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Consumer financial protection in Islamic banking: a study of conduct risk in Shari'ah governance

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Date
2021
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Abstract
Islamic banks (“IB”) are predominant institutions of Islamic Finance (“IF”) worldwide. Consumers are key stakeholders in IBs. The central objective of this research is to study consumer financial protection (“CFP”) in IBs. The presence of conduct risk (“CR”) in the form of reputational damage, monetary awards, costs and fines, emanating from grievances, claims and disputes between IBs and their consumers is indicated as resulting from laxity in CFP. As with conventional banks (“CB”), lax CFP in IBs results in CR due to various forms of misconduct, whether intentional, negligent or inadvertent. However, in IBs, lax CFP may also result in CR due to “tensions” in Shari'ah governance (“SG”) that may have nexus to CFP. That conundrum may lead to Shari'ah risk (“SR”) and Shari'ah non-compliance risk (“SNCR”). Statistical analysis and modeling of CFP key indicators is therefore instrumental in examining the relationships. Exploratory factor analysis (“EFA”), confirmatory factor analysis (“CFA”) and covariance-based structural equation modeling (“CB-SEM”) on consumer-facing survey instrument responses (key measurement CFP variables) was conducted. The resulting empirical evidence indicates that latent and key measurement CFP variables hypothesised by multinational banking institutions have a statistically significant impact on CFP in IBs. taxonomy of civil court rulings involving IBs and Shari'ah-compliant contracts for the period 2011-2018 using a qualitative legal document review methodology, limited in scope to those civil case rulings and decisions resulting in money awards, damages, asset impairment, costs and significant exposure, was conducted. A literature review of pre-2011 and post-2018 civil cases involving IBs and regulatory actions was also conducted, in search of indicia of CR. Recent Bank Negara Malaysia (“BNM”) enforcement actions involving CFP issues were reviewed and annotated. Islamic banking disputes lodged with the Ombudsman of Financial Services (“OFS”) and the related awards for the calendar years 2014-2018 were qualitatively reviewed in search of further indicia of CR in IBs. Results indicate that taken together, these civil court rulings, enforcement actions and alternative dispute resolution (“ADR”) actions from OFS form compelling evidence of the persistent presence of CR in IBs. Moreover, EFA and CFA on consumer-facing survey instrument responses statistically buttress the conclusion that latent and key CR measurement variables trigger grievances, disputes and claims against IBs.
Keywords
Conduct risk , Consumer financial protection , Islamic banks , Shari'ah governance
Citation
Abdullah, M. (2021). Consumer financial protection in Islamic banking: a study of conduct risk in Shari'ah governance (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/3658
Publisher
INCEIF
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