Toward a comprehensive theoretical framework for Shariah governance in Islamic financial institutions

The purpose of this research is to develop a comprehensive theoretical framework for interpreting Shariah governance mechanism in Islamic financial institutions (IFIs). After reviewing existing theories that were used to explain the phenomenon of corporate governance, three most commonly used theories in the corporate governance and Shariah governance area namely agency theory, stewardship theory and stakeholder theory were used and integrated based on their interrelated concepts and their relationship with Shariah governance. The constructed theoretical framework includes five concepts, namely accountability, disclosure and transparency, competency, confidentiality and independency among the key functionaries in Shariah governance, which are perceived to be the principles of Shariah governance. This research is among the first attempts to build an integrated theoretical foundation for Shariah governance in IFIs and the developed theoretical framework can be used as the basis for interpretations and comparisons on the ideal versus practical situation of Shariah governance in IFIs.     

Do equity-based <Emphasis Type="Italic">Sukuk</Emphasis> structures in Islamic capital markets manifest the objectives of Shariah??

The Islamic capital market is an important component of the overall Islamic financial system especially in providing an element of liquidity to the otherwise illiquid assets. Like its conventional counterpart, Islamic capital markets complement the investment role of the Islamic banking sector in raising funds for long-term investment. These long-term investments are facilitated through various Shariah contracts and instruments ensuring efficient mobilisation of resources and their optimal allocation. This article aims at reviewing equity-based Sukuk structure, which is one of the most popular instruments used in Islamic capital market today. This article argues that some innovations made in structuring Sukuk, which try to achieve the same economic outcome like conventional instruments, distort the vision of Islamic economics based on justice and equitability. These visions are deeply inscribed in the objectives of Shariah, also known as Maqasid al-Shariah. This distortion stems from the restricted view of understanding Shariah, by only focussing on the legal forms of a contract rather than the substance especially when structuring a financial product. The overemphasis on form over substance leads to potential abuse of Shariah principles in justifying certain contracts, which in fact are contradictory to the Shariah text and ultimately undermining the higher objectives of Shariah. In the final analysis, this article concludes that the substance of a contract that has greater implications to the realisation of Maqasid al-Shariah should be equally looked into. Otherwise, Islamic finance just appears as an exercise of semantics; the functions and operations are really no different from conventional banks, except in the use of euphemisms to disguise interest and circumvent the many Shariah prohibitions.     

Investment appraisal practices: A comparative study of conventional and Islamic financial institutions

This paper compares the use of capital budgeting techniques of conventional and Islamic financial institutions, using data obtained from a survey of 105 conventional and Islamic financial institutions. Our main aim is to analyze the use of capital budgeting and risk techniques by the two types of financial institutions from a comparative perspective to see whether prohibition of riba makes a difference. Standard difference-of-means tests of the mean scores methods were used to test the hypotheses of the study. The results reveal a number of important conclusions. First, discounted cash flow techniques are found to be more widely used by financial institutions, and among those techniques internal rate of return is the most common. Second, Islamic financial institutions are found to adopt traditional methods that do not comply with the principles of Islamic Sharia'a. Third, a huge gap is found between the theory base of Islamic institutions and some of the practices of those institutions. Fourth, firms' characteristics, such as size, listing status, sources of revenue and government ownership, have some impact on their decisions to adopt capital budgeting criteria, methods of estimating costs of capital and risk. Finally, the decisions to select particular capital budgeting techniques, cost of capital estimation methods, and risk assessments are partly related to the characteristics of the chief financial officers.     

Impact of the global financial crisis on Islamic and conventional stocks and bonds

This study explores the impact of the global financial crisis (GFC) on Islamic and conventional stock and bond indices in 11 Islamic and eight non‐Islamic countries. We find that there are benefits of Islamic stocks during the GFC, particularly during the early stage of the crisis because Islamic institutions are prohibited from holding sub‐prime mortgage securities and derivatives. The strongest benefits of Islamic stocks are in the UK and USA. We conclude that there are benefits of risk reduction and stability for Islamic stocks during a financial crisis, although not necessarily during a global recession.     

Shariah governance in Islamic banks: Practices,practitioners and praxis

This study examines Shariah governance in Islamic banks by analyzing and comparing international and national Shariah governance codes across 11 countries and the annual reports of the largest stand-alone Islamic bank in each of these countries. Drawing upon the practice theory framework, this study identifies the similarities and differences across countries in Shariah governance practices, practitioners, and praxis. Regarding practices, we found that the 11 countries reviewed have adopted different approaches, i.e., strict, moderate, or flexible approaches, in developing regulations for Shariah governance structures and processes. The approach taken by each country, in turn, influences Shariah governance practitioners and praxis at the institutional level to some extent. Specifically, Islamic banks in countries belonging to the moderate and flexible groups are likely to be more varied in terms of Shariah governance practitioners as well as praxis (activities or processes) to ensure Shariah compliance as compared to their counterparts in countries with strict regulations. Analyzing current Shariah governance practices in these 11 countries can promote a greater understanding and resolution in addressing critical issues due to different contextual circumstances. Therefore, the findings of this study can provide relevant information for both regulators and practitioners to further improve the Shariah governance best practices in the Islamic banking industry.     

金融资产危机与FM-IS-LM一般均衡模型

随着金融资产总量的迅速增长,金融资产价格变化对宏观经济的影响日益上升。本文在传统宏观经济理论的基础上,将可交易金融资产置入宏观经济模型之中,建立了FM-IS-LM一般均衡模型,并以此模型对金融资产膨胀、金融资产危机进行了系统化的讨论。这一研究的最重要价值在于把握金融资产膨胀、金融资产危机和实体经济波动的内在联系,提高宏观经济政策的完备性和有效性,避免金融危机在中国再现。     

Creation of an Islamic stock index in West Africa

Islamic finance, which has become inescapable has entered into financial markets by offering solutions consistent with the precepts of the Shariah. The objective of this paper is to propose the creation of an Islamic stock index in West Africa. The choice of market values ​​requires extra financial and financial screening system. The results show that 10% of the securities in Nigeria Stock Exchange , the Regional Stock Exchange (Brvm) and the Ghana Stock Exchange (Gse) were selected to form the Islamic index " Ecowas Shariah index.     

New strategies and a new paradigm for Shariah-compliant portfolio optimization

In this paper we analyze the effects of different strategies to construct Shariah compatible financial portfolios. The difference between conventional and current Shariah portfolio management is the application of sector screens and financial screens by which the asset universe is reduced. Yet, here different schools of scholars define different screening rules leading to significant differences with respect to compliance, but also with respect to performance. After analyzing this discrepancy we propose several new strategies to apply the inconsistent rule systems and a new paradigm for defining Shariah-compliance. Under this new paradigm compliance is attributed to the portfolio and not to the individual assets of the universe. We report results of an empirical study analyzing the potentials of these strategies and of the paradigm. We can show that under the proposed concepts Shariah-compliant portfolios can be realized which have return and risk profiles comparable to the conventional non-constrained portfolios.     

A comparison of conventional versus Islamic banking customers attitudes and judgment

This investigates the impact of customer attitude and judgment regarding conventional and Islamic banking system in Pakistan. This study attempts to find out, how the customers of Islamic banks perceive about Islamic banking practices in terms of Shariah compliance and conventional banking system regarding earning more profits. This study consists on primary data through a well design questionnaire. Four hundred and thirty (430) questionnaires were distributed among different customers of all three types of banking, such as Islamic, conventional and stand-alone branches in order to investigate customer’s attitude and judgment toward banking system. The findings indicate that overall 28% of Islamic banking customers don’t know the essential concept of Islamic financial institution’s in Pakistan. Furthermore, 54% customers of conventional banking show their interest to convert their accounts toward Islamic banks.

     

Political systems and the financial soundness of Islamic banks

We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia’a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia’a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors.     

Stakeholder Returns of Islamic Banks Versus Conventional Banks

Sharia principle shaping the Islamic banking model is most determinant on collection and deployment of funds with its ban on interest. This study aims to look at the results of funded activities in isolation for a healthier comparison between Islamic and conventional deposit banks with respect to their financial stakeholders. The differences are reflected as lower asset returns and lower returns for depositors of Islamic banks. These differences sustain throughout normal and crisis periods. Our findings show that despite differences in asset structures and returns, Islamic banks retain similar returns for shareholders to position themselves close to and in competition with their conventional counterparts.     

货币政策纳入资产价格目标后能更好地调控经济波动吗——基于金融结构视角的分析

本文通过构建包含金融结构的NK-DSGE模型,分析在不同的金融结构下,包含金融资产价格稳定目标的扩展型货币政策能否更加有效地熨平经济波动.研究表明:(1)相比传统货币政策,包含金融资产价格稳定目标的货币政策不仅能更好地熨平宏观经济波动、缩短波动持续期,还能提升社会福利;(2)在扩展型货币政策框架下,央行需结合不同类型冲击下金融结构与宏观调控变量波动的异质相关性,依据金融结构市场化进程,灵活调整其对各个变量的调控力度;(3)在扩展型货币政策框架下,当经济体系面临非持续性技术冲击、投资边际效率冲击或金融冲击时,金融结构市场化程度越高,社会福利增进效果越好.本文的研究为宏观经济调控政策特别是货币政策决策提供了有益启示,或可为新时期增强宏观经济调控效果、构建兼顾金融稳定和经济稳定的平衡发展路径提供新思路和新抓手.     

Is financial advice a cure-all or the icing on the cake for financial literacy? Evidence from financial market participation in China

We examine how financial advice interacts with financial literacy to shape household decisions on stock market participation in China. Particularly, we investigate how the effect of financial advice varies with economic expectations, preferences for asset diversification and the level of financial literacy. Feeding the data of 5274 households into a Probit model that predicts the probability of holding stocks, we find that, while an increase in financial literacy significantly raises the stock market participation of all households, seeking financial advice only increases the participation for those households which have a preference for asset diversification or which have an optimistic expectation about the economy. Moreover, the effect of financial advice is concentrated on households with high financial literacy, implying that an insufficient level of financial literacy is the reason for the poor performance of financial advice in China. We also examine if there are influential trust or quality concerns which would reduce the effectiveness of financial advice but we find no significant evidence for it.     

Islamic and conventional banks' soundness during the 2007–2008 financial crisis

The recent global financial crisis has induced a series of failure of many conventional banks and led to an increased interest in the Islamic banking business model. This paper attempts to answer empirically the following question: What was the effect of the 2007–2008 financial crisis on the soundness of Islamic banks and their conventional peers? Using the Z-score as an indicator of bank stability, our regression analysis (covering a matched sample of 34 Islamic Banks (IBs) and 34 conventional banks (CBs) from 16 countries) shows that there is no significant difference in terms of the effect of the financial crisis on the soundness of IBs and CBs. This finding reveals that IBs are diverging from their theoretical business model which would have allowed them to keep the same level of soundness even during the crisis.     

Time series analysis of financial stability of banks: Evidence from Saudi Arabia

Islamic banks are characterized by their compliance to Islamic laws and practices, primarily the prohibition of interest and the trading of loans. During the 2008–2009 financial crisis, when a large number of conventional banks announced bankruptcy, no Islamic bank failures were reported. However, there is no clear consensus in the literature on the question of whether Islamic banks are more or less stable than conventional banks. To shed some light on this issue, we studied a sample of Saudi banks using quarterly data over a period centered on the 2008 financial crisis. Careful analysis of the data suggested first of all that many of the variables typically used in financial stability studies may be non-stationary, a methodological point largely ignored in the literature. Using time series methods suitable for this type of data, we concluded that individual heterogeneity may matter more than either the conventional or Islamic nature of the banks. Concentrating on the largest banks, we find the Islamic banks contribute positively to the stability of the system.     

伊斯兰金融的未来

回顾伊斯兰金融的发展历程,从1963年成立首家伊斯兰银行,到2007年伊斯兰金融资产达到3000亿美元,伊斯兰金融发展迅速。文章通过实例剖析了伊斯兰债券与资产支持证券的异同,并从伊斯兰债券的金融本质入手,从宏观的角度展开对伊斯兰金融的未来前景的探讨,指出伊斯兰金融是传统伊斯兰融资体系适应全球化经济下的一种新模式探索,并期待着伊斯兰现代主义能够更好地促进伊斯兰金融的发展和成熟,使伊斯兰社会更好地融合到全球化的经济发展中。     

Islamic vs. conventional banking: Business model,efficiency and stability

How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.     

Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets

An understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.     

A framework for assessing the systemic risk of major financial institutions

In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro–macro model, takes into account dynamic linkages between the health of major US banks and macro-financial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15% of total liabilities of 12 major US financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008.     

The impact of corporate governance and agency effect on earnings management – A test of the dual banking system

This study investigates the impact of the Board characteristics, Chief Executive Officer’s (CEO) power and Shariah supervision on Earnings Management (EM) within conventional and Islamic banks. We provide evidence that EM levels do not significantly differ between Islamic and conventional banks. Contrary to public belief, additional value-based attributes such as the Shariah Supervisory Board (SSB) that promotes ethical and religious values, do not help in the restriction of opportunistic behaviour in Islamic banks. Additionally, attributes such as board size, firm size and leverage have a significant negative influence on EM of both Islamic and conventional banks. Our results are important in deliberating that the word ‘Islamic’ must not be used merely as a profit manifestation, but instead must promote a value-based business, which in turn could ensure reliability and sustainability.