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Ethical issues in profit rate charges in Islamic debt financing with special reference to Islamic personal financing product in Malaysia

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Date
2021
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Abstract
In past thirty years, Islamic banking has established itself in the global market as an alternative method of financing to interest-based financing. Most of Islamic financing products are formulated on debt financing contract such as murabaha and tawaruq contracts where elements of interest, ambiguities, gambling and impure commodities are duly avoided. While these contracts have complied with the fundamental principle of the Shariah, less attention is accorded to the pricing aspect of the contract especially in the setting of finance charges, namely profit rates on the facilities. While regulatory murabaha Shariah parameter defined the selling price of murabaha as a sum of the cost of purchase and profit margin, less study is attempted on the latter. Claims of exorbitant profits charged by Islamic banks have been voiced by various parties including consumer associations are not without basis. The first objective of this study is to examine and confirm the claims made by the consumer groups. This study has confirmed that the complaints have been true where Islamic banks were found to use the monthly profit rate compounding system as well as the flat rate method which have contributed to the questionable increase in profits earned by the banks. In the former, the effective profit rates (EPF) are found always higher than the quoted profit rates (QPR) while in the latter the use of flat rate method (FRM) over the reducing balance method (RBM) where both of these practices have increase banking profits at the detriment of customers. This study considers this case as an ethical issue as no clear guideline on this matter is accorded by the regulator in the murabaha Shariah parameter.
Keywords
Islamic banks , Profit rates , Ethical issues , Islamic debt financing , Malaysia
Citation
Haque, M. M. (2021). Ethical issues in profit rate charges in Islamic debt financing with special reference to Islamic personal financing product in Malaysia (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/3680
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INCEIF

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