Islamic Sustainable Finance, Law and Innovation: Opportunities and Challenges [1 ed.] 3031278593, 9783031278594

Table of contents :
Contents
Analysis of Acceptance´s Level of Takaful Products in Iran
1 Introduction
2 Takaful Insurance
3 Methodology
4 Acceptance of Takaful Insurance in Iran
5 Conclusion
References
Identifying and Ranking Factors Affecting the Demand for Takaful Insurance in Iran
1 Introduction and Literature Review
2 Materials and Methods
3 Results and Discussion
4 Conclusions
References
Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change
1 Introduction
2 Change Agility and Value Orientation
2.1 Change from Within
2.2 Every Employee Is an Agent of Change
2.3 Employee Agility in the Organizational Change Process
2.4 Employee Agility for Successful Organizational Change
2.5 Helping Each Other Between Employees in Facing Change
3 Nafsul Ihtisab Change Agility: Dimensions and Indicators
4 Future Research
5 Conclusion
References
The Conceptual Framework of Mustahiq Entrepreneurs´ Welfare in Productive Zakat Empowerment (Sharia Maqasid Approach)
1 Introduction
1.1 Background
2 Literature Review
2.1 Background Theory
2.1.1 Productive Zakat
2.1.2 Mustahiq Entrepreneur
3 Methodology
4 Results and Analysis
4.1 Results
4.1.1 Articles About Welfare Mustahiq
4.1.2 Mustahiq Entrepreneur Welfare Factors
4.2 Analysis
4.2.1 Productive Zakat Program Factors
4.2.2 Islamic Entrepreneurial Motivation
4.2.3 Entrepreneurial Competence
4.2.4 Islamic Business Success
4.2.5 Maqasid Sharia-Based Mustahiq Entrepreneurial Welfare Model
5 Conclusion and Recommendation
References
Economic Empowerment of Islamic Boarding Schools Through Optimization of Halal Value Chain: A Conceptual Offer
1 Introduction
1.1 Background Study
1.2 Objective
2 Literature Review
2.1 Background Theory
2.1.1 Economic Empowerment
2.1.2 Halal Value Chain
2.2 Previous Studies
2.3 Conceptual Framework
3 Methodology
3.1 Data
3.2 Model Development
3.3 Method
4 Results and Analysis
4.1 The Economic Potential of Islamic Boarding Schools and Its Impact
4.2 Halal Value Chain Concept in Islamic Boarding School Community Empowerment
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
Developing Conceptual Framework for Public-Private Partnership Projects via Mobilization of Islamic Finance in Indonesia
1 Introduction
1.1 Background of Study
1.2 Statement of Problem
1.3 Research Objectives
2 Literature Review
2.1 The Concept of Public-Private Partnership
2.2 The Need for Public-Private Partnership in Indonesia
2.3 Islamic Finance for Public-Private Partnership in Indonesia
3 Relevant Theories for Conceptual Framework
3.1 The Importance and Nature of Framework
3.2 Institutional Theory: Context of PPP Structures
3.2.1 Value Chain Theory: Relevance with PPP Cycle
4 Developing Conceptual Framework
4.1 Input
4.2 Project Physical Characteristics
4.3 Value for Money (VfM)
4.4 Legal and Concession Agreements
4.5 Risk Management
4.6 Resource Mobilization
4.7 Procurement
4.8 Shariah Compliance
4.9 Process/Activities
4.10 Resource Utilization
4.11 Contract Management
4.12 Project Construction and Implementation
4.13 Health, Safety, and Environment (HSE)
4.14 Output
4.15 Time, Cost, and Quality
4.16 Learning and Growth Indicators
4.17 Operation and Maintenance
4.18 Revenue Driver
4.19 Stakeholder Satisfaction
4.20 Environmental, Social, and Governance (ESG)
4.21 Project Outcome and Maslahah Aspect
5 Conclusion
References
Takaful on COVID-19 Coverage: Case Study of Malaysian´s General Takaful Operators
1 Introduction
2 Literature Review
2.1 Takaful Coverage for COVID-19 in Malaysia
3 Methodology
4 Findings and Discussion
4.1 Case Study 1: Etiqa General Takaful Berhad
4.1.1 TripCare 360 Takaful
4.2 Case Study 2: Syarikat Takaful Malaysia Am Berhad
4.2.1 Takaful myClick MozzCare
4.3 Case Study 3: Zurich General Takaful Malaysia Berhad
4.3.1 Z-CoVac Protect Takaful
5 Conclusion and Recommendations
References
The Impact of Islamic Branding on Customer Loyalty with Customer Satisfaction as an Intervening Variable
1 Introduction
1.1 Background
2 Literature Review
2.1 The Concept of Islamic Branding
2.2 The Concept of Customer Satisfaction
3 Methodology
3.1 Data
3.2 Method
4 Results and Analysis
4.1 Results
4.2 Analysis
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
Role of Islamic Microfinance in Enhancing Financial Inclusion in Bangladesh: A Systematic Literature Review
1 Introduction
2 Literature Review
3 Methodology
4 Findings and Discussion
4.1 What Is Islamic Microfinance?
4.2 Islamic Microfinance in Bangladesh
4.3 Concepts, Determinants, and Impacts of Financial Inclusion
4.4 Reasons for the Low Financial Inclusion Rate in Bangladesh
4.5 Effective Ways to Enhance Financial Inclusion Through Islamic Microfinance in Bangladesh
5 Conclusion and Recommendations
References
The Application of Artificial Intelligence in Metaverse: A New Challenge on Personal Data Protection in the Financial System
1 Introduction
2 Literature Review
3 AI in Metaverse: A Consideration on Financial System
4 Findings and Discussion
5 Conclusion
References
The Application of Mobile Banking Services by Malaysian Islamic Banks: An Evaluation of the Customers´ Main Concerns
1 Introduction
2 Literature Review
3 Mobile Banking Services Application: Customers´ Main Concerns
4 Findings and Discussion
5 Conclusion
References
Islamic Equity Financing as a Financial Inclusion Enabler: Nigeria in Spectrum
1 Introduction
2 Literature Review
3 Merits of Islamic Equity Financing for Nigeria
4 Challenges Militating Against Islamic Equity Financing in Nigeria
5 Conclusion and Recommendation
References
Financial Inclusion in Somalia Between Reality and Expectations
1 Introduction
1.1 Research Problem
1.2 Research Objective and Research Questions
1.3 Research Method
2 Literature Review
3 Result and Discussion
3.1 Overview of Financial Inclusion in Somalia
3.2 The Financial Sector in Somalia
3.3 Mobile Money Services
4 Conclusion and Recommendations
References
Potential of Islamic Microfinance: Issues, Challenges, and Way Forward
1 Introduction
2 Microfinance and the Poverty Alleviation
3 Microfinance: Issues and Challenges
4 Way Forward for Islamic Microfinance
References
The Role of Financial Behavior, Financial Stress, and Financial Well-Being Toward Islamic Financial Literacy
1 Introduction
2 Islamic Financial Literacy
2.1 Literacy and Financial Literacy
2.1.1 Literacy
2.1.2 Financial Literacy
2.2 Islamic Perspective on Financial Literacy
2.3 Global Perspective on Financial Literacy
2.4 Financial Literacy Among Youth
2.5 Malaysian National Strategy for Financial Literacy
3 Conceptual Framework of the Study
3.1 Hypotheses of the Study
3.1.1 Financial Behavior
3.1.2 Financial Stress
3.1.3 Financial Well-Being
References
An Analysis of the Impact of Islamic Microfinance Among Asnaf
1 Introduction
2 Review of Literature on Microfinance
3 Research Method
4 Findings and Discussion
5 Conclusion
References
Rectifying the Downsides Pension Fund with the Critical Analysis of Triangle Justice Ecosystem: A Comparative Case Study in In...
1 Introduction
2 Literature Review
3 Methodology
3.1 Triangle Sharia Justice Ecosystem (TSJE)
3.2 Implementation Procedure
4 Results and Discussion
4.1 Return and Risk Perspective in Green Investment
4.2 Business Model Canvas (BMC)
4.3 New Business Model and Strategy of the Triangle Sharia Justice Ecosystem (TSJE) Pension Fund
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
The Effect of Financing Distribution on NPF in Islamic Banking: A Short- and Long-Term ECM Analysis
1 Introduction
1.1 Background
1.2 Objective
2 Literature Review
2.1 Background Theory
2.1.1 Nonperforming Financing (NPF) in Islamic Bank
2.1.2 Murabahah and NPF
2.1.3 Mudharabah and NPF
2.1.4 Musyarakah and NPF
2.2 Literature Studies
2.3 Conceptual Framework
3 Methodology
3.1 Data
3.2 Model Development
3.3 Method
4 Result and Analysis
4.1 Result
4.1.1 Stationarities Test NPF, MR, MD, MS
4.1.2 Cointegration Test
4.1.3 Regression Analysis
4.1.4 Analysis
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
The Rahn Practices by the Real Estate Agencies in Afghanistan: The Sharīah and Legal Analysis
1 Introduction
1.1 Background
2 Literature Review
2.1 The Concept of Al-Rahn
2.1.1 Al-Rahn Practices as a Contemporary Microfinancing Tool
2.1.2 The Concept and Current Practices of Al-Rahn in Afghanistan
2.2 Previous Studies
3 Methodology
3.1 Result and Analysis
3.1.1 Sharīʿah Issues
3.1.2 Legal Issues
3.1.3 Al-Rahn Cases in Afghan Courts
4 Conclusion and Recommendation
References
Improving Microtakaful Offering Through Stakeholders´ Collaboration: Critical Analysis Using Systematic Literature Review
1 Introduction
2 Towards Financial Inclusivity
3 Methodology
4 Literature Review
4.1 Malaysia Microtakaful Products
4.2 Malaysia Microtakaful Regulatory Infrastructure
5 Analysis
5.1 Malaysia Redundancy of Microtakaful Products and Initiatives
5.2 Funding Uncertainties for Microtakaful Initiatives
6 Conclusion
References
Sukuk´s Role in Financing Infrastructural Development During the Covid-19 Pandemic in Nigeria
1 Introduction
2 Financing Development
2.1 Financing Infrastructure Development During Covid-19 Pandemic
3 Sukuk as an Alternative Source of Financing Infrastructure
4 Increasing Sukuk Role in Financing Infrastructural Development in Nigeria During Covid-19
4.1 Economic Downturn During the Covid-19 Pandemic
4.2 Investment Return of Sukuk
4.3 Sukuk Structure
4.3.1 Federal Government Ijarah Sukuk Structure
4.4 Sukuk Successes in Other Economies
5 Conclusion
References
Identifying Factors of Financial Exclusion of Rural Farmers: Case Study in Ulu Dong, Raub, Pahang
1 Introduction
1.1 Background
1.2 Problem Statement
1.3 Research Significance
1.4 Research Objectives
2 Literature Review
2.1 Agriculture in Malaysia
2.2 Background Performance of Rural Farmers in Ulu Dong, Raub, Pahang
2.3 Islamic Microfinance to Assist Rural Farmers in Malaysia
2.4 Challenges and Issues that Hampered Rural Farmers in Malaysia
3 Methodology
3.1 Location of Study and Participants
3.2 Design
3.3 Interview Protocol
3.4 Data Analysis
4 Findings
4.1 Issues of Rural Farmers in Ulu Dong, Raub, Pahang
4.2 The Knowledge of the Existing of Islamic Microfinance Financial Services to Assist the Rural Farmers
4.3 Factors of Low Involvement of Farmers in the Financial System
4.3.1 Lack of Documentation
4.3.2 Lack of Financial and Business Management Skills
4.3.3 Moral Hazard
5 Conclusion
References
Roles of Islamic Financial Literacy on Financial Decision-Making: Building a Conceptual Framework Based on the Theory of Plann...
1 Introduction
1.1 Background
2 Literature Review
2.1 Islamic Financial Literacy
2.2 Islamic Financial Decision-Making
2.3 Background Theory
2.4 Theory of Planned Behavior (TPB)
2.4.1 Attitude
2.4.2 Subjective Norm
2.4.3 Perceived Behavioral Control
2.5 Social Cognitive Theory
3 Methodology
3.1 Hypotheses Formulated
3.2 Data Collection Method
3.3 Population and Sampling
4 Data Analysis
5 Conclusion
References
An Evaluation of Cash Waqf Deposit Performance Through Islamic Banks in Bangladesh
1 Introduction
2 Objectives of the Study
3 Methodology
4 Literature Review
5 Findings of the Study
6 Recommendations and Conclusion
References
Takaful Plan for E-Hailing: A Comparison Between the Available Private Motor Vehicle Takaful Plans in Malaysia
1 Introduction
2 Motor Vehicle Takaful
3 Methodology
4 Findings and Discussions
4.1 Motor Vehicle Private Car Takaful Plans
4.2 Collaboration Between Grab and Takaful Operator and Insurance Company
4.3 Could Takaful Operators Provide Extensive Coverage for E-Hailers?
5 Conclusion
References
The Role of Religiosity and Hardworking on Human Resource Performance of Baitul Maal wat Tamwil Ummat Sejahtera Abadi
1 Introduction
2 Literature Review
2.1 Human Resource Performance
2.2 Religiosity
2.3 Hard Working
2.4 Religiosity and HR Performance
2.5 Religiosity and Hardworking
2.6 Hardworking and HR Performance
3 Research Methods
3.1 Variable Measurement
3.2 Analysis Techniques
4 Results and Discussion
4.1 Hypothesis 1 Test Result
4.2 Hypothesis 2 Test Result
4.3 Hypothesis Test Result
5 Conclusion
References
Improving Business Success Through the Use of Accounting Information and Business Capital Management
1 Introduction
1.1 Background
2 Literature Review
2.1 Stakeholder Theory
2.2 Motivation Theory
2.3 Business Success
2.4 The Use of Accounting Information
2.5 Business Capital Management
3 Hypothesis Development
3.1 The Effect of Using Accounting Information on Business Success
3.2 The Effect of Business Capital Management on Business Success
3.3 Research Framework (Fig. 1)
4 Research Methodology
4.1 Types of Research
4.2 Population and Research Sample
4.2.1 Population
4.2.2 Sample
4.3 Sampling Technique
4.4 Data Sources and Types
4.5 Method of Collecting Data
4.6 Research Period
4.7 Operational Definitions and Variable Indicators
4.7.1 Business Success
4.7.2 Use of Accounting Information
4.7.3 Business Capital Management
4.8 Analysis Techniques
5 Conclusion
References
Islamic Communication in Outbound Management Training
1 Training and Development
2 Management Outbound Training
3 Communication
References
Addressing Negative Spillover Effects of Overcrowding in Malaysian Prisons: Can Islamic Financial Institutions Play a Role?
1 Introduction
2 Research Methodology
3 Points of Discussion
3.1 Prison Maintenance and Management Cost in Malaysia
3.2 Current Measures to Utilize Human Resources in Malaysian Prisons
3.3 Comparison on Prison Maintenance Costs in Selected Countries Outside Malaysia
4 Role of Islamic Financial Institutions through Islamic Social Finance and Other Instruments
5 Conclusion
References
Evaluation on the Practice of Ijarah for Vehicle Financing and Its Regulation in Islamic Financial Institutions in Sri Lanka
1 Introduction
2 A Review of the Literature
3 Background and Development of Ijārah for Vehicle Financing in Sri Lanka
3.1 Islamic Bank
3.2 Islamic Windows of Conventional Banks
3.3 Islamic Windows of Finance Companies
4 Discussion and Analysis
4.1 Lack of Awareness on Ijārah Product
4.2 Inexperienced Bank Officers and a Lack of Sharī ah experts
4.3 Stiff Competition in the Market
4.4 Threat from an Extremist Buddhist Group
4.5 Opportunities of Ijarah for Vehicle Financing
5 Conclusion and Recommendation
Enhancing Access to Finance Amongst Asnaf Micro Entrepreneurs: How Can Islamic Fintech in Zakat Institutions Play a Role?
1 Introduction
2 Literature Review
2.1 Access to Finance for Asnaf Micro Entrepreneurs from Zakat Institutions
2.2 Islamic FinTech for Asnaf Micro Entrepreneurs
3 Methodology
4 Findings
4.1 Microfinancing Industry: Profiling of Asnaf Micro Entrepreneurs and Existing Islamic Microfinancing Products in Malaysia
4.2 Islamic Microfinancing Providers´ Weaknesses and Gaps
4.2.1 Zakat Institutions
4.3 Role of Islamic Fintech Credit in Zakat Institutions as Alternative Microfinancing Provider
References
Optimizing Digitalpreneurship through Digital Skills and Platform Strategy on MSMEs in Central Java
1 Introduction
1.1 Background
1.2 Objective
2 Literature Review
2.1 Background Theory
Digital Skill
Platform Strategy
Digitalpreneurship
2.2 Previous Studies
2.3 Conceptual Framework
3 Conclusion and Recommendation
3.1 Conclusion
3.2 Recommendation
References
Sharia Investment Decision-Making: Gender Lens Investing, Fear of Missing out, and Islamic Financial Literation
1 Introduction
2 Literature Review
2.1 Background Theory
2.1.1 Behavioral Finance Theory
2.1.2 Prospect Theory
2.2 Previous Studies
2.3 Conceptual Framework
3 Methodology
4 Results and Analysis
4.1 Results
4.2 Analysis
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
How Do Islamic Banks Report and Distribute Zakat in Malaysia?
1 Introduction
2 Literature Review
3 Methodology
3.1 Data Collection
3.2 Data Analysis
4 Discussion and Findings
4.1 Information Disclosure
4.2 Reference to JAWHAR´s Manual
5 Conclusion and Recommendation
References
The Role of Libyan Zakat Foundation in the Achievement of Social and Economic Development (Zliten Zakat Foundation as a Model)
1 Introduction
2 The Objective of the Research
3 Research Methodology
4 Literature Review
4.1 The Definition of Zakat
5 Libyan Zakat Fund in Zliten
6 Analysis and Discussion of Interview Results
6.1 The Extent to Which the Fund´s Internal Regulations Keep Pace with the Developmental of Zakat
6.2 Presentation of the Data Related to the Interviewees´ Evaluation of the Distribution Mechanism Followed by the Zliten Zaka...
6.3 Summary of Interviewees´ Attitudes About the Lack of Focus of the Zakat Fund on Crafts, Agricultural and Health Professions
6.4 The Interviewees´ Point of View on the Feasibility of Adopting the Zakat Fund in Zliten to Support Investment Projects (Cr...
6.5 Presenting Data Related to the Role of Zakat in Managing and Distributing Collected Funds Towards Investment Spending
6.6 The Most Prominent Obstacles and Difficulties Facing the Libyan Zakat Fund in the City of Zliten Towards the Adoption of S...
6.7 The Proposed Solutions to Overcome the Obstacles and Difficulties Facing the Zakat Fund in the City of Zliten Towards the ...
7 Conclusion
8 Recommendations
References
Islamicity and Reporting Performance on Islamic Banking Financial Performance in Indonesia Post-COVID-19 (Period: 2019-2021)
1 Introduction
1.1 Background
2 Literature Review
2.1 Previous Studies
2.2 Conceptual Framework
3 Methodology
3.1 Data
3.2 Model Development
3.2.1 Islamicity Performance Index on Financial Performance
3.2.2 Islamic Social Reporting on Financial Performance
3.3 Method
4 Results and Analysis
4.1 Results
4.1.1 Chow Test
4.1.2 Hypothesis Test
4.2 Analysis
4.2.1 Panel Data Regression Test
4.2.2 The Effect of Islamicity Performance Index (X1) on Financial Performance (Y)
4.2.3 The Effect of Islamic Social Reporting (X2) on Financial Performance (Y)
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
References
The Effect of Institutional Theory Toward Shariah Audit Practice in Malaysian Takaful Industry
1 Introduction
2 Literature Review
2.1 Shariah Audit Practices in Malaysia
2.2 Institutional Theory
2.3 Institutional Theory and Internal Auditing
3 Research Methodology
4 Findings and Analysis
4.1 Coercive Isomorphism
4.2 Mimetic Isomorphism
4.3 Normative Isomorphism
4.4 Expectations of Practitioners
5 Recommendations and Conclusions
References
Assessment of Financial Performance of RSI Sultan Agung Semarang Through the Maqashid Sharia Concordance (MSC) Approach
1 Introduction
2 Method
3 Result and Analysis
3.1 The Budget Work Plan Prepared Meets the Principles of Justice
3.2 Hospital Rates Are Fair for Patients, Doctors, and Hospitals
3.3 Recommendation from the Sharia Committee on Policies Taken by Hospitals
3.4 Cooperation with Islamic Banks
4 Conclusion and Suggestions
4.1 Conclusion
4.2 Suggestions
References
Impact of Electronic Service Quality on Customer Satisfaction of Islamic Banks in Pakistan
1 Introduction
1.1 Problem Statement
1.2 Research Objectives
1.3 Research Questions
2 Literature Review
2.1 Customer Satisfaction
2.2 Electronic Service Quality (e-SQ)
2.3 e-SQ and Customer Satisfaction
2.4 Dimensions of e-SQ
2.4.1 Reliability
2.4.2 Ease of Use
2.4.3 Efficiency
2.4.4 Privacy
2.4.5 Responsiveness
3 Research Methodology
3.1 Research Design
3.2 Population and Sample Size
3.3 Data Sources and Data Collection
4 Results and Discussion
4.1 Descriptive Statistics
4.2 Correlation Analysis
5 Conclusion
References
Maqashid Sharia Framework: Sharia Financial Inclusion Through Indonesian Sharia Mobile Bank
1 Introduction
2 Literature Review
2.1 Sharia Financial Inclusion
2.2 Sharia Banking
2.3 Maqashid Shariah
3 Method
4 Result and Discussion
4.1 Maqashid Shariah and Syariah Banking
4.2 General Mapping of BSI Mobile and Maqashid Syariah
4.3 Implication
5 Summary
References
Exploration of Sharia Bank Services in Muhammadiyah´s Higher Education Students
1 Introduction
1.1 Background
1.2 Objective
2 Literature Review
2.1 Background Theory
2.2 Previous Studies
2.3 Conceptual Framework
3 Methodology
3.1 Data
3.2 Model Development
3.3 Method
4 Result and Analysis
4.1 Result
4.2 Robustness Test (Table 2)
4.3 Analysis
5 Discussion
6 Conclusion and Recommendation
6.1 Conclusion
6.2 Recommendation
References
Is the Islamic Religiosity Become the Cashless Behavior Among Muslim Community?
1 Introduction
2 Methodology
3 Finding and Discussion
3.1 Concept of Religiosity
3.2 Islamic Religiosity
3.3 Religiosity and Cashless Behavior
4 Conclusion and Recommendation
References
The Presentation and Disclosure of Islamic Banks´ Financial Statements: A Comparative Analysis of IFRS and AAOIFI Financial Ac...
1 Introduction
1.1 Background
1.2 Objective
2 Literature Review
2.1 Background Theory
2.2 Previous Studies
2.3 Conceptual Framework
3 Methodology
4 Results and Analysis
4.1 The Importance of Understanding the Reporting for Islamic Financial Standards
4.2 The Differences Between the IFRS and AAOIFI Based on the Concept of Substance Over Form and Time Value of Money
4.3 Opinion on the General Issues on Presentation and Disclosure of Financial Statement Based on AAOIFI and IFRS, Respectively
4.4 Document Analysis: The Differences of Two Standards (IFRS and AAOFI) in the Treatment of Profit-Sharing Investment Account...
5 Conclusion and Recommendation
References
Indonesia´s South-South Cooperation in Promoting Sharia Economic Development in Sudan
1 Introduction
2 Literature Review
3 Research Method
4 Result and Analysis
4.1 South-South Cooperation Indonesia Encourages Indonesia´s Sharia Economy in Sudan
4.2 Indonesia-Sudan Cooperation Promotes Sharia Economic Development
5 Conclusion
References
Significance and Potential Role of the Islamic Banking and Finance Services in Bangsamoro Autonomous Region in Muslim Mindanao
1 Rationale
2 Methodology
3 Result and Discussion
4 Conclusions and Recommendations
References
ESG Practices and Firm Risk: Evidence from Malaysia
1 Introduction
1.1 Background
2 Literature Review
2.1 Background Theory and Previous Studies
3 Introduction
3.1 Measurements
3.2 Model Development
3.3 Method
4 Results and Analysis
4.1 Results
5 Conclusion and Recommendations
References
The Muhammadiyah Waqf Organization: Prospects and Challenges
1 Introduction
1.1 Background
1.2 Objectives
2 Methodology
3 Management of Integrated Waqf Model
4 Waqf in Muhammadiyah Organization
4.1 The Management and Administration
4.2 Social-Business Management
5 The Prospects and Challenges of Muhammadiyah Waqf
5.1 Administration
5.2 Management
6 Conclusion and Recommendation
6.1 Conclusion
6.2 Recommendation
References
Strategies for Improving Cash Waqf Fundraising Through Optimization of Cash Waqf Literacy in Indonesia
1 Introduction
1.1 Research Background
1.2 Objective
2 Literature Review
2.1 Background Theory
2.2 Previous Studies
3 Methodology
3.1 Data
3.2 Method
4 Results and Analysis
4.1 Results
4.1.1 Fundraising Basic Concepts
4.1.2 Motivation
4.1.3 Program
4.1.4 Method
4.1.5 Fundraising Cash Waqf
4.1.6 Direct Fundraising
4.1.7 Indirect Fundraising
4.1.8 The Urgency of Cash Waqf Literacy on Increasing Cash Waqf Fundraising
5 Conclusion and Recommendation
5.1 Conclusion
5.2 Recommendation
5.3 Suggestions
References
Measuring the Customer´s Perception of the Use of Financial Technology in Algerian Islamic Banks
1 Introduction
2 Algerian Banking System
3 Islamic Finance in Algeria
4 Al Baraka Online Banking
5 Al Salam Online Banking
6 Problem Statement
7 Significance of the Study
8 Research Objectives
9 Literature Review
10 Theoretical Framework
11 Hypothesis
12 Methods and Procedures
13 Summary
References
Current Trends and Sustainable Development of Warehouse Logistics
1 Introduction
2 Literature Review
3 Purpose of the Study
4 Results and Discussion
5 Conclusion
References
Exploring CSFs for Application of Six Sigma Programs: An Empirical Evidence from Small-Scale Industries (SSIs)
1 Introduction
2 Review of Literature
3 Problem Statement of the Study
4 Objectives of the Study
5 Methodology of the Study
6 Data Analysis, Major Findings, and Discussions
6.1 General Profile of SSIs
6.2 CPMs of Major Six Sigma Programs Adopted by SSIs
6.3 Descriptive Statistics of CSFs for Application of Six Sigma Programs
6.4 One-Sample Test for WCM Drivers and Barriers
6.5 Multiple Regression Model (MRM)
6.6 Managerial Implications and Conclusion of the Study
References

Citation preview

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 feature selected conference-based publications are also considered. The focus of the series lies in presenting the development of latest theoretical and empirical research across different viewpoints. This book series is indexed in Scopus.

Nadia Mansour • Lorenzo Mateo Bujosa Vadell Editors

Islamic Sustainable Finance, Law and Innovation Opportunities and Challenges

Editors Nadia Mansour Department of Finance University of Sousse-Tunisia and University of Salamanca-Spain Monastir, Tunisia

Lorenzo Mateo Bujosa Vadell Faculty of Law University of Salamanca Salamanca, Salamanca, Spain

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 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Analysis of Acceptance’s Level of Takaful Products in Iran . . . . . . . . . . Mitra Ghanbarzadeh, Asma Hamzeh, and Nasrin Hozarmoghadam

1

Identifying and Ranking Factors Affecting the Demand for Takaful Insurance in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asma Hamzeh and Mitra Ghanbarzadeh

13

Nafsul Ihtisab Change Agility: A Foundation to Spread the Spirit of Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dwi Indriastuti Yulianingsih and Olivia Fachrunnisa

23

The Conceptual Framework of Mustahiq Entrepreneurs’ Welfare in Productive Zakat Empowerment (Sharia Maqasid Approach) . . . . . . . . Ivan Rahmat Santoso, Syahrir Mallongi, Siradjuddin, and Muhammad Basir Paly

33

Economic Empowerment of Islamic Boarding Schools Through Optimization of Halal Value Chain: A Conceptual Offer . . . . . . . . . . . . Lamya Nurul Fadhilah and Syamsuri

45

Developing Conceptual Framework for Public–Private Partnership Projects via Mobilization of Islamic Finance in Indonesia . . . . . . . . . . . . Muhammad Imaduddin and Salina Hj. Kassim

57

Takaful on COVID-19 Coverage: Case Study of Malaysian’s General Takaful Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alya Nabihah Idris and Marhanum Che Mohd Salleh

83

The Impact of Islamic Branding on Customer Loyalty with Customer Satisfaction as an Intervening Variable . . . . . . . . . . . . . . . . . . . . . . . . . Abdul Muizz Abdul Wadud and Layaman

95

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

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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

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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), macroeconomic 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 community 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 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

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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’ acceptance 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 agreement 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).

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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 insurance 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

Marital Status

4.05%

Gender

5 0%

29.73%

49.32%

50.68% 66.22%

Male

Female

Single

Married

divorced/Separated

Level of Education

Income (Milion Rials) 60.00%

widowed

53.38%

60.00% 43.24% 40.00%

40.00%

31.08% 22.97%

22.97%

20.00%

20.00% 9.46%

6.76%

7.43%

30-50

50-70

0.68%

Diploma Associate Bachelor Master and below

0.00% < 30

2.03%

0.00% 70-90

>90

PhD and above

Employement Type 80.00% 58.11%

60.00% 40.00% 20.95% 20.00%

7.43%

4.05%

1.35%

0.68%

7.43%

0.00%

Fig. 1 Demographic information of respondents

respondents are employed in the private sector, whereas 21 percent of the respondents 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.

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Fig. 2 Which insurance the respondents have? Table 1 Awareness of respondents about takaful concepts

Concept Takaful insurance Riba (interest) Maisir (gambling) Gharar (uncertainty) Mudharabah contract Wakalah contract Takaful insurance is free of riba, gharar, and maisir According to some Sunni jurists, conventional insurance includes riba, gambling, and gharar Takaful insurance is more compatible with the principles of Islamic jurisprudence Policyholders share in the income from Takaful insurance operations and investments made according to Islamic Sharia Takaful insurance is based on the motive of supporting and providing the social welfare of the insured and her family Based on the principle of cooperation in Takaful insurance, members share in all losses and participate in risk transfer

Yes 33.78% 66.22% 70.95% 27.03% 54.73% 68.92% 29.73% 41.22%

No 31.08% 12.84% 10.14% 51.35% 22.97% 13.51% 43.24% 33.11%

Maybe 35.14% 20.95% 18.92% 21.62% 22.30% 17.57% 27.03% 25.68%

Mean score 2.03 2.53 2.61 1.76 2.32 2.55 1.86 2.08

42.57%

35.14%

22.30%

2.07

52.70%

29.05%

18.24%

2.24

49.32%

27.03%

23.65%

2.22

54.05%

29.95%

25%

2.42

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 Car third-party takaful Car body takaful Health takaful Life takaful Home takaful Mobile takaful Travel takaful

Desire to buy 31.76% 30.41% 35.14% 32.43% 29.73% 20.27% 16.89%

Reluctance to buy 29.05% 32.43% 31.08% 29.73% 31.76% 41.89% 40.54%

Not sure 39.19% 37.16% 33.78% 37.84% 38.51% 37.84% 42.57%

Table 3 Respondent’s agreement to the use of Arabic words (such as riba and gharar) in takaful insurance Opinion Yes

No

No idea

Percentage 4.05%

67.57%

Reasons To show takaful insurance as an Islamic product To show the difference between takaful and conventional insurance in Iran To attract customers who have problems with conventional insurance in terms of Islamic principles Other To avoid misunderstandings about other common insurances in the country To attract customers of any religion Other

Percentage in each opinion 50% 16.67% 16.67% 16.67% 37% 35% 28%

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 examined. 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 thirdparty 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

Concept Takaful insurance price The quality and variety of takaful insurance services Compliance with the principles of Islamic jurisprudence and not having riba, gharar, and gambling in takaful insurance Investing funds from takaful insurance premiums in Islamic financial markets Surplus distribution of capital among takaful policyholders Inflation Income Returns of other financial markets Proper marketing and advertising by the insurance company

Table 4 Importance of various factors on takaful insurance demand

34.50% 23.60% 21.60% 18.20% 22.30% 16.90%

20.90% 29.70% 31.80% 29.70% 27.70% 30.40%

26.40% 36.50% 34.50% 38.50% 40.50% 37.80%

Moderately important 18.90% 14.20% 29.10%

Important 27.70% 21.60% 16.90%

Very important 44.60% 54.70% 30.40%

4.10% 3.40% 5.40% 3.40% 6.10%

7.40%

Slightly important 3.40% 4.10% 10.80%

6.10% 8.80% 8.10% 6.10% 8.80%

10.80%

Not important 5.40% 5.40% 12.80%

3.86 3.80 3.85 3.93 3.82

3.45

Mean 4.03 4.16 3.41

1.14 1.21 1.23 1.15 1.25

1.26

Std. deviation 1.12 1.15 1.36

8 M. Ghanbarzadeh et al.

Analysis of Acceptance’s Level of Takaful Products in Iran

9

Table 5 Respondent’s acceptance level

I think takaful insurance is suitable for every customer I think the common insurance in the country is no different from takaful insurance All insurance companies must offer takaful insurance along with regular insurance I welcome the offer of takaful insurance in the country I think takaful insurance should be available for both Shia and Sunni people

Strongly agree 14.20%

Agree 23.60%

Undecided 42.60%

Disagree 10.80%

Strongly disagree 8.80%

Mean 3.24

Std. deviation 1.1

8.80%

22.30%

33.10%

23.60%

12.20%

2.92

1.14

20.90%

26.40%

32.40%

10.10%

10.10%

3.38

1.21

22.30%

30.40%

31.80%

7.40%

8.10%

3.51

1.16

32.40%

31.80%

27.70%

2.00%

6.10%

3.82

1.1

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.”

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Table 6 Reliability tests of questionnaire

Demand factors Awareness Acceptance

Cronbach’s alpha 0.894

Cronbach’s alpha based on standardized items 0.897

No. of items 9

0.879 0.739

0.877 0.738

12 5

To measure the internal consistency (homogeneous reliability) of the questionnaire, 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 locality), macroeconomic variables (such as inflation rate and return of other financial markets), price, services quality, Shariah view, marketing and advertisement variables, and product characteristics. Based on the findings, the respondents are somewhat 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 knowledge of customers.

Analysis of Acceptance’s Level of Takaful Products in Iran

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References Coolen-Maturi T (2013) Islamic insurance (Takaful): demand and supply in the UK. Int J Islam Middle East Financ Manag 6(2):87–104 Echchabi A, Ayinde Olorogun L, Azouzi D (2014) Islamic insurance prospects in Tunisia in the wake of the jasmine revolution: a survey from Customers’ perspective. J Islam Account Bus Res 5(1):15–28 Hamid MA, Rahman NMNA (2011) Commitment and performance: a case of Takaful (Islamic insurance) representatives in Malaysia. Aust J Basic Appl Sci 5(10):777–785 Kehinde LH, Sharofiddin A (2021) The level of acceptance and awareness of Takaful in Nigeria. J Islam Finance 10(1):46–58 Maiyaki AA, Ayuba H (2015) Consumers’ attitude toward Islamic insurance services (Takaful) patronage in Kano Metropolis, Nigeria. Int J Mark Stud 7(2):27–34 Muhammad I (2018) Takaful industry at crossroads: a critical examination. Kuala Lumpur. Available at: https://www.bis.org/review/r180514b.htm Razak MIM, Yusof RIMM, Ali WEJM (2013) Acceptance determinants towards Takaful products in Malaysia. Int J Humanit Soc Sci 3(17):243–252 Suma MA (2006) Asuransi Syariah dan Asuransi Konvensional, Cetakan: 1. Kholam Publishing, Jakarta Wan Abdul Aziz WA, Che Mat A, Engku Wok Zin EAM (2011) A study of contributing factors in Islamic motor insurance. Gaziantep Üniversitesi Sosyal Bilimler Dergisi 10(1):1–20

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 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

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Table 1 The most important differences between conventional insurance and takaful Takaful Donations are made through participant contributions. Pooled funds can be used to protect other participants from risk. It follows government and Sharia laws. The Takaful operator will only invest in Shariacompliant items that do not have any gharar (uncertainty), maisir (gambling and chance), and riba (interest). Profits are divided between managers and contributors of a takaful fund.

Conventional insurance The policyholder pays the premium to get coverage and the risk is transferred to the insurance company. It only obeys government laws. Insurance companies can invest in bonds, etc.

Profits are returned to shareholders.

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 conventional 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. . . Fig. 1 Report of the takaful industry worldwide, 2018. (Source: (Mihardjo et al. 2020))

General Insurance 33%

General Takaful 5%

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Family Takaful 7%

Life Insurance 55%

for takaful insurance are economic, education, interest rate, inflation, leverage, urbanization, sector deposit, and development, expected bankruptcy, Islamic banking/financial, demographic, company size, managerial ownership, tax considerations, 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 relationship with family takaful demand. Akhter and Khan (2017) revealed that inflation, 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, unemployment, pensions, stock, price of insurance, life expectancy, dependency ratio, financial 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 addition to identifying the factors that affect takaful demand, fills the gap in takaful literature in this field.

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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), development of Islamic finance/banking sector (E6), savings rate (E7), and the unemployment 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. . .

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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 (variables). 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: M=

12 nk ðk þ 1Þ

R2j –3n 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.

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Table 2 Descriptive statistics Indicators D1 D2 D3 D4 D5 D6 E1 E2 E3 E4 E5 E6 E7 E8 MS1 MS2 MS3 MS4 MS5 P1 P2 P3 P4 P5 P6 P7 P8 S1 S2 S3 S4

N 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34

Mean 3.5294 3.4118 3.4118 3.8824 3.4118 3.5882 3.8529 3.7353 3.5294 3.5294 3.7941 3.9706 3.6471 3.8529 4.2059 3.9118 4.1765 4.1765 4.3235 3.9706 4.2941 4.0882 3.7941 3.6765 3.7059 3.7059 4.1176 3.6176 3.9118 3.8235 3.9706

Std. deviation 1.07971 1.01854 1.04787 1.00799 1.07640 1.01854 1.07682 1.02422 1.10742 1.13445 1.06684 0.86988 1.12499 0.98880 0.84493 0.79268 0.93649 0.83378 0.72699 0.90404 0.75996 0.86577 1.03805 0.97610 1.00089 1.00089 0.64030 1.04489 1.02596 1.16698 0.90404

Minimum 1.00 1.00 1.00 1.00 1.00 1.00 1.00 2.00 1.00 1.00 1.00 2.00 1.00 1.00 2.00 2.00 2.00 2.00 3.00 2.00 3.00 2.00 2.00 1.00 2.00 2.00 3.00 1.00 1.00 1.00 2.00

Maximum 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Table 3 Friedman test results for demographic indicators Ranks D1 D2 D3 D4 D5 D6

Mean rank 3.46 3.19 3.19 4.29 3.24 3.63

Test statistics N Chi-square df Asymp. sig.

34 17.011 5 0.004

Identifying and Ranking Factors Affecting the Demand for Takaful. . .

19

Table 4 Friedman test results for economic indicators Ranks E1 E2 E3 E4 E5 E6 E7 E8

Mean rank 4.79 4.43 3.97 4.07 4.63 4.93 4.29 4.88

Test statistics N Chi-square df Asymp. sig.

34 8.702 7 0.275

Table 5 Friedman test results for marketing and sales indicators Ranks MS1 MS2 MS3 MS4 MS5

Mean rank 3.16 2.44 3.15 2.97 3.28

Test statistics N Chi-square df Asymp. sig.

34 15.093 4 0.005

Table 6 Friedman test results for the features of takaful insurance product indicators Ranks P1 P2 P3 P4 P5 P6 P7 P8

Mean rank 4.57 5.59 5.12 4.13 3.82 3.94 3.91 4.91

Test statistics N Chi-square df Asymp. sig.

34 28.482 7 0.000

Table 7 Friedman test results for social indicators Ranks S1 S2 S3 S4

Mean rank 2.10 2.71 2.54 2.65

Test statistics N Chi-square df Asymp. sig.

34 8.713 3 0.033

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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. . .

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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 products 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 urbanization, 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 investments 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 dependency ratio. The definition of this ratio is the average number of young or elderly family members who depend on primary income support. Supporting family dependents 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

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promises and provide quality services to win the trust of customers. Takaful operators 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 pandemic, 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 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

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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 leadership 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

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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 organizations 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,

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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 strategies 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

2.5

27

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

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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 indicators 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 1. Proactive:

Indicators Finding solution-related change problem Engagement Self-motivation Curiosity Collaboration

2. Competence

3. Nafsul Ihtisab

Rapid development of new skills and work procedures Ability to deal with different complex IT Ability to work with different tools and resources Ability to develop continuously Ability to improve knowledge and skill Willingness to help others in goodness Willingness to advise others in goodness Willingness to invite others toward goodness

References (Sherehiy and Karwowski 2014) (Sherehiy and Karwowski 2014) (Muduli and Pandya 2018; Patil and Suresh 2019) (Muduli and Pandya 2018; Patil and Suresh 2019) (Muduli and Pandya 2018; Qin and Nembhard 2015) (Breu et al. 2002) (Breu et al. 2002) (Petermann and Zacher 2022) (Sherehiy and Karwowski 2014) (Qin and Nembhard 2015)

QS (At-Taubah: 71), (Jihadussyufi and Hasanah 2019) QS (Ali Imron: 110), (Jihadussyufi and Hasanah 2019) QS. (Ali Imron: 110), (Jihadussyufi and Hasanah 2019)

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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 management 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.

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References Baran BE, Bible SC (2019) Agility and agile: an introduction for people, teams, and organizations (Society for Industrial and Organizational Psychology White Paper Series). https://static1. squarespace.com/static/5a66063790bade65840ba943/t/5d83e4297d51593a02acc632/1568924 715737/Ben%27s+SIOP+Paper.pdf Google Scholar Barclay A (2009) Employee change agents: the foundation for effective organizational change. Int Bus Res 2. https://doi.org/10.5539/ibr.v2n4p3 Breu K, Hemingway CJ, Strathern M, Bridger D (2002) Workforce agility: the new employee strategy for the knowledge economy. J Inf Technol 17(1):21–31. https://doi.org/10.1080/ 02683960110132070 Davis, Newstrom (1985) Human behavior at work; organizational behavior, International edn. Mc Graw Hill Book Company, Singapore Gilley A, McMillan HS, Gilley JW (2009) Organizational change and characteristics of leadership effectiveness. J Leadersh Organ Stud 16(1):38. https://link.gale.com/apps/doc/A205746070/ AONE?u=anon~f66d8560andsid=googleScholarandxid=0b724391 Griffin B, Hesketh B (2003) Adaptable behaviours for successful work and career adjustment. Aust J Psychol 55:65–73. https://doi.org/10.1080/00049530412331312914 Indriastuti D, Fachrunnisa O (2019) Triple psycho-organizational supports for change management process. Int J Econ Bus Account Res 3. https://doi.org/10.29040/ijebar.v3i04.613 Indriastuti D, Fachrunnisa O (2021) Achieving organizational change: preparing individuals to change and their impact on performance. Public Organ Rev 21:1–15. https://doi.org/10.1007/ s11115-020-00494-1 Jihadussyufi J, Hasanah U (2019) Amar Ma’ruf Nahi Munkar Dalam Pandangan Imam Al-Ghazali. AdZikra: Jurnal Komunikasi and Penyiaran Islam 10(2):244–260. https://doi.org/10.32678/ adzikra.v10i2.4238 Kotter JP (1995) Leading change: why transformation efforts fail. Harv Bus Rev 73:59–67 Muduli A, Pandya G (2018) Psychological empowerment and workforce agility. Psychol Stud 63: 276–285. https://doi.org/10.1007/s12646-018-0456-8 Patil M, Suresh M (2019) Modelling the enablers of workforce agility in IoT projects: a Tism approach. Glob J Flex Syst Manag 20(2):157–175. https://doi.org/10.1007/s40171-01900208-7 Petermann M, Zacher H (2020) Agility in the workplace: conceptual analysis, contributing factors, and practical examples. Ind Organ Psychol 13(4):599–609. https://doi.org/10.1017/iop. 2020.106 Petermann M, Zacher H (2022) Workforce agility: development and validation of a multidimensional measure. Front Psychol 13:841862. https://doi.org/10.3389/fpsyg.2022. 841862 Qin R, Nembhard DA (2015) Workforce agility in operations management. Surv Oper Res Manag Sci 20(2):55–69. https://doi.org/10.1016/jsorms.2015.11.001 Senge P, Kleiner A, Roberts C, Ross R, Roth G, Smith B (1999) The dance of change: the challenges to sustaining momentum in learning organizations. Doubleday, New York Sherehiy B, Karwowski W (2014) The relationship between work organization and workforce agility in small manufacturing enterprises. Int J Ind Ergon 44:466–473. https://doi.org/10.1016/ j.ergon.2014.01.002 Waterman RH, Peters Thomas J, Philips JR (1980) Structure is not organization, business horizon, online, http://www.tompoters.com/docs/structure Is Not Organization.pdf Yulianingsih D, Fachrunnisa O (2020) Encouraging behavior support to change: the role of individual readiness to change and commitment to change. International Journal of Economics, Business and Accounting Research 4. https://doi.org/10.29040/ijebar.v4i02.672

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 entrepreneurs make a living through these activities. But in business development, sometimes 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 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

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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 development 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 recipients, by providing accountable and transparent services. However, in the application to realize these goals, mustahiq sometimes encounters 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 2.1.1

Background Theory 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 productive 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 implementation 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 qualitative descriptive method of data analysis was used for the welfare of mustahiq entrepreneurs.

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4 Results and Analysis 4.1 4.1.1

Results Articles About Welfare Mustahiq

This section will present the outcomes of the literature using pre-established standards. 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 indicators 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. . .

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Table 1 List of journals No. 1

2

3

Journal Al-Shajarah: Journal of the International Institute of Islamic Thought and Civilization (ISTAC) Journal of Islamic Monetary Economics and Finance (JIMF) Iqtishadia (Journal of Islamic Economics and Business Studies)

4

At-Tawassuth: Journal of Islamic Economics

5

Small Business Economics

6

El-Qist: Journal of Islamic Economics and Business (JIEB)

7

Journal of Economics and Entrepreneurship

8

VISIONER: Journal of Regional Government in Indonesia

9

10

Scientific Papers-Series Management Economic Engineering in Agriculture and Rural Development Journal of Business Research

11

Journal of Management

Title The impact of zakat distribution on social welfare: A case study of Selangor zakat agencies, Malaysia Measuring Zakat Impact on Poverty and Welfare Using Cibest Model Zakat for Economic Empowerment (Analyzing the Models, Strategy, and Implications of Zakat Productive Program in Baitul Mal Aceh and Baznas Indonesia) The Effect of Productive Zakat of Medan City Baznas on Business Growth and Welfare of Mustahiq in Medan Timur District Surfeiting, the appetite may sicken: Entrepreneurship and happiness The Effect of Productive Zakat Utilization on Mustahiq Welfare in the Revolving Livestock Program of Baznas Gresik Regency The Effect of Productive Zakat Management and Human Resources Competence on Welfare The Influence of Competency of Village Facilitators and Effectiveness of Village Fund Allocation on Improving Community Welfare in Hand Cut and Alue Dama Villages, Setia District, Southwest Aceh Regency, Aceh Province Effect of Entrepreneurial Skills Acquisition on the Welfare of Agribusiness Households in Abia State, Nigeria Entrepreneurship and subjective wellbeing: Does the motivation to start up a firm matter? Why Entrepreneurs Often Experience Low, Not High, Levels of Stress: The Joint

Author (Sharofiddin et al. 2019)

Index Scopus

(Beik and Arsyianti 2016) (Furqani et al. 2018)

Scopus

(Sundari Tanjung 2019)

Google scholar

(Naudé et al. 2014)

Scopus

(Nafiah 2015)

Google scholar

(Musthofa 2019)

Google scholar

(Fauzie et al. 2020)

Google scholar

(Ariwodor and Agwu 2016)

Google scholar

(Amorós et al. 2021)

Scopus

(Baron et al. 2013)

Scopus

Google scholar

(continued)

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Table 1 (continued) No.

Journal

Title

12

Journal of Islamic Accounting and Business Research

13

Cogent Business and Management

Effects of Selection and Psychological Capital Analyzing the impact of productive zakat on the welfare of zakat recipients A mediating effect of business growth on zakat empowerment program and mustahiq’s welfare

Author

Index

(Mawardi et al. 2022)

Scopus

(Widiastuti et al. 2021b)

Scopus

Source: From various reference sources Table 2 Identification of Mustahiq’s welfare factors No. 1 2 3 4

Variable Productive zakat program Motivation Competence Business success

Source (Sharofiddin et al. 2019; Beik and Arsyianti 2016; Nafiah 2015; Widiastuti et al. 2021b; Mawardi et al. 2022) (Naudé et al. 2014; Amorós et al. 2021; Baron et al. 2013) (Musthofa 2019; Fauzie et al. 2020; Ariwodor and Agwu 2016) (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 entrepreneurial 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 management 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. . .

4.2.3

39

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) property protection (hifdz al-mal) to develop microenterprises that require expert management 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 involvement in Islamic social activities.

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4.2.5

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Maqasid Sharia-Based Mustahiq Entrepreneurial Welfare Model

On the basis of the above literature study, a conceptual model of mustahiq entrepreneur welfare is designed, made up of both independent and dependent variables. The independent variables include productive zakat program factors, Islamic entrepreneurial 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 entrepreneurial 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 enterprises 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 performance) 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. . .

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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 alleviation and empowerment of entrepreneurs, especially mustahiq recipients of assistance. For academics, this work opens up a new area for further exploration. To examine the suggested conceptual framework, especially the combination of variables 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, especially 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 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

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1 Introduction 1.1

Background Study

To improve the national economy, we can go through community economic independence. 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 exploitation 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. . .

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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, Indonesia, with a Muslim majority, has the potential to become the center of Islamic economic development in the world (Mu’awwanah et al. 2021).

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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 potential 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 2.1.1

Background Theory 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 economic development success. It can also be claimed that the main factor in community 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. . .

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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 materials, 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 incentives 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 entrepreneurship 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 development 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.

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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 simultaneously 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. . .

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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 principles of halal and thoyyib in their consumption behavior (Annisa 2019). The graphic data in Fig. 3 shows the economic potential of Islamic boarding schools.

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2.000 1.800 1.600 1.400 1.200 1.000 800 600 400 200 0 No Business unit Agribusiness

Cooperatives, SMEs & Islamic Economy

Plantation

Health Center

Arts Culture

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 economic 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 entrepreneurship practiced by the Islamic boarding schools also involves the local community. Giving Islamic boarding schools employment options, helping to lower unemployment, 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 institution that manufactures agricultural goods and sells them to the general public (Yulivan 2022).

Economic Empowerment of Islamic Boarding Schools Through Optimization. . .

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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 commodities 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

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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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Radjak LI, Hiola Y (2020) Accounting guidelines implementation: a study on economic development of Islamic boarding schools. J Asian Multicult Res Econ Manag Stud 1(2):54–60. https:// doi.org/10.47616/jamrems.v1i2.63 Sany UP (2019) Prinsip-Prinsip Pemberdayaan Masyarakat Dalam Perspektif Al Qur’an. Jurnal Ilmu Dakwah 39(1):32. https://doi.org/10.21580/jid.v39.1.3989 Simon H (1993) Hutan Jati dan Kemakmuran. Problematika dan Strategi Pemecahannya. Aditya Media Sugiono MAA, Indrarini R (2021) Kemandirian dan Pemberdayaan Ekonomi Berbasis Pesantren (Studi Kasus pada Pesantren al-Amanah Junwangi Krian). Jurnal Ekonomika Dan Bisnis Islam 4(1):88–98. https://doi.org/10.26740/jekobi.v4n1 Susilo A (2016) Model Pemberdayaan Masyarakat Perspektif Islam. FALAH: Jurnal Ekonomi Syariah 1(2):193–209 Syafa’at AM, Viphindartin S, Saleh M, Somaji RP (2020) Economic empowerment of communities around Islamic boarding school. Int J Adv Sci Technol 29(7) Syamsuri (2020) Strategi Pengembangan Ekonomi Berdikari di Pesantren Gontor Berbasis Pengelolaan Kopontren. Al-Intaj: Jurnal Ekonomi Dan Perbankan Syariah 6(1):37. https://doi. org/10.29300/aij.v6i1.2803 Syamsuri, Borhan JTB (2016) Eksistensi dan Kontribusi Pondok Modern Darussalam Gontor Dalam Pembangunan Sumber Daya Manusia. At Ta’Dib 11(2). https://doi.org/10.21111/attadib.v11i2.776 Talib MSA, Hamid ABA, Zulfakar MH (2015) Halal supply chain critical success factors: a literature review. J Islam Mark 6(5):41–49 Tieman M (2015) Halal clusters. J Islam Market 6(1):2–21. https://doi.org/10.1108/JIMA-052014-0034 Tieman M, Van der Vorst JGAJ, Ghazali MC (2012) Principles in halal supply chain management. J Islam Market 3(3) Yulivan I (2022) Economic empowerment in the framework of state Defense in Bandung District Islamic boarding schools. Technium Soc Sci J 31:388–396. https://doi.org/10.47577/tssj.v31i1. 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 investments, 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 projects 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 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 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 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

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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 introduced 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 allocation 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 Development 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

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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 projects 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

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Table 1 PPP projects in Indonesia Indonesia Financial close Active projects

Total PPP projects 140 123

Total investments US$67,274 million 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.

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61

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.

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Government Agency Offtaker Direct Agreement

PPP Contract

EPC Contractor

Financiers Project Company (Special Purpose Vehicle) Equity Investors

O&M Operator

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 procurement 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

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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 associated with economic growth. The Government’s National Medium-Term Development 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 Indonesia (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 projects worth a total of US$4.64 billion (approximately Rp64 trillion) were canceled.

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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 competitive 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, arguably, 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 projects. 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 perception and knowledge from relevant stakeholders are key factors to promote more

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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 characteristics as well as the government policies and regulations are also identified as the key barriers to the implementation of Islamic finance in the infrastructure projects. 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 population. 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

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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) infrastructure 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 longterm 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 organizations and institutions (Biygautane et al. 2019). Institutional PPPs enable the specific

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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 implementation 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 environment (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 understanding of the needs of the particular sector, skill in economic and financial appraisal of projects and PPPs, expertise in structuring privately financed infrastructure 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, particularly 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

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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 producer 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 challenges 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

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Table 2 PPP value chain variables Value chain Input

Variables Project physical characteristics Value for money (VfM) Legal and concession agreements Risk management Resource mobilization Procurement Shariah compliance

Process/ activities

Resource utilization Contract management

Output

Project construction and implementation Health, safety, and environment (HSE) Time, cost, and quality Learning and growth indicators Operation and maintenance Revenue driver Stakeholder satisfaction

Outcome

Environment and social governance Project outcome (economic and social outcome) Maslahah aspect

References Liu et al. (2014), Ahmad and Alawode (2017), and Uzunkaya (2017) World Bank (2012), Liu et al. (2014), Uzunkaya (2017), and World Bank (2017) World Bank (2012), Ahmad and Alawode (2017), and World Bank (2017) Kok (2014), World Bank (2017) and Xing and Guan (2017) Ahmad and Alawode (2017) World Bank (2017), Asian Development Bank (2018) Jalil (2006), Ayub (2007), Ahmad and Alawode (2017) Rashid et al. (2018) Minnie (2011), Yescombe (2011), Liu et al. (2014), Uzunkaya (2017) World Bank (2017), Adiyanti and Fathurrahman (2021) World Bank (2017), Asian Development Bank (2020) Hardcastle and Boothroyd (2003), Snodgrass (2013), World Bank (2017) Liu et al. (2014), Uzunkaya (2017), and Ahmad and Alawode (2017) Samii et al. (2002), Mohamad et al. (2018) World Bank (2017), Soltani and Firouzi (2020) Mu et al. (2011), World Bank (2017) Yuan et al. (2012), Wojewnik-Filipkowska and Węgrzyn (2019) World Bank (2017), Asian Development Bank (2020) Aundhe and Narasimhan (2016), Kwofie et al. (2016), and Uzunkaya (2017) 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

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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 characteristics, value for money (VfM), legal and concession agreements, risk management, resource mobilization, and procurement.

4.2

Project Physical Characteristics

Project physical characteristics entail the type of infrastructure assets as an underlying 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 provide 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)

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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 underlying 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.

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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

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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, developed institutions, financial resources, technology and technical measures, and efficiently functioning processes (Uzunkaya 2017). In a typical PPP structure, government and private sector investor have dissimilar stages of expertise, knowledge, 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 respective 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 enhancement 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):

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Design Build Finance Operate (DBFO). The responsibility of the private sector is to design, build, finance, and operate the infrastructure asset under the PPP concession (World Bank 2017). Build Operate Transfer (BOT). Under this regime, the private sector will construct, 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 infrastructure 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, transportation, 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 conditions under the financing agreements.

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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).

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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’ satisfaction 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 (WojewnikFilipkowska 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

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Theory of Value Chain PPP Project Life Cycle

Input

Process / Activities

Output

Outcome

Project Physical Characteristics Value for Money (VfM)

Islamic Finance Mobilization

Resource Utilization

Legal and Concession Agreements

Contract Management

Risk Management

Project Construction and Implementation

Resource Mobilization Procurement

Health, Safety, and Environment (HSE)

Time, Cost, and Quality Learning and Growth Indicators Stakeholder satisfaction Operation and Maintenance

Project Outcome (Economic and Social Outcome) Maslahah Aspect

Revenue Driver 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

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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 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 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 Organization 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 compare 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 postvaccination 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 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

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(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 government 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 hardship. 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, disruption 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

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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 Insurance 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 hospitalization 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

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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 COVID19 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/contribution 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

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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 premium 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 evaluating 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 distinction and resemblance (MokhtarianPour 2016). The data of takaful products collected from general takaful operator websites were listed and analyzed through documentation 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. 1 2 3

Takaful operators Etiqa General Takaful Berhad Syarikat Takaful Malaysia Am Berhad Zurich General Takaful Malaysia Berhad

Source: Author’s findings

COVID-19 coverage TripCare 360 Takaful Takaful mcClick MozzCare Z-CoVac Protect Takaful

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

4.1 4.1.1

Case Study 1: Etiqa General Takaful Berhad 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 unemployed. 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

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Table 2 Schedule of benefits in TripCare 360 takaful Benefit amount (RM) per person by level of cover International Summary of benefits (per any one accident/ Silver Gold Platinum incident, per trip) Domestic 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 4.2.1

Case Study 2: Syarikat Takaful Malaysia Am Berhad 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,

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Table 3 Benefits of Takaful myClick MozzCare

Benefits Dengue Zika

Sum covered Bronze plan RM 2000 RM 2000

Silver plan RM 3000 RM 3000

Gold plan RM 4000 RM 4000

Table 4 Benefits of Z-CoVac Protect Takaful Benefit A B C

Benefit description Accidental death and permanent disablement COVID-19 post-vaccination death COVID-19 post-vaccination inconvenience benefit

Basic cover (RM) 2000 2000 500

Upgraded cover (RM) 10,000 10,000 2000

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 4.3.1

Case Study 3: Zurich General Takaful Malaysia Berhad 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.

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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 COVID19-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-19approved 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 analysis 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 COVID19 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 COVID19 offered by general takaful operators were compared based on their Shari’ah

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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 lumpsum payment upon COVID-19 diagnosed (Takaful myClick MozzCare), and Zurich offered the benefit on hospitalization and death caused by the side effects of COVID19 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 implementation 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 restriction are completely abolished, other methodology for qualitative study such as interviews can be conducted to add more future studies on this topic. Some suggestions 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.

References Bowen GA (2009) Document analysis as a qualitative research method. Qual Res J 9(2):27–40. https://doi.org/10.3316/qrj0902027 Code Blue (2020). https://codeblue.galencentre.org/2020/03/12/who-declares-covid-19-pandemiccases-expected-to-climb/. Accessed 10 July 2021

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Eldaia M, Hanefah MM, Marzuki AB, Shatnawi SA (2021) Impact of COVID-19 on Malaysian Takaful business. The importance of new technologies and entrepreneurship in business development. In: The context of economic diversity in developing countries. Springer, Cham, pp 304–316. https://doi.org/10.1007/978-3-030-69221-6_22 Elengoe A (2020) COVID-19 outbreak in Malaysia. Osong Public Health Res Perspect 11(3): 93–100. https://doi.org/10.24171/j.phrp.2020.11.3.08 Fisher OC (2000) Awakening of a sleeping Giant—rediscovery of Takaful worldwide. Directory of Islamic insurance (Takaful). Inst Islam Banking Insurance Khairi KF, Laili NH, Kamarubahrin AF (2020) Market thoughts: potential implications of COVID19 on takaful scheme for mental health disorders. J Muamalat Islam Finance Res:49–58. https:// doi.org/10.33102/jmifr.v17i3.283 Life Insurance Association Malaysia (LIAM) (2020). https://www.liam.org.my/news/press_details. aspx?ps=91&ct=3. Accessed 11 July 2021 Life Insurance Association Malaysia (LIAM), Malaysian Takaful Association (MTA), & Persatuan Insurans Am Malaysia (PIAM) (2021). https://www.malaysiantakaful.com.my/media/mediarelease-press-statement/insurance-and-takaful-industry-covid-19-test-fund-calling. Accessed 11 July 2021 Mahadi NF, Ismail A (2021) Pandemic crisis: Malaysian Takāful market. Turkish J Islam Econ 8 (Special Issue):387–400. https://doi.org/10.26414/a2378 Malaysian Takaful Association (MTA) (2020). https://www.malaysiantakaful.com.my/sites/ default/files/2020-04/23032020-list-of-mta-member-companies-additional-measures-and-assis tant-for-covid-19.pdf. Accessed 13 July 2021 Meyer RD, Ratitch B, Wolbers M, Marchenko O, Quan H, Li D et al (2020) Statistical issues and recommendations for clinical trials conducted during the COVID-19 pandemic. Stat Biopharm Res 12(4):399–411. https://doi.org/10.1080/19466315.2020.1779122 Mokhtarianpour M (2016) Islamic model of Iranian pattern development process model. Pattern Islam Dev Iran 4(8):9–30 Patel S (2004) Takaful and poverty alleviation. Eur Econ Rev 48(5):1–21 Persatuan Insurans Am Malaysia (PIAM) (2021). https://piam.org.my/blog/2021/01/17/insuranceand-takaful-industry-commits-to-private-and-public-partnership-to-manage-the-covid-19-pan demic/. Accessed 2 Aug 2021 Saad NM (2012) An analysis on the efficiency of Takaful and insurance companies in Malaysia: a non-parametric approach. Rev Integr Bus Econ Res 1(1):33. http://irep.iium.edu.my/id/eprint/2 7270 Showkat N, Parveen H (2017) Non-probability and probability sampling. https://www. researchgate.net/publication/319066480 Stavrunova O, Yerokhin O (2008) Background risk and household portfolio choice: Bayesian analysis of a generalized selection model. Contributed paper presented at the 49th annual conference of the New Zealand Association of Economists, Wellington, New Zealand The Sundaily (2020). https://www.thesundaily.my/local/bnm-covid-19-affected-insurance-takafulparticipants-can-defer-premium-contribution-payments-KX2189972. Accessed 2 Aug 2021 The Sundaily (2021). https://www.thesundaily.my/local/life-insurers-and-family-takaful-operatorsextend-deferment-of-payment-DY7991849. Accessed 3 Aug 2021 Yin RK (2003) Case study research: design and methods, 3rd edn. SAGE Publications, Thousand Oaks, CA

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 Indonesia (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 stateowned 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 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

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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 population based on religion

Religion Islam Catholic Christian Protestant Christian Budha Hindu Kong Hu Cu Other

Unit People People People People People People People

Men 161,302 3085 6842 1045 47 30 5

Women 158,931 3489 7521 1117 56 26 1

Table 2 Cirebon city population based on religion 2018 Brand BSM BRI-S BNI-S BCA-S Bank Muamalat

TBI 27.6% 27.5% 27.0% 6.5% 4.2%

2019 Brand BRI-S BSM BNI-S BCA-S Bank Muamalat

2020 TBI 29.1% 21.2% 15.4% 15.4% 4.7%

Brand BRI-S BSM BNI-S BCA-S Bank Muamalat

2021 TBI 29.5% 20.3% 19.6% 11.2% 3.3%

Brand BRI-S BNI-S BSM BCA-S Bank Muamalat

TBI 29.2% 22.6% 19.9% 12.6% 4.2%

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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 services. 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 cooperatives, 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

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the fulfillment of needs and actual product loyalty, which is felt that in this increasingly 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 perceived 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.

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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 1 a

R .412a

R2 0.170

Predictors: (constant), Islamic branding

Adjusted R2 0.162

Std. error of the estimate 0.14451

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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 satisfaction (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 intervening 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 variables, 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

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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 accordingly 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 awareness 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 demonstrated 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 survival, which is the primary motivation for a company to attract and keep them. The

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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. Furthermore, 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.

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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 customer 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 challenging 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

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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, financial 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 marginalized 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 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

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1 Introduction Microfinance is a powerful instrument for eradicating poverty and can have a significant impact on national development. Offering financial services to the underprivileged 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 traditional 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. However, 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.

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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 significantly 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.

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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 organizations, 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,” “financial 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

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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 expectations 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

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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 agricultural 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 multilateral 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 collection 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

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140 high-income and developing nations, was created in 2017. The database contains 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 ownership. 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 promotes 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 investment, 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 experience 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

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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 inclusion 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 successful 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 connection 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

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Table 1 A structured approach to enhancing financial inclusion Level of income Low income Poverty (above poverty line) Extreme poverty (below poverty line)

Re-distributive pillar Hybrid solutions (applications with market-based solutions) Qard al Hasan, Zakah, and Waqf Zakah, Sadaqah, and Waqf

Risk-sharing pillar Micro-small-medium enterprises (MSME) Micro-finance (Murabaha, Musharikah), micro-takaful Collective risk sharing through 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 trickledown 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

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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 households 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 investments in their enterprises, health, and education. The availability of financial services 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 institutions 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 services 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

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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.

References Abdullahi A, Othman AHA, Kassim SF (2021) Inancial inclusion enhancement through the adoption of Islamic microfinance in Nigeria. Int J Ethics Syst 37(3):486–505. https://doi.org/ 10.1108/IJOES-02-2021-0040 Ahmad S, Lensink R, Mueller A (2020) The double bottom line of microfinance: a global comparison between conventional and Islamic microfinance. World Dev 136:105130. https:// doi.org/10.1016/j.worlddev.2020.105130 Ali AES, Ali KM, Azrag MH (eds) (2020) Enhancing financial inclusion through Islamic finance, vol II. Springer, London Ashraf MA (2018) Use of bounded rationality theory to understand participation of women in Islamic microfinance. Enterp Dev Microfinance 29(3):186–208. https://doi.org/10.3362/ 1755-1986.18-00005 Banna H, Mia MA, Nourani M, Yarovaya L (2022) Fintech-based financial inclusion and risktaking of microfinance institutions (MFIs): evidence from sub-Saharan Africa. Financ Res Lett 45:102149 Bharti N, Malik S (2022) Financial inclusion and the performance of microfinance institutions: does social performance affect the efficiency of microfinance institutions? Soc Responsib J 18(4): 858–874 Cameron A, Oak M, Shan Y (2021) Peer monitoring and Islamic microfinance. J Econ Behav Organ 184:337–358 Chen W, Yuan X (2021) Financial inclusion in China: an overview. Front Bus Res China 15(1): 1–21 Demirguc-Kunt A, Klapper L, Singer D, Ansar S (2018) The global Findex database 2017: measuring financial inclusion and the fintech revolution. World Bank Publications Hossain B, Abdullah MF (2019) The growth and contemporary challenges of Islamic microfinance in Bangladesh. Asian People J 2(1):45–53 Islam R, Ahmad R, Ghailan K, Hoque KE (2020) An Islamic microfinance approach to scaling up the economic life of vulnerable people with HIV/AIDS in the Muslim society. J Relig Health 59(3):1327–1343 Kassim SH, Rahman M (2018) Handling default risks in microfinance: the case of Bangladesh. Qual Res Financial Mark 10(4):363–380. https://doi.org/10.1108/QRFM-03-2017-0018 Milana C, Ashta A (2020) Microfinance and financial inclusion: challenges and opportunities. Strateg Chang 29(3):257–266 Muhammad NM (2022a) Islamic microfinance in Bangladesh: opportunities and challenges. Asia Proc Soc Sci 9(1):161–162 Muhammad NM (2022b) Why Bangladesh is falling behind in implementing Islamic microfinance system? A systematic literature review. KQT eJurnal 2(1):13–21 Muhammad NM (2022c) An Analysis of the Joint Liability Model in Bangladesh: Lessons for the Islamic Microfinance Institutions. Journal of Islamic Finance 11(2):149–160 Nabi MG, Islam MA, Bakar R, Nabi R (2017) Islamic microfinance as a tool of financial inclusion in Bangladesh. J Islam Econ Banking Finance 113(6218):1–28 Rohman PS, Fianto BA, Shah SAA, Kayani UN, Suprayogi N, Supriani I (2021) A review on literature of Islamic microfinance from 2010-2020: lesson for practitioners and future directions. Heliyon 7(12):e08549

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Shinkafi AA, Yahaya S, Sani TA (2019) Realising financial inclusion in Islamic finance. J Islam Market 11(1):143–160. https://doi.org/10.1108/JIMA-02-2017-0020 Uddin MN, Benabderrahmane O (2019) The effect of conventional and Islamic microfinance on poverty alleviation in Bangladesh. Studies 5(2):464–481 Uddin TA, Mohiuddin MF (2020) Islamic social finance in Bangladesh: challenges and opportunities of the institutional and regulatory landscape. Law Dev Rev 13(1):265–319. https://doi. org/10.1515/ldr-2019-0072 Uddin A, Chowdhury MAF, Islam MN (2018) Determinants of financial inclusion in Bangladesh: dynamic GMM & quantile regression approach. J Dev Areas 51(2):221–237 Umar UH, Baita AJ, Haron MHB, Kabiru SHK (2022) The potential of Islamic social finance to alleviate poverty in the era of COVID-19: the moderating effect of ethical orientation. Int J Islam Middle East Financ Manag 15(2):255–270. https://doi.org/10.1108/IMEFM-07-2020-0371

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 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

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1 Introduction Innovations in computer science have significant impacts on daily life through improving and transforming social interactions, communication, and human engagement. 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 environment 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 intelligence. 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

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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, customized 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 selfoptimization, 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 foundation 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

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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 accessible 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

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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 intelligence. 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 advantageous. 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 environments 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 development 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

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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 outstanding service in order to guarantee that they can utilize virtual reality services efficiently 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. Additionally, 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 government 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.

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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 interaction. 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. Largescale 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 application 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, cooperation, 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

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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, endangering 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

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the current product safety legislation that need to be filled, particularly in the Machinery Directive, according to the “Report on the Safety and Liability Implications 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 innovation 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 highimpact sectors and technologies including environment by focusing on AI’s contribution 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 investments 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,

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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.

References Barriga SES et al (2021) International New York academic research congress, BZT Akademi Yayinevi, p 592. ISBN 978-605-71461-2-0 Bisht D, Singh R, Gehlot A, Akram SV, Singh A, Montero EC et al (2022) Imperative role of integrating digitalization in the firms finance: a technological perspective. Electronics 11(19): 3252 Cheng S, Zhang Y, Li X, Yang L, Yuan X, Li SZ (2022) Roadmap toward the metaverse: an AI perspective. The Innov 3(5):100293 Emergen Research (2022) Worlds top 8 companies changing the dynamics of the finance sector with metaverse. https://www.emergenresearch.com/blog/worlds-top-8-companies-changingthe-dynamics-of-the-finance-sector-with-metaverse EU Commission (2021) European fit for the digital age: commission proposes new rules and actions for excellence and trust in artificial intelligence. https://ec.europa.eu/commission/presscorner/ detail/en/IP_21_1682 Humerick M (2017) Taking AI personally: how the EU must learn to balance the interests of personal data privacy & artificial intelligence. Santa Clara High Tech LJ 34:393 Huynh-The T, Pham QV, Pham XQ, Nguyen TT, Han Z, Kim DS (2022) Artificial intelligence for the metaverse: a survey. arXiv preprint arXiv:2202.10336 Kye B, Han N, Kim E, Park Y, Jo S (2021) Educational applications of metaverse: possibilities and limitations. J Educ Eval Health Prof 18 Morgan JP (2022) Opportunities in the metaverse. JP Morgan Mystakidis S (2022) Metaverse. Encyclopedia 2(1):486–497 Onik MMH, Chul-Soo KIM, Jinhong YANG (2019) Personal data privacy challenges of the fourth industrial revolution. In: 2019 21st international conference on advanced communication technology (ICACT). IEEE, pp 635–638 Park SM, Kim YG (2022) A metaverse: taxonomy, components, applications, and open challenges. IEEE Access 10:4209–4251 Samoili S, Cobo ML, Gomez E, De Prato G, Martinez-Plumed F, Delipetrev B (2020) AI watch. Defining artificial intelligence. Towards an operational definition and taxonomy of artificial intelligence

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

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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. Focusing on the application of mobile banking as a prominent part of banking digitalization 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 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

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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.

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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 fundamental 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 secondary 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 constraints, 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 & Investment Corporation (Malaysia) Berhad, AmBank (M) Berhad, Alliance Bank Malaysia 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 Commercial Bank of Cina (M) Berhad, Malayan Banking Berhad, OCBC Bank (Malaysia) Berhad, Public Bank Berhad, RHB Bank Berhad, Standard Chartered Bank Malaysia 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 customers 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,

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Bank Muamalat Malaysia Berhad (BMMB) introduced their mobile banking application known as i-Muamalat mobile application, which is equipped with a highsecurity 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 confidential. 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 samples 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 important 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.

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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 information 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 customers 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, selfservice 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)

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(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 introduce 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 providers, 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 applications. 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’

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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 Abdinoor A, Mbamba UO (2017) Factors influencing consumers’ adoption of mobile financial services in Tanzania. Cogent Bus Manag 4(1):1392273 Bakar RA, Aziz NA, Muhammud A, Muda M (2017) Perceived ease of use, security and privacy of mobile banking. Int J Bus Econ Law 13(2):56–62 Bank Islam Malaysia Berhad. https://www.bankislam.com/. Accessed 27 Dec 2022 Bank Muamalat Malaysia Berhad. https://www.muamalat.com.my/. Accessed 27 Dec 2022 Bank Negara Malaysia. https://www.bnm.gov.my/payment-statistics. Accessed 27 Dec 2022a Bank Negara Malaysia. https://www.bnm.gov.my/. Accessed 27 Dec 2022b Dixon R (1992) Islamic banking. Int J Bank Mark 10(6):32–37 Laukkanen T (2017) Mobile banking. Int J Bank Mark 35(7):1042–1043 Maali B, Casson P, Napier C (2006) Social reporting by Islamic banks. Abacus 42(2):266–289 Masrek MN, Uzir NA, Khairuddin II (2012) Trust in mobile banking adoption in Malaysia: a conceptual framework. J Mob Technol Knowl Soc:1–12 Shaikh AA, Karjaluoto H (2015) Mobile banking adoption: a literature review. Telemat Inform 32(1):129–142 Thaker MABMT, Amin MFB, Thaker HBMT, Pitchay ABA (2018) What keeps Islamic mobile banking customers loyal? J Islam Mark 10(2):525–542 Thaker MABMT, Pitchay ABA, Thaker HBMT, Amin MFB (2019) Factors influencing consumers’ adoption of Islamic mobile banking services in Malaysia: an approach of partial least squares (PLS). J Islam Mark 10(4):1037–1056

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 allocations for Islamic equity financing contracts in their financial asset creation. Further, 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 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

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Report of 1987” (United Nations 1987). The Brundtland Report harped on the sustainable development of the globe and set the tone for the Millennium Development Goals (MDG) and subsequently the Sustainable Development Goals (SDG) through which the UN intends to address myriad global crises that include socioeconomic crisis. The SDGs, among others, strive to reduce socioeconomic inequalities 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 Eradication 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). Biennial 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).

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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 Financial exclusion

2012 39.70%

2014 39.50%

2016 41.60%

2018 36.80%

2020 35.90%

Financial Exclusion 43.00%

41.60%

42.00% 41.00% 40.00%

39.70%

39.50%

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.

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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 enterpriselevel finance and distinct entry criterion should be used by Islamic financial institutions 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 debtbased 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:

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(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 underdeveloped or developing societies. (b) Growth-oriented: From the demand side, it encourages owners of small businesses to continue to improve their skills and talent to attract more investors or capital providers for a joint venture, thereby engendering innovation, and creativity. 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. Indebtedness, 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 government 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).

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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 simultaneously. 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 participation 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 impracticability 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 relationship 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).

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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 institutions 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

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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.

References Abdullah A (2022) Dr. Muhammad Nejatullah Siddiqi: the father of modern Islamic banking. https://www.muslimobserver.com/dr-muhammad-nejatullah-siddiqi-father-modern-islamicbanking/ Akosile TOI, Zain NRM (2023) In: Alareeni B, Hamdan A (eds) Deepening financial inclusion in Nigeria through Islamic financial offerings BT – innovation of businesses, and digitalization during covid-19 pandemic. Springer, pp 211–222 Alliance for Financial Inclusion (AFI) (2010) Second meeting of the Governors of developing eight (D-8) countries joint communiqué. https://www.afi-global.org/publications/922/Second-Meet ing-of-the-Governors-of-Developing-Eight-D-8-Countries-joint-communiqué Ayayi AG (2012) Micro-credit and micro-equity: the David and the Goliath of micro-enterprise financing. Econ Pap: A J Appl Econ Policy 31(2):244–254. https://doi.org/10.1111/j. 1759-3441.2011.00144.x Azmat S, Ghaffar H (2021) Ethical commitments and credit market regulations. J Bus Ethics 171(3):421–433. https://doi.org/10.1007/s10551-019-04391-6 CBN (2012) National financial inclusion strategy. https://www.cbn.gov.ng/out/2013/ccd/nfis.pdf CBN (2018) National financial inclusion strategy. In: Government of Nigeria (Issue October) D-8 (2010) Compilation of 7th D-8 summit July 2010, Abuja Nigeria. http://developing8.org/ image/Booklet/7th-D-8-Summit.pdf EFInA (2019) EFInA access to financial services in Nigeria 2018 survey (Issue January 2019). www.efina.org EFInA (2021) EFInA Access to Financial Services in Nigeria 2020 Survey. https://a2f.ng/wpcontent/uploads/2021/06/A2F-2020-Final-Report.pdf Kayed RN (2012) The entrepreneurial role of profit-and-loss sharing modes of finance: theory and practice. Int J Islam Middle East Financ Manag 5(3):203–228. https://doi.org/10.1108/ 17538391211255205 Khan H (2015) Some implications of debt versus equity-based financing in the backdrop of financial crises. J King Abdulaziz Univ: Islam Econ 28(1):165–180 Maikabara AA (2019) Why Islamic banks focus more on debt-based financing than equity-based which is more Shariah compliant? SSRN Electron J. https://doi.org/10.2139/ssrn.3492835 Maududi SAA (1947) Economic system of Islam. Islamic Publications Mohd Ariffin N, Hj Kassim S, Abdul Razak D (2015) Exploring application of equity-based financing through Mushārakah Mutanāqiṣah in Islamic banks in Malaysia: perspective from the industry players. Int J Econ Manag Account 23(2) Mohieldin M, Iqbal Z, Rostom A, Fu X (2012) The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries. Islam Econ Stud 20(2) Mondini G (2019) Sustainability assessment: from brundtland report to sustainable development goals. Valori e Valutazioni 2019(23):129–137 Naceur SB, Barajas A, Massara A (2015) OKUNDU_24.02.2018_Can islamic banking increase financial inclusion? IMF working paper, 1–41. https://doi.org/10.1016/j.siny.2015.07.001 Nations, U (1987) Our common future Office of the Senior Special Assistant to the President on Millennium Development Goals, O. Mdg (2020) Nigeria 2015 millennium development goals end-point report’ 3–4

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Onagun AI (2017) Musharakah financing as addressed in IFSB standard: a regulatory perspective. Springer Proc Bus Econ:783–793. https://doi.org/10.1007/978-3-319-43434-6_70 Sadiq R, Düzbakar Ö, Baqutayan SMS, Ariffin AS, Mohsin MIA, Mahdzir AM, Ascarya, National Bureau of Statistics, Prasetya SG, Abdullah M, Finance I, Issues L, Raimi L, Saibu A, Shokunbi MO, Naceur SB, Barajas A, Massara A, Junaidi E, Rizkiyah PD, Rusydiana A et al (2020) The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries. Int J Islam Middle East Financ Manag 2(1):1–22. https://doi.org/10.1108/ IMEFM-08-2013-0094 Shaikh SA (2017) Poverty alleviation through financing microenterprises with equity finance. 8(1): 87–99. https://doi.org/10.1108/JIABR-07-2013-0022 Siddiqi MN (1983) Banking without interest. The Islamic Foundation Siddiqi MN (1985) Partnership and profit-sharing in Islamic law. The Islamic Foundation The State House (2020) National social investment programme Yustiardhi AF, Diniyya AA, Amirah F, Faiz A, Subri NS, Kurnia ZN (2020) Issues and challenges of the application of Mudarabah and Musharakah in Islamic bank financing products. J Islam Financ 9(2):26–41

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 development 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 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

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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, payment 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).

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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 stakeholders 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

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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 products, 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

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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 exclusion: 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).

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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 vs. nonowners of bank accounts

Bank Accounts adults who own bank accounts non-owners of bank accounts

39%

61%

Fig. 2 Savers vs. non-savers

Savings

37 63

Savers non savers

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Fig. 3 Borrowers vs. nonborrowers

Loans

Borrowers 44 56

Fig. 4 The rate of financial literacy among adults in Somalia, Malaysia, and Norway

non Borrowers

80

71

60 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. Compared 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).

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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 transfer 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-20 948.1 667.2

1,025.10 712.3

1,222 845.7

1,500 1,000 500

145.8 222.7

0 Loans granted to the private sector

Deposits

Liabilies

Assets

Million US Dollars

Dec-21

Fig. 5 Change in the value of assets, liabilities, deposits, and loans granted to the private sector, between December 2020 and December 2021

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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 payments 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

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Mobile Money users in Somalia 78.2

64.3

75.4

70.4

100 50

%

82.7

0 secondary educaon or more

primary educaon or less

Age +25 and older

women

Men

Fig. 6 Mobile money users in Somalia

Product Mix by Volume

Product Mix by Value 4.4%

11.5%

0.8%

6.3%

14.0% 22.5%

49.9%

15.0% 30.4%

P2P transfers Disbursements Bill Payments Merchant Payment Airtime top-up International remittance

30.0% 10.3% 5.1%

155 m Million Transaction Monthly

Worth

$ 2.7 B

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).

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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.

References Ahmad AH, Green C, Jiang F (2020) MOBILE MONEY, FINANCIAL INCLUSION AND DEVELOPMENT: A REVIEW WITH REFERENCE TO AFRICAN EXPERIENCE. J Econ Surv 34(4):753–792. https://doi.org/10.1111/joes.12372 Arnold J, Gammage S (2019) Gender and financial inclusion: the critical role for holistic programming. Dev Pract 29(8):965–973. https://doi.org/10.1080/09614524.2019.1651251 Central Bank of Somalia (2021) Quarterly economic review. www.centralbank.gov.so Chithra N, Selvam M, Scholar MP, Head (2013) Determinants of financial inclusion: an empirical study on the inter-state variations in India Demirgüç-Kunt A, Klapper L, Singer D, Ansar S (2021) Financial inclusion, digital payments, and resilience in the age of COVID-19 Gas SA (2017) MOBILE MONEY, CASHLESS SOCIETY AND FINANCIAL INCLUSION: CASE STUDY ON SOMALIA AND KENYA. https://ssrn.com/abstract=3348257 Higgins D, Kendall J, Lyon B (2012) Mobile money usage patterns of Kenyan small and medium enterprises. http://direct.mit.edu/itgg/article-pdf/7/2/67/704905/inov_a_00129.pdf Iazzolino G (2015) Following mobile money in Somaliland. www.riftvalley.net

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Khandare VB (2019) FINANCIAL INCLUSION: EMPIRICAL STUDY OF BRICS COUNTRIES. https://ijsser.org/more2019.php?id=249. https://www.academia.edu/39477213/FINAN CIAL_INCLUSION_EMPIRICAL_STUDY_OF_BRICS_COUNTRIES Klapper L, van Oudheusden P (n.d.) Financial literacy around the world: INSIGHTS FROM THE STANDARD & POOR’S RATINGS SERVICES GLOBAL FINANCIAL LITERACY SURVEY. http://www.FinLit.MHFI.com Ozili PK (2021) Measuring financial inclusion and financial exclusion Shrier D, Canale G, Pentland A (2016) Mobile money & payments: technology trends Talom FSG, Tengeh RK (2020) The impact of mobile money on the financial performance of the SMEs in Douala, Cameroon. Sustainability (Switzerland) 12(1). https://doi.org/10.3390/ su12010183 The World Bank (2017) Mobile money in Somalia household survey and market analysis Triki T, Faye I (2013) Financial inclusion in Africa vodafone (2020) Vodacom and Safaricom joint venture to accelerate M-Pesa expansion. https:// www.vodafone.com/about-vodafone/what-we-do/consumer-products-and-services/m-pesa World Bank (2014) Global Findex database 2014: measuring financial inclusion around the world

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 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.

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 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

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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 distinction 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 Muslimmajority 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 socioeconomically 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

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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 highquality 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).

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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 convictions 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 investors, 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 infrastructure 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

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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.

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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 regulation, 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 suggestions 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

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Table 1 Country analysis of the implementation of Islamic microfinance Country Indonesia

Authors (year) Azmi, N. N. I. N. M., & Thaker, M. A. B. M. T. (2020). Literature survey on Islamic microfinance. Global Review of Islamic Economics and Business, 8(1), 023-033.

Indonesia

Wediawati, Besse. (2018). Sustainability of Islamic Microfinance in Indonesia: A Holistic Approach. Academy of Strategic Management Journal. 17. 32–45.

Indonesia

Satar, N., & Kassim, S. (2020). Issues and Challenges in Financing the Poor: Lessons Learned from Islamic Microfinance Institutions. European Journal of Islamic Finance, (Khan et al. 2018).

Malaysia

Kassim, S., Kassim, S. N., & Othman, N. (2019). Islamic Microfinance in Malaysia: Issues and Challenges. In Proceedings of the Second International Conference on the Future of ASEAN (ICoFA) 2017-Volume 1 (pp. 367–377). Springer, Singapore.

Issues and challenges 1. Governance and management issues where lack of Islamic banking expertise in managing Islamic microfinance 2. Difficulty in fully understanding the excessively complex models and Islamic banking procedures 3. Due to the absentee commissioners’ lack of internal control and the limited size of the company below the level allowed by the auditing (insufficient 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, regulation, and trustworthy reporting 6. No specific entity or agency that is monitoring and supervising the microfinance institutions 1. The issue of sustainability of the Islamic microfinance institutions—the disagreements between the stakeholders’ points of view is inextricably linked to the problem of IMFI sustainability 1. Insufficient human resources with good managerial skills to manage the performance of the institutions 2. Many officers and employees of Islamic financial institutions have low financial literacy and no background in finance and economic 1. Ethical concerns: commercialization and mission drift 2. Governance challenges: The restriction on deposit-taking activities and loan program inflexibility 3. Regulatory concerns: microfinance institutions as subsidized institutions 4. Governance issues: The need for centralized supervision and the separation of Islamic MFIs from mainstream banking (continued)

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Table 1 (continued) Country Pakistan

Yemen

Authors (year) Azmi, N. N. I. N. M., & Thaker, M. A. B. M. T. (2020). Literature survey on Islamic microfinance. Global Review of Islamic Economics and Business, 8(1), 023–033.

Issues and challenges 1. The issues related to sustainability and market outreach 2. Lack of awareness of Islamic microfinance 3. Low financial literacy 4. Constraint on religious beliefs 1. Issues related to regulation and supervision in Yemen 2. No separate law for the Islamic microfinance institutions that can legalize 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 institutions 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 establishment’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

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get funding from any other sources. On the other hand, the microfinance institutions 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 institutions 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.

References Alshebami AS, Khandare DM (2014) Microfinance in Yemen “challenges and opportunities”. Int J Manag Soc Sci 2(12):400–413 Alshebami AS, Khandare DM (2015) The role of microfinance for empowerment of poor women in Yemen. Int J Soc Work 2(1):36–44 Azmi NNINM, Thaker MABMT (2020) Literature survey on Islamic microfinance. Glob Rev Islam Econ Bus 8(1):023–033 Basu S, Roy A, Karmokar S (2020) Effectiveness of microfinance on household income generation strategy in the southwest region of Bangladesh. Asian J Soc Sci Leg Stud 2(3):56–62 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 microenterprise 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

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Elwardi D (2015) The role of Islamic micfrofinance in poverty alleviation: lesson from Bangladesh experience. MPRA paper no. 63665, posted 17 Apr 2015 08:16 UTC Gupta PK, Sharma S (2021) Literature review on effect of microfinance institutions on poverty in South Asian countries and their sustainability. Int J Emerg Mark Hermes N, Lensink R, Meesters A (2011) Outreach and efficiency of microfinance institutions. World Dev 39(6):938–948 Iqbal N, Tufail MS, Mohsin M, Sandhu MA (2019) Assessing social and financial efficiency: the evidence from microfinance institutions in Pakistan. Pak J Soc Sci (PJSS) 39(1) Kassim S, Kassim SN, Othman N (2019) Islamic microfinance in Malaysia: issues and challenges. In: Proceedings of the second international conference on the future of ASEAN (ICoFA) 2017, vol 1. Springer, Singapore, pp 367–377 Kasu B (2018) How does microfinance affect out–migration. Sociol Int J 2(6):452–454 Khan Z, Siddique M, Muhammad M (2018) Minimizing operating cost of Islamic microfinance institutions: a case of Akhuwat. J Islam Bus Manag 8(S) Khan RMN, Shafique O, Siddique N, Razzaq R, Hafeez RMZ (2021) A qualitative study on the socio-economic impact of participation in Akhuwat Islamic microfinance on poverty eradication and women empowerment. Bull Bus Econ (BBE) 10(4):176–185 Mokhtar SH, Nartea G, Gan C (2012) Determinants of microcredit loans repayment problem among microfinance borrowers in Malaysia. Int J Bus Soc Res (IJBSR) 2(7):33–45 Rafay A, Farid S, Yasser F, Safdar S (2020) Social collateral and repayment performance: evidence from Islamic micro finance. Iran Econ Rev 24(1):41–74 Satar N, Kassim S (2020) Issues and challenges in financing the poor: lessons learned from Islamic microfinance institutions. Eur J Islam Financ (15) Shaheen I, Hussain I, Mujtaba G (2018) Role of microfinance in economic empowerment of women in Lahore, Pakistan: a study of Akhuwat supported women clients. Int J Econ Financ Issues 8(2): 337 Siwar C, Talib BA (2001) Micro-finance capacity assessment for poverty alleviation: outreach, viability and sustainability. Humanomics Uddin MH, Hossain A (2020) Impact of microfinance on poverty alleviation: a study in the southern part of Bangladesh. Asian Bus Rev 10(2):81–86 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. Financial 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 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

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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 institutions, 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 government 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 regulatory authorities, nationally and internationally. This is to determine the level of financial literacy among the citizens and the population and create financial programs 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 wellbeing 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.

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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 empowerment. Financial literacy is the next stage and more complex step toward empowerment. 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

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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 legitimacy of the Islamic banking system. Moreover, they also found that educational attainment level among the masses, services quality, customer services, and legitimacy 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.

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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 knowledge. 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

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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 integrated 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 consumers. 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 contribute to a positive attitude and better practices on it.

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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 influences on the level of Islamic financial literacy (the dependent variable).

3.1 3.1.1

Hypotheses of the Study 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

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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 performance, 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:

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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 wellbeing) 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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Rahman SA, Tajudin A, Tajuddin AFA (2018b) The significant role of Islamic financial literacy among college students in Malaysia. Int J Manag Stud Res 6(11):46–50 Rahman M, Isa CR, Masud MM, Saker M, Chowdhury NT (2021) The role of fnancial behaviour, fnancial literacy, and fnancial stress in explaining the fnancial well-being of B40 group in Malaysia. https://doi.org/10.1186/s43093-021-00099-0 Schagen S, Lines A (1996) Financial literacy in adult life: a report to the NatWest Group charitable trust Steen A, MacKenzie D (2013) Financial stress, fnancial literacy, counselling and the risk of homelessness. Austral Acc Bus Finance J 7(3):31–48 Sujaini (2022) Financial literacy. https://cleartax.in/g/terms/financial-literacy Susanti (2013) Faktor-Faktor yang Mempengaruhi Perilaku Keuangan Siswa SMA di Surabaya Wagland SP, Taylor S (2009) When it comes to financial literacy, is gender really an issue? Australas Acc Bus Financ J 3(1) Yew SY, Yong CC, Cheong KC, Tey NP (2017) Does financial education matter? Education literacy among undergraduates in Malaysia. Inst Econ 9(1):43–60 Zaman Z, Mehmood B, Aftab R, Siddique MS, Ameen Y (2017) Role of Islamic financial literacy in the adoption of Islamic banking services: an empirical evidence from Lahore, Pakistan. J Islam Bus Manag 7(2):230–247. https://doi.org/10.26501/jibm/2017.0702-00 Zulaihati S, Susanti S, Widyastuti U (2020) Teachers’ financial literacy: does it impact on financial behaviour? Manag Sci Lett 10(3):653–658

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 Councils (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 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

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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 distinction 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 directions for microfinance. This impact study on microfinance may significantly contribute toward the sustainable and socially impactful growth of the Islamic finance

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industry, especially in achieving the maqasid Shariah and value-based intermediation (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 “collateral- 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 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 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 semistructured interview with the representatives of State Islamic Religious Councils (SIRCs) and Islamic financial institutions. The study also refers to several reports on

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Table 1 Selected literature on impact study of microfinance No. 1.

Reference Wibowo, K. A. (2014). Providing financial services to people who do not qualify banking in Indonesia. FINANCIAL INCLUSIVENESS OF THE POOR: ‘BEYOND MICROFINANCE’

2.

Abdullah, R. (2014). Islamic Microfinance Institution in Brunei Darussalam. FINANCIAL INCLUSIVENESS OF THE POOR: ‘BEYOND MICROFINANCE’

3.

Rahman, R.A. & Siwar, C., (2018). Chapter 5: Impact of Microfinance on Income Improvement and Poverty Reduction: Malaysian experience. Book: Financial Inclusiveness of the Poor Beyond Microfinance. IIUM PRESS Cokrohadisumarto, W.M. (2018). Chapter 2: Enhancing the role of Islamic Microfinance Institutions in Alleviating Poverty. Book: Financial Inclusiveness of the Poor Beyond Microfinance. IIUM PRESS Diniyya, A. A. (2019). Development of waqf based microfinance and its impact in alleviating the poverty. Ihtifaz: Journal of Islamic Economics, Finance, and Banking, 2(2), 107–124.

4.

5.

Impact of microfinance • Significant number of microenterprises and contribute to the employment rate in Indonesia • Does not impact the financial crisis and 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. • Microfinance as a mechanism to alleviate poverty • Empowering economic development • 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 • Analyze the socioeconomic profile of borrowers, learn history, size, and enterprises, impacts on employment, income, expenditure, savings, assets, and perceptions on livelihood and satisfaction on the operation of AIM • Reducing poverty • Improving the household income

• Able to contribute to the GDP • Play an important role in the socioeconomic development

the impact measurement of Islamic microfinance published by Islamic financial institutions.

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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:

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Here are the impacts of microfinance on the individual data extracted from the Sustainability Report 2021 by Sadaqa House.

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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 development 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 microenterprise 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 investment 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 conventionally. 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 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

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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 postretirement 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 accumulation 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 retirement 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

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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 Employment 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).

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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 administration) 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

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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 Investment 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 sustainable 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 personal 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

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Table 1 Differences in the scheme of the pension fund system in Malaysia and Indonesia Malaysia (employee provident fund (EPF)) • National mandatory savings—private sector • Contribute longer • More careful de-accumulation of assets Retirement age: 60 years (Hussein 2019) Employee Provident Fund Act 1991 23% of employee salary • 11% employees • 12% ≤ company Formula: Dues percentage × work period × months × last salary Assumption: Total funds in retirement account 23 % × 28 × 12 × 10.000.000 = 772.800.000 Account I 70 % × 772.800.000 = 540.960.000 Account II 30 % × 772.800.000 = 231.840.000 “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 age 55 years 120,000 (EUR 24,600) = Rp. 403,719,708.19 Before: 3. Withdrawal • Monthly payments/ options withdrawals from savings (November After: 1, 2007) • Flexibility < • Withdraw part of the savings at any time – Prevent members from withdrawing money at once – Not practical in longterm financial security – (Research) withdrawal at once spent within 10 years; life expectancy 75 – Accumulated savings are spent too quickly and prematurely

Indonesia (BPJS Ketenagakerjaan) There are no nationally binding rules

Retirement age: 56 years 3% of employee salary • 1% employees • 2% company Formula: Dues percentage × work period × months × last salary Assumption: Total pension fund contribution 3 % × 28 × 12 × 10.000.000 = 100.800.000 Formula: Maximum withdrawl × last salary Maximum benefit earned per month 40 % × 10.000.000 = 4.000.000

The total savings of employees during the retirement deduction is unknown at the end

Maximum withdrawal of 40% of accumulated pension contributions

(continued)

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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 → housing, 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.

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

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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.

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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 government, 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.

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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 recognized that there are still many problems. The pension fund system in Indonesia is also the lowest, far below Malaysia. Therefore, digital, green investment, and Shariabased 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.

References Ahmed YA (2020) Examining the financial performance of pension funds focused on sectors related to sustainable development goals. Int J Sustain Develop World Ecol 27(2):179–191 Ali I, Azman A, Hatta ZA, Islam MR, Hussain AB (2020) Is Malaysia’s pension scheme sufficient to secure the quality of life for the elderly? Soc Work Soc 18(2) Bank Syariah Indonesia (BSI) (2022) https://www.bankbsi.co.id/ Della Croce R, Stewart F, Yermo J (2011) Promoting longer-term investment by institutional investors: selected issues and policies. OECD J: Financ Mark Trends 2011(1):145–164 Huda FA (2022) The use of simultaneous equation model (SEM) in understanding the dynamic relationships between economic openness and real disposable personal income on inflation: the Indonesian experience. Muslim Bus Econ Rev 1(1):87–108 Huda FA, Kurnia A (2022) Triangle Syariah justice ecosystem: constructing business model of pension fund. Muslim Bus Econ Rev 1(2):153–182 Hussein AS (2019) Manajemen Bisnis Keluarga. Universitas Brawijaya Press Kasri RA, Haidlir BM, Prasetyo MB, Aswin TA, Rosmanita F (2020) Opportunities and challenges in developing Islamic pension funds in Indonesia. ETIKONOMI 19(2):311–322 Meilani T (2015) Sistem Pengelolaan Dana Pensiun Pada PT Bank Muamalat Indonesia, Tbk (Bachelor’s thesis, Fakultas Ilmu Dakwah dan Ilmu Komunikasi Universitas Islam Negeri Syarif Hidayatullah Jakarta 1437 H/2016 M) Otoritas Jasa Keuangan (OJK) (2022) Syariah Pension Fund. www.ojk.go.id. Retrieved March 22, 2022 at 13.30 Purba S (2022) The effectiveness of employee performance on the satisfaction of BPJS participants in obtaining social security funds. J Indonesian Manag (JIM) 2(2):301–306 Purnamasari SD, Rani LN (2019) Risk management of DPLK pension funds of Sharia financial institutions (Evidence from a DPLK pension funds of Muamalat Sharia financial institutions). KnE Soc Sci:469–491 Yandani NI (2016) Strategi Komunikasi BPJS Ketenagakerjaan KCP Pangkep dalam Menyosialisasikan Program Jaminan Pensiun (Doctoral dissertation, Universitas Islam Negeri Alauddin Makassar)

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 financing 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 conventional 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 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

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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 2.1.1

Background Theory 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.

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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.

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Literature Studies

Mutamimah and Saputri (2022) study findings demonstrated that murabahah financing 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)

Musyarakah (MS)

Fig. 1 Conceptual framework

NPF

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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: H 2: H 3: H 4: H 5: H 6:

3.3

Murabahah financing has a positive and significant effect on NPF in the long term. Murabahah financing has a positive and significant effect on NPF in the short term Mudharabah financing has a positive and significant effect on NPF in the long term. Mudharabah financing has a positive and significant effect on NPF in the short term. Musyarakah financing has a positive and significant effect on NPF in the long term. Musyarakah financing has a positive and significant effect on NPF in the short term.

Method

The method used in this research was descriptive and quantitative analysis. Descriptive analysis is used for obtaining clarity regarding the characteristics and descriptions 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).

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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 level significance (α = 0.05) and in partial show that there Table 2 Hypothesis test simultaneous result R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Table 3 Hypothesis test partial result

0.932612 0.913743 0.089966 0.202346 37.23071 49.42629 0.000000

Variable C PSR ZPR EDR DEWR IIVIR IICIR ISR

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat

Coefficient -411.5271 1.32E-06 -6.13E-05 0.019922 -8.07E-09 2.036525 414.4668 -2.358964

Std. error 1373.145 0.000130 0.000771 0.067140 2.44E-07 5.666116 1372.587 0.140639

1.488375 0.306323 -1.771558 -1.408769 -1.649491 2.120589

t-Statistic -0.299697 0.010210 -0.079559 0.296723 -0.033131 0.359422 0.301960 -16.77313

Prob. 0.7669 0.9919 0.9372 0.7691 0.9738 0.7223 0.7652 0.0000

Islamicity and Reporting Performance on Islamic Banking. . .

(b)

(c)

(d)

(e)

(f)

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is positive influence but no significant. This thing proves that profit sharing ratio has no effect on Performance Finance. 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. 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 Distribution Ratio has no effect on Performance Finance. Test Hypothesis Partial Director Employee Welfare Ratio to Performance 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. 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 Investment has no effect on Performance Finance. Test Hypothesis Partial Islamic Income vs Non-Islamic Income to Performance Finance This partial hypothesis is test of the influence Islamic Income vs Non-Islamic Income Ratio to Performance Finance. Test first produces coefficient 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 Performance Finance.

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Table 4 Coefficient determination test result R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.932612 0.913743 0.089966 0.202346 37.23071 49.42629 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter Durbin-Watson stat

1.488375 0.306323 -1.771558 -1.408769 -1.649491 2.120589

(g) Test Hypothesis Partial Islamic Social Reporting to Performance Finance Test hypothesis by partial is testing influence ratio for results to Performance 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 independent 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 Determination 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 4.2.1

Analysis Panel Data Regression Test

A statistical method for testing the relationship between the independent and dependent variables. The panel data regression equation is as follows:

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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 performance 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 performance 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.

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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-COVID19) 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 postCOVID-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

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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 Andreny & Putri (2017) 2018 Islamicity_Financial_Performance_Index_in_Indonesi 2(3) Azhari AR, Wahyudi R (2020) Analisis Kinerja Perbankan Syariah di Indonesia : Studi Masa 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 Reporting Terhadap Kinerja Keuangan Perbankan Syariah Di Indonesia. Invoice: Jurnal Ilmu Akuntansi 3(1):30–43. https://doi.org/10.26618/inv.v3i1.4971 Khasanah AN (2016) Pengaruh Intellectual Capital Dan Islamicity Performance Index Terhadap Kinerja Keuangan Perbankan Syariah Di Indonesia. Nominal, Barometer Riset Akuntansi Dan Manajemen 5(1):119–127. https://doi.org/10.21831/nominal.v5i1.11473 Mayasari FA (2020) Pengaruh Islamicity Performance Index Terhadap Profitabilitas Bank Umum Syariah Indonesia Periode 2014-2018. Kompartemen: Jurnal Ilmiah Akuntansi 18(1):22–38. https://doi.org/10.30595/kompartemen.v18i1.6812 Nasution AA (2018) Pengaruh Kepatuhan Syariah, Tata Kelola Perusahaan Islam dan Pelaporan Sosial Islam Terhadap Kinerja Keuangan dengan Ukuran Perusahaan sebagai Moderasi pada Bank Syariah, Repositori Institusi Universitas Sumatera Utara (RI-USU), Thesis Magister (1158). https://repositori.usu.ac.id/handle/123456789/10028 Tahliani H (2020) Tantanganperbankan Syariah Dalam Menghadapi Pandemi Covid-19. Madani Syariah 3(2):92–113 Trimulato et al (2021) Strategi Bisnis Bank Syariah di Masa Pandemi Covid 19 Pada PT. Bank 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 and Zurina Shafii

, Nurdianawati Irwani Abdullah,

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 governance 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 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

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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 discusses 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 Shariah 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 guidelines 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

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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 institutional 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 organizational 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 imitation procedures are caused by the uncertainty that deals with organizational technologies, 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 pressure resulting from professionalization that socializes personnel within the organization 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 science 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

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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 institutional 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 governance 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.

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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 sufficiency 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 recordings, 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 organization’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.

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Table 1 Details of interviewees Interviewees Respondent 1 Respondent 2 Respondent 3 Respondent 4 Respondent 5 Respondent 6 Respondent 7 Respondent 8 Respondent 9 Respondent 10 Respondent 11 Respondent 12 Respondent 13 Respondent 14 Respondent 15 Respondent 16 Respondent 17 Respondent 18 Respondent 19 Respondent 20 Respondent 21

Gender Male

Highest qualification Bachelor’s degree

Role Shariah auditor

Years of experience in industry 16–20 years

Female

Bachelor’s degree

Shariah auditor

6–10 years

Female

Bachelor’s degree

Shariah auditor

6–10 years

Male

Bachelor’s degree

16–20 years

Male

Master’s degree

Chief of Internal Auditor Shariah auditor

11–15 years

Male

Bachelor’s degree

Shariah auditor

6–10 years

Male

Bachelor’s degree

Shariah auditor

11–15 years

Male

Bachelor’s degree

Shariah auditor

11–15 years

Female

Bachelor’s degree

Shariah auditor

6–10 years

Male

Master’s degree

Shariah auditor

11–15 years

Female

Doctorate

Shariah committee

16–20 years

Female

Doctorate

Shariah committee

6–10 years

Male

Doctorate

Shariah committee

6–10 years

Female

Doctorate

Shariah committee

16–20 years

Male

Doctorate

Shariah committee

11–15 years

Male

Doctorate

Shariah committee

16–20 years

Female

Doctorate

Shariah committee

11–15 years

Male

Doctorate

Shariah committee

11–15 years

Male

Doctorate

Shariah committee

11–15 years

Male

Doctorate

Shariah committee

6–10 years

Male

Doctorate

Shariah committee

11–15 years

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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 organizations. These pressures are characterized by authority and coercive power. Regulations 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

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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 International Standards for the Professional Practice of Internal Auditing (IPPF)

100

0

100

0

81.8

Organization’s internal audit manual

18.2

Organization’s shariah audit manual

0

81.8 20

Yes

18.2

40

60

80

100

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)

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. . . 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 reputational 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

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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 uncertainty. 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:

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The function shall be performed by internal auditors, who have acquired adequate Shariahrelated 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 operational 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

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audit and when performing Shariah audit exercise. Audit charter is a very important document as it defines internal audit’s purpose, authority, responsibility, and position 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

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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 normative 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 demonstrated 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 continuous professional development, besides ongoing coaching practiced by the financial

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Knowledge Shariah

Skills

Others

• Islamic banking • Fiqh Muamalat • Auditing • Conventional banking • Auditing • Communication • Analytical thinking • Report writing • Negotiation skills when dealing with auditee • Characteristics • Willng to learn • Good attitude/ strong character • 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 qualification (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

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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 policymaker perspectives on this matter. Future research could also evaluate the effectiveness 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.

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References Ab. Ghani NL, Rahman ARA (2015) An analysis of Shariah audit practices in Islamic Banks in Malaysia. Jurnal pengurusan 43:107–118 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 Abdul Rahman NH, Matsuki N, Kasim N, Osman MR (2018) Risk Based Internal Shariah Audit Practices in the Islamic Bank. J Soc Sci Res 5:954–961 Ali NAM (2018) Challenges in recruiting specialized internal auditors: case study evidence of Islamic Financial Institution in Malaysia. Int J Acad Res Bus Soc Sci 8(1):60–74 Ali NAM, Kassim N (2019) Talent management for shariah auditors: case study evidence from the practitioners. Int J Financial Res 10(3):252–266 Ali NAM, Shafii Z, Shahimi S (2020) Competency model for Shariah auditors in Islamic banks. J Islam Account Bus Res 11(2):377–399 Al-Twaijry AAM, Brierley JA, Gwilliam DR (2003) The development of internal audit in Saudi Arabia: An institutional theory perspective. Crit Perspect Account 14(5):507–531 Bank Negara Malaysia (BNM) (2019) Shariah Governance Policy Document, Malaysia Deloitte (2015) Global Report 2015. Retrieved from https://www2.deloitte.com/nz/en/pages/aboutdeloitte/articles/global-report-2015.html DiMaggio PJ, Powell W (1983) The iron cage revisited: institutional isomorphism and collective rationality in organisational fields. Am Sociol Rev 48(2):147–160 Institute of Internal Auditors (2019) International Standards for the Professional Practice of Internal Auditing Karbhari Y, Alam MK, Rahman MM (2020) Relevance of the application of institutional theory in Shariah governance of Islamic banks. PSU Res Rev Kassim N, Sanusi ZM (2013) Emerging issues for auditing in Islamic Financial Institutions: Empirical evidence from Malaysia. J Bus Manag 8(5):10–17 Kassim N, Sanusi ZM, Mutamimah T, Handoyo S (2013) Assessing the current practice of auditing in IFIs in Malaysia and Indonesia. Int J Trade Econ Financ 4(6):414–418 Meyer JW, Rowan B (1977) Institutional organizations: formal structure as myth and ceremony. Am J Sociol 83(2):340–363 Mihret DG, Yismaw AW (2007) Internal audit effectiveness: an Ethiopian public sector case study. Manag Audit J 22(5):470–484 Mihret DG, James K, Joseph MM (2010) Antecedents, and organizational performance implications of internal audit effectiveness: some propositions and research agenda. Pac Account Rev 22(3):224–252 Mohajan HK (2018) Qualitative research methodology in social sciences and related subjects. J Econ Dev Environ People 7(1):23–48 Mohd Fauzi PNFN, Abdul Rashid K, Sharkawi AA, Hasan AF, Aripin S, Arifin MA (2016) Takaful: A review on performance, issues, and challenges in Malaysia. J Sci Res Dev 3(4): 71–76 Mohd Zamil NA (2014) An empirical investigation into the problems and challenges facing Islamic banking in Malaysia. Unpublished Thesis. Cardiff University, Cardiff Puad M, Aimi N, Shafii Z, Abdullah NI (2020) The practices of risk-based internal shariah auditing within Malaysian takaful operators: a multiple case study. Int J Acad Res Bus Soc Sci 10(7): 52–71 Scott WR (1987) The adolescence of institutional theory. Adm Sci Q 32:493–511 Shafii Z, Salleh S, Mohd Hanefah HM, Jusoff K (2013) Human capital development in Shariah audit. Middle East J Sci Res 13:28–34 Utami H (2016) A case study of internal auditing practice in a State-Owned Enterprise in Indonesia. Unpublished Thesis, University of Wollongong Australia

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Yahya Y, Mahzan N (2012) The role of internal auditing in ensuring governance in Islamic financial institution (IFI). Paper presented at the 3rd International Conference on Business and Economic Research (3rd ICBER 2012), Bandung Yazkhiruni Y, Nurmazilah M, Haslida AH (2018) A review of shariah auditing practices in ensuring governance in Islamic Financial Institution (IFIs)-a preliminary study. Adv Soc Sci Res J 5(7): 196–210 Yussof SA (2013) Prospects of Sharīʿah Audit Framework for Islamic Financial Institutions In Malaysia. Islam Civiliz Renew 4(3):80–102 Zakariyah H, Ahmed AA (2019) Contemporary Issues and challenges Faced by the Takaful industry in Malaysia: special reference to shariah. Al-Hikmah J 2(4):124–135

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 management 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 hospitals; 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 Concordance 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 conventional 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 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

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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/DSNMUI/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 Performance Assessment of RSI Sultan Agung Semarang through the Maqhashid Syariah Concordance (MSC) Approach. In general, this paper aims to assist the management

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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. 2. 3. 4.

The work plan drawn up meets the principles of fairness. Hospital rates are fair to patients, doctors, and hospitals. Recommendations from the Sharia Committee on policies taken by the hospital. 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 performance is using the sharia approach, namely, using the Maqhashid Sharia Concordance (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,

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Table 1 Budget fairness ratio Year 2017 2018 2019 2020 2021

Da’wah budget 1.991.485.000 2.833.776.301 4.193.121.56 3.967.186.068 1.949.724.420

SUd 20.476.342.072 27.806.036.182 49.531.39.518 54.663.605.125 54.663.605.125

Ratio (%) 9.73 10.19 8.47 7.26 3.57

Table 2 Tariff fairness ratio Year 2017 2018 2019 2020 2021

Complaint by doctor (2 × 6)/128 (5 × 6)/130 (2 × 6)/130 (5 × 6)/136 (5 × 6)/138

Complain by patient 0 0 0 0 0

Ratio (%) 9.38 23.08 9.23 22.05 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.

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Table 3 Sharia committee engagement ratio Year 2017 2018 2019 2020 2021

3.3

Recommendation 1 2 1 1 1

Number of letters 1 2 1 1 1

Ratio (%) 100 100 100 100 100

Recommendation from the Sharia Committee on Policies Taken by Hospitals

The Sharia Committee has the task of assessing, supervising, and providing recommendations 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 collaboration with RSI Sultan Agung Semarang are as follows:

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Table 4 Ratio of cooperation with Islamic banks Year 2017 2018 2019 2020 2021

Number of Islamic banks 5 5 5 6 5

Number of cooperation institutions 9 10 10 10 8

Ratio (%) 56 50 50 60 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 Alhamid T (2019) Perkembangan perbankan syariah (2009-2018) di Indonesia dan sumber daya 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, Batusangkar International Conference I (2016) Susanti E, Murnita S (2017) Analisis Kinerja Keuangan Pada Rumah Sakit Ibu Dan Anak Tahun 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. Descriptive 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 mechanism 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 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

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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 customers. 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 potential 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 development institutions that mobilize the individual’s savings and care to support monetary needs of the country. The State Bank of Pakistan (SBP) is solely responsible 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.

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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

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learning of the customer’s needs and expectations, and by meeting their requirements, 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 longterm 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 preferences. 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 reliability, responsiveness, accessibility, politeness, conversation, reliability, and stability in addition to tangibles. It is very difficult for a business entity to identify the customer

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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 2.4.1

Dimensions of e-SQ 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

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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 commercial banking, the comparative environment of banks affects satisfaction of a customer. 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 satisfaction 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 specifically 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

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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 Reliability Ease of use Efficiency Privacy Responsiveness Customer satisfaction

N 152 152 152 152 152 152

Mean 3.7617 4.5954 4.3654 3.3438 4.4450 3.9498

Std. deviation 0.70561 0.89240 0.95260 0.60835 0.37465 0.74186

Skewness -1.087 -0.475 -0.908 0.175 0.859 -0.372

Kurtosis 2.463 -2.483 3.400 -1.182 -1.126 -1.961

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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 evaluates the impact of e-SQ dimensions such as reliability, privacy, ease of use, efficiency, 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

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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 satisfaction 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 understanding 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 generally 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, involvement 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 wellA. Kurnia (✉) Universitas Islam Internasional Indonesia, Depok, Indonesia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 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

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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 realization 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 application’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 promoting 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.

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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 phenomenon 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 indicators that reflect economic structure such as GDP, unemployment, inflation, investment, infrastructure, population, and labor (Erlando et al. 2020). The statement said that poverty and inequality would decrease when financial inclusion fosters economic 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 standards 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

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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 advertisement, 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).

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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 everchanging 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 promoting 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

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the right sectors. This design translates into indicators for measuring the performance 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

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Table 1 BSI Mobile and Maqashid Sharia Menu/Maslalah Dharuriyat

Categories Ad-Din

An-Nafs Al-Aql

An-Nasl

Al-Maal

Hajiyat

Tahsiniat

BSI features 1. Complete Qur’anic feature 2. Sharing Ziswaf (Zakat, Infaq, Waqf, etc.) 3. Qurban saving 4. Hajj And Umrah Saving 1. Health insurance 2. Multi-payment 1. Islamic finance article 2. Education saving goals 3. Future insurance 1. Future saving plan 2. Retirement plans (sharia pension fund) 3. Social security 1. E-mas (provide the physical gold) 2. Sharia mutual fund 3. Sharia investment 1. Transfer 2. Purchase 3. Top-up 4. QRIS 5. Favorite 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

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3.

4.

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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. 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). 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. 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. 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 community 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

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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.

References Bank Indonesia (2014) Booklet Financial Inclusion. Bank Indonesia, Jakarta Demirgüç-Kunt A, Klapper L (2012) Measuring financial inclusion: the global Findex database. Policy Research Working Paper, 6025 Demirgüç-Kunt A, Beck T, Honohan P (2008) Finance for all? Policies and pitfalls in expanding access. A World Bank Policy Research Report, Washington, DC Erlando A, Riyanto DF, Masakazu S (2020) Financial inclusion, economic growth, and poverty alleviation: evidence from eastern Indonesia. Heliyon 6(10):e05235. https://doi.org/10.1016/j. heliyon.2020.e05235 Hadad MD (2010) Developing a financial inclusion strategy: the case of Indonesia. Presentation for the, 27–29 Hartati IA (2017) How important is Islamic financial inclusion for Indonesia. Makassar Financial Education and Training Center Indiarto N, Bambang S (1999) Business research methodology for accounting and management. BPFE, Yogyakarta Ismail N (2014) Maqashid Sharia in Islamic economics. Print I, Smart WR, Yogyakarta Jauhari S (2015) Inclusive finance for community empowerment through micro business development (case study at the Infaq Management Institute of Kediri City) Khmous DF, Besim M (2020) Impact of Islamic banking share on financial inclusion: evidence from MENA. Int J Islam Middle East Financ Manag 13(4):655–673. https://doi.org/10.1108/ IMEFM-07-2019-0279 Marlina L, Rahmat BZ (2018) Peran Lembaga Keuangan Syariah Dalam Mengimplementasikan Keuangan Inklusif Bagi Pelaku UMKM Tasikmalaya (November) Nurfalah I, Rusydiana AS (2019) Digitalisasi Keuangan Syariah Menuju Keuangan Inklusif: Kerangka Maqashid Syariah. Ekspansi: Jurnal Ekonomi, Keuangan, Perbankan dan Akuntansi ISSN (Online): 2580-7668 ISSN (Cetak): 2085–5230, vol. 11(1) (Mei 2019), Hal. 55–76. https://www.ojk.go.id/id/berita-dan-kegiatan/publikasi/Pages/Strategi-Nasional-LiterasiKeuangan-Indonesia-2021-2025.aspx Rusydiana AS (2016) Analisis masalah pengembangan perbankan syariah di Indonesia: Aplikasi metode analytic network process. Esensi: Jurnal Bisnis dan Manajemen 6(2):hal.237–hal.246 Rusydiana AS (2018) Developing Islamic financial technology in Indonesia. Hasanuddin Econ Bus Rev 2(2):143–152 Srisusilawati P, Eprianti N (2017) Application of the Principle of Justice in Mudharabah Contracts in Islamic Financial Institutions. Law Justice. https://doi.org/10.23917/Laj.V2i1.4333 Webster I, Pizalla J (2015) Fintech: Are banks responding appropriately? EY Publication 2015

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 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

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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 transactions, 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 purposes. 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.

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2 Literature Review 2.1

Background Theory

Mobile banking has recently become a tool for large-scale transactions. Additionally, the pandemic supports the adoption of mobile banking for all outside financial transactions. Mobile banking is an integrated mobile transaction application developed 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 institutions. 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 information, 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 implementation 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

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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. Moreover, 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.

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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.

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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 Brand image Intention

Perceived ease of use

Perceived usefulness

Trust

Items BI1 B12 INT1 INT2 INT3 PEU1 PEU2 PEU3 PU1 PU2 PU3 TRU1 TRU2 TRU3

OU 0.922 0.938 0.936 0.939 0.921 0.78 0.855 0.825 0.858 0.83 0.896 0.898 0.793 0.826

α 0.843

CR 0.927

AVE 0.864

0.925

0.952

0.869

0.76

0.861

0.673

0.832

0.896

0.742

0.803

0.878

0.706

Exploration of Sharia Bank Services in Muhammadiyah’s Higher. . . Table 2 Fornell-Lacker criterion

BI INT PEU PU TR

BI 0.93 0.686 0.124 0.092 0.238

461

INT

PEU

PU

TR

0.932 0.182 0.145 0.205

0.82 0.714 0.671

0.862 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 (=

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Table 3 Path coefficients Hypothesis H1 H2 H3 H4

Path relationship Brand Image → intention to use Perceived ease of use → Intention to use Perceived usefulness → Intention to use Trust → intention to use

Β 0.027 0.056

T statistics 25.43 1.855

P values 0.000 0.064

Remarks Supported Rejected

0.042

1.028

0.305

Rejected

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 preferences 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.

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463

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.

References Abdullah F, Ward R (2016) Developing a general extended technology acceptance model for e-learning (getamel) by analysing commonly used external factors. Comput Hum Behav 56. https://doi.org/10.1016/j.chb.2015.11.036 Adams DA, Nelson RR, Todd PA (1992) Perceived usefulness, ease of use, and usage of information technology: a replication. MIS Q Manag Inf Syst 16(2). https://doi.org/10.2307/249577 Baber H (2021) Examining the intentions to use crowdfunding platform - an extended technology acceptance model. Int J Serv Econ Manag 12(2). https://doi.org/10.1504/IJSEM.2021.117226 Baber H, Zaruova C (2018) Religion and banking: a study of islamic finance in India. J Ind Distribution Bus 9(6):7–13 Bank Muamalat Indonesia (2019) Transformasi untuk pertumbuhan bisnis yang berkelanjutan 2019. Annual Report BMI 2019, 119–207. https://www.bankmuamalat.co.id/uploads/ hubungan_investor/1_laporan-tahunan-2019.pdf Bankbsi.co.id. Tentang kami: Informasi lengkap Bank Syariah Indonesia. https://www.bankbsi.co. id/company-information/tentang-kami Bankmuamalat.co.id. Muamalat DIN (Digital Islamic Network). https://www.bankmuamalat.co.id/ index.php/e-banking/muamalat-din-digital-islamic-network Batunanggar S (2019) Fintech development and regulatory frameworks in Indonesia (No. 1014). ADBI Working Paper Series Chong AYL, Ooi KB, Lin B, Tan BI (2010) Online banking adoption: an empirical analysis. Int J Bank Mark 28(4). https://doi.org/10.1108/02652321011054963 Dahlberg T, Guo J, Ondrus J (2015) A critical review of mobile payment research. Electron Commer Res Appl 14(5). https://doi.org/10.1016/j.elerap.2015.07.006 Davis FD (1989) Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Q Manag Inf Syst 13(3):319–340. https://doi.org/10.2307/249008 Farooq O, Pashayev Z (2020) Shariah compliance and information transmission: evidence from an emerging market. J Islam Account Bus Res 11(8). https://doi.org/10.1108/JIABR-022018-0032 Gefen D, Karahanna E, Straub DW (2003) Trust and tam in online shopping: an integrated model. MIS Q Manag Inf Syst 27(1). https://doi.org/10.2307/30036519 Grabner-Kräuter S, Faullant R (2008) Consumer acceptance of internet banking: the influence of internet trust. Int J Bank Mark 26(7). https://doi.org/10.1108/02652320810913855 Ha HY (2004) Factors influencing consumer perceptions of brand trust online. J Prod Brand Manag 13(5). https://doi.org/10.1108/10610420410554412 Hoai Linh D (2017) Brand image on intention of banking services using: the case of vietnam banks. Int J Sustain Manag Inf Technol 3(6):63. https://doi.org/10.11648/j.ijsmit.20170306.12

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Hochstein M (2015) FinTech (the Word, That Is) Evolves. The American Banker http://www. americanbanker.com/bankthink/FinTech-the-word-that-is-evolves1077098-1.html IDN Financials. Digital banking transactions are projected to reach IDR 49,733 trillion in 2022. IDN Financials, https://www.idnfinancials.com/news/41944/digital-banking-transactionsprojected-reach-idr. Accessed on 1st December 2022 Juhri K, Dewi CK (2017) Kepercayaan dan penerimaan layanan mobile money t-cash di Bandung dengan pendekatan Technology Acceptance Model (TAM). Probisnis (e-Journal) 10(1) King WR, He J (2006) A meta-analysis of the technology acceptance model. Inf Manag 43(6). https://doi.org/10.1016/j.im.2006.05.003 KPMG (2020) The Pulse of Fintech H1 2020. In KPMG (pp 1–76). https://assets.kpmg/content/ dam/kpmg/xx/pdf/2020/09/pulse-of-fintech-h1-2020.pdf Marakarkandy B, Yajnik N, Dasgupta C (2017) Enabling internet banking adoption: an empirical examination with an augmented technology acceptance model (TAM). J Enterp Inf Manag 30(2). https://doi.org/10.1108/JEIM-10-2015-0094 McWaters, R., Bruno, G., Lee, A, & Blake, M. (2015). The future of financial services how disruptive innovations are reshaping the way financial services are structured, provisioned and consumed Milian EZ, de Mesquita Spinola M, Monteiro de Carvalho M (2019) Fintechs: a literature review and research agenda. Electron Commer Res Appl 34. https://doi.org/10.1016/j.elerap.2019. 100833 Miskam S, Yaacob AM, Rosman R (2019) Fintech and its impact on Islamic fund management in Malaysia: a legal viewpoint. In: Emerging Issues in Islamic Finance Law and Practice in Malaysia. Emerald Publishing Limited Nurfadilah D, Samidi S (2021) How the covid-19 crisis is affecting customers’ intention to use islamic fintech services: evidence from indonesia. J Islam Monetary Econ Financ 7. https://doi. org/10.21098/jimf.v7i0.1318 Patel KJ, Patel HJ (2018) Adoption of internet banking services in Gujarat: an extension of TAM with perceived security and social influence. Int J Bank Mark 36(1). https://doi.org/10.1108/ IJBM-08-2016-0104 Pavlou PA (2003) Consumer acceptance of electronic commerce: integrating trust and risk with the technology acceptance model. Int J Electron Commer 7(3). https://doi.org/10.1080/10864415. 2003.11044275 Rahim NF, Bakri MH, Yahaya SN (2019) Fintech and Shariah principles in smart contracts. doi: https://doi.org/10.4018/978-1-5225-7805-5.ch009 Singh S, Sahni MM, Kovid RK (2020) What drives FinTech adoption? A multi-method evaluation using an adapted technology acceptance model. Manag Decis 58(8). https://doi.org/10.1108/ MD-09-2019-1318 Stewart H, Jürjens J (2018) Data security and consumer trust in FinTech innovation in Germany. Inf Comput Secur 26(1):109–128 Sulistyowati WA, Alrajawy I, Isaac O, Ameen A (2021) Mobile banking adoption—extending technology acceptance model with transaction convenience and perceived risk: a conceptual framework. Lect Notes Netw Syst 248. https://doi.org/10.1007/978-981-16-3153-5_25 Usman H (2015) Customer communication strategy for islamic banks. Int J Ind Distribution Bus 6:17–24 Usman H, Mulia D, Chairy C, Widowati N (2022) Integrating trust, religiosity and image into technology acceptance model: the case of the Islamic philanthropy in Indonesia. J Islam Market 13(2). https://doi.org/10.1108/JIMA-01-2020-0020 Walfajri F (2021, November 02) Pada tahun 2025, BSI targetkan punya aset Rp500 triliun. Newssetup. https://newssetup.kontan.co.id/news/pada-tahun-2025-bsi-targetkan-punya-asetrp-500-triliun?page=all Wulandari N, Nasution RA (2019) Integrated value co-creation and affective commitment in banking industry. Bus Theory Pract 20. https://doi.org/10.3846/btp.2019.47

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 transactions, 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 behavior. 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 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

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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), consumer 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 adoption 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

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2018). In this study, the researcher generalized previous research related to the relationship between Islamic religiosity and the adoption of new technology, especially 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 constructs, 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 influence 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).

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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 religiosity 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 Albelaikhi (1997) Hassan (2007)

Number of dimension 2 5

Mokhlis (2009)

2 2 3 3

Name of dimension Beliefs, Attitudes, and Practice Ideologi, Ritual, Devotional, Eksperiential, and Konsekuential Attitudes and Moral Values Intrapersonal and interpersonal Practices, Altruism, and Honour Beliefs, Practices, Altruism, Enrichment Doctrinal, Intrinsic and extrinsic

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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-urRehman 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). 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). 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, experiential, and consequential; extrinsic, intrinsic, and quest religiosity; attitudes and moral values; intrapersonal and interpersonal; intrapersonal and interpersonal; beliefs, practices, altruism, enrichment, religiosity, religious disorganization, religious pretentiousness; and hedonism, religious education, sensitive, products and current issues, doctrinal, intrinsic and extrinsic. In several studies related to behavior, 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

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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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Mokhlis S (2009) Relevancy and measurement of religiosity in consumer behavior research. Int Bus Res. https://www.researchgate.net/profile/Safiek-Mokhlis-2/publication/42385940_Relevancy_ and_Measurement_of_Religiosity_in_Consumer_Behavior_Research/links/53f4472c0cf2 56ab87b7a880/Relevancy-and-Measurement-of-Religiosity-in-Consumer-BehaviorResearch.pdf Ramadani L (2016) Pengaruh Penggunaan Kartu Debit dan Uang Elektronik (E-Money). Terhadap Pengeluaran Konsumsi Mahasiswa 8(1):1–8 Shyan Fam K, Waller DS, Zafer Erdogan B (2004) The influence of religion on attitudes towards the advertising of controversial products. Eur J Mark 38(5–6):537–555. https://doi.org/10.1108/ 03090560410529204 Vitell S, Paolillo JGP, Singh JJ (2005) Religiousity and consumer ethics. J Bus Ethics 2(57)

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 comparative 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 semistructured 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 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

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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 developed 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 Corporation, 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 investment accounts.

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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 activities. Therefore, to fulfil their cultural ethics, Islamic banking takes note of the need to persist in being transparent. Through the practice, they guarantee accurate information 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 standards 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, credibility, 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

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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.

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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 statements 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.

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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 conventional 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

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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

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Table 1 Interview concluded with thematic analysis Respondents/ interview questions I1 I2 I3 I4

Question 1 Do you think it is important to understand reporting of Islamic financial transaction? Why?

Question 2 What is your opinion about substance over form and time value of money based on two standards, respectively? (IFRS/ MFRS and AAOIFI)

1. Very important 2. Unique 3. Lack of understanding 4. Mixed with conventional 5. Financial institutions

6. Substance first 7. Explain the form 8. Value is not the same 9. Permissible in deferred payment 10. Prohibited debt-based transaction

Question 3 Please share your opinion about the general issues on presentation and disclosure of financial statement based on two standards, respectively, (IFRS/MFRS and AAOIFI) 11. IFRS/MFRS is very general 12. AAOIFI for IFIs 13. Presentations are the same 14. Detailed disclosure required 15. Shariah principles

Question 4 What are the differences of two standards (IFRS/ MFRS and AAOIFI) treatment on profitsharing investment accounts? Why?

16. Compare annual reports 17. IFRS/MFRS treat PSIA under liabilities 18.Off-balance sheet 19. AAOIFI treat as quasi-equity 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 documents 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

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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.

References Biancone PP, Shakhatreh MZ (2016) Accounting issues in Sukuk issuance. Int J Islam Econ Financ Stud 2(3):95–108 Ehsan A, Syed K, Shahzad M, Iqbal H (2019) Compliance of financial statements of Islamic Banks of Pakistan with AAOIFI guidelines in general presentation and disclosure. SEISENSE J Manag 2(1):12–21 El-Halaby S, Hussainey K (2016) Determinants of compliance with AAOIFI standards by Islamic banks. Int J Islam Middle East Financ Manag 9(1):143–168. Retrieved from https://www. researchgate.net/publication/303377930_Determinants_of_compliance_with_AAOIFI_stan dards_by_Islamic_banks Mohammed N, Fahmi F, Ahmad A (2015) The influence of AAOIFI Accounting Standards in Reporting Islamic Financial Institutions in Malaysia. International accounting and business conference, pp 418 – 424. Mukhlisin M, Antonio MS (2018) Meta-analysis on direction of accounting standards for Islamic financial institutions: case studies in United Kingdom and Indonesia. J Islam Econ 10(1): 231–254 Mulyany R, Ariffin NM (2018) Islamic finance and the convergence towards international financial reporting standards (IFRS): the state of research development. J Account Res Organ Econ 1(1): 85–97 Namrata G (2015) Differences in accounting treatment of Ijarah: a case study of UAE Islamic banks. Int J Islam Middle East Financ Manag 8(3):1–13 Razik CA (2014) Challenges of international financial reporting standards (IFRS) in the Islamic accounting world, case of middle eastern countries. Sci Bull Econ Sci 8(14):1–6. amged_ [email protected] Rosman R, Abdul Khir MF, Saat NA, Rahman AR (2015) Accounting issues in the reporting of profit-sharing investment accounts in Islamic banks’ financial statements under IFSA 2013. ISRA Int J Islam Financ 7(1):129–138 Sarea (2013) The move towards global accounting standards for Islamic financial institutions: evidence from AAOIFI1. J Islam Econ Bank Financ 9(4) Retrieved from https://ibtra.com/ pdf/journal/v9_n4_article9.pdf Sarea AM, Al Dalal ZA (2015) The level of compliance with International Financial Reporting Standards (IFRS 7) Evidence from Bahrain Bourse. World J Entrepr Manag Sustain Dev 11(3): 231–244

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Shafii Z, Zakaria N (2013) Adoption of international financial reporting standards and international accounting standards in Islamic financial institutions from the practitioners’ viewpoint. Middle East J Sci Res 13(1):42–49 Shima KM, Gordon EA (2011) IFRS and the regulatory environment: the case of U.S. investor allocation choice. J Account Public Policy 30(1):481–500 Zamil M, Aiza N (2014) An empirical investigation into the problems and challenges facing Islamic banking in Malaysia. Retrieved from https://www.semanticscholar.org/paper/An-empiricalinvestigation-into-the-problems-and-in-Zamil-Aiza Zulkarnain Bin Muhamad Sori SB (2019) Contemporary issues in financial reporting of Islamic Financial Institutions. (UMK) University Malaysia Kelantan Press

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 descriptive 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 convenience 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 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

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(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 Development Bank (IsDB), Indonesia has been able to participate in several international forums to help other developing nations, like Sudan, by offering educational assistance. 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. Indonesian government’s efforts to give SEC education to Sudanese face several difficulties, 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 Economics 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 cooperation 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 development 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 development in Sudan. Meanwhile studies on SSC in encouraging the economic development 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 cooperation in the aerospace sector, the application of the SSC concept as a concept of

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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 shariabased economic development, which is based on the majority Muslim Indonesian

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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 development 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 collaboration 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

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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 cooperation 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 operational 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 IndonesiaSudan diplomatic relations through economic cooperation to increase Indonesia’s

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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 standards, 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 empowerment 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 challenges 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 agriculture, livestock, mining, and tourism. IsDB with a system of implementing Islamic financial products aims to provide accessible and easy resources, simplifying processes 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:

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ُ ‫ﺿﺎ‬ ً ‫ﻛﺮﻳﻢ ﺃﺟﺮ ﻭﻟ ُﻪ ﻟ ُﻪ ﻓ ُﻴﻀﺎﻋﻔ ُﻪ ﺣﺴﻨًﺎ ﻗﺮ‬. ‫ﺽ ﻗﺮ ﻳﺎ ٰﻟﺬﺫﺍﻣﻦ‬ 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 establishment 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 development of a sharia economic community is very compatible with economic growth.

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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 Ambassador 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, expansion 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 complicate 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 development 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 development. As fellow members of SSC, both Indonesia and Sudan direct all national programs to emphasize a partnership approach to sharia economic cooperation

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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 successfully 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, Indonesian with the Special Region Management of Sudanese Islamic Economic Community 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 contractors, 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

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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 international 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 experience 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 (IndonesiaAfrica 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

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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 Gray K, Gills BK (2016) South–South cooperation and the rise of the Global South. Third World Q 37(4):557–574. https://doi.org/10.1080/01436597.2015.1128817 Hashim A, Graf A (2021) African-Asia encounters new cooperations and new dependencies. In: Engel S (ed) South-South cooperation strategies in Indonesia: domestic and international drivers. Amsterdam University Press, Amsterdam, pp 155–182 Indonesia-Africa Forum (IAF) (2019) Gebrakan Sukses Kemlu Sasar Peluang Afrika’. Akses Gerbang Menuju Pasar Dunia, vol 35, Jakarta: Kementerian Luar Negeri IslamicDevelopmentBank (2022) Economic empowerment. Retrieved July 5, 2022, https://www. isdb.org/economic-empowerment KBRIKhartoum (2021, 28 August) KBRI Khartoum dukung pembentukan MES Sudan. Retrieved August 1, 2022, https://kumparan.com/kbri-khartoum/kbri-khartoum-dukung-pembentukanmes-sudan-1wQ6EsrRlbE/full Kementerian Luar Negeri (2021, 2 June) Tingkatkan Pemahaman Tentang Ekonomi Syariah, KBRI Khartoum Gelar Pembelajaran Bersama dengan Masyarakat Ekonomi Syariah Sudan. Retrieved on 10 May 2022, https://kemlu.go.id/khartoum/id/news/13804/kuai-kbri-khartoum-terimaaudiensi-inisiator-pembentukan-masyarakat-ekonomi-syariah-sudan Kementerian Luar Negeri, KUAI KBRI Khartoum (2021, 2 June) Terima Audiensi Inisiator Pembentukan Masyarakat Ekonomi Syariah Sudan. Retrieved on 10 May 2022, https://kemlu. go.id/khartoum/id/news/13804/kuai-kbri-khartoum-terima-audiensi-inisiator-pembentukanmasyarakat-ekonomi-syariah-sudan Kementerian Luar Negeri, Bidik Peningkatan Volume Perdagangan Indonesia-Sudan, Kementerian Luar Negeri, 2021, Retrieved May 10, 2022. https://kemlu.go.id/portal/id/read/2092/berita/ bidik-peningkatanvolume-perdagangan-indonesia-sudan-kbri-khartoum-ikuti-internationalfair-of-khartoum-ke-38 Levaggi AG, Blinder D (2021) High in the sky: Turkish–Argentine South–South space cooperation. Third World Q 43(1):94–113. https://doi.org/10.1080/01436597.2021.1993811 Masyarakat Ekonomi Syariah (2021, 8 August) Adakan Pertemuan dengan Act Dubes RI, MES Sudan akan Segera Dibentuk. Retrieved on 10 May 2022, https://www.ekonomisyariah.org/ blog/2021/06/08/adakan-pertemuan-dengan-act-dubes-ri-mes-sudan-akan-segera-dibentuk/ Pujayanti A (2015) Kerja Sama Selatan-Selatan dan Manfaatnya bagi Indonesia. Pusat Pengkajian, Pengolahan Data dan Informasi, Jakarta Sahroni O, Karim AA (2019) Maqashid Bisnis & Keuangan Islam Sintesisi Fikih dan Ekonomi. PT RajaGrafindo Persada, Depok, Jawa Barat Satrio AB, Rum M (2019) Energy Cooperation between Indonesia and Timor-Leste: Realization of South-South Cooperation. Sleman, Yogyakarta Shariabanking (2022a) Islamic Starup Loan. Retrieved July 5, 2022, https://www.shariabanking. com/islamic-loan-for-startup.html

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Shariabanking (2022b) Sudan Sharia Banking Sudan Islamic Banking Finance. Retrieved July 7, 2022, https://www.shariabanking.com/sudan.html Snider J, Jan MW (2022) UAE-Pakistan development cooperation: A model for South–South cooperation in a multipolar world. Conflict, Security and Development 22(1):97–118. https:// doi.org/10.1080/14678802.2022.2037851 UNDP (2022) Partnership Initiative for SSTC. Indonesia, https://www.undp.org/indonesia/projects/ partnership-initiative-sstc: UNDP Indonesia United Nations (2019) Sudan national report: implementation of Istanbul plan of action for least developed country. Ministry of Finance and Economic Planning, Khartoum Winanti PS, Alvian RA (2021) Indonesia’s South–South cooperation: when normative and material interests converged. Int Relat Asia-Pac 21(2):201–232. https://doi.org/10.1093/irap/lcz021

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 advantageous 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 constitutes 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 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

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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 Philippines’ 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 Autonomous 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.

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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. Additionally, 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 respondent; 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 questionnaire 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 providing opportunities for advancement for Muslim professionals.

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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.

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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 learning 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.

References Abdus S, Norman G, Bradley C (2014) Islamic banking and finance in theory and practice: the experience of Malaysia and Bahrain. https://www.researchgate.net Amt M, Ahmed T (2019) Islamic Banking: how to manage risk and improved profitability?. https:// ebookcentral.proquest.com Angelo M (2014) Islamic Banking and finance in South-east Asia: its development and future. https://ebookcentra1.proquest.com/lib/haagüeader.action?docID=8407()1 Arief Wibisono L, Diyatmika P (2020) Determinants of capital structure: a comparison between Sharia-Compliant and Sharia Non-Compliant Firms in Indonesia. https://www.dl.acm.org Brian K (2011) Case studies in Islamic Banking and Finance. https://ebookcentral.proquest.com/ lib/haagu'reader.action?docID=698009 Bunchuan D (2006) Islamic Banking and Finance: is it complementing or competing the conventional banks Carlos D (2021) Department of Finance: Strong Islamic bank system to boost BARMM development Cornee S, Jegers M, Szafarz A (2018) A theory of social Finance. https://halshs.archievesouvertes. fr/halshs-0171767 Disomimba A, Islamic Economic System Fara Madeha A (2012) 4, Potential and limitations of Shari ’ah Compliant private equity and Islamic Venture Capital France Ismael M (2015) Frequently asked questions in Islamic finance Johnson K (2013) The role of Islamic Banking in economic growth. Claremont Mckenna College. http://scholarship.claremont.edu/cmc_theses/642 Kettell C (2015) Brian International Journal of Islamic and middle Laurent M, Federic T (2008) Introduction to Islamic banking and finance Mahmuod M (2017) Islamic Banking and Finance. Bachelor’s thesis degree programme in finance and economics Mastura (1988) Islamic banking: The Philippine experience Mohammad S (2006) Islamic banking and finance in theory and practice: a survey of the art. https:// iesjournalog.org

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Muhammad R (2019) The psychological behavior of people in the selection of Islamic Banks Schoon N (2016) Modern Islamic banking: products and processes in practice Shamsudin M, Salamon H, Abu-Hussin M, Muhammad N (2015) Islamic banking and finance: traders not mere financial intermediary Siddiqi MN (1983) Issues in Islamic banking. The Islamic Foundation, Leicester

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 investigated 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 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

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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 Malaysian 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) development plan, introduced by the government in September 2021, serves as a strategic framework for the capital market to achieve economic growth and transform Malaysia 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

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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, organizations 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 connections 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’ perspective, as it diminishes business value and creditworthiness. Funds devoted to ESG activities could have been used better by the company. Besides, from a principalagent 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.

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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, Germany, 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.

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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 comprehensive evaluation of the sustainability impact and corporate conduct Control variable (Source: Refinitiv) Firm size SIZE Natural logarithm of total assets Market-toMTB Market value/book value of common equity book Profitability ROA Pretax income/total assets Leverage LEV Long-term debt/total assest

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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 overall 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, indicating 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%).

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Table 2 Descriptive statistics Variables Total risk Systematic risk ESG SIZE MTB ROA LEV

Obs 481 481 481 481 481 481 481

Mean 7.2018 0.6424 44.8294 15.104 0.5805 9.3697 29.1288

SD 4.8836 0.4028 18.6107 1.1399 1.3231 11.768 16.1342

Min 1.312 -0.534 2.84 11.637 -0.154 -20.67 0.00

Max 55.818 2.354 90.13 17.598 16.126 84.04 85.74

Table 3 Summary statistics Variables Obs Mean Panel A: Non-Shariah-compliant firms Total risk 209 7.8425 Systematic risk 209 0.6997 ESG 209 42.6752 Panel B: Shariah-compliant firms Total risk 272 6.7095 Systematic risk 272 0.59836 ESG 272 46.4847

Table 4 Correlation analyses

SD

Min

Max

5.7392 0.4274 20.4423

2.070 -0.534 2.84

55.818 2.088 85.01

4.05 0.37773 16.9236

1.312 -0.246 10.47

26.491 2.354 90.13

Variables (1) Panel A: Non-Shariah-compliant firms (1) Total risk 1.00 (2) Systematic risk 0.244** (3) ESG 0.114 Panel B: Shariah-compliant firms (1) Total risk 1.00 (2) Systematic risk 0.339** (3) ESG 0.018

(2)

1.00 0.279**

1.00 -0.084

(3)

1.00

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) nonShariah-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

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Table 5 Regression result Model A Total risk ESG SIZE MTB ROA LEV Constant Observation B Systematic risk ESG SIZE MTB ROA LEV Constant Observation

(1)

(2)

(3)

0.021(0.03648) 0.103(-1.8828) 0.543(0.135) 0.055(-0.1397) 0.140(0.0613) 0.054(33.451)) 481

0.089(0.0554) 0.139(-2.673) 0.543(1.03) 0.209(-0.16) 0.269(0.093) 0.096(44.033) 209

0.185(0.017) 0.133(-1.046) 0.617(-0.094) 0.123(-0.107) 0.061(0.052) 0.051(21.353) 272

0.001*** (0.007) 0.032(-0.296) 0.036(-0.043) 0.168(-0.005) 0.338(0.0053) 0.018(4.695) 481

0.002***(0.012) 0.030(-0.35) 0.130(-0.0912) 0.521(-0.043) 0.457(0.0085) 0.016(5.3) 209

0.136(0.004) 0.214(-0.2885) 0.075(-0.284) 0.390(-0.004) 0.474(0.0039) 0.162(4.717) 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 management 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

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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 indicators to investigate the impact of ESG on firm risk.

References Alam AW, Banna H, Hassan MK (2022) Esg activities and bank efficiency: Are Islamic banks better? J Islam Monetary Econ Financ 8(1):65–88. https://doi.org/10.21098/jimf.v8i1.1428 Albuquerque R, Koskinen Y, Zhang C (2019) Corporate social responsibility and firm risk: theory and empirical evidence. Manag Sci 65(10):4451–4469. https://doi.org/10.1287/mnsc.2018. 3043 Azmi W, Hassan MK, Houston R, Sydul M (2021) ESG activities and banking performance: International evidence from emerging economies. J Int Finan Markets Inst Money 70:101277. https://doi.org/10.1016/j.intfin.2020.101277 Baran LC, Zhang CX (2012) KLD 400 index inclusion and corporate bonds. Midwest Finance Association 2013, Annual Meeting Paper Bătae OM, Dragomir VD, Feleagă L (2021) The relationship between environmental, social, and financial performance in the banking sector: a European study. J Clean Prod 290:125791. https://doi.org/10.1016/j.jclepro.2021.125791 Breuer W, Müller T, Rosenbach D, Salzmann A (2018) Corporate social responsibility, investor protection, and cost of equity: a cross-country comparison. J Bank Financ 96:34–55. https://doi. org/10.1016/j.jbankfin.2018.07.018 Buallay A (2019a) Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector. Manag Environ Qual 30(1):98–115. https://doi.org/10.1108/ MEQ-12-2017-0149 Buallay A (2019b) Sustainability reporting and firm’s performance. Int J Product Perform Manag 69(3):431–445. https://doi.org/10.1108/ijppm-10-2018-0371 Cai Y, Pan CH, Statman M (2016) Why do countries matter so much in corporate social performance? J Corp Finan 41:591–609. https://doi.org/10.1016/j.jcorpfin.2016.09.004 Chakraborty A, Silva L, Sheikh S (2019) Managerial risk taking incentives, corporate social responsibility and fi rm risk. J Econ Bus 101(July 2018):58–72. https://doi.org/10.1016/j. jeconbus.2018.07.004 El Ghoul S, Guedhami O, Kwok CCY, Mishra DR (2011) Does corporate social responsibility affect the cost of capital? J Bank Financ 35(9):2388–2406. https://doi.org/10.1016/j.jbankfin. 2011.02.007 Eliwa Y, Aboud A, Saleh A (2019) ESG practices and the cost of debt: evidence from EU countries. Crit Perspect Account: 102097. doi:https://doi.org/10.1016/j.cpa.2019.102097

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Erragragui E (2018) Research in international business and finance do creditors price fi rms’ environmental, social and governance risks ? Res Int Bus Financ 45(October 2016):197–207. https://doi.org/10.1016/j.ribaf.2017.07.151 Erragragui E, Revelli C (2016) Review of financial economics is it costly to be both shariah compliant and socially responsible ? Rev Financ Econ 31:64–74. https://doi.org/10.1016/j.rfe. 2016.08.003 Friedman M (1970) The social responsibility of business is to increase its profits. New York Times Magazine, 13 September 1970, 122–126 Gillan SL, Koch A, Starks LT (2021) Firms and social responsibility: a review of ESG and CSR research in corporate finance. J Corp Finan 66(January):101889. https://doi.org/10.1016/j. jcorpfin.2021.101889 Goss A, Roberts GS (2011) The impact of corporate social responsibility on the cost of bank loans. J Bank Financ 35(7):1794–1810 Hair JF, Black WC, Babin BJ, Anderson RE (2009) Multivariate data analysis, 7th edn. Prentice Hall Humphrey JE (2011) The independent effects of environmental, social and governance initiatives on the performance of UK firms. Aust J Manag 37(2):135–151 Izzo MF, Magnanelli BS (2012) Does it pay or does firm pay? The relation between CSR performance and the cost of debt. SSRN Electron J. https://doi.org/10.2139/ssrn.1986131 Lueg K, Krastev B, Lueg R (2019) Bidirectional effects between organizational sustainability disclosure and risk. J Clean Prod 229:268–277. https://doi.org/10.1016/j.jclepro.2019.04.379 Masliza W, Mohammad W, Wasiuzzaman S (2021) Jo ur na the level of ESG disclosure and the financing incentive for firms with high ESG disclosure scores. In Cleaner environmental systems. Elsevier doi:https://doi.org/10.1016/j.cesys.2021.100015 Menz KM (2010) Corporate social responsibility: is it rewarded by the corporate bond market? A critical note. J Bus Ethics 96(1):117–134. https://doi.org/10.1007/s10551-010-0452-y Nguyen P, Nguyen A (2020) The effect of corporate social responsibility on firm risk Article information: (June 2015). doi:https://doi.org/10.1108/SRJ-08-2013-0093 Nirino N, Santoro G, Miglietta N, Quaglia R (2021) Corporate controversies and company’s financial performance: exploring the moderating role of ESG practices. Technol Forecast Soc Chang 162(October 2020):120341. https://doi.org/10.1016/j.techfore.2020.120341 Ruan L, Liu H (2021) Environmental, social, governance activities and firm performance: evidence from China. Sustainability 13(2):767. https://doi.org/10.3390/su13020767 Sassen R, Hinze A-K, Hardeck I (2016) Impact of ESG factors on firm risk in Europe. J Bus Econ 86:867–904. https://doi.org/10.1007/s11573-016-0819-3 Seltzer L et al (2020) Climate regulatory risks and corporate bonds. SSRN Electron J 2020. https:// doi.org/10.2139/ssrn.3563271 Shakil MH (2021a) Environmental, social and governance performance and financial risk: moderating role of ESG controversies and board gender diversity. Resourc Policy 72. https://doi.org/ 10.1016/j.resourpol.2021.102144 Shakil MH (2021b) Environmental, social and governance performance and financial risk: moderating role of ESG controversies and board gender diversity. Resourc Policy 72(May):102144. https://doi.org/10.1016/j.resourpol.2021.102144 Shakil MH, Mahmood N, Tasnia M, Munim ZH (2019) Do environmental, social and governance performance affect the financial performance of banks? A cross-country study of emerging market banks. Manag Environ Qual 30(6):1331–1344. https://doi.org/10.1108/MEQ-082018-0155 Stellner C, Klein C, Zwergel B (2015) Corporate social responsibility and Eurozone corporate bonds: the moderating role of country sustainability. J Bank Financ 59:538–549. https://doi.org/ 10.1016/j.jbankfin.2015.04.032

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 community with social benefits. Our research investigates the prospects and challenges of waqf management in the Muhammadiyah organization. This research uses observation 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 fundamental 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 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

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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 dignifying 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 generation (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, responsive, 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 empowerment 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).

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Table 1 Amal Usaha Muhammadiyah (Business unit for charity purposes) No

Type of Charitable Efforts

Education : 1 2

Higher Education (Universities, Institutes, Polytechnics, and Colleges) Secondary Schools (SMA / SMK / MA)

Total 20.214 176 1.143

3

Junior High Schools (SMP / MTs)

1.772

4

Elementary schools (SD / MI)

2.604

5

Nursery Schools (TK / ABA / PAUD)

6

Special Schools

7

Islamic Boarding Schools (Pesantren)

Health and Public Welfare

14.346 71 102 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

7

Death Benefits

8

Education and Skills Center (BPKM)

Economic Initiatives

1 38 15 1.224

1

Baitul Mal wa Tanwil

437

2

Sharia Rural Banks (BPRS)

762

3

Printing companies

Religious Activities or Da’wah

25 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 managing the current waqf assets in Muhammadiyah is the administration of waqf, because the primary source of sustainable economic growth is professional management, 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,

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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 decisionmaking 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 management 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 organizations 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

Fig. 1 Management of Waqf model

Fig. 2 The process of Muhammadiyah Waqf

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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. Currently, 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, determining 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. Meanwhile, 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

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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 responsible 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 institution 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 permanent 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

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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 certification 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

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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

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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 organization. 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 development 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, hospitals, 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 administration, 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

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enterprises (Nurhakim and Produktif 2010). There needs to be innovation by utilizing 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.

References Alzubaidi IB, Abdullah A (2017) Developing digital currency from an Islamic perspective: the case of blockchain technology. Int Bus Res 10(11) (September) Astuti T, Junarti J, Novida I (2022) Muhammadiyah Nazhir organization: is that productive Waqf literacy needed?. Proceedings of the 3rd international conference of business, accounting, and economics, ICBAE 2022, 10–11 August 2022, Purwokerto, Central Java Asy’ari, M. Problematika Tata Kelola Wakaf Di Lingkungan Muhammadiyah Aceh. Jurnal Ilmiah Islam Futura, 16(1), 32 (2017) Dalling I (2007) Integrated management system definition and structuring guidance, vol 1. Chartered Quality Institute, pp 1–9 Elhady A (2017) Islamic reform movement in Indonesia: role of Muhammadiyah in social empowerment. Int J Acad Res Bus Soc Sci 7(8):340–350 Graybeal P, Franklin M, Cooper D (2018) Differentiate between centralized and decentralized management. In: Principles of accounting, vol 2. Managerial Accounting Junarti J, Syed MA, Isnan HM, Anwar S (2021) Sustainability of Waqf Muhammadiyah: a historical study from past to present. Int J Bus Rev 4(1):41–54 Medias F, Pratiwi EK (2019) Evaluation of Muhammadiyah Waqf assets utilization in magelang regency. Iqtishadia 12(1):101 Mohsin MIA, Muneeza A (2020) The institution of waqf: an innovative financial tool for socioeconomic development. Pearson, Kuala Lumpur Mu’thi A, Mulkhan AM, Marihandono D (2015) K.H. Ahmad Dahlan (1868-1923) (D. Marihandono (ed.)). Museum Kebangkitan Nasional Direktorat Jenderal Kebudayaan Kementerian Pendidikan dan Kebudayaan Muhammadiyah PP (2015) Laporan Pimpinan Pusat Muhammadiyah. The Muktamar Muhammadiyah Ke-47 Makassar Nashir H (2015) Muhammadiyah a reform movement. Muhammadiyah University Press Nurhakim MM, Produktif PW (2010) Pengalaman di Lingkungan Muhammadiyah Kota Malang. In: Adnan A (ed) Muhammadiyah dan Tantangan Abad Baru: Percikan Pemikiran dari Negeri Jiran. Matan Press, pp 269–292 Ogliastri E, Prado A, Jäger U, Vives A, Reficco E (2015) Social business. International encyclopedia of the social and behavioral sciences (2nd edn), December, pp 168–173 Shaikh SA, Ismail AG, Mohd Shafiai MH (2017) Application of waqf for social and development finance. ISRA Int J Islam Finance 9(1):5–14 Syukriyanto (n.d.). Kisah KH Ahmad Dahlan Melelang Harta Benda untuk Gaji Guru Muhammadiyah. http://www.umm.ac.id/id/Muhammadiyah/13833.html Last accessed 2021/ 09/27

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Thaker MT, Bin MA (2018) Factors influencing the adoption of the crowdfunding-waqf model (CWM) in the waqf land development. J Islam Market 9(3):578–597 Ulfiana R, Yulianti R (2019) Optimalisasi Pengelolaan Wakaf PRoduktif di Majelis Wakaf dan Kehartabendaan Pimpinan Daerah Muhammadiyah Kota Yogyakarta. Jurnal Syarikah 5(2): 125–132 Utami Y, Sawarjuwono T, Al-Hadi AA, Yuliadi I (2017) Priority of Waqf development and its barriers among the Muhammadiyah Awqaf AUM (Amal Usaha Muhammadiyah) units: an AHP approach. Global Waqf Conference Riau, 1–12 Yusuf MY, Abbas A (1985) Cita dan citra Muhammadiyah. Pustaka Panjimas

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 particularly through information technology media in order to increase cash waqf collection 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 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

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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 regarding 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. . .

1.2

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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

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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 sustainability 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 technological 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

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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 4.1.1

Results 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.

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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 intermediaries, 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

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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.

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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-wakafharus-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 understanding 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-harusmanfaatkan-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 beneficial for the development of knowledge from waqf fundraising efforts through

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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.

References Adeyemi AA, Ismail NA, Hassan SSB (2016) An empirical investigation of the determinants of cash Waqf awareness in Malaysia. Intellect Discourse 24:501–520 Ahwal H (2021) Wakaf tunai berbasis crowdfunding: persepsi generasi Z & Y2. Al-Iqtishad 3 (March) Aiyubbi DE, Wijayanti D, Trisanty A (2021) Hubungan Antara Tingkat Pendidikan Masyarakat Terhadap Literasi Tentang Wakaf Tunai Dan Keputusan Untuk Berwakaf Tunai di Daerah Istimewa Yogyakarta. Bank Manag Rev 14:76–84 Badan Wakaf Indonesia (2022) Manajemen fundraising dalam penghimpunan harta wakaf. https:// www.bwi.go.id/339/2009/03/06/manajemen-fundraising-dalam-penghimpunan-harta-wakafbagian-1/ diakses 30 Agustus 2022. Baskoroputra GF (2019) Analisa Tingkat Literasi Wakaf Uang dan Pengaruhnya Pada Persepsi Wakaf Uang (Studi Kasus Pada Mahasiswa Ekonomi Islam Universitas Brawijaya). Jurnal Ilmiah Mahasiswa FEB Unviversitas Brawijaya Malang, 7(2). Available from: http:// repository.ub.ac.id/id/eprint/170058 Dewi R (2021) Analisis potensi dan literasi wakaf tunai untuk pengurangan kemiskinan di Kota Padang. Jurnal Menara Ilmu 15(1):77–85 Ekawaty M, Muda AW (2016) Wakaf Uang: Tingkat pemahaman masyarakat dan faktor penentunya (Studi Masyarakat Muslim Kota Surabaya, Indonesia). Iqtishoduna 11(2):73–83

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Fatmah (2006) Wakaf tunai solusi alternatif dalam rangka memberdayakan ekonomi rakyat. Balance: Econ Bus Manag Account J 3(1):180–193 Fauziah S, El Ayyubi S (2019) Faktor-faktor yang Memengaruhi Persepsi Wakif terhadap Wakaf Uang di Kota Bogor. Al-Muzara’ah 7(1):19–31 Gulo W (2002) Metodologi Penelitian. Grasindo, Jakarta Haidlir BM, Laksmono BS, Kasri RA, Azizon A, Hartono D (2021) Public behaviour on cash Waqf: evidence from Indonesia. JEJAK 14(2):316–332. https://doi.org/10.15294/jejak.v14i2. 32032 Hardani, Auliya NH, Andriani H, Ustiawaty RAFJ, Utami EF, Sukmana DJ (2020) Metode Penelitian Kualitatif dan Kuantitatif. Pustaka Ilmu, Yogyakarta Haruna HT, Ibrahim AS (2021) The contribution of Waqf institution as a financial tool in addressing poverty reduction: evidence from the literature. AZKA Int J Zakat Soc Finance 2 (2):151–178 Hasim K, Lubis D, Ali KM (2016) Analisis Faktor-Faktor yang Memengaruhi Penghimpunan Wakaf Uang di Indonesia (Pendekatan Analytical Network Process). Al-Muzara’ah 4(2):127– 141 Hassan SHM, Mustapha R, Mahmud M, Malkan SNA, Hassan NHC (2021) The influence of promotion and Waqf knowledge toward cash Waqf awareness in Pahang region. Int J Acad Res Bus Soc Sci 11(4):1252–1260 https://www.kominfo.go.id/content/detail/33588/percepat-transformasi-wakaf-produktifpengelolaan-wakaf-harus-manfaatkan-teknologi-digital/0/berita. Accessed 6 Sept 2022 https://www.mimbarnegeri.com/read-15131-2022-03-25-inovasi-pengelolaan-wakaf-harusmanfaatkan-teknologi-digital.html. Accessed 6 Sept 2022 Kementerian Keuangan RI (2019) Strategi Pengembangan Wakaf Uang dalam Rangka Pendalaman Pasar Keuangan Syariah. Ringkasan Eksek 5 Klein K (2016) Fundraising for social change, 7th edn. Wiley KNEKS (2022) Pengembangan digitalisasi dan integrasi data wakaf nasionahttps://knks.go.id/ isuutama/29/pengembangan-digitalisasi-dan-integrasi-data-wakaf-nasional-diakses, 19 Agustus 2022 Medias F (2010) Wakaf Produktif Dalam Perspektif Ekonomi Islam. La_Riba 4(1):71–86 Mollick E (2014) The dynamics of crowdfunding : an exploratory study. J Bus Ventur 29(1):1–16. https://doi.org/10.1016/j.jbusvent.2013.06.005 Ryu HS (2018) What makes users willing or hesitant to use Fintech?: the moderating effect of user type. Ind Manag Data Syst 118(3):541–569 Syamsuri, Perdi PFR, Setianto A (2020) Potensi Wakaf di Indonesia (Kontribusi Wakaf dalam Mengurangi Kemiskinan). Malia 12(1):79–94 Yusuf AM (2014) Metode Penelitian Kuantitatif, Kualitatif dan Penelitian Gabungan. Kencana, Jakarta

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, perceived 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 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

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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 implementation of financial technology techniques in providing financial services. Moreover, 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 importance 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 economies, 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 opportunities 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 framework 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

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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 institutions 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.

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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 experience 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 transactions; 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.

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Foreign trade platform including both (pre-domiciliation platform and documentary credit platform) to secure international bank transfers, Al Salam BankAlgeria 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, managers, and the government.

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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 influencing 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 government had to exert every effort to advance financial inclusion and digitization by utilizing all innovations and financial technology solutions (Table 1).

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Table 1 Study on consumers’ perception Dependent variables Subject perceptions

Study Lillis and Narayana (1974)

Subjects US and Japanese consumers

Kaynak and Cavusgil (1983)

Canadian consumers

Canadian consumers’ perceptions toward foreign products

Michael and David

USA

Subject perceptions

Chao and Rajendran (1993)

US consumers

Subjects’ perceptions

Nayga (1999)

USA

US consumers’ perceptions toward understanding of food labels

Van Nguyen and Nguyen (2020)

Vietnamese and Korean banking customers

Adoption of mobile banking from the Vietnamese and Korean customers

Trust, perceived usefulness, perceived risk

Ly and Ly (2022)

Cambodians banking customers

Internet banking adoption under technology acceptance Model

Trust, perceived ease of use, usefulness

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Independent variables Price-value service engineering, advertising reputation design style, and consumer profiles Quality of products in general and product classes

Perceptions within both space and tree representations for both brands and product categories Foreign product owner ship, foreign product levels, and consumer profiles Nutrition and ease of preparation, race, gender, income, and body mass index

Findings Existence of perceptual differences across cultures related to foreign and domestic products The result indicated that consumers’ perceptions toward foreign-made products tend to be product specific A conceptual model is developed that describes consumers’ ability to provide direct perceptions Preferences existed between occupational level and ownership of product origin Health- and dietrelated attitudes, status, perceived importance are important factors affecting consumers’ perceptions Evaluate a proposed conceptual model based on integrated (TAM) and (CSR) and compare the differences between Vietnam and South Korea Perceptions of trust and usefulness are the critical determinants of attitude toward IB and intention to adopt IB

Theoretical Framework

The conceptual framework of this study is based on a thorough analysis of theoretical and empirical literature with the purpose of determining the correlation between various factors, such as perceived usefulness, perceived ease of use, perceived risk,

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Perceived usefulness (PU)

Perceived ease of use (PEOU)

Social image

Intention to adopt and use fintech

Perceived Trust (PT)

Convenience

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 information 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. . .

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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. However, perceived risk has a negative impact on the intention to use financial technology services.

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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.

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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.

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References Abdinoor A, Mbamba UO (2017) Factors influencing consumers’ adoption of mobile financial services in Tanzania. https://doi.org/10.1080/23311975.2017.1392273 Al Salam Bank Algeria (2022) Al Salam Bank Algeria. Retrieved from Al Salam Bank Algeria Web site: https://www.alsalamalgeria.com/fr/accueil.html Al-Baraka Bank of Algeria (2022) Al-Baraka Bank of Algeria. Retrieved from Al-Baraka Bank of Algeria: https://www.albaraka-bank.dz/ Algeria Press Service (2022) Algeria Press Service. Retrieved from Algeria Press Service web site AllmenUE, Khera PD, Ogawa SD, Sahay R (2020, July 1) International Monetary Fund. Retrieved from International Monetary Fund web site: https://blogs.imf.org/2020/07/01/digital-financialinclusion-in-the-times-of-covid-19/ Chao P, Rajendran KN (1993) Consumer profiles and perceptions: country-of-origin effects. Int Mark Rev 10(2). https://doi.org/10.1108/02651339310032534 Davis FD (1989) Perceived usefulness, perceived ease of use, and user acceptance of information technology. Management Information Systems Research Center, University of Minnesota Fintechnews Middle East (2021) Fintech development in algeria lags behind MENA counterparts. Fintechnews Middle East Fortes ND, Ritab P (2016) Privacy concerns and online purchasing behaviour: towards an integrated model. European Research on Management and Business Economics Karima M, Sonia C (2022) Fintech Innovations and their Role in Enhancing Algeria’s GDP-Epayment as a Model Kaynak E, Cavusgil ST (1983) Consumer attitudes towards products of foreign origin: do they vary across product classes? Int J Advert 2(2):147–157. https://doi.org/10.1080/02650487.1983. 11104967 Lillis CM, Narayana CL (1974) Analysis of & “Made in” product images—An exploratory study. J Int Bus Stud 5(1):119–127. https://ideas.repec.org/a/pal/jintbs/v5y1974i1p119-127.html Ly B, Ly R (2022) Internet banking adoption under Technology Acceptance Model—Evidence from Cambodian users. Comput Hum Behav Rep 7:100224. https://doi.org/10.1016/J.CHBR. 2022.100224 Mufarih M, Jayadi R, Sugandi Y (2020) Factors influencing customers to use digital banking application in Yogyakarta, Indonesia. J Asian Finance Econ Bus 7(10):897–907. https://doi.org/ 10.13106/JAFEB.2020.VOL7.NO10.897 Nayga RM (1999) Toward an understanding of consumers’ perceptions of food labels. Int Food Agribusiness Manag Rev 2(1):29–45. https://doi.org/10.1016/s1096-7508(99)00011-7 Union of Arab Banks (2022) Retrieved from Union Of Arab Banks web site Van Nguyen A, & Nguyen TPT (2020) An Integrated Model of CSR Perception and TAM on Intention to Adopt Mobile Banking. J Asian Finance Econ Bus, 7(12):1073–1087. https://doi. org/10.13106/JAFEB.2020.VOL7.NO12.1073 World Bank (2022) Individuals using the Internet (% of population) - Algeria. World Bank

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 optimality 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 innovative 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 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

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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 thirdparty 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 information technologies and the wide application of computer knowledge in business, the industry of warehouse management is becoming more informative and automated. Inventory management system is an integral part of business. Content is important to decision-makers and business leaders, so a warehouse inventory management 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.

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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 management 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 increasingly 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 warehouses 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.

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185 180 180 173.69

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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. Collaborative 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, beverages, tobacco products, textiles, and clothing have the greatest demand for warehouse 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

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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 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 times faster cash-to-cash cycles while boasting a 15% reduction in supply chain costs (3pl Central 2022a).

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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). 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). 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). 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, accounting, 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). 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).

Collection technologies

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PickChoice to the Light

easy picking process from the warehouse.

Voice selection

uses smart headsets to allow the user to quickly select items.

Vision Picking

augmented reality provides a 100% error-free picking process using a portable PC, built-in camera and management software that connects to the WMS.

Robotic collection

using robots (collaborative robots) and autonomous mobile robots (AMRs) for robotic picking.

Tablet or mobile collection

uses tables or mobile scanners in conjunction 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 environment, 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.

References 3pl Central (2022a) 7 Warehouse technology statistics you should know. Available at: https:// www.3plcentral.com/blog/7-warehouse-technology-statistics-you-should-know 3pl Central (2022b) Automation: what does it really mean? Available at: https://www.3plcentral. com/blog/automation-what-does-it-really-mean

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Michel R (2018) Warehouse/Distribution center equipment survey: automation and robotics lead robust outlook. Available at: https://www.logisticsmgmt.com/article/2018_warehouse_distribu tion_center_equipment_survey_automation_robotics_lea Pro-consulting (2020) Analysis of the warehouse logistics market of Ukraine. 2019 year. Available at: https://pro-consulting.ua/ua/issledovanie-rynka/analiz-rynka-skladskoj-logistikiukrainy-2019-god State Statistics Service (n.d.). Available at: https://www.ukrstat.gov.ua/ Statista (2020) Number of warehouses worldwide 2020-2025. Available at: https://www.statista. com/statistics/1271245/warehouses-worldwide/ Wang X, Li M, Zhang X, Zhang Y (2020) Process analysis of warehouse logistics information system. IOP conference series earth and environmental science, vol 526(1) Warehouse Automation Spending by Country (2020). Available at: https://www.statista.com/ 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 smallscale industries (SSIs). This pragmatic study was exclusively conducted to ascertain substantial benefits and stumbling blocks toward the application of Six Sigma programs. 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 continuous 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 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

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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 minimizing 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, products, 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 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 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,

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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 improvement 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-CheckAct (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 application. 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

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reduction of process variation. The business and manufacturing processes can have core functional characteristics that should be carefully analyzed, evaluated, measured, 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 applications 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 applications 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 smallscale 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 programs 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

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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 largescale 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 managers 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.

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6 Data Analysis, Major Findings, and Discussions The data analysis, major findings, and valid discussions of this research are summarized 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 Prerequisite” 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, enhancing 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

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Table 1 CPMs of the major Six Sigma programs adopted by SSIs S. no. 1. 2. 3. 4. 5. 6. 7.

Critical performance metrics (CPMs) Minimization of customer complaints Reduction of operations cost Reduction in process variability Shortening manufacturing cycle time Continuous process improvement Improved quality Reduction of defects

No. of sample companies 42 52 32 26 60 60 60

Percentage (%) 70 87 53 43 100 100 100

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 positively 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 1. Management commitment 2. Customer focus 3. Employee involvement 4. Continuous process improvement 5. Linking Six Sigma to customers 6. Performance management 7. Training and education 8. Cross-functional teams 9. Empowerment and teamwork 10. Linking Six Sigma to employees

N 60 60 60 60 60 60 60 60 60 60

Mean 3.72 4.12 4.42 4.56 3.64 3.56 4.26 3.28 3.40 4.38

Based on a five-point Likert scale, SD standard deviation

SD 1.034 0.915 0.840 1.214 1.145 0.990 0.947 1.202 1.040 1.162

Std. Error Mean 0.093 0.081 0.074 0.090 0.102 0.089 0.085 0.108 0.093 0.104

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(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 Statistics of one-sample test Benefits and obstacles toward Sig. Mean implementation of Six Sigma t df (2-tailed) difference programs Benefits 1. Improved product quality 11.215 59 0.000 1.021 2. Reduction of cycle time 4.540 59 0.000 0.535 3. Improved work culture 5.235 59 0.000 0.518 4. Improved employee involvement 8.517 59 0.000 0.484 5. Reduction of costs, wastes, and 5.579 59 0.000 0.564 defects Stumbling obstacles 1. Financial constraints -10.981 59 0.000 -1.034 2. Work force resistance -8.647 59 0.000 -0.678 3. Time constraints -4.467 59 0.000 -0.476 4. Lack of sufficient training -2.907 59 0.000 -0.218 5. Lack of support by top -2.163 59 0.000 -0.258 management

95% Confidence interval of difference Lower

Upper

0.858 0.345 0.360 0.453 0.324

1.190 0.727 0.696 0.605 0.604

-1.212 -0.729 -0.512 -0.470 -0.403

-0.868 -0.647 -0.150 -0.144 -0.093

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From Table 3, the researchers have concluded that the significant benefits positively 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 Involvement) + 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 implementation 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 R2 Model Multiple R a 1 0.956 0.932 a

Adjusted R2 0.928

Predictors: (constant), application of Six Sigma programs

Std. error of the estimate 0.212

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Table 5 ANOVA results for the effect of CSFs on application of Six Sigma programs Summary results of ANOVAa Model Sum of squares (SS) 1 Regression 206.819 Residual 10.381 Total 217.200 a

df 5 114 124

Mean square (MS) 21.243 0.091

F 217.118

Sig. 0.000b

Dependent variable: Application of Six Sigma programs Predictors: (Constant), select CSFs

b

Table 6 Results of regression coefficients on select CSFs for application of Six Sigma programs Results of regression coefficientsa Unstandardized coefficients Beta (B) Std. Error Model 1 (Constant) -1.348 0.148 1. Continuous process improvement 0.240 0.046 2. Employee involvement 0.183 0.044 3. Linking Six Sigma to employees 0.141 0.053 4. Training and education 0.216 0.051 5. Customer focus 0.134 0.060

Standardized coefficients Beta (β) 0.314 0.269 0.170 0.296 0.189

t -8.443 2.798 2.111 3.415 2.710 3.763

Sig. 0.000*** 0.006** 0.037* 0.001** 0.008** 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 applications 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

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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 innovations, 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.

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