Application of musharakah as financing tools by Islamic banks in Malaysia : constraints and challenges

Abstract

The Mushārakah concept, an equity-based contract, is believed to promote partnerships, banker-partner relationship, and an investment culture between Islamic banking institutions (IBIs) and corporate or business entities under the banner of Profit-loss-sharing (PLS) concept. However, reports from Bank Negara Malaysia (BNM) have revealed that a majority of the Islamic financing provided by IBIs operating in Malaysia are applying the non-PLS concepts. The fact that there is only a small amount of PLS utilisation in the IBIs and these insignificant applications are riddled with controversies gave us the motivation for this study. The primary objective of this study is therefore to investigate the constraints and challenges in the application of Mushārakah-based financing facilities (MBFF) by examining the following concerns. Firstly, whether PLS financing method serves as a better alternative to debt-based financing or it only constitutes the other varieties of non-PLS financing products. Secondly, the literature advocates that PLS is superior to debt-based financing, as the former is more reflective of the spirit of Shāriʻah and is capable of providing justice to contracting parties. As such, it is interesting to examine how the IBIs in Malaysia implement PLS in the environment that does not support equity-based financing and how far the concept of debt-based financing has influenced the implementation of PLS financing facility. To address these concerns, a questionnaire and semi-structured interviews as well as a critical analysis of the literature were employed to collect the relevant data. The questionnaire and structured interviews were used to assess the users’ perceptions and awareness about MBFF offered by Malaysian IBIs, to investigate customers’ expectations and to analyse the classical theory of MBFF as financing tools within the context of its implementation by IBIs of Malaysia. The questionnaire and structured interviews were also used to examine the bank employees’ and customers’ perceptions on the application of Mushārakah concept and their expectations of MBFF and its prospects in the future. In addition, the critical analysis of the literature helped to develop a clear understanding of MBFF practices from the Islamic banks and the legal and Shāriʻah issues and other related challenges in the implementation of MBFF. The questionnaire data was analysed using the non-parametric tests consisting of the descriptive analysis and mean value calculation in SPSS. Cross-tabulation, Kruskal-Wallis, Man Whitney U Test, Chi-square tests and factor analysis were also employed. The data from semi-structured interviews, on the other hand, were analysed through a coding method based on the thematic analysis. This study opines that Mushārakah financing products passed the three types of risks: Shāriʻah, acceptance and legal. This positive finding therefore contributes towards the existing efforts to improve the perception and awareness of Malaysians on PLS. This study concludes with the recommendations for the proper management of the issues and challenges facing the MBFF products in Malaysia.