Journal of Islamic and Human Advanced Research, Vol.

3, Issue 7, Month 2013, 479-495

Comparison among Islamic Finance Article Info

Modes; Bank Islam Berhad in Malaysia
Received:29.05.2013
As A Case Accepted:20.06.2013
Published online:01.07.2013
Mahmoud Khalid Almsafir
Ayman Abdalmajeed Ahmad Al-smadi
Hasan Abobakr Ahmed Balfaqih
Graduate Business, College of Graduate Studies, Universiti
Tenaga Nasional, Campus Putrajaya, Jalan IKRAM-UNITEN,
43300 Kajang, Selangor
Mahmoud@uniten.edu.my
smadi370@yahoo.com
hasanbalfaqih@yahoo.com

Printed ISSN: 2314-7113

Online ISSN: 2231-8968

ABSTRACT

Islamic finance is one of the most rapidly growing segments of the global financial system. There has
been a fast growth in Islamic finance and banking in Muslim countries, Non-Muslim countries and
around the world for the last three decades. In this paper, an empirical comparative review on the Islamic
financial modes has been provided. Specifically, the basic features of each mode. The data collected have
been analyzed and discussed in order to compare the performance of Islamic finance modes and come out
with a conclusion for the best mode among them. This paper provides a succinct and accessible analysis
of the definition, sources, and methods of Islamic finance modes. The paper is based on secondary data
which is the annual reports of Bank Islam Malaysia Berhad from 1989 to 2008 which contains 20 years.
Profitability and liquidity have been used as the performance measures for this study. This paper basically
examines, explores and compares the performance of different Islamic finance modes by using SPSS 18.0
software. The result shows that among Islamic finance modes, Murabaha has the best performance. The
findings can form the basis for useful recommendations in encouraging the practice of Murabaha and
finding ways to improve its applications.

Keywords: Islamic finance, Murabaha, Musharakah, Mudarabah, Istisna’, Ijarah and Salam.

1.0 Introduction

During medieval time, Muslims tradesmen have engaged in financial transactions relying on
Sharia (Islamic law). At that time, Arabs had solid trade relationships with Spanish, and
established financial systems based on a profit- and loss-sharing basis (non-interest based
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philosophy of Sharia). In 1970s, Islamic finance started to grow exponentially and the first
recorded experiment in the modern era in the field of Islamic banking was in Egypt in 1963.
According to Kahf (2004), Ahmed al Najjar established a series of saving/investment houses in a
few small towns in rural northern Egypt. This venture was known as the experiment of 'Mit
Ghamr'. As a result of domestic circumstances in 1967, the bank’s work was stopped and this
experiment did not last long. Alsmadi, Hamdan & Almsafir (2012) stated that, the Islamic
product has been accepted positively by muslin and non-Muslim people, therefore it has been
increase the performance of the banks.

The actual development of Islamic financial institutions occurred in the 1980s. In 1985, the
board of OIC (Organization of Islamic Conference) stated Takaful /Islamic insurance as Sharia
compliant. The new vision of Islamic finance covers not only banking activities but also capital
markets and includes other financial instruments and intermediaries. Since the late 1990s, the
Islamic banking industry has been growing at a rate of 13% per year, and it is expected to keep
rising at this rate during coming years. By avoiding interest rates, Islamic finance enhances
increasing the productivity and wealth of the society. Islamic finance modes can be divided into
two main types. The first type is direct finance as capital funds through partnership (Musharakah
and Mudarabah). The second type is indirect finance through leasing (Ijarah) and sale contracts
(Murabaha, Salam, and Istisna’). All modes are based on avoiding interest, and all seek to
maintain Islamic business ethics.

In Mudarabah, Investors provide the financial institution with capital to fund a specified
enterprise where the financial institution contributes skills and knowledge to the investors.
Musharakah is a partnership wherein two or more parties invest capital in a joint entrepreneurial
endeavor and both the investor and the enterprise contribute toward the capital. Murabaha refers
to a contract in which financial institution purchases goods upon request of a client, who makes
deferred payments that cover cost and agreed-upon profit margin for the financial institution
(Ali, 2011). Murabaha mode is widely used in Islamic finance especially in trading. In Ijarah, a
capitalist purchases a property and lease it to an enterprise. Ijarah is known as lease purchase
contract while Salam is the sale of a certain product for deferred delivery in exchange for
immediate and full payment of its price. Finally Istisna’ is a manufacturing contract of
acquisition of goods by specification. The purpose of this paper is to compare the Islamic

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Finance modes applied in the market by using the strategy of time series. The data collected have
been analyzed by using SPSS software. The outcomes of the research discuss the reasons of
recommending one or two of Islamic Finance modes and show how this mode can be improved.

2.0 Literature Review

The inhabitants of the Middle East have for centuries conducted trade and business partnership
which can be traced back to the pre-Islamic period. With the introduction of Islam, some of the
pre-Islamic commercial practices which were in direct conflict with Islam were ratified to be
consistent with Islamic legal principles. At the time of Prophet Mohammad (peace be upon him)
the doctrine of financial operations was derived directly from the Holy Qur’an and Sunnah.
Since then, Sharia has apparently coordinated all financial transactions between Muslims and
there has been a continuing process of mutual adjustment between Sharia and the actual financial
practices of Muslims’ society. In Muhammad’s lifetime, Islamic methods of finance often drew
upon examples from the Prophet’s experiences (Gait, 2007). According to Kahf and Khan
(1993), there are many stories about the Prophet (peace be upon him) buying on credit, used
Mudarabah contract to trade with Khadijah’s capital as the Prophet an agent in Mudarabah
contract with an investment from Khadijah. Muslims in Arabia during that period had widely
practiced Shirkah of Musharakah when operating large commercial enterprises under a profit-
and-loss-sharing principle. Moreover, Prophet Mohammad allowed people to use sale on credit
(bay’ al-Salam) which was practiced in the agricultural sector of Madinah.

According to Almsafir and Alsmadi (2012) the industry of Islamic finance witnesses a clear
development all over the world whether in terms of transactions’ size or the mechanisms of
work, especially in the last quarter of twenty-first century. The Islamic financing is one of the
financing methods, and it is part of Islamic economic system, valuable and moral considering
deals as a main invariable in this financing. The modern concept for Islamic finance simply is a
relation between financing corporations with its comprehensible concept and corporation or
individuals, to provide credits to whom get a benefits whether covering personal needs or
investment purpose by providing religious agreed financial tools.

Kahf (2004) found that the first attempts in Islamic finance can be traced to Egypt in July 1963
when a bank in the Egyptian town of Mit Ghamr was established as a rural saving bank.

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According to Kuran (1995), the bank was closed due to the government’s hostility towards
private initiatives and its being suspicious of religion. In Malaysia, the first institution that was
involved in Islamic finance was the Muslim Pilgrim’s Savings Corporation in 1963 to help
people to save on a regular basis to pay for their pilgrimage. The rise of oil prices after 1974 has
seen a number of Arab and Muslim countries experiencing a rise in national income, economic
activity and greater investment. In addition, devout Muslims would not want to put their money
into a financial system that was not based on Islamic principles, and hence they became
dissatisfied with the rigid requirements of Western commercial banks and the banks’ view of
interest-earning activities.

2.1 Murabaha

Murabaha literally means increase in capital or profit of trading. Murabaha is an instrument used
for financing the purchase of goods and services where the financial institution purchases these
on behalf of the customer (Gait, 2008). It may be contracted either on a cash basis or deferred
payment basis. The main distinctive feature that distinguishes it from other kinds of sale is that
the seller in Murabaha contract expressly discloses to the purchaser how much cost he has
incurred, and how much profit is going to earn in addition to the cost. The legality of Murabaha
can be traced form the Qur’an, the Sunnah of the prophet Mohammad (peace be upon him) and
the consent of the majority of Muslim jurists.

All conditions of a sale contract apply to Murabaha contract as it is also a sale contract.
However, there are some specific conditions that need to be fulfilled for the Murabaha contract
to be valid. Murabaha is valid only where the exact cost of a commodity can be ascertained. If
the exact cost cannot be ascertained, the commodity cannot be sold on a Murabaha basis (Al-
Meaither, 2004). Instead, it can be sold on the basis of other types of sale contract which does
not require any reference to the original cost. Also, the mark-up (profit) must be disclosed to the
contacting parties since the profit constitutes a part of the selling price, it must be agreed upon
between the contracting parties in the contract because the selling price which includes the
original price and the mark-up is actually a condition of validity of the sale contract. The original
price in Murabaha should be of a fungible property. If the price of the goods is not something
that can be returned in kind such as goods other than gold and silver, then it cannot be sold based
on Murabaha. An item that is sold through a Murabaha contract must be acquired by the seller

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through a valid contract. Consequently, if the initial contract is not valid, then the second sale is
not permitted to be contracted on the basis of Murabaha because the Murabaha contract is
actually the resale of a commodity at a similar price with cost plus (Ali, 2010). Al-Meaither
(2004) states that Murabaha is the mode of contract the most frequently used in Islamic banking,
in some cases accounting for 90% of all financing. Murabaha contracts have been widely used by
many Islamic banks and financial institutions as a mode of financing in various financing
operations such as home financing, motor vehicle financing, personal financing and trade
financing. A Murabaha in its classical form may not give rise to many Sharia issues as legal
rulings related to its application have been laid down clearly and comprehensively by past jurists.

2.2 Musharakah
Musharakah is a derivative from the sharak which literally means sharing and mixing share of
two or more parties to make them interchangeable. Arshad (2010) mentioned that Musharakah is
“An agreement between two or more persons to carry out a particular business with the view of
sharing profits by joint investment”. Hanafi mazhab’s scholars define Musharakah as a contract
between partners on both capital and profit”. The Malikis define it as a permission to transact
with the partnership property while at the same time retaining his own right to transact with the
same property (Al-Dardir, 1766). Shafi’I scholars define partnership as “a confirmation of the
rights of two or more people over a common property” (Al-Sharbinin, 1552). According to
Hanbali scholars, it is the amalgamation of the rights or freedom to use (Ibn Qudamah, 1203). In
the Islamic banking and finance context, these definitions by Hanafi and Maliki scholars are
nearer to the modern partnership as a type of a contract. Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI) in its Sharia Standard No. 12, Clause 2/1 defines
Musharakah as “an agreement between two or more parties to combine their assets, labour or
liabilities for the purpose of making a profit

The legality of Musharakah is confirmed in the Qur’an, Sunnah and Ijma’ (unanimity of
scholars). There are two main types of Musharakah which are Sharikah almilk (ownership) and
Sharikah ikhtiyar (optional). Shirkat-ul-milk is a form of partnership in which one of the
partners’ promises to buy the equity share of the other partner gradually until the title of the
equity share is completely transferred to him (Arshad, 2010). The basic element of sharikah
almilk (ownership) is the mix of ownership either by choice or mandatorily. It occurs when two

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or more people are joint owners of one thing. In Shirkah ikhtiyar, the ownership is established
based on the acts of the partners such as asset that has been jointly purchased by them or they
became new owners of an asset as a result of a will or a gift while in shirkah jabr the ownership
is established mandatorily and not due to the acts of the partners.

AAOIFI in its Shari’ah Standard No. 12, Clause 2/1 states sharikah al-‘aqd is a partnership
affected by a mutual contract, which can be translated as a “joint commercial enterprise”. This is
considered a proper partnership because the parties concerned willingly entered into a
contractual agreement for joint investment and the sharing of profit and risks. In Sharikah Al-
‘Aqd (partnership by contract), all partners must have the capacity to contract and attain the age
of capacity and must be a sane person. Note: there is no objection to have a non-Muslim or an
institution as partner. The capital of Sharikah should be contributed in the form of monetary
assets and the ratio of profit-sharing between all the partners should be determined and mutually
agreed at the conclusion of the contract which is in the form of undivided percentage of profit,
not a sum of money or a percentage of the capital (AAOIFI, sharia Standard No. 12, Clauses
3/1/5/1). The business carried out by partners should be permissible and in compliance from the
perspective of Shari’ah. The purpose of the business must also not be illegitimate or prohibited in
Islam.

2.3 Mudarabah
Another Islamic finance mode is Mudarabah which means to make a journey because normally it
requires travelling to do a business specifically in the past. In Mudarabah financing, one party,
the Rab-Ul-Mal or financier, provides the capital, while the other party, the Mudarib, provides
the entrepreneurship and effort to run the business (Bacha, 1997). The profit will be shared
between them on a mutually agreed ratio. In case of a loss, it will be borne by the capital
provider and the labour will lose his effort. Some scholars use the term Qiard instead of
Mudarabah. This is simply because the capital provider cuts off some of his money to be utilized
by the labour in business activities.

Scholars of all known fiqh schools are of the view that Mudarabah is a valid and legal contract.
This view is based on evidences from the Qur’an, Sunnah, and ijma’. Faridi (2008) mentioned
that the clearest proof on the legality of Mudarabah from Sunnah is the act of the prophet (peace

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be upon him) himself who used to work as a mudarib for Khadijah. Zaman (1990) declared that
the best and the most profitable way is the condition of sharing with the worker in expected
profit (Mudarabah) since it is not always possible for the owner to employ a skilled person on
regular wages to efficiently conduct trade on his behalf. Offer in Mudarabah is done by uttering
the terms of Mudarabah or any other terms to that effect. An example is when A who has money
says to B: “take this money in Mudarabah and what God gives in profit will be divided between
us 50%” or he specifies a certain profit-sharing ratio. If B accepts the offer and takes the money,
then Mudarabah contract is established and the profit that is realized will be divided between
them in accordance with the agreed profit-sharing ratio.

The offer and acceptance can be done verbally, in writing or through any means of
communication that is acceptable by both contracting parties (Al-Sharbinin, 1552). However, it
would be preferable for all Mudarabah agreements to be in writing and with proper witnesses to
avoid any future dispute and misunderstanding. The capital must be present during the
conclusion of the contract. In other words, debt or receivable cannot be capital for Mudarabah.
AAOIFI states in its Sharia Standard No. 13, Clause 8/2, the mudarib (labour) cannot claim any
periodical salary or a fee or remuneration for the work done by him. However, it is permissible
for the two parties to construct a separate agreement independent of the Mudarabah contract
assigning one party to perform a business activity that is not part of the Mudarabah operations
for a fee.

(Al-Sharbinin, 1552) revealed that the contract is considered as non-binding contract before the
start of Mudarabah work and therefore it can be terminated by either of the two parties by giving
a notice to the other party. However, once the Mudarabah work has started, Muslim scholars
have different views on whether it can be terminated by one party without the consent of the
other party. Majority Muslim scholars are of the opinion that the contract can be terminated
based on the fact that it is non-binding contract. On the other hand, Imam Malik is of the view
that it can only be terminated with mutual consent of the contracting parties. In the context of the
present circumstances, most of the commercial enterprises today need time to bring fruit. They
also demand constant and complex effort. Therefore, it may be disastrous to the project if one of
the parties terminates the contract once it has started. In this light, Imam Malik’s view may be
more practical for application.

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2.4 Istisna’
Istisna’ is an order or request to manufacture something, whereby the requestor invited, induced
or caused another to make or manufacture some goods for him (Muhammad, 2007). It is a
contractual agreement with a manufacturer to produce items with specified descriptions at a
determined price, and manufactured from his own materials with his own effort. If the materials
needed are not provided by the manufacturer, the contract is considered a lease contract.
According to jurist, the legality of Istisna’ contract is established from different legal sources
such as Sunnah, Ijma’, Qiyas, and Istihsan. The object to be manufactured must be precisely
determined in its type, kind, quality and quantity. This is because the manufactured object is the
subject matter of Istisna’ contract which requires a clear determination of its essence considering
that Istisna’ contract is a form of sale of the non-existent which is exempted from its original
ruling. Also, the object must be something that the people are familiar with to contract it on the
basis of Istisna’ contract i.e. building houses and heavy vehicles. Therefore, objects such as a
book or a shirt is not valid to be the subject matter as the people are not accustomed to
contracting them on Istisna’ basis.

2.5 Ijarah

Another Islamic finance mode is Ijarah which means the reward given for a work or service or a
compensation given by the lessee for usufruct in a lease contract. The implied meaning of Ijara
in the Arabic context is the right of usage and enjoying the advantages and getting the profits of
assets and properties that are owned by a financial institution (Khanfar, 2009). It is a contact for
the transfer of ownership of usufruct for compensation. Some scholars say that: “It is a sale of a
known usufruct for a known compensation.” Thus, the contact of lease is a kind of contact of
financial exchange. The majority of jurists rule that Ijarah is a permissible and binding contract.
The evidence to that effect is drawn from The Qur’an, Sunnah, and the consensus. The common
mechanism of Ijarah as applicable in Islamic banking contracts happen when the client identifies
and approaches the vendor or supplier of the asset that he or she needs and collects all the
relevant information. Then the client approaches a bank for Ijarah of the assets and promise to
take the asset on lease form the bank upon purchase and the bank makes payment of price to the
vendor. After the vendor transfers ownership of the asset to the bank, the bank leases the asset,
transfers possession and specific right of use to the client. Then the client pays Ijarah rentals over

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future known time period and finally the asset reverts to the bank in the operating lease or is
transferred to the client in the financing lease.

2.6 Salam

Salam is the sale of a prescribed commodity for deferred delivery in exchange for immediate and
full payment of its price (Ahmad, 2009). The legitimacy of Salam contract can be deduced from
The Qur’an, The Sunnah of the Prophet (peace be upon him) and legal consensus of Islamic
scholars. The majority of scholars are of the opinion that there are three requirements of Salam
contract which are transacting parties, subject matter, and form of Salam contract. The price
must be clearly determined and paid in full by the buyer at the time of undertaking the sale to
avoid a later dispute. The seller on the other hand, must take possession of the price in full before
departing one another and the exact date and place of delivery must be specified in the contract.

A Salam contract is typically used in short-term financing and could also be employed for a
longer term of financing. It is an appropriate mode of financing for seasonal agricultural
productions in which lies the benefit for both contracting parties. Bacha (1999) mentioned that
Salam sale is clearly beneficial to the seller. As such, the predetermined price is normally lower
than the prevailing spot price. The bank may benefit from Salam contract by entering into a
contact in which payment is made on spot basis. The seller on the other hand, will have the funds
to enable him to produce the commodities according to the specified quantity and quality.
Modern banks are not so much in favor of Salam contact as it will result in their receipt of
certain commodities from their clients, and will not entitle them to receive money. As banks are
accustomed to monetary deals only, it seems irrelevant for them to receive different commodities
from different clients and to resell the commodities in the market since they cannot sell those
commodities before they are actually handed over to them because selling a commodity before
taking possession is prohibited by Sharia.

3.0 METHODOLOGY
This research paper is conducted to investigate the best Islamic Finance mode applied Bank
Islam Malaysia Berhad. The data gathering method in this research is a secondary data. In
Secondary source financial statements of the bank for the period of (1989-2008) have been used

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to analyze the performance of each Islamic Finance mode. The main question addressed in this
research is: What is/are the best Islamic Finance mode/s?

According to the literature review, there are several Islamic Finance modes which have different
from each other are going to be compared. Regarding to that, hypotheses have been developed as
following:

H1: Mudarabah is the best Islamic Finance mode.

H2: Musharakah is the best Islamic Finance mode.

H3: Murabaha is the best Islamic Finance mode.

H4: Ijarah is the best Islamic Finance mode.

H5: Salam is the best Islamic Finance mode.

H6: Istisna’ is the best Islamic Finance mode.

In this study, SPSS 18.0 (The Statistical Package for the Social Sciences) software has been used
which is powerful and flexible in decision making process and it deals when both qualitative and
quantitative aspects of a decision need to be considered. SPSS is among the most widely used
programs for statistical analysis in social science and it is capable to be used in decision making
methods in cases when the decision (the selection of given alternatives and their prioritizing) is
based on several criteria (sub-criteria). Multiple Regression equation is run to determine the
factors affecting the performance of each Islamic Finance mode.

Ideally, the target of the research is comparing the Financial Islamic modes which are Murabaha,
Musharakah, Mudarabah, Istisna’, Ijarah and Salam. However accessing to a bank which
practices the whole Islamic Finance modes is almost impossible; therefore the study is conducted
on Bank Islam Malaysia Berhad which apply four finance modes which are Ijarah, Mudarabah,
Murabaha and Musharakah. By conducting the Time series method, the hypotheses are tested
and examined.

4.0 Empirical Results

4.1 Descriptive Analysis

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Descriptive statistics which include the means and standard deviation are illustrated below:

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Ijarah 20 20928 243063 114559.10 48160.180
Mudarabah 20 321 40306 15445.95 12282.103
Murabaha 20 106523 1927568 874656.30 641568.938
Musharakah 19 99 220588 60253.21 78969.514
Valid N (listwise) 19

The highest mean value among Islamic financial modes variables was for Murabaha with RM
874,656.3. The different between mean of Murabaha and the next variable (Ijarah) is RM
760,097.2 .This means that Murabaha mode is the most favorable Islamic finance mode among
other variables which are Ijarah, Mudarabah and Musharakah.

4.2 Pearson Correlation Coefficient

Pearson correlation was used to determine the existence of any relationships between the Islamic

finance modes. A Pearson correlation test was conducted to determine the relationship between

profit and liquidity as dependent variables and the four Islamic finance modes of Ijarah,

Mudarabah, Murabaha and Musharakh as independent variables.

Correlations
Ijarah Mudarabah Murabaha Musharakh Profit Liquidity
*
Ijarah Pearson Correlation 1 .107 .266 .319 .011 .402
Sig. (1-tailed) .327 .128 .092 .482 .039
N 20 20 20 19 20 20
** **
Mudarabah Pearson Correlation .107 1 .731 .696 .175 -.140
Sig. (1-tailed) .327 .000 .000 .230 .278
N 20 20 20 19 20 20
** * *
Murabaha Pearson Correlation .266 .731 1 .514 .475 .278
Sig. (1-tailed) .128 .000 .012 .017 .118
N 20 20 20 19 20 20
** *
Musharakh Pearson Correlation .319 .696 .514 1 -.012 -.003
Sig. (1-tailed) .092 .000 .012 .481 .495
N 19 19 19 19 19 19
*
Profit Pearson Correlation .011 .175 .475 -.012 1 .213
Sig. (1-tailed) .482 .230 .017 .481 .184

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N 20 20 20 19 20 20
*
Liquidity Pearson Correlation .402 -.140 .278 -.003 .213 1
Sig. (1-tailed) .039 .278 .118 .495 .184
N 20 20 20 19 20 20
From the table above, it can be seen that Profit and Murabaha has a significant correlation at the
0.05 level while liquidity has positive relationship with Ijarah at the same level. The relationship
between Murabaha was tested against Mudarabah. The results indicate that there is a positive
relationship between the two variables (r .731, n = 20, p < .01). The relationship between the
variables is noteworthy although the correlation is moderate.

4.3 Linear Regression

Regression analysis was conducted to identify which of the four Islamic finance modes has the
most important dimension in explaining organizational performance. The results are illustrated as
following:

4.3.1 Profitability

One of the most important performance measures is profitability because it will show and
measure which one of the four Islamic finance mode performs better. The linear regression
analysis for profit as dependent variable is shown below.

a
Coefficients

Model Standardized
Unstandardized Coefficients Coefficients

B Std. Error Beta T Sig.

1 (Constant) 5755.901 226446.955 .025 .980

Ijarah -.355 1.918 -.045 -.185 .856

Mudarabah -9.193 12.160 -.375 -.756 .462

Murabaha .423 .209 .849 2.028 .062

Musharakh -.670 1.242 -.172 -.540 .598

a. Dependent Variable: Profit

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The Multiple R shows a substantial correlation between the four independent or predictor
variables and the dependent variable (R = .557). The R-square value identifies the accounted
portion of the variance by the independent variable. Approximately 31% of the variance is
accounted by Ijarah, Mudarabah, Murabaha and Musharakah. This also means that there are also
some other factors that can help to explain the profitability but were not being considered in the
study.

The Adjusted R Square is considered a better population estimate and is useful when comparing
the R Square values between models with different number of independent variables. The value
of Adjusted R Square obtained is 0.113 which reveals that 11.3% of changes in dependent
variable which can be explained by the four independent variables of Ijarah, Mudarabah,
Murabaha and Musharakah.

The beta value for Ijarah (β = -.045), Mudarabah (β = -.375), Murabaha (β = .849), and
Musharakah (β = -.172) explain the significance of the four independent variable. Among all four
Islamic financial modes, Murabaha (β = .849) is the strongest variable, followed by Ijarah,
Musharakah and Mudarabah. The results had shown the four Islamic finance modes, among the
four modes, Murabaha significantly influences the profitability.

4.3.2 Liquidity

Liquidity which is described by cash flow and outflow is used as a tool of measuring the
performance of each Islamic finance mode. Thus, to determine which one among them has the
best performance. The tables below describe the analysis of liquidity as a dependent variable.

a
Coefficients

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Model Standardized
Unstandardized Coefficients Coefficients

B Std. Error Beta t Sig.

1 (Constant) 1384607.566 2008993.150 .689 .502

Ijarah 8.406 17.020 .134 .494 .629

Mudarabah -142.343 107.882 -.738 -1.319 .208

Murabaha 2.419 1.852 .616 1.306 .213

Musharakh 4.646 11.017 .152 .422 .680

The Multiple R shows a substantial correlation between the Islamic finance modes and the
liquidity (R = .351). Approximately 12.3% of the variance is accounted by Ijarah, Mudarabah,
Murabaha and Musharakah which means that there are also some other factors that can help to
explain the liquidity but were not mentioned in the study. The beta value for Ijarah (β = .134),
Mudarabah (β = -.738), Murabaha (β = .616), and Musharakah (β = .152) explain the significance
of the four independent variable. Among all four Islamic financial modes, Murabaha (β = .616) is
the strongest variable, followed by Musharakah, Ijarah, and Mudarabah. Therefore, Murabaha
has the most significantly influence on the liquidity for the bank.

4.4 Results of Hypothesis Testing

The empirical results of the current study provide evidence that Islamic Banking practice has
been improved for the last two decades. The finding has suggested that Murabaha mode is the
most efficient practiced Islamic finance mode which is in line with the findings of Al-Meaither
(2004). There are six hypotheses for this research in which only one of them is accepted while
others are rejected. According to the results above, the accepted hypothesis is:

H3: Murabaha is the best Islamic Finance mode.

Murabaha contracts have been widely used by many Islamic banks and financial institutions as a
mode of financing in various financing operations such as home financing, motor vehicle
financing, personal financing and trade financing. It involves the sale of commodity through
Murabaha contract to the purchase order (MPO) for a pre-agreed selling price, which includes a
pre-agreed profit mark-up over its cost price. The payment is payable within a fixed future date
by lump sum or fixed installment.

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An example of applying Murabaha contract can be seen from buying motor vehicle. It starts
when the customer identifies the motor vehicle to be acquired. The bank purchases the identified
motor vehicle from the owner on cash basis then it sells the motor vehicle to the customer at a
cost plus profit on credit basis. Finally, the customer pays the bank within the agreed terms of
financing.

5.0 Conclusion, Limitation and Further Studies

5.1 Conclusion
This study has provided evidence and achieved its objective of investigating the best
performance of Islamic finance modes. Profitability and Liquidity have been used as measuring
dependent variables which explain the performance of each mode. It has been observed that
Musharakah, Mudarabah, Ijarah, Murabaha, Salam, and Istisna’ are the most applied Islamic
finance modes. From the findings of this study, Murabaha has the best performance among other
modes involved in this study which are Ijarah, Mudarabah, and Musharakah. Apart from that this
study might help scholars to pursue a diligent approach to comprehend the relationship between
the Islamic finance modes

5.2 Limitation

This study had limited its scope with only four Islamic finance modes which are Ijarah,
Mudarabah, Murabaha, and Musharakah which applied in Islamic Bank Berhad and this may
have impact the outcomes of the research.

5.3 Further studies

For future studies, the researchers could modify the prominence to a single Islamic finance mode
practices to narrow the scope to derive more precise evidence regarding the performance of each
Islamic finance mode.

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