
Bank Rakyat, a development bank in Malaysia. By referring to these studies,
engaging in this research is crucial since this study employed semi-structured
interviews as recommended by Tajuddin (2022), Tajuddin and Bahari (2019), and
Wan Abdullah et al. (2013) to collect banks’ officers’ insights on how Islamic banks
report and distribute their zakat. It is important to note that this research is a
continuation from the study conducted by Zaaba and Hassan (2020) as well as
Zaaba and Hassan (2022).
Table 2 Zakat calculation, reporting, and distribution literature matrix
Publication Focus Method Sample Results Recommendation
Haniffa and Hudaib (2004). Dis- Disclosure Content analysis of Five financial institu- • Lack clarity and consistency. • Larger sample.
closure practices of Islamic finan- practices 2002 annual reports tions in four countries • Comparison of information is • Better disclo-
cial institutions: An exploratory including zakat and disclosure not possible. sure instrument.
study. measures • Use both con-
tent analysis and
interview.
Haniffa and Hudaib (2007). Ethical identity Content analysis of Seven Islamic banks in • Minimal communicated • Compare actual
Exploring the ethical identity of including zakat 2002–2004 annual the Arabian gulf information using annual and communi-
Islamic Banks via communication reports region reports. cated ethical
in annual reports. identities.
• Compare actual
and ideal ethical
identities.
• Usage of other
media.
• Use of other
methods such as
interview.
Noor et al. (2011). Zakat and tax Zakat Content analysis of Shariah-compliant • Only some companies with • Integration of
How Do Islamic Banks Report and Distribute Zakat in Malaysia?

reporting: Disclosures practices of disclosure 2009–2010 annual companies (three zakat information. tax and zakat.
Shariah compliance companies. reports banks) • Banks complied with zakat • Include other
disclosure requirement. issues on zakat
• Do not comply with MASB disclosure.
TR i-1.
Wan Abdullah et al. (2013). Sha- Shariah super- Content analysis of Nineteen Malaysian • Information is still limited. • In need of more
ri’ah disclosures in Malaysian and visory board 2009 annual reports Islamic banks and four Low level of disclosure on zakat reporting
Indonesian Islamic banks:The and zakat Indonesian Islamic sensitive matters. guidelines.
Shari’ah governance system. disclosure banks • Larger sample.
• Large year
range.
379

• Use of inter-
view and survey.
(continued)
Table 2 (continued)
380

Publication Focus Method Sample Results Recommendation

Abd Samad and Said (2016). Zakat Content analysis of Sixteen Malaysian • Twelve banks are liable to • Comprehensive
Zakat disclosure by Malaysian disclosure 2014 annual reports Islamic banks pay zakat. zakat disclosure.
Islamic Banks. • Ten banks disclosed how
much they pay.
• Bank Islam, AmBank, and
Hong Leong disclosed
the most.
Abbas et al. (2018). A Review on Zakat payment Content analysis of Fifteen Malaysian • Twelve banks pay zakat. • Disclose details
Zakat Payments by Islamic Banks and calculation 2013–2017 annual Islamic banks • Lower zakat payment. on zakat compu-
in Malaysia. reports • No details on zakat tation.
computation. • Banks should
pay more zakat.
Tajuddin and Bahari (2019). Zakat reporting Content analysis of Sixteen Malaysian • All except one stated their • Development of
Exploring the Quality of Zakat 2018 annual reports Islamic banks responsibility towards zakat accounting stan-
Reporting of Islamic Banking. payment. dard.
• Computation method and rate • Use of
varies. interview.
• Nine banks stated their zakat
beneficiaries.
Abojeib et al. (2019). A Review of Zakat Content analysis Ten takaful operators • Inadequate disclosure about • Specify mini-
Zakat Practices of Islamic Finan- calculation and 16 Islamic banks zakat calculation. mum disclosure
cial Institutions in Malaysia. in Malaysia • Various zakat calculation requirement.
methods and rates. • Use of 2.5% as
• Different zakatable assets in zakat rate.
standards.
• No fix rules in zakat
distribution.
N. ‘. M. A. Zaaba and R. Hassan
Zaaba and Hassan (2020). Calcu- Zakat calcula- Content analysis of Sixteen Malaysian • More information disclosure. -
lation, distribution and disclosure tion, reporting, 2018 annual reports Islamic banks • Five banks pay zakat to the
of zakat in Malaysia Islamic and zakat authorities, two banks
Banks. distribution self-distributed, two banks
do both.
Tajuddin (2022). Comparative Zakat Content analysis of Four Malaysian • Inadequate and insufficient • Development of
Analysis of Business Zakat Com- calculation 2020 annual reports Islamic banks and four disclosures. accounting stan-
putation of Islamic Financial Saudi Arabian Islamic dard.
Institutions in Malaysia and Saudi banks • Use of
Arabia. interview.
Zaaba and Hassan (2022). The Zakat Content analysis of Sixteen Malaysian • Two banks disclosed efforts -
Practice of Islamic Bank in Zakat distribution 2018–2020 annual Islamic banks in response of Covid-19.
Distribution: The Case of reports
Malaysia.
How Do Islamic Banks Report and Distribute Zakat in Malaysia?
381
382 N. ‘. M. A. Zaaba and R. Hassan

3 Methodology

3.1 Data Collection

At present, Malaysia has a diversified range of institutions in the financial system.

Islamic banks are listed under the banking system, side by side with conventional
banks which both are under the supervision of Bank Negara Malaysia (BNM)
(Samah et al. 2020).
To date, there are 16 Islamic banks where 11 are local and the remaining are
foreign (BNM n.d.), which is the population of the study, as shown in Table 3.
This study explores how Islamic banks report zakat information as well as how
the banks distribute their zakat, thus focusing on banks that are obliged to pay
zakat. Four foreign banks do not pay zakat in Malaysia since they are not obliged to
do so or it has become the responsibility of their headquarters. Thus, the interview
invitation is sent to other 12 banks where one of the banks rejected the interview due
to their confidentiality policy. The final sample therefore consisted of 11 Islamic
banks. The date and place of interviews were then arranged and confirmed.

3.2 Data Analysis

All interviews were recorded with consent and then transcribed. The transcribed
documents were sent back to the participants for content confirmation. After the
content was confirmed, all documents were uploaded to the chosen

Table 3 Licensed Islamic banks in Malaysia

No. Banks Ownership
1. Affin Islamic Bank Berhad Local
2. Al-Rajhi banking and investment corporation (Malaysia) Berhad Foreign
3. Alliance Islamic Bank Berhad Local
4. AmBank Islamic Berhad Local
5. Bank Islam Malaysia Berhad Local
6. Bank Muamalat Malaysia Berhad Local
7. CIMB Islamic Bank Berhad Local
8. HSBC Amanah Malaysia Berhad Foreign
9. Hong Leong Islamic Bank Berhad Local
10. Kuwait finance house (Malaysia) Berhad Foreign
11. Maybank Islamic Berhad Local
12. MBSB Bank Berhad Local
13. OCBC Al-Amin Bank Berhad Foreign
14. Public Islamic Bank Berhad Local
15. RHB Islamic Bank Berhad Local
16. Standard chartered Saadiq Berhad Foreign
How Do Islamic Banks Report and Distribute Zakat in Malaysia? 383

computer-assisted qualitative data analysis software (CAQDAS), which was

ATLAS.ti. With the help of existing literature and mentor, the themes were chosen,
and the data is divided accordingly.
During the data analysis process, researchers had to apply anonymity since the
information is considered confidential, and before the interviews take place, an
agreement with participants was made to change their names and banks into
pseudonym.

4 Discussion and Findings

4.1 Information Disclosure

The participants were asked, “Does your institution disclose zakat in the financial
statement? Do you think that your institution discloses sufficient information on
zakat? Why?” Their perceptions were grouped into two categories: sufficient and not
sufficient. Eight banks responded that their banks disclosed enough information on
zakat, whereas three remaining banks said that the information disclosed was
insufficient, as presented in Table 4.
The majority of the participants responded that the information about zakat
disclosed in the financial statements of the banks was sufficient. Most of them
commented that the information disclosed was according to the standard practice.
Other information was not disclosed due to the absence of a requirement to do so.
Bank H participant said that a one-line information in the financial statement was
the standard practice, “We put one liner for zakat information. I think because of the
standard industry practice.” The participant from Bank E added that the bank would
not benefit by disclosing more information, saying, “And also, it does not bring any
additional benefit to our bank as long as we give to asnaf and it is approved by our
Shariah Committee.”

Table 4 Participants’ views on zakat reporting by Islamic banks

Categories Banks
Enough/sufficient • B.
• C.
• D.
• E.
• H.
• I.
• J.
• K.
Not enough/insufficient • A.
• F.
• G.
384 N. ‘. M. A. Zaaba and R. Hassan

The participants from Bank H and Bank I recommended reading the sustainability
report prepared by their respective group to obtain more information on zakat.
Furthermore, the participant from Bank K explained that the details on zakat
distribution were the responsibility of the zakat authority since the bank paid zakat
to the authority. The participant said, “Yes, it is sufficient since detailed zakat
distribution and etc. shall be disclosed by zakat authority. The bank only pays
zakat to zakat authority.”
In contrast, the participants from Bank A, Bank F, and Bank G were not satisfied
with the level of information disclosed in their respective banks’ financial state-
ments. Bank F participant commented that the information on zakat calculation was
enough, but not the information on zakat distribution. He thinks the bank should
disclose more information on zakat distribution. Although Bank A participant
responded that the information disclosure was not sufficient, he also added that
this was because the bank was not listed and was a subsidiary of a group of
companies.

4.2 Reference to JAWHAR’s Manual

The participants were also asked about their views on following the manual prepared
by JAWHAR. The question is as follows, “Does your institution follow JAWHAR’s
Manual Pengurusan Agihan Zakat or any manual from the zakat authority? Can you
explain why?”
Eight banks answered that they adopted JAWHAR, but three others do not. Their
answers to this question resulted in the categorization of two groups of banks, as
presented in Table 5.
The study found that most Islamic banks in Malaysia referred to JAWHAR’s
manual. Bank J upheld JAWHAR as a higher authority in Malaysia. Participants
from Bank E and Bank G stated that the manual issued by JAWHAR was considered

Table 5 Participants’ views on the adoption of existing regulations, rules, and guidelines in zakat
distribution by Islamic banks
Categories Banks
Refer to JAWHAR • C.
• D.
• E.
• F.
• G.
• I.
• J.
• K.
Do not refer to JAWHAR • A.
• B.
• H.
How Do Islamic Banks Report and Distribute Zakat in Malaysia? 385

as a standard that could be used as a reference in the whole country. Bank G

participant added that they referred to the manual to avoid questions from internal
and external parties. Moreover, Bank D participant said that the manual covers zakat
management and is appropriate for Islamic banking institutions. Bank F participant
explained that their bank included the manual as an appendix in the bank’s zakat
manual.
Bank C and Bank K also referred to the manual. However, their representatives
informed that the manual required adjustments. Bank K participant said, “With some
adjustments, it will be suitable for financial institutions.” In addition to JAWHAR’s
manual, Bank C incorporated the salient requirements of the manual and other zakat
authorities’ guidelines into the bank’s zakat policy.
Only participants from Bank A, Bank B, and Bank H stated that their banks did
not follow JAWHAR’s manual. This is due to a few reasons. For example, Bank A
and Bank B have already established their own zakat policy. Bank B participant
added that they adopted the haddul kifayah by PPZ and LZS with a mixture of
important information from state zakat authorities. Bank J, on the other hand, did not
have any guideline. Instead, the bank depended on the decisions of its shariah
committee and management.

5 Conclusion and Recommendation

Most of the participants are satisfied with the information disclosed in the financial
statements due to the standard practice in the market and nonexistence of the
requirement to do so. The minority suggested that there is more that banks can
disclose in their documents relating to zakat information.
The participants of the study said that the banks are referring to the JAWHAR
manual; however, they did not adopt the manual but rather adapted the manual by
adding other needed information. Only a few of them said that they do not refer to
the manual due to the existence of their own policy or adopting the manual from the
zakat institution.
Thus, this study recommends to regulators to revise the existing manual or to
publish a guideline with substantive information covering calculation, reporting, and
distribution so that the practitioners can make use of the guideline correspondingly.
Alternatively, the regulators, both JAWHAR and BNM, can arrange a thorough
discussion with the banks to discuss on the elements needed in the guideline to meet
banks’ needs and expectations. On the other hand, future research can focus on
producing a manual with the cooperation of the regulators and practitioners.

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The Role of Libyan Zakat Foundation
in the Achievement of Social and Economic
Development (Zliten Zakat Foundation
as a Model)

Salem Faraj Gamo, Abdulmajid Obaid Hasan Saleh,

and Deden Misbahudin Muayyad

Abstract The aim of the research is to evaluate the role of zakat in the development
of the micro-economy, to provide solutions to overcome the problems facing the
Libyan zakat fund by interviewing zakat experts, and thus to promote the develop-
ment of zakat funds and invest zakat profitably. This paper used the descriptive
analytical approach. Moreover, the interviews were conducted to enrich the study
with answers that are more focused on the problem of the study, especially since the
interview targeted the influential figures in the decision of the Libyan Zakat Fund,
and the owners of activities, expertise, and experience in the fields of these jobs.
Zakat has development dimensions in the humanitarian, scientific, economic, and
health fields if its funds fall within sustainable development plans such as a good
loan with its controls and conditions. In addition to building hospitals, it provides
appropriate medical equipment and financing scientific research that keeps pace with
the times and modern technology.

1 Introduction

Most Islamic countries, such as Libya, had to establish zakat funds for zakat funds to
contribute to the economic development process according to an organized and
accurate institutional work that benefits those who deserve it. In fact, the expendi-
tures of the zakat fund in Zliten, Libya, focus on consumer spending only rather than
spending on professions that guarantee job opportunities for young people and the

S. F. Gamo (✉) · A. O. H. Saleh

IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
e-mail: [email protected]
D. M. Muayyad
Fakultas Ekonomi dan Bisnis, Universitas Trisakti, West Jakarta, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 387
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_35
388 S. F. Gamo et al.

continuous growth of zakat funds. The role of zakat in economic development in the
Libyan society recommended the need to study investment projects and encourage
investment with zakat funds.

2 The Objective of the Research

The aim of the research is to evaluate the role of zakat in the development of the
micro-economy, to provide solutions to overcome the problems facing the Libyan
zakat fund by interviewing zakat experts, and thus to promote the development of
zakat funds and invest zakat profitably.

3 Research Methodology

The author used the analytical and descriptive approach. Moreover, the interviews
were conducted to enrich the study with answers that are more focused on the
problem of the study, especially since the interview targeted the influential figures
in the decision of the Libyan Zakat Fund, and the owners of activities, expertise, and
experience in the fields of these functions, as shown in Table 1.

4 Literature Review

4.1 The Definition of Zakat

According to the definition given in the literature, almsgiving can refer to blessing,
progress, growth, purity and cleanliness. Zakat is a part of property with certain
requirements that God Almighty expects the owner to pay to the right person to own
it with specific requirements, according to Muslim scholars (scholars). In addition,
the word “zakat” means “purification”, “growth”, “blessing”, and “praise”. A

Table 1 Characteristics, job experience and the positions of the interviewees

Character/function Code Experience Qualification
Zakat Fund employee in Zliten (E1) 20 years Degree in law
Zakat Fund employee in Zliten (E2) 16 years Bachelor in engineering
Advisor to the Zakat Fund Zliten (E3) 12 years PhD in Management Informa-
tion Systems
Researcher and former collaborator with (E4) 9 years Master of Business
the Zakat Fund Administration
Zakat Fund employee in Zliten (E5) 8 years PhD in Accounting
The Role of Libyan Zakat Foundation in the Achievement of Social. . . 389

Muslim has a financial obligation to pay zakat on certain net assets or agricultural
products if these assets exceed the nisab limit to a certain limit. Zakat is paid as part
of a religious requirement.
By examining the implications of all definitions, we find that zakat is considered
part of the total public revenues in the Islamic system, because it is taken on a regular
basis every year once or twice according to the nature of the yearbook from the zakat
money. This means that zakat funds necessarily contribute to improving the income
and living conditions of the beneficiaries.

5 Libyan Zakat Fund in Zliten

The Zliten Zakat Office is considered one of the largest zakat offices in terms of
revenues and expenditures among (30) zakat offices in Libya affiliated with the
Libyan Zakat Fund. The Zliten Zakat Bureau was established by Cabinet Resolution
No. (49) for the year (2013), and it is affiliated with the Libyan Zakat Fund and the
authority authorized by the state to collect zakat and deliver it to those who are
entitled to it according to legal principles. Rules and principles. The duties of this
office are to collect zakat funds, set rules and procedures for disbursing and distrib-
uting them to the beneficiaries, and work on managing and developing them (annual
report issued by the Libyan Zakat Fund 2015).
The volume of collection revenues for the fund from zakat funds during
(2018–2020) will be presented in Table 2. Collection of zakat report during the
period from 2018 to 2020):
Table 2 shows a decrease in the rate of collection of zakat funds in general during
the 3 years (2018, 2019, 2020), as it reached its highest level in 2018
(5,829,015.272) dinars and decreased by (81.78%). It reached (4,767,323,794)

Table 2 Zliten Zakat fund Revenue

Months 2018 2019 2020
January 232,843.500 Dinar 291,397 Dinar 168,105 Dinar
February 1,052,726.772 Dinar 231,878 Dinar 182,498 Dinar
March 215.840 Dinar 244,728.325 Dinar 178,730 Dinar
April 194,560 Dinar 279,947 Dinar 315,520 Dinar
May 484,476 Dinar 1,457,128.81 Dinar 1,046,167 Dinar
June 1,129,864 Dinar 674,111,663 Dinar 178,177 Dinar
July 260,647 Dinar 388,258 Dinar 192,980 Dinar
August 442,597 Dinar 207,046 Dinar 188,500 Dinar
September 300,297 Dinar 412,422.500 Dinar 274,659 Dinar
October 1,090,311 Dinar 166,161.50 Dinar 105,830 Dinar
November 179,596 Dinar 169,680 Dinar 216,391.250 Dinar
December 245,257 Dinar 244,565 Dinar 84,866 Dinar
Total 5,829,015.272 Dinar 4,767,323.794 Dinar 3,032,433.25 Dinar
390 S. F. Gamo et al.

Table 3 Zliten Fund Expenses

Number of The total amount spent in
Beneficiaries beneficiaries Libyan dinars
1 Monthly salary 620 5,952,274
Rent 115 340,960
2 Treatment allowance 674 3,080,967
3 Marriage allowance 317 individuals 1,638,000
4 Rebuild 132 houses 3,708,209
5 Fine allowance 180 1,779,421
6 Those whose hearts are to be 5 individuals 4300
reconciled
7 Traveller 22 individuals 13,589.5
Total 16,517,720.5

Libyan dinars in 2019. And it continued to decline further in 2020 to 3,032,433.25

dinars, and thus the rate of decline in its revenues reached 52.02% compared to 2018.
Therefore, it witnessed a sharp decline in the volume of its zakat revenues instead of
an exponential growth in the volume of its revenues.
As shown in Table 2, we found a significant, continuous, and steady decline in
zakat funds. This leads to the question whether the collection rate of zakat funds is
generally declining at the national level. The reason, in fact, is the spread of the
Corona pandemic, as well as the decline of the Libyan currency against foreign
currencies, which led to a decrease in the percentage of the fund’s zakat income.
However, if the decline in revenue occurred in the Zliten Fund only, then there is no
explanation for this except for the existence of a financial and administrative
imbalance or a deficiency in the system and mechanisms for collecting zakat
funds. In the following section, we will mention some of the factors behind the
decline in zakat funds in Zliten:
1. The absence of mandatory legal provisions that make the payment and collection
of zakat obligatory rather than voluntary from major taxpayers, institutions and
many companies. It should be noted that with Law No. 13 of 1997 that makes
zakat compulsory, and given the practical reality, we find that it is not
implemented in terms of the obligation to pay the subject zakat.
2. Not adopting specific software mechanisms and accurate accounting systems that
can be used by specialists in zakat accounting.
3. Lack of trust between the taxpayer and the Zakat Fund. This pushes many of
those who are charged with taking zakat money individually away from the
official authorities.
The Zakat Fund in Zliten distributed zakat to the beneficiaries, and here we refer
to the diversity of zakat expenditures carried out by the Fund during the period
2018–2020, as shown in Table 3 (Zakat Fund website in Zliten):
Table 3 shows that the role of the Zakat Fund is to reduce the phenomenon of
poverty, as most of the spending on the Zakat Fund was caring for the poor and
The Role of Libyan Zakat Foundation in the Achievement of Social. . . 391

Table 4 Activities and projects implemented by the Zakat Fund in Zliten during the period
2018–2020
The number of the The financial cost of the project in Libyan
Project projects dinars
1 Ramadan 2165 families 602,397
basket
2 Eid clothes 1079 families 569,100
3 Iftar project 12,250 individuals 183,750
4 Animal 1636 sacrifices 1,227,000
sacrifice
5 Olive oil 28,123 litter 196,861
6 Weddings 119 males 919,000
7 Iqraa’ 1159 students 166,505
campaign
Total 3,864,613

needy, as it was found that the largest percentage of Zakat. The proceeds were
distributed for the benefit of the poor and the needy, with a total amount of
16,517,720.5 dinars. The expenditures implemented by the fund during
(2018–2020) varied according to the size of the expenditures, as shown in the
previous table.
Table 4 shows the activities and projects implemented by the office during the
specified period (website of the Libyan Zakat Fund, Zliten, 2021):

6 Analysis and Discussion of Interview Results

In this section, we will present the most important outcomes of the interviews,
analyse them, and link them to the objectives of the study. Therefore, we will answer
the research questions.

6.1 The Extent to Which the Fund’s Internal Regulations

Keep Pace with the Developmental of Zakat

The interviewees agreed that the regulations and executive decisions were issued in
1998. They stressed the need to amend them to keep pace with the needs of those
who are entitled to zakat to meet their needs. Opinions also differed about the
performance of the Zakat Fund. He emphasized (H4) that “the Zakat Fund has
improved its performance much more than before, especially the Tripoli office, but
the fund still needs more efforts to play a vital role, and it also needs an effective
management that cooperates with the Dar Al Iftaa”. In intractable legal issues. “In
order to be able to make the right decisions, the presence of political division in the
392 S. F. Gamo et al.

country and instability posed a great challenge to those in charge of this fund”. It
agreed with the opinion of (E2), (E3), and (E5) who were interviewed, saying: “Most
of the Zakat Fund offices perform an effective performance in reducing poverty in
Libyan cities”, according to their financial capabilities.

6.2 Presentation of the Data Related to the Interviewees’

Evaluation of the Distribution Mechanism Followed by
the Zliten Zakat Fund

The participants explained that the Zakat Fund in Zliten follows precise mechanisms
in investigating the collection of information for those applying for zakat, making
cards and submitting documents that help in fair distribution, and determining how
to distribute in terms of quantity, quality, and type, which is a good and legitimate
mechanism that contributes to the efficient delivery of zakat to those who deserve
it. But (H2) said that the distribution mechanism is based on the regulations issued
by the Board of Directors. E3 and E5 also considered that the distribution mecha-
nism is good because it is based on research, investigation and scrutiny of zakat
requests, in addition to cooperation with some official and unofficial agencies to
reach the poor, to ensure that zakat is received by them; it is considered a good
mechanism by Sharia law. In addition, E4 reports that the Zakat Fund in Zliten has
done its job properly because it collects money from its payers as much as possible
and distributes it to beneficiaries within the municipality of Zliten. Moreover, E5
reports that the office is trying to balance a large number of families with a small
number of families.

6.3 Summary of Interviewees’ Attitudes About the Lack

of Focus of the Zakat Fund on Crafts, Agricultural
and Health Professions

Those interviewed agreed that the fund’s mission is to provide for those in need.
Then you should focus on financing trades and professions. It should be noted that
E2 and E5 attributed the reason why the fund did not continue to support the
professions because the beneficiaries sold their equipment or machines, and after a
while, they ended up in poverty again. However, H3 attributed the reason for the
absence of a legal law for this issue to the absence of anything regulating this issue in
Libyan law, as Libyan law is considered a weak law and does not focus much on
zakat. Issues. Moreover, E3 indicated that if these projects continue, there will be a
solution for poor families.
The Role of Libyan Zakat Foundation in the Achievement of Social. . . 393

6.4 The Interviewees’ Point of View on the Feasibility

of Adopting the Zakat Fund in Zliten to Support
Investment Projects (Crafts, Professional, Agricultural
and Health)

The interviewees acknowledged that there is a future that requires deeper and more
detailed studies and knowledge of the fund’s adoption of investment projects.
However, H1 indicated that if the Zakat Fund in Zliten adopts these projects, they
will be feasible because of the benefit they bring to those who are eligible for zakat.
He added that the investment of these funds stipulated laws that govern these
projects in terms of determining the persons who will receive them through a
thorough investigation. He explained that the Zakat Fund has purchased transport
vehicles and buses as a first step in this investment. However, he referred to previous
experiences that were not feasible due to the dependence of most of the beneficiaries
and the lack of sufficient awareness of the importance of these projects. Finally, E3
indicated otherwise, explaining that “it would be possible by having plans to invest
in the craft, vocational, agricultural and health fields, but within a period of three
months, the Fund prepared to buy some buses and transport vehicles for some people
to provide them with job opportunities and get them out of circle of poverty”.

6.5 Presenting Data Related to the Role of Zakat in Managing

and Distributing Collected Funds Towards Investment
Spending

All opinions confirmed that the Zakat Fund (Zliten) does not have a legal personal-
ity, that is, it does not have the authority to carry out investment financing because
there are no laws regulating this work. However, E1 indicated that the fund needs the
approval of the senior management office in Tripoli. In addition, H2 explained that
the zakat funds can hardly meet the urgent needs of the poor, and there is no surplus
for investment. The writer pointed out that the imbalance in the lack of investment
spending is due to the Diwan administration at the headquarters.

6.6 The Most Prominent Obstacles and Difficulties Facing

the Libyan Zakat Fund in the City of Zliten Towards
the Adoption of Specialized Programs in the Field
of Investment and Development of Zakat Funds

The respondents indicated that there are procedural, organizational and technolog-
ical obstacles facing the Libyan Zakat Fund in collecting and distributing zakat fairly
394 S. F. Gamo et al.

to the beneficiaries. Zakat funds. However, they pointed to many challenges that
prevent the fund from investing and developing zakat funds, which indicates the
absence of a disciplined mechanism around this work. However, H1 justified the
recent establishment of the Libyan Zakat Fund, with the lack of experience of those
in charge of managing the fund, the absence of administrative stability due to
changing the board of directors from time to time and the existence of political
conflict. Failure to update the Fund’s systems in line with the development taking
place, lack of community awareness of the importance of the Zakat Fund and the
existence of corruption within the Zakat Fund negatively affected the fair distribu-
tion of Zakat as a state. The agencies did not oblige the capital and big companies to
give their zakat money for zakat money to distribute it fairly.

6.7 The Proposed Solutions to Overcome the Obstacles

and Difficulties Facing the Zakat Fund in the City
of Zliten Towards the Adoption of Specialized Programs
in the Field of Investment and Development
of Zakat Funds

First, (H1) indicated that there are many proposed and urgent solutions that contrib-
ute to overcoming the difficulties facing the Libyan Zakat Fund in the city of Zliten
towards adopting specialized programs in the field of investment and developing
zakat funds, which are mostly external. Reasons such as:
1. Encouraging the payer to pay his zakat to the fund. However, (H1) requested the
cooperation of charities with the Zakat Fund in collecting because it is broader
and more comprehensive information about the beneficiaries of Zakat and their
need for these funds.
2. Requiring companies to submit zakat declarations to the Zakat Fund, with the
obligation to grant Zakat Fund employees the authority to discipline those who
fail to pay Zakat.
3. Issuing new laws commensurate with the calamities and developments of zakat.
4. The fund’s independence and funds will contribute effectively to the adoption of
specialized programs in the field of investment and the development of zakat
funds.

7 Conclusion

This research will present results and recommendations taking into account the
theoretical background, information, and data on the programs, projects, and activ-
ities of the Libyan Zakat Fund in Zliten as follows:
The Role of Libyan Zakat Foundation in the Achievement of Social. . . 395

1. Zakat has development dimensions in the humanitarian, scientific, economic, and

health fields if its funds are allocated within sustainable development plans such
as the good loan program with its controls and conditions. In addition to building
hospitals, providing appropriate medical equipment, and financing scientific
research that keeps pace with the times and modern technology.
2. Zakat addresses economic problems, reduces their consequences, and raises the
life of the beneficiary. Therefore, they will donate in a society seeking
development.
3. The Libyan Zakat Fund distributes zakat within its geographical scope. Where its
primary role is to combat the problem of poverty, as poor families received the
largest share of the aid that was distributed and the projects that were
implemented in general, and that there is a continuous decline in the volume of
their annual revenues rather than steady growth.
4. The activities of the Libyan Zakat Fund focused on directing the largest share of
zakat to the poor and needy, as it distributes it in various ways and mechanisms,
including the monthly salary, paying rent to the homes of the needy, and financial
aid to the needy. Treating the chronically ill, marrying the disabled, and building
or renovating homes for needy families.
5. The Zlatine Zakat Fund is not interested in addressing the problem of unemploy-
ment. The necessity of presenting projects to solve the problem of unemployment
through the mechanism of a non-usurious good loan, financing small projects,
and paying attention to the educational aspect.
6. Zakat fund expenditures in Zliten for zakat funds are concentrated on consumer
spending only without investment spending. It should be noted that the fund’s
policy was necessary to support investment projects (crafts, vocational, agricul-
tural, and health) to provide job opportunities for unemployed youth.

8 Recommendations

Given the previous findings, the author recommends the following:

1. The need for the Zakat Fund in Zliten to pay attention to the investment and
production aspects.
2. Developing the collection, control, distribution, and organization mechanism
approved by the Zakat Bureau in general and the Zliten Fund in particular.
3. The necessity of reviewing the legal legislation related to zakat with local and
mandatory laws, making it a religious obligation, and establishing legal guaran-
tees for its implementation. In addition, he instituted regulations to end the
occurrence of double levying and to get people to pay zakat to mandated
institutional bodies.
4. Adopting university programs to prepare and qualify specialists in the field of
investing and developing zakat funds, in addition to qualifying people in account-
ing for zakat funds.
396 S. F. Gamo et al.

5. The need for the Zliten Zakat Bureau to pay attention to education. Where he
must adopt the project of caring for poor students because education is one of the
most important pillars of development.
6. Coordinating with the Ministry of Education to integrate the concepts of zakat
into the curricula of all levels, including the university level. In addition to
including the subject of zakat accounting in university education curricula.

References

The annual report issued by the Libyan Zakat Fund (2015)

The website of the Libyan Zakat Fund, Zliten (2021)
Islamicity and Reporting Performance
on Islamic Banking Financial Performance
in Indonesia Post-COVID-19 (Period: 2019–
2021)

Cahaya Fitriana Dewi Amala, Ely Windarti Hastuti,

Muhammad Ridlo Zarkasyi, Kurnia Rahman Abadi,
and Yaafiatul Hasanah

Abstract Islamic banking is an institution engaged in carrying out company per-

formance based on sharia principles. Islamic banking needs to measure financial
performance in the post-COVID-19 period. Several ratios can be used to measure
financial performance, such as the Islamicity Performance Index and Islamic Social
Reporting. The purpose of this research is to investigate the impact of the Islamicity
Performance Index and Islamic Social Reporting on Islamic banking in Indonesia
post-COVID-19. This type of research is quantitative. The sample used is 14 Islamic
Commercial Banks in Indonesia in the period 2019–2021 (post-COVID-19). Panel
data regression analysis is the data analysis technique used, and it is processed using
the Eviews 12 program. The results of this study indicate that the Islamicity
Performance Index and Islamic Social Reporting have a significant effect on finan-
cial performance in Islamic Banking in Indonesia post-COVID-19.

1 Introduction
1.1 Background

Indonesia has the largest Muslim population in Southeast Asia. According to

Statista, 87% of Indonesia’s population is expected to be Muslim in 2020 (Kristina
2020). In the Financial Services Authority’s report in the 2020 Indonesian Islamic
banking snapshot, it was explained that Islamic Commercial Banks had an asset
growth value of IDR 397.07 trillion.
Considering the developments in Islamic banking and the significance of Islamic
banking, it is necessary to improve Islamic banking performance (Fatmala and
Wirman 2021), because observing asset and market share growth alone does not

C. F. D. Amala (✉) · E. W. Hastuti · M. R. Zarkasyi · K. R. Abadi · Y. Hasanah

University of Darussalam Gontor, Ponorogo, Indonesia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 397
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_36
398 C. F. D. Amala et al.

provide a comprehensive picture of the Islamic banking industry’s development.

Other important aspects must also be explored and observed, including the elements
of profitability, industrial ecosystem, and more importantly performance and com-
pliance with sharia values.
On March 2, 2020, the first COVID-19 case in Indonesia was announced; two
residents of Depok, West Java, were confirmed positive for COVID-19, which
started from a Jakarta event where the patient had direct contact with a foreign
citizen (WNA) from Japan who lives in Jakarta. Malaysia. The patient complained of
a fever, cough, and shortness of breath following the meeting. Responding to the
COVID-19 pandemic, policies began to emerge, beginning with the implementation
of work from home (WFH) among the forms of efforts called for and carried out by
the world to reduce the spread of COVID-19, namely, social or physical distancing,
until large-scale social restrictions were implemented (Tahliani 2020).
The COVID-19 pandemic had an impact on Islamic banking performance, as
evidenced by fluctuations, particularly at the start of the pandemic. In terms of
deposits and debt financing, the performance of Islamic banks varied. During the
pandemic, there has been a fairly consistent decline in lease financing. Meanwhile,
growth in equity financing was significant and consistent. This adds to the theory
that the profit sharing system used in Islamic bank products equity financing can
withstand domestic and international economic turmoil (Azhari and Wahyudi 2020).
Throughout the COVID-19 pandemic, Islamic banking must preserve company
value while improving performance. The COVID-19 pandemic is reducing Islamic
banks’ competitiveness. As income falls, so does competitiveness, and profit sharing
on deposits falls, making Islamic banks less appealing (Trimulato 2021). The
COVID-19 pandemic, which has lasted more than a year, has had numerous
consequences in the life sector, particularly in the economic and financial sectors,
particularly in Islamic banking. A performance assessment of Islamic banking is one
way to determine a bank’s soundness, because it will be seen how the bank can carry
out its functions properly as an intermediary institution and maintain the soundness.
One of the most important aspects of a company’s financial condition is financial
performance; in this study, the financial performance ratio used in Islamic banking is
return on assets (ROA). Return on assets is a financial performance ratio that
compares profit (before taxes) to total bank assets. This ratio can also show a
bank’s level of efficiency in asset management (Fatmala and Wirman 2021).
Islamic banking is a financial institution that conducts business in accordance
with Sharia principles. The Islamicity Performance Index is another option for
measuring financial performance in Islamic banks (Andreny and Putri 2017). This
index is an alternative for measuring the financial performance of Islamic banks.
Research on the Islamicity Performance Index has been conducted several times.
According to the findings of Fatmala’s research, the Zakat Performance Ratio has a
positive effect on financial performance (Fatmala and Wirman 2021). Khasanah’s
research shows that there is a significant positive effect between Profit Sharing Ratio,
Zakat Performing Ratio, Equitable Distribution Ratio, and Islamic
Income vs. Non-Islamic Income simultaneously on financial performance
(Khasanah 2016).
Islamicity and Reporting Performance on Islamic Banking. . . 399

Along with the development of Islamic banking, standards for reporting the social
performance of a company that follows Sharia principles, known as Islamic Social
Reporting or ISR, are also required. Islamic social reporting is a measure of a
company’s social responsibility to society as a whole. In accordance with research
conducted by Nasution, Ananda Anugrah shows that there is a significant negative
effect on the financial performance of Islamic Commercial Banks in Indonesia
(Nasution 2018). Fatmala’s research shows that Islamic Social Reporting has a
positive effect on financial performance (Fatmala and Wirman 2021).
Based on the state of Islamic Banking during the COVID-19 period, which saw a
lack of competitiveness, Islamic Banking must maintain company value while also
improving financial performance. In several previous studies, the Islamicity Perfor-
mance Index and Islamic Social Reporting had a large influence on financial
performance, and researchers wanted to find out whether during the COVID-19
pandemic (2019–2021 period) there was an influence of the Islamicity Performance
Index and Islamic Social Reporting on the financial performance of Islamic Banking
in Indonesia.

2 Literature Review

2.1 Previous Studies

Fatmala and Wirman published a study titled The Effect of Islamicity Performance
Index and Islamic Social Reporting on the financial performance of Islamic Banking
in Indonesia in 2021. According to the test results, the profit sharing ratio has no
effect on financial performance. The Zakat performance ratio improves financial
performance, whereas Islamic social reporting has the opposite effect. Profit sharing
ratio, zakat performance ratio, and Islamic social reporting all improve financial
performance.
According to Pangesti et al. in their study titled The Effect of Intellectual Capital,
Non-Performance Financing, Islamic Social Reporting, and the Islamicity Perfor-
mance Index on the financial performance of Islamic Banking for the 2014–2018
period published in 2021. The results revealed that 63 samples of data met the
criteria. According to the study’s findings, Intellectual Capital, as measured by the
Value Added Intellectual Coefficient, Islamic Social Reporting, and the Islamicity
Performance Index, has no effect on financial performance, whereas
nonperformance financing has a negative effect.
The difference in this study with previous research is that in this study, the
researchers measured the Islamicity Performance Index and Islamic Social
Reporting on financial performance in Islamic Banking in Indonesia. The period
of research conducted by researchers is post-COVID-19.
400 C. F. D. Amala et al.

2.2 Conceptual Framework

Islamicity Performance Index (IPI)

Financial Performance
Islamic Social Reporting (ISR)

3 Methodology

3.1 Data

The data analysis technique used in this study is panel data regression analysis,
which is processed using the Eviews 12 software. Panel data is a type of data that
consists of cross-section (multiple variables) and time-series data (based on time).
Panel data regression research is used to examine the effect of independent variables
on the dependent variable. The equation of the regression model in this study is

Y ROA = β0 þ β1 X PSRIt þ β2 X ZPRit þ β3 X EDRit þ β4 X DEWRit þ β5 X IIvIRit

þ β6 X IIcIRit þ β7 X ISRit þ μit ð1Þ

3.2 Model Development

3.2.1 Islamicity Performance Index on Financial Performance

The Islamicity Performance Index measures performance without forgetting the

obligation to run the wheels of the financial institution by Islamic law. This shows
that in running the company, humans must remain in the area of the hallway that
complies with Islamic law. Adherence to Islamic sharia can increase the confidence
of prospective users of sharia banking products so that Islamic banks’ financial
performance can be improved. According to the findings of Fatmala and Wirman
(2021) research, the Islamicity Performance Index has a positive effect on financial
performance. As a result, the hypothesis formulation can be stated as follows:
H1: Islamicity Performance Index has a positive effect on financial performance

3.2.2 Islamic Social Reporting on Financial Performance

Islamic Social Reporting or ISR is a standard in reporting the social performance of a

company that applies sharia principles. Sharia Enterprise Theory states that the
Islamicity and Reporting Performance on Islamic Banking. . . 401

financial performance of Islamic banking is a description of a company’s financial

situation. Each company is required to report its financial condition to stakeholders
at the end of the reporting period through Islamic Social Reporting (ISR) as a form of
corporate responsibility, so that the better the financial performance, the more likely
it is to disclose ISR. According to the findings of Nasution (2018) research, Islamic
social reporting has a negative impact on financial performance. As a result, the
hypothesis formulation can be stated as follows:
H2: Islamic Social Reporting has a negative effect on financial performance.

3.3 Method

This study employed a quantitative approach to research. A quantitative approach is

a research method used to investigate a specific population or sample. The type of
data in this study is secondary data in the form of an annual report on Islamic
Banking in Indonesia after COVID-19. Secondary data is an interpretation of
primary data, data that already exists and does not have to be collected by
researchers. The population in this study is Islamic banking in post-COVID-19
Indonesia (2019–2021 period), with the number of samples in 2019–2021 totaling
11 samples.

4 Results and Analysis

4.1 Results

4.1.1 Chow Test

Chow test is used to compare or choose between the common effect model and the
fixed effects model. Making a decision based on the profitability ( p) of cross-section
F. If the p value is greater than 0.05, the common effects model is chosen. However,
if p 0.05, the chosen model is the fixed effects model.
According to the Chow test Table 1, the two score Probability of Cross Section F
and more Chi square small from Alpha 0.05 are accepted, so H0 is accepted. So, to
demonstrate common effects, the best model to use is one that employs the common
effects method.

Table 1 Chow test result Effects test Statistic d. f. Prob.

Cross-section F 2.345939 (10,15) 0.0660
Cross-section Chi-square 31.071237 10 0.0006
402 C. F. D. Amala et al.

4.1.2 Hypothesis Test

1. Test Hypothesis Simultaneous (F Test)

Test F statistic used for test is all variable existing independent _ in the model that
has influenced together to variable dependent.
Based on the data in Table 2, it shows the test hypothesis by simultaneous F-
statistics of 49,42629 with probability of 0.000000 or score probability < level
significance (α = 0.05), which thereby is known by simultaneous Islamicity
Performance Index and Islamic Social Reporting to have a significant effect on
Performance Finance. This thing could be proved that F-statistics is smaller from
level significance.
2. Test Hypothesis Partial (t Test)
Test hypothesis partial used for knowing is variable independent individually
affect _ variable dependent that is Profit Sharing Ratio, Zakat Performance Ratio,
Equitable Distribution Ratio, Director Employee Welfare Ratio, Islamic
Investment vs. Non-Islamic Investment, Islamic Income vs. Non-Islamic Income,
and influential Islamic Social Reporting to Performance Finance. Criteria testing
shows score probability < level significance. The following served as results for
test hypothesis partial as follows (Table 3):
(a) Test Hypothesis Partial Profit Sharing Ratio to Performance Finance
Test hypothesis by partial is testing influence profit sharing ratio to
Performance Finance. Test first produces coefficient 1.32E -06, and t value
is 0.010210 with probability 0.9919. Test results show coefficient positive
and probability > level significance (α = 0.05) and in partial show that there

Table 2 Hypothesis test simultaneous result

R-squared 0.932612 Mean dependent var 1.488375
Adjusted R-squared 0.913743 S.D. dependent var 0.306323
S.E. of regression 0.089966 Akaike info criterion -1.771558
Sum squared resid 0.202346 Schwarz criterion -1.408769
Log likelihood 37.23071 Hannan-Quinn criter -1.649491
F-statistic 49.42629 Durbin-Watson stat 2.120589
Prob(F-statistic) 0.000000

Table 3 Hypothesis test par- Variable Coefficient Std. error t-Statistic Prob.
tial result
C -411.5271 1373.145 -0.299697 0.7669
PSR 1.32E-06 0.000130 0.010210 0.9919
ZPR -6.13E-05 0.000771 -0.079559 0.9372
EDR 0.019922 0.067140 0.296723 0.7691
DEWR -8.07E-09 2.44E-07 -0.033131 0.9738
IIVIR 2.036525 5.666116 0.359422 0.7223
IICIR 414.4668 1372.587 0.301960 0.7652
ISR -2.358964 0.140639 -16.77313 0.0000
Islamicity and Reporting Performance on Islamic Banking. . . 403

is positive influence but no significant. This thing proves that profit sharing
ratio has no effect on Performance Finance.
(b) Test Hypothesis Partial Zakat Performance Ratio Against Performance
Finance
This partial hypothesis test is a test of the influence Zakat Performance
Ratio to Performance Finance. Test first produces coefficient -6.13E-05, and
t value is -0.079559 with probability 0.9372. Test results show coefficient
negative and probability > level significance (α = 0.05) and in partial show
that there is negative influence but no significant. This thing proves that Zakat
Performance Ratio has no effect on Performance Finance.
(c) Test Hypothesis Partial Equitable Distribution Ratio to Performance
Finance
Test hypothesis by Partial is testing influence Equitable Distribution Ratio
to Performance Finance. Test first produces coefficient 0.019922 and t value
of 0.296723 with probability 0.7691. Test results show coefficient positive
and probability > level significance (α = 0.05), in partial show that there is
positive influence but not significant. This thing proves that Equitable Dis-
tribution Ratio has no effect on Performance Finance.
(d) Test Hypothesis Partial Director Employee Welfare Ratio to Perfor-
mance Finance
Test hypothesis by partial is testing influence Director Employee Welfare
Ratio to Performance Finance. Test first produces coefficient -8,07E -09,
and t value is -0.0333100, with probability 0.9738. Test results show
coefficient negative and probability > level significance (α = 0.05), and in
partial show that there is negative influence but not significant. This thing
proves that Director Employee Welfare Ratio has no effect on Performance
Finance.
(e) Test Hypothesis Partial Islamic Investment vs Non-Islamic Investment
To Performance Finance
This partial hypothesis test is a test of the influence of Islamic Investment
vs Non-Islamic Investment Ratio to Performance Finance. Test first produces
coefficient 2.036525, and t value is 0.359422 with probability 0.7223. Test
results show coefficient positive and probability > level significance
(α = 0.05) and in partial show that there is positive influence but no
significant. This thing proves that Islamic Investment vs Non-Islamic Invest-
ment has no effect on Performance Finance.
(f) Test Hypothesis Partial Islamic Income vs Non-Islamic Income to Per-
formance Finance
This partial hypothesis is test of the influence Islamic Income vs
Non-Islamic Income Ratio to Performance Finance. Test first produces coef-
ficient 414,4668, and t value is 0.301960 with probability 0.7652. Test results
show coefficient positive and probability > level significance (α = 0.05) and
in partial show that there is positive influence but no significant. This thing
proves that Islamic Income vs Non-Islamic Income has no effect on Perfor-
mance Finance.
404 C. F. D. Amala et al.

Table 4 Coefficient determination test result

R-squared 0.932612 Mean dependent var 1.488375
Adjusted R-squared 0.913743 S.D. dependent var 0.306323
S.E. of regression 0.089966 Akaike info criterion -1.771558
Sum squared resid 0.202346 Schwarz criterion -1.408769
Log likelihood 37.23071 Hannan-Quinn criter -1.649491
F-statistic 49.42629 Durbin-Watson stat 2.120589
Prob(F-statistic) 0.000000

(g) Test Hypothesis Partial Islamic Social Reporting to Performance

Finance
Test hypothesis by partial is testing influence ratio for results to Perfor-
mance Finance. Test first produces coefficient -2.358964 and t value is -
16,77313 with probability 0.0000. Test results show coefficient negative and
Performance Finance < level significance (α = 0.05) and in partial show that
there is negative influence and significance. This thing proves that Islamic
Social Reporting has a significant effect on Performance Finance.

3. Coefficient Determination R2
Test coefficient determination conducted for measure ability variable indepen-
dent that is Projected Islamicity performance index and Islamic Social Reporting
in explain variable dependent that is Return on Assets (ROA). Following served
results test coefficient determination with see adjusted R– squared variable
dependent among others (Table 4):
Results from (Table 4) data processing show that Test Coefficient Determina-
tion Adjusted R-squared value of 0.9137 (91.37%) indicate that Performance
Finance could be explained by Islamicity Performance Index and Islamic Social
Reporting by 91.37%. The rest (100% - 91 1.37% = 8.63%) is explained by
other variables outside the model.

4.2 Analysis

4.2.1 Panel Data Regression Test

A statistical method for testing the relationship between the independent and depen-
dent variables. The panel data regression equation is as follows:
Islamicity and Reporting Performance on Islamic Banking. . . 405

Y = - 411:52 þ ð1:32Þ ð11 × 3Þ PSR þ ð- 6:13Þ ð11 × 3Þ ZPR

þ ð0:02Þ ð11 × 3Þ EDR þ ð- 8:07Þ ð11 × 3Þ DEWR þ ð2:03Þ ð11 × 3Þ IIvIR
þ ð414:46Þ ð11 × 3Þ IIcIR þ ð- 2:35Þ ð11 × 3Þ ISR = - 411:52 þ 43:56
þ ð- 202:29Þ þ 0:66 þ ð- 266:31Þ þ 66:99 þ 13:67718 þ ð- 77:55Þ
= ð- 832:78282Þ

4.2.2 The Effect of Islamicity Performance Index (X1) on Financial

Performance (Y )

The findings of this study contradict previous research (Fatmala and Wirman 2021)
and (Khasanah 2016), which claim that the Islamicity Performance Index has a
positive effect on financial performance. The findings of this study are supported by
(Mayasari 2020) research, which found that the profit sharing ratio, zakat perfor-
mance ratio, equitable distribution ratio, and Islamic Income vs Non-Islamic Income
have no effect on financial performance (Return On Assets).
This results showed that during the period 2019–2021 (post-COVID-19), Islamic
banking in Indonesia was less than optimal in managing the Islamicity Performance
Index properly in maintaining sharia values in Islamic banks, resulting in a lack of
efficiency in providing added value for companies and increasing financial perfor-
mance in terms of the six ratios in the Islamicity Performance Index, namely, PSR,
ZPR, EDR, DEWR, IIvIR, and IIcIR; the six ratios do not show a significant effect
on the financial performance of Islamic banking.
Judging from several things:
1. The figure for Non-Performing Financing (NPF) in 2019–2021 fluctuated. The
rise in the value of the NPF resulted in a drop in financial performance. Although
the amount of profit-sharing financing is increasing, if many customers do not pay
off or pay their obligations, Islamic banking’s financial performance may suffer.
2. Judging from the value of the zakat performance ratio of each Islamic commercial
bank studied, the majority of banks have zakat expenditure levels below 2.5%,
namely, the Islamic nisab for issuing zakat. In contrast, according to the results of
the zakat performance ratio, the amount of zakat issued is not proportional to the
amount of net assets owned.
3. This is due to the unequal distribution of income among stakeholders, marked by
a gap in income distribution among stakeholders.
4. The calculation ratio demonstrates that the average Islamic bank has not allocated
benefits to directors and employees in a fair and consistent manner.
5. People still lack knowledge about halal investment. Thus, halal investment is less
attractive to the public. This can result in a drop in financial performance.
6. The presence of non-halal income in Islamic banking transactions, indicating that
Islamic banking that generates non-halal revenue from conventional activities
demonstrates that the bank has not conducted business in accordance with Sharia
principles.
406 C. F. D. Amala et al.

4.2.3 The Effect of Islamic Social Reporting (X2) on Financial

Performance (Y )

Based on data analysis and the third hypothesis, it can be seen that the coefficient
value is -2.358964 and the t value is -16.77313 with a probability of 0.0000. The
test shows that there is a negative but not significant effect. This proves that the third
hypothesis is not supported, meaning that Islamic Social Reporting has no effect on
financial performance.
Financial performance is impacted by Islamic Social Reporting disclosure, which
includes investment, social, environmental, labor, corporate governance, and service
product indicators. The study’s findings are consistent with research (Nasution’s
2018) indicating that Islamic Social Reporting has a negative impact on financial
performance. The study’s findings show that during the 2019–2021 (post-COVID-
19) period, Islamic banking emphasizes the “less profit, more sense” social bank
aspect, which means that Islamic banking is willing to operate with a small profit
while providing significant benefits, excellent for both the environment and society.

5 Conclusion and Recommendation

5.1 Conclusion

Seeing the developments that occur in Islamic banking and reviewing the importance
of the role of Islamic banking, it is necessary to improve the performance of Islamic
banking. During the COVID-19 pandemic, Islamic banking must maintain company
value and continue to improve performance. The purpose of this research is to look
into the impact of the Islamicity Performance Index and Islamic Social Reporting on
the financial performance of Islamic commercial banks. Based on the findings of the
hypothesis testing, it is possible to conclude that the Islamicity Performance Index
and Islamic Social Reporting have an impact on the financial performance of Islamic
banks in Indonesia post-COVID-19.

5.2 Recommendation

Assessment of financial performance can be measured through two variables in this

study, namely, Islamicity Performance Index and Islamic Social Reporting. This
research is practical for Islamic banks in making policies to be able to disclose post-
COVID-19 financial performance assessments. It is recommended that Islamic
banking activities be executed in accordance with Sharia principles in order to easily
assess financial performance. Furthermore, Islamic banking can maintain the
Islamicity Performance Index and Islamic Social Reporting in order to optimize
Islamicity and Reporting Performance on Islamic Banking. . . 407

financial performance. Furthermore, the researcher suggests that future researchers

conduct research by comparing the period before and after COVID-19, so that the
research results can be appropriately generalized. Researchers can then introduce
new variables to reveal a financial performance assessment post-COVID-19.

References

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Pandemi Covid-19. Jurnal Ekonomi Syariah Indonesia 10(2):96–102
Kristina E (2020) Pengaruh Intellectual Capital Dan Islamicity Performance Index Terhadap
Kinerja Keuangan (Studi Empiris Pada Bank Umum Syariah Periode 2012–2018). https://
repository.mercubuana.ac.id/56139/, S1 Thesis
Fatmala K, Wirman W (2021) Pengaruh Islamicity Performance Index Dan Islamic Social
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Akuntansi 3(1):30–43. https://doi.org/10.26618/inv.v3i1.4971
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Nasution AA (2018) Pengaruh Kepatuhan Syariah, Tata Kelola Perusahaan Islam dan Pelaporan
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Tahliani H (2020) Tantanganperbankan Syariah Dalam Menghadapi Pandemi Covid-19. Madani
Syariah 3(2):92–113
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Panin Dubai Syariah Cabang Makassar. Jurnal Ilmiah Ekonomi Islam 7(3). https://doi.org/10.
29040/jiei.v7i3.2908
The Effect of Institutional Theory Toward
Shariah Audit Practice in Malaysian
Takaful Industry

Noor Aimi Mohamad Puad , Nurdianawati Irwani Abdullah,

and Zurina Shafii

Abstract Ineffective governance practice in any Islamic financial institutions will

lead to the possibility of facing Shariah risk and incident of Shariah risk in their
activities and operation. Shariah audit function is one of the components of gover-
nance that play a role in ensuring Islamic financial institutions to have a sound and
effective internal control system of Shariah compliance. This study aims to examine
the effect of institutional theory on Shariah audit practice in Malaysian Takaful
industry. Institutional theory in this study describes how the social environment
shapes organizational structures and processes. Semi-structured interviews were
conducted with the auditors who involved in the shariah audit to get in depth
understanding on the process of shariah audit. Data were analyzed by using thematic
analysis. In line with Shariah audit practice, an organization’s commitment to
effective Shariah compliance could lead from isomorphism due to environmental
pressures. The finding discovers that there are impacts of coercive isomorphism,
mimetic isomorphism, and normative isomorphism on the current Shariah audit
practice. Therefore, the results may be used to find the expectations from the
practitioners on enhancing the current practice of Shariah audit.

1 Introduction

In the development of Islamic financial institutions (IFIs), compliance with Shariah

is the most important feature that distinguishes IFIs from other subdivisions of the
global financial system. Failure to comply with Shariah can damage public trust in

N. A. M. Puad (✉)
Islamic University of Selangor, Kajang, Malaysia
e-mail: [email protected]
N. I. Abdullah
International Islamic University Malaysia, Gombak, Malaysia
Z. Shafii
Islamic University of Science Malaysia, Nilai, Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 409
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_37
410 N. A. M. Puad et al.

the purity of IFI activities and thus reduce their market capitalization. Shariah audit
function demonstrates an extra governance framework in accordance with its Islamic
financial accountability and the interests of stakeholders with regard to ensuring
shariah compliance for IFIs. Given the rise and popularity of Islamic banking and
finance, Islamic financial institutions now have a responsibility to ensure that all
their activities and transactions adhere to Shariah standards, prompting a request for
more rigorous Shariah auditing.
This study focuses on Takaful industry as previously inefficient governance
processes in Takaful industry have been highlighted as one of the main problems
(Deloitte 2015; Mohd Fauzi et al. 2016; Zakariyah and Ahmed 2019), which then
expose takaful operators to the risk of Shariah noncompliance in their operations and
activities. The need of having an effective internal control of Shariah noncompliance
risks for the objectives of creating a robust Shariah governance framework in the
Islamic financial system is the basis for this research. Hence, the main objective of
this chapter is to analyze the effect of institutional theory on Shariah audit practice in
Malaysian takaful industry.
This chapter is divided into four main sections. Literature review section dis-
cusses Shariah audit practices in Malaysia and institutional theory together with
internal audit. Section 3 features the elaboration on the methodology and design of
study involved. Then, Sect. 4 presents the substantial findings, and the final section
contains the concluding comments.

2 Literature Review
2.1 Shariah Audit Practices in Malaysia

The study on Shariah audit practice was started by Yahya and Mahzan in 2012 which
found that the practices of Shariah audit in Malaysia are acceptable since the Shariah
audit function was just introduced during that period. Among the suggested areas to
be improved include promoting understanding of Shariah auditing among internal
auditors, enhancing Shariah knowledge of internal auditors, standardizing the Sha-
riah audit structure, and providing general guidelines to develop an audit program for
Shariah auditing.
There are other studies that were conducted to further explore the current audit
practice (Kassim et al. 2013; Kassim and Sanusi 2013; Ab. Ghani and Rahman 2015;
Yazkhiruni et al. 2018; Abdul Rahman et al. 2018; Puad et al. 2020). From the
previous study on the current practices, it can be concluded that the procedures are
still evolving where further developments and improvements are needed with a
particular focus on the standardization of the Shariah audit framework and guide-
lines for the design of the Shariah auditing audit program. The study conducted by
Puad et al. (2020) can be regarded as the latest study on Shariah audit practice which
discovered the implementation of risk-based audit by takaful operators and propose
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 411

the need of developing specific Shariah audit framework to enhance the current
practices and provide consistencies.

2.2 Institutional Theory

The most recent study used institutional theory to describe how organizations affect
institutions and how they in turn affect organizations. Understanding two institu-
tional theory fundamentals is crucial. First, the essential principle of the theory is that
individual behavior is influenced by the organizational environment, which is
socially constructed. On the other hand, individual actions and conduct have an
impact on the environment. To put it another way, people create the institutional
environment (DiMaggio and Powell 1983; Meyer and Rowan 1977). Second,
organizations are seen as open systems from the perspective of institutional theory,
which means that both players inside and outside of an organization can have an
impact on organizational structures and operations (Scott 1987).
There are two different types of isomorphism, competitive and institutional
(coercive, mimetic, and normative), according to DiMaggio and Powell (1983).
Competitive isomorphism relates to competition between organizations in an orga-
nizational field for resources and customers, while institutional isomorphism relates
to the desire for political power and legitimacy. According to DiMaggio and Powell
(1983), coercive isomorphism is caused by cultural expectations in the society in
which organizations operate as well as formal and informal constraints placed on
them by other organizations on which they depend. Pressures may be perceived as
calls to collaborate or as the exercise of power. Change is also brought about as a
direct result of the government’s directive.
On the other hand, mimetic isomorphism happens when organizations face a high
degree of uncertainty and search for a good model by following the behavior of
successful organizations (DiMaggio and Powell 1983). In this situation, the imita-
tion procedures are caused by the uncertainty that deals with organizational tech-
nologies, objectives, and environmental expectations. Normally, the successful
organization is the model for the less successful organization. For instance, a
newly formed organization can model itself on a well-established organization.
The third isomorphism is normative isomorphism which is described as a pres-
sure resulting from professionalization that socializes personnel within the organi-
zation to consider as lawful certain forms of structures and procedures (Mohd Zamil
2014). Normative isomorphism is also based on the assumption that organizational
change is accomplished through the process of professionalism. This process takes
place through two processes: first, formal education and research-based products
from authoritative professionals, and second, professional networks that share sci-
ence and technology (DiMaggio and Powell 1983).
Institutional theories provide a rich and dynamic view of organizations and can be
used to study the practice of Shariah audit. The practice of Shariah audit is a part of
organizational phenomena that new institutional theory can describe. This is
412 N. A. M. Puad et al.

demonstrated by previous studies which suggest that new organizational theory is

applicable in both developing countries and developed countries to understand the
practice of internal audit functions (Al-Twaijry et al. 2003; Mihret et al. 2010; Mihret
and Yismaw 2007). In a similar vein, some scholars have pointed out that internal
audit roles are socially constructed and that this is consistent with the current
organizational theory which considers the institutional system to be socially
constructed.

2.3 Institutional Theory and Internal Auditing

Since it has been highlighted in the SGF 2011 that the role of Shariah auditor should
be performed by internal auditor, it is relevant to discuss the application of institu-
tional theory to the internal auditor. According to the study by Karbhari et al. (2020),
this institutional theory will best serve the development of operational strategies and
structures for IFIs, as well as the role, function, and authority of the various
stakeholders, including regulators and those involved in the Shariah governance
process of IFIs. In the case of this study, it focuses on the role of the Shariah auditor.
In addition, they also recognized the institutional theory to perform a key role in
enriching the structural framework of Islamic financial institutions due to several
reasons.
Overall, Shariah governance is a holistic overview of relationships with various
parties linked to IFIs from an institutional theory lens. The concepts of Shariah
define the positions and duties of all multiple parties against both the institution and
society. The concept of Shariah describes the roles and functions of all multiple
parties toward the institution as well as to society at large. The overall outlook of
Shariah governance indicates that wider institutional structures surround the gover-
nance system. This implies that to protect the interests of all parties, the Shariah
governance system should be more systematic and socially developed than the
general association of the agent principal outlook (Karbhari et al. 2020).
Thus, based on the description of institutional theory to understand the Shariah
governance, it is proven that this institutional theory is suitable to be applied in this
study to understand the practices of Shariah audit and issues surrounding this area
which become the basis for the first research objective. In addition, the isomorphism
in institutional theory will be used in detail to examine whether there is any pressure
for continuity or changes in Shariah auditing practices for the purpose of improving
Shariah audit function in the future.
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 413

3 Research Methodology

The purpose of this study is to gain insight into Shariah committee and Shariah
auditor on the current practice to further examine on the effect of institutional theory.
This study employed a qualitative approach using in-depth interviews to gather
evidence. Despite the issues can be examined in detail and in depth, the data
collected on the basis of human experience is also more powerful and even more
convincing than quantitative data (Mohajan 2018).
The researchers employed a purposive sampling strategy whereby we engaged
with the respondents who are willing to participate in this study. Twenty-one
(21) interviews using semi-structured interview questions were undertaken. The
respondents include of Shariah committee involved in the process of Shariah
audit, shariah auditor, and the chief of internal auditor. The details of respondents
are shown in Table 1.
Based on the details of respondents, it can be considered that all of them are very
highly knowledgeable, have vast experience, and play a dominant role in their
organizations. The interviews were conducted by the researcher via face-to-face
sessions. The general questions focused on how practitioners perceived on suffi-
ciency of available guidelines for Shariah audit in assisting them and the need of
having specific Shariah audit framework. A semi-structured interview approach was
used, starting with a set of questions that was extended according to the
circumstances.
The study used thematic analysis. It included transcriptions of interview record-
ings, and the coding stages proceeded. After obtaining the data from the interview
sessions, the data was transcribed to attain general ideas of what the interviewees
were responding to and to further reflect on its meaning before the data was encoded.

4 Findings and Analysis

This section analyzes the effect of institutional theory on Shariah audit practice.
Institutional theory describes how the social environment shapes organizational
structures and processes. Organizations tend to be homogeneous in their practice,
as suggested by Meyer and Rowan (1977), through an isomorphic method to
represent rationalized guidelines. In line with Shariah audit practice, an organiza-
tion’s commitment to effective Shariah compliance could lead from isomorphism
due to environmental pressures.
Figure 1 summarizes the impact of coercive isomorphism, mimetic isomorphism,
and normative isomorphism on the current Shariah audit practice.
414 N. A. M. Puad et al.

Table 1 Details of interviewees

Highest Years of experience in
Interviewees Gender qualification Role industry
Respondent Male Bachelor’s degree Shariah auditor 16–20 years
1
Respondent Female Bachelor’s degree Shariah auditor 6–10 years
2
Respondent Female Bachelor’s degree Shariah auditor 6–10 years
3
Respondent Male Bachelor’s degree Chief of Internal 16–20 years
4 Auditor
Respondent Male Master’s degree Shariah auditor 11–15 years
5
Respondent Male Bachelor’s degree Shariah auditor 6–10 years
6
Respondent Male Bachelor’s degree Shariah auditor 11–15 years
7
Respondent Male Bachelor’s degree Shariah auditor 11–15 years
8
Respondent Female Bachelor’s degree Shariah auditor 6–10 years
9
Respondent Male Master’s degree Shariah auditor 11–15 years
10
Respondent Female Doctorate Shariah committee 16–20 years
11
Respondent Female Doctorate Shariah committee 6–10 years
12
Respondent Male Doctorate Shariah committee 6–10 years
13
Respondent Female Doctorate Shariah committee 16–20 years
14
Respondent Male Doctorate Shariah committee 11–15 years
15
Respondent Male Doctorate Shariah committee 16–20 years
16
Respondent Female Doctorate Shariah committee 11–15 years
17
Respondent Male Doctorate Shariah committee 11–15 years
18
Respondent Male Doctorate Shariah committee 11–15 years
19
Respondent Male Doctorate Shariah committee 6–10 years
20
Respondent Male Doctorate Shariah committee 11–15 years
21
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 415

Fig. 1 Impact of institutional theory on Shariah audit practice

4.1 Coercive Isomorphism

Coercive isomorphism stems from compelling pressures that are formal or informal.
Informal pressures may arise from the cultural forces and expectations of a society or
environment in which the organization exists. Formal pressure relates to pressure to
comply with the laws and regulations issued by authoritative bodies or organiza-
tions. These pressures are characterized by authority and coercive power. Regula-
tions are issued by IIA and BNM examples of pressures in Shariah audit practice in
Malaysia.
In terms of the current practice of Shariah audit, takaful operators are bound by
internal auditing regulations. It is a concern of takaful operators in Malaysia to
comply with international requirements (IIA) and local requirement (minimum
guideline on internal audit and SGF) when performing this Shariah audit. The
416 N. A. M. Puad et al.

Guidelines used by Takaful Operators

IFSA 2013 100 0

Internal audit guideline by BNM 100 0
Takaful Operational framework 100 0
Shariah Governance framework 100 0
COSO 100 0
International Standards for the Professional
Practice of Internal Auditing (IPPF)
100 0
Organization’s internal audit manual 81.8 18.2
Organization’s shariah audit manual 18.2 81.8

0 20 40 60 80 100

Yes No

Fig. 2 Comparison of guidelines used by takaful operator

compliance of the takaful operators toward all the requirements can be seen in Fig. 2
as all takaful operators use the guideline by IIA and BNM as the main reference
when conducting Shariah audit function.
Based on Fig. 2, it is worth to note that takaful operators are responsive to the
institutional pressures that come from regulations because they are using available
guidelines as their references. The difference on the guidelines used can only be seen
in terms of using either organization’s internal audit manual or organization’s
Shariah audit manual. Organization’s Shariah audit manual means the takaful
operator develops its own Shariah audit framework for the purpose of Shariah
auditing. According to the respondent, Shariah audit manual was tweaked based
on the internal audit manual and Shariah governance framework:
. . . audit manual was prepared by General Head Office, but I developed Shariah audit
framework. From the audit manual, we changed the structure for Shariah audit. For example,
in terms of reporting, and guideline reference . . . since because there is no Shariah audit
framework . . . (R1)

On the other hand, if the organizations do not develop their Shariah audit
framework, usually they will refer to their internal audit manual in performing
Shariah audit. Normally, internal audit manual comes from existing policy or
guidelines provided by the regulators. This is the practice in most Takaful Operators.
Majority of Takaful operators refer to their internal audit manual when conducting
Shariah audit. They embed the Shariah elements when they are conducting the
mandatory internal audit. These are among the statements from respondents which
proved their responsiveness:
our audit process universe is from the General Head Office and consists of a variety of
patterns which include industry outlook, regulations from BNM . . . (R1)
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 417

. . . we are now towards risk based . . . as there are changes in the policy of auditing . . . (R3)
we are following all the requirements by regulators . . . (R10)
Yes, we are aware of new coming TOF . . . In fact, now we are busy checking with all
Shariah papers issued by BNM . . .” (R5)
Currently, we have started to notify SC as it is the requirement in the ED of SGF. Before this,
we just highlight on key audit issues, but now we table everything to SC . . . (R14)
We don’t have any standard for Shariah audit, but yes. . . our main reference will be the
requirement by BNM . . . (R15)

All the above statements prove that takaful operators are very responsive to the
new changes or new circulation of any regulations which relate to the operation of
takaful operators. In fact, all auditors claimed that their Shariah audit process is in
accordance with the market practice. Below are some of the statements from
respondents:
Yes, because basically we are following IIA . . . (R14)
I would say yes . . . because we are following all requirements by regulators . . . (R12)
Yes . . . we are following the operational audit guidelines which is updated from time to time
. . . (R10)
Yes . . . because as an auditor, we are governed by the red book (IPPF) and COSO . . . So, it is
as per the market practice because what we are practising now is based on the requirement by
the regulators . . . (R8)
Yes . . . because we have fulfill all the requirements by BNM . . . (R5)

Compliance to all governing regulations has been seen as a part of takaful

operators’ corporate culture. Among the reasons for compliance is to avoid reputa-
tional risk and noncompliance with regulations. These are among the responses from
the auditors:
We have to follow the requirements by BNM, otherwise there will be issues with BNM
. . . (R3)
In whatever conditions, we will avoid having any issues with BNM, therefore we will follow
all the guidelines . . . (R11)
We are very concerned on reputational risk . . . (R10)

Malaysian takaful operators are very fortunate because the regulations on Shariah
governance receive full support from the regulators. This will be an added value for
these takaful operators in enhancing transparency. In addition, coercive pressure also
includes articulated regulatory practices such as rules, assessments, and codes of
practice. The takaful operators also perceive those external pressures on Shariah
audit practice come from the key stakeholders which consist of their customers,
takaful agent, investors, financial analyst, and other interest groups which indirectly
contribute toward coercive isomorphism. Control from BOD can also be identified
as the elements of coercive pressure. For example, when the auditors want to
418 N. A. M. Puad et al.

determine the audit scope, it happens sometimes that there are areas which are not
agreed by BOD, and then the auditor must provide the justifications.
Since it is proven that the Shariah audit practice of takaful operators were moved
by formal pressures especially from regulators, it could be the best solution if the
regulators can provide one specific Shariah audit framework. As revealed by a few of
the respondents, there were efforts from regulators such as BNM and MTA to
conduct workshops to obtain input from practitioners on developing a Shariah
audit framework in 2015, but until now, there is no outcome from that workshop
or any announcement from BNM regarding the Shariah audit framework. These are
among the reactions of some respondents involved in the workshop:
My comments on the proposed audit program, it is more of a compliance checklist, not an
audit program . . . an audit programme should not be too lengthy. It should be based on risk.
So, here we need Shariah key risk areas . . . (R1)
The framework cannot be too descriptive . . . a Shariah audit framework should be at policy
level only . . . (R3)
I have asked BNM on the outcome of the workshop, they answered that industry have not
prepared . . . some claimed that different companies have different nature . . . (R10)

There were also efforts from academicians such as a proposal by International

Islamic University Malaysia (IIUM) to the Malaysian Institute of Accountants
(MIA) to come out with a framework for the competency of Shariah auditors.
Ideally, having a specific guideline for Shariah audit would result in a more accurate
way of performing a robust Shariah audit exercise to reflect the definition of
“Shariah” itself. It also would give an accurate way to measure whether the current
Islamic institutions have achieved their main objective, as takaful operators should
look back at the definition of “Takaful” which simply means to help each other. In
addition, takaful operators are expected to communicate performance and Shariah
compliance which could reflect the financial results and true economic value. Thus,
it is very important for the industry to be guided by this specific guideline to achieve
the efficiency of Shariah audit function.

4.2 Mimetic Isomorphism

Mimetic isomorphism happens when an organization faces a high amount of uncer-

tainty. This pressure puts businesses in an environment of uncertainty in which they
can adopt referenced behaviors of other organizations, industries, or countries,
modeling themselves on such behavior. For this study, mimetic isomorphism is
identified in two situations. The first one is the behavior of the auditors mimicking
the conventional audit procedures when conducting the Shariah audit process.
Due to the inexistence of specific framework, during the analysis, it is observed
that the main reference used the one provided by IIA. The SGF also has clearly
mentioned that the function of Shariah audit can be conducted by the internal audit
department:
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 419

The function shall be performed by internal auditors, who have acquired adequate Shariah-
related knowledge and training. In addition, the internal auditors may engage the expertise of
the IFI’s Shariah officers in performing the audit, as long as the objectivity of the audit is not
compromised. (page 23)

Therefore, takaful operators are using the same process and method in conducting
both operational audit and Shariah audit. Here are some of the responses from
auditors on this issue:
If you are talking about process in Shariah audit, more or less the process used is similar
when conducting conventional audit . . . (R3)
. . . right now, we can see no difference with normal audit. (R4)
We are using the same method as operational audit . . . (R10)
We are governed by IIA . . . (R7)
So far, I don’t see any difference in the process of Shariah audit . . . (R15)
Planning, executing, reporting and follow up . . . all these processes are performed as per the
normal audit . . . (R14)

Based on the above response, it is notable that takaful operators are using the
same approach in conducting Shariah audit and operational audit. In fact, they are
using the internal audit manual in conducting their Shariah audit process. This
proved that there is mimetic isomorphism in the practice of Shariah audit. The action
of imitating conventional audit procedures is not necessarily bad for audit practice.
Conventional audit procedures here are also known as mandatory audit. Internal
audit processes have been developed and established for a very long time, and it has
gone through many phases of changes. Currently, internal auditing has become more
complex, covering a wider scope, and is expected to continue to contribute to the
organization in achieving its corporate objectives. Internal auditors are also governed
by The Institute’s Code of Ethics and Professional Practices Framework to guide
professional ethical behavior and rendering of quality audit services.
This finding is in line with the study by Yussof (2013), which stated that current
Shariah audit practice is replicating the conventional audit framework as a result of
the inexistence of specific Shariah audit practice. The auditors make full use of
available resources if they can achieve the objective of Shariah audit function. The
study by Abdul Rahman et al. (2018) also concluded that the internal Shariah audit
practice by Bank Islam also has similar process and methodology with their oper-
ational auditing. Despite all the benefits of imitating the process of operational audit,
it is important to note that the process of Shariah audit should be treated differently,
specifically in the planning process while determining the audit scope.
Imitating the normal audit procedures presents a few weaknesses which are
considered as issues. This is because the auditors are conducting independent
assessment related to the internal control of Shariah compliance. When it comes to
Shariah compliance, the audit scope should not be the same as operational audit; it
should cover all the elements in takaful such as the scope that has been highlighted in
SGF. Additionally, takaful operators do not have a specific audit charter for Shariah
420 N. A. M. Puad et al.

audit and when performing Shariah audit exercise. Audit charter is a very important
document as it defines internal audit’s purpose, authority, responsibility, and posi-
tion within an organization. Having a vague audit charter for Shariah audit will result
in the unclear role of a Shariah auditor. Audit charter is also a key benchmarking tool
against which the organization can measure the effectiveness of internal audit.
The second situation of mimetic pressure is when takaful operators refer to the
market practice or the practice of other takaful operators when they have any
uncertainty. This is based on the statement by R10:
When there was any query from the Malaysian insurance industry and we never resolve
those issues, we will check with the market practice . . . (R10)
If there is an opportunity to meet other Shariah auditors from the industry, we always have a
discussion on how to improve the current practice or current process . . . (R10)
Our practice is similar with some of the organizations. I have asked a few Takaful Operators,
the way they do audit is normally based on audit risk by function . . . (R13)
I have attended one training conducted by IBFIM. I purposely invited Shariah auditors from
other Takaful Operators to attend the training so that we can exchange any idea or any input
. . . (R14)

Thus, it is observable that the auditors always refer among themselves in the
takaful industry if there is any uncertainty regarding the practice or the process.
These efforts are the identified positive impact of mimetic pressure on the Shariah
audit practices of takaful operators. The auditors should always be open-minded and
willing to share new inputs that will help them improve current practices and
encourage them to compete in the best manner.

4.3 Normative Isomorphism

The idea that organizational progress derives primarily from professionalism and
sustainable education is centered on normative isomorphism (DiMaggio and Powell
1983; Meyer and Rowan 1977; Utami 2016). Normative pressure also is a result of
the adoption by professional groups and trade associations of similar methods and
attitudes that are introduced into organizations by employment. According to
DiMaggio and Powell (1983), the professionalization comprises two important
aspects of isomorphism sources, namely, formal education as well as professional
networks that share knowledge and technologies. These normative pressures are
transformed through education, professional training, standards, and networks of
interorganizations (Abdul Aziz et al. 2017).
In this study, the normative pressures are derived from education requirements
and also from various relevant professional bodies. Since currently the Shariah audit
function is conducted by internal audit function, most of all the requirements are
specified for the internal audit function. They are the Institute of Internal Auditors
(IIA), The Institute of Internal Auditors Malaysia (IIA Malaysia) Bank Negara
Malaysia and Malaysian Takaful Association (MTA), and Malaysian Institute of
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 421

Table 2 Responses of takaful operators to the normative pressures

Main source of normative pressures
SGF 2011
An IFI must ensure that its internal auditors who perform the Shariah audit function are qualified
to perform internal audits and have the requisite knowledge on Shariah requirements applicable to
Islamic financial business
IPPF
• Undertake their duties with due professional care
• Enhance their competence through continuing professional development
• Education and training system
Sources: Utami (2016), BNM (2019), IPPF (2019)

Accountants (MIA). Internal audit requirements were provided by both the IIA and
IIAM as international bodies. The standard issued by IIAM is essentially the
adoption of an international standard issued by the IIA. These professional bodies
are aimed at promoting internal audit guidelines and professional standards and
promoting the global implementation of best practices in internal audit. Table 2
demonstrates the response of takaful operators to the normative pressures.
These are among the responses from the participants which relate to the norma-
tive isomorphism:
We always involve in any conference or talk organized by the regulator . . . (R1)
I prefer someone with accounting/economy background to be the auditor, but he/she has to
undergo certain training or class in order to equip themselves with shariah knowledge
. . .” (R2)
Although I have an accounting background, I also took some additional courses, where I do
my foundation in Takaful and Shariah . . .” (R3)
The main problem is to hire the good staff to conduct Shariah audit, it is either you must have
good audit skills or good Shariah knowledge. It is very challenging to find someone who is
competent in both knowledge . . . (R4)
We always find a way to improve our Shariah audit function. . . (R7)
Sometimes we do inhouse training and in fact, we invite the auditor from other Takaful
Operator to join . . . (R9)
We always look up for the training which has an added value and can assist us in performing
our duties. Most important is the training or the course must get the recognition from IBFIM/
MTA . . . (R10)

Based on the responses, it revealed that the auditors are very enthusiastic to
enhance their competency by attending the related training and course. This dem-
onstrated the positive action among the auditors which could reflect the function of
the Shariah audit in the future. The management also could support by allocating the
necessary budget for course or training or make it mandatory for the auditors to have
any professional certificate which relates to their function. A study by Ali and
Kassim (2019) identifies two (2) factors which are the training courses and contin-
uous professional development, besides ongoing coaching practiced by the financial
422 N. A. M. Puad et al.

• Islamic banking
• Fiqh Muamalat
Knowledge Shariah
• Auditing
• Conventional banking
• Auditing
• Communication
Skills • Analytical thinking
• Report writing
• Negotiation skills when dealing with auditee
• Characteristics
• Willng to learn
• Good attitude/ strong character
Others
• Teamwork
• Committed
• Passion/interest

Fig. 3 Element in KSOC model. Sources: Ali et al. (2020)

institution, coupled with individuals’ progressive characteristics contributing to the

increase in knowledge and skills of the Shariah auditor.
This normative isomorphism is very much related to the competency and talent
management issues in IFIs. These issues have been debated a lot in the previous
study such as lack of knowledge on both Shariah and accounting and auditing
knowledge among Shariah auditors, duties, and role of Shariah auditors and quali-
fication (Yahya and Mahzan 2012; Yussof 2013; Shafii et al. 2013; Ali 2018). The
latest study in competency was conducted by Ali et al. (2020) which proposed on the
competency model for the Shariah auditors known as the KSOC model which
comprises the elements of knowledge Shariah, skills, and others. The summary of
this KSOC model is illustrated in Fig. 3:
To solve the competency issue, currently, there is a certificate Professional of
Shariah Auditor (CPSA) program which is designed to equip candidates with the
requisite technical understanding and professional skills on Shariah compliance
audit and review processes for the Islamic banking and finance industry. This
program would become the benchmark to solve the competency issues in Islamic
Finance industry; maybe all takaful operators should make this certificate mandatory
for their auditors.

4.4 Expectations of Practitioners

The expectations of practitioners provide the recommendations to enhance the

current process which is through the development of a Shariah audit framework.
Based on the analysis of interviews, the study then proposed the elements that should
The Effect of Institutional Theory Toward Shariah Audit Practice. . . 423

Duties and Responsibilities of Auditor

Ethics of Auditor

Reporting of Structure/Governing Structure

Key Risk Area

Audit Sampling

Fig. 4 Proposed elements in Shariah Audit Framework

be taken into consideration by regulators in developing a Shariah audit framework.

This is also known as the expectation from practitioners. The listed elements are
illustrated in Fig. 4:

5 Recommendations and Conclusions

This study explores the effect of institutional theory on the current Shariah audit
practice. Based on one aspect of institutional theory, normative isomorphism, we
assessed the effect of all available guidelines which all the requirements are specified
for the internal audit function. As with most other empirical studies, there are also
some limitations of this study. First, this research has a limitation in generalizing the
views from all takaful operators’ main players as this study only offers insightful
knowledge concerning one Shariah committee and one Shariah auditor for every
takaful operator. Therefore, a holistic debate on Shariah audit practices in takaful
operators needs to obtain more views and opinions. Secondly, the scope of the study
is limited to the takaful industry only.
Although this study comes with limitations, the findings provide significant
contributions to the Shariah audit practices. The limitations of the study also provide
the opportunity for the future research. Future research could explore the policy-
maker perspectives on this matter. Future research could also evaluate the effective-
ness of current audit practice of the Islamic finance industry especially the takaful
industry. Despite all the limitations, the analysis of the study is important in
enhancing the current Shariah audit practice especially for takaful industry player.
424 N. A. M. Puad et al.

References

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Abdul Aziz NA, Senik R, Yau FS, San OT, Attan H (2017) Influence of Institutional Pressures on
the Adoption of Green Initiatives. Int J Econ Manag 11(S3):939–967
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Assessment of Financial Performance
of RSI Sultan Agung Semarang Through
the Maqashid Sharia Concordance (MSC)
Approach

Muhammad Ali Ridho and Luluk Muhimatul Ifada

Abstract Islamic economics has a goal to achieve maqhashid sharia through the
realization of justice and balance in society. This chapter aims to assist the manage-
ment of RSI Sultan Agung Semarang in measuring the company’s performance
using the Maqhashid Syariah Concordance (MSC). The company’s performance
measurement is measured in four main areas, including work plans that are prepared
to meet the principles of fairness; fair hospital rates for patients, doctors, and
hospitals; recommendations from the sharia committee on policies taken by hospi-
tals; and cooperation with sharia banks.
This research design uses descriptive quantitative analysis by analyzing the
financial statements of the Sultan Agung Hospital Semarang during 2017 to 2021.
The data is calculated using an index according to the Maqhashid Syariah Concor-
dance model. The results of the paper show that the portion of da’wah and social
costs shows a very good value, the ratio of complaints to tariffs is still
within reasonable limits, the role of the Sharia Committee is in accordance with
its function, and the portion of RSI Sultan Agung Semarang cooperation with
Islamic banks is larger than conventional banks. The conclusion of this paper is
that the financial performance of RSI Sultan Agung Semarang based on the
Maqhashid Syariah Concordance approach is good. Suggestions that can be given
are to increase cooperation with Islamic banks and reduce cooperation with conven-
tional banks.

M. A. Ridho (✉)
Faculty of Economics, Department of Accounting, Universitas Islam Sultan Agung, Semarang,
Indonesia
Central Java, Indonesia
L. M. Ifada
Faculty of Economics, Department of Accounting, Universitas Islam Sultan Agung, Semarang,
Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 427
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_38
428 M. A. Ridho and L. M. Ifada

1 Introduction

Islamic economics has a goal to achieve maqhashid sharia through the realization of
justice and balance in society. Maqhashid Sharia is an important thing in practicing
muamalah. The application of sharia principles began to emerge in 1990 and
continued in 1992 with the birth of a sharia bank for the first time, namely, Bank
Muamalat Indonesia (BMI). Indonesia has a huge opportunity because according to
(Alhamid 2019), Indonesia is a country with the largest Muslim population in the
world.
Currently, public trust in sharia services has increased and has even become a
lifestyle. Public trust in sharia services is not only for sharia banking services but
also for sharia health services. The National Sharia Council-Indonesian Ulema
Council (DSN-MUI) in 2016 issued fatwa number 107/DSN-MUI/X/2016
concerning Guidelines for the Operation of Sharia Hospitals. Furthermore, on
October 1, 2016, the National Sharia Council-Indonesian Ulema Council
(DSN-MUI) established RSI Sultan Agung Semarang as the first sharia hospital in
Indonesia in accordance with the DSN-MUI decree number 008.55.09/DSN-MUI/
VII/2017 regarding certificates that have met sharia principles for RSI Sultan Agung
and were extended according to the DSN-MUI decree number 014.106.09/DSN-
MUI/VII/2020.
Indonesia as a country with a Muslim majority population has enormous potential
in efforts to develop sharia health services. The existence of a hospital based on the
Islamic religion has been around for a long time, but it does not yet have a reference
standard and legitimizing institution, so that the application of Islamic values in
health services needs to be confirmed with sharia hospital certification standards.
According to data from the Secretariat of the All-Indonesian Islamic Health Efforts
Council (MUKISI), currently there are 31 hospitals certified as sharia hospitals and
42 hospitals are in the process of becoming sharia hospitals, bringing a total of
73 hospitals. This development is quite encouraging, but the quite disturbing thing in
the implementation of the Sharia Financial Management Standards (SSMAK) is that
hospitals still use conventional measuring instruments in measuring their financial
performance.
In measuring its financial performance, Islamic hospitals still use financial ratios
commonly used by public companies, such as profitability, liquidity, solvency ratios,
and several other financial ratios. Therefore, according to (Susanti and Murnita
2017), if hospital financial management does not go well, the need for carrying
capacity of health services will also be disrupted. In response to the above, one of the
solutions offered by Islam is through the maqhashid sharia approach, which
according to (Sulistiadi 2016) the approach considers reality in relation to the
ultimate goal (maqhashid) and Islamic sharia values as well as the rules of society
and civilization. Based on the results of the description of the problems found in the
case, the researcher was then interested in writing a paper on the Financial Perfor-
mance Assessment of RSI Sultan Agung Semarang through the Maqhashid Syariah
Concordance (MSC) Approach. In general, this paper aims to assist the management
Assessment of Financial Performance of RSI Sultan Agung Semarang. . . 429

of RSI Sultan Agung Semarang in measuring the company’s financial performance

using Maqhashid Syariah Concordance (MSC).

2 Method

This research was conducted at RSI Sultan Agung Semarang, which is the first sharia
hospital in Indonesia. This research design uses descriptive quantitative analysis by
analyzing the financial statements of the Sultan Agung Hospital Semarang during
2017 to 2021. The data is calculated using an index according to the Maqhashid
Syariah Concordance model. Company performance measurement is measured in
four main areas, including:
1. The work plan drawn up meets the principles of fairness.
2. Hospital rates are fair to patients, doctors, and hospitals.
3. Recommendations from the Sharia Committee on policies taken by the hospital.
4. Cooperation with Islamic banks.
In this study, the ratios used are ratios selected which were formulated from the
standards in the Sharia Hospital Accreditation Standard Book, which are used in the
assessment of sharia hospital accreditation by the DSN-MUI. This formulation is
inspired by the tools used (Muhamed and Dzuljastri 2008) who have verified
measurements that will be used by sharia experts spread across the Middle East
and Malaysia, who are experts in both fields, both in the field of Islamic banking and
conventional banking.
The difference between this study and previous studies is that previous studies in
measuring the assessment of the company’s financial performance always use
conventional ratios, such as profitability, liquidity, solvency, and several other ratios.
While this research in measuring the assessment of the company’s financial perfor-
mance is using the sharia approach, namely, using the Maqhashid Sharia Concor-
dance (MSC) approach.

3 Result and Analysis

3.1 The Budget Work Plan Prepared Meets the Principles

of Justice

The principle of justice referred to in the preparation of the budget is to consider the
budget allocation for the needs of hospital operational management and the need for
da’wah to the community (Masyhudi 2019). Then because RSI Sultan Agung
Semarang does not calculate zakat, it is logical that RSI Sultan Agung Semarang
allocates its wealth for da’wah and social funds equivalent to the value of zakat mal,
430 M. A. Ridho and L. M. Ifada

Table 1 Budget fairness ratio

Year Da’wah budget SUd Ratio (%)
2017 1.991.485.000 20.476.342.072 9.73
2018 2.833.776.301 27.806.036.182 10.19
2019 4.193.121.56 49.531.39.518 8.47
2020 3.967.186.068 54.663.605.125 7.26
2021 1.949.724.420 54.663.605.125 3.57

Table 2 Tariff fairness ratio

Year Complaint by doctor Complain by patient Ratio (%)
2017 (2 × 6)/128 0 9.38
2018 (5 × 6)/130 0 23.08
2019 (2 × 6)/130 0 9.23
2020 (5 × 6)/136 0 22.05
2021 (5 × 6)/138 0 21.73

which is 2.5% of the rest of the business. If the ratio value is below this value, it can
be concluded that the performance is categorized as unhealthy. Conversely, if the
value is equal to or more than the standard, it can be concluded that the performance
is in the healthy category. The data for the da’wah budget and the total budgeted
costs for 2017–2021 are as follows:
The results of the calculation of the ratio in Table 1 show that the budget fairness
value of RSI Sultan Agung Semarang from 2017 to 2021 shows a value above 2.5%.
This shows that the value of budget justice is in the healthy category, but it needs
attention because the value is decreasing.

3.2 Hospital Rates Are Fair for Patients, Doctors,

and Hospitals

Data for complaints on hospital rates by doctors and patients and the number of
product tariff items are as follows:
Based on the tariff fairness ratio Table 2, it can be conveyed that the ratio of
complaints to tariffs is still within reasonable limits. During 2017–2021, the ratio of
complaints varied, and the highest was in 2018, where there were five doctors from
different SMFs asking for tariff adjustments. However, according to data from the
Public Relations and Partnerships Division, from 2017 to 2021, there were no
complaints about the tariffs from patients receiving health services at the Sultan
Agung Hospital, Semarang.
Assessment of Financial Performance of RSI Sultan Agung Semarang. . . 431

Table 3 Sharia committee engagement ratio

Year Recommendation Number of letters Ratio (%)
2017 1 1 100
2018 2 2 100
2019 1 1 100
2020 1 1 100
2021 1 1 100

3.3 Recommendation from the Sharia Committee on Policies

Taken by Hospitals

The Sharia Committee has the task of assessing, supervising, and providing recom-
mendations on policies and governance of health services in hospitals in accordance
with sharia principles. Thus, there is a guarantee that Islamic values in health
services can be implemented in every work unit in sharia hospitals.
How high the involvement of the Sharia Committee in making decisions and
formulating hospital policies in the financial sector is calculated from the number of
recommendations of the Sharia Committee issued for the number of application
letters submitted by the finance sector for one period. Data on the number of
recommendations from the Sharia Committee as well as the number of regulations
and cases related to financial practice at RSI Sultan Agung Semarang are as follows:
Based on the results of the calculation of the ratio of the involvement of the Sharia
committee as shown in Table 3, it shows that from time to time, the Sharia
Committee at RSI Sultan Agung Semarang has always contributed to the role of
maintaining sharia implementation, especially in the financial sector.

3.4 Cooperation with Islamic Banks

According to (National Sharia Council - Indonesian Ulema Council (DSN-MUI)

2016) in the seventh dictum regarding provisions related to the placement, use, and
development of hospital funds, explained that hospitals are required to use the
services of Sharia Financial Institutions in an effort to operate hospitals, whether
banks, insurance, financing institutions, guarantee institutions, or pension funds.
Therefore, Islamic hospitals are required to cooperate with Islamic banks, so to
calculate the ratio, it is calculated based on the number of collaborating Islamic
financial institutions compared to the number of collaborating financial institutions.
The data on the number of Islamic Financial Institutions, the number of banks,
insurance, financing institutions, guarantee institutions, and pension funds in col-
laboration with RSI Sultan Agung Semarang are as follows:
432 M. A. Ridho and L. M. Ifada

Table 4 Ratio of cooperation with Islamic banks

Year Number of Islamic banks Number of cooperation institutions Ratio (%)
2017 5 9 56
2018 5 10 50
2019 5 10 50
2020 6 10 60
2021 5 8 62.5

Based on the results of the calculation of the value of the ratio of cooperation
with Islamic banks as presented in Table 4, it shows that there is an effort
from RSI Sultan Agung Semarang to implement the fatwa from the National
Sharia Council-Indonesian Ulema Council (DSN-MUI). This can be seen from
the increasing value of the ratio, and this can be continued until the ratio reaches
100%.

4 Conclusion and Suggestions

4.1 Conclusion

Based on the research that has been done, it can be concluded that the financial
performance of RSI Sultan Agung Semarang based on the Maqhashid Syariah
Concordance approach is good.

4.2 Suggestions

Based on the research that has been done, the advice that can be given is to
increase cooperation with Islamic banks and reduce cooperation with conventional
banks.

References

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manusianya
Masyhudi AM (2019) Tranformasi Ekonomi Syariah di Bidang Pelayanan Kesehatan (Rumah
Sakit) dalam Menjawab Dinamika Perekonomian Global Melalui Sertifikasi Rumah Sakit
Syariah
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Muhamed and Dzuljastri (2008) The performance measures of Islamic banking based on the
Maqasid framework, IIUM international accounting conference INTAC IV Putra Jaya Marroit
Malaysia
National Sharia Council - Indonesian Ulema Council (DSN-MUI). Pedoman Penyelenggaraan
Rumah Sakit Berdasarkan Prinsip Syariah (2016)
Sulistiadi. Rahayu. Potensi Penerapan Maqashid Syariah Dalam Rumah Sakit Syariah di Indonesia,
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Anggaran 2013-2015 Di Kota Banda Aceh. Jurnal Akuntansi Muhammadiyah 8(1). ISSN:
20879776
Impact of Electronic Service Quality
on Customer Satisfaction of Islamic Banks
in Pakistan

Altaf Ahmad, Zishan Naseer, and Habeebullah Zakariyah

Abstract Islamic banking experienced a remarkable development and increasingly

challenging pace over the past decade. The concept of digital banking channel has
been gaining increasing popularity not only in Pakistan but all over the world in
recent years due to the nature of these channels for providing faster banking services
delivery to a wide range of customers. The study was conducted to investigate the
influence of electronic service quality on the satisfaction level of Islamic banks
customers within Pakistan. The study also figured out what are the factors customers
believe are hurdle in usage of digital channels offered by different banks to their
customers. The study made use of a questionnaire, filled from 152 customers of
Islamic banks who are using banks digital channels by random sampling. Descrip-
tive statistics, correlation analysis, and multiple regression model were employed to
achieve the objectives of the study. The study found that all five electronic service
quality dimensions found to have positive and statistically significantly influence on
the level of satisfaction of the Islamic banking customers. The results provide
Islamic banking industry regulators, central bank, academicians, and practitioners
useful guides in their efforts to formulate adequate electron service quality mecha-
nism to attract and retain more customers and to promote digital banking channels.

1 Introduction

Islamic finance has grown and is being considered as a better alternative for dealing
with the structural weaknesses of conventional financial system that was responsible
for financial crises across the globe. Islamic banking in comparison to conventional
banking has its distinguished strengths like participation in real economic activity

A. Ahmad (✉) · H. Zakariyah

International Islamic University of Malaysia (IIUM), Kuala Lumpur, Malaysia
e-mail: [email protected]
Z. Naseer
University of Management and Technology (UMT), Lahore, Pakistan

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 435
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_39
436 A. Ahmad et al.

and being inbuilt risk management mechanism, detailed investment disclosures, and
the highest standards of corporate governance. Islamic banking is increasingly
winning the confidence of consumers all over the world and that Shariah compliance
is a comparative edge for Islamic financial institutions besides the basic customer
demand of service quality. In the financial market, although Islamic banking has
been acknowledged and recognized with the passage of time, yet conventional
banking seems to be a well-established and biggest rival for this contemporary
Islamic industry. Islamic banking is an important pillar of the financial sector
today, and widening customer base and attracting new customer is a need of time
and cannot be achieved without a good satisfaction level/loyalty of existing cus-
tomers. Islamic banking has no longer be perceived as community-based business
intended to satisfy the religious commitments of Muslims only, but increasingly, as a
business competes strongly through pleasing existing customers, and attract poten-
tial customers to earn their loyalty. In Pakistan, banking industry is considerably
based upon Islamic banks, commercial banks, investment banks, and specialized
banks. On the contrary, nonbanking financial intermediaries including pension
funds, provident funds, insurance companies, takaful operators, and financial devel-
opment institutions that mobilize the individual’s savings and care to support
monetary needs of the country. The State Bank of Pakistan (SBP) is solely respon-
sible to regulate and supervise the banking sector and provide guidance on banking
policies development. The banking industry is a vital ingredient of the financial
sector to hold up economic activities of the country and is the sole body for fund
mobilization in the economy. Although conventional banking system in Pakistan is
well established, central bank has issued order to all the commercial banks to start
full-fledged or Islamic window operations of the Islamic banking by the year 2020.
The fact is that Islamic banking is receiving positive recognition from the customers,
yet conventional banking seems to be the biggest rival for this contemporary Islamic
industry.

1.1 Problem Statement

The continuation of conventional and Islamic banking in Pakistan shaped a contest

to magnetize a large figure of audience base. Earlier studies exist on the Islamic and
conventional banking sectors; however, most of studies are presented concerning
different features of conventional system while exceptional for the other (Chong and
Liu 2009). Similarly, many studies done compare efficiency in both banking streams
in diverse economies, but there is scarcity of studies concerning Islamic banking
sector with respect to e-SQ and customer satisfaction (Al-Hawary and Al-Smeran
2016). Therefore, a study is required to study the association between the customer
satisfaction and electronic service quality perspective within Pakistan to follow up
the gap in the existed literature in the context of Islamic banking industry.
Impact of Electronic Service Quality on Customer Satisfaction of. . . 437

1.2 Research Objectives

This study deals with the following research objectives:

1. To determine the impact of e-SQ on the satisfaction level of Islamic banks
customers in Pakistan.
2. To explore the relationship between reliability and the satisfaction level of
Islamic banks customers in Pakistan.
3. To explore the relationship between ease of use and the satisfaction level of
Islamic bank customers in Pakistan.
4. To investigate the relationship between efficiency and the satisfaction level of
Islamic bank customers in Pakistan.
5. To explore the relationship between privacy and the satisfaction level of Islamic
bank customers in Pakistan.
6. To explore the relationship between responsiveness and the satisfaction level of
Islamic bank customers in Pakistan.

1.3 Research Questions

The study addresses the following research questions:

1. Do e-SQ has a statistically significant influence on the level of satisfaction among
the customers of Islamic banks in Pakistan?
2. Do their exist relationship between reliability and the level of satisfaction among
the customers of Islamic banks in Pakistan?
3. Do their exist relationship between ease of use and the level of satisfaction among
the customers of Islamic banks in Pakistan?
4. Do their exist relationship between efficiency and the level of satisfaction among
the customers of Islamic banks in Pakistan?
5. Do their exist relationship between privacy and the level of satisfaction among the
customers of Islamic banks in Pakistan?
6. Do their exist relationship between responsiveness and the level of satisfaction
among the customers of Islamic banks in Pakistan?

2 Literature Review

2.1 Customer Satisfaction

The main concern of customer satisfaction is to make profitable, long-term customer

relationship with the focus of increasing productivity of firm to lower overall cost
and to create differentiation or customization by meeting the customer needs and
demands. This customer satisfaction results in customer loyalty as it promotes
438 A. Ahmad et al.

learning of the customer’s needs and expectations, and by meeting their require-
ments, they try to achieve competitive advantage. These are offered to customers and
and they are satisfied with the products or services above their expectations upon
which customer satisfaction depends and eventually become loyal. Gurbuz stated
that customer satisfaction has become an important component in the case of the
banking sector due to extensive competition and their need to retain and build long-
term relationships with their good customers. Afsar Rehman and Shahjehan argued
that satisfaction to be achieved needs previous usage knowledge and depends upon
price tag, while quality may be understood without having always demanding a new
previous usage knowledge and also won’t generally depend upon price tag. Internet
banking is the use of an electronic gadget to retrieve or process data related to
banking such as details about transactions or financial statements or to initiate
transactions remotely with another bank or financial services provider. Literatures
have found a strong association among service quality and customer satisfaction in
service sector in general and banking industry in particular (Culiberg and Rojšek
2010). Ahmad and Haron (2002) summarized that the quality of the service, friends
and family influences, and the credibility of banks and corporate image were the
main factors for customers of banks at the time of the decision of the selection of
banks (Colgate et al. 1996).

2.2 Electronic Service Quality (e-SQ)

According to De Ruyter et al., the aim of e-SQ is to strengthen the relationship

between the service providers and the customers. It is the use of an electronic gadget
to retrieve or process data related to banking such as details about transactions or
financial statements or to initiate transactions remotely with another bank or financial
services provider. Customers became a center for all banking tricks because of the
growing global competition for greater market share. Each bank is trying to improve
its presentation by improving their quality of services relating to customer prefer-
ences. According to Carden and Delli Fraine (2004), customer satisfaction is a
behavior following the purchase framed by the contrast of the quality that the
customer requires an exchange that really does receive in exchange.

2.3 e-SQ and Customer Satisfaction

Service quality has become a popular issue due to an era of high competition in
today’s business world. It has been suggested that organizations should improve
their services to meet the demands and requirements of customers. Parasuraman and
Berry, for example, discover factors connected with service quality such as reliabil-
ity, responsiveness, accessibility, politeness, conversation, reliability, and stability in
addition to tangibles. It is very difficult for a business entity to identify the customer
Impact of Electronic Service Quality on Customer Satisfaction of. . . 439

perception and evaluation regarding quality of its services. According to a study by

Hegazy on Egyptian customers about their attitude of Islamic banking, it was found
that most of the customers select a particular bank due to the efficiency and speed of
delivering e-banking services.

2.4 Dimensions of e-SQ

2.4.1 Reliability

Reliability is the capacity of a firm to perform stated tasks in a trusted and a precise
method. Sung et al. argued that this included workers’ genuine curiosity to solve the
customers’ complaints with high resolution as promised by the company. Thus,
customers decide your reliability and exactness regarding not only your provided
program but additionally your program staying provided.
H1: There is positive relationship between reliability and customer satisfaction of
Islamic banks in Pakistan.

2.4.2 Ease of Use

Ease of use is an important factor for e-SQ successful utilization. It makes a customer
to repeatedly visit the website to search out new products or services being offered
by the organization. Davis defined it as a user belief that a particular system is
effortless in usage.
H2: There is positive relationship between ease of use and customer satisfaction
of Islamic banks in Pakistan.

2.4.3 Efficiency

Efficiency has to do with the provision of services at the appropriate specified period
along with determination to aid consumers. It also embodies an organization image
resolution to make sure error-free information along with companies.
H3: There is positive relationship between efficiency and customer satisfaction of
Islamic banks in Pakistan.

2.4.4 Privacy

Privacy is also an important dimension of e-SQ on which the digital banking channel
customers are usually concerned upon. According to Zeithaml et al., privacy appears
confident to the bank users to make online transactions. Since websites often store
440 A. Ahmad et al.

customers’ personal information to allow better services, therefore online customers

are sensitive to website trustworthiness while making online transactions.
H4: There is positive relationship between privacy and customer satisfaction of
Islamic banks in Pakistan.

2.4.5 Responsiveness

Recent studies have found that responsiveness is considered the most significant
dimension because it has the highest influence on customer satisfaction. In commer-
cial banking, the comparative environment of banks affects satisfaction of a cus-
tomer. However, responsiveness to clients’ needs may now be classified under CSR
bank services. Parasuraman et al. did not consider such a dimension. The banking
industry is facing diverse competition.
H5: There is positive relationship between responsiveness and customer satisfac-
tion of Islamic banks in Pakistan.

3 Research Methodology

3.1 Research Design

The research study is essentially descriptive in nature, as it describes Islamic banking

customer’s responses for identified variables of study. The research study is specif-
ically designed to determine the electronic service quality factors which play an
important part in customer satisfaction of Islamic banks with special emphasis on the
Pakistan’s Islamic banking industry. It is qualitative research.

3.2 Population and Sample Size

The population for this study is the customers of five full-fledged Islamic banks who
are using electronic or internet banking being provided by the Islamic banks. A
sample size of 175 respondents is used for the study. However, 23 responses were
discarded, thus representing a response rate of 86.8%.

3.3 Data Sources and Data Collection

The primary data is used for addressing the research objectives of the study. The
information for all variables has been collected from the customers of full-fledged
Islamic banks with the help of a research instrument. The questionnaire is also filled
Impact of Electronic Service Quality on Customer Satisfaction of. . . 441

by direct interaction with the Islamic banking customers. In both above methods, the
responses have been collected from the Islamic banking customers residing in
Lahore, Pakistan.

4 Results and Discussion

4.1 Descriptive Statistics

Table 1 represents the descriptive statistics of the variables taken to determine the
influence of e-SQ on the customer satisfaction within Islamic banks operating in
Pakistan. Table 1 provides descriptive for 152 respondents. Descriptive statistics
included the results of mean, skewness, kurtosis, standard deviation, and total
number of observations used. Mean indicates the average or central value for the
set of data points or numbers. The results show that the value of the mean for
reliability (RL) is 3.76, ease of use (EU) is 4.59, efficiency (EF) is 4.36, privacy
(PV) is 3.34, responsiveness (RS) is 4.44, and customer satisfaction (CS) is 3.94.
Standard error is basically measuring the standard amount of difference among
the actual population mean and sample mean that is reasonable to expect simply by
chance. Similarly, standard deviation shows the variation in the data set. If the data is
close together, the standard deviation will be small. If the data is spread out, the
standard deviation will be large. RL has a standard deviation of 0.70, EU has 0.89
standard deviation values, EF has standard deviation of 0.95, PV has a value of 0.60,
RV has a value of 0.37, and CS has a standard deviation of 0.74, respectively. The
values of standard deviation depicted that there are no outliers in the data set and data
is said to be in normal shape for running the regression analysis.

4.2 Correlation Analysis

To examine the multicollinearity presence in the variables for determining the

influence of e-SQ on customer satisfaction, Pearson’s correlation analysis is applied.
The findings of the table show that correlation coefficient for all variables is below

Table 1 Descriptive statistics

N Mean Std. deviation Skewness Kurtosis
Reliability 152 3.7617 0.70561 -1.087 2.463
Ease of use 152 4.5954 0.89240 -0.475 -2.483
Efficiency 152 4.3654 0.95260 -0.908 3.400
Privacy 152 3.3438 0.60835 0.175 -1.182
Responsiveness 152 4.4450 0.37465 0.859 -1.126
Customer satisfaction 152 3.9498 0.74186 -0.372 -1.961
442 A. Ahmad et al.

0.60, representing no serious issue of multicollinearity among the variables. The

results revealed all variables found to have positive correlation between them at the
0.01 level of significance. The results of correlation analysis are given in
Annexure – C.

5 Conclusion

The concept of digital banking channel has been gaining increasing popularity not
only in Pakistan but all over the world in recent years due to the nature of these
channels for providing faster banking services delivery to a wide range of customers.
Islamic banking is increasingly winning the confidence of consumers all over the
world and that Shariah compliance is a comparative edge for Islamic financial
institutions besides the basic customer demand of service quality. The study evalu-
ates the impact of e-SQ dimensions such as reliability, privacy, ease of use, effi-
ciency, and responsiveness on the satisfaction level among the customers of Islamic
banks of Pakistan.
Literature review is used for the development of the theoretical framework for the
study leading to the development of hypotheses for the research that are verified
creating the primary research as a base. The step afterward is about adapting the
methodology of research and collection of data for deciding the question of research.
The data gathering phase leads to the analysis phase that aids in determining the
question of research and meet goal and purposes of the research. A quantitative
methodology is used and involves collecting primary data from the target sample
using a questionnaire.
The target population of the study is the customer of Islamic banks in Pakistan
that are providing e-services to their customers. The sampling method used to get
samples from the population is convenient sampling. The reason for choosing this
sampling technique is that the cost and time required to carry out a convenience
sample are small. A total of 175 respondents were asked and requested to fill in the
survey instrument, out of which 152 respondents filled properly, representing a
response rate of 86.7%. The principal method used to determine the sample size is
previous literature and questionnaire survey to be conducted. Questionnaire was
adopted and developed from the earlier scholarly work of Al-Hawary and
Al-Smeran, Khan et al. and Ariff et al. MS Excel and SPSS are employed as data
analysis software. Regression analysis, correlation analysis, and reliability analysis
were used to achieve the objectives of the research study. Customer satisfaction is
taken as a dependent variable for multiple regression analysis, while reliability (RG),
ease of use (EU), efficiency (EF), privacy (PR), and responsiveness (RP) are taken as
independent variables.
Explanatory power in regression model is 49.7% which means that 49.7%
variance from total variation in dependent variable is due to significant independent
variables used, whereas remaining 50.3% is explained by other factors which are not
taken in current research study. The F-statistics value of the model is also greater
Impact of Electronic Service Quality on Customer Satisfaction of. . . 443

than the critical value of 3.52 (for 5% level of significance using F-statistics chart),
that is, 28.84 which also indicates that model is statistically significant. The results of
OLS regression found that all five variables including reliability (RL), ease of use
(EU), efficiency (EF), privacy (PR), and responsiveness (RS) have significant impact
on the satisfaction level of customers in Islamic banking sector of Pakistan, as their
p-value at 5% level of significance is less than the 0.05, respectively. Moreover,
variables were found to be statistically positively significant at the 5 percent level of
significance.

References

Ahmad N, Haron S (2002) Perceptions of Malaysian corporate customers towards Islamic banking
products and services. Int J Islam Financ Serv 3(4):13–29
Al-Hawary SIS, Al-Smeran WF (2016) Impact of electronic service quality on customers satisfac-
tion of Islamic banks in Jordan. Int J Acad Res Account Financ Manage Sci 7(1):170–188
Carden R, Delli Fraine JL (2004) An examination of hospital satisfaction with blood suppliers.
Transfusion 44(11):1648–1655
Chong BS, Liu MH (2009) Islamic banking: interest-free or interest-based? Pac Basin Financ J
17(1):125–144
Colgate M, Stewart K, Kinsella R (1996) Customer defection: a study of the student market in
Ireland. Int J Bank Mark 14(3):23–29
Culiberg B, Rojšek I (2010) Identifying service quality dimensions as antecedents to customer
satisfaction in retail banking. Econ Bus Rev 12(3):151–166
Maqashid Sharia Framework: Sharia
Financial Inclusion Through Indonesian
Sharia Mobile Bank

Andiyani Kurnia

Abstract Financial technology (Fintech) has emerged as a tool that can process
payment faster, easier, more efficiently, and safer. This concept encourages under-
standing Islamic financial inclusion in the present and future. Although it has many
benefits and advantages, examining BSI Mobile to sharia principles needs to be
discussed further. This qualitative research observes BSI Mobile application
launched by Islamic Banks in Indonesia. This study examines the compatibility of
BSI Mobile with Maqashid sharia, which is very important to determine whether it is
following Islamic law’s objectives. This study adapts the BSI Mobile application
integrated with Maqashid sharia concept. This is conducted by reviewing the BSI
Mobile and Bank Syariah Indonesia applications used to assess the proposed
framework as case relevant. This research is expected to encourage Islamic financial
inclusion and noncash transactions developed by the Indonesian government.

1 Introduction

Based on data from the Financial Services Authority (2021), the 2019 National
Survey of Financial Literacy and Inclusion (SNLIK) shows that the financial literacy
index is 38.03% and the financial inclusion index is 76.19%. This is because
financial literacy is essential in community empowerment, personal well-being,
consumer protection, and augmentation. However, the Indonesian population gen-
erally understands the characteristics of formal financial products and services.
Financial services institutions show that they are not financial inclusion.
As Indonesia’s financial inclusion strategy is not an isolated initiative, involve-
ment in financial inclusion includes not only the responsibilities of Bank Indonesia
but also regulators, ministries, and other authorities that provide financial services to
the wider community. A national strategy for financial inclusion should lead to well-

A. Kurnia (✉)
Universitas Islam Internasional Indonesia, Depok, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 445
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_40
446 A. Kurnia

structured cooperation between national institutions and stakeholders. The role of

the National Banking System as a community financial intermediary is essential to
the realization of this national program. Inclusive finance is essential to support the
effectiveness of the functions and commitments of the Central Bank of Indonesia
and the national banking sector in relation to both currency and payment systems, as
well as macroprudential supervision. Islamic banking, as part of the national banking
system, has this special function and has great potential to contribute to the realiza-
tion of national financial inclusion. However, according to a 2016 study by the
Office of Financial Services (OJK), the reality is that while most of Indonesia’s
population is Muslim, the level of literacy and financial inclusion under Sharia law is
far from optimal. According to the survey, out of 100 Muslim residents, only
8 understand Islamic financial products and services, and 11 have access to the
products and services of Islamic financial services institutions. Of course, this
relationship is essential today to strengthen the role of banks and the Islamic
financial industry.
The potential for the development of an Islamic financial industry based on
Fintech or financial technology companies in Indonesia is very open and possible.
A study conducted by Rusydiana (2018) overcomes several obstacles, such as the
lack of policy instruments to sustain the FinTech work process from upstream to
downstream, and the availability of his qualified FinTech staff is required. On the
other hand, according to Webster and Pizalla (2015), the competition between
FinTech and traditional financial services is intensifying year by year due to
advances in information technology.
Bank Syariah Indonesia (BSI) has launched BSI Mobile as a Sharia banking
application considered a media platform to support Islamic financial inclusion in
society. Therefore, this study aims to reconstruct the functionality that exists in BSI
Mobile based on the Maqashid Syariah framework. Using BSI’s products, this
proposal becomes a form of Islamic finance education and can simplify the appli-
cation’s functionality.
A similar study was conducted by Nurfalah and Rusydiana (2019). That study
proposed a “connected one-stop solution” application solution, a digital innovation
solution to raise the level of Islamic financial literacy and inclusion in Indonesia.
Although the development was successful, it is characterized by the construction of a
financial system that is stable and benefits all levels of society. In this regard,
according to Hartati (2017), financial institutions play an important role in promot-
ing economic growth, income distribution, and poverty reduction and achieving
financial system stability through their intermediaries. Unequal access to banks
between urban and rural areas results in low levels of financial inclusion and literacy
rates.
Maqashid Sharia Framework: Sharia Financial Inclusion Through. . . 447

2 Literature Review

2.1 Sharia Financial Inclusion

Financial inclusion is a program that objective communities at the bottom of the

pyramid when it comes to accessing financial services (Marlina and Rahmat 2018).
According to research conducted by Jauhari (2015), financial inclusion is an attempt
to facilitate access to banking services for communities and MSMEs. In Indonesia,
financial inclusion is a national strategy to promote economic growth through
equitable income distribution, poverty reduction, and financial system stability
(Hadad 2010). Everyone’s right to access quality financial services of all kinds at
affordable prices is guaranteed. The policy aims to pay special attention to the
low-income poor, the low-productivity poor, migrant workers, and people in remote
areas (Bank Indonesia 2014; Demirgüç-Kunt et al. 2008; Demirgüç-Kunt and
Klapper 2012).
Financial inclusion is believed to foster economic growth, thereby reducing
poverty and inequality. The aspect of financial inclusion is reflected in the phenom-
enon of financial penetration. Communication between communities, easy access to
credit, and access to financial services are provided by communities to support
business and work. Furthermore, it is adjusted for growth aspects of various indica-
tors that reflect economic structure such as GDP, unemployment, inflation, invest-
ment, infrastructure, population, and labor (Erlando et al. 2020). The statement said
that poverty and inequality would decrease when financial inclusion fosters eco-
nomic growth. Second, there are indicators of economic growth, one of which is
infrastructure with existing infrastructure, economic growth will improve. Directly
proportional to financial inclusion.
From most of these theories, it becomes clear that the definition of Islamic
financial inclusion is the best access and availability of Islamic financial services
for Islamic banks and non-Islamic financial institutions. Community. In Maqassid
Sharia, governments are obliged to provide welfare and prosperity in the form of
economic equality so that they can support the needs of their people, avoid economic
inequality, and influence the welfare of their communities.

2.2 Sharia Banking

Concurring to the House of Agents of the Republic of Indonesia (2008), Islamic

banks are all related to Islamic banks and Shariah substances, counting teach, trade
exercises, and strategies and forms for conducting trade exercises. Shariah’s stan-
dards and sorts comprise of Shariah’s commercial banks and Shariah’s well-known
money-related banks. According to a Khmous and Besim (2020), consider that
Islamic bank stocks for the most part have a negative affection money related
consideration. This is often clarified by the ugly Islamic products, which are costly
448 A. Kurnia

for people and need of client data around Islamic banks. The affect of Islamic banks
on budgetary incorporation is much more grounded (superior) in middle-income
nations than in high-income nations, so in this ponder, Islamic banks are more likely
to dismiss devout banks. We have moreover found prove that it can contribute to
great budgetary consideration with Riba (intrigued).

2.3 Maqashid Shariah

The wording of Maqshid Shariah was, to begin with, talked about within the book
al-Burhan by Imam al-Harmayn within the chapter `illah and usul. He contends that
maqashid sharia can be categorized into three to be specific dharuriyat, hajiyat, and
tahsiniyat. In addition, it has defined dharuriyat al-kubra in sharia, better known as
maqashid al-khomsah. Imam Ghazali, a master within the twelfth-century advertise-
ment, law (fiqh), Islamic convention (aqeedah), Islamic otherworldly existence
(Sufism), and reasoning, composed in his book Syifa al-ghalil, with two Macassid
Shariah, claimed to be divided into parts: religion and Dunyawi (world). When
categorizing the world, center on four things: taking care of people’s self, staying
normal, protecting people’s descendants, and ensuring people’s property. When it
comes to the category of religion, there is everything that abstains from abominable
deeds (Ismail 2014). Imam Shatibi, too known as Syaikhul Maqasid in his work Al
Muwafaqat, divides Maqasid Shariah.

3 Method

This study is a type of descriptive study with a qualitative approach. That procedure
produces descriptive data (descriptions of events or problems) in the form of words
written from people or actions that are not directly observed, or in a single case, only
in one place. The qualitative paradigm emphasizes understanding the problems of
social life based on real-life conditions or holistic, complex, and detailed natural
environments (Indiarto and Bambang 1999). The type of data used in this document
is secondary data, which is the source of written data indirectly acquired and
recorded by intermediary media or other parties.
This study uses the Maqashid Sharia analysis to confirm the compatibility
between Islamic financial products and service innovations and the policy level for
current Sharia-compliant needs. The Framework of Maqashid Sharia Maslahah
Dharuriyyat is also known as Maqashid al-Khamsah, that is, religion (al-Din), soul
(al-Nafs), descendants (al-Nasl), intellect (al-'Aql), and wealth (al-Mal). Maslahah
Hajiyat removes the narrowness and difficulty of meeting basic human needs.
Maslahah tahsiniyat is intended to protect the honor of Maqashidal-Khamsah (Ismail
2014).
Maqashid Sharia Framework: Sharia Financial Inclusion Through. . . 449

4 Result and Discussion

4.1 Maqashid Shariah and Syariah Banking

Islamic banking is the leading clone of Islamic banking as Islamic banking wealth
management accounts for 83% of the total assets of the entire Islamic finance
industry (Indonesian Monetary System Statistics, February 2017). In the ever-
changing and growing thicket of life these days, much work needs to be done to
be willing to construct an Islamic self-image to a relevant degree. In this case,
Maqashid Syariah could be a relevant passage underlying the events of Islamic
banking systems, practices, and even products in this fourth-dimensional age. The
Makassid Shariah legal system is considered by many students to be a good way for
Islamic banking to face the dynamic contemporary problems as a result of the
benefits and welfare it upholds. The concept of Maslahah is the essence of Syara’
(maqashid shari’ah), a provision of Islamic law. Here, Maslahah means Jalbul
Manfa’ah American State Daf’ul Mafsadah (attract profit and ward off evil)
(Srisusilawati and Eprianti 2017).
Islamic banking faces challenges in the growth of the developing Islamic banking
industry, including how Islamic banking practices and fashions may evolve in the
future. From an operational point of view, the corporate version of Islamic Banking
covers all business and nonbusiness aspects (consisting of sharia/social aspects) of
the network’s various financial and social sports. For example, the corporate district
is an operation of Islamic banking, promoting network corporate sports and bringing
blessings to stakeholders and the entire national economic system as well as pro-
moting the improvement of the Islamic banking district and the national economic
system. An example of a Shariah issue is whether the Indonesian version of Shariah
Bank conforms to Makhashid Shariah. This includes elements such as justice,
aspiration, and unity for people to perceive the fabric and religiously rich Indonesian
society (Srisusilawati and Eprianti 2017). The first target is nonpublic education.
This means that both knowledge and personal skills grow and spiritual values
increase.
Islamic banks are obligated to develop ethically sound education and training
programs to improve the knowledge and skills of their employees. The bank has also
informed its stakeholders that the products on offer are Shariah compliant. This goal
is divided into three parts:
developing knowledge, acquiring new skills, and public awareness of the existence
of Islamic banking. The second goal is justice. Impartiality means that Islamic
banks are obligated to ensure integrity and fairness in all transactions and
business activities involving products, prices, and terms/contracts. He has three
aspects to this goal:
fair contracts, affordable products and services, and anti-fraud. The third target is
Maslaha. Maslahah means that Islamic banks are obligated to develop investment
projects and social services to improve people’s well-being. There are three
aspects to this: profitability, income and wealth distribution, and investment in
450 A. Kurnia

the right sectors. This design translates into indicators for measuring the perfor-
mance of Islamic banks. In fact, the Islamic banking system is very different from
the traditional banking system. The most fundamental difference concerns the
benchmarks (“worldviews”) of individual financial institutions. This fundamental
difference leads to differences in the product formulation/manufacturing of the
two benchtop models and the performance of each measured (Nurfalah and
Rusydiana 2019).

4.2 General Mapping of BSI Mobile and Maqashid Syariah

BSI Mobile is one of the distribution channels owned through Bank Syariah
Indonesia to get entry to money owed owned through clients the usage of 3G/4G
generation and WIFI thru smartphones. The layer shown on BSI Mobile is as follows
(Fig. 1):
BSI provides features and services that can assist its customer’s transactions.
These features include checking account balances, transferring funds, and various
other payments such as Account Balance Check, Transfer, Purchasing, Payment,
QRIS, E-Mas, Withdrawal, Islamic Services, and Sharing.
From the BSI Mobile tool description above, there are several tools that can be
grouped into one category. This study focuses on assessing a combination of
Shariah’s principles and multiple tools built into Shariah’s concept of Macassid.
BSI mobile itself should be developed into a virtual wallet (e-wallet) based on
Sharia’s principles, not as a payment method for other e-wallet platforms.

Fig. 1 BSI Mobile display

Maqashid Sharia Framework: Sharia Financial Inclusion Through. . . 451

Table 1 BSI Mobile and Maqashid Sharia

Menu/Maslalah Categories BSI features
Dharuriyat Ad-Din 1. Complete Qur’anic feature
2. Sharing Ziswaf (Zakat, Infaq, Waqf, etc.)
3. Qurban saving
4. Hajj And Umrah Saving
An-Nafs 1. Health insurance
2. Multi-payment
Al-Aql 1. Islamic finance article
2. Education saving goals
3. Future insurance
An-Nasl 1. Future saving plan
2. Retirement plans (sharia pension fund)
3. Social security
Al-Maal 1. E-mas (provide the physical gold)
2. Sharia mutual fund
3. Sharia investment
Hajiyat 1. Transfer
2. Purchase
3. Top-up
4. QRIS
5. Favorite
Tahsiniat 1. Transaction schedule
2. Live chat with Aisyah (customer service)
3. Add friend

The combination of the three majors Maslahah (Dharuriyyah, Hajiyat,

Tahsiniyat) formulated by scholars and the division of Maslahah Dharuriyyah into
five categories are the main foundations for the reconstruction of the BSI Mobile
application concept in the development of application functionality have adapted to
maqashid sharia. Therefore, in reality, there are no services or products derived from
Islamic norms or teachings. Essentially, this mobile application aims to facilitate
public access to Islamic financial services and products that are still far behind
traditional financial literacy at the inclusion and inclusion and literacy levels.
Below are the details of rebuilding BSI Mobile features that are maqashid shariah
compliant (Table 1):

4.3 Implication

The development of BSI Mobile as an innovation in Islamic finance will have a

positive impact on the development of Islamic finance in Indonesia. Here are the
benefits you get with these rebuild apps:
1. Support the Expansion of Sharia Financial Inclusion
452 A. Kurnia

Furthermore, the digitization of Islamic financial services and products is a

form of attempt to raise public awareness of the existence of Islamic finance in
Indonesia. Meanwhile, the general public can access His Sharia financial services
and products anytime and anywhere using simple technology currently being
developed via his BSI Mobile application with additional His Sharia maqashid
compliant features. Therefore, facilitating public access to Islamic finance
through this application will have a significant impact on raising the level of
Islamic financial inclusion in Indonesia.
2. Improving Financial Literacy Through the Digitization of Sharia Financial
Services and Products
Phone and Internet usage levels that continue to increase each year are seconds
that must be used in all sectors of the economy, including the Islamic financial
industry. With the emergence of facts, this will become more and more open, and
programs to make Islamic finance more accessible to the general public will make
the public aware of Islamic currency products and services that can facilitate all
their needs. Moreover, given the numerous features of BSI Mobile, the general
public will increasingly fear that Islamic finance offers very different products
and services and is not as good as the traditional financial industry (ojk.go.id).
3. Increasing Share of Shariah Financial Market
BSI Mobile is so versatile that it offers a wide range of Islamic financial
products and services. It is hoped that the general public will have easy access to
all information related to Islamic finance as registration and use of this application
are straightforward. This information helps ordinary people save money and trade
Islamic financial products and services. This application aims to increase market
share and improve productivity in the Islamic financial market.
4. Support Halal Needs According to Maqashid Syariah
BSI Mobile application is expected to be able to develop a system equivalent
to halal and shariah transactions, so that people don’t have to worry about the
Galar, Maycil, Tadrith, Iftiqar, and usury elements.
5. Support Cashless
The general public is expected to use applications such as mobile banking and
card payments, as well as cashless payment functions. BSI Mobile strongly
supports the development of this government program that enables any commu-
nity to make payments using QRIS and NFC scanning capabilities. In addition,
we provide a payment menu for various merchant payments such as PLN, credit,
and PDAM to support general commercial transactions.

5 Summary

The concept of simplifying the Maqashid Syariah menu when applied to the BSI
mobile application will become the foundation and means of education for the wider
community, especially customers of Bank Syariah Indonesia. As the largest sharia
bank in Indonesia, BSI, which is based on the Maqassid Syariah concept, will
Maqashid Sharia Framework: Sharia Financial Inclusion Through. . . 453

distribute features that simplify the e-wallet application menu and increase public
views of the sharia industry and its movements. Mobile banking concept of
reconstructing the BSI Mobile application menu in this study is expected to have
implications in the future, therefore constructive criticism and suggestions are
needed in developing this study in the future.

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Exploration of Sharia Bank Services
in Muhammadiyah’s Higher Education
Students

Ummu Salma Al Azizah and Bella Jastacia

Abstract In this era of digital transformation, technological advancements enable

financial transactions on the M-Banking platform page, specifically, mobile banking
for Muslims. The ability to easily and conveniently pay tuition fees using mobile
banking is one of the numerous innovations and advantages of the current fintech
application for its users. There is no longer a need to wait in long lines, even while
paying for education, thanks to technological advancements. However, this finding
sought to examine the variables that affected students’ intentions to use mobile
banking (M-banking) of two significant Islamic banks in Indonesia, BSI Mobile and
Muamalat DIN (Digital Islamic Network). Because of their partnership with
Muhammadiyah University, everyone enrolled in this institution of higher learning
will benefit. 657 people responded to the research. Smart PLS 3.3.3 is used for the
analysis of structural equation models (SEM). The findings indicated that brand
image has an impact on consumers’ intentions to utilize mobile banking, but
perceived ease of use (PEOU), perceived usefulness (PU), and trust have no such
impact. As a result of this study, transactions are made very simple by the advent of
sharia m-banking, but there are still technological issues that banks must take into
account while providing services through mobile banking applications.

1 Introduction

1.1 Background

Mobile banking has become an integral part of all financial transactions. Thus,
mobile banking customers have undergone a tremendous increase from year to
year, including in sharia financial context. In advancing sharia financial inclusion,
financial technology contributes to the system’s stability. In Indonesia context, there

U. S. Al Azizah · B. Jastacia (✉)

University of Muhammadiyah Prof DR HAMKA, Jakarta, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 455
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_41
456 U. S. Al Azizah and B. Jastacia

are many various Islamic banks that are famous and mostly used by Indonesian
users, for example, Bank Muamalat Indonesia (BMI) and Bank Syariah Indonesia.
These banks are famous and integrated to some Islamic universities payment system,
so that it is easier for students to pay for college payment purposes. However, this
bank continues to innovate and issue various kinds of products named Muamalat
DIN (Digital Islamic Network). Mobile banking (M-banking) is an M-banking
service from Bank Muamalat Indonesia which was created on November 14, 2019
(Bank Muamalat Indonesia 2019). This service was created to make it easier for BMI
users such as conducting financial transactions without having to come to the bank.
It has many services such as paying tuition fees at collaborating universities with
BMI (bankmuamalat.co.id).
In addition, there is Indonesia’s largest Islamic bank named Bank Syariah
Indonesia (BSI). This bank is a combination of several large Indonesia Islamic
banks, which are Bank Syariah Mandiri, BNI Syariah, and BRI Syariah, which
became one entity on February 1, 2021 (bankbsi.co.id). Although relatively new,
BSI already has 15.5 million customers (Walfajri 2021). Thus, BSI has a wide range
of products and services for its customers. One of them is M-banking service called
BSI Mobile. This mobile phone has several features, one of which is for ease of
transactions such as money transfers and tuition payments.
However, these two Islamic banks are the largest Islamic banks in Indonesia. BSI
was only established in 2021 and launched its BSI Mobile banking. In BMI case, it
has mobile banking named Muamalat DIN which was launched in 2019. These two
m-banking have several features such as tuition payments to facilitate student trans-
actions, especially students at the Muhammadiyah Islamic campus. The
Muhammadiyah Islamic campus has collaborated with these two banks, so that
students can transact easily for college payment purposes. With the new services
from the two Islamic banks, it is important to investigate the effectiveness of the
services they provide for students’ intention to use.

1.2 Objective

The aim of the study is to evaluate the quality of mobile banking applications of BSI
and BMI that have collaborated in Muhammadiyah higher education in terms of
providing digital services via mobile banking applications to tuition payment pur-
poses. This research used the Technology Acceptance Model. This analysis of sharia
bank services is intended to give information and user convenience trends to the
sharia bank digital service provider via mobile banking.
Exploration of Sharia Bank Services in Muhammadiyah’s Higher. . . 457

2 Literature Review

2.1 Background Theory

Mobile banking has recently become a tool for large-scale transactions. Addition-
ally, the pandemic supports the adoption of mobile banking for all outside financial
transactions. Mobile banking is an integrated mobile transaction application devel-
oped by the financial technology industry. Fintech can accelerate Islamic financial
inclusion, namely, in the banking industry. However, according to McWaters et al.
(2015), this will provide challenges for conventional banking and financial institu-
tions. Nevertheless, fintech must be studied further through agreement in the process
of altering its usage (Milian et al. 2019). According to Stewart and Jürjens (2018),
fintech is digital tools and mobile devices for transactions, account balance infor-
mation, and billing notifications. The user will be notified via text message or other
means. Sharia fintech tends to adhere to the stipulated sharia compliance in this
instance (Rahim et al. 2019). Nevertheless, there are still technological limitations
(Miskam et al. 2019). Fintech in this instance is M-banking. It is a service used by
banks to facilitate client communication. Hochstein (2015) stated that the imple-
mentation of M-Banking’s fintech would have numerous advantages, including
reduced costs and the ability to reach more clients. In addition, it is vital to establish
a solid system. In addition, according to Sulistyowati et al. (2021), the system’s
simplicity enables users to feel secure and benefit from it. Therefore, scholars are
interested in researching Islamic M-Banking in Muhammadiyah universities using
the technology acceptance model (TAM) approach.

2.2 Previous Studies

Numerous study literatures on financial technology were discovered, and their

ramifications were extremely diverse. Usman (2015) raised research on fintech
trends in the charitable sector that demonstrated a substantial association between
the usefulness and perceived usefulness of a religion or belief using TAM analysis.
Thus, there are numerous variations of TAM analysis as a benchmark for the market
success of a technology (King and He 2006). Thus, perceived ease of use and
perceived utility are essential factors that directly or indirectly influence behavioral
intentions. Although these two factors are not related to the other two variables when
behavioral intentions are assessed under a variety of conditions, they are related to
the other two variables (Abdullah and Ward 2016). Regarding Sharia law, Baber and
Zaruova (2018) emphasize that the Shariah compliance aspect incorporated into a
technology serves as the foundation for Sharia application purity. Consequently,
Shariah compliance becomes crucial for all Islamic products and services (Farooq
and Pashayev 2020). When conducting transactions, consumers frequently assess
their level of confidence in transaction security (Gefen et al. 2003). According to
458 U. S. Al Azizah and B. Jastacia

Pavlou (2003), online transactions are more susceptible to security issues than
in-person purchases. Thus, Singh et al. (2020) propose that fintech implementation
can be evaluated using various technology acceptance constructs, such as the
Technology Acceptance Model (TAM), the Unified Theory of Acceptance and
Use of Technology (UTAUT), ServPerf, and WebQual 4.0, which can be
supplemented by data on digital behavior and demographics that influence
technology use.
Fintech has an enormous impact in this era of the banking industry disruption.
Other evidence indicates that investment in fintech is common. According to KPMG
(2020), fintech companies spent $4,256,202 million globally in 2018 and are
projected to reach $7,971,957 million by 2022, with a CAGR of 17%. Nonetheless,
Batunanggar (2019) demonstrates that Indonesia has a substantial fintech potential.
However, this incidence does not rule out mobile payments. Dahlberg et al. (2015)
define mobile payments as a tool for the technologically based payment of services,
bills, or anything else. Mobile payments can be initiated with a single tap on a mobile
device. The amount of mobile payment transactions in Indonesia is influenced by the
numerous benefits connected with mobile payment applications. By 2022, it is
anticipated that the total value of digital banking transactions will be 49,733 trillion
rupiah (IDN Financials 2022). Therefore, this technical breakthrough facilitates
more Internet-based financial transactions using mobile banking applications. More-
over, it has permeated the improvement of transactional procedures in the education
sector to prevent errors.
Muhammadiyah Higher Education (PTM) is one of the cases in the realm of
education that collaborates with Islamic banks BMI and BSI to provide educational
services. The display elements of these two Islamic banks are aesthetically pleasing
and user-friendly. One of the financial operations related to tuition fees that have
been digitized is mobile banking. In addition, Wulandari and Nasution (2019) notes
that usage and convenience perspectives are crucial when using mobile payments to
pay for education. In contrast, Singh et al. (2020) value perceived usefulness and its
influence on social aspects. However, Juhri and Dewi (2017) discovered that the
perceived usefulness had no impact; therefore, the authors interpreted this gap as an
intervening variable in the adoption of mobile payments in the transaction process of
paying tuition fees at Muhammadiyah Higher Education (PTM).

2.3 Conceptual Framework

Figure 1 showed the conceptual framework of this study. Based on the concept, the
study addresses the following issues regarding exploration of Islamic banking
services at Muhammadiyah University:
H1: Brand image affects the intention to use M-banking.
H2: Perceived ease of use affects the intention to use M-banking.
Exploration of Sharia Bank Services in Muhammadiyah’s Higher. . . 459

Fig. 1 Conceptual
framework

H3: Perceived usefulness affects the intention to use M-banking.

H4: Trust affects the intention to use M-banking.

3 Methodology

This research utilizes an online survey approach based on purposive sampling which
were Muhammadiyah colleges and sharia mobile banking services named BSI and
BMI mobile. This research used technology acceptance model (TAM). The gathered
data were then evaluated using the TAM-based structural equation model analysis.

3.1 Data

The questionnaire was separated into two sections: the demographic session and the
5-point Likert scale variable survey. In this study, 721 college students in
Muhammadiyah University have contributed to the data collection. After cleaning
the data by removing erroneous data and random filling, 657 legitimate respondents
with an effective response rate of 72.8% were successfully picked.

3.2 Model Development

Analysis uses the acceptance theory utilizes model theory to confirm the utilization
of mobile applications to evaluate the utility, convenience, and usability of mobile
applications.
460 U. S. Al Azizah and B. Jastacia

3.3 Method

There were five variables that was utilized by the researcher. It was adapted and
adjusted from prior research, in which perceived usefulness and perceived ease of
use were adopted from Davis (1989) and Adams et al. (1992); intention was adopted
from Marakarkandy et al. (2017), Grabner-Kräuter and Faullant (2008), and Patel
and Patel (2018); brand image is adopted from Ha (2004); and trust was adopted
from Chong et al. (2010).

4 Result and Analysis

4.1 Result

Table 1 showed the measurement model of each variable.

4.2 Robustness Test (Table 2)

Table 1 Measurement model

Constructs Items OU α CR AVE
Brand image BI1 0.922 0.843 0.927 0.864
B12 0.938
Intention INT1 0.936 0.925 0.952 0.869
INT2 0.939
INT3 0.921
Perceived ease of use PEU1 0.78 0.76 0.861 0.673
PEU2 0.855
PEU3 0.825
Perceived usefulness PU1 0.858 0.832 0.896 0.742
PU2 0.83
PU3 0.896
Trust TRU1 0.898 0.803 0.878 0.706
TRU2 0.793
TRU3 0.826
Exploration of Sharia Bank Services in Muhammadiyah’s Higher. . . 461

Table 2 Fornell-Lacker BI INT PEU PU TR

criterion
BI 0.93
INT 0.686 0.932
PEU 0.124 0.182 0.82
PU 0.092 0.145 0.714 0.862
TR 0.238 0.205 0.671 0.637 0.84

Fig. 2 Path coefficient

4.3 Analysis

After conducted the validity and reliability test, this researcher conducted empirical
research of the fintech service adoption model which it used sample data analysis.
Finally, it evaluates the hypothesis using the sample data and a structural equation
model. The SEM model is used to produce the standardized path coefficient, t value,
and p value, which are provided by SmartPLS 3.0 and used to assess the hypothesis
put out in this study. If p is less than 0.05 and t is greater than 1.96, the coefficient test
is deemed significant. If p is less than 0.01 and t is greater than 2.58, the coefficient
test is deemed significant. The coefficient test is deemed significant at p 0.001 if
t > 3.1 (Fig. 2).
According to Table 3, the results indicate that brand image (= 0.027, t = 25.43)
has a significant impact. Significant positive on Intention to Use mobile banking.
Meanwhile, perceived ease of use (= 0.056, t = 1.855), perceived usefulness (=
462 U. S. Al Azizah and B. Jastacia

Table 3 Path coefficients

T P
Hypothesis Path relationship Β statistics values Remarks
H1 Brand Image → intention to use 0.027 25.43 0.000 Supported
H2 Perceived ease of use → Intention to 0.056 1.855 0.064 Rejected
use
H3 Perceived usefulness → Intention to 0.042 1.028 0.305 Rejected
use
H4 Trust → intention to use 0.047 1.141 0.254 Rejected

0.042, t = 1.028), and trust (= 0.047, t = 1.147). As previously discussed regarding

the minimal t-value for testing hypotheses, their t-value is greater than 1.96; hence,
the H1 is accepted, but H2, H3, and H4 hypotheses are rejected and also that these
variables have no significant effect on Intention to Use m-banking.

5 Discussion

The hypothesis test demonstrates that consumer perceptions and preferences for
mobile banking services are influenced by the brand image. This result is the same as
Hoai Linh’s (2017) research, where brand image has influence on intention to use
bank services. However, brand image revealed to play a significant effect. Islamic
banks in Indonesia must project a positive image and prevent negative issues on the
market; a marketing strategy is required for them to be accepted and become the
people’s preferred option for financial transactions. According to Hu et al., Baber
(2021), Usman et al. (2022), and Nurfadilah and Samidi (2021), consumer prefer-
ences are based on positive testimonials from people who have utilized fintech
services and have a favorable view of the market for banking firm operations.
Nurfadilah and Samidi (2021) also stated that Bank Syariah Indonesia’s brand
image is improving because it is a state-owned megabank and so it is safer to
conduct business there.

6 Conclusion and Recommendation

6.1 Conclusion

The findings of the study show that consumers’ intentions to use financial services,
in this case Islamic banking, are significantly influenced by their perception of a
company’s brand. Indonesians today have a tendency to trust, feel secure utilizing,
and find simple mobile banking services based on brand image. There are significant
reasons why Indonesians should adopt Islamic mobile banking services. The study’s
case studies, Bank Syariah Indonesia and Bank Muamalah Indonesia, highlight the
beneficial effects of brand perception on consumers’ intentions to purchase.
Exploration of Sharia Bank Services in Muhammadiyah’s Higher. . . 463

6.2 Recommendation

This study employs just simple variables and focuses on respondents from the
Muhammadiyah community and the younger generation who are students. It is
intended that additional study will reach all circles so that a broader perspective on
technological acceptance for the adoption of fintech services may be obtained. In
terms of assessing the measurement of our study model, there are still values that do
not match the necessary minimum standards, as certain variables only employ an
insufficient number of indicators. Future researchers are anticipated to be able to
develop more accurate indicators for measuring factors.

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Is the Islamic Religiosity Become
the Cashless Behavior Among Muslim
Community?

Chindy Chintya Cahya and Khoirul Umam

Abstract In Islam, the religiosity factor can also be an indicator that can influence
the behavior patterns of individuals and society. If someone has high Islamic
religiosity, he will behave by religious values. Likewise, in using noncash trans-
actions, someone with high Islamic religiosity will not use noncash transactions for
things that are prohibited by religion. The purpose of this study is to conceptualize
the role of Islamic religiosity on people’s behavior with a public acceptance
approach to payment system technology. The methodology used in this research is
qualitative through content analysis. The results of this study reveal that indicators in
Islamic religiosities, such as belief, attitude, and practice, can affect cashless behav-
ior. This can be interpreted that the higher a person’s religiosity level, the more he
will choose to use noncash transactions because it is more effective and efficient to
provide mashlahah for its users. Therefore Islamic religiosity can directly influence
the behavior of the Muslim community in using cashless.

1 Introduction

Religion is an important cultural factor to study because it is universal and has a

significant influence on the behavior of individuals and groups of people (Mokhlis
2009). Indonesia is a country with a majority Muslim population. The Directorate
General of Population and Civil Registration (Dukcapil) of the Ministry of Home
Affairs noted that Indonesia’s population is 273.87 million in December 2021, and
this figure has added 1.64 million people compared to June 2021 of 272 million
people. There are 238238.09 million people or 86.93% of Indonesia’s population
who are recorded as Muslims at the end of 2021, as many as 20.45 million (7.47) of
Indonesians are Christians, as many as 8.43 million people (3.08%) are religious
Catholics, and 4.67 million (1.71%) Hindus. There are also 2.03 million people or

C. C. Cahya · K. Umam (✉)

University of Darussalam Gontor, Ponorogo, Indonesia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 465
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_42
466 C. C. Cahya and K. Umam

0.74 million people in the country who are Buddhists; there are 73.63 thousand
people who embrace Confucianism; and there are 126.52 thousand (0.05%) who
adhere to religious beliefs (Budy 2022). The data above show that the majority of
Indonesia’s population is Muslim. As a Muslim one must behave in accordance with
Islamic principles.
Commitment to religion occupies an important role in determining people’s
behavior (Ateeq-ur-Rehman and Shabbir 2010). According to Jamal (2003), con-
sumer behavior can be influenced through changes in attitudes and feelings (Jamal
2003). In addition, religion can be used as a benchmark for determining things that
are prohibited and permissible to do (Shyan Fam et al. 2004). In practice, all forms of
a Muslim’s actions are strengthened by religious obligations, so adopting a new
product can also be influenced by religious beliefs (Baig and Karamat Baig 2013),
including adopting a new product in the form of a technology payment system.
One of the religious principles presented by Islam in muammalah is to bring
convenience and benefits so that mashlahah is achieved in society. The many
conveniences and benefits provided by the current technology payment system
make people tend to choose to use noncash transactions in transactions (Ramadani
2016).
Based on several studies conducted by Ateeq-ur-Rehman and Shabbir (2010)
regarding the relationship between religiosity and an interest in adopting new
products (Ateeq-ur-Rehman and Shabbir 2010), he stated that belief in religion
can determine what products will be adopted by society. Besides that, Ansari’s
research (2014) states that there is a very close relationship between religiosity and
what new products will be adopted (Ahmad 2014). Furthermore, Baig’s research
(2013) states that religiosity can influence the adoption of new products in Pakistani
society (Baig and Karamat Baig 2013). Besides that, Al-Khowaiter’s research
(2022) found that the Islamic religiosity variable can strengthen the relationship
between interest and behavior in using m-payments (Alkhowaiter 2022). Some of
the studies above show a significant relationship between religiosity and the adop-
tion of new products. Therefore, this paper will examine more deeply the religiosity
index and its relationship with the adoption of new products in the form of a
technology payment system with a content analysis approach, which is based on
the results of previous studies.

2 Methodology

The methodology used in this research is content analysis. Content analysis is

research that examines a text objectively to get an overview of the content as it is
without the intervention of the researcher. Research eliminates certain biases, biases
and tendencies by researchers. The results of content analysis research truly reflect
the contents of a text and are not the result of the researcher’s subjectivity. Content
analysis is nomothetic which is aimed at making generalizations from messages, not
idiographic types which generally make detailed descriptions of phenomena (Ahmad
Is the Islamic Religiosity Become the Cashless Behavior Among. . . 467

2018). In this study, the researcher generalized previous research related to the
relationship between Islamic religiosity and the adoption of new technology, espe-
cially toward cashless behavior.

3 Finding and Discussion

3.1 Concept of Religiosity

Since the 1960s, there have been many studies trying to measure the
multidimensional dimension of religiosity. One of the measurements of religiosity
is that proposed by Charles Glock; he stated that the dimensions of religiosity
include ideological dimensions, ritualistic dimensions, experiential dimensions,
intellectual dimensions, and consequential dimensions (Glock 1962). From Glock’s
religious dimension, it can be seen that religion is not only an aspect of worship
rituals but a commitment to behave according to one’s religion in every sphere of life
(Azam et al. 2011). Then Allport and Ross measured religiosity using two con-
structs, namely, intrinsic religiosity and extrinsic religiosity. According to him,
intrinsic religious is religious which is motivated by internal beliefs. People who
have high intrinsic religiosity will try to live according to their beliefs, while
extrinsic religiosity does not involve spirituality but focuses more on how social
networks accept one’s religion and how this religion makes one’s life easy and
comfortable. Therefore, according to him, inter-intrinsic religiosity has more influ-
ence on behavior than extrinsic religious (Vitell et al. 2005).

3.2 Islamic Religiosity

Religion in Islam is a very important thing; according to Riaz Hassan, Religion is the
essence of Muslim identity (Hassan 2007); with religion, the identity of a Muslim
will be seen in every aspect of his life. According to Islam, people are called
religious or pious if they do all the commands of Allah swt. and avoid all its
prohibitions. In order to achieve this piety, Muslims must have a basic belief that
rests on the five main pillars called the pillars of Islam (reciting the shahadat, prayer,
fasting, zakat, and hajj). The six pillars have been clearly mentioned in the Qur’an
and Hadith which mean:
It is not a virtue to turn your face towards the east and the west, but indeed that virtue is
believing in God, the Last Day, angels, books, prophets and giving the property he loves to
his relatives, orphans , the poor, travelers (who need help) and those who beg; and (liberate)
the slave, establish prayer, and pay zakat; and those who keep their promises when they
promise, and those who are patient in hardship, suffering and in war. They are those who are
true (of faith); and they are those who fear (Al-Baqarah 176–178).
468 C. C. Cahya and K. Umam

While the prophet’s hadith about this pillar of faith comes from Umar bin Qathab,
about the story of Jibreel alaihissalam coming to ask the Prophet sallallahu alaihi
wasallam about faith. So he bless him peace, said, which means:
You believe in God, His angels, His books, His Messengers, the Last Day, and you believe
in good and bad destiny (HR. Muslim no. 9).

A Muslim must also believe in what is called the pillar of faith. The pillars of faith
consist of believing in God, believing in God’s angels, believing in God’s prophets
and messengers, believing in God’s books, believing in the Last Day, and finally
believing in God’s provisions (Al Qada and Al Qadr). This has been mentioned in
the hadith of the Prophet, he said which means:
Islam is built on five things: (1) Testifying that there is no deity worthy of worship but Allah
and Muhammad is the messenger of Allah, (2) Establishing prayer, (3) Zakah (4) Hajj, and
(5) fasting in the month of Ramadan (HR. Bukhari Muslim).

Thus religious in the context of Islam at least consists of worships that are
doctrines of faith, worships that are between humans and God, as well as worships
that are between humans and humans. Therefore, studies of religiosity in the context
of Islam must contain these three elements. Most of the research on religiosity is
done in the west and is limited to Christian and Catholic communities. Even if the
measurement of religiosity is used for the Christian community, there may be
concepts and items that can be used for the Muslim community, but overall the
scale is limited by culture and cannot be used to measure the religiosity of a Muslim.
The religiosity scale made for Christians is of no use if it is used to reveal the
psychological aspects of a Muslim [2]. Therefore there are several scales of religi-
osity in Muslim terminology which are summarized in Table 1:
Based on Table 1, it can be seen that the religiosity scale according to Islamic
terminology that is often used is belief, attitude, and practice. Some researchers who
use the religiosity scale are those carried out by Albelaikhi (1997).

Table 1 Religiosity scale according to Muslim scientists

Researchers Number of dimension Name of dimension
Albelaikhi (1997) 2 Beliefs, Attitudes, and Practice
Hassan (2007) 5 Ideologi, Ritual, Devotional, Eksperiential, and
Konsekuential
2 Attitudes and Moral Values
Mokhlis (2009) 2 Intrapersonal and interpersonal
3 Practices, Altruism, and Honour
Beliefs, Practices, Altruism, Enrichment
3 Doctrinal, Intrinsic and extrinsic
Is the Islamic Religiosity Become the Cashless Behavior Among. . . 469

3.3 Religiosity and Cashless Behavior

According to Glock and Stark, religiosity consists of four dimensions, namely,

belief, practice, experience, and knowledge (Glock 1962, p. 4). Besides that,
Al-Belaikhi (1997) as a Muslim scientist also stated that the indicators of religious
Islam are belief and practice, attitude, and knowledge (Albelaikhi 1997, p. 41). In
addition, Alsanie as a Muslim scientist (1989) stated that Islamic religiosity has two
dimensions, namely, belief and practice (Mohd Dali et al. 2019, p. 14). In this case,
religion is considered an important cultural factor to study because it is one of the
most universal and has an influence on attitudes and behavior, both individuals and
society.
Kotler (2000) states that religion is part of culture that can shape people’s
behavior (Kotler 2000). This means that religious people who hold religious values
can influence their actions and decisions, especially in adopting new products such
as technology payment systems. Several studies have been conducted by Ateeq-ur-
Rehman and Shabbir (2010) regarding the relationship between religiosity and the
interest in adopting new products (Ateeq-ur-Rehman and Shabbir 2010); he stated
that belief in religion can determine what products will be adopted by society.
Besides that, Ansari’s research (2014) states that there is a very close relationship
between religiosity and what new products will be adopted (Ahmad 2014). Further-
more, Baig’s research (2013) states that religiosity can influence the adoption of new
products in Pakistani society (Baig and Karamat Baig 2013). Besides that,
Al-Khowaiter’s research (2022) found that the Islamic religiosity variable can
strengthen the relationship between interest and behavior in using m-payments
(Alkhowaiter 2022). Based on some of the research above, it can be seen that a
person’s level of religiosity is not a barrier for someone to adopt new technology,
especially in payment technology. Therefore this can be an opportunity for Islamic
financial institutions to continue to improve the quality of service in the noncash
payment system, so that it can make it easier for people to do muammalah.

4 Conclusion and Recommendation

Based on the explanation above, it can be concluded that several dimensions of

religiosity in Islam include intrinsic and extrinsic dimensions; beliefs, attitudes, and
practice; Islamic world views and personality; ideology; ritual, devotional, experi-
ential, and consequential; extrinsic, intrinsic, and quest religiosity; attitudes and
moral values; intrapersonal and interpersonal; intrapersonal and interpersonal;
beliefs, practices, altruism, enrichment, religiosity, religious disorganization, reli-
gious pretentiousness; and hedonism, religious education, sensitive, products and
current issues, doctrinal, intrinsic and extrinsic. In several studies related to behav-
ior, the majority of researchers used the belief, attitude, and practice religiosity scale.
Some researchers who have used the religiosity scale are those that have been carried
470 C. C. Cahya and K. Umam

out by Albelaikhi (1988), Francis and Sahin (2008), Tiliounie and Belgoumidi
(2009), and Tiliounie et al. (2009). It can be interpreted that religious people who
hold religious values can influence their actions and decisions. In this case, the
behavior of interest in using cashless can be based on the three scales above.
Therefore it can be concluded that there is a very close relationship between aspects
of religiosity and cashless behavior. When someone has a high level of religiosity, he
will prefer noncash transactions because it is more effective and efficient, especially
for noncash payment instruments based on sharia aspects.

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The Presentation and Disclosure of Islamic
Banks’ Financial Statements:
A Comparative Analysis of IFRS
and AAOIFI Financial Accounting
Standards

Pazilaiti Ababaike, Romzie Rosman, and Ashurov Sharofiddin

Abstract Financial reporting is a formal recording of transaction and activities of a

financial entity. The demand for standards in financial reporting started way back
before introducing the Malaysian Accounting Standards Board (MASB). A compar-
ative analysis of the presentation and disclosure of Islamic banks’ financial statement
based on IFRS and AAOIFI financial accounting standard (FAS) is essential in
explaining Islamic banks’ reporting and compliance. Therefore, this study was
conducted to compare the two accounting standards and their effectiveness in
different Islamic banks. A critical literature review showed the origin and different
opinions of several studies about IFRS and AAOIFI FAS. This study adopts semi-
structured interview which has been conducted with industry practitioners and
academicians to investigate the underlying issues in general on the different
reporting based on the two standards, particularly on the reporting and disclosure
of the profit-sharing investment accounts. The results show that IFRS focuses on
reporting the economic substance of transactions, while the AAOIFI focuses on
ensuring the IFIs regulations adhere to Shariah laws. The AAOIFI has been
unwelcoming to two concepts in the IFRS, the time value of money and substance
over form.

1 Introduction

1.1 Background

Financial reporting is a formal recording of transaction and activities of an entity

which are financial in nature. The standards in financial reporting were demanded by

P. Ababaike (✉) · R. Rosman · A. Sharofiddin

Institute of Islamic Banking and Finance, International Islamic University Malaysia, Kuala
Lumpur, Malaysia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 473
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_43
474 P. Ababaike et al.

investors and stakeholders who wanted reliable accounting report which they could
use to make economic decisions (Zulkarnain Bin Muhamad Sori 2019). According
to the MASB, the lack of proper accounting standards for the IFIs prohibited the
proper preparation of the financial reports and comparison done on the financial
performance. As a result, MASB held the view that lack of dedicated accounting
standards will affect the Islamic efforts in developing suitable accounting standards
for the institution. The MFRS requirement of companies to present statement of
financial position, statement of equity and changes, and statements of cash flows at
the end of the financial year proved to be hard for most Islamic financial institutions.
Another issue observed in the adoption of MFRS in Malaysia is that companies
which found the cost of preparing the financial statements to be higher than their
profits requested the board of committee at the MFRS to exclude them for that
financial year from preparing the information (Shafii and Zakaria 2013). However,
overtime the MFRS has found a way for the Islamic financial institutions in Malaysia
to adopt the international accounting standards by offering training and teaching on
the benefits of the standards. The various methods undertaken by the MFRS have
seen an improvement in the adoption and implementation of the standards in the
preparation of financial reports in Malaysia (Biancone and Shakhatreh 2016).
On the other hand, Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) is nonprofit organization based in Bahrain which was devel-
oped in 1991. It was developed as an organization which was to issue Islamic
financial institution with accounting standards. Since it was established, it has issued
100 accounting standards in Shariah laws, ethics, governance, and accounting
(Mukhlisin and Antonio 2018). The Islamic Development Bank, Investment Corpo-
ration, and Kuwait Finance House are among the founders of the AAOIFI. The
AAOIFI and MASB are the two accounting bodies which have the objective of
setting and issuing accounting standards for Islamic financial institutions globally.

1.2 Objective

The aim of the paper was to find out the financial disclosure and presentation of
Islamic bank financial statements from the two banks: Bank Islam Malaysia Berhad
and Bahrain Islamic Bank. The motive of the study is to investigate the application
of AAOIFI and IFRS during financial reporting, example of profit-sharing invest-
ment accounts.
The Presentation and Disclosure of Islamic Banks’ Financial Statements:. . . 475

2 Literature Review

2.1 Background Theory

Islamic banking remains the utmost attractive segment in the entire Islamic financial
system (Ehsan et al. 2019, p. 12). The whole institution attributes to both economic
and social aspects based on the Shariah strategies. As a result, the management of
these institutions calls for great answerability to their stakeholders (Sarea and Al
Dalal 2015). One of the radical methods of being accountable is through disclosure
and presentation of their annual financial reports. It represents the major method of
confessing their financial and nonfinancial performance (Shima and Gordon 2011).
Shariah is a great foundation of beliefs and ways of orchestration, among others.
When compared to other social jurisdictions, Islamic ways of life dwell peculiar.
They carry their practices across various paradigms, including their business activ-
ities. Therefore, to fulfil their cultural ethics, Islamic banking takes note of the need
to persist in being transparent. Through the practice, they guarantee accurate infor-
mation is divulged based on the activities of the banks.
Additionally, these reports indicate the financial reports represent the truthful
state of the bank, especially profiting. For these banks to continue to be of integrity,
Islamic banking recognizes various accounting standards (Namrata 2015). These are
a set of guidelines and principles that ought to be followed during the preparation of
annual, monthly, or quarterly Islamic banking reports (Razik 2014). The major
standards included in Islamic financial reporting include the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI) and International
Financial Reporting Standards (IFRS).

2.2 Previous Studies

Islamic banking reporting standards command great compliance, which brings

uniformity across their financial institutions. Compliance reflects the extent to
which presences comply with the financial accounting standards (El-Halaby and
Hussainey 2016, p. 143). Islamic banks are compelled to acknowledge these stan-
dards in their reporting, which indicates the importance of the entire process. For the
appropriate determination of compliance, both AAOIFI and IFRS present their
compliance index (El-Halaby and Hussainey 2016, p. 143). They include boundaries
pointing at the accounting information granting its authenticity and truthful state in
line with Islamic financial reporting obligations.
The purpose of appropriate accounting standards is to reflect the entirety of
Islamic financial transactions (Mohammed et al. 2015, p. 418). Experts claimed
standardizing the reporting structure would enhance the clarity, consistency, credi-
bility, and reliability of these financial institutions. It would be a cheerful note
claiming more Islamic investors. Intensive efforts came in place led by the Islamic
476 P. Ababaike et al.

Development Bank headquartered in Jeddah, Saudi Arabia, but with other Muslim
member states. With the establishment of AAOIFI in 1991 in Bahrain, it changed the
Islamic financial reporting perspectives by introducing a modern set of standards
(Sarea 2013). The prime objective of the body remains to ensure that all Islamic
financial institutions consider international financial reporting standards and comply
with Shariah laws. At present, AAOIFI and IFRS remain in the dark when it comes
to its consent to various regulatory bodies.
On top of that, it is not authoritative over other Islamic banks, making them apply
the standards. That being the case, to ensure utmost compliance, these standards
need support from other regulatory bodies or seeking cooperation with major Islamic
financial institutions (Mulyany and Ariffin 2018). It is still evident that there lack
supervisory characteristics meant to appreciate the implications of AAOIFI and
IFRS financial reporting standards. Until now, the loftiest applicable standards
suitable for Islamic banks remain sidelined even in a majority of Islamic nations
(Sarea 2013). However, central banks and other monetary agencies belong to some
Islamic nations like Bahrain, Jordan, and Sudan quests for AAOIFI compliance. The
move is often voluntary, which relaxes the freedom of these financial institutions
when it comes to the employment of their best-fitting standards.
The inclusion of these standards is faced with the utmost difficulties due to them
failing to be adopted comprehensively. The ordinary standards presented by these
principles must be followed, ensuring successive reporting. The failure to include all
applicable standards could lead to unsound reporting (Zamil and Aiza 2014). The
application of these standards in these reports is frequently filled with challenges.
When it comes to accuracy, there are consistent issues where some principles are
declared to lack proper backing. At other times, ignorance and lack of proper honors
of these standards contribute to poorly manage financial reports.

2.3 Conceptual Framework

Bank Islam Malaysia Berhad complies with IFRS/MFRS, reporting investment

account as a liability—it should be noted that the Islamic banks in Malaysia reported
the general investment accounts and specific investment as deposits. However, after
the IFSA (2013), there have been issues raised regarding the accounting of the
investment accounts where the Malaysian Financial Reporting Standards has
redefined the meaning of investment accounts to mean to deliver cash to another
financial obligation with the hope that the capital deposited will generate income to
be shared between the contractual parties. Therefore, it can be argued that the
investment account can be treated as a liability since the capital provider has the
obligation of profit sharing with the labor provider of the capital investment once it
has reached the maturity date. The standards of treating investment account as
liability are provided by the IFRS which has different policies from the Mudarabah
which recognizes this accounting as deposits.
The Presentation and Disclosure of Islamic Banks’ Financial Statements:. . . 477

Bahrain Islamic Bank applies AAOIFI (FAS), reporting the investment account
as a quasi-equity – The Financial Accounting Standards (FAS) provided by the
AAOIFI requires the unrestricted type of investment to be treated as a quasi-equity
investment. It further states that in the financial statement, it should be represented
on a different category in the Islamic account to be between liabilities and owners’
capital. By accounting for the investment account in this manner, both the investor
and the labor provider can share the risks involved (Rosman et al. 2015). In this
particular case, the bank and customer can share the risks which arise from the
investment done to a particular business or purpose.

3 Methodology

The approach used for this research involves applying a qualitative research method
based on a systematic literature review. The aim is to gain insights and improve our
knowledge about the presentation and disclosure of Islamic bank’s financial state-
ments which are a complex and dynamic phenomenon of two standards IFRS/MFRS
and AAOIFI (FAS), respectively. Primary data for this study was collected through
interviews with industry practitioners. The interviews were recorded and then coded
using the Atlas.ti software for qualitative research. Thematic analysis was employed
for the analysis of the data, and the financial statements of two banks, Bahrain
Islamic Bank and Bank Islam Malaysia Berhad, were compared with respect to their
disclosure of profit-sharing investment accounts.
These research methods are used for exploring the following research questions:
RQ1. What are the underlying concepts of IFRS/MFRS and AAOFI financial
accounting standard in relation to Islamic financial transactions in selected banks?
RQ2. How are Islamic bank financial statements disclosed and presented based on
IFRS/MFRS and AAOIFI financial accounting standard in selected banks?
RQ3. What are the issues faced on presentation and disclosure of PSIA based on
IFRS and AAOIFI financial accounting standards in selected banks?
The aim is to investigate the issues on financial statement presentation and
disclosure of Islamic financial transactions based on IFRS/MFRS and AAOIFI
(FAS) for profit-sharing investment account. Additionally, conducting a document
analysis of the financial statements of Bahrain Islamic Bank and Bank Islam
Malaysia Berhad can serve as a foundation for future research in this area. On top
of that, the study intends to participate in interviews to seek the point of view from
experts that involve in reporting and accounting of Islamic financial transactions. It
ensured that there is a respective ground of arguments based on the experiences of
the various participants.
478 P. Ababaike et al.

4 Results and Analysis

4.1 The Importance of Understanding the Reporting

for Islamic Financial Standards

As per the insights provided by the financial practitioner interviewed, the existence
of accounting standards within Islamic financial institutions (IFIs) helps to ensure
that Muslims are able to adhere to their way of life even in the accounting procedures
of these institutions operating within the domain of Islamic finance. According to I
4, “It is important for an accountant to understand the Islamic finance standards due
to the unique nature of the financial reporting which is different from the conven-
tional method. By understanding an individual is then able to present the financial
statements as required in the Islamic finance standards.” The development of Islamic
accounting standards is extraordinary in addressing the needs of Muslim world
accounting desires, which are different from the conventional banking system.

4.2 The Differences Between the IFRS and AAOIFI Based

on the Concept of Substance Over Form and Time Value
of Money

According to interviewee 2, “To the IFRS an entity should account for a transaction
or event to show the economic substance over the legal form of the economy. The
AAOIFI on the other hand states that in the presentation of financial statements the
entity should take into account the substance and legal form of the economy.”
However, when the pressure comes to choose between the substances over legal
form, then in the Islamic finance legal form should be given a priority. According to
SAC of BNM, it states that substance and form must be consistent with each other
and should not contradict each other. However, in the event that the transaction to be
accounted for has to choose between substances to form, according to the sharia
laws, substance is given priority.
According to I3 on the concept of concept over substance, “Form and substance
are universal concepts adopt by various disciplines. In Islamic finance, both concepts
are observed in shariah, legal, economics and accounting as well as reporting.
Financial reporting of Islamic financial transactions requires an assessment of the
reporting process and the object of reporting. Generally, the reporting process is
intended for fiduciary relationship, that is, accountability as well as economic
decision usefulness that is also, utility. Both form and substance are important and
to be integrated as well as mutually representative. In otherward true sale is both in
form and substance as well as proper financing is both in form and substance. Time
value of resources provides a broader understanding that time value of money. In the
case of the former, it could be either organic or inorganic. The former such as crops
and livelihood where natural growth occurs with time. Inorganic growth relates to
The Presentation and Disclosure of Islamic Banks’ Financial Statements:. . . 479

labor resources deployed to capital general legitimate wealth. Capital inherently is

non-productive and hence no time value of money.”
Conventional financial institutions take into account the concept of time value of
money when preparing the financial books of account so that they can get the true
fair value financial performance of the institutions. When they take into account the
time value of money, they then can calculate and establish the exact financial
performance of the company.

4.3 Opinion on the General Issues on Presentation

and Disclosure of Financial Statement Based on AAOIFI
and IFRS, Respectively

According to I3 “Both IFRS and AAOIFI standards complement each other for
Islamic financial institutions subject to conformance to Shariah principles and
rulings. Adoption of either one only will not neither be adequate nor complete.”
I 4 “The accounting standards of Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) were issued due to a lack of standards that
cater to the unique accounting and finance procedures of the Islamic institutions
which the IFRS fails to cater to due to the specific nature of the Islamic instruments.
Nonetheless, the AAOIFI has two significant challenges, mainly on the adoption and
the adequacy of its standards.”
Both the IFRS and AAOIFI agree that disclosure is important in the presentation
of financial transactions as it states why in the presentation of financial statements
one choses this type of closure to the other one. Although many countries, including
the Islamic Banking countries, have complied with IFRS like Malaysia, there is still
the thought of the standards presented to serve the unique function of Islamic
Banking of operations and financial instruments.

4.4 Document Analysis: The Differences of Two Standards

(IFRS and AAOFI) in the Treatment of Profit-Sharing
Investment Account (PSIA)

Based on financial statement analysis of two banks, Bahrain Islamic Bank which
applies AAOIFI FAS and Bank Islam Malaysia Berhad which applies IFRS/MFRS,
it further states that in the financial statement, it should be represented on a different
category in the PSIA to be between liabilities and owners’ capital. It can be argued
that the PSIA can be treated as a liability since the capital provider has the obligation
of profit sharing with the labor provider of the capital investment once it has reached
the maturity date. The standards of treating PSIA as liability are provided by the
IFRS which has different policies from the Mudarabah which recognizes this
480 P. Ababaike et al.

Table 1 Interview concluded with thematic analysis

Respondents/
interview
questions Question 1 Question 2 Question 3 Question 4
I1 Do you think it is What is your Please share your What are the dif-
I2 important to opinion about opinion about the ferences of two
I3 understand substance over general issues on standards (IFRS/
I4 reporting of form and time presentation and MFRS and
Islamic financial value of money disclosure of AAOIFI) treat-
transaction? Why? based on two financial state- ment on profit-
standards, respec- ment based on sharing invest-
tively? (IFRS/ two standards, ment
MFRS and respectively, accounts? Why?
AAOIFI) (IFRS/MFRS and
AAOIFI)
1. Very important 6. Substance first 11. IFRS/MFRS 16. Compare
2. Unique 7. Explain the is very general annual reports
3. Lack of under- form 12. AAOIFI for 17. IFRS/MFRS
standing 8. Value is not the IFIs treat PSIA under
4. Mixed with same 13. Presentations liabilities
conventional 9. Permissible in are the same 18.Off-balance
5. Financial deferred payment 14. Detailed dis- sheet
institutions 10. Prohibited closure required 19. AAOIFI treat
debt-based 15. Shariah as quasi-equity
transaction principles 20. Mudarabah
21. The loss
22. Rabbul mal

accounting as deposits. Reporting as a quasi-equity—The Financial Accounting

Standards (FAS) provided by the AAOIFI requires the unrestricted PSIA to be
treated as a quasi-equity investment (Table 1).

5 Conclusion and Recommendation

The general purpose of the financial statement of the AAOIFI is to present docu-
ments that follow the Shariah guidelines of the type of investment to be undertaken
by Islam investors. At the same time, the IFRS provides guidelines for financial
statements based on the economic decisions of the investor. The AAOIFI focuses on
the religious point of view, while the IFRS focuses on the individuals’ interpretation
of the information for them to make a financial decision of the investment. The
AAOIFI is mainly focused on creating balance and equality of resources to the
society, and any excess profit is discouraged. At the same time, the IFRS is interested
in presenting the financial statement to show the financial performance of an entity.
The AAOIFI financial statements discourage the practice of gambling and any
activities which are dubbed as illegal and immoral as they do not follow the Shariah
laws. At the same time, the IFRS provides standards for all business activities which
The Presentation and Disclosure of Islamic Banks’ Financial Statements:. . . 481

have been globally accepted as economic. Accounting for assets in the AAOIFI is
stated to be valued at the cost of money at which it was acquired, and no interest
should be placed on it.
In contrast, for IFRS, the cost of the asset depends on the time value of money and
the fair market value of the property, which will attract interest. The differences
between the AAOIFI and the IFRS depend on the difference in the purpose of
reporting and preparing the financial statements. The Islamic finance institutions
like Bahrain Islamic Bank chose to focus from the religious point of view following
the Shariah laws. In contrast, Bank Islam Malaysia Berhad chose the IFRS/MFRS
which focuses on providing standards that will create harmony in the presentation of
the reports.

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Indonesia’s South-South Cooperation
in Promoting Sharia Economic
Development in Sudan

Agata Nina Puspita, Ica Cahayani, and Ahmad Mujaddid Fachrurreza

Abstract This study discusses Indonesia’s South-South Cooperation (SSC) in

encouraging the development of Islamic Economics in Sudan through technical
cooperation between the two countries. The method used in this research is descrip-
tive qualitative with a systematic literature review. The results of the study show that
SSC Indonesia’s policy in promoting sharia economic development in Sudan is
positive. The results of the study prove that the impact of implementing Indonesia’s
SSC policy in Sudan can encourage economic growth in Sudan, providing conve-
nience in managing business among small and medium enterprises (SMEs). This
study provides evidence to support economic growth among developing countries
and must use other successful developing country economic methods or strategies
because the business or economic structure of society tends to be the same. The
problems faced by Indonesia tend to be the same as those of Sudan, so the sharia
economic development program is attractive to be implemented in Sudan because
the sharia economic strategy is considered successful in several economic sectors in
Indonesia. Indonesia’s development strategy as a fellow developing country is more
acceptable in Sudan than the economic development strategy of developed countries
which sometimes fails to be implemented due to the already high standard of
economic strategy. Standards of economic development through developed country
banks require complicated capital lending standards and have big consequences.

1 Introduction

Since the 1960s, when Presidents Soeharto and Umar Hasan Ahmad Al-Basyir were
in office, diplomatic relations between Indonesia and Sudan have grown through
bilateral cooperation. Due to their membership in the South-South Cooperation

A. N. Puspita · I. Cahayani · A. M. Fachrurreza (✉)

Faculty of Social and Political Sciences, Department of International Relations, Gadjah Mada
University, Yogyakarta, Indonesia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 483
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_44
484 A. N. Puspita et al.

(SSC) and similar potential in the agriculture, livestock, mining, and tourism sectors,
Indonesia and Sudan are in a complementary position in terms of their bilateral ties.
Due to its middle-income status and membership in the G20 and Islamic Develop-
ment Bank (IsDB), Indonesia has been able to participate in several international
forums to help other developing nations, like Sudan, by offering educational assis-
tance. This is done through SSC. However, Sudan, whose majority population also
embraces Islam, wants to improve relations and economic cooperation by increasing
superior products and tourism potential.
On February 6, 2021, representatives of the Initiator for the Establishment of a
Sharia Economic Community (SEC) in Sudan were received by the Deputy Chief of
Mission (DCM) of Indonesian Embassy in Khartoum. A further response by the
Sudanese government to the economic disruption, particularly considering the
advancement of digital technology, is the founding of the SEC in Sudan. Sudan,
which has a GDP percentage of 9.45% and is categorized as a low-middle income
country, aspires to boost productivity and encourages people to participate in
economic development. Sudan has started working with Indonesia to develop
Islamic economics by focusing on Islamic economic education. Sudan, while having
a predominantly Muslim population, does not adhere to any one religion, which
makes it difficult to implement Sharia Economic development cooperation. Indone-
sian government’s efforts to give SEC education to Sudanese face several difficul-
ties, including the unstable economic environment, and the difficulty the Sudanese
government has distributing the welfare of the population.
With the establishment of the Sharia Economic development cooperation, it is
expected to increase the productivity of SEC in Sudan to support the development of
the Islamic finance industry in Sudan. This cooperation focuses on Islamic Econom-
ics education considering Indonesia’s position as the first-ranked country in the
Islamic Finance Country Index (IFCI) and has made Indonesia a pioneer and
consolidator of Islamic Economics at the international level. By referring to the
information provided, this study would like to study further regarding the coopera-
tion in the development of Islamic Economics between Indonesia and Sudan through
the education of the SEC in Sudan. Thus, this study aims to answer the question of
“How is Indonesia’s SSC in encouraging the development of sharia economics in
Sudan?”

2 Literature Review

This study will examine Indonesia’s SSC in promoting sharia economic develop-
ment in Sudan. Thus, the main dimension in this study refers to Islamic economics
which is carried out through SSC Indonesia’s policy to support economic develop-
ment in Sudan. Meanwhile studies on SSC in encouraging the economic develop-
ment of a country have been carried out quite a lot with various focuses. SSC is not
only specifically used in economic cooperation but can also be applied in coopera-
tion in the aerospace sector, the application of the SSC concept as a concept of
Indonesia’s South-South Cooperation in Promoting Sharia. . . 485

development cooperation in framing space technology (Levaggi and Blinder 2021)

SSC in the field of Aerospace for Turkey aims to encourage the development of
strategic industries in accordance with its military needs. Argentina, however, is
developing its satellite sector as part of a wider initiative to increase innovation and
profitability. Through the SSC, Argentina and Türkiye are pushing for cooperation
on geostationary projects. This cooperation occurred because both countries realised
that Aerospace is an alternative path for technological growth through dependence
on traditional geopolitical partners and technology providers (Levaggi and Blinder
2021).
Developments regarding SSC can encourage many applications in various fields,
both in the fields of security, economic development, infrastructure development,
technology, and so on. Joshua Snider and Mohammad Waqas Jan (Snider and Jan
2022) explained the importance of understanding SSC concept from a development
perspective where the UAE offers low-cost, low-risk, and high-impact development
assistance to promote resource development and focus on the region. Despite that
Pakistan is not a GCC country, the UAE has stepped up development assistance to
address one of the main criticisms highlighted by various post-development experts
that aid flowing to South Asia and Pakistan aims to strengthen the sociocultural
hegemony of the great powers and their dominance of the development space as a
part of the securitization agenda (Snider and Jan 2022). Joshua Snider and
Mohammad Waqas Jan want to explain that the application of the UAE SSC concept
is not only for countries with the same region or members of the GCC but can also be
done in countries outside the region. In addition, the UAE SSC wants to prove that
SSC can reduce the involvement and domination of the hegemonic state in Pakistan.
SSC concept has been applied by Indonesia in various fields of development
cooperation, one of which is cooperation in the energy sector in encouraging energy
availability in Timor Leste. The research of Alfian Budi Satrio and Muhammad Rum
(2019) aims to explain the opportunities and challenges as well as the motivation
behind the cooperation between Indonesia and Timor Leste in the energy sector. The
concept of SSC Indonesia aims to establish good relations and support the economic
development of Timor Leste to be closer to ASEAN countries. The existence of SSC
Indonesia in Timor Leste proves that SSC framework provides an alternative to
release East Timor from exploitation relations with Australia (Satrio and Rum 2019).
Thus, Satrio and Rum want to prove that Indonesia’s SSC policy is not always
concentrated on an interest-based or material perspective but still emphasizes a
normative perspective by underlining the transformation of energy development
and releasing Timor Leste from the domination of developed countries (Satrio and
Rum 2019).
The literature review above aims to help provide methods for researchers to be
able to limit the scope of the study to be studied. Furthermore, from the research
literature that has been described, it shows that SSC is a concept that provides a new
development strategy to be applied to fellow developing countries. This research
itself will try to emphasize the application of Indonesia’s SSC in encouraging sharia
economic development in Sudan. As a country that applies the concept of sharia-
based economic development, which is based on the majority Muslim Indonesian
486 A. N. Puspita et al.

society, it encourages development and puts a focus on sharia economy to be

implemented in Sudan through SSC policy.

3 Research Method

This article is followed by an analysis of Indonesia’s SSC in promoting sharia

economic development in Sudan using systematic qualitative research methods.
This study collects data through observations and documents which the researcher
then reviews all data, understands it, and organizes it into categories or themes that
cross all data sources regarding the development of Indonesian SSC in Sudan
(Creswell 2009). This study aims to explore Indonesia’s SSC policy with the
development of sharia economics in Sudan and to explore the extent to which
Indonesia-Sudan cooperation can improve development in Sudan. The analysis
used to assess the extent to which Indonesia’s SSC can have a positive development
effect in Sudan. In conducting the analysis, the research resources started from
official documents of Sudanese Islamic banks, official documents from the IsDB,
annual reports of the Indonesian, and Sudanese governments regarding economic
cooperation to encourage sharia economic development in Sudan, journals, trusted
online publications, and so on. In addition, there are official statements submitted by
the Indonesian or Sudanese governments directly on the official websites of their
respective governments. The method used is to process data systematically to
explain and explore SSC Indonesia’s policies in promoting sharia economic devel-
opment and the efficiency of sharia economic implementation on economic growth
and business development in Sudan.

4 Result and Analysis

4.1 South-South Cooperation Indonesia Encourages

Indonesia’s Sharia Economy in Sudan

According to the United Nations Office for South-South Cooperation (UNOSSC),

South-South Cooperation (SSC) is understood as a broad framework of collabora-
tion among countries of the South in the political, economic, social, cultural,
environmental, and technical domains. Indonesia has been a major player in SSC
since hosting the Asian-African Conference in Bandung in 1955 which resulted in a
Declaration on the Promotion of World Peace and Cooperation which laid the
foundation for the formation of SSC (Hashim and Graf 2021). Indonesia became
the initiator of SSC concept so that the understanding of SSC can also be said to be
the foundation of Indonesia’s foreign policy. SSC shows the convergence between
the normative and material interests of the global south countries. Indonesia’s SSC
Indonesia’s South-South Cooperation in Promoting Sharia. . . 487

practice shows a convergence tendency of normative interests and material interests

which indicates the emergence of interest-based third world country solidarity
(Winanti and Alvian 2021). Indonesia’s discourse on the development of coopera-
tion through SSC policy reflects high solidarity terminology where the technology
and expertise available in developing countries will be more appropriate with the
scale of economic growth. Market size and other social problems tend to be the same
and effective for developing countries to apply compared to the production skills,
technological assistance, and expertise of developed countries to support domestic
economic growth in less developing countries. SSC Indonesia’s policy in the context
of agricultural development initiatives was launched in partnership with the IsDB
(UNDP 2022).
Through the policy of SSC, Indonesia creates sharia business loans which are
defined as lending facilities available with Islamic financial institutions or Islamic
borrowers to get access to halal funds. Sharia business loans aim to support small
and medium enterprises (SMEs) with Islamic financial products and services that
apply Islamic financial rules and are used to build businesses (Shariabanking 2022a).
Islamic finance is considered capable of creating financial stability for Sudanese as a
country that is still in the development stage with a community economy that still
tends to be small. Sudan is preparing a legal framework for Islamic financial
products such as the issuance of Islamic bonds (Sukuk) and to help finance SMEs.
Sudan will promote Sukuk, Takaful, and halal microcredit (Shariabanking 2022a, b).
The push for sharia economic policies through SSC provides significant economic
development opportunities in Sudan. Currently, Sudan has a number of fully oper-
ational Islamic banks serving Islamic retail and corporate banking offering halal
financing products such as ijra-wa-iqtina, Mudarab, Murabahah, and Musyakah.
Sharia bank encourages lending for startups as a halal initial business financing
facility that is provided through Islamic loans for Muslim investors and dedicated to
Muslim and Muslim startup entrepreneurs. Islamic startup loans aim to provide
access to funds to young Muslim entrepreneurs who want to create a business that
follows Sharia rules and uses halal funds that reflect Islamic finance principles.
Startup sharia lending helps startup companies fund steps to provide startup capital
and debt by mixing sources of funds using classic Islamic banking. In addition,
through Islamic bank loans, startups do not have to face the classic challenges of
conventional banks such as credit checks, assessments, and payment capacity
(Shariabanking 2022a, b).
Seeing the potential for economic development of these startups, Indonesia has a
big initiative to encourage economic development in Sudan through SSC policy.
SSC policies include the provision of technical assistance, training, and socialization
which are contextualized in the Islamic business training model or business through
sharia guarantees. SSC is a form of cooperation that encourages economic growth
similar to that of donor countries where Indonesia as a donor country with the
context of a qualified sharia economic system is compared to Sudan so that the
decision to provide training assistance, socialization, and economic cooperation
through SSC policies is very appropriate. SSC policy is supported by Indonesia-
Sudan diplomatic relations through economic cooperation to increase Indonesia’s
488 A. N. Puspita et al.

trade. Through the International Fair of Khartoum (IFK) activity in January 2021,
Indonesia promoted various potentials of Sudan to accelerate Sudan’s economic
recovery. The Embassy of the Republic of Indonesia in Khartoum supports the plan
to establish the Indonesia Sudan Business Council (ISBC) as a forum for business
communication between the two countries. Indonesia can promote Sudan’s superior
products, namely, gum Arabic, sesame, peanuts, mining products, fruits, cotton, and
also Sudan’s tourism potential. Through the Business Forum, we can see the
potential for trade cooperation between Indonesia and Sudan, which is concentrated
in the agricultural, livestock, mining, and tourism sectors (KBRI Khartoum 2021).
Sudan has the potential to implement SSC policy using the training funding methods
and business strategies offered by Indonesia. SSC policies are implemented through
sharia funding and business strategies. Sudan’s still small economic growth and
relatively small business potential require funding that does not have double stan-
dards, namely, loans with very high interest rates.
In the context of training and economic assistance, it is implemented through SSC
policy emphasizing on Islamic economics where funding is carried out through the
IsDB. Economic empowerment through IsDB has seven basic principles, one of
which is not to regard disadvantaged people as a social burden. This is in line with
SSC principle which sees other developing countries not as a place to achieve
economic interests for donor countries or create unequal economic interests. IsDB
provides an opportunity to change the financial paradigm and economic empower-
ment by ensuring that the poor are involved as economic and business actors. IsDB
formulates a traditional approach to overcome poverty, sustainable growth, and
development, especially for developing countries in facing socioeconomic chal-
lenges from economic constraints. In addition, it provides a great opportunity for
emerging countries not to fall into the global economy and the stagnation of the
secular economy that pushes developing countries into poverty. IsDB ensures that
developing countries, especially a number of developing Islamic countries, have
integrated, comprehensive solutions that can participate in a competitive economic
landscape (IslamicDevelopmentBank 2022).
Thus, IsDB’s collaboration to obtain funding for infrastructure development and
SSC policies can be seen as Indonesia’s success in encouraging Sudan’s economic
development through training, empowerment in various sectors, including agricul-
ture, livestock, mining, and tourism. IsDB with a system of implementing Islamic
financial products aims to provide accessible and easy resources, simplifying pro-
cesses that lead to Islamic finance and sharia-compliant banking modes. IsDB fully
supports the economic development of developing countries with an economic
system that leads to micro, small, and medium enterprises (MSMEs) businesses in
accordance with sharia business rules (IslamicDevelopmentBank, Economic
Empowerment, 2022). Sudan is an example of an African country that has developed
an Islamic economy and has succeeded in implementing economic empowerment
methods with the highest Islamic economic value chain besides Palestine, Egypt,
and Tunisia. The following hadith supports sharia lending in the context of lending
to fellow humans as part of social life:
Indonesia’s South-South Cooperation in Promoting Sharia. . . 489

‫ﺽ ﻗﺮ ﻳﺎ ٰﻟﺬﺫﺍﻣﻦ‬ ً ‫ﻛﺮﻳﻢ ﺃﺟﺮ ﻭﻟ ُﻪ ﻟ ُﻪ ﻓ ُﻴﻀﺎﻋﻔ ُﻪ ﺣﺴﻨًﺎ ﻗﺮ‬.

ُ ‫ﺿﺎ‬
Who will lend Allah a good loan? Allah will multiply the loan for him and he will get a great
reward (Al-Hadiid: 11) (Sahroni and Karim 2019).

The loan is in the form of a loan through a domestic Islamic bank in Sudan to
support domestic economic growth as well as a foreign loan from the IsDB which
aims to create economic progress in Sudan. The progress of the implementation of
the Islamic economy in Sudan illustrates cooperation in encouraging economic
development between Islamic countries. In addition, Islamic loans guarantee large
profits for borrowers because they will cause usury so that Islamic loans provide
good business opportunities in Sudan to increase Sudan’s economic growth. Islamic
banking strictly adheres to principles based on the Qur’an and the teachings of the
Prophet Muhammad which prohibits usury or gharar and Maysir. In 2016, the global
Islamic finance sector was estimated to be worth $2.2 trillion and is projected to
grow by about 72% to $3.78 trillion by 2022 (Fitriyanti 2020). The following is a
verse of the Qur’an regarding the prohibition of taking advantage that harms others
(usury):
‫ﺍﻟﺮﺑﺎ ﻭﺣ ٰﺮﻡ ﺍﻟﺒﻴﻊ ﺍﻟ ٰﻠ ُﻪ ﻭﺃﺣ ٰﻞ‬.
Even though Allah SWT has justified buying and selling and forbids usury (Surah
Al-Baqarah: 275) (Sahroni and Karim 2019).

The verse above explains the difference between the law of buying and selling
and the law of usury. This verse tries to analyze the economy which concludes that
loans that harm others and benefit one party are forbidden.
Opportunities to implement SSC policies through a sharia economic system in
Sudan have great potential for success. Agricultural development with products
packaged with halal labels provides a huge business opportunity in Sudan. In
addition, halal tourism branding is also an important concern for SSC Indonesia to
direct training and empowerment in accordance with Indonesia’s domestic tourism
policy. Halal culinary and tourism branding enable Indonesia to attract international
tourists to travel to Indonesia. Therefore, SSC policy implemented in order to
improve and encourage the sharia economy through IsDB funding can reach training
in processing agricultural and livestock products into food that can be consumed by
all people. Halal branding is important to be implemented in Sudan through proper
processing and marketing training. Cooperation efforts to develop the Islamic
Economy of Indonesia and Sudan have succeeded in contributing to the establish-
ment of MSMEs Gathering at the Omdurman University Sudan which is considered
to create jobs through halal products. The involvement of Indonesian students in
Sudan can accelerate the efforts of sharia economic development policies in Sudan
through Indonesia’s SSC development policy. SSC’s policy of establishing a sharia
economic community is the main point in the Sudanese national economic program.
The Sudan government’s support for the sharia economy is in line with the
priorities of Indonesian government in promoting development of the national
economy in Sudan. As a country that has a large Muslim population, the develop-
ment of a sharia economic community is very compatible with economic growth.
490 A. N. Puspita et al.

Indonesia and Sudan feel that the sharia economy must be supported by good
policies and cooperation. State support for the development of a sharia economic
community is driven by economic interests with the reality of the domestic economy
of Sudan still requiring development and the existence of significant financial
support. Through Islamic banks, it is important for Sudan to improve and support
the development of MSMEs which are the foundation of the Sudanese economy.
Indonesian Embassy in Khartoum in collaboration with regional administrators,
especially the Sudanese sharia economy, held online socialization and technical
assistance related to sharia economy and finance in April 2022. Indonesian Ambas-
sador to Khartoum stated that Indonesian government encourages sharia economic
development through a number of business strategies, namely, the preparation of
regulation of the sharia finance industry, development of sharia social funds, expan-
sion of sharia business activities, management of zakat potential, and management of
sharia capital markets. Indonesia’s commitment is supported by the inauguration of
the Regional Managers Especially the Islamic Economic Community (RMEE-IEC)
in August 2021 at the African International University (KBRIKhartoum 2021).
The training is a form of SSC Indonesia in an effort that is considered to have the
capacity to achieve the goals of developing cooperation in developing countries such
as Indonesia and Sudan. SSC can not only be carried out between countries with the
same region, SSC provides assistance to other developing countries not to be trapped
in the hegemony of world finance and developed countries which actually compli-
cate development in that country Snider and Jan (2022). SSC is a development
concept for third world countries which is considered comprehensive to solve the
problem of poverty in less developing countries (Gray and Gills 2016). Thus, SSC
Indonesia’s policy is to try to share techniques with Sudan to build the economy of
other southern countries. Sharia economy is the right choice for Sudan because of the
similarity of identity as an Islamic country so it is very easy to implement sharia
financial and economic policies in Sudan.

4.2 Indonesia-Sudan Cooperation Promotes Sharia

Economic Development

As a part of global citizen with the majority of the population being Muslims,
Indonesia has helped in shaping the global Islamic economic trend. Indonesia’s
Islamic economy has given opportunities for Indonesia to promote sharia economic
development with Sudan which also have a positive impact on the national economy
balance sheet. The cooperation between Indonesia and Sudan contributes to devel-
opment of Islamic finance which has led to the maximization of the potential of zakat
and waqf. Since the 1960s, both Indonesia and Sudan have made various efforts to
enhance bilateral cooperation, including cooperation in sharia economic develop-
ment. As fellow members of SSC, both Indonesia and Sudan direct all national
programs to emphasize a partnership approach to sharia economic cooperation
Indonesia’s South-South Cooperation in Promoting Sharia. . . 491

through various policies (Pujayanti 2015). Therefore, the assistance provided by

Indonesia to other developing countries, such as Sudan, is in the form of grants and
various forms of training in agriculture, fisheries, good government, and SMEs.
However, the government of Sudan has also made various efforts to overcome the
inequality by initiating various collaborations with various government agencies and
the private sector both nationally and internationally under the auspices of the
Ministry of Finance and Economic Planning (United Nations 2019). This is done
by developing the agricultural sector and encouraging the private sector and SMEs
(United Nations 2019). In this regard, both Sudan and Indonesia have a goal to
develop SMEs since Indonesia provides training and Sudan needs educational
assistance.
The Chairperson of SEC in Khartoum, Sudan, on 6 February 2021, stated that the
purpose of SEC’s establishment was to provide education through “Socialising the
Sharia Economy and Encouraging Sharia Economics” (Kementerian Luar Negeri
2021). Furthermore, on 2 June 2021, Indonesia, as a pioneer and consolidator of
Islamic Economics at the international level, established and provided training for
SEC in Sudan by involving Indonesian Embassy in Khartoum and Indonesian
people in Sudan. Through cooperation in Sharia Economy, both countries provide
opportunities for the community to be actively involved in the program, so they
would be able to develop the Sharia Economy and give impact to global economy.
The education program, which has been implemented since June 2021, has success-
fully organized various seminars and working visits both in Indonesia and Sudan
which aim to develop and strengthen the foundations of the Sharia Economy.
Through the collaboration, Indonesia assisted Sudan to prepare the regulations
and the development of Sharia Economy, halal industry, funds, and the management
of zakat on April 12, 2022 (Masyarakat Ekonomi Syariah 2021). Moreover, on April
23, 2022, with the role of Islamic boarding schools in Sudan, Sharia economic
growth has increased, currently at 6.8% in Sudan (Kementerian Luar Negeri 2021).
This happened because in April 2022, Indonesian Embassy in Khartoum and the
University of Omdurman Sudan carried out collaborative work by realizing the
Gathering MSMEs and involving both students and diaspora. In addition, Indone-
sian with the Special Region Management of Sudanese Islamic Economic Commu-
nity began to introduce contemporary Islamic finance products and financial risk
management.
On 22 September 2022, Indonesia collaborated in the construction sector to
encourage state-owned enterprises (BUMN) to Go Global. The collaboration is
established to collaborate with the contractor associations from Sudan with up to
5000 business players consisting of construction contractors, infrastructure contrac-
tors, electrical contractors, oil and gas services, engineering, and other fields. The
cooperation between the two countries is marked by IsDB (Kementerian Luar Negeri
2021). Indonesia has carried out an industrial transformation known as Making
Indonesia 4.0 with five priority sectors, namely, food and beverage, textile and
apparel industry, electronics industry, automotive industry, and chemical industry.
Meanwhile, Sudan offers investment opportunities in industrial sector, including
food and beverage processing industry, livestock skin processing, and renewable
492 A. N. Puspita et al.

energy. The Sudanese government hopes for a cooperative exchange of information,

capacity training, and transfer of experience from Indonesia to Sudan in the form of a
Memorandum of Understanding (Kementerian Luar Negeri 2021). Indonesia in this
collaboration could market halal meat with international standards managed by the
Al Kadaro Slaughterhouse. The Halal Slaughterhouse is the largest in Sudan and is
also the largest slaughterhouse in the Middle East and Africa Region with interna-
tional quality meat (Kementerian Luar Negeri 2021).
The cooperation between Indonesia and Sudan further shows that SSC relations
support Indonesia-Sudan cooperation model where the government of Sudan was
able to exchange information, capacity training, and transfer of Indonesia’s experi-
ence to Sudan. In addition, the goal of implementing sharia-based SSC is getting
stronger, which is planned to be funded by IsDB. Thus, Indonesia’s opportunity to
support Islamic-based Sudanese economy can be concluded as successful. Economic
growth is a determining factor in economic development, but what needs to be
considered is not only based on statistical increases in per capita income but also on
who creates economic growth. If all people can participate in economic growth
efforts, it can reduce poverty and the gap between the rich and the poor. Cooperation
efforts to develop Islamic Economy of Indonesia and Sudan have succeeded in
contributing the establishment of MSMEs Gathering at the University of Omdurman
Sudan (Kementerian Luar Negeri 2021). The government’s policies in overcoming
the challenges of social inequality also need to be improved through increased
economic activity. In addition, the success of development also depends on the
ability of the government to accelerate economic growth. Indonesia is also able to
carry out its commitments and play a role in international forums through the
Indonesia-Africa Forum (IAF) which has been established since 2018 (Indonesia-
Africa Forum 2019). Thus, the policies of the governments in the development of
Sharia Economy have increased the productivity of the SEC and achieved national
development targets for both countries.

5 Conclusion

By executing development strategies and strategies based on Islamic economic

principles, SSC Indonesia seeks to promote economic growth in Sudan. Given
how deeply ingrained Islamic identity is in Sudan, Islamic economics takes on an
interesting context. The implementation of SSC Indonesia, a third-world nation and
a member of the IsDB, provides Sudan with the necessary technical assistance to
develop its domestic economy, particularly a small-scale economy based on sharia
economic principles. Islamic economics is a theory that prohibits the existence of
unilateral profits in an Islamic state’s economy. The accomplishment of Indonesia’s
role as a middle power nation is intimately tied to SSC policy’s implementation.
Indonesia has a policy of providing international development assistance services
through SSC. This study also promotes an understanding of SSC that has received
insufficient attention both nationally and internationally, particularly in the context
Indonesia’s South-South Cooperation in Promoting Sharia. . . 493

of Islamic or sharia-based economic development. The SSC policy is used by the

Indonesian government to realize the interests and positive image of Indonesia as the
initiator of the first SSC concept as a solution for development cooperation in
developing countries.

References

Creswell JW (2009) Research design qualitative, quantitative, and mixed methods approaches.
Sage, Los Angeles
Fitriyanti A (2020, 15 April) Indonesia and the global Shariah economy, The country has the
potential to be a global leader. What’s holding Indonesia back? Retrieved August 10, 2022, from
Strategic Review: http://sr.sgpp.ac.id/post/indonesia-and-the-global-shariah-economy
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37(4):557–574. https://doi.org/10.1080/01436597.2015.1128817
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drivers. Amsterdam University Press, Amsterdam, pp 155–182
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isdb.org/economic-empowerment
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August 1, 2022, https://kumparan.com/kbri-khartoum/kbri-khartoum-dukung-pembentukan-
mes-sudan-1wQ6EsrRlbE/full
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Significance and Potential Role
of the Islamic Banking and Finance Services
in Bangsamoro Autonomous Region
in Muslim Mindanao

Jawad Z. Salic

Abstract The purpose of this study was to promote and introduce the significance
and potential role of the fundamental principles and concepts of Islamic banking and
finance services to the people of the Bangsamoro Autonomous Region in Muslim
Mindanao in order to enhance their understanding of utilizing Islamic banking and
finance services. This study employed a quantitative research approach, and the
findings were based on data collected using a 12-page structured questionnaire.
There were 500 questionnaires issued, and a total of 436 were returned with
responses. In addition weighted mean and frequency and percentage distributions
were used to evaluate and analyze the obtained data. As a result, the majority of
respondents strongly agreed that Islamic banking and finance services are advanta-
geous for individuals of all religions and beliefs. Islamic banking and finance
services assist in resolving economic backwardness, attracting additional aid and
finances for economic progress, attracting and promoting productive investment, and
contributing to economic growth and attracting constructive investment. According
to the study, the government of the Bangsamoro Autonomous Region in Muslim
Mindanao should organize an annual conference with the participation of various
sectors and the collaboration of select ASEAN universities and banks with expertise
in Islamic banking and finance services in order to increase the Bangsamoro people’s
knowledge of existing Islamic banking and finance services.

1 Rationale

Banking and finance based on Islamic principles are increasingly common among all
types of people. Those who are interested in gaining knowledge about what consti-
tutes a lawful and an unlawful transaction in Islam will find that this is one of the
most contentious topics to discuss. In particular, government employees who

J. Z. Salic (✉)
Mindanao State University, Marawi City, Philippines
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 495
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_45
496 J. Z. Salic

identify as Muslims in the Philippines are expected to have a thorough understanding

of the system, its components, and the universality of Shariah. It has been a long time
since more Muslims in the Philippines saved money in conventional banking since
they are more familiar with that banking system than saving money in the Philip-
pines’ only Islamic bank, Amanah Islamic bank. In this regard, the theme of the
research investigates aspects of daily living as well as religious practice among
Filipino Muslims. Because the vast majority of Filipino Muslims are unfamiliar
regarding this topic, they do not place any implication on it. As a direct consequence
of this, they favor the idea of becoming customers of conventional banks over
Islamic financial institutions. For example, professionals among the Meranaw prefer
to withdraw or deposit their money in Land Bank or Philippine National Bank rather
than Amanah Islamic Bank.
For the purpose of organizing a society that is founded on justice and allowing all
members of that society to benefit from the equitable benefits it may provide, Islam
provides the guidelines on banking and financial activity. Financial practices that are
in accordance with Shariah law are referred to as Islamic banking. Often, the phrases
Islamic finance and Shariah-compliant finance are used interchangeably (Islamic
law). Sharing profits and losses and forbidding lenders and investors from collecting
and paying interest are the two main tenets of Islamic banking. Islamic banks don’t
pay interest; instead, they make money through equity participation, which requires
borrowers to give the bank a percentage of their income.
Islamic banking is based on the precepts of Islam as they relate to financial
dealings. The Qur’an, the central text of Islam, is the source of Islamic banking
doctrines. All transactions in Islamic banking must adhere to Shari’ah, or Islamic
law. The regulations that regulate business dealings in Islamic banking are known as
Fiqh al-muammalat.
According to a 2020 study by the Islamic Corporation for the Development of the
Private Sector (ICD) and Retinitis, Islamic financial assets climbed from $1.7 trillion
to $2.8 trillion between 2012 and 2019 and are expected to reach around $3.7 trillion
by 2024. A portion of this increase can be attributed to the developing economy of
Muslim nations.
This issue was chosen by the researchers because it is congruent with Islamic law,
which Islamic students and the Filipino Muslim community as a whole must pursue
and understand. The researchers hoped that the study would assist in promoting the
significance and potential of Islamic banking and finance in the Bangsamoro Auton-
omous Region of Muslim Mindanao and the Philippines as a whole, as well as
educating everyone about the benefits that Islamic banking and finance may bring.
The study’s major goals were to introduce the significance and vital role of
Islamic banking in all aspects of life and in a healthy economy. Respondents were
selected from among Muslim-Filipino government personnel working in the
Bangsamoro Autonomous Region of Muslim Mindanao. This was conducted to
ascertain the percentage of Muslim-Filipino government employees in the
Bangsamoro Autonomous Region in Muslim Mindanao that are knowledgeable in
Islamic Banking and Finance.
Significance and Potential Role of the Islamic Banking and. . . 497

2 Methodology

In this study, primary data was obtained from respondents through the use of a
quantitative research strategy and a self-structured, validated questionnaire. Addi-
tionally, a descriptive survey methodology was utilized. The questionnaire for the
study was given out to a total of 500 Muslim-Filipino government employees
working in the Bangsamoro Autonomous Region in Muslim Mindanao as a respon-
dent; however, only 436 of those questionnaires were handed back utilizing quota
sampling. The researcher remained patient, while they awaited the completion of the
questionnaire from further responders.
The researcher conducted lawful communication with the participants in order to
tell them about the project before the data collection phase began. The researcher
handed out paper copies of the questionnaires to each participant, and they were
given the opportunity to respond to the research inquiry in an honest manner
throughout the allotted amount of time. With the assistance of statistical techniques
such as frequency and percentage, the responses of the respondents to the question-
naire were tabulated, analyzed, and handled in a manner appropriate for their
presentation. For the purpose of conducting an analysis of the data in light of the
responses provided by the respondents, both the corresponding mean and the
weighted mean were utilized, with the choice of which method to use depending
on whether or not it was thought that it was acceptable. The findings offered
extremely helpful new perspectives on the research. The responses were the basis
upon which the conclusion and suggestions were constructed.

3 Result and Discussion

The large majority of those who responded strongly agreed that Islamic banking and
finance services have important rules that they should follow in their daily lives
based on the reasons that are given below: individuals are protected from engaging
in immoral business activities, thanks to Islamic banking and finance; banking and
finance services in accordance with the Law of Islam while maintaining one’s
identity as a Muslim; individuals are able to escape poverty with the help of Islamic
banking and finance; the application of Islamic banking and finance, which makes a
substantial contribution to the growth of an individual’s spirituality; Islamic banking
and finance services are beneficial to society as a whole and can be practiced now;
the use of Islamic banking and finance methods can be beneficial for societies that
are both Muslim and non-Muslim; Islamic banking and finance services are more
efficient than Western financial services processes; banking and finance according to
Islamic principles spares politicians the trouble of addressing the grievances of Riba;
and the implementation of Islamic banking and finance services shields the general
public against dishonest officials in positions of public authority while also provid-
ing opportunities for advancement for Muslim professionals.
498 J. Z. Salic

According to the information presented, it appears that using banking and finance
that adheres to Islamic principles can help a person grow in life and shield them from
sliding into any form of poverty. Because of this, Islamic banking and finance
contribute to the entire well-being of individuals, notwithstanding the conditions
in which they may find themselves. Islamic banking does not permit usury or
speculation as a type of financial transaction, which is another important distinction
between it and traditional banking systems. One of the most significant distinctions
among the two forms of banking is this. In addition, Shariah law forbids the charging
of interest on loans. Additionally, it is strictly forbidden to engage in any type of
investment that involves goods or activities that the Quran forbids, such as gambling,
alcohol, or pork. These investments include, for instance, wagering on sports or
engaging in adultery. This holds true for all varieties of investments. From this
perspective, Islamic banking can be seen as a type of ethical investing that is
different from the kinds of investing that are typical in other cultures.
The majority of respondents firmly agreed that Islamic banking and finance play
the following key roles in economic growth: Islamic banking and finance are
applicable everywhere; Islamic Banking and Finance is a viable substitute for the
Conventional Banking System; The Islamic Banking and Finance sector offers
reliable products and services; Public interest is at the heart of Islamic Banking
and Finance; the principles of Islamic finance and banking help minimize some of
the dangers associated with the financial markets; banking and finance based on
Islamic principles offer the greatest potential for societal economic development;
there is never a circumstance in which Islamic banking and finance cannot be
applied; Islamic banking and finance totally abolish the practice of riba; and the
use of Islamic banking and finance increases investor and consumer satisfaction
levels. Muslims are very lucky to be able to use Islamic banking and finance as a part
of their religion. Earning halal revenue and many blessings is possible via the use of
Islamic banking and financial services. As a result, society as a whole benefits and
the Muslim community is able to cleanse their hearts of greed. And it fosters
genuine, spiritual solidarity among its adherents by bringing them closer together.
Additionally, one’s faith in Allah is strengthened and one’s relationship with Allah is
deepened via the practice of Islamic banking and finance.

4 Conclusions and Recommendations

In the regions of the Philippines that have a significant Muslim population, Islamic
banking and finance services can function as a competitive financial institution. The
presence of a Muslim population in the Philippines is the single most important
factor that determines the country’s accessibility to Islamic banking and finance
services. In addition, there is a demand to enlighten the Filipino-Muslim people
especially the Bangsamoro people on the advantages of using Islamic banking and
financial services as a workable alternative source of funding.
Significance and Potential Role of the Islamic Banking and. . . 499

In order for the respondents to have sufficient knowledge that will be to their
benefit as well as the benefit of others, the researchers would like to recommend to
the respondents that they extend their academic research, understanding, and learn-
ing to this subject matter, which is the significance and potential role of Islamic
banking and financial services.
The researchers would also like to recommend that in order for Muslim-Filipinos,
particularly the Moro people, to be more informed and mindful of the existing of
Islamic banking and finance, it is encouraged that the Philippine government, with
the collaboration of the BARMM government, organize conferences, symposium,
seminars, or conventions in each provinces or municipalities for the purpose of
making citizens aware of the significance of Islamic banking and finance and that the
government make this topic a part of the curriculum that is taught in both public and
private schools so that students will have an understanding of it.

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ESG Practices and Firm Risk: Evidence
from Malaysia

Nik Anis Idayu Nik Abdullah and Razali Haron

Abstract This study examines the effect of environmental, social, and governance
(ESG) practices on firm risk in Malaysia. Prior research has primarily focused on
countries with more developed ESG awareness, and minimal studies have investi-
gated the interaction between ESG and Shariah-compliant firms. Therefore, these
two combined effects are mostly unknown and worth researching. This paper aims to
fill this gap by assessing whether Shariah-compliant firms can obtain a more
significant risk-mitigating impact for greater ESG scores for nonfinancial firms.
This study employed a panel data analysis base on a sample of listed firms from
2008 to 2021. This study finds a significant positive relationship between ESG
performance and systematic risk in all samples and non-Shariah-compliant sample
firms. This implies that ESG activities are not viewed as a value driver affecting the
firm’s systematic risk in Malaysian firms but rather a resource that could be better
allocated to other value-added activities. Based on the findings, we argue that listed
firms in Malaysia (both Shariah and non-Shariah compliant) still lack sufficient
investment in ESG activities. The lack of association between ESG scores and
firm risk indicates that higher ESG performances do not reduce a firm’s risk in
Malaysia. We recommend that they improve their overall ESG scores and increase
their awareness of the future benefits that ESG activities may offer.

N. A. I. N. Abdullah (✉)
Faculty of Accountancy, Universiti Teknologi MARA (UiTM), Selangor, Malaysia
Institute of Islamic Banking and Finance, IIUM, Kuala Lumpur, Malaysia
R. Haron
Institute of Islamic Banking and Finance, IIUM, Kuala Lumpur, Malaysia
e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 501
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_46
502 N. A. I. N. Abdullah and R. Haron

1 Introduction

1.1 Background

Studies on environmental, social, and governance (ESG) have greatly increased in

recent years, supported by growing investor interest on a global and domestic scale.
ESG issues are being examined more closely as firms and investors worldwide grow
more socially and environmentally concerned and as the potential financial rewards
become clearer. ESG consists of three components: environmental, social, and
governance (ESG). Though often associated with corporate social responsibility
(CSR), ESG factors have become critical considerations for investors due to their
impact on the risk-reward profile of their investment portfolios (Sassen et al. 2016).
The impact of ESG practices on firm risk is relatively new topic in empirical
finance (Alam et al. 2022). Prior studies have focused on the effects of ESG on
financial performance be it operating, efficiency, and/or valuation (Buallay 2019a;
Masliza et al. 2021; Ruan and Liu 2021). The management of risk, which is an
expression of uncertainty about expectations for the future, is essential to
accomplishing the company’s value objective (Nirino et al. 2021). Furthermore,
the risk is a critical aspect in the present and future of managerial and financial
dynamics. In the financial literature, the firm’s total risk is measured by the volatility
of stock returns (Azmi et al. 2021; Lueg et al. 2019; Sassen et al. 2016; Shakil
2021a). Meanwhile, systematic risk is measured by market beta. According to
previous research by Sassen et al. (2016), ESG practices have an influential role in
reducing the stock volatility and risk of the firm. This is due to transparency in ESG
reporting that demonstrates to investors that a company can reduce risks and produce
long-term, sustainable financial rewards.
The focus of this study is on listed firms in Malaysia. According to the
PriceWaterhouseCoopers (PWC) report in December 2021, 94% of the top Malay-
sian public limited companies (PLCs) currently have ESG plans in place. Progress
observed among Malaysian firms in integrating ESG considerations comes on the
back of an ongoing push by the government to advance sustainability and strengthen
security, well-being, and inclusivity. The 5-year 12th Malaysia Plan (12MP) devel-
opment plan, introduced by the government in September 2021, serves as a strategic
framework for the capital market to achieve economic growth and transform Malay-
sia toward greater inclusivity and sustainability.
Previous studies find significant positive, negative, mixed, and insignificant
influences of ESG on financial risk in the context of different industries and countries
(Alam et al. 2022; Nguyen and Nguyen 2020; Sassen et al. 2016; Shakil 2021a). In
this context, exploring the relationship between ESG practice and firm risk in
Malaysia is critical because Malaysia is still in the early stages of its ESG journey
but is already ahead of the rest of ASEAN, trailing only Singapore. The primary
research question of this study is to investigate whether there is any influence of ESG
on the financial risk of listed firms in Malaysia. To achieve the research objective,
this study uses a sample of 51 listed firms in Malaysia (24 non-Shariah-complaint
ESG Practices and Firm Risk: Evidence from Malaysia 503

and 27 Shariah-compliant firms) resulting in 481 firm-year observations from 2008

to 2021 to investigate the direct influence of ESG on financial risk. This study finds a
significant positive effect of ESG on systematic risk in both sample and subsample of
non-Shariah-compliant firms.
The results of this study will assist investors in emphasizing ESG issues before
investing in a company. The outcome will also help policy-makers and regulators,
including central banks and the security commission; revise the ESG criteria; and
rank companies according to their ESG performance.

2 Literature Review

2.1 Background Theory and Previous Studies

Risk mitigation and overinvestment views are the two main theories that forecast the
association between ESG and firm risk (Erragragui and Revelli 2016; Sassen et al.
2016; Stellner et al. 2015). These theories make opposing predictions, each backed
by empirical evidence. According to the risk mitigation viewpoint, ESG creates
goodwill or additional capital for the company. According to the theory, organiza-
tions that perform better in environmental, social, and governance (ESG) have a
better risk profile than those that perform poorly (Goss and Roberts 2011). This is
because organizations with solid ESG performance are expected to invest in internal
resources and intangibles like reputation, customer loyalty, and long-term connec-
tions with diverse stakeholder groups, all of which can lead to competitive advantage
(Cai et al. 2016; Eliwa et al. 2019). As a result, cash flow volatility should be
reduced, as the company is protected from adverse credit events, which improves its
creditworthiness.
Goss and Roberts (2011) refer to the contrary viewpoint as the overinvestment
view, which considers ESG or CSR investment a waste of precious resources that
diminishes the corporate value. The notion can be traced back to Friedman (1970),
who believes CSR investment to be value-destroying from shareholders’ perspec-
tive, as it diminishes business value and creditworthiness. Funds devoted to ESG
activities could have been used better by the company. Besides, from a principal-
agent standpoint, a company’s management may benefit personally from investing
in ESG initiatives by strengthening their reputation at the expense of shareholders
(Azmi et al. 2021; Bătae et al. 2021). All the strategies outlined above have the
potential to reduce profitability and increase volatility.
Many studies examine the relationship between sustainability reporting and firm
risk (Albuquerque et al. 2019; Erragragui 2018; Gillan et al. 2021; Lueg et al. 2019;
Nguyen and Nguyen 2020; Shakil 2021a). However, these studies have generated
significant positive, negative, mixed, and insignificant influences of ESG practices
on firm risk in different industries and countries.
According to Gillan et al. (2021), ESG can affect many types of risk, including
systematic, regulatory, supply chain, litigation, reputational, and physical risks.
504 N. A. I. N. Abdullah and R. Haron

Some studies found a negative relationship between sustainability reporting and firm
risk (Albuquerque et al. 2019; El Ghoul et al. 2011; Lueg et al. 2019; Seltzer et al.
2020; Shakil et al. 2019; Stellner et al. 2015). For example, Albuquerque et al.
(2019) conclude that firms with high ESG performance have lower systematic risk
due to less price elastic demand. Consistent with a relationship between CSR and
cost of capital, Eliwa et al. (2019) differentiate between ESG performance and ESG
disclosure to find evidence that both have an equal impact on lowering the cost of
debt for firms with more robust ESG performance or disclosure. Meanwhile, some
studies found no or nonsignificant relationship between ESG and firm risk (Eliwa
et al. 2019; Stellner et al. 2015). Stellner et al. (2015) conclude that no statistically
significant relationship exists between firm corporate social responsibility and credit
rating in a country with below-average ESG. Accordingly, Humphrey (2011) find
that UK firms with high and low corporate social performance ratings do not differ in
their amount of idiosyncratic risk.
Some empirical research supports the notion that ESG practices result from
overinvestment or agency issues rather than a concern for a firm’s risk. For example,
some studies have found a positive relationship between sustainability reporting and
firm risk (Breuer et al. 2018; Menz 2010). Menz (2010) shows a positive but weakly
significant association between ESG and corporate spreads in his research of 498
European corporate bonds, implying that firms with superior ESG performance
suffer larger corporate bond spreads. This reinforces the argument that spending
money on ESG initiatives wastes precious resources that could be better used
elsewhere in the organization. Using a sample of 332 companies in France, Ger-
many, Italy, and Japan, Izzo and Magnanelli (2012) find no evidence of a negative
relationship between ESG and the cost of debt. In line with Menz (2010), their
results reveal a positive relationship that better ESG is penalized with a higher cost of
debt. Meanwhile, Baran and Zhang (2012) find that the yield spreads of newly issued
bonds increase systematically after companies have been included in KLD
400 Index, an index that comprises companies with superior ESG performance.
The overall results support the finding of Menz (2010) and Izzo and Magnanelli
(2012).
When looking at the effect of ESG on firm risk, the research results presented
above show quite conflicting results. These studies all have one thing in common:
they quantify the influence of some overall measure of ESG performance on firm
risk. Therefore, this study hypothesizes that:
H1: The higher the ESG practice, the lower the level of financial risk of listed firms
in Malaysia.
ESG Practices and Firm Risk: Evidence from Malaysia 505

3 Introduction

This study’s population comprises 101 listed firms with financial and ESG data from
the Refinitiv database for 2008–2021. According to the preliminary screening, as
expected, some firms do not provide the needed information to determine the level of
ESG practices. Following Buallay (2019b), firms should have data for at least
2 years to be included in the sample. Finally, we obtained a sample of 51 firms for
2008–2020, resulting in 481 firm-year observations. This study uses stock price
volatility as a proxy for total risk and market beta for the firms’ systematic risk. Other
firm-specific variables, for instance, firm size, market to book, profitability, and
leverage, are selected according to prior studies (Chakraborty et al. 2019; Sassen
et al. 2016; Shakil 2021b). The data of all control variables are collected from
Refinitiv Eikon Datastream. Academics and researchers regularly use the database
as the database provides transparent and high-quality data (Bătae et al. 2021; Shakil
2021b; Shakil et al. 2019).

3.1 Measurements

Table 1 presents the definitions of all the variables included in this study and the
sources from which they were drawn.

Table 1 Definition of variables and the source of information

Variables Labels Measurements
Dependent variable (Source: Refinitiv)
Total risk TR Total risk (total stock volatility) measured by the annualized standard
deviation of monthly stock returns over the previous year
Systematic BETA Systematic risk measured by sensitivity to changes in market returns
risk
Independent variable (Source: Refinitiv)
ESG score ESG Represents the weighted average of the ESG scores to provide a com-
prehensive evaluation of the sustainability impact and corporate conduct
Control variable (Source: Refinitiv)
Firm size SIZE Natural logarithm of total assets
Market-to- MTB Market value/book value of common equity
book
Profitability ROA Pretax income/total assets
Leverage LEV Long-term debt/total assest
506 N. A. I. N. Abdullah and R. Haron

3.2 Model Development

We specify the model to explain the relationship between firm risk and ESG
practices as follows:

ESGi, t þ Control Variablesi, t þ ei, t = FRi, t ð1Þ

The above model represents firm risk as to the function of ESG score and the
control variables. FR is total and systematic risk, and ESG is environmental, social,
and governance practices. This study considers other control variables based on
previous literature (Chakraborty et al. 2019; Sassen et al. 2016; Shakil 2021b; Shakil
et al. 2019).

3.3 Method

Our analysis is divided into three steps. First, we consider the sample of all firms
(Shariah-compliant and non-Shariah-compliant firms) and regress firm risk on over-
all ESG score while controlling for firm-specific variables.
Next, we separate the sample into Shariah-compliant and non-Shariah-compliant
firms. We generate a dummy variable, which takes the value 1 if the firm is a
Shariah-compliant firm and 0 otherwise. We use the same set of firm controls.

4 Results and Analysis

4.1 Results

Please note that the first paragraph of a section or subsection is not indented. The first
paragraphs that follow a table, figure, equation, etc. does not have an indent, either.
Subsequent paragraphs, however, are indented.
Descriptive statistics are presented in Table 2 and refer to the entire sample. The
mean of total and systematic risk is 7.20 and 0.64, respectively. The average ESG
score is 44.83 for the total sample firms.
Panel A and B of Table 3 report the summary statistics for non-Shariah-compliant
and Shariah-compliant firms, respectively. The average total risk for non-Shariah
firms is 7.84, whereas the average risk for Shariah firms is 6.71. For systematic risk,
the average for non-Shariah and Shariah firms are 0.7 and 0.6, respectively, indicat-
ing only a slight difference. Looking at the mean of ESG scores between the two
groups, we see Shariah firms have a higher score (46.5%) than non-Shariah firms
(42.7%).
ESG Practices and Firm Risk: Evidence from Malaysia 507

Table 2 Descriptive statistics

Variables Obs Mean SD Min Max
Total risk 481 7.2018 4.8836 1.312 55.818
Systematic risk 481 0.6424 0.4028 -0.534 2.354
ESG 481 44.8294 18.6107 2.84 90.13
SIZE 481 15.104 1.1399 11.637 17.598
MTB 481 0.5805 1.3231 -0.154 16.126
ROA 481 9.3697 11.768 -20.67 84.04
LEV 481 29.1288 16.1342 0.00 85.74

Table 3 Summary statistics

Variables Obs Mean SD Min Max
Panel A: Non-Shariah-compliant firms
Total risk 209 7.8425 5.7392 2.070 55.818
Systematic risk 209 0.6997 0.4274 -0.534 2.088
ESG 209 42.6752 20.4423 2.84 85.01
Panel B: Shariah-compliant firms
Total risk 272 6.7095 4.05 1.312 26.491
Systematic risk 272 0.59836 0.37773 -0.246 2.354
ESG 272 46.4847 16.9236 10.47 90.13

Table 4 Correlation analyses Variables (1) (2) (3)

Panel A: Non-Shariah-compliant firms
(1) Total risk 1.00
(2) Systematic risk 0.244** 1.00
(3) ESG 0.114 0.279** 1.00

Panel B: Shariah-compliant firms

(1) Total risk 1.00
(2) Systematic risk 0.339** 1.00
(3) ESG 0.018 -0.084 1.00

In Table 4, we report the correlations among firm risks and ESG score for both
non-Shariah (Panel A) and Shariah-compliant firms (Panel B). Pearson correlation
coefficients of all variables are less than 0.90, showing no multicollinearity issues
among variables (Hair et al. 2009).
This study aims to examine the relationship between ESG practices and firm risk.
Table 5A and B present the regression results of (1) all sample firms, (2) non-
Shariah-compliant and (3) Shariah-compliant firms. The results did not support our
hypothesis that the higher the ESG score, the lower the firm’s financial risk level.
This study finds a significant positive relationship between the ESG score and the
508 N. A. I. N. Abdullah and R. Haron

Table 5 Regression result

Model (1) (2) (3)
A Total risk
ESG 0.021(0.03648) 0.089(0.0554) 0.185(0.017)
SIZE 0.103(-1.8828) 0.139(-2.673) 0.133(-1.046)
MTB 0.543(0.135) 0.543(1.03) 0.617(-0.094)
ROA 0.055(-0.1397) 0.209(-0.16) 0.123(-0.107)
LEV 0.140(0.0613) 0.269(0.093) 0.061(0.052)
Constant 0.054(33.451)) 0.096(44.033) 0.051(21.353)
Observation 481 209 272
B Systematic risk
ESG 0.001*** (0.007) 0.002***(0.012) 0.136(0.004)
SIZE 0.032(-0.296) 0.030(-0.35) 0.214(-0.2885)
MTB 0.036(-0.043) 0.130(-0.0912) 0.075(-0.284)
ROA 0.168(-0.005) 0.521(-0.043) 0.390(-0.004)
LEV 0.338(0.0053) 0.457(0.0085) 0.474(0.0039)
Constant 0.018(4.695) 0.016(5.3) 0.162(4.717)
Observation 481 209 272
Notes: * significant at 10%, ** significant at 5%, *** significant at 1%

systematic risk proxies by BETA in (1) and (2) firms. While this is surprising, it
seems that listed firms in Malaysia do not systematically consider that ESG plays a
much more critical role in risk reduction. This is the result that the overinvestment
view would expect. Our result in Table 5A indicates that the ESG scores are
statistically insignificant, suggesting no relationship between ESG scores with total
risk in all (1), (2), and (3).

5 Conclusion and Recommendations

In this study, we look at how the ESG practices of listed nonfinancial firms in
Malaysia influence firm risk assessed by total and systematic risk. According to the
risk mitigation perspective, companies can minimize risk by participating in ESG
activities that help maintain a close relationship with their stakeholders. On the other
hand, the overinvestment view implies that companies will have a greater risk if their
ESG initiatives are seen as a waste of resources, typically to the benefit of manage-
ment to the detriment of the company. According to Stellner et al. (2015), rational
investors should only view ESG investments as value-enhancing and risk-reducing
provided the marginal gains of these investments outweigh the marginal costs.
Based on the sample of 51 listed nonfinancial firms in Malaysia between 2008
and 2021, we find a significant positive relationship between ESG scores and
systematic risk in all sample firms and the subsample of Shariah-compliant firms.
It indicates that firms should be mindful of the diminishing effect of ESG activity on
ESG Practices and Firm Risk: Evidence from Malaysia 509

firm risk and be more efficient in allocating resources for ESG activities. We find that
for total risk, none of the result were statistically significant. The lack of association
between ESG score and firm risk suggests increased ESG activity does not reduce
firm’s risk in Malaysia.
Although this study contributes to the literature on firm sustainability and firm
risk, this study is not without limitations. Firstly, this study is limited to only listed
firms in Malaysia; thus, future research may study the effect of ESG on firm
performance by considering other countries. Second, the data collection comprises
only listed nonfinancial firms in Malaysia with at least 2 years of data available in the
Refinitiv database from 2008 to 2021. Although this may not be a limit, future
studies may focus on small-medium enterprises (SMEs), which often have limited
resources and higher risk than listed firms. As this study only considers market-based
risk measurements, future research may also consider accounting-based risk indica-
tors to investigate the impact of ESG on firm risk.

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The Muhammadiyah Waqf Organization:
Prospects and Challenges

Junarti, Isnan Hari Mardika, Syed Musa Alhabshi, and Amirsyah

Abstract Muhammadiyah is an Islamic organization that is very well known in

Indonesia because its usefulness has a massive impact on society. The Central Board
Council of Muhammadiyah 2010–2015 on Muhammadiyah organization has since
engaged in charitable efforts, particularly in education, health, public welfare,
economics, and preaching (da’wah) from waqf properties, including waqf land.
Majelis Wakaf dan Kehartabendaan establishes an asset management division as
Muhammadiyah’s function to administer waqf and the organization’s assets in a
professional, transparent, accountable, and productive manner to provide the com-
munity with social benefits. Our research investigates the prospects and challenges
of waqf management in the Muhammadiyah organization. This research uses obser-
vation and interviews to examine the waqf challenges and prospects in the
Muhammadiyah organization. Lastly, this paper highlights that the Muhammadiyah
waqf organization has high public trust. The dilemma of effective coordination and
integration between centralized and decentralized administration is also a funda-
mental challenge of waqf management in Muhammadiyah.

Junarti (✉)
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Institut Teknologi dan Bisnis Ahmad Dahlan, Banten, Indonesia
I. H. Mardika
Institut Teknologi dan Bisnis Ahmad Dahlan, Banten, Indonesia
S. M. Alhabshi
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Amirsyah
Universitas Muhammadiyah Jakarta, Banten, Indonesia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 511
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_47
512 Junarti et al.

1 Introduction

1.1 Background

Muhammadiyah is a socioreligious organization and movement that is concerned

with the social and cultural conditions of Java and Indonesian society as a whole
(Mu’thi et al. 2015). Kyai Haji Ahmad Dahlan, born with the name Muhammad
Darwish, is the founder of the Muhammadiyah organization who was inspired,
motivated, and encouraged by surah Al Maun in the Qur’an (Elhady 2017; Yusuf
and Abbas 1985) to help those who are weak, like orphans and needy (Mu’thi et al.
2015). Surah Al-Maun empowers the weak (mustad’afin) in the economy, education,
and health. There are the poor to fulfill their life (Al-Maun), i.e., education (provide
schools and universities), health (provide hospitals and health clinics), and dignify-
ing the orphans (provide orphanages and boarding schools) (Utami et al. 2017).
Muhammadiyah was established in Kauman Yogyakarta on November 18, 1912,
and declared in the public meeting on December 20, 1912, in Gedoeng Lodge
Gebauw Malioboro. Unfortunately, it did not automatically obtain legal recognition
from the Dutch East Indies government, with was a long process. It was finally
approved as a legal entity on August 22, 1914, recorded on Besluit Number
81 (Nashir 2015). Through waqf, Kyai Haji Ahmad Dahlan enhances social welfare.
Although the initial establishment of the Muhammadiyah organization focused on
education, Muhammadiyah can empower itself in social welfare for the next gener-
ation (Mu’thi et al. 2015). Nowadays, Muhammadiyah has successfully managed
charitable efforts, based on the Councils of the Central Board of Muhammadiyah
2010–2015 (Muhammadiyah 2015) shown in Table 1.
One of the Waqf and Assets Council’s visions for ensuring organizational
sustainability is to establish the function of managing Muhammadiyah assets, such
as waqf properties, funds, and other organizational assets in a professional, respon-
sive, accountable, and productive way. Kyai Haji Ah-mad Dahlan pioneered the
concept of reporting the contribution of the principal value and performance of waqf
assets. Asset definitions and recognition criteria associated with the value of future
benefits from past transactions controlled by the company are used to determine
waqf asset valuation following the accounting framework (IASC 1997; FASB 2001;
IAI 2009).
On the other hand, internal Persyarikatan and external challenges to ensure a
seamless waqf policy and strategy implementation were reviewed by the head of the
Majelis Wakaf dan Kehartabendaan, Zubir (2016), which revealed that at least four
focus targets were discussed at the national work meeting, including the empower-
ment of Muhammadiyah assets throughout Indonesia. Many endowments lack
proper and effective utilization of waqf assets, including property, land, and fund,
to realize their full potential. Muhammadiyah faces a dilemma in managing the waqf
asset portfolio in a centralized or decentralized manner. Although Muhammadiyah
unity is more maintained and may establish cross-subsidies between activities and
agencies with a centralized design, the decentralized structure allows the
Muhammadiyah movement to become more inclusive and pragmatic toward Islam
or have a strong influence on society (Muhammadiyah 2015).
The Muhammadiyah Waqf Organization: Prospects and Challenges 513

Table 1 Amal Usaha Muhammadiyah (Business unit for charity purposes)

No Type of Charitable Efforts Total

Education : 20.214
Higher Education (Universities, Institutes, Polytechnics, and Colleges)
1 176
2 Secondary Schools (SMA / SMK / MA) 1.143
3 Junior High Schools (SMP / MTs) 1.772
4 Elementary schools (SD / MI) 2.604
5 Nursery Schools (TK / ABA / PAUD) 14.346
6 Special Schools 71
7 Islamic Boarding Schools (Pesantren) 102
Health and Public Welfare 1.146
1 Hospitals/Clinics 457
2 Orphanages 421
3 Orphans with Special Needs 82
4 Family Cares 78
5 Nursing Homes 54
6 Special Home for Abandoned Children 1
7 Death Benefits 38
8 Education and Skills Center (BPKM) 15
Economic Initiatives 1.224
1 Baitul Mal wa Tanwil 437
2 Sharia Rural Banks (BPRS) 762
3 Printing companies 25
Religious Activities or Da’wah 11.959
1 Mosques 6.270
2 Musallas 5.689

1.2 Objectives

This study examines the prospects and challenges of waqf management in the
Muhammadiyah organization. The critical aspect that must be emphasized in man-
aging the current waqf assets in Muhammadiyah is the administration of waqf,
because the primary source of sustainable economic growth is professional manage-
ment, transparent waqf administration, and complementary public investment
(Shaikh et al. 2017). The Muhammadiyah waqf institution is still in a dilemma to
implement a combined system of centralization and decentralization.

2 Methodology

This paper uses a literature review, interviews, and observation to examine and
assess waqf challenges and prospects in the Muhammadiyah organization. Review
the existing Muhammadiyah document, and there are waqf frameworks, policies,
514 Junarti et al.

and operations. Lastly, content analysis with proper codification to gain insight and
elicit pertinent challenges waqf Muhammadiyah management and administration.

3 Management of Integrated Waqf Model

Developing effective integrated management systems is essential for organizations,

including the waqf institution. Organizations implement integrated management to
effectively manage their processes in totality, meet the organization’s objectives, and
equitably satisfy the stakeholders (Dalling 2007). As a result, the institution must
decide how to organize and bureaucracy the organization to facilitate decision-
making and subsequent assessment when implementing integrated management
(Graybeal et al. 2018).
There are five attributes for creating an integrated waqf model in management,
movable or immovable assets (Mohsin and Muneeza 2020). First, the waqif is the
waqf founder; second, the waqf property (al-mawquf); third, the mutawalli is the
waqf’s trustee or manager; the fourth beneficiary of the waqf (al-mawquf alihim);
and lastly, nazir is the supervisor of waqf. From the waqf attributes, the management
level can be identified; for the lower-level management, Mutawalli is the trustee or
custodian of the waqf who is responsible for managing the waqf asset about
preserving, saving, and distributing income generated in compliance with the
requirements of the founder to the stated beneficiaries (Mohsin and Muneeza
2020). In mid-level management, Nazir as a supervisor monitors and controls
Mutawalli (lower-level management). They routinely monitor waqf property man-
agement and status and impose penalties for mishandling of waqf property, as is the
case with Mutawalli (Mohsin and Muneeza 2020). Finally, the central board is a
component of high-level management. Once a waqf organization has established its
management levels, it must decide whether the bureaucracy will be centralized,
decentralized, or mixed (Hybrid) in Fig. 1. Hybrid combines centralized and
decentralized. Understanding the structures of centralized and decentralized organi-
zations establishes the foundation for recognizing the variations of the integrated
waqf model (Dalling 2007).

4 Waqf in Muhammadiyah Organization

4.1 The Management and Administration

Majelis Wakaf dan Kehartabendaan Muhammadiyah consists of two divisions,

namely Waqf and Assets, where the Waqf Division manages the waqf assets/land
and the Assets Division manages the non-waqf assets (Ulfiana and Yulianti 2019). In
addition, the practice of waqf Muhammadiyah also consists of administration and
management (Fig. 2).
The Muhammadiyah Waqf Organization: Prospects and Challenges 515

Fig. 1 Management of Waqf model

Fig. 2 The process of Muhammadiyah Waqf

516 Junarti et al.

For waqf administration under Majelis Wakaf dan Kehartabendaan and for waqf
management under the several assemblies in Muhammadiyah Central Board, there
are Majelis Pendidikan Tinggi (higher education); Majelis Pendidikan Dasar dan
Menengah (primary and middle education); Majelis Pembina Kesehatan Umum
(health); Majelis Pemberdayaan Masyarakat (community development); Majelis
Ekonomi dan Kewirausahaan (business); and Majelis Pelayanan Sosial (social).
The waqf management in Muhammadiyah and Majelis Pelayanan Sosial (social)
(Astuti et al. 2022; Junarti et al. 2021). The practice of waqf in Muhammadiyah is
decentralized in which each level manages waqf assets. So the central board does not
have actual data on how Muhammadiyah manages many total waqf assets. Cur-
rently, Majelis Wakaf dan Kehartabendaan is conducting an inventory of all assets
through the SIMAM program to have big data assets centrally.
There are various advantages of having ownership and administration centralized
on the Central Board of Muhammadiyah: first, legal assurances for the long-term
sustainability of waqf assets. Second, monitoring can be linked with comparable
organizational policies. Third, waqf assets are simple to manage. Fourth, determin-
ing the strategy for generating waqf assets is simple (Medias and Pratiwi 2019).
Since Muhammadiyah was established on November 18, 1912, as a preaching
organization-based institution in Indonesia, KH Ahmad Dahlan has been trusted to
independently manage the awqaf asset (Mu’thi et al. 2015; Nashir 2015; Utami et al.
2017). As a result, the Minister of Home Affairs issued Decree No. SK.14/DDA/
1972 establishing the Muhammadiyah Organization as a legal organization capable
of owning land with property rights. Based on the Decree, waqf assets collected by
Muhammadiyah management at all levels of organizational institutions in every
region throughout Indonesia must have SKPP (Certificate of Central Leadership)
Muhammadiyah as Waqf Nazir so that every waqf property must be registered in the
name of the Muhammadiyah organization (Medias and Pratiwi 2019) (Fig. 3).
The process of managing waqf assets, especially land, is carried out by
Muhammadiyah organizations at the province, subdistrict, or village levels. Mean-
while, it is only for coordination and supervision (Medias and Pratiwi 2019). Majelis
Wakaf dan Kehartabendaan as nazir in Yogyakarta (Ulfiana and Yulianti 2019) and
Magelang (Medias and Pratiwi 2019) manage Muhammadiyah waqf from waqf
collecting to waqf asset management and utilization.

Fig. 3 The process of collecting Muhammadiyah waqf’s asset

The Muhammadiyah Waqf Organization: Prospects and Challenges 517

4.2 Social-Business Management

At the beginning of the establishment, the Muhammadiyah ijtihad (effort) and tajdid
(renewal) focused on human historicity, nationality problems, and society. Poverty
reduction through education and health services is a tangible and genuine public
relations issue. Kyai Haji Ahmad Dahlan is an action man. More than his words, he
made history by his work (Mu’thi et al. 2015). Furthermore, Amal Usaha
Muhammadiyah (AUM-the charitable business unit) is the idea of KH Ahmad
Dahlan (Mu’thi et al. 2015). Muhammadiyah, as a nonprofit organization (NPO)
(Mu’thi et al. 2015; Nashir 2015), administers assets and waqf in a socially respon-
sible manner (Muhammadiyah 2015). Nonprofit organizations should prioritize
professionalization, genuine social effects, and financial sustainability (Ogliastri
et al. 2015). Amal Usaha Muhammadiyah is recognized as Muhammadiyah’s true
great idea for managing assets, including waqf and non-waqf (Elhady 2017).
Since the first century, the Muhammadiyah Organization has had assets of around
278 billion (Muhammadiyah 2015). Although in 1914, KH Ahmad Dahlan had
difficulty paying teacher salaries until he sold his property (Syukriyanto n.d.),
Muhammadiyah is now one of the wealthiest Islamic organizations in Indonesia
(Nashir 2015). The success of the Muhammadiyah organization cannot be separated
from social-business management in internal programs and financing from external
source institutions such as Islamic banks (Muhammadiyah 2015). However, its
initial establishment focused on education and health (Mu’thi et al. 2015). Then
came Baitul Mal wa Tanwil, Sharia Rural Banks (BPRS), printing enterprises, and
the BUEKA business group, among other things (Nashir 2015). For example,
Muhammadiyah University of Malang (UMM), a Muhammadiyah educational insti-
tution built on a waqf land area of approximately 1700 m2, 2008, has grown to
264,443 m2 (Nurhakim and Produktif 2010).

5 The Prospects and Challenges of Muhammadiyah Waqf

Currently, public trust in Waqf in Muhammadiyah is quite strong. Economic efforts

are increasingly being felt through the growth of MSMEs, such as minimarkets, the
expansion of the Baitut Tamwil Muhammadiyah network, the utilization of waqf
land, and collaboration with corporations and financial institutions overseas.
According to research done by the Economic and Entrepreneurship Council, there
are about 3717 ha of waqf assets and fixes. There is 24% or approximately 895 ha for
higher education, 61%, or approximately 2260 ha for schools, 6%, or approximately
219 ha for hospitals, and a 0.81% or approximately 30 ha for orphanages operated by
Muhammadiyah. At the same time, around 3.4% is taken from delicate and perma-
nent crops such as palm oil, lumber, orchards, and so on.
However, in waqf land management, a fundamental problem is faced by
Muhammadiyah, namely, the administration of institutions, whether it should be
518 Junarti et al.

centralized, decentralized, or hybrid. Muhammadiyah unity is better maintained, and

cross-subsidies may be created through centralized administration. However, the
centralized bureaucracy fosters the accumulation of all problems at the Central
Council, slowing the pace of Muhammadiyah because many have to do with
difficulties and work. Decentralized administration, on the other hand, allowed the
Muhammadiyah movement to be more inclusive and pragmatic in its approach to
Islamic preaching. However, it fosters contradictions among branch/regional leaders
and even places where Muhammadiyah and corporate charities have a sectoral ego.
As a result, one of the options in this research makes use of technology and employs
hybrid management or a mix of centralized and decentralized systems.
Muhammadiyah must select which one as soon as possible so that the situation
does not get more difficult and widespread (Muhammadiyah 2015).

5.1 Administration

In the waqf administration, Muhammadiyah faced several issues. There are certifi-
cation issues, documentation, and records and databases. The amount of
Muhammadiyah waqf property and land not guaranteed by waqf certificates or
property rights is still controversial. In 2013, the Waqf Council and the
Muhammadiyah Treasurer visited and assisted in 34 cases of disputes over waqf
land assets in several regions. For example, the Muhammadiyah Region in Aceh
occupies 2,486,061 m2. The land consists of 221 waqf land areas (59.6%) and 150
non-waqf land areas (40.4%), representing 371 land areas. There are 46 land areas
and not yet 302 certificates (Asy’ari 2017). Both centralized and decentralized
bureaucracy, this system requires a database to identify how much Muhammadiyah
manages waqf land and how much has been utilized. However, the Muhammadiyah
organization has not yet had an actual asset database. They only use assumptions to
estimate their wealth.

5.2 Management

Several issues must be addressed in the management of Muhammadiyah waqf. For

starters, waqf land has not been used. 8.64% of Muhammadiyah waqf property, or
around 321 ha, has not been utilized in scrub woods or abandoned land. Unused
waqf land, for example, covers 566,375 m2 or 32.68% of Aceh (Asy’ari 2017). Then
there’s an area of 100 ha in East Nusa Tenggara and 75 ha in West Nusa Tenggara
(Muhammadiyah 2015). As a result, the Muhammadiyah Central Board must
develop commercial land management methods to provide land plots for social
and business objectives. Because of the enormous advantages of waqf land, waqf
can be a feasible solution for reducing poverty and unemployment provided its
The Muhammadiyah Waqf Organization: Prospects and Challenges 519

benefits are properly leveraged. Society might also be economically strengthened to

reap the blessings of waqf.
Second, fundraising for land waqf management is critical because
Muhammadiyah is not a for-profit organization and requires funding to continue
and expand. So far, funding for Muhammadiyah’s charity has come from Islamic
banks, financial organizations, or various corporate collaborations (Muhammadiyah
2015; Nurhakim and Produktif 2010). Muhammadiyah’s activities cannot be funded
using development aid funding. As a result, several projects and activities in regions
and branches have not functioned as efficiently as they could. Muhammadiyah
groups continue to require significant financial support at all levels. Integrated
Waqf is a source of internal finance for Muhammadiyah social activities
(Muhammadiyah 2015). Therefore, it is essential to investigate the relevant fund
development plan through waqf.
Third, Muhammadiyah’s unprofessional mutawalli (administrator) must also be
addressed. For example, in Mutawalli Waqf Muhammadiyah in Aceh (Asy’ari
2017), whose waqf property is only a place of worship, Nazir lacks knowledge
and creativity in productive waqf management. Muhammadiyah cannot operate the
present waqf assets simply through voluntary nazir. Waqf management should begin
by enhancing the quality of nazir or by recruiting specialists who understand waqf
and other concerns, such as management, to increase waqf assets more productively.
Finally, parts of Muhammadiyah’s waqf assets are still administered traditionally,
making them less profitable and seldom empowering the poor, mosques and prayer
halls, madrasas, and orphans. The Muhammadiyah waqf organization has not fully
documented Persyarikatan’s value. In this case, the Muhammadiyah Central Board,
Majlis Wakaf dan Kehartabendaan, has worked tirelessly to establish
Muhammadiyah’s asset tracking system. One reason for this is that not all trust
money is properly reported at all levels of trust. Majlis Wakaf and Kehartabendaan,
on the other hand, will continue to work to collect data on trust assets.
An alternative solution to solve that problem is digital asset management (DAM).
A DAM system comprises the infrastructure required to help processes effectively
and efficiently utilize an organization’s digital assets. It automatically imports digital
assets into an easily searched, documented, transformed, edited, packaged, and
distributed centralized repository. A DAM system’s main administrative functions
include tracking utilization, asset-centered flow, automated system management,
and asset rights and permissions. The implication is that the formulation of waqf
desired by Muhammadiyah figures is practical and flexible (Nurhakim and Produktif
2010). However, until now, waqf in the Muhammadiyah organization still uses the
traditional system.
Furthermore, for fundraising, Muhammadiyah waqf can develop the concept of
social-business management. Several Muhammadiyah institutions have applied the
social-business concept, such as Muhammadiyah University of Malang, Yogyakarta
Muhammadiyah University, Malang Aisyiyah Islamic Hospital, etc. In addition, the
source of capital and waqf institution management optimization can create the digital
waqf assets (Thaker and Bin 2018). Hopefully, the digital revolution PBUH will
result in a great jump in technical advancement, computers, and automation, opening
520 Junarti et al.

up opportunities for further inventions. It has the potential to re-dimension the

distance and interaction between world populations, connecting them via a large
yet simple and rapid mechanism that can save expenses, boost utilization, and much
more (Alzubaidi and Abdullah 2017). Waqf in Muhammadiyah can be appropriately
operated.
On the other hand, management and administration are the essential issues that
must be emphasized in applying the current waqf asset in Muhammadiyah. Although
several units in the organization can overcome their financial problems by using part
of their assets to become a profitable business (Nurhakim and Produktif 2010), they
need to be innovative by utilizing technology currently being developed.

6 Conclusion and Recommendation

6.1 Conclusion

The dilemma of applying a bureaucratic centralized and decentralized administration

and management system is the fundamental challenge in the Muhammadiyah orga-
nization. The issue directly impacts waqf management in Muhammadiyah. There are
areas where the Persyarikatan successfully manages waqf, but on the other hand,
many waqf lands are not utilized. The problem today is the uneven understanding of
waqf and a new social paradigm. In terms of waqf and its various types, the
certification of waqf land is not yet optimal, the management of productive waqf
land assets is not yet optimal, there are still many unprofessional mutawalli, the
availability of waqf databases is not yet optimal, and the empowerment and devel-
opment of cash waqf are not yet optimal. Furthermore, based on an evaluation of the
implementation system in Majelis Wakaf dan Kehartabendaan Muhammadiyah,
certain factors must be considered the next time.

6.2 Recommendation

In the past, Muhammadiyah’s initial establishment focused on education and health,

the main problems in 1912 (Mu’thi et al. 2015). KH Ahmad Dahlan’s sincerity as the
founder and the seriousness of the management in managing the organization,
especially for assets, both waqf, and non-waqf. As a consequence, Muhammadiyah
was able to expand into numerous elements such as educational institutions, hospi-
tals, health centers, orphanages, places of worship (mosques and prayer rooms),
destitute houses, research on everyday social and personal life according to Shari’a,
and Amal. Muhammadiyah endeavors (Nashir 2015). Management and administra-
tion, on the other hand, are critical aspects that must be highlighted in the current
implementation of waqf assets in Muhammadiyah. However, some organizational
units can overcome financial difficulties by converting part of their assets into viable
The Muhammadiyah Waqf Organization: Prospects and Challenges 521

enterprises (Nurhakim and Produktif 2010). There needs to be innovation by utiliz-

ing technology currently developing. The limitation of this paper is only in the
literature review at the central board level. The next author can explore each
management level in the Muhammadiyah organization and make a pilot project
applying a centralized and decentralized or hybrid pattern for administration and
management in the waqf assets portfolio.

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Strategies for Improving Cash Waqf
Fundraising Through Optimization of Cash
Waqf Literacy in Indonesia

Nurul Rahmania and Hartomi Maulana

Abstract Indonesia is a country with the largest Muslim population in the world,
and this supports Indonesia to have a high potential for waqf, especially from the
potential for cash waqf. However, the implementation of the understanding of cash
waqf in the community is limited and is still fixated on traditional waqf which causes
the collection of waqf to be low. BWI reports that the ability for waqf in Indonesia is
around Rp. 180 trillion per year, while the calculation of the realization of waqf in
2020 only reached Rp. 397 billion. In addition, survey data related to the literacy
level of cash waqf reviewed by the Fiscal Policy Agency, Ministry of Finance of the
Republic of Indonesia, stated that the cash waqf literacy index data reached 0.475
which was included in the poor or low category. This phenomenon requires a
strategy to increase the level of waqf literacy in the community, particularly in
cash waqf literacy. So, the existence of cash waqf can help to empower the national
economy. Therefore, increasing public literacy on cash waqf must be realized. The
aim of the research was to decide the extent of the influence of literacy on optimizing
the collection of cash waqf in the community. This research is a qualitative research
through content analysis, by digging up information and data through scientific
journals and sources from technology media. The analytical method used is data
collection, data reduction, data presentation, and drawing conclusion. Based on
review of several previous studies, the results showed that collection of cash waqf
will be collected properly if the community’s understanding related to cash waqf is
good. The study suggests that Badan Wakaf Indonesia (BWI) and other waqf
institutions should be more concerned with increasing of cash waqf literacy partic-
ularly through information technology media in order to increase cash waqf collec-
tion in Indonesia.

N. Rahmania · H. Maulana (✉)

Department of Islamic Economics Law, Postgraduate Program, Universitas Darussalam Gontor,
Ponogoro, Indonesia
e-mail: [email protected]; [email protected]

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 523
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_48
524 N. Rahmania and H. Maulana

1 Introduction

1.1 Research Background

Cash waqf is one of the social financial instruments in Islam that contains the value
of sustainability, which is followed by the willingness of the waqf distributor. The
benefits of waqf are able to become eternal tools whose benefits can prosper the
people and, in other words, are very helpful in economic and social
development (Medias 2010).
The beneficiary of cash waqf is using one of the public sources, both in the form
of project financing and service financing. As a country with the majority of its
population embracing Islam, Indonesia has the potential to develop and manage cash
waqf. And this potential can be realized to reduce social inequality in people’s lives
if there is an increase in the collection of waqf funds or assets. Thus, the distribution
and awareness of waqf money from the community is able to help solve economic
problems by making waqf a source or flow of financing to meet the basic needs of the
poor Indonesian people (Syamsuri et al. 2020).
To pursue this potential, waqf institutions try to socialize cash waqf to the wider
community and be more specific. This effort is expected able to produce changes to
the mindset and knowledge of the community regarding the existence and benefits of
cash waqf in Indonesia, where the mindset of the Indonesian people is still very
minimal and common regarding cash waqf (Kementerian Keuangan 2019). The
statement of the problem is supported by data from the National Committee for
Economics and Finance that the basis of the problem is caused by one factor,
namely, the low literacy of waqf, where waqf literacy in Indonesia is low at 50.48
(KNEKS 2022). Therefore, the purpose of this study is in line with the problems that
are being faced and are being addressed by waqf institutions in Indonesia, where
according to BWI (Indonesian Waqf Board), the level of public knowledge regard-
ing waqf and the mechanism of waqf is still very low.
Socialization through social media is one of the positive steps in the development
of cash waqf in Indonesia. In addition, Indonesia is a country that is high in the use of
social media sites, so it is able to take advantage of existing technology media as a
facility for financial transactions. The utilization of technology is a supporting tool in
maximizing the delivery of cash waqf from the public to waqf institutions, by
providing easy and practical services and facilities (Ryu 2018). And this fundraising
model has been applied by several countries, such as Malaysia, etc. In line with the
method of fundraising through technology, this is an effort to develop social
networks and communities in people’s lives (Mollick 2014).
This study attempts to refine previous studies by looking at the potential of
technological media in increasing public money waqf literacy which will affect the
fundraising of cash waqf. In addition, it is also an evaluation of the field of waqf and
an overview of the current conditions related to the literacy level of cash waqf.
Hence, this research aims to determine the extent of the influence of cash waqf
literacy on the collection of cash waqf in waqf institutions in Indonesia.
Strategies for Improving Cash Waqf Fundraising Through Optimization. . . 525

1.2 Objective

The purpose of this study is to try looking at the potential of technology media in
increasing public money waqf literacy which will affect cash waqf fundraising, as
well as being an evaluation material in the field of waqf and an overview of current
conditions associated with the literacy level of cash waqf in Indonesia. Hence, this
study aims to determine the extent of the influence of cash waqf literacy on the
collection of cash waqf in waqf institutions in Indonesia.

2 Literature Review

2.1 Background Theory

There are many previous studies that have discussed cash waqf. One of them is
Hassan et al. (2021) and Fauziah and El Ayyubi (2019), from their research stating
that literacy levels greatly affect public awareness and understanding of cash waqf. It
can be said that the literacy standard of cash waqf has an effect on collecting waqf
from the community. And if the literacy level of the community’s waqf increases or
is at a good level, it will help in the distribution of cash waqf, and if the literacy level
of cash waqf in the community will also have a negative impact on the number of
collection of cash waqf (Hassan et al. 2021; Fauziah and El Ayyubi 2019).

2.2 Previous Studies

There are many previous studies that have discussed cash waqf. One of them is
Hassan et al. (2021) and Fauziah and El Ayyubi (2019), from their research stating
that literacy levels greatly affect public awareness and understanding of cash waqf. It
can be said that the literacy level of cash waqf has an effect on collecting waqf from
the community. And if the literacy level of the community’s waqf increases or is at a
good level, it will help in the distribution of cash waqf, and if the literacy level of
cash waqf in the community will also have a negative impact on the number of
collection of cash waqf (Hassan et al. 2021; Fauziah and El Ayyubi 2019). In line
with Haruna and Ibrahim (2021) and Adeyemi et al. (2016) who emphasize the
importance of the contribution of waqf in the sustainability of people’s lives, the low
awareness of waqf becomes an obstacle in collecting waqf, for example, lack of
understanding, socioculture, and promotions related to cash waqf. Therefore, the
management of waqf also needs to be considered so that the purpose of waqf is
achieved according to Islamic law (Haruna and Ibrahim 2021; Adeyemi et al. 2016).
Other studies that also focus on raising waqf funds, such as Haidlir et al. (2021)
and Dewi (2021), state that optimizing the collection and management of waqf
526 N. Rahmania and H. Maulana

requires a good level of literacy related to waqf and is supported by the quantity of
advice and infrastructure so that assets or cash waqf funds can experience sustain-
ability in their collection. It can be concluded that with the potential of waqf owned
by Indonesia, it should be able to help reduce the level of poverty that occurs if it can
be collected sustainably and managed properly (Haidlir et al. 2021; Dewi 2021).
Based on several problems from the above study, the study states that literacy of
cash waqf and collection of cash waqf have an influence on each other. Therefore,
this study seeks to analyze the right strategy to increase cash waqf fundraising by
optimizing cash waqf literacy in the community. This study expands research by
utilizing technology from social media as a measuring tool in increasing the literacy
of cash waqf from the community. Media technology as a medium for disseminating
information has been applied to several previous studies and shows that technology
can be used as a benchmark for public knowledge about cash waqf in waqf
fundraising strategies (Ahwal 2021). Thus, the decisive strategy that is included to
help optimize waqf literacy and increase cash waqf fundraising is to utilize techno-
logical media from social media from the general public.

3 Methodology

This study aims to explain and examine a symptom, event, or phenomenon using a
qualitative approach. The qualitative approach serves to examine and explain the
meaning of a problem that occurs or is faced, starting from the form of data, pictures,
words, or events (Yusuf 2014). The source of data in this study is secondary data.
The classification of secondary sources in this study is journal publications, books,
documents, reports, and scientific websites (Hardani et al. 2020). The analysis
technique in this research is descriptive analysis. In every research, the analytical
technique is a mandatory and important method for research to be more
systematic (Gulo 2002).

3.1 Data

This section will explain the data used in the study. As for the data used in this study,
secondary data from books, reputable journals, scientific information websites, and
interviews were used to analyze the problems discussed in this study.

3.2 Method

This study aims to explain and examine a symptom, event, or phenomenon using a
qualitative approach. The qualitative approach serves to examine and explain the
Strategies for Improving Cash Waqf Fundraising Through Optimization. . . 527

meaning of a problem that occurs or is faced, starting from the form of data, pictures,
words, or events (Yusuf 2014). The source of data in this study is secondary data.
The classification of secondary sources in this study is journal publications, books,
documents, reports, and scientific websites (Hardani et al. 2020). The analysis
technique in this research is descriptive analysis. In every research, the analytical
technique is a mandatory and important method for research to be more
systematic (Gulo 2002).

4 Results and Analysis

4.1 Results

4.1.1 Fundraising Basic Concepts

Along with technological developments and innovations in the world of waqf,

making cash waqf becomes popular and lyrical by the public. Apart from being an
effort to utilize technology in people’s lives, this action is also an effort to overcome
waqf assets to make it more productive. So, the results of the development and
management of waqf assets can be maximized to help realize prosperity in people’s
lives.
However, several obstacles were detected in the management of cash waqf; in
general, these obstacles were related to the capability of the community and the level
of knowledge and public awareness regarding cash waqf.
So that the purpose of the cash waqf project is realized, it requires a strategy in
fundraising waqf assets, then managed and developed, which will then be distributed
to mawkufalaih. Fundraising can be defined as the activity of collecting or raising
funds from the public or wakif (Klein 2016). Fundraising is not only synonymous
with money, but rather, the scope of fundraising is very broad and deep, because the
influence of fundraising gives good meaning to the existence and development of an
institution. So, to understand the fundraising system, first, understand the substance
of the fundraising itself (Badan Wakaf Indonesia 2022). The basic substance of
fundraising can be explained in the following three ways, including motivation,
program, and method.

4.1.2 Motivation

Motivation is a series of knowledge, values, and beliefs that dominate the donor/
wakif to distribute part of the waqf property. And in the series of fundraising, Nazhir
as the recipient of waqf assets must conduct education, socialization, promotion, and
dissemination of information related to waqf, so that awareness is created from wakif
and is able to bring in candidates for waqf or wakif to perform waqf or even
participate in waqf management.
528 N. Rahmania and H. Maulana

4.1.3 Program

In this case, program activities have an effort in empowering the implementation of

the vision and mission of a waqf institution (nazhir) clearly, so that the people who
are moved are able to carry out waqf.

4.1.4 Method

The method stage is a method or method carried out by an institution with the aim of
raising funds from the community. At this stage, the emphasis is on fundraising
methods that must be able to provide trust, convenience, pride, and benefits to the
donor community/waqf.

4.1.5 Fundraising Cash Waqf

The implementation of fundraising activities has several methods and techniques

carried out. The method in question is an activity carried out by an organization with
the aim of raising funds from the community. The method is divided into two types,
namely, direct fundraising and indirect fundraising (Badan Wakaf Indonesia 2022).

4.1.6 Direct Fundraising

This method uses a process that involves the participation of wakif directly. The
form of fundraising interacts and accommodates directly to the wakif response. And
if the wakif has the desire to donate after getting promotion from an institutional
fundraiser, it can do so easily and is supported by the complete information needed
to make a donation, for example, Direct Mail, Direct Advertising, Telefundraising,
and live presentation.

4.1.7 Indirect Fundraising

An indirect fundraising method is a technique or method that does not involve the
role of the wakif directly. This form of fundraising is not carried out by providing
direct facilities for instantaneous wakif responses. Examples of Indirect fundraising
methods are advertorials, image campaigns, and organizing events, through inter-
mediaries, relationships, or mediation of figures.
Generally, an institution applies direct or indirect fundraising methods. This is
because each method has its advantages and disadvantages, where the direct
fundraising method is useful because, without the direct method, wakif will find it
Strategies for Improving Cash Waqf Fundraising Through Optimization. . . 529

difficult to donate funds. And both methods can be applied flexibly to each of these
methods.

4.1.8 The Urgency of Cash Waqf Literacy on Increasing Cash Waqf

Fundraising

Several studies on waqf, including Adeyemi et al. (2016), in the study, concluded
that the low awareness of cash waqf in Malaysian society was caused by low
understanding and promotion and also influenced by social culture. So, information
is needed or increased literacy in the community so that awareness for cash waqf
increases (Adeyemi et al. 2016).
The same thing was stated by Hasim et al. (2016) that institutional elements
greatly influence the increase in the collection of cash waqf and there are three core
factors that have an influence, namely, the focus of nazhir, understanding of cash
waqf from the community, and a complete set of money waqf laws (Hasim et al.
2016). In addition, Ekawaty and Muda (2016) support that most of the Muslim
community does not understand cash waqf. So to increase the understanding of the
community, it is necessary to increase religious knowledge and access to media
information (Ekawaty and Muda 2016). Furthermore, Aiyubbi et al. (2021) in their
research results state that cash waqf literacy has an influence on the level of
education on the decision to cash waqf (Aiyubbi et al. 2021).
Waqf activities should be developed optimally and professionally so that the
benefits of waqf can be distributed for the benefit of the wider community and even
the state. Fatma’s research (2006) supports that the concept of cash waqf can be an
alternative solution to people’s economic empowerment (Fatmah 2006).
From the several studies above, explaining the understanding of community waqf
so far is still at the point of understanding land and building properties that are
difficult to develop further. So cash waqf has problems in its implementation.
Meanwhile, cash waqf can be an alternative way of financing and as an effort to
alleviate poverty, where poverty is still a hot topic for overcoming it. From the
results of the estimation of the number of waqf funds in Indonesia, it is estimated that
waqf funds have a lot of potential in Indonesia, especially if they are developed and
managed properly. The background to the problem of the low collection of cash
waqf above is none other than the understanding of the community that underlies
each individual in making choices, including the decision to make cash waqf. So, it
can be said that the influence of the literacy level of cash waqf will affect the
decision-making process in cash waqf (Baskoroputra 2019).
Therefore, the collection of cash waqf funds can be carried out in the initial stage,
namely, increasing understanding through literacy related to cash waqf to the
community, and then the next stage is the formation and implementation of
fundraising from waqf institutions. From the several stages above, it will support
the performance of cash waqf in order to experience sustainability in the collection,
so that the distribution of waqf benefits to the community both in terms of economic,
social, and development can be fulfilled.
530 N. Rahmania and H. Maulana

The development and utilization of waqf must be supported by innovation in

order to be able to invite the community to have the initiative to issue waqf.
According to SF Hariyanto, the Regional Secretary (Sekda) of Riau, he called for
efforts to develop and collect waqf in the community through the use of digital
technology by increasing knowledge and literacy of waqf, besides that the use of
technology is also a means to maximize waqf collection in a direct method (https://
www.mimbarnegeri.com/read-15131-2022-03-25-inovasi-pengelolaan-wakaf-
harus-manfaatkan-teknologi-digital.html. Accessed 6 Sept 2022).
Indirectly, it can be said that information technology media plays an important
role in disseminating information related to waqf so that it can be widely known and
even able to influence the public to distribute waqf, especially cash waqf, especially
supported by attractive and motivating advertising packaging.
Supported by the Indonesian vice president’s statement, in increasing understand-
ing and awareness of waqf through socialization, literacy, and education, one must
be able to utilize technology and digital platforms continuously and be presented
with narratives that are easily understood by all levels of society. Furthermore, the
vice president emphasized that the public needs to receive education related to cash
waqf; in addition to being educated to the community, it is also emphasized to
Nazhir as the guardian of the value of the principal of the waqf. So, the ease of cash
waqf can be conveyed, because basically cash waqf can be carried out by all levels of
society and does not require a large quantity (https://www.kominfo.go.id/content/
detail/33588/percepat-transformasi-wakaf-produktif-pengelolaan-wakaf-harus-
manfaatkan-teknologi-digital/0/berita. Accessed 6 Sept 2022).

5 Conclusion and Recommendation

5.1 Conclusion

Based on some of the explanations above, in general, it can be concluded that the
collection or fundraising of cash waqf will be collected properly if the understanding
related to cash waqf in the community is of good value or is at a high level of
understanding. The suggestion can be carried out by increasing cash waqf literacy
through socialization, either through technology social media or direct socialization
with the community.

5.2 Recommendation

This research is useful for related parties, namely, waqf institutions, and other
philanthropic institutions, in an effort to increase the level of waqf fundraising
through cash waqf literacy in the community. For academics, this finding is bene-
ficial for the development of knowledge from waqf fundraising efforts through
Strategies for Improving Cash Waqf Fundraising Through Optimization. . . 531

literacy instruments, the use of technology media, and waqf fundraising methods
used to see the level of development and management of cash waqf. This research is
expected to be used as reference material for further research in the field of cash
waqf, especially research on the business of collecting cash waqf and the use of
technology media in cash waqf institutions.

5.3 Suggestions

Based on the research findings above, this study recommends the following
suggestions:
1. Encouraging policy-makers of cash waqf institutions to improve the quality of
money waqf fundraising institutions. This phenomenon shows the data that the
development of cash waqf is still far from its potential. For this reason, several
incentive measures are needed from the government, institutional managers,
communities, and related parties aimed at developing cash waqf in Indonesia.
2. As discussed earlier, this study focuses on the importance of the influence of the
literacy level of cash waqf on the fundraising of cash waqf. Thus, further
researchers can examine other factors that can affect the collection of waqf
funds. In addition, future research may use different methodologies, theories, or
research sites to produce different findings that can enrich related results in related
scientific fields.

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Measuring the Customer’s Perception
of the Use of Financial Technology
in Algerian Islamic Banks

Taalbi Abdelhak, Ashurov Sharofiddin, and Nur Farhah Binti Mahadi

Abstract Financial technology has emerged as one of the main factors that changed
the way the financial and banking industry works, and its use has been enhanced in
the financial industry around the world, stemming from the increasing spread of
innovative banking services that are characterized by high efficiency and low costs.
Particularly for the sizable portion of society that does not interact with the banking
system, financial technology has the potential to transform the structure of financial
services and make them faster, less expensive, and safer. The hypothesis model is
based on technology acceptance model (TAM). The methodology in this study
includes data collection through questionnaires distributed to the users of financial
technology, and the sample included the users and nonusers of mobile financial
services. Structural equation modeling is utilized for data analysis procedures when
using survey data gathered from 300 customers who have access to financial
technology services in Algerian Islamic banks. The objective of this study is to
determine the factors (including perceived usefulness, perceived ease of use, per-
ceived risk, trust, convenience, and social image) influencing user intention to use
financial technology services in Algerian Islamic banks. The implications of this
research help to determine the right strategy to know the customers’ perceptions and
the factors influencing their choice of using mobile banking services. This study can
be extended to future studies that include Islamic banks and conventional banks in
Algeria. The study is under progress.

1 Introduction

The use of financial technology has increased in the financial industry globally as a
result of the growing popularity of innovative banking services that are distinguished
by high efficiency and low costs. Financial technology has emerged as one of the key

T. Abdelhak (✉) · A. Sharofiddin · N. F. B. Mahadi

Institute of Islamic Banking and Finance, International Islamic University Malaysia, Selangor,
Malaysia

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 533
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_49
534 T. Abdelhak et al.

factors that have changed how the financial and banking industry operates. Financial
technology can change the structure of financial services and make them faster,
cheaper, and safer, especially for the large segment of society that does not deal with
the banking system. However, the speed of development in financial technology
services provides innovative financial solutions that help banks to offer them to their
customers, which makes financial technology and its various applications create
opportunities and challenges for banks and other financial institutions. The Islamic
banking industry is not exempt from the opportunities and challenges posed by
financial technology, and it has proven its position in the global financial markets
with a competitive banking share and has achieved several successes. However, the
Islamic banking industry faces many challenges that hinder its movement to become
an equal competitor with conventional banks, especially with the increasing imple-
mentation of financial technology techniques in providing financial services. More-
over, the perception of customers is an important element in achieving satisfactory
results for the Islamic banking industry, due to the increase in competition, and the
urgency of customers to request services with high specifications that satisfy their
desires. Islamic banks had to know and be aware of the nature, and desires of
customers, since customers’ desires are renewable and growing, Islamic banks
should improve, diversify, and develop services according to the customer’s wishes,
which is considered one of the main pillars in Islamic banks, and given the impor-
tance that the customer occupies in Islamic banks. Hence, Islamic banks must work
to achieve the customers’ desires and satisfaction.
On the other hand, the generalization of the use of financial technology has
positive effects in promoting financial inclusion, especially in developing econo-
mies, where there is great difficulty in accessing financial services. According to the
International Monetary Fund, the shift to digital financial services benefits societies’
financial inclusion before the onset of the Corona pandemic, which has benefited
many low-income families and small companies that usually have limited opportu-
nities to benefit from the services of conventional financial institutions (Allmen et al.
2020).

2 Algerian Banking System

The Algerian banking system has witnessed many banking changes in the frame-
work of the transition to a market economy, the most important of which is the
banking reform within the Money and Credit law 90–10, which restructured the
Algerian banking system. The number of banks operating in Algeria reached
20 banks and 9 financial institutions, including 6 government banks and 14 private
banks, the latter of which is distributed between local, Arab, and foreign banks
(Algeria Press Service 2022).
1328 branches made up the total number of banks in Algeria. About 35,000
employees work in the banking industry in Algeria. There are 7 local banks and
13 foreign banks, depending on whether they are owned locally or abroad. As they
Measuring the Customer’s Perception of the Use of Financial Technology. . . 535

account for around 80% of the banking sector’s assets, 85% of its loans, and 90% of
its deposits, government banks in Algeria have the largest share of the country’s
banking activity under their control (Union of Arab Banks 2022).
Despite the great achievements made by the Algerian banking sector, there is still
much work to be done. For example, even though the Algerian economy accounts
for 8.4% of the Arab economy, the Algerian banking sector only makes up 4.9% of
the Arab banking sector. This shows that the Algerian banking industry must keep
up with the growth of the Algerian economy. Despite the growth in assets and capital
that Algerian banks have seen, their limited size compared to other Arab and global
banks continues to be a problem. Notably, there are no national banks with privately
owned Algerian ownership since the private banks in Algeria are subsidiaries of
foreign banks. This has an impact on the level of competition among banks, the
quality of services offered, and the creation of new banking products (Union of Arab
Banks 2022).
This made the authorities think about practicing and expanding Islamic banking,
as these banks opened Islamic banking windows after the approval of the Bank of
Algeria, which recently issued Regulation 20–02, which explains Islamic banking
operations and the regulations governing its use by banks and other financial
institutions.

3 Islamic Finance in Algeria

The Algerian banking sector is host to more than 28 banks and financial institutions,
which serve as financial intermediaries by providing funding for the financial deficit
through a variety of means, such as financing with interest or interest-free Islamic
contracts. There are just two Islamic banks among these operating financial institu-
tions in Algeria, namely, Al Baraka Bank of Algeria and Al-Salam Bank. One of the
most important decisions that came in the Money and Credit law 9–10 is to open the
way for private banks, and through this law, the first Islamic bank in Algeria was
established, Al Baraka Bank of Algeria, and that was in 1991, in 2008 the Salam
Bank was established, as some private banks started to yield Islamic products that
meet the customers’ desires until the 18–02 regulation came in 2018 which allowed
public banks to practice Islamic banking through Islamic windows; then in 2020, the
20–02 regulation originated, which regulates Islamic banking operations in Algerian
banks.
The Supreme Islamic Council, on the other hand, established the National Sharia
Board for Issuing Fatwas for the Islamic Financial Industry, which would issue
banks and other financial institutions a Shariah Certificate of Conformity. This
authority was created following regulation No. 20–02 of March 15, 2020, which
was published in Issue 16 of the Official Gazette of the same year. It controls Islamic
banking practices and the regulations that govern how banks and other financial
institutions implement their activities effectively.
536 T. Abdelhak et al.

4 Al Baraka Online Banking

In the interest of creativity and innovation, Al Baraka Bank Algeria provides many
digital services to respond to the needs of its customers, as the bank offers remote
banking services 24/7. Al Baraka Net Service, Al Baraka App.DZ, Al Baraka
e-payment, and Al Baraka SMART are the most important services provided by
the bank (Al-Baraka Bank of Algeria 2022).
The Al Baraka DZ mobile service is a new service that comes after the Al Baraka
Net service, whereby the bank can provide banking services to its customers
anywhere and at any time via tablets or phones smart (IOS, Android) in order to
optimize the time and money resources of its customers. Customers can benefit from
services such as checking account balance; viewing performing an operation search
on accounts; downloading and editing the account statements; editing the statements
of the bank identity RIB; benefiting from a messaging service; making internal
transfers from account to account; making transfers to third parties (peer banks);
and tracking the banking transactions made via your Al Baraka CIB card. In
addition, “Al Baraka Net” is a remote banking service that allows customers to
access their bank accounts and perform various banking transactions electronically.
This service provides customers with more convenience and simplifies their lives by
allowing them to conduct banking activities from the comfort of their own homes or
offices, without having to physically visit a bank branch. In summary, Al Baraka Net
is a remote electronic banking service that enhances the customer banking experi-
ence by providing more flexibility, accessibility, and convenience (Al-Baraka Bank
of Algeria 2022).

5 Al Salam Online Banking

Al Salam Bank Algeria provides its customers with four electronic services, namely,
remote banking, mobile app, foreign trade platform, and payment via QR code
(Al Salam Bank Algeria 2022).
Remote banking or called Al Salam Moubachir, the service is available 7/7 and
24/24, and it allows their customer via the web to:
For individuals, it provides several options, including search for account trans-
actions; edit the account statements; track the electronic payment transactions; order
checkbooks; track the funding; make account-to-account transfers; make transfers to
beneficiaries; order the credit cards; and many others (Al Salam Bank Algeria 2022).
For businesses: This section is divided into two packages, namely, Premium
Pack and Gold Pack.
Mobile app called (Al Salam Smart Banking) provides many services like
viewing the balances and latest transactions; sorting and searching on the latest
operations; simulating the financing; and converting the currencies.
Measuring the Customer’s Perception of the Use of Financial Technology. . . 537

Foreign trade platform including both (pre-domiciliation platform and docu-

mentary credit platform) to secure international bank transfers, Al Salam Bank-
Algeria offers safe payment methods that comply with international standards. Also,
for quality service and flexible care, adapted to daily professional life, Al Salam
Bank-Algeria provides their customer with a web portal allowing them to fill in
wherever they are 24/7 the pre-domiciliation form necessary for direct debit
requests.
Payment via QR code (WIMPAY BY AL SALAM) app is an application that
offers the possibility to many services; the customer just has to scan the QR
displayed at the merchant (Al Salam Bank Algeria 2022).

6 Problem Statement

Fintech development in Algeria is still disappointing when compared to other

nations in the Middle East and North Africa (MENA) area, despite Algeria’s high
mobile broadband connectivity and high mobile penetration (Fintechnews Middle
East 2021). In comparison to the Middle East and North African countries, where
23% of adults and 18% of women utilize digital payments, just 16% of adults and
11% of women do so in Algeria (Fintechnews Middle East 2021).
On the other hand, Algerian banks should take their opportunities from a large
number of users of the Internet in Algeria, as World Bank figures indicate that the
percentage of Algerians who use the Internet has dramatically increased, particularly
in recent years (World Bank 2022).
Several factors that influence customers’ intentions to use the service will have an
impact on their intentions (Fortes and Ritab 2016). The technology acceptance
model (TAM) and the various models developed from the TAM model are usually
used for research on the intention to use technology services. According to the TAM
model, factors including ease of use, perceived usefulness, and attitude toward
service have an impact on the intention to use through the theory of rational action
and the theory of planned behavior (Davis 1989). The TAM model has additionally
been extended to include a number of new factors, including perceived risk, trust,
and convenience (Fortes and Ritab 2016).

7 Significance of the Study

Many parties may benefit from this study such as customers or depositors, managers
of the banks, regulators, and practitioners to identify the customer’s perception of the
use of financial technology in Algerian Islamic banks. The significance of the study
is to provide insight into measuring the customer’s perception of the use of financial
technology in Algerian Islamic banks, which can be valuable to depositors, man-
agers, and the government.
538 T. Abdelhak et al.

8 Research Objectives

To determine whether the six factors including perceived usefulness, perceived ease
of use, perceived risk, trust, convenience, and social image has a (positive or
negative) impact on the intention to use financial technology services.

9 Literature Review

The use of internet banking services has been the subject of numerous studies in
Algeria. On the scope of perception of the customer using financial technology
services, no research has been done, though. Studying the variables influencing users
of financial technology services development in Algeria is necessary to make sure
that Islamic and conventional banks there can change to the digital banking business
model. Given the abovementioned reasons, the objective of the paper is to measure
the customer’s perception of the use of financial technology in Algerian Islamic
banks.
Abdinoor and Mbamba (2017) in their paper have mentioned the factors influenc-
ing consumers’ adoption of mobile financial services in Tanzania. A regression
model and primary data were used in the research. The results of their study
demonstrate that individual awareness, perceived usefulness, and perceived benefit
are all positively related to the adoption of mobile banking services, but cost effects
are negatively related.
Banks’ conversion of the mobile banking app into a digital banking app has
caused customers to reassess their options in light of their preferences. Users’
attitudes and intentions to adopt digital banking are more strongly influenced by
their perceptions of risk and trust. In contrast, user attitude and user intention to
utilize digital banking are not significantly influenced by social image, perceived
usefulness, and perceived ease of use. The implications of these findings aid in
choosing the appropriate messaging and approach so that more consumers with more
advantages can use this technology (Mufarih et al. 2020).
The study by Karima and Sonia (2022) in the Journal of Economic Integration
entitled Fintech Innovations and their Role in Enhancing Algeria’s GDP-E-payment
as a model mentioned that by emphasizing the implementation of e-payment systems
to assist the Algerian GDP highlighted the importance of commercial banks adopting
Fintech to improve financial inclusion in Algeria. Therefore, the Algerian govern-
ment had to exert every effort to advance financial inclusion and digitization by
utilizing all innovations and financial technology solutions (Table 1).
Measuring the Customer’s Perception of the Use of Financial Technology. . . 539

Table 1 Study on consumers’ perception

Dependent
Study Subjects variables Independent variables Findings
Lillis and US and Jap- Subject Price-value service Existence of percep-
Narayana anese perceptions engineering, advertis- tual differences across
(1974) consumers ing reputation design cultures related to
style, and consumer foreign and domestic
profiles products
Kaynak Canadian Canadian con- Quality of products in The result indicated
and consumers sumers’ percep- general and product that consumers’ per-
Cavusgil tions toward classes ceptions toward
(1983) foreign products foreign-made prod-
ucts tend to be prod-
uct specific
Michael USA Subject Perceptions within A conceptual model is
and David perceptions both space and tree developed that
representations for describes consumers’
both brands and prod- ability to provide
uct categories direct perceptions
Chao and US Subjects’ Foreign product Preferences existed
Rajendran consumers perceptions owner ship, foreign between occupational
(1993) product levels, and level and ownership
consumer profiles of product origin
Nayga USA US consumers’ Nutrition and ease of Health- and diet-
(1999) perceptions preparation, race, related attitudes, sta-
toward under- gender, income, and tus, perceived impor-
standing of food body mass index tance are important
labels factors affecting con-
sumers’ perceptions
Van Vietnamese Adoption of Trust, perceived use- Evaluate a proposed
Nguyen and Korean mobile banking fulness, perceived risk conceptual model
and banking from the Viet- based on integrated
Nguyen customers namese and (TAM) and (CSR)
(2020) Korean and compare the dif-
customers ferences between
Vietnam and South
Korea
Ly and Ly Cambodians Internet banking Trust, perceived ease Perceptions of trust
(2022) banking adoption under of use, usefulness and usefulness are the
customers technology critical determinants
acceptance of attitude toward IB
Model and intention to adopt
IB

10 Theoretical Framework

The conceptual framework of this study is based on a thorough analysis of theoret-

ical and empirical literature with the purpose of determining the correlation between
various factors, such as perceived usefulness, perceived ease of use, perceived risk,
540 T. Abdelhak et al.

Perceived
usefulness
(PU)

Perceived
Social image ease of use
(PEOU)

Intention to
adopt and
use fintech

Perceived
Convenience
Trust (PT)

Perceived
Risk (PR)

Fig. 1 Model for analyzing the process

trust, convenience, and social image, with the acceptance and adoption of financial
technology services.
The previous literature assessment revealed that perceptions toward acceptance
and adoption of new technology are influenced by perceived usefulness and ease of
use. Furthermore, individual awareness of financial technology can influence the
acceptance and adoption of financial technology services. Moreover, perceived
benefit, trust, and convenience have an influence on the acceptance and adoption
of financial technology services. However, perceived risk has a negative impact on
attitudes toward using financial technology services, and that makes sense because
risks are ideas about the losses users might face when utilizing the service. A barrier
to using financial technology services is the possibility of losing personal informa-
tion or transactions. As a result, lowering perceived risk as much as possible will
improve customers’ attitudes toward the service (Fig. 1).
Measuring the Customer’s Perception of the Use of Financial Technology. . . 541

11 Hypothesis

Based on the results of previous studies, the hypothesis of this research is as follows:
Perceived usefulness perceived ease of use, trust, convenience, and social image
have a positive impact on the intention to use financial technology services. How-
ever, perceived risk has a negative impact on the intention to use financial technol-
ogy services.

12 Methods and Procedures

The research is primarily quantitative, and for data analysis, technique’s structure
equation modeling is used for analyzing the data. The survey data will be collected
from 300 customers who have access to financial technology services in Algerian
Islamic banks. As this study is intended to evaluate and measure the customer’s
perception of the use of financial technology in Algerian Islamic banks, the
researcher adopted a quantitative approach. A sample of 300 participants was
selected randomly from Algeria particularly big cities comprising the users and
nonusers of financial technology services. The sample will be randomly selected,
the sample for the data collection on perceived usefulness, perceived ease of use,
perceived risk, trust, convenience, and social image of financial technology services.
The sampling frame of this study consists of financial technology services users
(both internet banking and Mobile banking) in Algeria Islamic banks. This sampling
frame has been selected randomly at the bank and online. The study attempted to use
primary data only. The field survey will be conducted, and the data will be collected
using questionnaires that will be distributed randomly to financial technology users
in Algeria Islamic banks. A survey was chosen because it offers an authentic
description or account of the features and achieves the desired aims of this study.
In order to evaluate the view, and preferences of Algerian customers using financial
technology services, this design was chosen to fulfill the objectives of the analysis.

13 Summary

This study will accomplish all of the objectives listed above. Some important
information regarding financial technology operators’ and customers’ perceptions
will be explored and updated in this study. The primary objective of this study is to
measure the perception of customers toward the use of financial technology services.
This objective will be met by developing a combined measure including ease of use,
trust, convenience, risk, usefulness, and social image. The study is in progress.
542 T. Abdelhak et al.

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Current Trends and Sustainable
Development of Warehouse Logistics

P. Reznik Nadiia , А. Demchenko Tetyana , А. Slatvinskyi Maksym ,

V. Kosmidailo Inna , M. Khodakyvskyy Volodymyr ,
V. Bugaychuk Vita , and V. Valinkevych Nataliia

Abstract Warehouse logistics plays an increasingly important role in the activities

of enterprises and modern society in general. Warehouses are used both by
manufacturing enterprises to store raw materials, materials and products ready for
shipment, and by trading companies that store finished products there. The optimal-
ity of the work of industrial enterprises, the speed of turnover in trading companies,
as well as the level of customer satisfaction depend on the efficiency of warehouse
management. To organize an effective business, you need to be able to properly
manage resources, flows, and means. The main element of warehouse logistics is a
warehouse; the purpose of which in modern conditions is no longer the storage of
goods; and it is transformed into a transhipment point for the provision of modern
services of cross-docking, assembly, consolidation, sorting, labeling of goods in
order to minimize the costs of transportation and storage of goods, and reducing
delivery time. This chapter analyzes modern warehouse logistics management
mechanisms and examines its main types. It was determined that the growth of the
consumer society and the rapid development of electronic commerce require inno-
vative solutions to ensure higher warehousing efficiency. The world and Ukrainian
market of warehouse services and its growth rates were also analyzed. The impact of
digital transformation on requirements for warehouse logistics management is

P. Reznik Nadiia (✉)

Department of Management, National University of Life and Environmental Sciences of
Ukraine, Kyiv, Ukraine
А. Demchenko Tetyana · А. Slatvinskyi Maksym
Department of Finance, Accounting and Economic Security, Pavlo Tychyna Uman State
Pedagogical University, Uman, Ukraine
e-mail: [email protected]
V. Kosmidailo Inna
Department of Economics, Finance and Information Technology, Uman Branch of the
European University, European University, Kyiv, Ukraine
M. Khodakyvskyy Volodymyr · V. Bugaychuk Vita · V. Valinkevych Nataliia
Department of Economics, Entrepreneurship and Tourism, Polissia National University,
Zhytomyr, Ukraine

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 543
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_50
544 P. Reznik Nadiia et al.

determined. On the basis of the research carried out, directions for the development
of warehouse logistics in the modern world were identified.

1 Introduction

Warehouse management is also highly valued by enterprises as a key link in third-

party logistics. With the rapid development of the modern science of logistics
management, the role of warehouse management has also changed qualitatively
and quantitatively; although its regulation of the volume of production and the
function of initial demand has not changed due to the high development of infor-
mation technologies and the wide application of computer knowledge in business,
the industry of warehouse management is becoming more informative and auto-
mated. Inventory management system is an integral part of business. Content is
important to decision-makers and business leaders, so a warehouse inventory man-
agement system is responsible for its ability to provide enough information and
safety practices for employees.

2 Literature Review

In recent years, the issue of logistics and warehouse logistics, in particular, has been
in the center of attention of compatriots and foreign scientists, such as Aucklander
M.A., Bowersox D.D., Chornenka L.M., Ivanov D.A., Husak L.V., Krykavskyi E.
V., Kunytska M.O., Zahorodnia A.S. et al. Their works describe the importance of
organizing warehouse logistics. However, the issue of building effective warehouse
operations requires further research.

3 Purpose of the Study

The purpose of the chapter is to study modern warehouse logistics, the types of
warehouses and automation systems used at this stage, the analysis of the world and
Ukrainian markets of warehouse services, and new innovative opportunities for
warehouse logistics.
Current Trends and Sustainable Development of Warehouse Logistics 545

4 Results and Discussion

Modern warehousing is a department and control center in the logistics and supply
chain system. WMS (warehouse management system) is a specific abstraction of
warehouse management information. WMS is divided into three substances: the first
type is the business system of a logistics distribution center, such as a distribution
center in a Chinese supermarket and a spare parts distribution center in supply and
production logistics. The second category is an integrated information storage
system that coordinates and integrates the information system of various automated
equipment. For example, various specialized equipment of enterprises have its own
information system. The third type is an application system that focuses on man-
agement solutions for the warehouse industry, such as general logistics companies
that use a WMS system for enterprises that provide warehousing services (Wang
et al. 2020). The ability to advance technology has affected all aspects of modern
business, including how third-party logistics (3PL) warehouses (3PL) and
outsourcing operate and provide services. The latest warehouse technology solutions
and automation offer greater efficiency, lower costs, and increased profitability.
Warehouse automation is the practice of modernizing the movement of goods in
and out of a warehouse with minimal human intervention to eliminate repetitive and
time-consuming tasks. When aggregating thoughts about warehouse automation, we
can imagine robots wandering around warehouses, but in many cases, this may
involve replacing manual labor with software solutions. Modernizing a warehouse
can result in significant upfront costs, but there are also many benefits, such as
efficiency, speed of transfer, and reduced staff error.
With online retail sales expected to exceed $6.3 trillion by 2024, and the
coronavirus pandemic fueling the need for online shopping, demand for warehouse
automation solutions has never been greater. Automation is becoming an increas-
ingly attractive option but also more affordable for companies operating in logistics,
distribution, and parcel delivery. As logistics costs rise, more countries are investing
in warehouse automation solutions.
In 2020, the United Kingdom was the leader in warehouse automation with an
average spend of $451,000 per warehouse. The United States ranked second with an
average of $377,000 (Warehouse Automation Spending by Country 2020). In 2020,
there were approximately 151,000 warehouses worldwide. 25,500 of them were
located in North America. Due to the boom in e-commerce, the number of ware-
houses worldwide is expected to reach just under 180,000 by 2025 (Fig. 1).
Modern tools and techniques used in warehouse automation can range from
simple replacement tasks such as the use of conveyor and modular belts to complex
technologies such as machine learning, robotics, and artificial intelligence (AI).
Therefore, the implementation of these technologies requires significant material
investments in hardware and software, as well as the use of time and significant costs
associated with the implementation of the latest systems and retraining of
employees.
546 P. Reznik Nadiia et al.

185
180
180
175 173.69

170 167.61

165 161.73
160
156.07
155
150.6
150
145
140
135
2020 2021 2022 2023 2024 2025

Fig. 1 Estimated number of warehouses in the world from 2020 to 2025 (Statista 2020)

In 2020, around 384,000 units of industrial robots were deployed worldwide.

Asia and Australia were the places with the most units installed; approximately
266,000 units were installed in 2020 alone. It is predicted that by 2024, the number
of industrial robots in these regions will reach 370,000 units.
Modern transformation contributes to the growth of the use of industrial robots.
The global market for industrial robots, which was around US$45 billion in 2020,
could reach an estimated US$102 billion by 2027 as more companies undergo digital
transformation by incorporating technological equipment into the manufacturing
process. Since then, the software market has grown and is expected to grow to just
under US$40 billion by 2024.
This digitization process is highlighted in the combination of the functions of
industrial and service robots in a new type of robots: collaborative robots.
Implemented to work in close proximity to humans, these co-bots are expected to
be a large market that will reach a size of nearly US$1.5 billion by 2026. Collabo-
rative robots are used for operations such as material handling as well as assembly.
The main demand for warehouse space is formed by distributors, retailers, and
companies that are directly engaged in production. In 2018, in the structure of
demand for warehouse real estate, retailers were in the lead—63%, followed by
representatives of medicine and pharmaceuticals and 3PL operators. Together, they
occupied 95% of warehouse space, and the remaining 5% were occupied by other
segments. Among representatives of the industrial sector, producers of food, bever-
ages, tobacco products, textiles, and clothing have the greatest demand for ware-
house space (Pro-consulting 2020) (Fig. 2).
The volume of services provided by warehouse logistics in Ukraine, as well as in
the world, is constantly growing. If in 2017 the volume of warehouse services
amounted to UAH 31.6 billion, then in 2021, it increased to USD 68.3 billion, that
is, more than twice. The rate of increase in the volume of warehouse services on the
Ukrainian market was from 15.38% (2020) to 26.15% (2018). In the geographical
structure of the warehouse logistics market of Ukraine in 2020, Odesa region was the
Current Trends and Sustainable Development of Warehouse Logistics 547

80000 30
68309
70000 26.15 25.5 25
60000 54428
20
50000 47171
18.18
39914
40000 15.38 15
31640
30000
10
20000
5
10000

0 0
2017 2018 2019 2020 2021

Fig. 2 Volume of warehouse services provided in Ukraine in 2017–2021, million UAH (State
Statistics Service n.d.)

leader with a share of 22.36%; Dnipropetrovsk region was in second place—

12.31%; and Kyiv and Kyiv region occupied 12% and 7.36%, respectively.
Zammler, Raben Ukraine, Kuehne + Nagel, FM Logistic, and EKOL Logistics
form the five leaders in the field of warehouse processing and storage in terms of
warehouse space. The warehouses of these companies are represented by class «A»
and «B» and «B» and «B+» warehouses. They are mainly located in Kyiv or the
Kyiv region. There is also a trend of building new warehouses in Lviv and
Dnipropetrovsk, which is connected with the growing demand in these cities. Lviv
region is attractive due to its geographical location (it has a border with Poland).
In the near future, due to the large vacancy of warehouse spaces, it can be
expected that new facilities will be absorbed by manufacturers, distributors, and
retailers immediately after putting them into operation. Responding to active
demand, companies that provide warehouse services will begin to raise the rent
(the rental rate can increase by more than 20%) (Pro-consulting 2020).
Ukraine’s warehouse logistics shows high rates of growth and introduction of
automation and other innovative technologies. However, as already mentioned, the
development of consumer society and e-commerce requires more active changes,
which may include:
1. Optimization of 3PL 79% of performing 3PL companies have revenue growth
above the industry average. Optimizing and expanding any 3PL business with
innovative technologies lead to even greater prospects for optimal profit growth.
There is unlimited possibility and potential for 3PLs that are serious about
modernizing and scaling their business. Success lies in the centralized manage-
ment of the flow of goods and services in the warehouse, which is under the
control of supply chain management (SCM). Research shows that 3PL companies
with optimal SCM have times faster cash-to-cash cycles while boasting a 15%
reduction in supply chain costs (3pl Central 2022a).
548 P. Reznik Nadiia et al.

Optimization of 3PL 79% of high-performing 3PL companies has revenue

growth above the industry average. Optimizing and expanding your 3PL business
with innovative technology lead to even greater heights for optimal profit growth.
There is almost unlimited opportunity and potential for 3PLs that are serious
about optimizing and scaling their business. The key to success lies in the
centralized management of the flow of goods and services in the warehouse,
which is under the control of supply chain management (SCM). Research shows
that 3PL companies with optimal SCM have three times faster cash-to-cash cycles
while boasting a 15% reduction in supply chain costs (3pl Central 2022a).
2. The global warehouse modernization market exceeds USD 10 billion annually
and is expected to continue to grow. 3PL organizations want to continue to grow,
need to digitize, or their growth will slow down due to inefficiencies. The
booming market over the past few years has led to changes in operations, labor
shortages, and increased labor costs. To meet the demands of the evolving
e-commerce market, warehouse logistics must streamline their operations with
modern automation to increase throughput and achieve a significant return on
investment (ROI). Without turning to digitalization, a 3PL risks falling behind the
competition and ending up at a scaling dead end (3pl Central 2022b).
3. 50% of the time spent by the workforce in the warehouse or distribution center is
spent on order picking work. Selection time takes up too many precious minutes
and takes time in the execution process. Using a WMS in conjunction with
barcode scanners and automated processes accelerates picking and processing.
A WMS effectively integrates a large number of picking systems so that the
picker can quickly fulfil orders on time. They can quickly find the shortest route,
perform repetitive tasks, and check items in each order. There are many different
types of collection technologies (Fig. 3) (Michel 2018).
4. 72% of respondents believe that a warehouse management system (WMS) is the
best warehouse management software. WMS saves money, ensures fast delivery,
and helps 3PL companies stay competitive. A reliable WMS optimizes the
maximum of warehouse operations, namely, warehouse management, account-
ing, receiving, packaging, fulfillment, assembly, delivery, ownership of goods,
and inventory monitoring. WMS allows 3PL organizations to use multichannel
ordering and meet volume requirements (3pl Central 2022a).
5. More organizational and integrated forms of order fulfillment with WMS result in
more than 20% less space usage, 30% more efficient use of inventory, and more
than 25% productivity improvement. Using a WMS system for rapid integration
of orders, picking and inventory management help improve the efficiency of the
entire supply chain. The goal of any WMS is always to improve the accuracy and
efficiency of all processes. On-time delivery and time management help avoid
delays in transit and control costs. A WMS is a critical component of an advanced
product management system, helping 3PLs manage speed and accuracy during
spikes (3pl Central 2022a).
Current Trends and Sustainable Development of Warehouse Logistics 549

PickChoice to the
easy picking process from the warehouse.
Light

uses smart headsets to allow the user to quickly

Voice selection
select items.
Collection technologies

augmented reality provides a 100% error-free

picking process using a portable PC, built-in
Vision Picking
camera and management software that connects
to the WMS.

using robots (collaborative robots) and

Robotic collection autonomous mobile robots (AMRs) for robotic
picking.

Tablet or mobile uses tables or mobile scanners in conjunction

collection with attached barcodes.

Fig. 3 Technologies of collecting orders in the warehouse (3pl Central 2022a)

5 Conclusion

According to the results of the analysis of the current situation, it was established that
the revitalization of the logistics market causes an increase in the demand for storage
facilities and leads to an increase in consumer demands for the quality of services for
the storage and processing of goods in warehouse complexes. The main goal of the
work of 3 PL operators in serving cargo owners is to take into account their interests
in ensuring full and high-quality processing of cargo with the rational use of existing
resources (warehouses, transport, etc.). It is necessary to develop new approaches
aimed at the effective organization of the warehouse complex due to the rational use
of warehouse resources and optimization of functioning parameters.
Analysis of logistics digitized system processes and information system design
can better manage warehouse relationships. In today’s turbulent logistics environ-
ment, communication with the warehouse is particularly important in the logistics
process. The analysis of the warehouse process is of great importance for the
digitalization of the warehouse link and the improvement of work efficiency.

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statistics/1274351/warehouse-automation-spending-country/
Exploring CSFs for Application of Six
Sigma Programs: An Empirical Evidence
from Small-Scale Industries (SSIs)

T. K. Murugesan , K. P. Jaheer Mukthar , V. Raju ,

Nelson Cruz-Castillo , Rolando Remigio Sáenz Rodríguez ,
and Lilia Uribe-Pomachagua

Abstract The nitty-gritty of this empirical study is to explore an exclusive critical

success factors (CSFs) for effective application of Six Sigma programs in small-
scale industries (SSIs). This pragmatic study was exclusively conducted to ascertain
substantial benefits and stumbling blocks toward the application of Six Sigma pro-
grams. The study data were effectively collected from the structured interview
schedule administered among 110 SSIs. Out of 110 interview schedules, 60 interview
schedules were obtained from the plant managers of the small-scale industries. The
outcome of this research has clearly shown that the factors found to be critical for
successful application of Six Sigma programs by the sample respondents are con-
tinuous process improvement, employee involvement, linking Six Sigma to
employees, training and education, and the customer focus. More prominently,
this present study also indicated that the substantial benefits which encourage SSIs
to embrace Six Sigma programs are in the positive side, and the stumbling obstacles
which impede the effective implementations of the Six Sigma programs are in the
negative side.

T. K. Murugesan · K. P. Jaheer Mukthar (✉) · V. Raju

Kristu Jayanti College Autonomous, Bengaluru, India
e-mail: [email protected]
N. Cruz-Castillo
Universidad Nacional Mayor de San Marcos, Lima, Peru
R. R. S. Rodríguez
Universidad Cesar Vallejo, Huaraz, Peru
L. Uribe-Pomachagua
Universidad Nacional Santiago Antúnez de Mayolo, Huaraz, Peru

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 551
N. Mansour, L. M. Bujosa Vadell (eds.), Islamic Sustainable Finance, Law
and Innovation, Contributions to Management Science,
https://doi.org/10.1007/978-3-031-27860-0_51
552 T. K. Murugesan et al.

1 Introduction

The concept “Six Sigma” has come from the domain of statistics popularly viewed as
process capability studies. The Six Sigma was pioneered and popularly developed in
the year 1981 by the Motorola, USA. The Six Sigma program was first articulated in
the year 1986 by the Bill Smith in the Motorola. The Six Sigma program was a
colossal and registered service mark of the international corporation Motorola, Inc.
The further early adopters of Six Sigma program were General Electric and
Honeywell. In today’s business environment, all the fortune organizations have
successfully begun implementing Six Sigma programs with the sole aim of mini-
mizing costs and maximizing quality of the product or the business process. Now,
the concept of the Six Sigma was considered to be the widespread and prevalent
implications in most of the manufacturing industries at Bengaluru.
Six Sigma refers to a set of programs especially designed for reducing the
occurrence of product defects to attain the lower costs, improved quality, and
enhanced customer delight. Technically, the concept Six Sigma refers to have not
more than 3.4 DPMO in any business processes, products, or services. The Six
Sigma methodology pursues to develop quality standard of business process, prod-
ucts, and services by detecting and eliminating the major causes of errors or defects
and reducing the variability in business and manufacturing processes effectively. Six
Sigma’s implicit goal is to improve all processes to that level of quality or better.
Within the organization, each and every Six Sigma program implemented follows
the defined sequence of the significant steps in the process and has quantified target
values. These quantified targets could be the financial targets such as profit increase
or cost reduction or whatever these targets are critical to the customer focus such as
safety, cycle time, delivery, and satisfaction. The Six Sigma programs were pro-
foundly enthused by the six former decades of the quality improvement techniques
and tools such as quality improvement, total quality control, and zero-defect toler-
ance based on the foremost and notable work of emerging pioneers in the field of
quality such as Deming, Shewhart, Juran, Taguchi, Ishikawa, and others.
The term Six Sigma is defined as the set of exclusive practices and programs
designed exclusively for improving the manufacturing and business processes and
exclude the pressing defects in manufacturing and business process defects. The
application of Six Sigma programs was subsequently extended to other types of
business processes as well. In the framework of Six Sigma, a defect is said to be any
output of manufacturing and business processes that do not meet the customer
specifications and other requirements or that could lead to producing the goods or
services that do not meet the customer’s wants and specifications. In modern years,
some quality practitioners have successfully combined the Six Sigma ideas with the
lean manufacturing system to harvest a methodology called Lean Six Sigma (LSS).
The exclusive structure of this empirical paper is abridged as follows: In Sect. 2, a
comprehensive literature review is performed, followed by Sect. 3 which deals with
research problem statement where the researcher clearly stated the problem under
study, followed by Sect. 4 that discusses the specific objectives of the study,
Exploring CSFs for Application of Six Sigma Programs: An. . . 553

accompanied by Sect. 5 which sheds light into the methodology used for the study.
Section 6 explains results and discussions pertaining to the study, followed by final
section of conclusion.

2 Review of Literature

In today’s business era, there were enormous modern models for process improve-
ment and process design or process redesign. The most of modern models are based
on Plan-Do-Check-Act Cycle (PDCA) cycle promulgated by the quality guru
Deming (Pande and Holpp 2020). The application of Six Sigma programs was
subsequently extended to other types of business processes as well
(Balasubrahmanya 2005). The Six Sigma programs were profoundly enthused by
the six former decades of the quality improvement techniques and tools such as
quality improvement, total quality control, and zero-defect tolerance (Bayati and
Taghavi 2007). The effective implementation of the Six Sigma programs requires
high continuous commitment from various functional managers of organization,
predominantly from the top-level management (Antony 2006).
The Six Sigma Models/Six Sigma Projects/Six Sigma Programs followed two
major project methodologies effectively developed by Deming’s Plan-Do-Check-
Act (PDCA) Cycle. The modern framework of Six Sigma was originally established
by the international corporation Motorola in middle age of the 1980s. Consequently,
Six Sigma concept has evolved into a comprehensive improvement tool and appli-
cation. The Six Sigma is defined as having the six standard deviations (6σ) between
the mean of actual performance of the business and manufacturing processes and the
expected performance boundaries of the business and manufacturing processes.
These methodologies, encompassing five phases each, bear the acronyms
DMAIC framework and DMADV framework. The DMAIC framework clearly
stands for the Define, the Measure, the Analyze, the Improve, and the Control
which is applied for projects aimed at improving an existing business process. The
Six Sigma effectively translates to a numerical value of 0.999997 chance
(99.9997%) that the performance of business process is as desired, or to the fewer
than the defect rates of 3.4 per one million opportunities (Bubevski 2016). A
business paradigm of statistical thinking was effectively embodied in the Six
Sigma’s Projects and Methodologies, which were applied as the basis for achieving
continuous process improvement in the manufacturing operations of the small-scale
industries (Lagrosen et al. 2011).

3 Problem Statement of the Study

The main doctrine of the Six Sigma program clearly proclaims that the constant and
continual efforts are required to attain the stable and foreseeable outcomes of the
business process such as improvement of quality, customer satisfaction, and
554 T. K. Murugesan et al.

reduction of process variation. The business and manufacturing processes can have
core functional characteristics that should be carefully analyzed, evaluated, mea-
sured, controlled, and improved for achieving sustained quality improvement in the
products, services, processes, delivery time, and other quality parameters of the
organization. In order to achieve sustained quality improvement in the business
process, the Six Sigma programs will have to be effectively implemented by micro-,
small-, medium-, and large-scale industries. The effective implementation of the Six
Sigma programs requires high continuous commitment from various functional
managers of organization, predominantly from the top-level management. The
previous studies have thrown a light on CSFs for successful applications of Six
Sigma projects and programs by large- and middle-scale industries. This has paved a
comprehensive lead to make the pragmatic analysis of CSFs for effective applica-
tions of Sig Sigma programs by small-scale industries in Bangalore. This pragmatic
analysis was done with key focus on the awareness status of small-scale industries
about Six Sigma programs and their journey in achieving competitiveness through
implementation of Six Sigma programs. This study also threw a light on exclusive
quality parameters of the Six Sigma methodology adopted by many industries and
the parameters discussed in the quality improvement initiatives taken by the previous
researchers

4 Objectives of the Study

This study explores the critical success factors for the effective application of Six
Sigma programs by SSIs. Six Sigma is a proven tool to achieve competitive edge at
every operations of the business. In order to focus mainly on the effective applica-
tions of Six Sigma programs, the following objectives were framed by the
researchers.
1. To find an awareness level of Six Sigma projects and programs among small-
scale industries (SSIs).
2. To explore the CSFs for the effective application of Six Sigma programs and
projects.
3. To identify significant benefits for embracing Six Sigma programs by SSIs and
the stumbling blocks which impede effective implementation of Six Sigma pro-
grams in SSIs.
4. To highlight persistent reasons for not actively applying Six Sigma programs and
projects by sample SSIs.
Hypothesis of the study: In order to throw light on the exploration of critical
success factors (CSFs) for the effective implementation of Six Sigma programs by
the small-scale industries (SSIs) and the significant benefits and obstacles toward the
Exploring CSFs for Application of Six Sigma Programs: An. . . 555

applications of the Six Sigma programs, the following hypotheses were framed by
the researches in this study.
• H1: SSIs are more inclined to apply Six Sigma programs for achieving excellence
in the manufacturing process.
• H2: The significant benefits positively influence the application of the Six Sigma
programs,
• H3: The stumbling obstacles negatively influence the applications of Six Sigma
programs.
• H4: There is a statistical association between CSFs and the effective applications
of the Six Sigma projects and programs.

5 Methodology of the Study

In modern business era, manufacturing concerns are normally categorized into

different scales such as small-scale firms, the medium-scale firms, and the large-
scale firms. Any manufacturing and business concern across the globe can make
such classification based upon its scale of operations and the production capacity.
The survey reported here was effectively conducted at small-scale industries (SSIs)
located in South India. Altogether 100 small-scale industries (SSIs) were surveyed,
out of which only 60 productive responses were obtained by the researchers.
A sample size of 60 small-scale industries (SSIs) was drawn conveniently by
applying area-cum-judgment sampling technique. A structured interview schedule
on the basis of the study objectives was effectively designed with the help of the
industrial experts and sent via Google Form for collecting the data for this empirical
research study. In order to prepare an effective interview schedule, a pilot study was
conducted among ten plant managers of SSIs located in and around Bengaluru City.
During the pilot study, most of the sample respondents or the plant managers were
comfortable with the interview schedule designed for the study.
The data required for this study were purely primary data collected through the
Google Form. Moreover, a telephonic interview was conducted among plant man-
agers of 60 small-scale industries for collecting reliable, valid, and trustworthy data
for the research study. The same interview schedule was also chosen for the main
survey also. The period of the study was 3 months starting from October to
December 2022. The single sample t-test and multiple regression analysis were
applied at appropriate places for drawing statistical inferences and conclusions
about the study. The statistical tools used for this empirical study can include simple
percentage analysis, descriptive statistics, single sample t test, and the multiple
regression model. The empirical findings and managerial conclusions about this
study are purely based upon the perceptions, opinions, and responses obtained from
the sample respondents.
556 T. K. Murugesan et al.

6 Data Analysis, Major Findings, and Discussions

The data analysis, major findings, and valid discussions of this research are summa-
rized below:

6.1 General Profile of SSIs

Out of 60 small-scale industries, 40 firms are aware of all Six Sigma programs and
12 firms are not aware of all the Six Sigma programs implemented by most of the
manufacturing firms. Out of 40 sample SSIs, which are conscious of all Six Sigma
programs, 24 companies are vigorously applying few Six Sigma programs in their
manufacturing operations. All the 60 SSIs have focused on the Six Sigma programs
of achieving continuous process improvement, enhancing standard quality, and
minimizing defect rates of products and services periodically. All the small-scale
industries (SSIs) have observed that the financial constraint is the only key stumbling
obstacle for preventing or delaying the effective implementation of Six Sigma
programs
Majority of the small-scale industries (SSIs) have responded that they have
attained the substantial benefits of adopting Six Sigma programs like increasing
productivity of the company and reducing the overall cost of poor quality (OCPQ)
by implementing major Six Sigma initiatives and programs. The outcome of this
empirical study clearly indicated that majority of the SSIs have perceived that
continuous effective training and active involvement by the lower level employees
were also deemed to be the most important hindrances for realizing major Six Sigma
levels. It is also clear that the sample SSIs, which are not actually implementing all
the Six Sigma initiatives, have absolutely replied that “Not a Mandatory Prerequi-
site” and “Not Expected by Clients” as the key causes for not effectively applying
Six Sigma projects in their manufacturing operations

6.2 CPMs of Major Six Sigma Programs Adopted by SSIs

Table 1 clearly indicated that majority of SSIs (100%) have rigorously focused on
the most important Six Sigma drivers of continuous process improvement, enhanc-
ing quality dimensions of the products and minimizing defect rates of the products
and services provided by SSIs. It is also clear from Table 1 that most of the SSIs
(more than 50%) are trying to achieve the critical performance parameters of Six
Sigma initiatives by adopting modern production technologies and manufacturing
systems in the continuous chase of excellence in high-quality standard of the
products/services and in production and operations processes. Moreover, the other
significant Six Sigma initiatives effectively embarked by SSIs are the drastic
Exploring CSFs for Application of Six Sigma Programs: An. . . 557

Table 1 CPMs of the major Six Sigma programs adopted by SSIs

S. no. Critical performance metrics (CPMs) No. of sample companies Percentage (%)
1. Minimization of customer complaints 42 70
2. Reduction of operations cost 52 87
3. Reduction in process variability 32 53
4. Shortening manufacturing cycle time 26 43
5. Continuous process improvement 60 100
6. Improved quality 60 100
7. Reduction of defects 60 100

reduction in operation costs, minimization of both internal and external customer

grievances, reduction in the process variability of the business process, and shorting
manufacturing cycle time

6.3 Descriptive Statistics of CSFs for Application of Six

Sigma Programs

Table 2 displays CSFs for the effective application of Six Sigma programs. The
sample small-scale industries have been requested to rate six critical success factors
on a scale of 1 to 5. The sole aim of this study is to prioritize the CSFs which the SSIs
have considered as key initiatives for effective applications of Six Sigma programs.
It is evident from Table 2 that “continuous process improvement” was deemed as the
most imperative factor for the application of Six Sigma programs by SSIs with
highest average score of 4.56. The descriptive statistics presented in Table 2 posi-
tively support the first hypothesis (H1) of this study
The other factors found to be significant for the successful implementations of Six
Sigma programs by SSIs are “Employee Involvement (Mean Score = 4.42),”
“Linking Six Sigma to Employees (Mean Score = 4.38),” “Training and Education

Table 2 Descriptive statistics of CSFs for application of Six Sigma programs

CSFs N Mean SD Std. Error Mean
1. Management commitment 60 3.72 1.034 0.093
2. Customer focus 60 4.12 0.915 0.081
3. Employee involvement 60 4.42 0.840 0.074
4. Continuous process improvement 60 4.56 1.214 0.090
5. Linking Six Sigma to customers 60 3.64 1.145 0.102
6. Performance management 60 3.56 0.990 0.089
7. Training and education 60 4.26 0.947 0.085
8. Cross-functional teams 60 3.28 1.202 0.108
9. Empowerment and teamwork 60 3.40 1.040 0.093
10. Linking Six Sigma to employees 60 4.38 1.162 0.104
Based on a five-point Likert scale, SD standard deviation
558 T. K. Murugesan et al.

(Mean Score = 4.26),” “Customer Focus (Mean Score = 4.12),” “Management

commitment (Mean Score = 3.72),” “Linking Six Sigma to Customers (Mean Score
= 3.64),” “Performance Management (Mean Score = 3.56),” “Empowerment and
teamwork (Mean Score = 3.4),” and “Cross-Functional Teams (Mean Score =
3.28)”

6.4 One-Sample Test for WCM Drivers and Barriers

In this study, the second hypothesis and third hypothesis (H2 & H3) mainly threw a
light on the substantial benefits and paybacks that positively encourage SSIs to
embrace Six Sigma programs and the stumbling obstacles that hinder SSIs from
embracing Six Sigma programs. The one-sample test has been applied to measure
whether these observed and experimental means of the significant benefits and
stumbling blocks are statistically variant from mid-point score of 3.0. The statistical
outcomes of this pragmatic study were properly summarized in Table 3. According
to the statistical outcomes shown in Table 3, the study results are highly found to be
very statistically prominent from mid-point score of 3.0 ( p < 0.01). These empirical
statistical results clearly confirmed that all key driving benefits that boost SSIs to
embrace the Six Sigma programs are in positive side and stumbling obstacles that
prevent SSIs from embracing Six Sigma programs are in the negative side

Table 3 One-sample test for significant benefits and obstacles toward implementation of Six
Sigma programs
Test value for the study = 3.0
95% Confidence
Benefits and obstacles toward Statistics of one-sample test interval of difference
implementation of Six Sigma Sig. Mean
programs t df (2-tailed) difference Lower Upper
Benefits
1. Improved product quality 11.215 59 0.000 1.021 0.858 1.190
2. Reduction of cycle time 4.540 59 0.000 0.535 0.345 0.727
3. Improved work culture 5.235 59 0.000 0.518 0.360 0.696
4. Improved employee involvement 8.517 59 0.000 0.484 0.453 0.605
5. Reduction of costs, wastes, and 5.579 59 0.000 0.564 0.324 0.604
defects
Stumbling obstacles
1. Financial constraints -10.981 59 0.000 -1.034 -1.212 -0.868
2. Work force resistance -8.647 59 0.000 -0.678 -0.729 -0.647
3. Time constraints -4.467 59 0.000 -0.476 -0.512 -0.150
4. Lack of sufficient training -2.907 59 0.000 -0.218 -0.470 -0.144
5. Lack of support by top -2.163 59 0.000 -0.258 -0.403 -0.093
management
Exploring CSFs for Application of Six Sigma Programs: An. . . 559

From Table 3, the researchers have concluded that the significant benefits posi-
tively impact the applications of the Six Sigma programs by SSIs and significant
barriers negatively impact the application of Six Sigma programs and projects by
SSIs. The statistical outcomes shown in Table 3 clearly indicated that the most
substantial benefit that encourages SSIs to implement Six Sigma programs was
found to be “Improved product quality” scoring a highest mean value of 11.215.
Linked to this, the other significant benefits were “Improved employee involvement
(mean score = 8.517),” “Reduction of costs, wastes, and defects (mean score =
5.579),” “Improved work culture (mean score = 5.235),” and “Reduction of cycle
time (mean score = 4.540)”
It is also found from Table 3 that the most stumbling block that prevents the
effective implementation of Six Sigma programs by SSIs was observed to be
“Financial constraints” scoring a highest negative mean score of -10.981. Followed
by this, the other significant obstacles that might prevent or delay the effective
implementation of Six Sigma programs were “Work force resistance (mean score
= -8.647),” “Time constraints (mean score = -4.467),” “Lack of sufficient training
(mean score = -2.907),” and “Lack of support by top management (mean score =
-2.163)”

6.5 Multiple Regression Model (MRM)

The regression analysis was carried out to test fourth hypothesis (H4) of this study.
The regression model was carried out with the five critical success factors with the
mean score of more than 4.0 as independent variables and implementation of Six
Sigma programs as dependent variable. This regression analysis was employed to
determine the relationship between the select CSFs and their influence on the
effective implementation of Six Sigma programs. This hypothesis can be explored
in the multiple linear regression equations as described below:
Application of Sig Sigma = bo + b1 (Customer Focus) + b2 (Employee Involve-
ment) + b3 (Continuous Process Improvement) + b4 (Training and Education) + b5
(Linking Six Sigma to Employees) + b6
Table 4 portrays the outcomes of the regression model to prove third hypothesis
(H3) of this study. In order to prove H3 of this study, the five critical success factors
with the mean score of more than 4.0 were regressed with the effective implemen-
tation of Six Sigma. From Table 4, when the five critical success factors were
regressed with the implementation of Six Sigma programs, the R2 value was found

Table 4 MRM results for the effect of CSFs on application of Six Sigma programs
R statistics of multiple regression
Model Multiple R R2 Adjusted R2 Std. error of the estimate
a
1 0.956 0.932 0.928 0.212
a
Predictors: (constant), application of Six Sigma programs
560 T. K. Murugesan et al.

Table 5 ANOVA results for the effect of CSFs on application of Six Sigma programs
Summary results of ANOVAa
Model Sum of squares (SS) df Mean square (MS) F Sig.
1 Regression 206.819 5 21.243 217.118 0.000b
Residual 10.381 114 0.091
Total 217.200 124
a
Dependent variable: Application of Six Sigma programs
b
Predictors: (Constant), select CSFs

Table 6 Results of regression coefficients on select CSFs for application of Six Sigma programs
Results of regression coefficientsa
Unstandardized Standardized
coefficients coefficients
Model Beta (B) Std. Error Beta (β) t Sig.
1 (Constant) -1.348 0.148 -8.443 0.000***
1. Continuous process improvement 0.240 0.046 0.314 2.798 0.006**
2. Employee involvement 0.183 0.044 0.269 2.111 0.037*
3. Linking Six Sigma to employees 0.141 0.053 0.170 3.415 0.001**
4. Training and education 0.216 0.051 0.296 2.710 0.008**
5. Customer focus 0.134 0.060 0.189 3.763 0.000***
*p < 0.05, **p < 0.01, ***p < 0.001
a
Dependent variable: Application of Six Sigma programs

to be 0.932. This indicates that 93.2% of the variance in implementation of Six

Sigma programs by SSIs was explained by the five critical success factors such as
customer focus, employee involvement, continuous process improvement, training
and education, and linking Six Sigma to employees.
Table 5 indicated statistical outcomes of ANOVA, and it was carried out between
five critical success factors and their effect on successful implementation of Six
Sigma programs. The F value of 217.118, which is significant at 0.000, indicates that
there was a positive substantial relationship among the select CSFs for the applica-
tions of Six Sigma programs in SSIs.
The beta values as indicated in Table 6 clearly shows that all the five critical
success factors have a positive and significant effect on the applications of Six Sigma
programs by the small-scale industries (SSIs). Out of five CSFs, the critical success
factor “Continuous Process Improvement” has the greatest influence on the effective
implementation of Six Sigma programs (βeta = 0.314, p < 0.05), followed by,
Training and Education (βeta = 0.296, p < 0.05), Employee Involvement
(βeta = 0.269, p < 0.05), Customer Focus (βeta = 0.189, p < 0.05), and Linking
Six Sigma to Employees (βeta = 0.170, p < 0.05). The direction of influence for all
five CSFs on the implementation of Six Sigma programs was positive. The positive
sign of beta values clearly indicated that there is a significant positive relationship
between the select CSFs and implementation of Six Sigma programs. Thus, these
significant positive beta values effectively support for H4. Among all these critical
Exploring CSFs for Application of Six Sigma Programs: An. . . 561

success factors, the continuous process improvement was emerged as the most
significant contribution of the effective implementation of Six Sigma programs
with the beta value of 0.314.

6.6 Managerial Implications and Conclusion of the Study

The paradigm of business era positively paves a clear-cut way for the progress and
evolution of Six Sigma concept. This current study clearly reveals that out of
60 companies, all the 60 SSIs have focused on the Six Sigma programs of achieving
continuous process improvement, improving quality and reducing defect rates
periodically. All the small-scale industries (SSIs) have observed that the financial
constraint is the only key stumbling obstacle for preventing or delaying the effective
implementation of Six Sigma programs. The outcome of this study clearly revealed
that the key and critical factors for the successful implementation of Six Sigma
programs by the sample respondents are Continuous Process Improvement,
Employee Involvement, Linking Six Sigma to Employees, Training and Education,
and Customer Focus. More prominently, this present study also indicated that the
significant benefits which encourage SSIs to embrace Six Sigma programs are in the
positive side and the stumbling obstacles which impede the effective
implementations of Six Sigma programs are in the negative side.
It is also found from the survey that all small-scale industries (SSIs) have viewed
financial constraint as only one significant obstacle for effective application of Six
Sigma programs. Small-scale industries (SSIs) need to apply various kinds of Six
Sigma projects to achieve the excellence in the competitive priorities of the business
such as improvement of quality, reduction of manufacturing cost, delivery speed,
durability, flexibility in manufacturing operations, productivity, business innova-
tions, process capability, etc. The multiple regression model of this research clearly
indicated that there is a positive significant connection between the select CSFs and
implementation of Six Sigma programs. Among all these critical success factors, the
continuous process improvement was emerged as the most significant contribution
of the effective implementation of Six Sigma programs with the beta value of 0.314.
However, it is obligatory to create the new business paradigm for small-scale
industries (SSIs) to embrace major Six Sigma initiatives and projects successfully for
realizing the continual improvements in the high competitive measures of business
operations like manufacturing cost, product quality, customer delivery speed,
manufacturing productivity, process and operations capability, manufacturing defect
rate, and customer gratification. Like other empirical studies, this study also suffers
from few pitfalls. The major drawbacks of this study are: (1) this study was restricted
to 60 small-scale industries (SSIs) in South India, and a sample size of 60 is not
adequate to deliver the statistically substantial results about this empirical study;
(2) this empirical study was confined to only small-scale industries (SSIs), and it fails
to consider medium-scale industries and large-scale industries; and (3) the sample
size drawn for the study might not be representatives of total population.
562 T. K. Murugesan et al.

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