Research Monograph

The interest in developing Islamic fintech in Malaysia and the efforts in achieving it are constantly on the rise. Several startups have launched Shariah-compliant fintech solutions. Shariah advisory boards at regulatory and industry levels have discussed various Shariah issues related to fintech. Resolutions and exposure drafts have been issued or modified by regulators to cover a wide range of Islamic fintech activities. Some government agencies have established dedicated departments to support fintech and the Islamic digital economy. Universities and training centres have started offering specialized courses and programmes to provide the requisite human capital, while research centres have invested in substantial efforts to push the industry forward by conducting extensive research and providing consultancy services. This report documents a representative sample of such efforts.

Micro, small and medium-sized enterprises (MSMEs) play a pivotal role in driving economic growth, fostering innovation, and providing employment opportunities globally. According to the World Economic Forum (2021), MSMEs represent about 90 per cent of business establishments globally and contribute up to 70 per cent of both employment and global gross domestic product (GDP), accentuating their role as the backbone in many economies. As the global economy transitions towards more sustainable and responsible business practices, and environmental, social, and governance (ESG) factors become increasingly scrutinised, MSMEs are presented with both opportunities and challenges to align their operations with sustainability practices and ESG requirements. Yet, most of the existing sustainability assessment frameworks tend to cater for the needs of large corporations. Realising this gap, INCEIF University - in collaboration with Ficus Capital - has developed the Shari'ah-compliant ESG (ESG-i) Assessment Framework to assess sustainability practices among MSMEs in Malaysia. The ESG-i Assessment Framework serves as a starting point for MSMEs in understanding complex sustainability frameworks and taxonomies that are incongruent with their operational reality. By incorporating Shari'ah principles and embracing the Quadruple Bottom Line (QBL) concept - Planet, People, Profit, and Principle - the framework provides a comprehensive blueprint for evaluating sustainability practices among MSMEs. In contrast to the existing frameworks, the ESG-i Assessment Framework simplifies the criteria for evaluating sustainability practices among MSMEs and provides them with an assessment tool for them to comprehend and integrate into their businesses, regardless of their size and scale. The journey of developing the ESG-i Assessment Framework transcends theoretical constructs to achieve practical efficacy. The pilot phase, featuring a diverse set of MSMEs, not only demonstrates its real-world viability but also emphasises the need for a targeted approach in supporting MSMEs on their journey towards a Low Carbon, Circular and Resilient (LCCR) future. This aligns with the current strategic initiatives taken by many financial institutions and regulatory supervisory authorities driving transition finance. Building upon insights from the pilot phase and feedback from different stakeholders - regulators, practitioners, Shari'ah scholars, and academicians, the ESG-i Assessment Framework has undergone comprehensive enhancements. Aligned with the prevailing domestic ESG guidelines, taxonomies, and assessment framework (e.g., Securities Commission Malaysia (SC)'s Principles-Based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market (SRI Taxonomy); Sustainable and Responsible Investment Sukuk Framework; Maqasid Al-Shariah Guidance Islamic Capital Market (Maqasid Guidance); Bank Negara Malaysia (BNM)'s Climate Change and Principle-Based Taxonomy (CCPT), Value-Based Intermediation (VBI); and SME Corporation Malaysia (SME Corp. Malaysia)'s PKS Lestari), as well as international sustainability assessment frameworks (e.g., B Impact Assessment by B Corporations (B Corp), ESG Score by Refinitiv, and standards issued by Global Reporting Initiative (GRI)), the ESG-i Assessment Framework provides a simplified tool developed in recognition of the reality of MSMEs' operations and capabilities. Hence, it serves as a transitional framework for them to embrace sustainability practices. It not only provides an assessment tool but also acts as a bridge to carry MSMEs through the evolving labyrinth that the global sustainability landscape represents. The ESG-i Assessment Framework beckons to be a catalyst for change and champions a more sustainable supply chain for MSMEs. The ESG-i Assessment Framework is increasingly crucial as the European Union's Carbon Border Adjustment Mechanism is set to take effect in 2024, bringing about substantial implications for the Malaysian economy, particularly impacting MSMEs, which contribute over 16 per cent to the country's exports. Economic Forum (2021). MSMEs represent about 90 percent of business establishments globally and contribute up to 70 percent of both employment and global gross domestic product (GDP), accentuating their roles as the backbone in many economies.

Recent calls for risk-sharing - as expounded in the 2012 Kuala Lumpur Declaration, the 2014 Jeddah Declaration and the 2014 International Monetary Fund statement - elucidate the present situation of Islamic banking and finance: an acknowledgement that risk sharing is a "salient characteristic" of Islamic financial transactions on the one hand and that it is "not deeply embedded" on the other. The objective of this practical evidence-based research paper is to address this schism between prescription and practice. It recapitulates the principles underpinning risk sharing and the reasons why it is integral to the Shar??ah and why (as stated in the Declaration) risk transfer and risk shifting violate a Shari'ah principle. he paper presents preliminary research utilizing empirical data from Malaysian Islamic banks and the Malaysian stock market as a proxy for the real economy. It considers newly enacted Malaysian legislation, the Islamic Financial Services Act 2013 (IFSA), from the perspective of its aim to more clearly define the products and activities of Islamic banks.

The need for sustainable funding of institutions of higher learning led the Government of Malaysia to formulate its Universities Transformation Programme 2015-2025. This transformation agenda came out as the Purple Book which highlighted the need to address the funding gap that may occur in the education sector in the event of unexpected budget cuts. It called for the enhancement of income generation, endowments and waqf to achieve self-sustainability for higher learning institutions (Ministry of Higher Education Malaysia, 2016). Based on the above premise, this research explores the viability of corporate waqf via initial public offering (IPO) as an instrument to raise funds and sustain Malaysia's higher learning institutions. Corporate waqf, as defined by the Securities Commission Malaysia, refers to: A type of corporate [financial] instrument where liquid-asset-like shares or securities [are] endowed as waqf assets and [sic] thus enabling the waqf institutions to benefit from the dividend that can finance any welfare project or initiative (Securities Commission Malaysia 2014, p. 17).

Islamic banks provide similar trade finance facilities to those of conventional banks. They intermediate between buyers (i.e., importers) and sellers (i.e., exporters), act as a custodian of documents, and provide means to reduce payment risks via different payment terms (e.g., open account, documentary collection and letter of credit (LC)). They also provide financing - as need be - to help with working capital tied to the trade transactions. This research focuses only on financing by Islamic banks to importers that involve LCs. Different underlying Shari'ah contracts are used for import financing facilities under LC, the most common being the murabahah contract. At the time of sale, the existence of the subject matter and its ownership by the seller are the key requirements for the validity of a murabahah contract. In the absence of either of these requirements, the contract is considered null and void.

Sukuk in its contemporary form as a financial instrument has gained prominence only over the last one to two decades. Like a share, a sukuk is defined as an instrument representing undivided ownership over the underlying assets. Naturally, the question arises whether sukuk are subject to the same zakat rulings as shares. Accordingly, this research has identified the similarities between shares and Sukuk. The zakat rulings applicable to shares are also identified, and the research has made an attempt to apply those rulings in the context of sukuk. However, the research has identified the peculiarities of sukuk as it is currently practiced in the global market and provided fresh insights on how these may impact the applicability of zakat to sukuk. While the research includes theoretical Shari'ah analysis and discussion on various relevant zakat matters, it also reviews today's practices. Accordingly, relevant Shari'ah standards and requirements of various jurisdictions are identified, and several sukuk prospect uses are examined in relation to zakat calculation and disclosures. By this the research aims at enabling a coherent understanding of the theory and practice.